The next wave of innovation will see products and services combining technology from across the digital, physical and biological worlds. Intersections between these worlds are opening up new sources of sustainable value, providing a foundation for such technology.
2019 has been the year that the tech Unicorn lost its wings. What was supposed to be a coming out party in which a bumper crop IPO’d has turned into an annus horribilis. The 25 that listed have seen their combined market value decline by 17% (as of the time of writing). Name brands like Uber, Pinterest, Lyft, Slack and Peloton hvave seen falls ranging from 6% to 47%.
But there are exceptions. Beyond Meat has seen a 231% rise. 10x Genomics 76%. What distinguishes these two groups? While the former focused on incrementally retrofitting digital technologies onto the world, the latter are creating sustainable value by more fundamentally weaving them into its very fabric. This approach will form the foundation of the next wave of innovation.
New opportunities are coming from creating products and services that combine technology from across the digital, physical and biological worlds. It is the intersections between these worlds that are opening up new sources of sustainable value.
Take buildings. New entrants are going beyond using digital technologies to optimize their use, and are instead rethinking their fundamental design and purpose, creating a built environment that lives and breathes. Pavegen seeks to deploy new materials in flooring so that it can generate electricity through footsteps. Basilisk is pioneering a new form of concrete that can self-heal. Econcrete partners with cement makers to produce modified concrete that fosters the growth of plants and animals. And 3M has developed roofing granules used in asphalt shingles to reduce smog – each ton of these granules has the capacity to mitigate the smog created annually by one car driven 3,000 miles.
Emerging innovators are also targeting human biology. Platforms like WeChat and Snap have enabled us to develop and edit our virtual selves. But a combination of AI, robotics and CRISPR may soon enable us to edit and upgrade our physical selves. Biotech start-ups are using machine learning to identify cancer-curing agents and wearable robotics start-ups are working to enhance human strength and mobility. Roam builds robotic exoskeletons that help Navy Seals run faster and more efficiently and has begun offering a commercial device for skiers. Seismic’s activewear looks and feels like apparel but is fused with discreet robotics to augment human strength. Its Powered Clothing suit supports the body’s core by providing up to 30 watts of power to each hip and the lower back.
Early-stage capital is already switching its attention to these new opportunities. Our analysis of global VC flows over the past five years shows that funding to physical and biological technologies has increased by 441%, almost double the rate of digital technologies.1 Y Combinator, the Silicon Valley “accelerator” that supports early-stage start-ups put 23% of its 2018 investments toward physical or biological technologies, up from 4% in 2013.2
The digital, physical and biological systems upon which these examples are built are more complex to engineer and scale than pure-play digital solutions. To succeed, would-be innovators will need to re-focus their efforts in three ways.
1. To innovate at the next frontier, disrupt your R&D habits
Companies will need to go beyond today’s proven digital technologies to innovate at the next frontier. And doing so depends on fundamental research, and the requisite skills, knowledge and infrastructure – as well as patience. This will prove challenging for many. It’s true that overall spending on R&D has been increasing in recent years: our analysis of the innovation habits of the largest 10,000 public companies by revenue over the past five years shows that average R&D spending rose by 31%. But that spending tends to be focused on incremental innovation in the legacy business. In a survey we conducted of 1,090 executives, only 18% reported they were applying disruptive innovation in emerging businesses.3
Ikea counters this trend. To take aim at radical solutions for a sustainable planet, it funded a fully independent R&D lab called Space10. The lab’s staff is made up of a rotating group of freelancers, selected for their expertise project-by-project in areas such as architecture, clinical psychology and 3D imaging. Space10’s projects have included Building Blocks, an open-source blueprint for low-cost modular housing that can be printed and adjusted to the environment; Lokal, a vertically integrated salad bar based on hydroponic and aquaponic farming that Ikea plans to offer via at-home kits; and Neatball, a set of meat-free alternatives to the 2 million meatballs the retailer serves each day.
According to Space10 co-founder Simon Caspersen, “We try to find patterns in the chaos. But we don’t look for solutions for Ikea, we look for solutions for humanity. And then say, ‘OK is that something that could be relevant for Ikea to actually solve?’ Which just gives us a completely different perspective.”
Marriott is another company using R&D facilities to push the frontiers of its business. Its lab, called The Underground, is a 10,000 square-foot space in the basement of its headquarters. It is a maze of rooms, each a working prototype of a guest space in one of its hotel brands. Ideas from The Underground are channelled into its M Beta hotel in Charlotte, which operates in “live beta,” with guests giving feedback in real-time. One floor is dedicated to “Stay Well” rooms, which features chlorine-neutralizing shower heads and lights that adjust to the sun’s natural movements.
2. To achieve scale, don’t be afraid to make new friends
While developing internal R&D capabilities is important to making new breakthroughs, few organizations will have access to the full range of capabilities required to take them to market at scale. After all, operating beyond the confines of digital technologies means dealing with the messiness of hardware, requiring access to highly developed industrial design and manufacturing skills. This calls for new models of collaboration that span the digital, physical and biological worlds.
Corteva Agriscience, which was spun out of the chemical giant DowDuPont, is one company building a network of partners to scale its innovations. It has pioneered the first large-scale industrial use of CRISPR/Cas9 genome editing, which makes it possible to deliver nutritious plants that could occur in nature or be developed through conventional breeding, but faster and more efficiently. There are a range of potential applications for the technology, including creating low-gluten wheat, improving the flavour and cost of decaffeinated coffee with a naturally decaffeinated bean, and reducing vineyard fungus affecting the wine industry.
To accelerate their development, Corteva and the Broad Institute of MIT and Harvard have jointly offered access to their CRISPR-Cas9 technology for use in agricultural applications, removing a significant barrier for organizations of all sizes to apply it. One such organization is Simplot, which is using the technology to bring desirable traits forward in fruits and vegetables such as potatoes. This could reduce the bruising and browning of potatoes, eliminating some of the 3.6 billion pounds of potatoes wasted each year.
3. To reduce risk, get serious about corporate venturing
The infrastructure, skills and resources needed for the next wave of innovation require substantial funding capacity over an extended period. Testing and scaling is much more costly when it involves purchasing hardware as well as software, which is available and relatively inexpensive from the cloud. Not only is the capital intensity higher than digital product development, the payback periods are typically further in the future because of the longer time to market for frontier technologies.
In order to reduce the risk associated with their innovation efforts, incumbents are broadening the investment vehicles they use beyond their internal R&D efforts and M&A activities to also encompass a greater focus on corporate venture capital (CVC). According to CB Insights in 2018 CVC funding hit an all-time high of $53 billion, an increase of 47% over 2017, and up from $10 billion in 2013. 264 new CVCs invested for the first time – spanning industrial verticals from logistics and shipping (Maersk Ventures) to automotive (Porsche Ventures) – with 773 CVCs making investments. In the United States, CVC constituted 50% of total venture capital deal value in 2019.
These investments aren’t just about capital, they also come with the provision of technical and operational expertise. Nor are they solely allocated externally – internal teams can also access it. The biotech company Genentech, which became a subsidiary of Roche in 2009, runs an innovation fund that supports employees with novel ideas that aren’t necessarily being explored by the company, such as new drug-delivery systems or applying AI to drug design. The industrial giant Siemens runs a Quickstarter program that allows employees to independently allocate money to support the development of colleagues’ ideas. And ZX Ventures, the brewer AB InBev’s CVC, runs a two-week boot camp every summer for around 15 AB InBev employees, where they learn and then apply techniques for developing new products.
The past era of innovation, in which atoms were replaced by bits, saw industry incumbents fundamentally challenged by start-ups. The next era of innovation may be different. The future will advantage those with patience, partnering prowess and risk management capabilities, all of which are more commonly associated with incumbents.
The 2010s were the age of the Unicorn. Will the 2020s be the age of the incumbent?
The authors thank Dave Light, Mike Moore, and Babak Moussavi of Accenture Research for their contributions to this article.
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