Academic critics have long argued that U.S. companies need to make more “creative-destruction” investments that boost productivity by replacing existing processes with very different and more efficient ones. Instead, U.S. companies too often think small, looking for ways to cut costs and settling for safe investments that increase productivity modestly.
A 2020 Harvard Business Review article titled, “Your Company Is Too Risk-Averse,” described a McKinsey survey that asked 1,200 managers this question: “You are considering a $100 million investment that has some chance of returning, in present value, $400 million over three years. It also has some chance of losing the entire investment in the first year. What is the highest chance of loss you would tolerate and still proceed with the investment?”
The expected value of the investment is positive if the probability of success is at least 25%. Yet, on average, the managers said that they would make the risky investment only if the probability of success was 82%. Just 9% of the managers required less than a 60% chance of success. Based on this survey and their own consulting experiences, the authors concluded that, “managers in large corporations routinely quash risky ideas.”
A more fundamental problem may simply be that managers cannot confidently specify anything resembling the black-and-white choices posed in these surveys. The reluctance to commit substantial resources to risky ventures may be due to the reality that the risks may not lie simply in the probability of failure but in an overwhelming uncertainty about the potential payoff.
In recent years, some companies have been making riskier investments but so far have little to show for it. Elsewhere, we have written about the recurring failures of AI moonshots, like IBM’s Dr. Watson, which are mostly attributable to business executives being seduced by AI’s nasty habit of overpromising and underdelivering.
Other areas seem more promising, though still uncertain. Nuclear fusion, an area once considered too far-off for commercial investment, is booming. Among the $3.4 billion given to nuclear startups in the past years, five of the seven largest investments went to fusion-focused companies. Commonwealth Fusion Systems raised a huge round of more than $1.8 billion in December 2021 led by Tiger Global and investments from Bill Gates and about two dozen others.
Quantum computing is also in the midst of a venture-capital funding boom, receiving a record $823 million in 2021, up more than 70% from 2020. Palo Alto-based PsiQuantum received $450 million, which gave the company a $3.1 billion valuation. Toronto-based Xanadu, a designer of quantum silicon photonic chips received $100 million.
Venture capital firms and growth-equity funds have also plowed close to $42 billion into battery technology startups across almost 1,700 deals in the past 10 years; 75% of these investments happened in the past two years. General Motors GM, for example, has invested in SES AI SES, +2.07%, which is developing lithium-metal batteries. Ford Motor F, -1.56% has done the same with Solid Power SLDP, -5.25%, a solid-state startup that’s closing in on production. Volkswagen VOW, -1.00% has a significant stake in solid-state company QuantumScape QS, +1.48%, and Porsche P911, -0.60% invested $100 million in Group14, which is developing silicon-augmented anodes that can help make batteries lighter and more powerful.
A fourth example of an increased appetite for risky investments is synthetic biology. Startups in this field received $18 billion in 2021, capping a long runup for these technologies. Some have gone public, a fact celebrated by even Nature magazine. Ginkgo Bioworks DNA, +0.51%, for example, landed a blank-check deal that valued the company at $15 billion, more than triple what it was worth last year.
Long on promise; short on time
Will these and other risky investments prove fruitful? Hard to say. These types of technologies often take decades to succeed, which is a long time for venture capitalists known for their myopia and impatience.
Some investors are already getting antsy. Share prices for synthetic biology startups, including Ginkgo, began to plummet in late 2021, particularly ones that hadn’t begun human testing. Share price declines have continued in 2022.
Battery share prices are also tanking. QuantumScape’s share price began its decline in 2021, followed by Standard Lithium SLI, -0.48% and others in 2022. The title of a February 2022 Wall Street Journal article says it all: “Why All Those EV-Battery ‘Breakthroughs’ You Hear About Aren’t Breaking Through.”
IonQ IONQ, -0.40%, Rigetti Computing RGTI, +1.72% and other quantum computing stocks have also tumbled more than 80% from their peak as experts have grown more skeptical about quantum computing.
Technical critics are also voicing concerns about nuclear fusion. A 2022 Science Magazine article detailed the technical challenges such as fitful operations, turbulent bursts of plasma, neutron damage, and even a lack of fuel, Tritium. Economic concerns are a separate issue. Other critics focus on the hype of the nuclear fusion startups.
The outcome of these investments is uncertain. What we can say is that investors have finally done what critics have argued for decades needed to be done — invest in risky science-based technologies. It is too early to tell if the reward justifies the risk but the clock is ticking and, right now, the results don’t look very good.