Rethinking the Financial Drivers in Innovation Culture

By: Haydn Shaughnessy

Recent reports in the Harvard Business Review question the efficiency of the traditional Silicon Valley venture capital innovation funding model and more emphasis is now being placed on how to manage the innovation process in a low finance environment. In this article we look at one grass roots movement that is providing a model for creating the widest possible innovation culture, at the same time bringing this new innovation management thinking into the mainstream.

Some cultures do good research but poor innovation. That description has haunted policy makers for four decades. It bears some truth but it also bears some thinking about. Japan as an innovation culture for example impacted the world market in the 1980s but then peaked and declined. In the mid-1980s European policy makers decided to support the nascent mobile phone industry by pouring big R&D dollars into 3G and mobile infrastructure and by brokering Europe-wide partnerships. Europe has enjoyed a lead in mobile ever since, even though it may have faltered when entering the US market.

As the iPhone and Apple recently heaped enough pressure on Nokia to cost the Finnish market leader’s CEO his job, it’s undoubtedly time once again to address the issue of innovation culture.

Some cultures do good research but poor innovation.

We now have sector clusters, we have creative quarters in a number of cities, we have national research agendas to give some direction to the innovation but few countries produce the all inclusive sense of excitement and awe at the possibility of change the way the United States has done for five decades and China and India are now emulating. Somehow the thrill of innovation doesn’t quite get beyond the core audience of existing business people.

In troubled times we need a broader definition of innovation and a new relationship between money and growth. In fact managing innovation on radically reduced budgets its likely to be a feature of innovation management in the future, and as the New York Times recently illustrated there is real excitement around innovation at what C.K. Prahalad called the ‘bottom of the pyramid.’

What can we learn from the grassroots?

Silicon Valley of course is a magnet for people who want to see an innovation culture in action. The top tech innovation websites, Techcrunch (recently sold to AOL) and GigaOm, attract millions of readers per month from around the world and are as successful as any traditional business and technology magazine. Facebook of course recently founds its way to the movies. The sense that innovation is not only a well managed process but is an exciting part of life permeates some cultures. Change energizes people. Challenges like the ones we face now, provide an opportunity for people to show their mettle.

Ron Schultz plays a modest but illustrative part in American innovation culture. Though he hails from Los Angeles he is not a part of Valley culture or of Hollywood. Schultz’s latest project is to bring innovation to the homeless of LA. At the same time he has a new publishing venture (Impact Books) aimed at the mid-market author, and his new Social Enterprise Zone project is slated to reach from the downbeat to the small business community early in 2011. It’s a growing trend with new community funding initiatives opening across the USA and growing interest in Europe.

Schultz also runs the International Social Action Film Festival. Let’s start with that.

It’s a growing trend with new community funding initiatives opening across the USA and growing interest in Europe.

The International Social Action Film Festival delivers inspirational videos about social change to people hosting social entrepreneurism events. “The videos are about the work of social entrepreneurs” explains Schultz, “and about people doing positive things in their communities through social innovation. The problem is people with those skills tend not to be able to tell very compelling stories about their experience.” So rather than run a festival that invites people in, Schultz runs a festival that sends movies out – to wherever people gather to discuss social innovation. Event organisers can create their own festival program from Schultz’s catalogue and from there it is a do-it-yourself affair.

It is both a novel approach to festival organising (soon you will be able to download films from samnet.tv) but also an opportunity to provide feedback to film makers about their story telling techniques.

Schultz’s mission is to make innovation management skills available everywhere, not just through the festival but also through his grassroots schemes making it available to anyone who wants to try their hand.

Social financing innovation comes to the advanced economies

Schultz’s other big project is Lending4change, a program he runs in collaboration with Pepperdine University in Mailbu. There can be few more prestigious addresses than Pepperdine and Malibu but for Schultz this is an opportunity to develop a Kiva type microfinancing initiative to Americans who live outside the fold.

The program currently provides a 14 week training course in entrepreneurism to homeless people and awards grants of $1000, first round funding, and $2000, second round, to start a new business. “Fifteen people who are homeless in Southern California,” muses Schultz, “Now going onto a business foundation course!”.

“It’s taken four years to get it off the ground,” he explains. “It ends with the participants creating a business plan and a small amount of financing so they get a chance to improve their credit ratings.”  Once they have an improved credit rating the stand some kind of chance of attracting more conventional funding.

But the program is also a grounding for a larger ambition – to reintroduce entrepreneurial lending where Credit Unions once served the American population.

Financial innovation has been part of our history

“Credit Unions began as neighbour to neighbour lending. Before we heard of microfinance, that is what Credit Unions were doing.” In fact what Schultz points out is that many of the institutions around us were once innovations. Some of those we now take for granted were significant social innovations in their own right when they were first founded. Like Credit Unions they grew and were managed into the mainstream and lost sight of their innovative role. But that also means the seeds of long term change lie with initiatives like those Schultz has been busy promoting.

The bigger ambition for Lending4change is a fund that provides funding in the $25,000 to $50,000 bracket in a neighbour to neighbour environment. A lot has changed recently in American funding models. For a decade or more the venture capital community drove innovation, or at least funded the ramp up to IPOs. But recent reports in the Harvard Business Review show that venture capital funds, with few exceptions, did not provide better paybacks for investors than investing in the NASDAQ stock market.

Changes in Innovation culture

Though we have all been in thrall to it, selecting a modest number of hopeful companies with the expectation of a large drop-out rate but huge returns on a minority of winners is not a good model of innovation. The V-C innovation model of the last twenty years looks broken.

Small investments in people willing to learn business, and with a passion for personal betterment, seems like an old fashioned and somewhat romantic version of how societies grow economically. Innovation has tended to be a story about real heroes, big bets and giant valuations. Yet, the small town version of innovation is gaining traction. Not only Ron’s neighbourhood project but also projects like the entrepreneur commons, Mark Cuban’s open source funding model, Village Cap and the Vencorps peer community.

These examples illustrate a trend that all innovation managers need to take into account – reduced funding, lowered expectations in terms of financial reward and in that respect a different type of motivation, but also a need to participate in broadening the innovation message.

For Ron Schultz the business of innovating begins at the grass roots. And it is perhaps no accident that he’s running his project in California, because although this is the most heroic of innovation cultures people like Schultz are still there to remind people that the ability to make a difference is a birthright that everyone can enjoy.

By Haydn Shaughnessy