"Innovation Is In Crisis"

Posted by: Michael Arndt on March 04, 2009

As a venture capitalist, Pascal Levensohn must be an optimist by nature. Why else would he direct his San Francisco VC fund to invest in startups that have little going for them beyond potential? But in a speech on Mar. 4, the founder and managing partner of Levensohn Venture Partners sounded downright despondent.

“Innovation, American know-how, entrepreneurs—these are the foundations of American success. But our foundations are crumbling,” Levensohn said at the Cybersecurity Applications and Technologies Conference for Homeland Security in Washington. “I firmly believe America’s innovation ecosystem is in crisis and that this crisis is becoming progressively more acute.” (His entire speech is here.)

His cri de coeur reminded me of a despairing report issued last week by the Information Technology and Innovation Foundation. Titled Benchmarking EU and U.S. Innovation and Competitiveness, the report found that while the U.S. ranks sixth globally in innovation and competitiveness, its score fell further than any other nation’s in the last decade.

What's wrong with the U.S.? Levensohn said two long-term trends are converging with a new one to choke off innovation. First, corporations have been spending their research and development funds increasingly on incremental breakthroughs rather than basic science. Second, total R&D spending as a percentage of the overall economy has been shrinking, though it's rising in many other lands.

And third--and this is may be the biggest threat today--the financial crisis has turned almost everyone into a scaredy cat. With markets crumbling, few are willing to invest in anything that has even a whiff of risk.

"Precisely at the time when we most need long-term risk capital to plant the seeds for the next generation of breakthrough innovations and to fuel sustainable job growth in America," Levensohn said, "these factors have conspired to drain the risk capital that is the lifeblood of our economy. This financial dislocation dims what could otherwise be a bright future for the next generation of American entrepreneurs."

What to do? Venture capitalists, investment funds, and banks must renew their lending to startups, Levensohn said. (He didn't say anything about what he's doing with his fund's $200 million in committed capital. I wonder why not.) The federal government must also boost its R&D budget, as it is under President Barack Obama's economic stimulus package. And the U.S. must attract the smartest minds from around the world, and then entice them to stay.

Innovation and national competitiveness are vitally important to the standard of living of the U.S. Are the alarm-ringers getting the public's attention?