Why Exits Matter for Future Innovation Investments

Abstract

Our interest in writing this article is to create a bridge between the scholarly and academic research on technological innovation and a private sector, for-profit business model that implements the ideas on innovation and entrepreneurship, primarily in metro regional economies.

The theory of technology innovation described as Structural Evolutionary Regional Economic Theory (SERET), suggests that exit events from prior capital market innovation investments provides clues on where to search for current and future innovation investments (Predicting Technology).

The theory also describes a second type of exit event that does not get much coverage or attention in the popular press or academic articles on innovation. The term exit also applies to the life-cycle of existing firms, when they exit from existence (death rates).

SERET suggests that the better reason to watch what is happening in the death rates of existing firms is to find evidence of entirely new products being produced by firms who are crossing technology between industrial sectors.

That form of innovation is called radical innovation, and it is more rare and much harder to discover than sustaining innovation. But, it provides both higher investment returns and greater economic growth, when it can be discovered at all. For the evidence on radical innovation, the exits from the first type of exit event that occurs in the capital markets must be investigated.

In other words, profits made from prior venture capital investments must be investigated to determine if those profits are being invested in regional new firms making products that are New-To-The-World another term for radical innovation.

Keywords: radical innovation, sustaining innovation, SERET, regional private capital markets, death rates

JEL Classification: L16, M13, O16, O31, O32, O33, O34, O38, R58