Tech Revolutions + Venture Capital
Key takeaways from Carlota Perez's study on the Dynamics of Golden Ages + Downturns
As we enter into what many predict will be a mild recession (or prolonged cyclical downturn) that may last until the end of 2024 it might be timely to reflect on the cycles of technological revolutions that have come before.
Technological revolutions tend to last 50-60 years. It is important to note though that the development of a new technology is not the same as a technological revolution.
Railways were initially developed to transport coal out of mines and only later became used as trade routes.
Oil refining had been well understood (pun intended) and the internal combustion engine was developed and mainly used in luxury automobiles for many years before the Model T and mass production made the general adoption of automobiles possible.
Semiconductors in the form of transistors were used to stretch the market for radio far before the first computers.
A technological revolution requires not just innovation but a set of conducive circumstances.
There have been 5 major technological revolutions in recent history
The industrial revolution:
mechanization
roads, bridges, ports, and canals which allowed for expanded trade
The age of steam and railways (pictured above)
Steam as a technology to power trains, cars, and machinery
Railways as a distribution channel
The age of steel, electricity, and heavy engineering
The Carnegie steel plant and heavy engineering for new technology
Electricity to power these new machines
The age of oil, automobiles and mass production
The first model T and the process innovation of mass production
Oil as an energy source to power the automobile
And our current age —> The age of information and telecommunication
Information as the input
Telecommunication as the distribution channel
During the period of diffusion of a new technology all types of friction can occur. In the past, the economic benefits of technological revolutions have been unevenly distributed at first. Many in the labor market will not have been equipped with the skills required to take advantage of the jobs created by the technological revolution and as a result there is often a painful loss and/or geographic displacement of jobs. Regulatory systems created for the previous paradigm will be inadequate to address the new technology being diffused (like data protection regulation is today). But as input prices drop, distribution channels flourish and regulatory systems push for a more even distribution of gains (e.g. wages) broad-based benefits accrue and a new golden age begins. For these reasons, when new technology is introduced it typically takes 20-30 years for it be diffused throughout culture and for appropriate institutional frameworks to be built to allow for widespread societal benefit and a “golden age.”
But during each of the previous technological revolutions the golden ages have always come to an end. As the utility of existing technology becomes exhausted, incumbents typically invest in incrementally improving what they offer and try to exclude innovations that may challenge them. Incumbents rarely invest in major radical innovation because it risks cannibalizing the market they control. And the incumbents who dominated the existing paradigm will fight hard to resist the leaders of the new school. For this reason, incumbents try to stretch solutions to their own products and processes to maintain relevance. Sometimes this even includes minor uses of radical new technologies, like world governments using blockchain technology to develop stablecoins.
This has an impact on investors (as is noted below):
“As low-risk investment opportunities in the established paradigm begin to diminish, either in innovation or in market expansion, there is a growing mass of idle capital looking for profitable uses and willing to venture in new directions. Thus, the exhaustion of a paradigm brings with it both the need for radical entrepreneurship and the idle capital to take the high risks of trial and error.” (Carlota Perez, “Technological Revolutions and Financial Capital,” Edward Elgar Publishing, 2002, p. 33)
For this reason venture capital, at its best, helps to break down the gates of innovation (without this same conflict of interest as incumbents) so that upstarts can innovate and bring new technology to the masses. Which is why it’s so important that venture capital back a diverse set of entrepreneurs who are building companies that seek to avoid uneven distributions of benefits (like our portfolio company Increment).
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And to those interested in peering ahead to the next cycle — these 5 signs might indicate there is a conducive environment for a new technology to supplant the old.
The infrastructure being in place for that technology to be adopted (cars need roads)
That the inputs for that technology are cheap, abundant, and widely applicable
That the utility of the alternative is diminishing (electricity was invented far before it began to power industrial machinery and then commercial appliances. It was only when steam power began to show its limits that electricity took off.)
That cities and companies are growing and B2C + B2B consumption is rising
Regulation leading to a potential opportunity within a given industry