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passive_fist comments on Open Thread, Apr. 27 - May 3, 2015 - Less Wrong Discussion
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Disclaimer: this thought is "foxy", in the sense that I don't assert it's definitively true, but I still think it could be a useful lens for viewing the world.
Startups Don't Create New Technology
Contra gurus like Paul Graham and Peter Thiel, successful tech startup companies do not actually create new technology. Good tech startups do one of two things: 1) invent a new technology-dependent business model, or 2) repackage and polish existing technology in such a way as to bring it above the threshold for widespread use.
Consider a couple of recent successful tech startups: Facebook, Twitter, Uber, AirBNB, and Dropbox. None of these can be said to have innovated deeply new technology. Instead, they realized that they could create a new business model based entirely on available technology.
Uber is a particularly illustrative example. The company depends enormously on several powerful new recent technologies: smart phones, GPS, and mapping software. However, Uber itself did not innovate any of those. If one of those technologies hadn't been available, Uber probably would not have been successful. Uber certainly could not have created any of those technologies as part of its business plan.
I'm not suggesting here, of course, that tech companies in general do not create new technology. The point is that startups don't create technology. Instead, deeply new technology is primarily developed by large, established companies. The basic pattern for technology creation is:
The history of Amazon illustrates this pattern very well. Amazon started by creating a new business model using currently available web technology. It depended on a huge array of technology that was developed by others - web browsers, web servers, databases, the internet, personal computers - but it did not develop any of that technology itself and would not have been successful if it had had tried to do so (imagine trying to innovate the web browser so you could sell books online).
While Amazon did not create new technology in its startup phase, it certainly has created deeply new technology now that it is in its mature phase. The clearest example of deeply new technology created by Amazon is cloud computing (some people might also point to eBooks). Cloud computing could never have been innovated by a startup company - the resources required in terms of finance, talent, and corporate resilience are far too great. While cloud computing could never have been innovated by a startup, it is now becoming a foundational technology for the new generation of startups.
So the lifecycle of entrepreneurial technology development suggests a kind of virtuous circle. A company becomes profitable by building a new technology-dependent business model or repackaging technology developed by others. Then it grows, and when it reaches a certain point, it becomes able to create new technology that feeds the next generation of startups.
I agree with your first premise (that startups don't create new technology), but not the second premise (that large, established companies do).
Read 'The Sources of Innovation' by Eric von Hippel. It reaffirms what your first point, and shows that real technological progress usually comes from users of technology rather than producers (or, to put it in a better way, from cooperation between users and producers). More precisely, innovation happens when there is a feedback loop where users use technology in creative ways (according to needs not foreseen by the original producers) and producers incorporate those ideas back into their products. The contribution of the producer is to identify creative uses of their products and formulate business models around them. Amazon's cloud computing initiative is definitely consistent with this point of view.
Another major source of innovation is academic institutions, where risk-taking is encouraged when it comes to new ideas. Of course, it's also true that established companies also fund research.