Guest Post: The real lesson Indiana can learn from Silicon Valley
How to leverage critical mass to achieve sustainable innovation and capital growth
By Tom Underwood
There has been no shortage of thought pieces in recent decades seeking to help the industrialized Midwest mimic Silicon Valley’s innovation formula. However, political and economic developments in recent years have compelled Midwest economies to keep seeking answers to drive valuable employment growth, attract innovation capital, and retool economies from their historical reliance on manufacturing while avoiding the pitfalls of over-reliance on low-value service sector industries. If the former “Rust Belt” is to be a viable economic player in the future that can compete with the Coasts, this continued search for answers is necessary.
This short piece will argue that when seeking answers from Silicon Valley, people often look in the wrong places. There is a model for success there that makes the headlines, but below those headlines there is an innovation ecosystem not built on the legendary, lone entrepreneur, but instead on a near surgically-precise method to continuous innovation, capital deployment and value creation. It is in that latter model for innovation that unique opportunities for Indiana can be found.
Silicon Valley leaders are just fine with the mythology of the Ivy League dropout that moves to the West Coast to disrupt entire industries, or the Stanford genius that gets millions of VC funding while still living in her dorm room. It keeps peoples’ eyes off of what is really going on, and the Valley’s real formula for domination of innovation capital (both financial and human).
So what is that formula? It is based on network-enabled ecosystems tied to innovation sectors in which financial and human innovation capital are constantly recycled through major companies, to startups, to successful exit events (IPOs or acquisitions), back to major companies, all facilitated through venture capital funding.
Here is how the formula works in daily practice:
A budding innovator at a major company (such as Salesforce or Genentech) either decides, or is more likely encouraged by venture capitalists, to start a new venture
The innovator becomes the founder and works with his or her employer and sponsoring venture capitalists to form the startup with some degree of connection to the major company – this could range from launching it from within the company, to a joint venture, to simply co-developing and licensing IP
Upon launch, the company invests alongside the venture capital firm and becomes one of the venture’s first customers and first sources of revenue, and its executives support the venture in developing new business and recruiting key executives to the venture
With this nearly turnkey critical mass of capital, which for a standalone startup are the most difficult building stages in its life cycle and the period where failure is most likely, the venture is launched into the world
Plans for exit, either an IPO or sale, are developed early-on. Target acquirers are recruited from a built-in network of companies and private equity firms associated with the company, the venture capital firm, and the executive team recruited to the venture.
Following exit, proceeds from the sale or IPO are distributed among the venture capital firm, company, founder, and recruited executives
These principals of the venture now recycle themselves, and the capital they gained, into the next round of promising ventures and the companies, venture capital firms, and executive teams needed to feed the ecosystem
The vast majority of successful ventures that work through this ecosystem never make the popular press. They do not make their founders billionaires or household names. But the constant flow of ventures with exit events in the $50 million to $1 billion range are the bedrock of Silicon Valley’s wealth and innovation dominance.
Efforts to replicate the Silicon Valley innovation model fail when it is believed that Step 4 is the real start. Failure is a near certainty when you start with the startup. But as the above makes clear, success is not based on the startup, it is based on the collection of capital that is organized prior to the startup’s founding. Should such capital not be formed prior to launch, the likelihood of success of any venture, or the economic policy from which it came, is near zero.
Replicating such a powerful model in a short time may seem hopeless at first, but I believe Indiana is uniquely positioned with critical masses of capital in budding areas of innovation that must simply be reorganized properly to begin the creation of such network effects and capital deployment.
Examples include:
Healthcare
IU Health System, Eli Lilly, and the many medical device manufacturers in Northwest Indiana form a natural ecosystem for developing, testing, and deploying novel clinical innovations in areas such as precision medicine, nanotechnology, molecular pathology, and immunology.
These same players could drive innovation on the cost side of healthcare – partnering to test novel models for healthcare reimbursement that focus on patient value and outcomes, breaking our country’s unsustainable reliance on Fee for Service healthcare payment.
Agriculture
Indiana’s vast network of capital in the agricultural sector can be reorganized and funded to drive innovation in critical areas such as meat alternatives and alternative fuels, with Purdue as its foundational center for IP development, talent, and innovation testing.
End-of-Life Care
Adjacent to healthcare but with markedly different needs and structural issues, end-of-life care is on trend to overwhelm health systems in developing economies both in terms of costs and infrastructure strain.
Hillenbrand Industries is the global leader in end-of-life care and can partner with IU Health System and its network of customers (such as American Senior Communities, based in Indianapolis) to test needed innovations in end-of-life care models.
These are just examples drawn from growing up in Indiana, but each also offers unique and tangible opportunity for two reasons:
Each are real areas of either emerging innovation or where innovation and national leadership are desperately needed
Silicon Valley has limited-to-no leadership in any of these innovation areas
Should Indiana commit to organizing its capital to seize these and similar opportunities, I have no doubt that the industriousness and sound economic policy that have been hallmarks of Indiana for generations can be leveraged to create such innovation ecosystems in a surprisingly short time span.
About Tom Underwood
Based in Chicago, Tom Underwood grew up in Muncie and is a Ball State graduate. He has held executive positions at Deloitte Consulting, Nielsen Company, Zurich Financial Services, and the American Medical Association and has worked globally in data innovation, healthcare reform and insurance.
