My Mental Model of the Innovation Ecosystem

Last updated Nov 16.  Thanks to Arnobio Morelix for additional input.

A very basic rendering, off the top of my head.  To be refined….

  1. R&D funding, via government
    1. Necessary because some projects doesn’t meet the hurdle rate for private investment, but do so as a public investment because of spillovers.
    2. ~$150B/year in the US, going mainly to universities and some private labs
      1. Consists of basic science, applied science, development, and capital funding.
  2. Universities & National Labs
    1. Receive science funding, output research
    2. Add to the human capital stock, later hired by corps
  3. Large corporations
    1. Also fund basic science, as well as applied science, and turn these into product
    2. Acquire entrepreneurial companies through M&A
  4. Entrepreneurial companies
    1. Originate as
      1. Spinoffs from large corps
      2. Tech innovation from universities
      3. Users
    2. Growth companies exhibit an up or out dynamic, a very low proportion actually try to innovate, a very low proportion actually succeed
    3. Exit via IPO and increasingly M&A since 2000
  5. Entrepreneurial Finance
    1. VC
      1. Act as portfolio investors for ent. companies
      2. Most funds are crap
      3. Most portfolio companies are crap
      4. The good funds provide expertise / networks in addition to capital
    2. Angel
    3. SBIR/STTR
    4. Debt
    5. Own funding / friends & family / bootstrapped
  6. Intellectual Property Rights (IPR)
    1. Patents are of primary concern (trademark and copyright more niche value)
    2. Necessary for a market for ideas — protecting inventors, establishing initial incentive to innovate (guarding vs. theft of idea), and allowing trade
      1. Not sufficient for a market for ideas, however!  This was Myhrvold’s stated aim with Intellectual Ventures (IV), but instead he birthed a patent troll.
    3. Huge debate over the proper role… exploding applications/grants + litigiousness over the past 20 years, in large part due to CAFC reforms
  7. General patterns
    1. Innovation requires bringing people to the knowledge frontier (universities’ educational component) and pushing out the knowledge frontier (conducting research)
    2. Process looks linear, as a facile approx, but actually is super messy.  Things don’t just proceed from basic to applied to product cleanly
    3. Healthy entrepreneurial scene is key
    4. We don’t know the optimal levels of ANYTHING here
    5. The micro level is pretty much a black box

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