Global Market Commentary

September 12, 2014

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New Tech Innovations Keep Coming

As part of our ongoing emphasis on tech innovations, we’ll mention a few stories that have caught our eye recently. Some are obviously tech-related, others less so. We continue to believe that such innovations — and the entrepreneurs who bring them from concept to reality — will be key driving forces of the U.S. economy.

Calico Launch: Google’s Moonshot Biotech Venture

We reported a few weeks ago on Google’s Baseline project, which marries genetics, medicine, and big data in an ambitious attempt to establish a massive database about the normal functioning of the human body.

Recently, Google (NASDAQ: GOOG) stepped further into the healthcare world by launching a collaboration between Calico, a subsidiary company it set up to research life-extension technologies, and AbbVie (NYSE:ABBV), the drug company that recently purchased Shire plc and is relocating its headquarters to Dublin.

Under the agreement, GOOG and ABBV will each contribute $250 million to build and staff a Bay area research center. At that center, GOOG’s Calico will perform drug discovery, and shepherd any candidates through Phase 2 testing, which does the first serious vetting of new drugs on safety and efficacy criteria. ABBV will then have the opportunity to license those drugs and take them through Phase 3 testing, commercialization, and marketing.

Calico is being led by former Genentech CEO Art Levinson, who left when Genentech was acquired by Roche in 2009. He is one of many examples of GOOG’s aggressive hiring of the best and brightest, having run one of the world’s most successful and innovative biotech firms.

GOOG has also brought other rock-star researchers on board. If GOOG’s history is a guide, the company will be bringing its cross-disciplinary strength to bear on the discovery process, and we would not be surprised to see a host of novel drugs emerging from Calico and perhaps from ABBV — over the coming years.

Bringing Data to the Developing World

O3b Networks (a satellite communications company that stands for “[The] Other 3 billion” people in the world for whom broadband internet is not readily available) recently announced that its eight medium-earth satellites were operational. O3b is using these lower-level satellites — about 17,000 miles closer to the Earth’s surface than typical geostationary satellites — to provide high-speed satellite internet connections to countries that lack any fiber-optic infrastructure. Pakistan and Nigeria were early bookers of O3b’s capacity. According to company reports, the latency (time lag) of its internet connections compare favorably to those of traditional groundbased broadband infrastructure.

Broadband Could Revolutionize Africa’s Development

We survey the world and see the alarming rise of fundamentalism and intolerance in many places, along with its devastating economic consequences. The prospect that large parts of the developing world could entirely leapfrog traditional broadband infrastructure buildout is very encouraging, since it will help entrepreneurs, boost education, and increase the integration of various populations into the global community. It’s not a quick fix for the likes of Nigeria’s Boko Haram, but we believe that education and economic growth are the best long-term foil for ignorance and intolerance, and efforts like those of O3b Networks will lay the foundations for that process. We look forward especially to the nexus between broadband connectivity in the developing world, and the advent of massive open online courses (MOOCs), a topic we have written about several times in these pages.

Lending Club Comes Public — Disintermediating the Banks?

Above we discussed the soon-to-come flood of tech IPOs led by Alibaba — but we did not mention one “stealth tech” IPO whose date has not yet been confirmed. That’s the offering for Lending Club — potentially a very disruptive entrant into the financial industry.

Lending Club began as an online venue for consumers seeking loans at better rates than they were being offered by banks and credit cards. Lending Club would vet borrowers according to its own algorithms and sell notes backed by payments on those loans to investors — in short, doing what banks have traditionally done, but leveraging big data analytics for the task, and functioning essentially as a peer-to-peer lending system. Lenders can browse the characteristics of Lending Club’s loans and build portfolios based on their risk analytics. Lending Club was the first such lender approved by the Securities and Exchange Commission.

The intricacies of this system will take time to work out. We suspect that as the model gains traction, there will be legal and regulatory snags. But it seems inevitable that this model will pursue and, we think, possibly overtake traditional lending — especially as Lending Club is branching out from unsecured consumer loans into small business loans. This presents the prospect of revolutionizing the funding of small businesses, particularly since one of the notable side-effects of the financial crisis has been the relative starvation of credit by big banks
who are reluctant to lend.

The Lending Club model will also open a new territory of securities to investors, who have until now had no easy means to invest in consumer and small business debt.
This new technology doesn’t just remove banks as the middlemen and gatekeepers in lending — it makes a century’s worth of financial regulations irrelevant. Regulators here, as in other financial arenas, are going to be playing catch-up with technology — and we will be watching to see if they do it effectively.

The “Patent Troll” Becomes An Innovator

We became familiar with Intellectual Ventures (IV) several years ago when we read Steven Levitt and Stephen Dubner’s entertaining book Super Freakonomics. IV has acquired a reputation as one of the most hated companies in Silicon Valley. Founded by Microsoft alumni Edward Jung and Nathan Myhrvold, for years the company focused on building a portfolio of patents — buying them on the cheap when no one could see their potential, and then extracting fortunes from the likes of GOOG, AAPL, and Intel (NASDAQ: INTC) when those patents have turned out to be worth something.

Critics called them “trolls” and “rent seekers,” although from our distant perspective, anyone who buys an undervalued asset and then reaps rewards when its value has become more apparent should properly be called a “successful investor.”

Now, bankrolled by investors who have taken a stake in its giant patent portfolio, IV has engaged in a radical self-transformation — seeking new inventions from a stable of 25,000 independent inventors, and offering them royalties when their products come to market. In the process IV has pared its staff by 20 percent.  The co-founders believe that Silicon Valley has lost itself — getting bogged down in an obsession with smartphone apps and losing the grand vision of technical solutions to intractable problems. Myhrvold got some notoriety with the publication of Super Freakonomics when he proposed outlandish geoengineering solutions to problems like hurricanes and global warming. The inventions IV is looking to commercialize now aren’t as grandiose at that — for example, non-electric storage tanks that can keep vaccines refrigerated for a month with only dry ice. But still, Myhrvold says, they are the kind of long-term projects that a CEO might get lambasted by his board for pursuing.

In spite of their very different business models, we see a commonality here with GOOG. Both companies built a bread-and-butter business model — patents in IV’s case, internet advertising in GOOG’s — and then began using the proceeds to pursue more ambitious, transformative goals.

It remains to be seen how successful IV’s new transformation will be — but we are happy to see companies reaching for audacious technological goals. To us, this is the most basic engine of U.S. economic strength. Investment implications: We continue to bet on the creativity of U.S. tech entrepreneurs, and believe that

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