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The Pace and Price of Innovation

David H. Smith, CFA, Senior Vice President, Domestic Equities

Matt Johnson, Vice President, Healthcare Investments at Bailard

December 31, 2019

It’s hard to remember our lives without modern technology.

Recall that the first internet message was transmitted only 50 years ago. Using an experimental computer network known as ARPANET, the message originated with grad students at UCLA and was received by computers at the Stanford Research Institute that sits just down the road from us in Silicon Valley. The message sent was just one word (“login”), but the program ran out of memory and crashed after the first two letters. With that, the history books recorded the internet’s first message as “lo.” It took another two years to send the first email in 1971.

Fast forward and consider that the world sent nearly 300 billion emails per day in 2019. Taking a moment to look at the dates of technological breakthroughs can be jarring given how many of them are so recent. The Human Genome Project was “essentially completed” in 2003.(1) The original iPhone was released in 2007. The license for autonomous vehicles was granted in 2012 and the first gene therapy approved for use by the FDA occurred in 2017.(2) The last decade in particular was a whirlwind of innovation, and reflecting upon it is a humbling exercise. These developments not only changed our daily lives but fundamentally altered the structure of our society and the world economy.

Progress in tech over the last ten years has forced investors to rethink how enterprise companies consume technology. There are many examples of this, but we’re specifically thinking of the impact of virtualization and Infrastructure-as-a-Service offerings like Amazon Web Services and Microsoft Azure. These services—which have grown into behemoths themselves—allow enterprises to purchase virtualized storage and resources over the internet on a highly-scalable, incremental, as-needed basis. This has proven incredibly attractive to large enterprises, as they can effectively outsource data center management. More broadly, virtualization and cloud services have dramatically lowered the cost of starting and scaling a new company.

Not so long ago, a new startup would need to make a very significant, fixed upfront investment in servers and hardware to roll out a new product. That’s no longer the case. That same cost is paid for on an as-needed basis and scaled up to meet demand as the customer base grows. Let’s not underestimate the impacts of lower barriers to entry for the innovation ecosystem; perhaps some of the IPOs we see today would simply not exist if their start-up costs had remained elevated.

Analogous to this shift, a number of companies today are redefining how developers think about non-core application functions. Not too long ago, if you needed functionality to allow your app to email a user, this required upfront investment in coding hours as well as an email server and licensing. Today, that same process can be done in a matter of seconds with a few short lines of code utilizing a third-party API. We’ve already seen new companies develop similar services offering solutions for real time translation, voice to text, security authentication, fintech, and payments. Similar to the industrial revolution, we view these developments as tools building better tools; the progress, proliferation, and democratization of these building blocks is exceptionally exciting as we enter the new decade.

In many ways, biotechnology companies have mirrored the adoption and commercialization curve of information technology companies with respect to these building blocks. Biotechnology even has its own form of Moore’s Law (which predicted the doubling of transistors in computer chips every 18 months), related to the cost reduction of sequencing a human genome over time. The early genetic testing/sequencing technologies—such as Southern blot analysis and Sanger sequencing methods—were deployed in the 1970s and 1980s and allowed for screening of heritable diseases such as cystic fibrosis, phenylketonuria, and Duchenne’s muscular dystrophy. At the time, these were cutting-edge technologies; yet today, seventeen years after the completion of the Human Genome Project, we not only use new rapid sequencing technologies that can be completed practically at the bedside but we also have medicines targeted at the underlying genetic mutations for treatment.

Consider a therapy comprised of two small molecules approved for use in cystic fibrosis patients identified with two copies of a particular gene mutation. The drug was approved by the FDA in 2015 and works by improving the conformation (or shape) of the mutated protein as well as promoting the production and function of the CFTR protein cells found in organs such as the lungs. (3)

Another incredible example of taking our genetic knowledge even further was the 2017 FDA approval of a one-time gene therapy for the treatment of patients with vision loss due to mutations in both copies of a specific gene. This was the first time a gene therapy was approved outside of oncology indications and was also the first gene therapy approved that was directly injected into the tissue being corrected. We are just beginning to see the massive potential human impact from this foundational building block. Today, just two years after that FDA approval, there are already over 1,000 studies listed on that are recruiting patients for gene therapy trials. (4)

While these tremendous stories in technology and healthcare are inspiring, we believe it’s equally important to remember that these innovations are tools and are not by themselves inherently good or evil. Society—and media in particular—can fall into the trap of broadly painting new technologies as miraculous gifts that will solve the world’s problems.

Society can fall into the trap of broadly painting new technologies as miraculous gifts that will solve the world’s problems.

This past decade was a reminder that, in the hands of the wrong people, technology can have devastating consequences. While many social media platforms launched in the 2000s, their power was fully realized in the 2010s. The largest and most influential social media platform in the world, Facebook, conducted its IPO in 2012 and earned $538 million in operating profits that year. In 2019, that total is expected to exceed $25 billion. The ability for individuals to connect with families and friends has reshaped our relationships, and users across the world share and socialize with groups passionately dedicated to movements. Yet, a major theme of the last decade was the havoc that decentralized information platforms can wreak on societies when bad actors create systems to take advantage of unknowing users.

The term “fake news” became part of our everyday lexicon partially as a result of the preponderance of misleading and outright falsified rumors frequently circulated to millions across the globe. We saw nefarious groups use powerful marketing techniques to micro-target U.S. citizens during the 2016 election cycle, which prompted multiple government investigations. Social media was also used as a key platform in disseminating hate speech, false rumors, inflammatory messages, and propaganda to fuel the heinous ethnic cleansing of the Rohingya people in Myanmar.

Stories of bad actors utilizing new technology were seen in the world of biotech, as well. Chinese scientist He Jiankui implanted two women with genetically-altered embryos resulting in three “designer” babies in an attempt to confer resistance to HIV with edits made to the embryo. Jiankui was recently sentenced to three years in jail as a result of his actions.

The last decade will be remembered as one in which these tools gained widespread adoption. But, the next decade may well be remembered for how our society reacts to them, both behaviorally and legally. Despite these drawbacks, we remain exhilarated by the impact of technology and the pace of innovation. Looking ahead, we see the convergence between the worlds of technology and healthcare gaining traction over the next decade. There is a clear theme in the venture capital world of blending this line: using artificial intelligence to help predict cellular pathways or utilizing modern tech services to evolve the delivery of healthcare services, for example.

We can’t wait to see what’s next.

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