Investment in ideas

November 4, 2014, 12:14pm

Investment in ideas

DBN CEO Martin Inkumbi talks about the strategic importance of finance for innovation


At the turn of the millennium, a farmer in Southern Namibia developed a vehicle uniquely suited for the local terrain. It was known as the Uri. The vehicle received a lot of acclaim due to its suitability for tourism, farming, mining and civil safety under the most rugged conditions.


Unfortunately, due to lack of institutional support, low order levels and poor currency conditions, the local manufacturing operation floundered. The manufacturing operation was moved to South Africa, representing a loss for Namibia. This loss alone points to the crucial importance of recognising innovation and giving it support within the borders of our country.


Three major benefits of innovation


Innovation has three key values for Namibia: improvement of enterprise efficiency, resource utilisation and improved social indicators.


Innovation unlocks enterprise efficiency in the form of economies of scale and competitive differentials that strengthen individual enterprises. This secures the future of enterprises, their ability to create and retain employment, as well as their ability to grow. This may be on the basis of an individual enterprise or an entire industry sector.


In terms of resource utilisation, enterprises will significantly use resources more effectively, reducing costs and improving sustainability. However, this facet is also expected to improve local value adding, a key component of national economic self-sufficiency through import substitution and trade.


Thirdly innovation will improve social development indicators, not just as a byproduct of job creation and income generation, but also through development of direct approaches to enterprise such as the growing field of social entrepreneurship. Examples of this, in the Namibian context, include private medical enterprises and educational opportunities.


Acceptance of inherent risk


In order for Namibia to progress economically, and prosper, it has to adopt an accommodating approach to innovation. An accommodating approach to innovation entails, firstly acceptance of inherent risk and secondly, management of that risk. Innovation typically entails a risk to the innovator as well as the financier.


The innovator has to risk personal resources to develop the innovation, which is usually 'untried'. There is a significant, potential lost opportunity cost if the innovator could focus on a tried and tested form of enterprise, or if he or she opts for income from employment. This risk is a major barrier to development of innovations by innovators. By creating an environment which fosters innovation, through finance and institutional support, innovators can be encouraged to develop ideas, and the potential of more innovation can be unlocked.


The financier at the same time also experiences a barrier in the form of financial risk. Faced with a derivative fund model that expects returns in line with an optimum investment basket, the financier will be hesitant to retain the potential lost opportunity cost. However a closer look at traditional structuring of investment strategies shows that there is room for risk  capital in the high risk portion of the investment portfolio.


Approaches to management of investment in innovation


Typically a range of smaller investments are made across a group of investments of innovation. A number of these investments are expected to fail, however the failures are written off against significant gains of project successes. This was the approach taken by Andy Bechtolsheim, and venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital, in financing Google.


Namibian legislation makes provision for investment in local unlisted opportunities, and a portion of this capital can be expected to be directed towards innovative entities. The provider of bulk capital, in this case locally registered funds, can offset a part of the risk with the management services of special purpose vehicles. Further mitigation of risk can be provided in the form of entrepreneurial knowledge and skills to the innovator.


Vision 2030 a blueprint for innovation


Inclusion of human capital as a component of Vision 2030 opens the door for innovation vested in the intellect of excellent people. Even if innovation is not a focus, the development of human capital will entail innovation as a byproduct.


In order to attain the goals of Vision 2030, and reap the benefits of this Vision, it is critical that the risk culture of innovation be accepted and managed by all stakeholders. By fostering innovative individuals and enterprises, with managed finance, and institutional and enterprise support, Namibia can take significantly valuable steps to economic self-sufficiency.