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The Innovation Ecosystem

We cannot and should not prevent the ongoing failure of individual corporations. We must actively support the entire innovation ecosystem for the sake of evolving our economic future.
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If I were a venture capitalist in the year 65.5 million B.C. and had to make an investment choice that would change the future of planet Earth, the conversation might go something like this:

Dinosaur: "We're the largest, most dominant species on the entire planet. If we die, 75 percent of the world species die. We need your investment to keep our species going."

Mammal: 'We're the little guys. We don't have much to show for ourselves yet, but we're super adaptable, future-oriented, and can survive a catastrophic event. We're the right team to be the next dominant species."

As a VC, I'd invest in the mammals. Not because of 20/20 hindsight, but because of Charles Darwin's wisdom: "It is not the strongest of the species that survives, nor the most intelligent, but rather the one most responsive to change."

With that in mind, Thorstein Veblen in 1898 first pondered whether the rules of natural evolution can be applied to economics. Current events prove this to be more relevant than ever.

Right now, the U.S. Congress and economic experts are trying to avert a mass extinction of U.S. auto companies. Their rationale: Such extinction would destroy more than the industry, it could collapse our economy completely. Determining the right path is not easy, and either way the results will be painful.

But at this point, I'm interested in a different question: How can we prevent it from happening again?

Although I am the director of a leading university institute for innovation and a serial entrepreneur myself, in some ways I've learned as much about business lifecycles by observing nature on my weekend mountain bike rides.

What I've seen is that a thriving ecosystem, whether in nature or economics, emerges from an evolutionary culture that nurtures diversity, doesn't artificially pick "winners," and embraces failure early and often.

Nature resists monocultures - a single form of life - because of its heightened vulnerability to change. Just take a ride through a "managed conifer forest" in Oregon, which features a single species perfectly cultivated for timber harvesting. According to an analysis by Oregon State University and the U.S. Geological Survey, this lack of biodiversity has caused a severe, sustained epidemic of Swiss Needle Cast in Douglas-fir populations. A diverse forest, on the other hand, would be able to bounce back, helping the threatened tree adapt to the new threat.

Like in nature, diversity keeps the business ecosystem healthy. Innovation starts with the "understory" of the economic food chain: the entrepreneurs. In this group, you'll find the diverse and future-oriented thinkers that will advance our economy despite times of struggle. This group gives us the mutations - the radical changes that enable groundbreaking ideas to enter the ecosystem if they are worthy.

Big companies play an important role, too, in this healthy, diverse business ecosystem. They help amplify - through acquisition, licensing, or even copying - the impacts of successful ideas. But simply depending on large monopolies creates a dangerous susceptibility to economic stress like we are experiencing today.

Just as dangerous as cultivating a monoculture is picking a "winner" prematurely.

In the recent green energy debate, for example, the U.S. chose to subsidize corn ethanol as the winning new clean fuel, giving $7.0 billion in subsidies in 2006 alone. But according to an April 2008 World Bank report, world food prices have increased by 75 percent due to increased production of biofuels. Ethanol burns dirtier than gasoline, and it's no cheaper.

Through premature decision making, have we thwarted cheaper and cleaner competitors?

What we should have done, and still can, is to encourage innovators developing a wide range of fuel-alternatives including wind, algae, solar, methanol, and so on. Government should make available research funding, infrastructure, education, incentives, and regulations for the outcome we want, and let the market decide.

As evolutionary biologist Leslie Orgel once remarked, "Evolution is cleverer than you are."

We've heard about the five mass extinctions in the history of the Earth. What we don't talk about is that 99.9 percent of species that have ever lived are now extinct due to constant natural selection. This "background extinction rate" of species since life began has averaged 10-100 per year.

Death is inevitable in an ecosystem, and furthermore it can be healthy. It's this brutal process of failure that prunes out the weak from the herd. And as my friend John Seely Brown likes to say, it's these failures that form the fertilizer for the next generation.

Global Crossing may be the most striking example. In the late 1990's they had built an extensive IP-based network connecting four continents, 27 countries and 200 major cities. Despite their spectacular bankruptcy, we have a global information infrastructure unimaginable a decade ago.

But new innovations often cannibalize old products, just as digital photography did to film and the personal computer to the minicomputer. Economist Joseph Schumpeter described this process as "creative destruction," where entrepreneurs often destroy existing markets but are the foundation for long-term economic growth.

This scares many established companies that have a great vested interest in the status quo. But those corporations that can successfully adapt and embrace the process of creative destruction will help avert mass extinctions and today's "too big to fail" scenario.

Henry Ford would have concurred. In 1934 he said, ""I made my fortune when I had nothing to start with, by myself and my own ideas... If I lose everything in the collapse of our financial structure, I will start in at the beginning and build it up again."

I've come to realize that we cannot and should not prevent the ongoing failure of individual corporations. But while it's easy to say "let them fail," we must actively support the entire innovation ecosystem for the sake of evolving our economic future.

It is ironic that the mass extinction of the dinosaurs eventually turned into petroleum, which has in turn fueled the internal combustion engine and today's failing auto industry. I look forward to seeing what's today's failures will fertilize.

Krisztina "Z" Holly is the Vice Provost for Innovation at the University of Southern California, and Executive Director for the USC Stevens Institute for Innovation. She has a dog named Darwin.

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