Finance for Innovation - Essay Example

Finance for Innovation Sources for Innovation Financial innovation involves the creation and popularization of new financial approaches to various financial circumstances. The term can be used to define creation of new security elements, new and interesting money management approaches, but generally, financial innovation is about a financial idea or instrument that differs what has been there before thus having the potential to be desired in the end (Smith 2006). It involves creation of revolutionary products including mortgage-backed security, first swap, first zero coupon or introduction of junk bonds to leverage buyouts. Financial resources are critically essential in all innovation process aspects and all financial sources are significant. A good financial innovator is Kueski.com, a financial innovator located at Gaudalajara in Mexico, which chose a banking platform in Mambu cloud to operate its magnificent and fast growing lending business. Kueski.com is an innovator that offers online loans through a complicated risk algorithm drawing on several sources of data like a client’s social profile so as to assess his/her creditworthiness (Mambu 2014). There are several sources to finance innovation; Venture capital- Venture capital industry is regarded as a solution for financial innovation since it addresses most needs for technology startups. Venture capital typically funds innovations through rich investors, university endowment funds, pension funds as well as other institutional investors for a certain period of time. Venture capitalists actively invest and are involved in assisting strategy, operations, marketing and personnel. Usually they restrict give restriction to entrepreneurs from getting funds from other potential investors without explicit permission from the venture capitalists (Fabrizio 2007). Venture capital involves specialized funds that are invested and managed in companies by people who best understand the industry that they are investing. The funds offered by venture capital and the equity share kept by managers are sensitive to the ability and experience of the capital providers and how mature the firm that is being funded is. Venture capital usually boosts the value of the funded firms especially if the investors are experienced. There are several stages that venture capital provides funds; Venture capitalists provide finance for research, assessing and developing the initial concept of a business before it reaches the star up stage. It finances businesses that require more funds after the development stage to initiate sales and commercial manufacturing. During management buyout, funds are provided for investors and the operating management to attain a product business or line that is in existence. Private investors- these investors are also referred to as business angels. They are wealthy people who are ready to use their personal financial resources and take risk on investments under their own interests and experience (Shane 2009). Most of them are retired executives from major companies or mainly individuals who sell their companies and decide to invest their money in other ventures. Others after being made redundant may wish to invest the money. Private investors invest local business sectors where they have experience. The investment may be individually or in small groups thus becoming quiet small and they make quick decisions as well. The private sector invests on mature companies also known as leveraged buy-out with 3-6 years. It deals with high level of financing including debts thus combining bank loans and private money. The private sector usually has management consultancy skills and a high level of financial engineering. It also trades in young and start-up companies. The private sector holds the share of mature companies for more than 5 years or in other words at a longer period because they have a long term view (Van Osnabrugge 2000). Most of the time the investors are involved in company’s start up either as corporate or as family. Most of the long-term private investors effectively develop a holding company hence buying into existing firms. The shareholders in this sector usually share the profits both in short term and long-term basis. No collateral is required and the investors do not magnify issues associated with finances. Public sector- This sector trades and sells the market ownership and the investors benefit from all upward potentials. In this case, the financial risk investment is willingly large. When the share price reflects the discount cash flow to be expected in years to come, the shareholders tend to have an interest in investing more in the company’s long-term value (Tidd and Bessant 2008). The public support on innovation involves various mechanisms, which depends on the components of innovation. The primary development and research are funded by the government grants through agencies placing less requirements or boundaries on the innovator. Hereby, such grants usually leave the innovators with controlling power and autonomy. On the other hand, the government grants can be tied or directed to particular goals and objectives. Some agencies and programs like Department of Defence or Department of Energy supports the goals of innovation (Block 2011). The government also supports procurement as a significant mechanism of innovation. This is because start-ups entrepreneurial firms strain in getting customers who can take risk on the product and offer secure revenues as well. The public sector can nurture entrepreneurs by providing ongoing support to the innovators as well as the willing power to work through the innovation process up to the time the product is commercially ready to enter the market. The public organizations or the government does not show much interest on short term benefits when investing thus public procurements and contracts are a significant mechanism in supporting and funding innovation hence covering the entire innovation process scope. Personal financing- this is particularly essential during the early stage of innovation though at a small-scale level. Hereby, an individual can invest through personal savings, financial support from friends or family. This kind of financing enables the innovator to take full charge of risk and burden of financing. However, he/she is in charge of all the innovation claims hence retaining the control and high autonomy in the innovation process. Financial Institutions- Financing loans can be quiet challenging for most investors in various ways. Many new entrepreneurs and ventures often have problems securing loans due to the collateral required by lenders as well as the ongoing revenue stream required before credit is extended. In this case, debt financing usually is not in use throughout the early phases of the innovation process (Smith 2006). However, debt financing is desired for other reasons. The outlays and payments are fixed. The innovators do not renounce their own claim thus keeping the portion of the returns from their success. The innovator also retains the control of both the organization and the innovation. The lender does not influence or specify the organization’s strategy and management. In innovation, finance is an essential factor and most entrepreneurs and innovations do not succeed due to insufficient financial capital. Additionally, innovation changes in terms of financial institutions and instruments as technology determines the availability of funds. Therefore, innovation and finance are both reinforcing and endogenous. Impact of Global Financial Crisis on Innovation Global financial crisis refers to a state situation of economic difficulty experienced over a period of time. This period sees financial contractors close on projects or contracts. This is because financial resources are likely to be less than as previously estimated (Financial Times Lexicon 2014). Financial institutions tend to stop funding various parties, demand loans repayment and advance on the scale of required collateral facilities. This threatens the down fall of financial institutions. It brings the economy to a status of economic depression. Governments are often forced to move in and help these financial institutions. This greatly impacts on availability of funds for financing innovations. This is because the financial institutions are a major source of funds channeled towards innovation practices. Severe breakdown of the financial market result to a turn in economic activities. Financial crisis has a devastating effect on the funding of innovations. Financial crisis have serious effect on funding of innovations. Innovation projects were faced with closure due to withdrawal of funding from various internal and external sources. This was because the funders were faced with the challenge of inputting more funds on the innovations. The cost of running an innovation increased due to a shortcoming in the financial market. Funders and owners of an innovative initiative could no longer able to obtain funds to continue supporting innovation. They faced uncertainties in the future funding of the innovation. This forced them to withdrawing support on the innovation tasks in terms of financing. The consequences resulting from the move was halting or closure of innovation plans. Other innovations were suspended until the financial crisis was to be termed resolved. Funders were cautious that the value obtained from the innovations would not reflect their anticipation. An innovative project or process lost most of potential sources of funds. This resulted to decrease in funds channeled towards innovation initiatives. A reduction in the cash flow from business activities was experienced. There was also the effect of reduction in other external sources of funding for the innovations. The global financial crisis hence led to a reduction in capital funds directed towards innovation. Innovation potentially turned to financial institutions for their funding. Financial institutions are set to lend credit facilities to innovation projects. However, in the period of global financial crisis, financial institutions were not able to effectively offer loans, grants and other varied credit facilities to interested personnel. Various credit requests by innovations were rejected by financial investments. Financial lending institutions had set their interests rates at considerably very high denominations. The banks had to do it to deter borrowing of funds and attract capital to restock the facilities. Financial institutions reduced liabilities and security focusing on secured sources of finances such as bonds (Rixtel and Gasperini 2013). This discouraged borrowing of funds from such institutions. This was as result of the fact that credit was considerably low in terms of supply by financial institutions (European Commission 2009). Other innovations were required by the financial institutions to repay previous obtained loans hence could not be given more capital as loans or other forms of credit facilities. Some innovators also doubted the confidence of obtaining funds from financial institutions. The credibility of the financial institutions are under a scale of mistrust. Such innovators were not assured that obtaining funds from the financial institutions was much of a choice. This led them not to borrow funds from financial institutions. Innovation practice was also faced with the challenge of increase in prices commodities required for the innovation. This caused the innovation project to incur extra cost that was previously not expected. The innovation had to utilize funds that were previously scheduled for other plans within it. It saw innovations fetch into saved funds for the current running of the innovation. The global economic crisis stimulated sky rocketing of prices of items and other resources in the market. This resulted from increased cost of living forcing commodity prices to rise rapid and continuous. Innovations were under pressure of compiling budgets for the innovation process to ensure that innovations utilized the considerably little amount of capital within the innovation process activities. This was because it was faced with increased cost of obtaining resources required by the innovation initiative. The innovations were faced with shortfalls in funds required by the innovation. The global financial crisis also led to a reduction in government expenditure on the innovations. The government withdrew their expenditure on certain innovations that previously received funding from the government. This implicates a jeopardy for the innovation to obtain funds to finance it (Dzunic 2012). The government was faced with other economic policies to attend to. The government had to put the funding of innovation projects on suspension. Government spending influenced the public financing on the innovations. Retraction of government spending resulted to weakening of financial support from the public weakening the innovation. The public organizations that funded the innovations also withdrew their funding from the innovations. The financial crisis led to a decline private investment (Dzunic 2012). Private investors fund innovations with varied motives. Majority of private investors were less attracted to invest on certain innovations. Investments were directed towards short term and budget conscious innovations. These were considered less risky. Initially supporting private investors of long term innovations retracted their continued provision of funds to the innovation activities. The innovations were associated with high risks. The investors reached this point due to decline in the gross domestic product during this time of economic sluggishness. The investors were propelled against inputting their capital into the innovations because of the future uncertainties expected in the market (OECD Science 2012). Financial crisis led to weakening of investment opportunities (European Commission 2009). Investment in innovation is important for an innovation to generate profit. Lack of investment saw the innovations failure to attract profits. Investors based their decisions on behavior by credit facilities provision by financial institutions (Dzunic 2012) Some innovations were externally by other countries from the world. The global financial crisis saw various countries withdrawal the funding for such innovations. They directed these funds to their countries to establish economic stability in their respective countries. Global financial crisis had led to low demand for products produced by innovative businesses (Dzunic 2012). This reduced capital obtained by the innovative businesses. The revenues generated by such innovation businesses gradually decreased during the period of the financial crisis. The decrease in revenues generated led to a large margin reduction of funds collected by innovation businesses. Considerably low profits and revenues generated through innovation businesses products were not sufficient to fund the internal fund source of innovations. Internal financing for the innovations was therefore a challenge for the innovations. Internal financial sources were among the possible way for innovations to obtain funds. Profits obtained by the innovations were utilized in financing the current operation of innovations. Small earnings were used as funds for innovations. The crisis had an effect on the stock market. This in turn affected the prices of commodities in the market. Various innovations during this period aimed at delivering their products in the market. This was a move to increase profits for such innovation businesses. They aimed at increasing internal funding for the innovation business. However, the financial crisis discouraged their endeavor to put extra products in the market. This led to a cut on the funds obtained by the innovation businesses through profits and revenues hence cutting on the innovations funds source. This resulted to losses in potential output by the innovations businesses. The potential output would provide funds to internally run an innovation. Production by innovation businesses can be financed through equity issues and the sale of assets (Milberg and Shapiro 2014). The recent global crises caused a decline in the prices of shares and assets sold by an innovation business. Innovation businesses sell assets value and shares to earn funds for an innovation business. The financial crisis acted as a bottleneck to innovation businesses to acquire funds through this platform. Prices of assets and shares of innovation businesses were very low and hence an innovation business opted not to sell them. References Block. F. 2011. Where do Innovations come from? Boulder: Paradigm publishers. Chesbrough, H. & Socolof, S. 2000. 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