Growth and Innovation: Venture capital, private equity, and innovation processes in service industries

This report focuses on service-innovation in firms supported by venture capital/private equity. The first part discusses specific characteristics of services and develops a typology of innovation modes. The second part identifies the importance of service firms among Norwegian firms supported by risk money. Results are reported from a small survey among fund managers focused on motives for investing in their portfolio firms. The last part conveys results from a qualitative case study including 21 portfolio firms in services. It documents development processes and resources used in innovation projects. Few projects were classified as radical innovation. The majority of projects were incremental innovations or based on recombination of existing resources. Technology and software were important elements in most projects. Customers’ needs were identified as an important trigger, but the innovation project was mainly initiated by the firm’s own personnel. Innovation projects were formally organized, often dependent on resources controlled by the operational part of the firm. This dependency created conflicts, normally solved through informal relations. Innovation projects were seldom registered as R&D. Only crude measures of performance were used. The most important resources for innovation were reported to be the firm’s human capital, combined with a culture for change and well-developed social networks. Financial and managerial support from the VC/PE-owner were also regarded as important, but generally, the firms were not involved in larger networks of partners for innovation. Lastly, some implications for innovation policy are discussed.