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?
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:
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?
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.
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