Innovation orgs need a money factory

Because they create things riddled with knighting uncertainty that aren’t necessarily products, innovation orgs cannot depend on their outputs for free cash flow. Therefore, they need a consistent external funding source, whether it is repeated equity investments, a budget from a parent org, an endowment, grants, contracts, or something else.

Don’t all organizations need a funding source? The two major differences between an innovation org and a normal business is that innovation orgs have a significantly longer cycle time and much more Knightian Uncertainty about their output. Additionally that output isn’t necessarily a product that can be sold directly - it might be a prototype, a process improvement, or simply something that is hard to monetize without hamstringing its impact. The nature of an innovation org’s output means that the difference between an innovation org’s money factory and other types of funding is that it needs to be able to deliver consistent funds (hence money factory^1) that are decoupled from the organization’s output.

Historically, it takes a long time for actually new ideas to become a valuable thing out in the world. <It takes roughly 20 years to exploit a phenomenon at scale > ^2 This means that even if a project is going to become incredibly valuable, the organization creating it is going be illiquid for a long time. However, the difference between innovation orgs and other businesses is not just about timescales, but also about uncertainty. Other organizations like large energy and infrastructure projects can take years to start making money but the amount of money they need to get there is fairly predictable, so they don’t need a consistent source of cash. In addition to uncertainty about how long it will take to pay off, new types of work differs from other long term projects because there is much more uncertainty about whether it even will generate a return or whether seeking that return is even a good idea. <There is a significant class of innovations that would create drastically less value for the world if their value had been captured by their creators>

The more an organization looks like past organizations the more accurately one can predict future performance based on a set of leading indicators. By contrast, the process of creating new things in the world both has uncertain timescales and it’s not clear at all what success metrics should be. Unlike other long-timescale organizations, an innovation organization might never converge on a set of metrics. Almost tautologically if they are consistently trying to create appreciably different new things then there will consistently be new ways to evaluate those things.

Despite (and in part because) of the uncertainty inherent in the research process, innovation orgs need stable cash flows. Arguably, the stability may be just as important as the amount. People's incentives go haywire if they have money but don't know that it will continue. Innovation organizations are extremely diva-ish in this way: they want consistent cash flows for inconsistent results. Through this lens, it makes sense why many rational people are hesitant to fund them in the way that they need. Research’s uncertain timescales mean that it’s extremely hard to do one-shot funding for any given project.^3 Project-by-project funding is tough because innovation orgs often need to do multiple projects over time, both because the chance of any single project not working out is high and because there are compounding returns to institutional knowledge.

The money source for an innovation org needs to deal not just with uncertain timescales and illegible leading indicators but the fact that a chunk of the money is inevitably going to be “wasted.” History shows that humans are shockingly bad at predicting which research projects are going to be wildly valuable (either in the cash and impact sense) and which are going to be duds. Complicating the matter is the fact that these expectations can even feed back and either hurt or help the project. <List of progress studies questions>

Innovation organizations need stable cash flows to support long term projects with large Knightian Uncertainty and illegible success metrics. Despite their diversity, these common characteristics make it useful to lump funding sources for innovation orgs together into the idea of a “Money factory.”


^1: Some people use the term money fountain - I think this makes it sound a bit too magical. Money factories are mystical enough.
^2: Figuring out how to develop technology faster is so impactful because it breaks this initial assumption and weakens the dependence on a money factory. At the same time, technology R+D+Diffusion timescales seem weirdly robust, so the burden of proof is on anyone who claims to have sped up the process.
^3: Although better program design could help! You can create a program design discipline that enables better research and development

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