As corporate purse strings have drawn tighter some companies have looked for innovation beyond the office cubicle.
Where does innovation come from? For one answer, consider the work of MIT professor Eric von Hippel, who has calculated that ordinary U.S. consumers spend $20 billion in time and money trying to improve on household products—for example, modifying a dog-food bowl so it doesn’t slide on the floor. Von Hippel estimates that these backyard Edisons collectively invest more in their efforts than the largest corporation anywhere does in R&D.
The low-tech kludges of consumers might once have had little impact. But one company, Procter & Gamble, has actually found a way to tap into them; it now gets many of its ideas for new Swiffers and toothpaste tubes from the general public. One way it has managed to do so is with the help of InnoCentive, a company in Waltham, Massachusetts, that specializes in organizing prize competitions over the Internet. Volunteer “solvers” can try to earn $500 to $1 million by coming up with answers to a company’s problems.
We like Procter & Gamble’s story because the company has discovered a creative, systematic way to pay for ideas originating far outside of its own development labs. It’s made an innovation in funding innovation, which is the subject of this month’s Technology Review business report.
How we pay for innovation is a question prompted, in part, by the beleaguered state of the venture capital industry. Over the long term, it’s the system that’s most often gotten the economic incentives right. Consider that although fewer than two of every 1,000 new American businesses are venture backed, these account for 11 percent of public companies and 6 percent of U.S. employment, according to Harvard Business School professor Josh Lerner. (Many of those companies, although not all, have succeeded because they’ve brought new technology to market.)
Yet losses since the dot-com boom in the late 1990s have taken a toll. In August, the nation’s largest public pension fund, the California Public Employees Retirement System, said it would basically stop investing with the state’s venture funds, citing returns of 0.0 percent over a decade.
The crisis has partly to do with the size of venture funds—$1 billion isn’t uncommon. That means they need big money plays at a time when entrepreneurs are headed on exactly the opposite course. On the Web, it’s never been cheaper to start a company. You can outsource software development, rent a thousand servers, and order hardware designs from China. That is significant because company founders can often get the money they need from seed accelerators, angel investors, or Internet-based funding mechanisms such as Kickstarter.
“We’re in a period of incredible change in how you fund innovation, especially entrepreneurial innovation,” says Ethan Mollick, a professor of management science at the Wharton School. He sees what’s happening as a kind of democratization—the bets are getting smaller, but also more spread out and numerous. He thinks this could be a good thing. “One of the ways we get more innovation is by taking more draws,” he says.
In an example of the changes ahead, Mollick cites plans by the U.S. Securities and Exchange Commission to allow “crowdfunding”—it will let companies raise $1 million or so directly from the public, every year, over the Internet. (This activity had previously been outlawed as a hazard to gullible investors.) Crowdfunding may lead to a major upset in the way inventions get financed, especially those with popular appeal and modest funding requirements, like new gadget designs.