Is innovation an investable concept? Can we predict innovation before innovation occurs?
A magnetron is an electronic vacuum tube that generates high-frequency radio waves. Magnetrons were used by the United States Military in the 1940s. High-frequency radio waves were emitted from a small magnetron, propagated through either air or water, bounced off solid objects, and then detected with a small antenna back at the source. These so-called radars could spot submarines under the water and airplanes over the horizon.
The magnetron became a top priority for the Allies of World War II. Percy Spenser knew the magnetron better than almost anybody. He worked for defense contractor Raytheon at the time and developed a more efficient way to manufacture magnetrons. Under his guidance and the new manufacturing process, Raytheon was able to crank out 2,600 magnetrons per day during World War II, up from about 100 under the old process. He literally helped the Allies win World War II.
One day towards the end of the war, Spenser paused for a moment next to a working magnetron. He had a chocolate bar in his pocket. The bar became a gooey mess. The high-frequency radio waves from the magnetron had melted the candy bar in his pocket.
Spenser became curious. He put popcorn kernels next to the device. Soon popcorn was popping all over his lab. He tried various foods, including eggs, and to his surprise the radio waves emitted from the magnetron were a fast and easy way to cook all types of food.
Today, Percy Spenser’s name is tied not so much to his pioneering work on radars, but to the invention of the microwave oven. In October of 1945, Raytheon filed the first patent for the microwave cooking process and by 1947 had built the first commercially available microwave oven.
Innovation pops up sometimes where you least expect it. Here is a case where a defense contractor inadvertently created a consumer product.
In 1928, Alexander Fleming returned from vacation to find mold growing on his petri dishes. He went on to discover penicillin. George Mestral found burs stuck to his pants after a birding trip. He discovered Velcro. Roy Plunckett discovered Teflon while experimenting with refrigerants. The history of innovation is filled with chance encounters and what seems like just dumb luck.
Not a person on the planet could have predicted these specific innovations. They were just too random.
Why is it, though, that the vast majority of all innovation with respect to computers and computer power has come from a country with less than 5% of the world’s population? Is it happenstance that Bill Gates and Steve Jobs both emerged at the exact same time and in essentially the exact same location? How about Larry Ellison (Oracle) and Thomas Watson (IBM) and Michael Dell (Dell Computer)? Is it just chance that all these innovators come from one geographic location that contains a tiny fraction of the world’s population?
A similar cluster of innovation occurred during China’s Southern Song Dynasty in the 12th and 13th centuries. The Chinese during that time developed the concept of movable type, made huge advances in the uses of gunpowder, invented the mechanical clock, developed the magnetic compass, created new and innovative ways to produce porcelain, and developed new and innovative ships. Innovation was virtually nonexistent in the rest of the world at the time. Many of the innovations that the Chinese enjoyed would not emerge outside of China for another several hundred years. The Southern Song Dynasty was literally centuries ahead of the rest of the world.
Is it a coincidence that two of the greatest innovators of all time – Leonardo da Vinci and Michelangelo – emerged at the exact same time (15th century) in the exact location (Florence, Italy) at a time when innovation in the rest of the world was for all practical purposes nonexistent? Florence, a city with no port and no natural resources to speak of, became the worldwide epicenter for high-end wool fabric and, later, for high-end silk and, still later, for banking and financial instruments. Florence in the 15th century was simply more advanced than the rest of the world.
Florence was so confident in its ability to innovate that it designed and started construction on the Florence Cathedral before the technology to construct its large brick dome even existed. They figured that by the time they got to the dome, somebody would figure it out. Someone did.
That doesn’t sound random to us.
Then there is the Industrial Revolution. Innovation with respect to harnessing steam power, the mechanization of manufacturing processes, and the refinement of iron production processes, among others, sparked the Industrial Revolution. While the benefits of innovation during the Industrial Revolution eventually spread to the rest of the world, the innovation itself originated during a relatively brief slice of time (late 18th century) in a small country (Britain) that contained a tiny fraction of the world’s population.
The light bulb, the phonograph, the motion picture machine, the electronic voting machine, the Quadruplex Telegraph (the first machine capable of sending two messages on the same wire at the same time), and alkaline storage batteries were all developed in the exact same lab (Menlo Park, New Jersey) by the exact same person (Thomas Edison) during a brief span of time (1870s and 1880s).
That doesn’t sound so random to us.
Isn’t it interesting that pushing the envelope of Moore’s Law (the number of transistors in an integrated circuit doubles every two years) in the 1970s, 1980s, and 1990s all came from one company, Intel? Advances in telephone switching technology in the 1970s all came from one company, Ericsson. Innovations in the Graphic Processing Units (GPUs) today primarily occur within one company, NVIDIA. These clusters of innovation are not random isolated events; they are decades of one innovation after another all occurring in a single company.
That doesn’t sound so random to us either.
Innovation has a weird similarity to gun violence. If gun violence were totally random, we wouldn’t expect it cluster in certain locations. We would expect gun violence in Switzerland (0.1 gun-related fatalities per year per 100,000 residents) to be similar to the gun violence on the southside of Chicago (115 gun-related fatalities per year per 100,000 residents). If gun violence were random, we wouldn’t expect the city of Tijuana, Mexico (138 gun-related fatalities per 100,000 residents) to be at the top of the global league tables for gun violence year after year after year.
Gun violence clusters because it is not random. A set of enabling circumstances exists that facilitates gun violence. Gun violence flourishes when that set of enabling circumstances exists. Gun violence disappears when that set of enabling circumstances does not exist.
The trick to predicting gun violence is to first identify the set of enabling circumstances and then keep an eye out for those enabling circumstances. When they emerge, gun violence won’t be too far away.
The same is true with innovation, in our view. Innovation is not random. It flourishes when a certain set of enabling circumstances are present. The trick to predicting innovation is to first identify the enabling circumstances and then keep an eye out for those enabling circumstances. When they emerge, innovation won’t be too far away.
The clustering of innovation in both time and location is a very powerful datapoint that suggests innovation is not totally random. It tells us that a set of circumstances exists that favors innovation. It tells us that innovation can be predicted. It tells us innovation is an investable concept.
