Investing in innovation is a puzzle — but Josh Lerner has some hints for solving it.

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How to Fund Innovation

April 12, 2013

How can we fund innovation? Josh Lerner, author of “The Architecture of Innovation: The Economics of Creative Organizations” and a professor of Investment Banking at Harvard Business School, shares his insights.

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Businesses fail when markets shift, customers move on, or — worst-case scenario — companies lose their creative edge.

No model is perfect, but Harvard Business School professor Josh Lerner says innovation is the best predictor of a company's success. It safeguards against inevitable ebbs and flows, and may lead to new discoveries and revenue streams. And there’s only one way to ensure innovation in any business — you have to invest in it.

Venture Capitalists Kevin Skillern of GE Venture Capital, and Vinod Khosla of Khosla Ventures speak at a conference.
Photo Credit: TechCrunch / Flickr Creative Commons

Venture Capital

Venture capital is one of those terms that you can hear (and even use) a hundred times without fully understanding it. If you have only a fuzzy definition of the concept, Lerner is here to help.

“Venture capital really involves funding, typically, young companies — often ones that don’t have any kind of revenue, much less profits, at the time — and trying to transform them into something more,” he explains.

Venture capital has helped fuel some amazing success stories. Apple, Facebook, and Intel all grew into the tech giants they are today with the help of venture capital funding. But while venture capital works incredibly well for fields like technology, it isn’t a great funding strategy for other fields — like scientific research.

“Peter Theil has this line about venture capitalists, that they promised us flying cars and they ended up delivering 140 characters,” Lerner says. “The funds are set up to have a ten year life, and typically that means by the end of year five, venture capitalists are getting a little nervous.”

That sort of short-term pressure can help developers working on a new iPhone app. But it’s not well suited to funding projects that take extensive research, like alternative fuels.

You might not think government funding could fuel innovation — but you'd be wrong.
Photo Credit: Zonie_Zambonie / Flickr Creative Commons

Government Funding

We might not always think of the government as a major funder of innovation, but Lerner says that overlooking it is a disservice.

“What are the two tech industries that have had the most transformative effect in recent years? You think about biotech and you think about Internet,” he says. “And you think both those things clearly originated in the government.”

The Internet came out of the defense department, while the National Institute of Health and the National Science Foundation have leant support to innovations in biotechnology. Even things that American citizens take for granted — such as a functioning legal system — make the country an easy place to innovate. But Lerner says that the government can do more than just support basic research.

“The government, if it’s smart about it, can also play a role in terms of nurturing private companies,” he says. “Either by giving grants, or contracts…[or] in a variety of other ways.”

But how can a government be sure that it’s investing in the next big thing, rather than throwing money away? Lerner says is pays to ask for help. Successful government programs tend to ask for matching funds from investors, a reality check that keeps taxpayer money away from most harebrained schemes.

Don't wait for a Mark Zuckerberg to start the innovation process. You could be waiting forever.
Photo Credit: Deny Terrio / Flickr Creative Commons

But no matter how you fund innovation, Lerner argues, making a consistent and sustained investment is crucial to your company’s success. Funding provides the resources to work towards innovation every day, instead of waiting for one great leader — a Bill Gates, Mark Zuckerberg, or Steve Jobs — to create innovation out of nothing.

“There’s much more than simply waiting around for the great person to show up, he says. “Because we may be waiting for a very long time.” 

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