Last week I broke down the math that demonstrates that the vast majority of entrepreneurship and startup activity occurs in places outside of the traditionally recognized tech hubs. Cities like San Francisco and Seattle get a lion’s share of press – mostly because of the money invested from those cities, not the technology happening in them – but are in actuality a really small sliver of the overall startup pie.
But another reason those cities are so highly regarded is that they headquarter some of the world’s largest tech companies. After all, it’s companies like Google, Meta, Apple, Amazon and Microsoft that are leading the world in developing new technologies, right? Actually – no.
It may surprise you to know that the biggest of the big tech companies actually do very little authentic innovation in-house. Almost every major tech product that you’ve seen launched to market by an established tech brand has its origins in a startup company that big tech acquired.
Consider Amazon’s Alexa.
In October of 2011, Apple launched the iPhone 4S with a revolutionary new voice assistant, Siri. Recognizing the power of a natural language interface for technology, Amazon needed to craft a competitive response. They did not have internal capabilities to build advanced NLP technology on their own and acquired a British startup, Evi in 2012. Evi had created a voice-activated search app. In 2013, Amazon acquired Ivona Software, a Polish speech-to-text startup, integrated it with Evi and launched Alexa a year later.
But the Alexa story is one of competitive catch-up. What was the story behind the OG, Siri?
Well it turns out that Apple didn’t innovate Siri either. In fact, Siri was first launched in February of 2010 by Siri, Inc, a mobile phone software startup working on voice assistants. The startup was a spin-out from a DARPA project that coordinated more than 300 researchers from 25 universities around the world from 2003-2008 to create core voice technology innovations.
Apple purchased Siri Inc for $200M two months after they launched their voice assistant. In that same period, Apple acquired mobile chip company Intrinsity (April 2010, est. $15-35M) and mobile advertising platform company Quattro Wireless (Jan 2010, $275M). They spent about 18 months integrating the complementary technologies into the iPhone 4S for a unified platform experience.
There was extremely little real “innovation” happening at Amazon or Apple, from a technology perspective. Both companies are great at identifying market opportunities, purchasing solutions from the startup domain, and then integrating and scaling. In total, Apple paid about $500M collectively for the core components of their Siri ecosystem, and certainly millions more in marketing it. But none was their own developed technology.
Amazon didn’t even innovate the Alexa name. It came from Alexa Internet, a web analytics company that Amazon had acquired in 1999. [Note – Alexa is used for the sound of the X when spoken, which is more easily identifiable by the voice recognition algorithms than some other consonant sounds in spoken language].
Let’s look at another household tech brand with a major presence in RTP. Cisco Systems was a big company when John Chambers joined the company with revenues of $70M. During his 20 year tenure as CEO, he orchestrated 180 acquisitions, growing the company to $47B in sales. The vast majority of these were technology acquisitions (with the balance being direct competitor acquisitions to grow market share).
I had the pleasure to join Chambers as a speaker at a recent AI event. He spends most of his time in retirement investing in new AI startup companies. Chambers has followed a simple playbook in his Cisco career. It is far more profitable to innovate by acquisition than through internal development. As an investor, he’s now helping build the next generation of future acquisitions.
I’ll share a personal experience. I spent about 20 years of my career working in major tech companies, including Ericsson, HTC and Sony (via their joint venture with Ericsson). I worked mostly in new product development and technology exploration.
These are vaunted brands known the world over that have launched iconic products. And the companies have world-class engineers and developers. But year after year, we would fight for even the tiniest budgets for new technology development. When times were really good, we might get a budget for 2 or 3 people to work on advanced technologies at a site with 1,000 employees. And any time another project got off track, we would get pulled off our technology work to support nearer-term needs in the business.
The new technology budget would cover a few salaries, but not actual technology development projects. I recall one year our total new technology development project budget was less than six figures. Compare that to the $24M that Siri, Inc had raised from investors to bring voice tech to market. Which team is more likely to succeed, the well-funded startup or the cost-avoiding multinational tech company?
Big companies need to make quarterly earnings reports and are driven by shareholder pressure to minimize costs and maximize speed of profits. Transformational technology innovation takes time and money. Back in the 1950’s, employees were listed on the asset side of a company balance sheet. A great team was seen as an asset that was rewarded when calculating the value of a company on the stock market.
Similarly, a great corporate research lab meant the promise of innovative future products. Bell Labs, Xerox and GE were titans of developing in-house technology innovations. But the world has changed since those days. CEOs like Jack Welch at GE moved employees from the asset side to the cost side of the ledger. This creates an easy path to show short-term profitability through rapid cost-cutting (layoffs) to shore up stock prices any time there is a slow sales quarter.
Most corporate “innovation” in recent years has been around creative accounting, tax avoidance and other measures of financial performance. Pay attention to how often earnings reports today use non-GAAP methods (Generally Accepted Accounting Principles). That’s a good indicator that a company isn’t focusing outward on solving customer needs, but rather is inwardly manipulating numbers to protect shareholder value. The pressure for short-term performance has driven all focus to the bottom line with no room for long-term technology investment.
Internal corporate technology innovation teams, with their limited project budgets, can only afford to scout what is happening in the startup and university research spaces. A sub-six figure budget will cover limited travel and testing of startup technologies. It won’t support developing technology yourself.
Instead of authentic technology development, companies put budgets into highly talented technology integration teams with powerful branding like Lab126 (Amazon) and Google X. This reinforces public belief that major technology brands are the innovators, even though in practice they are integrating the work of others. The cost of a tech integration team is far less than the cost of long-term technology development.
Big tech typically acquires startups after they demonstrate market traction and technology maturity to de-risk themselves from spending research dollars on tech that might fail to perform. This dramatically shortens the time between the investment cost (startup acquisition) and the revenue return of selling and scaling the startup’s innovation in the market. The approach prioritizes financial returns over engineering problem solving.
About a dozen years ago, HTC ran an advanced concepts team out of American Underground. I helped lead a team that traveled around the world, finding cool tech, and then integrating these new technologies into advanced concept prototypes. We had to demonstrate new technology integration concepts to the HTC board of directors every month, with immediate go/no-go decisions coming down. The very few new technology integrations that made the cut needed to be in the market within a year. [Fun fact – HTC, out of AU, purchased Beats for ~$300M and integrated their audio algorithms and brand into HTC phones before Apple – a much bigger player – came along and bought Beats for $3B].
We didn’t do much real innovation, though we worked on really innovative concept products. The actual advancement of science and technology came from startups and small businesses, as continues to be the approach today. Alas, even that HTC integration team didn’t survive shareholder pressure and was shut down just a few years after it was started. Short-term accounting thinking prevailed over longer-term engineering development. Without new customer value coming to market, HTC as a handset provider failed and the cellular industry consolidated.
So what does this mean in the broader context? After all, we continue to see technology advances get to market in many industry verticals. Does it really matter whether that innovation is coming from startups and small businesses or from big tech? The question to ask, in my opinion, is what does our society need most?
If we care most about the financial health of the stock market, as a proxy for the economy, then the status quo will suffice. It means continued market consolidation to fewer and fewer really large corporate technology integrators. Wealthy investors will continue to support a relatively small technology startup community and big companies will cherry pick the least financially risky of them to launch new products.
But if our society wants to achieve real societal wins like curing cancer or solving climate change, we need to prioritize funding the growth of dramatically more technology startups. Solving important problems in our world tends to be the driving force motivating innovators and entrepreneurs. It is not the focus of bankers and financiers.
The government needs to stop giving major tax breaks and incentives to multinational technology integrators (big tech) and instead allocate tax revenues to supporting new small ventures. We can’t rely entirely on the small concentration of really wealthy people to be the only venture capitalists. There isn’t enough breadth to grow a real middle class of tech companies from such a narrow demographic.
A positive reality is that a small business only survives by creating actual value. Small companies aren’t big enough to create false value by laying off employees or offshoring revenues or performing complex financial tricks. But small companies can and do create major technology innovations.
And technology companies pay high salaries. Those high income jobs circulate money through the local economy, supporting jobs in restaurant and retail, arts and entertainment. High paying jobs enable healthy economies and great places to live. We need many more small technology businesses to truly advance the economy for everyone.
It’s time to recognize where actual commercial technology advancement is happening and to focus our economic policies accordingly.
