Nurture the Unpredictable
Economic growth will depend on quirky entrepreneurs, not incumbent corporations.
By Vinod Khosla, NEWSWEEK, Dec 31, 2008
Today, the world is in the midst of an economic, social and environmental crisis that is overturning much conventional wisdom. The best course of action is to tackle it head-on with new ideas and paradigms, fostering an environment that rewards creativity and encourages "black swans."
What is a black swan? Author Nassim Taleb defines a black swan as an event that has "rarity, extreme impact, and retrospective (though not prospective) predictability." The world has just grappled with a financial black swan, a very negative one, in 2008. Technology shocks (often positive black swans) are one of the best examples of this maxim in action—ranging from personal computers, the creation of the Internet and the agricultural revolution to the rise (and demise) of the traditional telecommunications infrastructure. Often underestimated when first encountered, black swans can transform markets or create new ones. We need to encourage them as solutions for a financially and environmentally challenged world.
Black swans can transform any industry, but my focus recently has been on energy—an area that has been ignored for too long. Energy is a crucial part of any nation's economic and security agenda and in dire need of transformation. The only way this transformation will happen is through technology black swans that rid us of our dependence on oil and dirty coal. If the 9 billion people who will likely populate the planet in 2050 are to have a standard of living similar to the best-off 500 million people today, the world must generate a lot more energy. The only way will be to promote a clean-energy black swan.
The first area of focus should be research. The U.S. National Institutes of Health receives approximately $29 billion in federal funding; the National Renewable Energy Laboratory's budget is about 1 percent of that ($308 million). Sen. Richard Lugar has estimated that the United States spends $50 billion a year in military costs on protecting its petroleum interests in the Middle East—yet it spends far less on trying to actively replace oil.
Beyond increasing support for fundamental research in universities and national laboratories, tools such as the already enacted Renewable Fuels Standard, which mandates minimum levels of renewable fuel that must be used in automobiles, and the recently proposed Renewable Power Standard, which proposes minimum levels of renewable zero carbon energy that utilities must produce, offer the ability to create enticing new markets and encourage research, experimentation and venture startups. By mandating a market for renewable fuels and renewable electricity, the government encourages entrepreneurs to develop these technologies and venture capitalists to invest in them. Though many such efforts will fail, I am convinced that the best companies that emerge can achieve unsubsidized market competitiveness relative to their fossil-energy competitors over time.
Is the idea of such fundamental change in the energy industry too farfetched or idealistic? I think not. Just over a decade ago, every major telecommunications company said that it would not adopt the Internet protocol as its core network, even as a telecommunications equipment company called Juniper was being launched to produce IP equipment. Now, Juniper is a successful public company offering free long-distance phone calls using Internet technologies that have become the norm. As a result, telecommunications has changed more in the past 10 years than the previous 50 and giants like AT&T have been sold for a song. Likewise, in 1996 I had a meeting with the CEOs of nine major U.S. media companies (including The Washington Post, The New York Times, Knight Ridder, Tribune, Cox and Times-Mirror) and tried to explain how the Internet would disrupt their business models, and how ventures like Yahoo, eBay, Google and others would become a major threat. The CEOs viewed the technologies as interesting, but too remote and intangible to act on. Today, Google is worth more than most of them combined.
While there are many actions that can be taken in many industries to create more fertile ground for black swans, at a more fundamental level, we need a restructuring of today's form of capitalism. We need to get rid of the "incumbency capitalism" that entrenches existing participants in a market, while stifling innovation by constantly raising the barriers to entry for innovative new ideas and by creating an unlevel playing field tilted toward incumbents. We must realize the difference between "incumbency capitalism" and "innovative capitalism." Today, every bill out of Washington is engineered phrase by phrase by the lobbyists on K Street to protect the interests of the incumbent corporations (who can afford them). Innovators and entrepreneurs often don't even know what legislation is being formulated, resulting in rules that entrench the status quo. We must have new rules that encourage competition and innovation. We must bias the playing field toward positive black swans instead of incumbents.
Such innovation is often unpredictable, but the degree of change to come in global energy is likely to be enormous. Our focus should be on encouraging and guiding it. As the famous Silicon Valley computer scientist Alan Kay said, "The best way to predict the future is to invent it." Toward that goal, we may try and fail, but let's not fail to try.
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