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Personal Finance

Innovation funding a key driver of economic growth

Investors should improve access to finance for
Investors should improve access to finance for innovative enterprises with growth. FILE PHOTO | NMG 

Vision 2030 recognises the importance of innovation as a pillar in growing the economy. Invention is key to creating jobs for the youth and spurring the economy.

Any great nation supports this culture of creation among the youth. Successful innovations have also benefited the public once they have been commercialised. For example M-Pesa totally revolutionised e-commerce in Kenya.

One major challenge that innovators face is little access to funding opportunities. Some had rather invest in opportunities which are low risk and in businesses that have historical records on profitability.

In today’s article, I want to make a case for innovation funding and why we need more investors in this line.

Innovation funding is a high risk venture primarily because there is little historical evidence as to whether the venture will succeed or fail. Innovations have not been tested to understand their market reception.

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However, it is for the same reasons that they present the investor with an opportunity to participate in high returns. Returns from successful innovations are very high.

Most of today’s wealthiest people are techpreneurs and other innovators. Here are some examples, Bill Gates of Microsoft, Jeff Bezos of Amazon, Elon Musk of Tesla and Space X, Mark Zuckerbag and Jack Ma of Alibaba. All of these profitable companies attained profitability due to innovation.

Inasmuch as innovation based investments carry high risk, they also carry high returns. It is an investment opportunity for the risk takers. Innovative companies rake in high profits as they have little competition and any intellectual property rights granted may assist them maintain a monopolistic advantage in the market.

There are many ways innovation funding can be done including grants, equity, debt, quasi equity and hybrid. However intermediary funding is fast becoming the ideal way of innovative funding.

Grants are given by the Government or other entities for innovation. Grants are not repayable and so long as the innovator meets the criteria then he becomes eligible to participate. Grants can therefore be susceptible to abuse as there is no guarantee that completion will be reached.

Large profitable businesses, can consider issuing grants in specific social impact areas, as a CSR strategy. It is even better when the business offers incubation to the successful candidates such that whatever innovations are successfully completed have a positive social impact.

Equity funding is mostly done by venture capitalists who invest in an innovation with the aim of making profits. The investor contributes capital, market access and management expertise into the venture while the innovator contributes technical knowhow. There have been many success stories of innovation based ventures.

Intermediary funding happens when an intermediary manages funds on behalf of investors. The intermediary has discretion as to what innovations to invest in provided there is a good return for the investors.

The benefits of investing in innovations is due to the opportunities it offers the investor. It is a chance to diversify investment portfolio and has good social impact. It presents an opportunity for high returns. It can be used as a CSR strategy due to mentorship and job creation. It is good for the brand and it’s also innovative in itself.

There are many organisations that offer innovation funding, for example Softbank Vision Fund. The fund has been able to attract other investors, for example Saudi Arabian investors.

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