Refined Innovation: A New Approach to Investing

4/22/10

It’s obvious that the financial downturn has negatively impacted innovation. Lack of investment has meant fewer startups, and lack of capital for liquidity events and exits has pushed a listless market into even greater torpor. Overall, the downward pressure is preventing a lot of great new ideas and technological advances from getting off the ground.

But is there a positive side effect of the recession? What if the legacy of the most acute economic distress since the 1930s is that, rather than simply returning to our old pace and methods, we shift to a studied, more sustainable form of innovation and growth? What if we’re entering an era of “refined” innovation that will change the way ideas move from concept to market for years to come?

Stop adopting, start assessing

We’re coming off a ten-year run of hyper-innovation that has revolutionized our daily lives. From consumer electronics to energy efficiency to alternative materials to data interchange to entertainment, virtually every aspect of our lives has been impacted. The past decade has essentially been a large global whiteboard on which visionaries have jotted down earth-shattering new concepts that ultimately formed and transformed big and bold markets.

But the new truth is that we can absorb only so much innovation—and so much change—in a given period. That’s why, at some point, consumers, commercial markets, investors, and strategic partners need to stop adopting and start assessing and refining.

This means we’ll begin to embrace new technology on a more selective basis. It means we’ll begin to incorporate and absorb the long-term impact of innovation and transform past fads or previous follies into sustainable evolutions. And it means we’ll begin to look for synergies across various breakthrough ideas that have survived the vetting process and extract their most positive and efficient attributes.

Call it innovation refinement or innovation consolidation, this is where we need to go. It’s about catching our breath and extracting maximum value from the super-spasm of innovation that has just taken place.

Low-risk funding

What does this mean for financing? Everything.

There are vast opportunities for low-risk innovation investment today. And the foundation has already been laid for this approach. A vast array of science projects has been hatched and funded, and now we need to focus on which of these innovations can be improved on with additional investment—an approach that carries less risk than ground-up funding.

Investors have the appetite to fund these types of deals, and strategic acquirers and investors have the need to take current technology and make it even more effective or efficient and tailored to consumer and business markets.

The bottom line is that there are plenty of game-changing ideas out there right now. If the best ones—the ones with the greatest potential—are picked up by the most insightful investors and nurtured even slightly, the results could be breathtaking.

Greater long-term value creation

This approach will spur a more results-oriented strategy for innovation investing. It will also deter the quick-hit mentality that’s plagued the market for many years. And it will—without fail—lead to greater long-term value creation. Ironically, this unlikely marriage of conservatism and innovation may be the basis for a new and more successful investment model that can carry us through the next decade and beyond.

But let’s be clear: Start-from-scratch new innovation won’t—and shouldn’t—shut down. But there’s a significant and extremely cost-effective opportunity to pick up some of the glittering breakthroughs of the past few years, polish them, and then make an even brighter splash in the marketplace to drive adoption and create long-term value.

One logical outcome here is that we’ll soon see a new generation of cutting-edge but underutilized technologies spun out of corporate portfolios. These innovations have been kept in cold storage, and they haven’t been properly cared for, deployed, leveraged, or exploited. But if they end up back in the right entrepreneurial hands, they can have a major impact and generate significant returns.

The art and science of fine-tuning

Refining innovation can be as daunting as creating new innovation. Yes, there’s less risk and less cost. But there’s also the challenge of delicate fine-tuning that makes a revolutionary idea better—not just different.

So there’s an art, and a science, to this new strategy. And technologists as well as investors must be aware of both the opportunities and the obstacles as they seek greater results and returns from already-developed innovation. The ability to combine the technology and ideas of tomorrow with the systems and products in use today will enhance the likelihood of widespread adoption in established markets while increasing the possibility of sustained returns.

Taft Kortus is a partner in the technology and life sciences group at Moss Adams, an accounting and consulting firm based in Seattle. Follow @

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