Innovation Insights: More to innovation than meets the (A)I

Today, we live in a world where the news is often fast, loud, and siloed. Sometimes, what is most important is not what is screaming at us. In 2023, artificial intelligence (AI), the soft economic landing that few believed in, and the Magnificent Seven¹ dominated the news. From our vantage point, these three headlines merited attention. However, a handful of stories, in the fullness of time, might prove equally or even more important for investors in innovation. In this paper, we give the “big three” storylines and our opinions on them their due, and we also identify five ideas that may have flown under the radar.

1. The release of ChatGPT inaugurated the year of AI.

It felt like AI burst onto the scene in 2023, but this technology has been around for decades.² Large-language models (LLMs) specifically had a breakthrough year. In response, companies raced to build all the new hardware (e.g., chips) and infrastructure (e.g., cloud) that will serve as the rails for LLMs in the years to come.³ The excitement around LLMs is deafening but not unmerited. We think AI may become the next large platform in technology and could rival the internet, mobility and cloud in importance. If 2023 was the year of the hardware buildout, then we think that 2024 and 2025 will see attention shift to applications and software. It is important to note that we believe this technology is productivity-enhancing in a way that social media and mobility were not. We believe progress in AI should benefit the entire economy.

2. The economic soft landing few believed would happen … happened.

At the beginning of 2023, 58% of economists forecasted a recession.⁴ In contrast, we felt this prediction was far too pessimistic, and our intuition was proven correct. Technology, in general, and AI, robotics and cloud computing, specifically, are inherently deflationary and large enough to affect the entire economy through increased productivity. The United States is the leader in the Third and Fourth Industrial Revolutions, and, because of this, we think the United States should have the lowest inflation and highest gross domestic product (GDP) of the G7 economies. We saw evidence of this in lower inflation and better markets at the end of 2023. We expect disinflation to hold in 2024. Of the three main stories in 2023, we would not be surprised if this one is forgotten first.

3. The Magnificent Seven broke out from the crowd.

Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla received a new nickname, the Magnificent Seven. In 2023, these companies’ revenue on average grew 25%, and yet these seven stocks returned a simple average of 110%.⁵ We aren’t surprised. As we’ve argued before, we are at the beginning of the Fourth Industrial Revolution.⁶ These “mega-cap” companies are benefiting from cheaper capital relative to older companies and are using it to construct competitive moats in new industries. Not only do we expect the Magnificent Seven to maintain a great competitive position, but we also believe more new companies will join the half-trillion-dollar market cap club.

As mentioned, these three stories are worthy of the attention they received. However, they do not encompass everything that happened last year. To dig deeper, we asked ourselves the question: in 10 years, what will we look back on as significant? Below are five innovations that didn’t dominate the headlines in 2023 (or, in one case, early 2024) to the same degree as the “big three,” but that we could very well look back on as just as impactful.

1. GLP-1⁷ drugs may have a greater impact on human life than AI.

Like LLMs, GLP-1s were around before 2023, but, also like LLMs, this was the year that their media coverage reached an inflection point.

Currently, 40% of Americans are either obese or morbidly obese.⁸ It is a massive sign of human progress that obesity has eclipsed starvation as a public health concern,⁹ but now we have progressed even further. We now have a solution to the problem of obesity in the form of a drug class, GLP-1s, that curbs our overeating. Given this context, we certainly think the hype about GLP-1s could be merited. This new class of drugs has the potential to change diets dramatically toward the positive.

In our opinion, GLP-1s could have a greater impact on human lives than even AI. GLP-1s may assist in treating chronic diseases, including helping to prevent heart attacks, strokes, kidney disease, cirrhosis of the liver and even addiction to alcohol, tobacco and gambling.¹⁰

The impact of these drugs likely extends beyond improving the quality of our lives; we believe it may affect other industries as well. For example, planes could use up to 20% less fuel per flight. This is a big deal for the airlines that are accustomed to somewhat extreme cost-saving measures. In the 1980s, American Airlines removed one olive per salad to save US$40,000 per year, partly from lower fuel costs.¹¹ These drugs could be an even bigger cost saver.

2. Crypto exchange-traded funds (ETFs) were approved, making it easier for the average investor to access this asset class.

You no longer need to be a computer programmer or pay high commissions for bitcoin. On January 11, 2024, the Securities and Exchange Commission (SEC) approved the listing and trading of long-awaited Bitcoin ETFs.

Americans can now buy bitcoin reliably, fairly and without a discount from several large financial institutions. If you believe the bull thesis that the crypto market (US$1.7 trillion today)¹² could grow bigger than that of gold, currently a US$14 trillion market,¹³ then this was a major positive step. Of course, as it stands, crypto is still riskier than gold.

3. The US Food and Drug Administration (FDA) approved the first gene editing drugs. Drug approvals accelerated.

The FDA gave the green light to two cell-based gene editing treatments for sickle-cell disease,¹⁴ a genetic disorder of the blood that afflicts patients with anemia and episodes of extreme pain. This marks an amazing milestone in medicine; scientists are now able to edit a gene in a safe and effective way to treat disease.

These gene editing drugs were only two of 55 new drugs approved in 2023. For context, 55 is the highest number of new drugs approved in one year in the last 30 years. It’s important to point out that the sickle-cell drugs weren’t the only genomic drugs approved, just the first specifically to use gene editing. In fact, the FDA approved five different cell and gene therapies in 2023 vs. five in total the five years prior.¹⁵

The massive acceleration in drug approvals made 2023 a banner year for health care innovation. These approvals are important because research and development (R&D) spend needs to show results to keep innovation moving forward. In the future, this tech­nology could treat thousands of diseases, including cancer, heart disease, hemophilia, blindness, AIDS, cystic fibrosis, Huntington’s disease, muscular dystrophy and even COVID-19.¹⁶ We believe it won’t stop here.

4. Many unicorn challengers went bankrupt or got consolidated. Zero Interest-Rate Policy (ZIRP) ended.

The ZIRP era is over, and the predictable aftermath is upon us. After spending US$100 billion to create over 50 different brands for food delivery and taxi services,¹⁷ and multiple billions more for new brands of electric vehicles, office hoteling in class A office space and so many more examples, the end of free money under ZIRP has contributed to ongoing consolidation and rationalization. In our view, this is healthy for the ecosystem.

A unicorn is a private company worth more than US$1 billion. 2023 was the year that many unicorns, many of them disruptors, went bankrupt or were consolidated. The crop of 2021 was one of the largest classes of unicorns—171 went public; however, by 2023, half of those were worth at least half as much (< US$500 million).¹⁸ Furthermore, out of the 532 private unicorns in 2023, 60% had not been revalued since between 2020 and 2022, which is notably before interest rates went up. It’s likely that many of these companies will no longer be unicorns once they are revalued in this new interest-rate regime.

Capital efficiency today is dramatically lower than just two years ago. Some companies are now valued at less than 4x their seed rounds, meaning that venture capitalists could have been better off investing in the tech companies of the S&P 500. Exacerbating the problem, private companies are also having difficulty going public or “cashing out,” with only 7% of unicorns going public in 2023 vs. 66% a decade ago.¹⁹

5. The Apple Virtual Reality (VR) Headset was released to the world.

Two years after Facebook changed its name to Meta, VR has taken another big step toward widespread adoption with Apple’s release of its first VR headset. This is an important milestone because Apple has a history of defining the times in consumer hardware. In 2007, the introduction of the iPhone amazed the world. It became a revolu­tionary device that US adults now use, on average, for five hours a day. In 2015, the Apple Watch launched. Today, more Apple Watches are sold than all other watches combined. And now we have the headset, which uses incredibly fast semiconductors to process images 8x faster than the blink of an eye.²⁰ We have used the product and agree with the reviews: this headset is great. We would argue that it can replace TV for many as a completely immersive experience.

In our view, five more advancements beyond the big stories of the year is a significant number. These five stories are all signs that change continues to occur at a rapid rate, innovation in the economy is accelerating, and we are still just at the beginning of the Fourth Industrial Revolution. This revolution is a transformation at the level of the byte, the atom and the gene that we believe can create tremendous value for investors and benefit society as well. For the revolution to continue, we need innovation to advance further. We think it has. All the examples shared in this paper show that significant forward progress was made in 2023.

There are also risks in investing in this or any asset class. The initial potential of any asset class may not carry over to any specific company or the entire asset class chosen for investment, over any investment time period. Any of the investment assumptions may never come to fruition. Investors should be prepared for potential losses as well as the possibility of invest­ment gains. Ideas, products, companies or entire asset classes with positive past performance are not indicative of future results.