Financing the Next Generations of Innovation: New Dimensions in the Private Equity Model

Abstract

It is widely acknowledged that, for firms to grow, they need to regularly introduce new generations of innovation; however, this is rarely addressed in the finance or private equity literature. If the private equity investment class is structured based on the business cycle, little is known about how it fosters firms’ capacity to regenerate. This leads to the question: How can private equity support firms’ ability to repeatedly innovate? Building on the literature in innovation management and design theory, we propose complementing private equity models with new dimensions: the design of potential future products and their expected value. This model is used to analyze in-depth a longitudinal case provided by a French investment fund. We show that it is far better suited to certain investment strategies than are classical models. Among other important implications, we suggest that private equity must not only provide seed, venture, or buyout capital, but also support firms’ innovation portfolio regeneration. JEL Codes: G320, O32