Demand is the Cornerstone of Successful Innovation Ecosystem

The debate on how to build a successful innovation ecosystem exists for a long time. Though and still the Silicon Valley (as the most successful one) is unique. Of course, there are more examples. And they also have their “personal” unique characteristics. For instance, Israel was and is extremely successful on producing broad range of startups each year, Scandinavian region (including Sweden, Denmark, Finland). Could name several more.

Almost all authors who investigate the secret sauae of Silicon Valley since 80s tried to find their own systematic view on what comprises the success of Silicon Valley and what others should do in order to build a new Silicon Valley. I’m not an exception. However, my strong opinion is, “There is no way to build another Silicon Valley, it’s simply impossible. Each country or region should search for it’s own way leveraging existing historical circumstances, country’s resources (capital, people, technology), potential and comptetive advantage, and long-term view.” Let me explain here why. I will also list several analysis approaches of innovation ecosystems (mainly taking Silicon Valley example as it is today). Then I will come up with some ideas that authors of these approaches doesn’t consider.

Innovation Ecosystem Model

This is structural model of innovation ecosystem as I understand this phenomenon. Thank you Anna Ariefieva for visualization my thoughts. Basically what comprises innovation ecosystem is a network of multiple stakeholders and flow of interactions between them. Again, this is structural view. I don’t want to analyze dynamics of this system.

Innovation Ecosystem Model

Innovation Ecosystem Model

Several approaches for analysing an Innovation Ecosystem (Silicon Valley as an archetype):

1. Rainforest Theory Approach

In my previous post (What economy need to have successful innovation ecosystem) I have already mentioned the work titled Rainforest by Victor W. Hwang and Greg Horowitt. They intented to build a model of innovation ecosystem, including insights on sociobiology from Harvard, economic transactions from the University of Chicago, and design theory from Stanford. I liked that approach a lot. At least because they included Culture in the innovation ecosystem (IE) model, talking about Social Contract and Trust within the system. Whereas neoclassical economists believe that wealth is based on inputs – such as labor, land, capital, and perhaps technology – the authors argue that such a theory fails to describe the behavior of innovation ecosystems. To explain the difference between highly productive systems like Silicon Valley and most other places in the world, what is most important are not the ingredients of economic production, but the recipe – the way in which the ingredients are combined together.Human systems are most productive when talent, ideas, and capital are allowed to flow freely. They also tried to establish a recipe of how to create an IE. Quoting, “Instead of creating Siicon Valley clones leaders should concentrate their efforts on organizing a system in a way which will stimulate trustworthy, general rules and irrational motivations”

In a sense Silicon Valley is not a place. It’s a mindset.

The problem with this approach I think is that they analysed a system as it is, without considering historical roots of Silicon Valley origin. These roots give us another very important dimension. Will tell about a bit later.

2. Policies Making Approach

There is a nice book called “Growing the Next Silicon Valley” (published by Lexington Books in July 1987). The authors are Mr. Miller (was a Director of Technology and Management Program at the Universoty of Quebec in Canada, founder of strategic consulting firm SECOR) and Mr. Cote (was apresident of SECOR and a partner in Amber ElectroDesign based in Montreal). So, now you have a perception of what would be an approach I’m going to describe. Consulting, strategic, a bit academic, based on facts. Their main idea is that the right strategy can trigger the formation of a regional high-tech cluster. Well, sounds good. But what is inside?

They insists that a successful strategy must match the existing resources and capabilities of the region. But all sound approaches will stress a long-term commitment by public and private leaders, a focus on homegrown enterprises, the use of contracts by existing companies to stimulate new ventures, linkups between universities and businesses, and a supportive, if secondary, role for government. This approach is more likely to yield the high-tech incubators, company-to-company links, research and development vitality, and local venture capitalists needed for a self-sustaining high-tech cluster.

To put it into action authors propose:

  • Ensure the development of incubators
  • Develop linkages through initial contracts
  • Fund R&D to maintain technological vitality
  • Encourage contractual links between universities and bisenesses
  • Develop professional venture capitalists

Implementation of this approach, however, strongly depends on the starting point and region’s assets, public and private leaders. They should design appropriate program and list of policies in order to ensure successfulness of the future innovation ecosystem. Moreover, when we speak about the developing countries mostly all of them lack all the points. Or at least they are starting from scratch. Thus, this method should come after establishing an economy where it will be easy to do a business. Thus, we’re close to the next approach which aim is to build a healthy economy first.

3. Ecosystem and Infrastructural Approach

I’ve already mentioned this framework in my post before (What economy need to have successful innovation ecosystem). It’s main parts are:

  • The rule of law. 
  • Respect for property rights. 
  • Stable money. 
  • A progrowth tax system.
  • Ease of starting a business.
  • Few barriers to doing business.

 In short, it’s about creating neccessary conditions for an economy where it will be possible to do business easily.

But  all of the well-meaning approaches I’ve listed here are missing an essential ingridient: demand for innovations.

Demand as a key force for building innovation ecosystem

The demand for innovation has been the common force behind all higtech hot spots, as well as the most important inventions. Let’s remember main technological breaktrhoughs since 1750s. Steamsheep, trains, cars, aviation responded to a compelling need felt by a huge number of people to move faster from point A to point B. Telegraph, radio, telephone, internet, cell phone were an answer to the need of faster communication. And so on… Government projects in Germany (30-40s), USA and Soviet Union during Cold War drove demand for more basic technologies (which are simply inventions that no one has asked for yet) in the 20th century. Think about First Sattelite, or Apollo program or first rockets.

Now the most interesting. According to many researchers including Steve Blank Silicon Valley was built on demand coming from Goverment and research for Defense. The US Department of Defense put up tens of billions of dollars in contracts for microelectronics. Which later gave us innovators, startups. The same for the Soviet Union Technical Boards and Design Department. A lot of new methods, technologies, breakthrough inventions happened due to the Government Order which was driven by geopolitics.

Let me provide you with a nice presentation which describes the Secret History of Silicon Valley.

Types of Demand for Innovations

The demand is not created equally. There is difference. I think we can distinguish between consumer (market-driven) demand and state-sponsored demand.

Market-driven demand is far less predictable, and therefor much riskier, than state-sponsored demand of the sort that launched first man into space. Companies that depend on their product’s commercial appeal are limited in the kinds of innovations that they can safely introduce. In other words, if one of the products fails in the marketplace they may not survive to build another one. That’s why we see very few successful examples of corprate innovations. Another important feature of this type of demand is short-term orientation. Company should be fast enough to meet changing requirements of its customers. Thus, it requires fast break-even, high ROIs and almost no long term orientation nowadays.

State-sponsored demand is long-term initiative. It’s predictable. For instance, Apollo program gave innovators very clear goals, roadmaps and quite long terms eventhough there wasa tough competition between USA and SU. Unlike market-driven demand, state-sponsored one creates an environment in which multiple solutions to technical problems can appear ad coexist. Some of these research efforts will never see the shelf-life. However, it was diversity of options, that allowed digital revolution to happen. Therefore, I strognly believe that modern Silicon Valley appeared due to firstly state-sponsored demand. This means that this is the more efficient mechanism for generating innovations especially when we think about long-term inventions (which require 10-20-30 years of work).

One of possible models that could work is presented below. This is a model designed in Crowdsynergy (by Alex Krol and improved by me). The main idea is to launch a cycle of money, demand, people and projects. The driving force would be demand of achieving some long lasting goals, it will be pushed by government and major companies to venture funds, universities, corporate R&D labs, incubators in order to get solutions to the problems. These players consequently should educate, involve and create teams of talented people, as well as transfer money coming from government and companies. Startups will create technologies, patents, inventions which could be either transferred into successful businesses, or put on a shelves. However, the main driving force here is demand.

The Cycle of Demand, Money, Projects and People in the Innovation Ecosystem

The Cycle of Demand, Money, Projects and People in the Innovation Ecosystem

One interesting question could come up after thinking about all this.

From where demand will come? How governments will know what goals to establish?

During the history I think there were two main forces: geopolitics (competition for resources) and ensuring satisfaction of basic human needs. So, what will be in the future? Let’s see…

Lessons Learned

There is one lesson that could be learned for those who want to create a succesfull innovation ecosystem. Don’t try to replicate a Silicon Valley. It’s unique in terms of combination of players, universities, VCs, R&D centers, and it’s historical development. Try first to understand what do you want to develop in your region country (which areas of knowledge would be key for your country), then build a roadmap and create a demand for innovation. After that innovations will come.

Good luck for you.


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