Finance4Good: Financing innovation and entrepreneurship
“Is finance for good?” – asked Martin Wolf, chief economics commentator for The Financial Times . The seasoned commentator seemed disillusioned. In response, esteemed guests from the World Bank, Oxford University, and the financial industry, put aside their differences and called for innovation and trust.
The two cornerstones of our economic system are ultimately the fuel for its financial life force. As such they have proven tentative and elusive, hard to grasp and harder still to finance. In the “Financing Innovation” session of Finance4Good conference, HEC Paris Professor Johan Hombert invited Nicolas Von Bülow (Clipperton Finance), Claire Lelarge (CREST, Bank of France), and Juanita Gonzalez-Uribe (LSE) to explain how to avoid the pitfalls, build trust, and foster innovation.
The Invisible Hand of Innovation
The first wave of venture capital innovation swept the world in the 1970s - corporates with easy access to funding going for long-term infrastructure projects. At the turn of the century, an explosion in start-up activity meant that no one knew what they were doing anymore, but by 2007, their business reinvented, investors were more willing to support small, newborn enterprises than established giants. In the new American dream, IT startups morphed, in a matter of years, into real economic powers with the broadest reach and scope.Now corporates learn to follow independent firms, unicorns take centre stage, and tech-based funds go massive. There is hardly a business left that can ignore the challenge presented by digitalization. TV series talk, somewhat cynically, of saving the world in the Silicon Valley, and students see entrepreneurship as the most glamorous and promising career path out there. Are we close to oversaturating the market? Not nearly.
Country-wise, the US and even the UK far outstrip Europe, where investment has remained stable and comparatively tiny over time. The VC scene there is ill-equipped, and lacks visionaries of Elon Musk’s caliber and fortune. The celebrated ‘green’ innovation has gone predominantly low-tech in the past 6 years, social impact businesses have only just begun to expand. And yet, there have appeared the first European category leaders – service providers, second-level platform players (Spotify, Blablacar, etc.).
Digital innovation happening right now disrupts businesses; the process, devoid of any overt philanthropic intent, will, nevertheless, have a profound impact on the environmental and social dimensions of the economy. First, with better links between different economic agents and their needs, a more efficient and less damaging allocation of resources will be possible. Second, entrepreneurs will lend momentum to the transformation of larger groups. The key to that future is to manage risk, trust, and control issues that hold up the flow of finances.
Tips and tricks
How do you breed unicorns? As custom would have it - easily enough in the right cultural climate and steady legal and fiscal environment, populated by wildlife: advisors, lawyers, mentors, and generous governmental support. Interestingly, many more habitats are conducive to raising majestic beasts than generally assumed. One of them is France, with its history of small-scale entrepreneurship, power clustering, sizable social security net, a central European position in the post-Brexit world - and international students.
What of capital? Early investors are responsible for holding on to a rooky company long enough for it to stabilize, develop best practices, and make an impact, not letting it disappear without a trace in the clutches of a new owner. To be able to do that, they need a diversified return-maximizing portfolio and professional expertise, which venture capitalists have steadily gained over the past 15 years. Newly evolving forms of financing, like crowdfunding, have potential and a role to play, given the public good nature of innovation.
For governments, the right move may well be trickier still, despite the sheer variety of proposed schemes (the #1 French JEI programme, tax credits for large firms and subsidies to young ones, for attracting independent investors, etc.) and the solid, extensive research that exists to back them up. Uncertainty and information asymmetries, investment specificity and search costs stand in the way of the right incentives. They bring about mistakes, a crowding-out of investment and competition, control and trust issues, and a price effect unmatched by an increase in R&D. Still the governments battle to win over even a single percent of potential beneficiaries – for the huge difference it makes.
Finally, it is important to remember that investors and public authorities are as human as entrepreneurs themselves. A satisfyingly productive relationship will spring up if the parties are a good match, and the process of looking for external capital is similar to that by which men choose wives to surrender their freedom to. Innovation is our way to look for answers. Capital, trust, and reputation are all fragile and tend to accumulate, and in the old world it is up to the three capital-hubs to do it. This is the time for Paris to reinvent its brand and build its financial scene. This is time when the good-impact part of any self-respecting entrepreneurial pitch is, suddenly, no longer a gimmick.
Written by Yana Nakhimovich, HEC Paris student