At its core, innovation strategy is comprised of Value Creation + Value Capture. Identifying areas of strategic value creation is a combination of:
In business, value capture is the process of retaining some percentage of the value provided usually through a profit. Traditionally, pricing mechanisms are used to capture value however other methods also include data capture. For example; Apple captures value through the pricing mechanism of its products, while Facebook captures value through data collected of its users which it sells.
For governments, choosing what kind of value to create is the easy part. Governments are well accustomed to identifying their nations strengths and challenges while also possessing deep enough pockets to commit significant resources into strategic areas and building supportive public policy.
Capturing the value is the hard part. Governments have a huge blind spot when it comes to capturing value, assuming creating value leads to capturing it. In the private sector, the value created and captured, usually through a profit, ensures penetration and scale is possible. Capturing value is a prerequisite for business success. Without capturing value, businesses cant scale.
In the private sector, successful innovation strategy is tied to firms existing capabilities, competitive advantage, strategic positioning and emerging consumer needs. The best firms marry their R&D capabilities with marketing and commercialisation. For the best firms, commercialisation has become a core capability and a fundamental part of the innovation road map. In the USA, over the past decade, the number of new consumer products introduced in the United States has grown at a compound annual rate of about 7 percent, to 32,000 a year, according to the research group Productscan Online. The focus on route to market ensures an ROI realisation strategy.
Private sector innovation strategy has a clear route to market. Planning is not perfect, our analysis of innovation efforts at fortune 100 companies has shown a wide discrepancy between planned time to market and actual time to market.
Lag time is the length of time from which innovations move between the completion of research and development to where ROI is slowly being realised. Research into this area predates the lean innovation, agile and design thinking revolutions. However, research in 1971 found mean lags varying between industry; 1.2 years in electronics sector, 1.7 years in chemicals, 2.4 in machinery. Innovations in product design, coupled with record technology adoption levels have led to startups like Slack, Groupon, Xiaomi, to reach billion dollar valuations in under 2 years. In todays age, lag time has been minimalised.
Yet, governments remains WAY off the mark. Research into lag time of publically funded R&D is limited, but lag time between medical publication and medical advancement gives us an indication. Research into this area shows lag times varying from 28 years for ‘enabling scientific research’ and new drugs being taken to market, and 17 years from original research and implementation. It should be noted, healthcare has its own unique market dynamics.
For western governments, the separation between the state and market means route to market is not key component of innovation policy, or executed in the same manner as the private sector. This is partly because the traditional models of value capture are culturally uncomfortable; Profits/pricing mechanisms/ equity positions in spinoffs/ technology licensing agreements with industry etc. As a result of this discomfort, innovation policy does not emphasise roll out, implementation and commercialisation. The final hurdle of innovation strategy, market penetration, is never emphasised but it is only at this stage where value creation can be realised.
At the same time, Challenge Advisory’s work with numerous governments has shown a bias towards ‘Radical Innovation’; the commitment of resources to sponsor high cost research and development. The result is non-actionable innovation. Potential breakthrough solutions are stuck in the labs meaning, once again, value creation is never realised. Without an effective value capture model and focus on route to market, government innovation efforts will always be perceived as failing or under delivering.
Western governments require a new model for capturing value, one which emphasise commercial roll out and market penetration. By emphasising market penetration and adoption of innovation as an integral part of the innovation policy, governments have multiple opportunities to capture value, realise their efforts and be assessed against the greatest competitive pressures – the market.
Indeed, without implementation and marketplace adoption, was any value ever created if it was not validated by a market?
A new approach to capturing value must:
The ultimate objective of innovation policy is to drive economic growth, both in the short term and long term. The challenge lies in quantifying innovation aspirations in relation to economic growth and utilising the multiplier effect to inform innovation strategy. A value capture model of licensing technology through exclusive agreements to a foreign multinational corporation has a lower economic growth multiplier effect than a successful state-owned spinoff.
Throughout our work with several government departments, we have noticed recurring objectives for government innovation policy which include:
The metrics used to assess innovation policy avoid placing too much weight on the success of startups, instead choosing to focus on macro collaboration and investment figures between industry and the research base. Examples include:
Although some governments such as the UK Agritech and France’s AI strategy include more specific ‘market success’ metrics, they do not go far enough focussing on the end outcome and not the benchmarks and milestones as part of the startup growth cycle. These include:
Underpinning this is a fundamental belief that successful startups occur out of the ashes of failures left by others, therefore governments role is to create the ecosystem and ashes of innovation.
The high failure rate and unpredictability of startup success provide sufficient ammunition to avoid measuring policy success by startup success. The civil-state boundaries in western governments also prevents state overreach into the private sector. Much of the broader aims of state innovation policy are directly dependent on the success of innovative startups, in their domestic markets and international.
Governments must view a key parts of innovation policy through the lens of founders and venture capitalists and align innovation policy success metrics with the startup life cycle. By compartmentalising the startup life cycle, understanding the unique challenges faced by innovators at each state of their growth, governments can strategically commit resources to maximise their chances of success.
At Challenge Advisory, our Venture Capital Team specialises in securing large early stage capital for disruptive tech startups within our industry expertise. Government innovation policy typically commits resources to the early stages of the startup life cycle, whether its investment in R&D or fostering startup creation. Following establishment of product-market fit in domestic markets and capturing a sufficient market share, founders usually will return to the venture capital markets to raise their Series A, usually to fund international expansion or sales and marketing.
VC’s are hesitant in funding international expansion opportunities because a large percentage of startups fail due to underestimating the technical and commercial challenges in capturing market share in foreign markets. From VC’s perspective, scaling a domestic American startup which has established product-market fit is more attractive than gambling on a European startup enter the US and scaling. To add to the challenge, the European venture capital market suffers from a lack of growth funds. Early stage capital is in abundance but the larger rounds (post Series A) are lacking.
To address this issues like this, governments must strategically commit resources to help startups create product-market fit validation in larger markets earlier in the startup life cycle, where access to capital is easier. Utilising bi-lateral trade relations, access to market, helping with R&D to address problems facing larger international markets etc.
By breaking down the startup life cycle, understanding the challenges faced at each stage, and strategically committing resources to address those, governments can maximise the chances of success of the innovators. In the case of attracting venture capital, governments can proactively help startups raise successful funds.
The challenges of securing venture capital is just one of many challenges experienced by founders at a specific time in their startup journey. Governments can proactively help startups address their different challenges, but must understand their challenges at each major milestone of the startup growth cycle. The broader objectives of innovation strategy rely on startup success.
DARPA was formed in 1958 shortly after the Soviet Union launched Sputnik with a simple original mission ‘to prevent and create strategic surprise’. What makes DARPA remarkable for both governments and corporations is its consistent track record of radical breakthroughs with modest resources. These Include:
DARPA has an annual budget of $3billion to fund 200 programs, owns no laboratories making it a relatively tiny government agency. There are only 100 temporary technical program managers. The support staff which includes, HR, finance, legal and security comprise of just over another 100 people. Yet it is still able to attract the best cross sector talent to create actionable innovation to solve pressing challenges.
DARPA programs last between 3-5 years led by fixed term technical managers. Program managers are accomplished individuals ranging from industry, academia, startup and non profit.
Limited tenures combined with clearly articulated focus creates urgency. DARPA has committed itself to avoid blue sky research and focus its strategy on pushing the frontiers of basic science to solve well defined use inspired needs
Decisions are not made by committees and breakthroughs do not lend themselves to consensus. Instead Program Managers are able to drive resource allocation and decision making orchestrating the entire process.
Synthesising the success of DARPA is a difficult task. At its heart, structures and processes are put into place to attract the brightest minds to come together to solve the biggest challenges.
DARPA avoids the institutional perils facing government innovation efforts while unprecedented levels of decentralised autonomy and decision making avoids the required ‘innovation roadmap’ and predicted output which corporations require.
Adopting innovations which threaten a corporation’s market position and competitive advantage limits the usefulness of corporate innovation efforts. DARPA has no primary market position to protect as such it is not shackled down to the same challenges facing big business.
The overarching innovation philosophy focuses on pushing the boundaries of basic science to solve well defined, use inspired problems.