Do flights of fantasy & innovation 'win the future' for the US economy?

Americans love innovation, particularly if they are venture capitalists or politicians.

Venture capitalists such as Kleiner Perkins Caufield Byers claim to be able to "see around corners" to anticipate the "next big thing". To do so, they must risk real-world capital on often untested ideas, ie innovation, that then become real-world profits, sometimes from companies that actually make things and provide services.

President Barack Obama said investment in innovation would be how the US would "win the future" by unleashing the ingenuity of business, leading to the country's Sputnik moment in his state of the union address he gave at the beginning of the year.

I had often wondered whether this focus on innovation was more than contemporary alchemy… the profits from innovation could become real gold for the investors, but what would be the benefit for the wider economy. Would jobs, taxes and other revenues flow out of the country?

Henry R. Nothhaft writing in the San Francisco Chronicle clarified this conundrum for me with a fantastic analysis of what this innovation-only policy means: outsourcing manufacturing to other countries such as China, while the US leads on the gamechanging innovations, creates problems for the economy, not jobs or revenue.

Innovation-only "explains why the $30 billion trade surplus in high-tech products that the United States enjoyed 10 years ago has become a $56 billion deficit," he says.

Consider that in 1980, America produced 42 percent of the world's semiconductors. Today, the United States produces only 14 percent of the world's supply of a device that we invented 53 years ago. And along with the movement of production offshore, 8 percent of R&D spending by U.S. semiconductor firms within the United States also has moved offshore. 

Americans in general appear to find gadgets and shiny new things more appealing solutions to climate change and transport issues. That explains the enthusiasm among VCs and politicians for electric vehicles rather than something a bit simpler to deploy, but less sexy, such as a comprehensive bus system.

Even academics get swept up into these flights of fancy when characterising what "innovation" could do for the future of US transport. Tyler Cowen, who is a professor of economics, lamented in the New York Times at the weekend that companies are being restricted in testing and developing technologies for "driverless" cars. Google has apparently requested a relaxation of laws in Nevada to allow it to test on the state's roads.

Prof Tyler has written in the past about how little benefit the average American may gain from innovation:

Although America produces plenty of innovations, most are not geared toward significantly raising the average standard of living. It seems that we are coming up with ideas that benefit relatively small numbers of people, compared with the broad-based advances of earlier decades…

Which is why his comments in the NYT on Sunday were all the more surprising when he described what I would view as a nightmare scenario on US roads:

The benefits of driverless cars are potentially significant. The typical American spends an average of roughly 100 hours a year in traffic; imagine using that time in better ways — by working or just having fun. The irksome burden of commuting might be lessened considerably. Furthermore, computer-driven cars could allow for tighter packing of vehicles on the road, which would speed traffic times and allow a given road or city to handle more cars.

I can't imagine an arena that an American would find more "irksome" than not having control of  their car. And doing something useful while commuting is not a "radical innovation" in countries that are willing to invest in public transport. Cars driven by computers - sorry to contradict the bright minds at Google - belong in the same category as Jetson-style personal spacecraft.

All this blue sky thinking when VCs talk about innovation can be a bit dizzying, which is why companies such as Solazyme come as a breath of fresh air.

Solazyme, the algal biofuels company, has been a great success story for its VC investors, which include VantagePoint Capital Partners, Braemer Energy Ventures and Lightspeed Venture Partners.

Last week, it started trading on NASDAQ after raising $198m on its IPO which exceeded expectations. Solazyme is focused on transport fuels, and has so far signed three increasingly large deals with the Department of Defense to provide hundreds of thousands of tonnes of algae-based fuel for the US Navy.

Those deals, and last week's IPO are ringing endorsements of the science behind Solazyme's technology. But bringing this innovation to scale is problematic, even for a successful startup such as Solazyme, and doubts remain over the scalability of the production of algal biofuels.

Solazyme said last week that it purchased its first commercial-scale plant in Illinois, funded in part by a $22m grant from the Department of Energy, according to Bloomberg.

But it will need much more capital than that to compete with the heavyweights in the oil and chemical industries. The IPO was part of this strategy but Solazyme will also have to partner with the competition - Chevron and Dow Chemicals and Unilever - are among those in the frame. The traditional companies also rely on innovations from companies such as Solazyme, creating a symbiotic relationship between startup and establishment.

So far, Solazyme, is possibly the closest to a breakthrough start up that can show VCs and presidents that the alchemy of investment innovation - with its magic formula of bringing a new idea to scale -  can turn into real gold for the US economy.