Where does innovation come from?
That’s the question posed by a recent MIT Technology Review Business Report on Innovation Funding. It’s a good read for those of you wanting to understand the paradigm shift in funding innovation, whether that’s about software innovation or product innovation, in general. The report states that the impact of venture capital is decreasing. This gives you a snapshot into why the authors think so. For more detail, we recommend you download the actual report.
Expanding Consumer Power Base
We’re all familiar with the phrase – “the consumer is king” – but as it turns out, that factor also is influencing the very funding mechanisms of innovation and idea generation. How?
- Listening to consumers – Whereas in the past, corporations developed the next best thing and pushed it out to consumers, today firms like P&G are using advanced listening options to gather and use consumer insights to develop new products. Swiffers are an example of this kind of invention based on consumer input. There are also lots of companies operating in the virtual consumer community research space which help companies acquire and make sense of customer needs wants and ideas.
- Engaging consumers as problem solvers – Think of this as assembling lots of human brands into a master solution base. The report spotlights Massachusetts-based, InnoCentive, which specializes in offering crowd “solvers” incentives to come up with solutions to various highly specific problems. Companies reward the solvers with anywhere from $500 to $1M. InnoCentive has innovated the very model of funding innovation.
A Harvard Business School analysis revealed that two of every 1,000 American businesses are venture backed. That accounts for a mere 11% of public companies and 6% of the US workforce. That leaves significant innovation potential outside this narrow band of companies currently receiving venture funding?
New avenues of funding are emerging for those firms, supported by the following shifts:
- Lower cost of web based businesses
- Options for outsourced software development
- Infrastructure (i.e. servers) rental options
- Portfolio of funding sources — seed accelerators, angel investors, or Internet based funding options such as Kickstarter.
Also influencing this parading shift, according to Wharton Professor of Management, Ethan Mollick (a contributor to the report), The US and Securities Commission plans to allow “crowd-funding” previously outlawed to prevent consumer fraud. This move will free companies to raise up to $1 million in funds directly from the public. And crowdfunding has immense potential to introduce significant disruption in the way innovation is funded.
Venture Capitalists Struggle to Promote True Innovation
The report cites Venture Capitalists as pigeonholed into a narrow band of technologies which constrains their ability to promote more explosive innovation. For example, there’s currently a significant amount of Venture Capital funding into areas such as social media and web. Why are VCs generally invested in such a narrow band of technology innovation?
- Venture Capital & Cycle Length — Drawing from historical data, the report cites that Venture Capital tends to do better in sectors where the innovation cycle is shorter. This includes industries such as media and software vs. advanced materials and biotechnology where the cycles tend to be much longer.
- Boom or Bust Cycles Drive Investment & Risk Undertaking Decisions – Looking back at the levels of investment since 1985, the report looks at the Venture Capital market as uneven, moving between boom and bust. It examines the emotional component to driving or not driving innovation. For example, during the early to mid-70s, there was no venture capital funds raised in the US. That had a significant influence on the timing of innovation efforts in need of funding during that period.
The report is a nice perspective into funding innovation and includes several useful sections specific to the software industry as well as crowdsourcing examples. Full report available on MIT Technology Review.
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Source: Entire content is based on MIT Technology Review, A Business Report on Innovation Funding, 2012.