As the founding partner of a European fundraising consultancy, my job is to identify promising European startups and to support their funding applications to the European Commission (EC).

In an effort to stimulate market growth and job recovery, the EC in 2014 earmarked €3 billion worth of public subsidy to advance market-creating innovation in Europe. This funding programme draws on the work of Clayton Christensen and Derek van Bever who, in their article The Capitalist’s Dilemma, define market-creating innovations as distinct from both performance-improving innovations and efficiency innovations in their ability to generate revenue and job growth. The selective funding process is administered by the European Innovation Council led by Carlos Moedas (MBA’00).

Since my company subsists purely on success fees in a funding programme with a success rate of less than 4%, we must be able to beat those odds significantly by selecting only the most outstanding applicants. You may think this is an easy task, since the EC has made explicit its intentions to fund market-creating innovation. It’s not.

In practice, the EC delegates the evaluation of funding proposals to third-party experts drawn from venture capital and private industry. But market-creating innovations often have return characteristics that are very different from what typical private investors look for. For example, their effects on job creation and growth may be realized over a time horizon longer than five years, making these opportunities appear unattractive to short-term investors. The typical market-creating innovation follows a growth trajectory similar to that illustrated below.

The deceptive nature of exponential change (Source: Alireza Azimi)

When companies look for early funding, they are very often in the deceptive area of the graph, where classic growth metrics like return on invested capital (ROIC) do not apply. As a result, evaluators may miss these opportunities and instead direct funds toward more incremental projects that carry less upside for the economy as a whole.

This is the public funder’s dilemma: the European Commission wants to allocate capital to market-creating innovations, but it relies on the existing market to select awardees.

How can we better align vision and execution? We must find better ways to identify and select these opportunities. The five years I’ve spent spotting high-potential market-creating innovations offer a few lessons about what to look for.

An Enabling Technology

One clue is the presence of an enabling technology that provides improving levels of performance at progressively lower cost. These are occasionally known as exponential technologies. Take for example the cost of sequencing the genome of one person, which has gone from $100 million in 2001 to less than $1,000 today. This drastic cost reduction has opened up a fantastic range of innovations relying on our capability to read, rewrite, and even create DNA.

Between 2001 and 2008, DNA sequencing improvements appeared linear- although this was exactly the time to start investing in market-creating innovations based on these technologies. Ten years later, the market for synthetic biology was born with the potential to solve some of the biggest challenges of our century.

Cost of sequencing a single human genome (source

Recently, my company supported Genome Biologics’ bid to win a €2.4M grant from the EC. The startup has developed a unique methodology to allow up to 50 genes to be expressed in one animal, directly in target tissue, without affecting the genome. This methodology removes the need for breeding, radically reducing the number of animals needed to make a transgenic model, and decreasing the cost, time, and ethical burden of animal testing in the pharmaceutical industry.

Aimed At Non-Consumption

However, when seeking market-creating innovation, simply selecting an enabling technology with exponential characteristics does not suffice. To illustrate, let’s consider two AI-enabled startups that recently approached me for fundraising support.

Company A is using AI to power a customer relationship management (CRM) solution. The product’s deep learning insights enable sales managers to improve the efficiency of their teams. While AI technology is exponential in nature, it is applied here as an efficiency innovation that will have very little impact on job creation and growth. In fact, if the product is successful it will eliminate jobs by allowing sales teams and existing CRM users to operate more efficiently.

Company B is using AI to power a chatbot that provides psychological counseling. The chatbot’s deep learning insights enable it to engage meaningfully with users who struggle with mental health but who have not consulted a psychologist or doctor. Any number of barriers may stand in the way of these individuals seeking help. Whatever those obstacles may be, if the alternative is receiving no care at all, then a given user is better off in the care an AI-powered chatbot. If the product is successful, it will not replace professionals’ jobs but rather complement their work by providing lower-level care in situations where live counseling may be impractical or impossible.

While Company A targets existing sales organizations and CRM users, Company B is targeting the absence of consumption of mental health services. By aiming an exponential technology at a non-consuming market, Company B creates a new market for AI-based counseling. This is as signature mark of market-creating innovation. But because Company A’s customers are readily identifiable and its payoffs more predictable, it is likely to be favored in the private capital allocation process.

As the EC is working to show, government intervention is one way to channel funding toward market-creating innovation. But is it the only one?

What if there were a new class of private, patient capital ready to invest in exponential opportunities that could take a decade or more to mature? What new metrics can we create to promote these projects?

Answers to questions like these will drive solutions to the most pressing challenges of this century, including climate change, sustainable agriculture, and precision medicine.

Xavier Aubry (MBA ’01) is the founder of Zaz Ventures, a European fundraising consultancy. He is based in Zurich, Switzerland.