Investing in innovation is great idea but the idea can have its problems. A recent article from Connecticut comes to mind as well as President Nixon’s “War on Cancer” almost 40 years ago. Connecticut passed a number of laws offering incentives to bioscience companies and to local governments with a major university with a bioscience program.
These laws are intended to attract investment dollars, provide jobs, and lead to taxes being paid into the state coffers. Nixon’s war on cancer came on the heels of a dramatic cutback in federal funds for basic research and by the mounting cost of pursuing a war in Asia and increasing social programs. The problem with investing in new ideas, especially basic research, is even though results can occasionally be amazing it takes years to see a payoff for the investor. Also, basic research, seeming unrelated to anything “important” is often the root of scientific innovation. An example is the discovery of penicillin because a petri dish was dirty.
It is difficult to do analysis on a company with no products, no sales, and working in a technology understood well by only half a dozen people in the country.
Similar laws and incentives provide general incentives to research efforts, reduce costs, and give incentives for hiring new staff, and start new programs the laws improve cash flow in some small research companies. However, this is not sufficient incentive for an outside investor to invest for short term with talent in basic research and, more importantly, bringing research ideas and basic research findings to market in a sellable form, the “killer application.”
A company such as Apple under Steve Jobs is a perfect example of the ability to take current technology and convert it into popular products. Companies such as IBM and the old AT&T are examples of companies that provided the world with some of the most innovative, Nobel Prize winning research ever, but were not able to promptly turn that research into sellable products. Investing in innovation should probably lead investors to the Apples of the world as opposed to the old AT&T’s.
Much of investing in innovation requires either technical expertise or excellent advice. When investing in new ideas many people try to stick with companies with a long history of bringing new, interesting, and profitable products to market. Unlike startup biotech companies, companies like HP and Apple do not find their stock going up a hundred fold. However, these companies bring in profits, pay dividends, and see their stock go up year after year.
The oldies like Proctor and Gamble routinely bring popular and profitable products to market. In looking for predictable results investing in innovation is not much different than investing in beer or oil companies. Startups and occasional home runs are nice but predictable results are better. Innovation does not just come with startup companies and innovation with startups often takes a number of years to show profits.
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