Reflecting on the Role of the State in Funding Radical Innovations

August 2016

Last week, I had the privilege of meeting with the founders of a groundbreaking company in Munich. These three physicists have dedicated nearly a decade to tackling one of the most complex problems in physics, working toward a transformative breakthrough that could disrupt a multi-billion-dollar infrastructure market untouched for 70 years. Despite their progress, they still face significant technical and reliability hurdles, with full-scale commercialization likely another five years away.

This encounter left me reflecting on the unique challenges companies like these face and the broader role of the State in nurturing radical innovation.

The Characteristics of Radical Innovation

Radical innovation is not for the faint of heart. It demands a unique blend of patience, persistence, and risk tolerance. From my observations, such endeavors share several defining characteristics:

1. Long Time to Market:
   Bringing radical technologies to market involves navigating a series of daunting steps, including:

   • Fundamental research and technological development.

   • Transitioning from lab-scale prototypes to industrial-scale production.

   • Extensive product reliability testing and validation by end-users.

These stages can span decades, with the history of transformative innovations—transistors, optical communications, LCDs, LEDs, and the Internet—showing an average timeline of 20 years from invention to commercialization.

2. Scaling Challenges:
   Scaling these technologies from small-scale lab environments to large-scale manufacturing is fraught with technical and logistical challenges. Companies must refine reliability and yields at every stage while often developing specialized equipment and processes to remove production bottlenecks.

3. Capital Intensity:
   Radical innovation requires substantial capital investments across multiple stages of development, from R&D to commercialization. This makes funding highly unpredictable and challenging to secure, especially for private investors focused on short-term returns.

Given these challenges, it’s unsurprising that many venture capital (VC) firms avoid these opportunities. The high technological and capital risks associated with radical innovation make them poorly suited to the typical VC model, which prioritizes investments with shorter time horizons and more predictable returns.

Why the State Should Play a Proactive Role

In the absence of adequate private-sector support, the State is uniquely positioned to bridge the funding gap for radical innovation. While the notion of an active State role in venture funding may raise eyebrows, history demonstrates that State involvement has been instrumental in driving technological breakthroughs with far-reaching societal benefits. Here’s why I believe the State should take a more proactive stance:

1. Tolerating Economic Waste for Long-Term Gain

Markets prioritize efficiency, often to a fault. The private sector’s aversion to uncertainty leads to an overemphasis on low-hanging fruit—technologies with short commercialization cycles. Radical innovation, by contrast, involves inherent inefficiencies and risks, often labeled as "economic waste."

Yet history shows that such waste has been a powerful driver of economic growth. The State, with its vast resources and broader societal mandate, is uniquely equipped to absorb these inefficiencies and channel them into transformative outcomes. Instead of merely subsidizing or de-risking private investment, the State should actively manage a portfolio of high-risk, high-reward projects.

2. Superior Long-Term Portfolio Management

Radical innovation is a marathon, not a sprint. The process of invention, prototyping, scaling, and market creation can take 15–25 years. This requires a level of patience and long-term strategic thinking that private investors often lack.

The State is inherently better suited to managing such intertemporal portfolios. By leveraging its ability to take a long view, the State can nurture technologies through the inevitable setbacks and challenges that arise over decades of development.

3. Addressing the Funding Gap

Commercializing radical innovation can cost hundreds of millions, far exceeding what most VC funds are willing or able to commit. In the past, large corporations like IBM, AT&T, and Siemens played a pivotal role in financing such projects. However, the rise of shareholder value maximization in the 1980s has shifted corporate priorities toward shorter-term gains.

Similarly, reductions in State budgets, austerity measures, and defense cuts have diminished government funding for foundational R&D. This creates a critical opportunity for the State to step in as a primary financier of radical innovation, ensuring that transformative technologies continue to advance.

4. Remaining Competitive in a Changing World

The traditional concept of the Nation-State is under pressure from globalization, digitalization, and decentralized business models. To remain competitive and relevant, States must invest in general-purpose technologies capable of driving economic growth and human capital development.

A compelling example is Israel, where the State has actively incubated cutting-edge R&D and commercialized transformative technologies, significantly enhancing its economic and technological standing over the past two decades.

A Call to Action

Radical innovation holds the potential to redefine industries, create new markets, and address some of humanity’s greatest challenges. However, realizing this potential requires a level of risk tolerance, patience, and strategic vision that the private sector alone cannot provide.

Peter Thiel famously lamented, “We wanted flying cars; instead, we got 140 characters.” If we are to see the next generation of transformative technologies—whether in energy, transportation, or computing—the State must embrace its role as a proactive investor, not merely a safety net for private capital.