Innovation isn’t free. In fact, it’s eye-popping expensive. Early-stage research and development is typically funded by grants. Later stage research and development can access venture capital. But what does the middle group do—the stage of research that is past the grant-funding level, but not yet ready for prime time?
$2.3 trillion was being invested for impact in 2020. (ifc.org)
About 2% of global AUM can be characterized as impact investing. (ifc.org)
62% of millennial investors feel that impact investing has greater potential than traditional philanthropy to create long-term positive change in the world. (fidelitycharitable.org)
Back before the late 1970s, most cutting-edge technology originated in U.S. federal labs—think space travel, the internet, radar development, GPS, etc. Since the dawn of the digital age, however, funding for technology research and development has shifted to the private sector. The U.S. government still provides funding for start-up and greenshoot ideas through federal grants to universities and U.S.-backed research entities (e.g., Lawrence Livermore Labs) but this funding is dwarfed by private funds, venture capital and other funding flowing into innovative R&D.
However, most of this private funding flows to technologies that have reached—or nearly reached—the monetized market stage. This means that technologies that might take decades to mature, such as green hydrogen and fusion, get caught in no-man’s land—a place for technologies that have outpaced the government’s focus on early-stage development but aren’t mature enough for private industry to take over. A paper by Richard Tippitt and Sherman Williams calls this untenable position a “Valley of Death.” If innovations at this stage can’t find funding, they will likely be forgotten.
Privately funded impact funds were made for just such a scenario. These funds invest in companies or projects that are working to address social or environmental challenges, and they have the potential to play a significant role in supporting tech innovation that has a positive impact on society.
These funds often give investors the opportunity to get in on the ground floor of a new technology when its market value is still unknown, but the process looks promising. This is “patient” money that doesn’t need a return in two or three years, but can afford to ride the process to fruition.
As impact funds gain in popularity, they may encourage other investors, including venture capital firms and angel investors, to consider the social and environmental impact of their investments. This could lead to an increase in funding for tech companies that are working on innovative solutions to proptech, fintech and greentech problems, further supporting tech innovation in these areas.
According to Silicon Valley entrepreneur Steve Blank, the U.S. needs a new funding mechanism that can take promising ideas from start to finish, even if they take decades. He points to America’s Frontier Fund (AFF) as one idea. This fund is set up as a non-profit investment vehicle (so it doesn’t need to achieve maximum profitability for investors) filled with “patient” capital raised from both private and public sources. The fund will be entirely focused on identifying critical technologies and strategic investing in projects for the national interest. AFF has government backing, but it takes a market-driven approach to eventually scale and monetize successful enterprises.
If successful, the AFF might just prove to be a template for the type of public / private partnership that will assure the U.S. remains at or near the top when it comes to innovative ideas, processes, and solutions.
And if it doesn’t work? Well, certainly we are innovative enough to find something that does.