From time to time, the capitalists of the world do pay some attention to the research that is being done in academic finance circles. Among the most talked about working papers of 2017 was “Optimal Financing For R&D-Intensive Firms,” written by researchers at the MIT Sloan School of Management and the University of Minnesota. It frames finance as the backbone of organizations where innovation and R&D are a priority, which is the case for EdTech and learning technology startups. In hindsight, it is surprising that this kind of research was not done sooner.
Innovation financing is by no means a new field of study, but most of the research takes place in the private sector. Seemingly due to concerns over intellectual property, the research is often kept private. This makes it difficult to access research, but perhaps more worryingly, to examine it, ideally through peer-based review. Another challenge of locking research in is the inability to aggregate and draw conclusions that are valuable at a large scale. We seem to be, in some form, “victims” of this phenomenon. We are generally aware of the value of investing in R&D and its generally high returns, even accounting for risk; but small- and medium-sized organizations systematically lack the practical skills to take on projects with, as the authors call it, “long gestation periods.”
Previously, research that analyzed public financial records with innovation-based revenues found clear, if unsurprising, results. In biotechnology, for example, more R&D funding was correlated with positive R&D outcomes. But the link was found to be “inefficient” or costly. Over time are companies able to increase their financial expertise and become capable of delivering higher R&D returns at a given financial commitment and lowering financing costs. In addition, it is common that R&D funding is supported by third parties, such as VC capitalists or public funds, which protects innovators, especially the bigger ones. In short, financial knowledge and external backing is what supports R&D in society.
None of the circumstances mentioned above preclude a smaller team from taking on the financial implications that would make long-term R&D planning a reality. The research offer some findings which might be helpful in this regard:
- Results of R&D projects are not binary, therefore investing in them should not be seen as an all-or-nothing gamble. This is suspected as the main reason for the reported “funding gap” existing across economies and industries.
- R&D projects do benefit from “substantial specialized knowledge.” But after an organization commits to investing in innovation for the long haul, the R&D operation itself starts to become the main source of such knowledge. The level of in-house knowledge can also help determine the amount of funding that can come from debt as opposed to equity.
- From a financial perspective, acquired knowledge means lowering the risk of a decision while maintaining the outcome. R&D is to organizations what skill acquisition is to students and professionals: a time-intensive process that benefits from continuous feedback, deliberate practice, and, ideally, personalization.
- While it is true that larger corporations generally enjoy more financial support, such as funding from grants or tax exemptions, innovation partners and ecosystems are usually available for teams and entrepreneurs at any stage. They don’t preclude any starting efforts or investments, however.
- Successful R&D managers tend to “overbudget and underspend.” That is, they always ask for a lot more than the original project is anticipated to need, and then promote scarcity and resourcefulness throughout the actual innovation process. (The analysis does not take wages into account.) It is also preferable to procure as much funding as early as possible, as this sets more “comfortable” initial expectations of R&D returns.
- A large amount of funds raised also helps promote competition among sources and lowers the cost of funding, but only to a point, after which return expectations can compromise the operations and trigger responses from competitors.
- People responsible for raising funds, especially from external sources, benefit from the quality of the “organization’s innovation journey,” which entails the team’s expertise and evolved capabilities in the field, but also subjective or emotional appeals.
Finally, research opens the possibility for the role of an “R&D financing intermediator” who provides value in lowering the financial costs of long term investments and helps organizations realize returns from acquired knowledge.
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