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Fostering Innovation

I recently sat on a panel to discuss how to create an innovation economy with a high-level delegation from an Eastern European country. To prepare for this discussion, I sat down with a clean sheet of paper and outlined the necessary conditions for innovation to occur, and the attributes innovation hubs tend to share.

I began by thinking about centers of excellence in general.  Why are there so many great baseball players coming from the Dominican Republic?  Because kids there believe it can really happen to them too.  There is a clear progression to follow from little league to the big leagues, and numerous success examples from their neighborhood.  And baseball is a meritocracy.  Nobody cares who you know or what you look like if you can throw a 100MPH fastball.

For entrepreneurs, it is exactly the same.  Those with great potential need to see success examples, and need a clear path to follow.  Building on that, here is my list of necessary conditions for a strong innovation economy to exist:

1. Success is Attainable – People are highly aware of success in their peers, and attempt to emulate those who became successful.  When entrepreneurs are visibly successful and heralded in their community, then others will seek to follow in their footsteps.
2. Clearly Visible Path to Success – There must be a clear starting point, identifiable milestones marking progress, and a highly sought-after finish line that is not impossibly distant.  In the US, the path is visible and clear.  Get a good education, move to one of the primary centers for innovation, join a startup, or launch one.  Get experience, fail (usually), and try again until you find a winner.
3. Accessible Mentors – Budding entrepreneurs rely heavily on mentors to demystify the process of raising capital and growing a business.
4. Accessible Capital – For every stage of risk, there needs to be a decent chance of raising capital.  Generally this means a healthy private venture capital market.
5. Exit opportunities – For capital to take risk, rewards must be visible and attainable.
6. Available Markets – Young companies can’t afford worldwide salesforces.  The web solves some of this problem, but selling directly is an important source of revenue for young companies.

The challenge with creating centers for innovation the “chicken and egg” or the “day zero problem.”  Just as someone in the Dominican Republic needed to be the first to play in the major leagues, someone in an innovation center needed to create that first, large, successful business from nothing in five years.  Which brings me to opportunities for governments to actively foster innovation.

1. Create a Level Playing Field – There are no examples of innovation flourishing in a state where success is determined by other than market forces.
2. Fund Research – Risk Capital has not found basic research a profitable investment.  Many successful companies receive their first cash from government grants.
3. Seed Venture Funds – Government Pensions worldwide seek higher overall returns by investing in a portfolio of private equity funds or funds-of-funds.  This risk capital is the fuel for the fire innovation.  Targeting some of this capital to local investments is a key catalyst for igniting an innovation cycle.
4. Regulate/Legislate for Fair Competition and Transparency – Create clear laws governing business practices and intellectual property, assure fair adjudication of those laws, and require transparent financial reporting. Entrepreneurs are willing to bet on outwitting their competitors, but won’t take risk starting a company if they think the game is rigged.  Similarly, transparency assures investor confidence.
5. Be Patient – It takes at least a decade for the virtuous cycle of mentors and role models begetting new entrepreneurs to become self sustaining.

Given all of these requirements, where do centers for innovation generally succeed?

• Near a world class university
• In a highly sought-after place to live (stimulating, creative cultural centers)