Investing in White Space
A new model for creators and entrepreneurial investors?
Here is a central paradox: intangibles and intellectual property are primary drivers of wealth creation, corporate valuations and long-term value.
To put this in context, multiple studies show that investment in intangibles, such as software, database rights, research and development, artistic originals, design, brands and business model innovation has grown steadily. Investment in tangibles has declined. The world’s major companies by market capitalisation, such as Apple, Alphabet, Microsoft, Amazon and Tencent have relatively little tangible capital.
At the heart of this, the paradox is that invention and creativity is a secret world, elusive and difficult to measure. It is largely uncharted by conventional asset managers and beyond the reach of conventional economic modelling and forecasting.
It seems easy to forget, in a finance-oriented world, that creativity, ideas and invention are at the root of all investment. Yet since invention is difficult to measure, many potentially breakthrough inventions do not get support.
This is changing. Entrepreneurial investors, tiring of mainstream markets, hedge fund performance and specialist funds, are not simply looking to ‘get exposure’ to early stage ideas, but to invest direct.
Some are going further: at the leading edge, they are not only active investors, but active inventors, outsourcing creativity to specialists and targeting high returns in the white space between clusters of mainstream inventions. A novel approach to portfolio strategy is emerging. This may be where the future action is.
One of the drivers of these changes is the amount of private capital looking for better long-term returns. This has grown substantially over the last few years: seed capital rounds get bigger. Many high growth technology firms remain private for long periods and may never be listed.
Against this background, private offices, in particular, have important incentives and advantages. They take the long view and are less risk averse than institutional investors who are often hamstrung by rigid fund structures. Many are entrepreneurs and culturally aligned with the worldviews of both creators and founders. They have specialist market-sector knowledge.
Even so, they are not alone: corporate venture funds are thinking more strategically and taking bigger risks. Sovereign wealth funds are more active than ever outside the mainstream financial markets.
The emerging options for investors in ideas are, at one extreme to invest in the hotspots, with the crowds, or at the other to invest and invent in white space.
Landscapes of ideas
If ideas are the new currency, the top priority in practice is to understand how these ideas are connected in networks. Linked ideas give clues to how innovation might emerge to transform industries, product categories, asset classes and the wider economy. This is the essence of radical, systemic innovation.
The first task is to map the landscape of ideas and reveal hotspots. This is where everyone is inventing. Take augmented reality a few years ago. Or more recently, the cluster of inventions associated with autonomous electric vehicles. In effect, the landscape delivers a forecasting framework for the ‘high impact, high certainty’ drivers of future sectors or asset classes.
Specialist research can identify themes, networks of related ideas and ultimately IP-rich early stage target companies. It can play a novel role in creating a portfolio strategy based on dominating an ‘ecosystem’, on building an IP ‘fortress’ of linked investments and a portfolio of inventions. Radical innovation is systemic innovation.
This is useful for investment and business strategy, but not necessarily for high returns. The next big thing may be clear ten or more years before it emerges as commercial reality, but hotspots signal competition. Competing patent claims. Thickets. Ultimately, this means lower investment returns, more failures and more risk.
Inventing and Investing in White Space
More important, the IP landscapes reveal ‘white space’ – the areas where there are few ideas in the form of patents, trademarks and academic research papers but emerging business or societal needs. To the leading innovators, the question is ‘why invent with the crowd?’
‘White space may indicate barren areas, but it is where few people are looking and where truly disruptive innovation comes from. This is where to find exceptional returns. It also has predictive power, because chances are someone is working hard to invent in what amount to open, unpopulated regions, free of competition. In other words, the world’s great inventors are white space specialists.
What is emerging here is a new model which is a long way from ‘search and discover’.
To recap, there are different ways to co-create and invent in white space. First through mainstream investments in listed companies. Listed companies should be inventing in white space. Second, through specialist venture funds. Third, focus on direct investment in start-ups and early stage private companies. Where do the targets fit in the landscape?
Fourth, invent direct, with partners— set out to build ‘fortresses’. Dominate ecosystems. Go from investing in white space to inventing in white space.
Ultimately, this is about actively co-creating and direct invention, taking advantage of the growing trend towards ‘open innovation’. It is about taking a leaf out of the playbook of the very best corporate innovators who are engaged in off-balance-sheet R+D and innovation.
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