Innovation,Ideas and the Search for Growth in a market disconnected with the Real Economy

The Best Innovative Idea can come from Anywhere Today.

End users need, market demand, availability of new technology and the search for growth are some of the Key driving forces behind innovation. FOR example Africa out of necessity is becoming the testing ground for new and innovative mobile banking experiments. The ongoing innovation in mobile payment and mobile banking is filling the growing demand generated from a part of the population that was once excluded from the economic activities and considered untouchables by traditional banks. Today mobile phone is allowing people to participate in the demand side of the economy. These mobile banking experiments could potentially change the traditional banking as we know it.  And going forward traditional banking models where if you were poor you are excluded will find it very hard to survive if they don’t adapt to the changing world around them.

Consumer lead innovation generally has a higher degree of success rate as it allows the corporate and entrepreneurs to fill in a growing demand.  Companies as wells as governments across the world have realised that innovation and technological advances are key to their long term sustainable growth.

While corporates are driven by profit, the governments have an important role to play in creating a platform that allows and encourages real value ADD innovation. The governments need to work very closely with companies, entrepreneurs and provide a supporting framework which facilitates Innovation and with it Research & Development (R&D).

Today the policy makers in the developed world find themselves aggressively competing with their counterparts from the developing nations in order to make sure they don’t lose the competitive advantage but who is to say that the NEXT BIG THING won’t come from a developing nation.

Technology has changed the world around us and without it some of us will struggle to carry out routine work. We live in a world of Facebook, Twitters , messengers, youtube and the list goes on. Today our world is so interconnected like never before. And there are legitimate concerns about the impact of ideas like Facebook, Twitter etc on the society. Going forward the society, the policy makers will continue debating the pros and cons but we can all agree that there is no turning back the clock.

The success of ideas like facebook is in its approach to innovation and its application. The scope of applications of a technology or innovations in terms of scale is far greater today than ever before.  Technologies and ideas that had more than 90% chance of failure some 10 years ago are in fact a SUCCESS story today.  Technology is evolving and in some cases too fast with significant affect on the society and the world around us.

Going forward Innovation and technology will be Key to success for developing countries especially economies and societies like China, India who run the risk of chocking on their own growth. For R&D Companies especially in Green Technology demand from countries like China & India will be at the forefront of their business strategy.

We have already seen the fast paced evolution in green technology especially in Wind and Solar.  Today the world wide wind capacity stands at around 251’000 MW and growing while the Photovoltaic production growth has averaged around 40% per year since 2000 and the installed capacity reached over 16 GW in 2011. Going forward the cost of power generation from green technologies like wind & solar will decline steadily as the technology gets better and more efficient.

The demands from developing countries for cleaner, cheaper, smarter, efficient and better technological innovations & ideas are coming out of sheer necessity and NECESSITY IS THE MOTHER OF ALL INVENTION. This growing demand will serve as a breathing ground for innovation. So it is highly plausible that the next BIG IDEA could come from the developing world or could be created for the developed world. And in order to make the most from the available opportunities companies, entrepreneurs, innovators will need to be based in markets that are generating the underlying demand.  The governments in the developing world including of countries like China and India will need to work closely with all the participants and provide the required and essential support to harness innovation and new ideas.

Some of the things the governments in the developing world could do to encourage innovation:

• Tax breaks over medium to long term to companies, entrepreneurs, innovators
• Encourage state or privately held companies to acquire R&D companies overseas to fast track innovation. Burning cash on duplicating the efforts already made by others in a competitive R&D environment may not be worth a while exercise.
• Promote Innovation & technology knowing well that (R&D) is a risky investment but this risk profile can change overnight with a single EUREKA moment.
• Promote Innovations and R&D that adds real value to the economy and bring simplicity with it
• Pick and target sectors where it can create a niche and support it by domestic demand.
• Have a collaborative approach to mitigate the risk profile of the development phase of a certain technology hence enhancing the return on investment
•  Be willing to share the development risk with the private sector
• Help with hand holding where necessary including with the implementation of the technological innovation in the market
•  Open the market to competition  attract overseas R&D Companies and support them with funding, risk sharing and establishment of a market ( if the underlying demand is not sufficient to support the bottom-line) by creating smart legislation and work with regional partners

While innovation and technology are going to be one of the Key drivers of sustainable growth it will be unwise to assume that all the innovations will add real value and provide growth. There are Innovations that add real value to the society and meet the growing needs and demands of the population but there others which may have an impact on the society but their real VALUE ADD is debatable.

Innovation and technology is a risky venture and not all of them will go on to become the NEXT BIG Thing. We live in a world where a company like Facebook with an estimated revenue of around USD 2 billion ( FY ending 2011 ) is valued at over US 100 billion and Twitter carries a valuation tag of around US 10 billon with an estimated revenue projection of approximately US 110 million ( FY 2011 ). Incredible valuation for private companies that may or may not exist after 30 or 50 years but whether or not we agree with the valuation and the methodology used for valuing these companies the fact remains that some in the market are happy to pay the price tag on these companies and ideas.

 In January of this year Goldman Sachs and Digital Sky Technologies (DST) paid US $ 1.5 billion  this investment valued the social network company at US 50 billion, a record valuation for a privately held company. Few months later General Atlantic purchased 2.5 million shares of Facebook valuing the company at US 65 billion.  The valuation jumped by over US 15 billion is less than 3 months without any fundamental improvement in the bottom-line of the company.

Growth projections of a business are mostly an estimated guidance but using it as a KEY ingredient in your valuation methodology is pretty much like assuming that a person is tall by looking at their shadow. The numbers are only as good the people who create and make them so it is unwise to take them as the gospel set in stone.

There is a strong disconnect between the real economy, society and the market. And the problem is if any of these overpriced investments go bad the market and the media will report this as the bursting of technology bubble depriving good and essential innovative idea & technology of capital. And the technology sector will become a no go area again. We saw a bubble burst in the 2000s and its aftermath.

 A sector could go from being attractive and undervalued to be overvalued in no time depending on the speed and the amount of capital flow it gets from investors around the world. There is a strong temptation among some in the market to ride on an in fashion trend and jump in the bandwagon. For example if emerging market is the growth story we are all tempted to ride it but the logic says if a country is growing at 9% percent it doesn’t necessarily mean that all the sectors of the economy are growing and attractive so committing capital based on the overall growth story is not just ill-advised it is how we build bubble and distort the reality.