Funding breakthrough innovation : The theory of value translation

Breakthrough (high-impact) innovation often happens at startups, which require external financing ex ante, when there is only an invention with potential to become a breakthrough, and uncertainty is at its peak. Are we underfunding breakthrough inventions? Extant research has focused on technological and market uncertainty, because investors need to balance risk and reward. I focus instead on the bounded-rationality problem that startup and investor face when developing an invention. I propose the theory of value translation as a foundation to analyze how the characteristics of the invention, the startup and the investor, affect valuation and investment. The central premise is that inventions do not translate into innovations linearly; the startup or investor need to map and evaluate all possible technological trajectories, select the trajectory of maximum value, and if attractive, fund the startup. This value translation process requires complete scientific and technological, but also commercialization knowledge. This leads to a dual-bounded-rationality problem: the investor is less likely to have complete scientific/technological knowledge, while the startup is less likely to have complete commercialization knowledge. With knowledge to map and evaluate only a subset of the possible trajectories, there is a value translation problem (a gap between maximum and bounded valuation), which in turn leads to underfunding. I discuss platform technologies (inventions that can lead to multiple non-competing products, as coined by physical and life sciences) as more likely to lead to breakthroughs than products. I argue breakthrough inventions require more knowledge, face a greater value translation problem, and are hence underfunded