People, Process, Technology, And Funding Are Key
Innovation can be defined as novelty that creates value for customers and stakeholders. While more than 80% of executives surveyed by McKinsey in 2021 said that innovation was one of their three key priorities, only 10% are content with their team innovation efforts. If innovation is ubiquitous, why is it so difficult to achieve and sustain? This series of “Innovation Blueprint” articles will explore key elements of cultivating an innovation ecosystem, including measuring and scaling innovation for your organization. This article discusses 6 key elements of an innovation ecosystem.
What Is An Innovation Ecosystem?
An ecosystem in nature is a community of living organisms that interact and grow together. An ecosystem is comprised of three components: 1) the population of the ecosystem that has both driven the development of and is the result of the ecosystem; 2) the location and environment where the ecosystem exists; and 3) the interdependency, interaction, and symbiosis amongst the population members of the ecosystem. Similarly, an innovation ecosystem shares all of these characteristics as a network of innovators, startup companies, stakeholders, funders, and venture capitalists that interact together to drive ideas into products that add value in the marketplace.
In his research at Harvard Business School and Babson College, Professor Daniel Isenberg delineates a framework of the 6 key elements of an innovation ecosystem: people, markets, policy, culture, finance, and infrastructure support. Each element includes several characteristics or conditions that need to be present.
People
There are three key elements under the umbrella of people: 1) strong networks and platforms that foster networks to grow across government, industry, and academia; 2) innovators as well as skilled and unskilled workforce members; and 3) talent acquisition and development strategies and structures that include an innovation competency skills model to gauge the skills gap and related training and resource allocation needs.
Markets
Free-functioning markets, a broad customer base, and robust supply chains are fundamental to the development and growth of an innovation ecosystem. As startups take ideas and develop them into solutions for customers, they need to have immediate and direct access to marketplaces and customers.
Policy
Isenberg combines leadership and government under the policy umbrella largely because they are foundational to the ecosystem. Leadership and championing innovation unequivocally are foundational. Leaders who support innovation provide social legitimacy to the efforts of innovators and the broader ecosystem, help drive innovation strategy, and can also instill a sense of urgency to tackle crises and challenges. Similarly, government institutions have a crucial role to play by defining the regulatory framework, including tax benefits, funding research, instituting venture-friendly legislation around contracts, intellectual property rights, and labor and bankruptcy laws, among others.
Culture
Culture is so critical in an ecosystem because it is the glue that holds everything together. A culture that tolerates calculated risk-taking, embraces failure, and defines mistakes as learning opportunities is critical. An innovative culture fosters an innovation mindset and encourages creativity, experimentation, and questioning of the old ways of doing things. An innovative culture also encourages and exemplifies ambition, drive, and a hunger to succeed. A key component of culture is also the ability to story-tell and share success stories from the innovation ecosystem stakeholders. Because success breeds success, making successes visible across the ecosystem is critical, as is discussing failures and the resulting learnings.
Funding
Funding sources are crucial for innovation ecosystems and include micro-loans, angel investors, friends and family, zero-stage venture capital, venture capital funds, private equity, robust capital markets, and access to debt. Startups are inherently risky because they are focusing on addressing unmet customer needs with the development of new products and services that have not been market-tested. The increased risk and lack of data about the value of the new product in the market are two deterrents to accessing funding through regular channels like bank loans.
Venture capital is a type of private equity that examines startup teams and their ideas, evaluates current and future risk, and funds innovative ideas. There are six stages of venture capital:
- Seed money, which is initial funding often provided by angel investors or crowdsourcing. Seed money is not always tied to Return On Investment.
- Startup funding pertains to the early stage that needs funding for product development and marketing expenses.
- First-round funding, or Series A (growth) funding, is given for manufacturing and the early sales stage.
- Second-round funding, or Series B funding, is working capital for companies that are selling products but not yet profitable.
- Expansion or Mezzanine funding is expansion money for a newly profitable company.
- Exit or bridge financing is the fourth round of funding, which finances the “going public” process of the company. Usually, the VC exits at this stage, having earned their Return On Investment.
Infrastructure And Support Entities
This element is equally crucial because it provides the equivalent of the soil for a planted seed that needs to grow. This element includes the infrastructure that facilitates innovation, such as telecommunications, internet access, cybersecurity, transportation, logistics, and supply chains. Additionally, it includes professional services such as legal, accounting, banking and financial services, and other technical expertise. Support entities include innovation cells, innovation hubs, accelerators such as Techstars and Y Combinator, business plan competitions, conferences that bring together innovators and investors, associations, and small business support groups that offer advice and guidance to startups and their teams.
Conclusion
As a leader, to foster an innovation ecosystem, you must first understand these elements and how they function, and then continuously foster connecting the dots across them by eliminating obstacles, facilitating connections, and driving an innovative culture. The people, the innovators who generate new ideas and work to turn them into value-adding products and services, are crucial elements in the innovation ecosystem. As a leader, you need to mentor, engage, and encourage the innovators during their long and often arduous journey of innovation.
