Grant funding plays an essential role in helping innovative ideas get off the ground. The benefits of grant funding innovation can be numerous, not just to the organisations that receive the funding, but to their customers, the wider market and the economy itself.
By carrying some of the risk it encourages organisations to experiment and take chances that they might normally shy away from. Enabling organisations to develop early on can also act as a springboard to further investment in the future.
At Nesta we define innovation as the process by which new ideas turn into practical value in the world: new products, services, or ways of doing things. It's not just about new technologies or about scientific R&D. It's been at the root of incredible developments in public services, social enterprises and commercial initiatives. Hospices, Freecycle, Oyster cards and NHS Choices are great examples of innovation across the board. But without the right support it's likely that these projects may never have got off the ground.
There is a strong correlation between innovation and economic growth. Nesta's research has shown that in the last two decades, two-thirds of productivity growth in the UK was the result of innovation and that businesses that innovate are disproportionately likely to enjoy high growth and generate more jobs. Countries that take innovation seriously, like Finland and Korea, tend to thrive.
While the UK has many innovative individuals and organisations, behind the successes lays a worrying trend. Our 2012 Innovation Index showed that UK businesses' investment in innovation has fallen by £24bn since the recession and has not recovered.
We also know that public investment in innovation has fallen too. Despite some worthwhile initiatives innovation is a very small part of what government does. This begs the question, if businesses are reducing their investment in innovation where can start-ups and social enterprises get the support and finance they need to innovate?
Innovation means taking risks. A lot of innovations result in failure and those that do succeed, do so because they are adept at learning quickly from things that go wrong. But when the pressure's on and the stakes are high (e.g. operating a public service in a time of rising demand and reducing budgets) the tolerance of risk and failure can understandably be very low. Grant funding innovative ideas is therefore critical for a number of reasons.
Firstly, it shoulders some of the risk; providing legitimacy and much needed space, support, skills and access to networks that ensure that when change happens, it's mindful and deliberate - and tested. There's space to fail; as long as ventures fail quickly and learn from it.
Secondly, genuinely new and ground-breaking ideas need soft money. It took $20bn (12.34bn) of philanthropic investment into microfinance before it started to gain traction. When there is little incentive or motivation for the existing system or incumbents to innovate, philanthropy and grant funding can provide a very necessary intervention to test a concept that might otherwise never lift off the page.
And grant funding can be the start of a bigger journey. Social ventures that grow and develop because of that initial grant may find themselves well placed to explore other options such as social investment. Funds like Nesta Impact Investments look for life-changing innovations that will reach more people, more effectively while also providing the experience and skills to help build profitable organisations.
While it is necessary, it's important that we measure the effectiveness of different types of grant funding and are transparent about what does and doesn't work. This is why at Nesta we've been calling for randomised control trials (RCTs) and a range of standards of evidence to be used more widely when evaluating policies to support business growth and innovation; allowing us to see much more clearly - much earlier on - what type of interventions really work.