25 Apr 2009

The emergence of companies

Posted by jofr

One of the great challenges in evolution is to explain giant evolutionary leaps such as the emergence of a completely new species, in evolutionary biology for example the colonization of land by plants or the emergence of vertebrates. In the language of complex adaptive systems, major evolutionary jumps are equal to the passing of large fitness barriers.

As I describe in my book and in the wiki, there are at least three different ways to cope with large fitness barriers in evolution, (1) bypass it (2) tunnel through it or (3) overcome it:

  1. to bypass through exaptation: explore a different direction and make a side-leap
  2. to tunnel right through the barrier by borrowing complexity
  3. to wait for a catastrophe, until the barrier is reduced through catastrophic events

Two of them are illustrated in this picture from the book:

Do you think this sounds strange? In the case of the economic system, it is ‘business as usual’. The borrowing of complexity here means simply borrowing of money: it is well known that completely new companies often emerge through a venture funding process in the economy. This Venture Capital Financing process is a tunneling process as mentioned above. Young start-ups or smart founders borrow money from VC (Venture Capital) firms, go through a tough phase of growth and extreme pressure where their fitness would not allow them to exist in the market (the tunneling process), until they emerge after an IPO (Initial public offering) as a new, full-grown actor in the market. Then the VC firms try to find the next breakout company.

A famous example is Google: an Internet company like Google did not exist before. Google was unique: no software company built so much mighty data centers to run its software before, no software company hired such an army of PhDs, and no company before was subject of speculations about an AI lurking somehwere inside. And they opened a completely new market by building a kind of operating system for internet advertising. Founded by Sergey Brin and Larry Page in 1998, the early Google borrowed large amounts of money from VC firms (Sequoia Capital and Kleiner Perkins Caufield & Byers). Then they went for 6 years through a tough phase of growth and high pressure where their they made no money at all in the beginning (the tunneling process), until they emerged after the IPO in 2004 as a new, full-grown actor in the new internet advertising market.

There are other examples of tunneling where actors and individuals emerge as full-grown actors after a long period of growth:

  • babies borrow complexity from their parents until they emerge as grown-ups: especially mammals receive all kinds of help, advice and support for a long time until they can act and survive on their own
  • cultures borrow complexity from their ancestors, predecessors and neighbors: all ancient cultures started small, and learnt from their predecessors. For example the Romans, which learnt for a long time from the ancient Greek and Phoencian cultures. They borrowed and adopted their habits, beliefs and writing system, until they develop their own owns.
  • prophets borrow complexity by creating religions which they don’t understand completely in the first place, for example by using the words and theories they have heard elsewhere, and by adopting beliefs from other religions and other prophets
  • scientists can borrow complexity by creating theories which they don’t understand fully first, for example by using the capabilities of other scientists. Einstein is an example: although he didn’t understand differential geometry completely, he formulated his theories of relativity with a bit of luck and the help of others, for instance Henri PoincarĂ© and David Hilbert
  • the Baldwin effect is an example for borrowing complexity in organisms and biological systems: first, phenotypic plasticity allows an individual to increase increases the fitness, then it is later replaced and specified by genotypic changes. A behavior change occurring in an organism as a result of its interaction with its environment becomes assimilated into its developmental genetic or epigenetic repertoire.

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One Response to “The emergence of companies”

  1. […] the economy, the driving force behind the emergence of new companies is money. This is no suprise. The sources of innovation are less public, but the origin of […]


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