The Growth Trilemma

Text of a presentation by Gerard O'Neill to Dublin BIC, February 2019:

Much of our work at Amárach involves sensing, measuring and projecting the shifting zeitgeist for our clients and their customers in turn. We use the standard tools of market research and statistical analysis, adding a dose of experience, imagination and conjecture.  These thoughts are mainly about the latter!

Given Dublin BIC’s remit to foster and support start-ups mainly in the tech space with growth potential outside of Ireland, I think it’s important to understand some of the key ways I see the growth zeitgeist for start-ups and more mature businesses shifting in the coming years. And just to prepare you, it isn’t necessarily shifting in a positive direction.

The cause of my cautious outlook can be summed up as the Growth Trilemma. What do I mean?  In outline there are three factors coming together that I believe will make it considerably harder for business owners and investors to generate the kind of returns they’ve either been used to or actually need.  What are the three factors?  They are:

  • Diminishing returns on science research in general and tech innovation in particular
  • The inexorable ageing of the developed world’s population and soon most of the developing world’s as well
  • The growing economic, regulatory and bureaucratic burden of the state and public sector in Europe and North America in particular.

Together they represent a trilemma for investors and entrepreneurs: each on their own is problematic but coming together they create an interlocking head wind, the likes of which we haven’t experience before.  What we are witnessing is the diminishing impact of the benign forces that drove most of the global growth phenomenon of the past 25-30 years or so (following the collapse of the Soviet Union, the success of the World Trade Organisation and the tech revolution) as they are replaced by considerably less benign ones.

Let me explain a bit more about the components of the trilemma:

Diminishing Returns

Patrick Collison (from Stripe) and Michael Nielsen recently wrote an article in The Atlantic with the title: ‘Science is getting less bang for its buck’[1] pointing out the clear evidence that, despite enormous increases in investment, the return on scientific research (admittedly a tricky thing to measure) has essentially collapsed. This feeds into a wider narrative among economists that productivity is declining in the absence of seismic breakthroughs like electrification and the internet, leading to what Tyler Cowen calls ‘The Great Stagnation’[2].  Together, these factors means that the contribution of productivity growth to economic growth is falling well below recent levels, leaving future growth dependent mainly on expanding populations.

Demographic Winter

Which brings us to the second leg of our Growth Trilemma: the populations in a growing number of nations (Europe, Asia, the Middle East and the Americas) are falling, not rising. Birth rates are plunging across most of Europe, hence the rapid ageing of populations (including Ireland as we head towards the 50/50 future in the next 15 years, i.e.: half of all Irish adults will be over 50). Of course, many see this as an opportunity: ‘the silver market’ etc. But unfortunately – and I say this as a signed up member of the over 50s club! – the cold reality is that an ageing population is synonymous with slow or no growth, not fast growth. And it’s also very hard for investors to make significant returns, ask those who have invested in nursing homes, for example[3]. Needless to say, this trend has come to the attention of policy makers, not just entrepreneurs.

The Panopticon State

Which brings us to the third leg of our Growth Trilemma: ever since the Great Recession/Financial Crisis of 2008, the one constant has been the growing economic footprint of government and the state in most developed countries. Whether through perpetual budget deficits, QE monetary expansion and – increasingly – more and more regulatory and compliance requirements across more and more sectors of the economy, we’ve all witnessed the increasing presence of what I call the Panopticon State. And it’s not about to go into reverse, if anything, another economic crisis would quickly see the socialisation of much of what we consider to be the domain of the private sector and business.  Ben Hunt has written extensively on this trend over at Epsilon Theory[4], I’d recommend you check him out.

So what does the Growth Trilemma mean for start-ups, entrepreneurs and their investors for the next 3-5 years (or even 15-20 years)?  Let me share a few thoughts and then we can discuss them:

  1. Make the state your friend: if the economic footprint of government, policy makers and regulators is only going to get bigger (and it will, everywhere, including Ireland), then look to opportunities for products and services that meet the outsourced demands of state agencies (including those tied to an ageing population). And maybe appoint a retired Secretary General of a Government department or two to your board!
  2. Forget the search for the next tech unicorn, the relentless impact of digital disruption will lead to further deflation in a growing number of sectors (look at retail), militating against some of the traditional channels through which innovation feeds into higher productivity, profitability, job creation and economic growth.
  3. Focus on what is scarce: profit flows to scarcity (because demand exceeds supply), and right now there is a scarcity of solutions to some of our most pressing problems, including various health crises (physical and mental), but also energy and the environment.
  4. Think big: Stripe want to ‘grow the GDP of the internet’ – are there start-ups who can solve pressing social problems such as loneliness, polarisation, digital addiction(!)

It has never been easy growing a successful business on our small island, but Dublin BIC has had considerable success is helping businesses do just that, despite head winds from the east and from the west.  I’ve no doubt you’ll continue to navigate successfully to the future, even one characterised by the Growth Trilemma. 





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