It's a great time to be a Rule Breaker investor. The world is brimming with innovation, and technological breakthroughs like artificial intelligence, genomic sequencing, and blockchains are giving the market plenty to talk about.
But there are also a lot of buzzwords being tossed around, so we tracked down an expert to get an inside look at what's really driving the world's progress.
In this video, Motley Fool senior contributor and advisor Simon Erickson speaks with Collision Conference founder Paddy Cosgrave. Cosgrave is the founder of several global technology conferences, including Europe's Web Summit, China's RISE, and America's Collision, which gives him a firsthand look at what's new and innovative.
Learn about the technologies that entrepreneurs and investors are most excited about before Cosgrave shares some investing ideas in the financial sector as well as the name of the Chinese company that he believes is the most important start-up in the world right now.
A full transcript follows the video.
Simon Erickson: Hi everyone. Simon Erickson from The Motley Fool here. I'm joined this morning by Paddy Cosgrave, the co-creator and co-founder of both the Web Summit and this year's 2018 Collision Conference. Paddy, thanks so much for joining me this morning.
Paddy Cosgrave: Thank you.
Erickson: You've got 25,000 people coming from all over the world for the Collision conference right now. There's a ton of activity going on. What are you most excited about?
Cosgrave: There are certain fields like artificial intelligence, machine learning, and blockchain which are huge. And there are investors from all over the world here to meet with some of the most exciting start-ups. Renewables, we have a stage here called Planet Tech. Al Gore, vice president Al Gore, was here yesterday to speak. We've got some fantastic companies from all over the world speaking. And the world is facing probably it's most significant existential crisis ever And it's great to see the entrepreneurs building the technologies that will hopefully transverse to a cleaner, better future.
Erickson: Sure. You got a lot of innovative, future thinking entrepreneurs that are here today. You mentioned a couple of the different tracks that are here within Collision. What are the fields that you think are most exciting for today's entrepreneurs?
Cosgrave: The ones that I mentioned certainly: artificial intelligence, machine learning, blockchain, robotics, autonomous driving. Autonomous driving is a consequence of a lot of AI and machine learning. And certainly there are lots of talks on that, lots of start-ups in that space, lots of investors doubling down. So those for me are the hottest sectors.
Erickson: So our audience is mostly individual investors here at the Motley Fool. Do those also translate to the investment community? Or said another way, where are investors really excited about putting money to work, as far as industries go?
Cosgrave: I was in China for the last two weeks, two weeks prior to this. I think financial technology is huge. The likelihood that several of the largest banks in the world and smaller banks are going to be disrupted by heretofore unknown challenger banks is increasing rapidly. We're seeing that, in Europe in particular, there are a host of online-first banks that have no bricks-and-mortar presence whatsoever.
Revolut is a perfect example. Last week, they raised a quarter of a billion. Four years ago they didn't exist. They're signing up millions and millions of customers, and people love the product. And I think that will pose a huge challenge to many of the largest banks today. So I think if you've got one eye on th medium-to-long-term with regard to bank stocks, you've got to be watching these new kids. They're growing very fast, faster than I think anybody expected.
Erickson: A couple of those companies we also know in the U.S. here. BofI Holding is an online only bank that doesn't have any bricks-and-mortar locations and has a lower cost structure. But you mentioned some European stuff, which is the same thing going on over there. I know that you've been to China. Web Summit is based in Europe. You're going to Toronto next year. You seen kind of a global perspective all over the world. What's different that is happening globally, than what's happening in the United States?
Cosgrave: Well I think the United States has been on a long, slow decline for 40 years. You're seeing that in new company creation. So, over 40 years, start-up creation is at a 40-year low. Forty years ago, the population was a lot smaller. It's grown by 40%, while the rate of new company formation has declined by 40%. I think that's a very startling figure.
If you look at the largest companies in the United States. Typically, the United States produces the most innovative, market-shifting, market-changing companies in the history of the world. Take America's S&P 500. Over the last 10 years, the rate of capital investment by those companies has been the lowest in history -- 92% of all profits have gone to share buybacks and bonds. And I think that's a major challenge. It's a big, massive vote by the largest American companies in their future. And they're voting "no". They're just saying we don't have a future, we're no longer going to innovate at the rate that we used to. And that opens the door, I think, to new companies all over the world, particularly in China, where companies in China are aggressively pursuing huge capital investments in very nascent, very exciting, and very challenging fields. And they post huge threats to America longer-term.
Erickson: A lot of that is government-backed as well. The Chinese government has a very aggressive genomic sequencing project. You mentioned AI -- they also have a lot of patents related to AI.
Cosgrave: You know, America is the most extreme example of a state capitalist system in the history of the world. No government really, at scale, has ever invested the amounts of money in companies that America has.
So take your most important export sector, which is A&D (Aerospace and Defense). Take Boeing, which is still the most important net exporter in the United States. A full 90% of all of its R&D spend through the 1960s still originated from the U.S. government. And that enabled Boeing to out-compete lots of challengers all over the world and become the most important export manufacturer still to this day in the United States. It created jobs across every state in America.
Now, I think even Boeing itself is under threat from a Chinese company which is called Comac (Commercial Aircraft Corporation of China, Ltd). They still haven't shipped a plane. But I think when they do, America needs to watch out. America runs a technology trade deficit -- it doesn't run an A&D trade deficit. So in terms of earning money, earning foreign money that comes into the country, A&D is incredibly important. Donald Trump went to China in November, and he signed a trade agreement that was hardly reported in the United States. But I think it was probably the most important trade agreement the United States has signed in 40 years. That was a reciprocal trade agreement that in 2022 allows China to sell Comac planes, tariff-free into the United States in return for Boeing selling Boeing planes tariff-free into China.
That is a big problem. The cost structure of Comac, whose planes will ship in 2022, is radically different. First of all, when it comes to competing on price with Boeing in America, Comac is always going to win. Two, when it comes to the purchasing habits of domestic airlines within China, it's very easy for the government to direct airlines within China to purchase Comac planes -- irrespective of whether factors of quality might deter them from doing so. So the world could quite rapidly switch off Boeing if they're not careful.
I'd be very concerned if I was the United States. I think Comac is the most important start-up in the world right now and people should pay close attention.
Erickson: I think I can recap that by saying policy matters in business.
Cosgrave: Policy absolutely matters. The most successful venture capitalist in the history of the world was the United States government. Silicon Valley for the best part of the last half-century was merely a subsidiary of the United States Department of Defense. All of the important technology that has been commercialized today came out of an entirely state-funded research program. Everything from the internet to semiconductors to microprocessors. GPS, which was developed in the 1970s and first used in 1991 in Operation Desert Storm, then commercialized today very effectively by Uber, Google Maps, and other American companies, would not exist were it not for massive state intervention. And then of course, the early purchaser of the first generation of microprocessors and semiconductors was the U.S. military. And then eventually, when those technologies became cheap enough to be commercially viable, they were available on the private market. So I don't think America should forget when they look at China, and they see huge state intervention, they need to remember that all that China is doing is copying exactly the economic model of the United States from roughly 1946 to 1970. And it worked very, very well.
Erickson: So everything that we've just mentioned about the climate, from investors to start-ups to governmental policy. Why Toronto next year? Why did you choose Toronto for the next Collision conference?
Cosgrave: Yeah, that's a great question. We were approached by cities all over the United States and Canada over the last two years by some fantastic cities. And not just on the coasts of the United States. But in cities like Reno, NV and Denver, who were really just fantastic hosts. We flew from our offices in Dublin to their cities.
And in the end we just fell for Toronto. We think it's a fantastically diverse city. It's got a huge tech scene in its own right. It's very diverse, which I think is a huge strength. And in the end, when Justin Trudeau intervenes and says he wants to make this happen and writes you a lovely letter, that also becomes an important factor. We had a great time in New Orleans. The event's continuing to grow. And we need to find a more globally connected city. Denver was close, as were cities on both coasts of the United States. But in the end, I think Toronto was a perfect fit.
Erickson: Sure. Paddy, last question for you. We mentioned that a lot of larger corporations are spending money on buybacks, on dividends, or even just cash sitting on the balance sheet, they're not even deploying it. Start-ups don't have that problem of too much money just sitting around or capital allocation decisions. They just want to innovate out there. Are there technologies out there right now that are giving smaller, start-up companies an advantage, even over bigger companies that have a lot more resources?
Cosgrave: Well, John Chambers, the former CEO of Cisco, who took Cisco from a company valued at $70 million to hundreds of billions talked about not just the simple fact that the greatest technology small companies have is size and nimbleness. They can just move faster and out-innovate much larger companies. That's not necessarily a technology, but it's the greatest strength these smaller companies have.
But that being said, there isn't a problem with capital in the world. There's never been so much private capital in the history of the United States. It's just a question of where it's being put to work. And I think there's a huge opportunity for a new epoch for the U.S., because there is so much capital on hand. It's just down to policymakers to incentivize the most successful companies in the history of the world, which are overwhelmingly American, to put the capital that so many of them have sitting on their balance sheets back to work. When they do that, longer-term, they'll see huge rewards. Shorter-term it might not necessarily be great for their shareholders. But some bull decisions are called for if the United States wants to remain the most innovative and brilliant economy that it has been for the past fifty years.
Erickson: Well we're certainly seeing a lot of innovation coming out of the Collision Conference here in 2018 at New Orleans in the United States. Paddy, thank you very much for sharing your perspective.
Cosgrave: Thank you so much.
Erickson: Thanks for tuning in. Fool on!