Government Money Pushes Innovation

Encouraging Business InvestmentFor the past several months, I’ve been working with a remarkable young man on yet another high tech start-up. In general, I avoid such projects like the plague. But I’ve worked with this guy before and he has two things you rarely see in high tech: the ability to actually get things done and a total lack of bullshit. In the past two months, we’ve made great progress and have a very basic working prototype. And surprisingly, we have some interest from private donors. But in the longer term, we may need to go to the government to really flush the whole thing out. Because the fact is that it is very hard to get much in the way of funding for an endeavor before it is a business. And even then, funders want to see a product on the horizon.

Given what we are doing, we might be able to move this project to a full business simply with private funding. But the two of us met and learned most of the fundamentals of this project at a company that was fully backed by the US Air Force and NASA. What’s more, the project uses two technologies that were fully funded by the government: GPS and internet. (The coolest parts of the project have little to do with that, but alas, I am not able to discuss it yet.) The conservative take on all of this is, “Sure, the government is necessary to help with infrastructure like that, but it is you rugged individuals working in your garages who make it all happen!” I appreciate the compliment. And my young friend really is a brilliant visionary. But we wouldn’t be able to do any of this if we were born in the slums of Bangladesh.

There’s another aspect of this. It is all great to talk about the government building infrastructure. And I’m all for that. But what is infrastructure? Fifty years ago, there was no GPS; there was no internet. One hundred years ago there was no interstate highway system. Two hundred years ago there was no transcontinental railroad. These are all things that conservatives at the time said were not necessary to invest in. There are lots of inventions that go into anything as complex as the Global Positioning System. So if we are going to cut off government funding for pure and applied research—which includes some pretty kooky sounding things—then we are mistakenly assuming we’ve reached the end of history.

What I think people miss is how technological innovation and the state interact. All the work is done by individuals. Some of those individuals work for the government at national labs and the National Institutes of Health. But most work for companies and colleges with government money. For example, 75% of the most innovative new drugs—that is, not yet another erectile dysfunction pill—are developed with NIH funding. The development of Google’s original algorithm got NSF funding. Apple got its start with a half million dollar small-business investment company grant.

Those interesting facts come from an excellent article by Mariana Mazzucato at Slate, It’s a Myth That Entrepreneurs Drive New Technology. The thesis of the article is that most high tech industries (including biotech) would be lost without the mother’s milk of government investment. In fact, the problem is very bad in the pharmaceutical industry:

The risk has been increasingly moved to the public sector while the private sector keeps the rewards. Indeed, one of the most perverse trends in recent years is that while the state has increased its funding of R&D and innovation, the private sector is apparently de-committing itself. In the name of “open innovation,” big pharma is closing down its R&D labs, relying more on small biotech companies and public funds to do the hard stuff. Is this a symbiotic public-private partnership or a parasitic one?

This gets to an important point that I think people miss about projects like the one that we are working on. They say, “Steve Jobs never would have created the Apple computer if he hadn’t known of all the money he could make!” That’s not really true. At least it isn’t with us. We are interested in it regardless of the ultimate reward because it is totally awesome and we are making something work that wasn’t clearly possible a year ago. We want to make money, of course. But just being paid a reasonable salary to do it would be great. The work is not in the least effected by how high our taxes will be ten years from now.

But there is a disconnect. Venture capitalists require a great deal of control and large part of future profits. In general, the government, which takes the biggest risks requires very little. What’s more, companies, after they get big off work that the government paid for, do their best to avoid even paying their taxes. Mazzucato has a good solution for that:

The repayment of some loans for students depends on income, so why not do this for companies? When Google’s future owners received a grant from the NSF, the contract should have said: If and when the beneficiaries of the grant make $X billion, a contribution will be made back to the NSF.

Other ways include giving the state bank or agency that invested a stake in the company. A good example is Finland, where the government-backed innovation fund SITRA retained equity when it invested in Nokia. There is also the possibility of keeping a share of the intellectual property rights, which are almost totally given away in the current system.

I am fine with all of this. I think that all people on this side of a project are. So now is when the government should ask to be cut in. Because liberal as I may be, afterwards, I will likely be able to justify why I don’t owe the government a damned thing.

Now about that half million dollar grant…

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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