In the first chapter, I suggested that there are an abundance of ideas, projects, and even companies to fulfill our global needs for innovation and entrepreneurship. Yet, the economic measurements of employment, financial growth, and wealth distribution are lagging behind this idea. What might be needed is a broader, more dynamic perspective in how we identify what those ideas and opportunities might be. Let’s look at some of the ways you find them.

Sources of Ideas

Finding ideas worthy of becoming projects for successful commercialization is a critical part of the entrepreneurial journey. As suggested in the last chapter, it isn’t that there are not enough ideas. Rather, there is an abundance of possible avenues for achieving the project’s goals. This is where the process begins. It is to ensure that as many viable sources as possible are considered for the overall model to be as effective as it can.

By sorting out multiple sources of innovation, it’s important to avoid repeating blindly the use of singular source channels. Actively and dynamically seeking out the best match of source to a given project is critical. In Figure 2-1, you saw five traditional groups of resources for technology commercialization. It is not meant to be an inclusive list, but rather a partial selection of alternatives.

As noted in Chapter 2, aircraft pilots who are certified to fly airplanes in metrological conditions that lack outside visual references (such as when flying through cloud banks or heavy traffic) follow Instrument Flight Rules (IFR). In the training for that certification, pilots learn to use six primary instruments to fly the aircraft. Training includes the skillset of visually scanning the instruments for information. If the dynamic scan is broken and the operator becomes fixated on any one instrument, it becomes a recipe for failure.

This parallels the quest for a similar process that’s utilized in seeking business opportunities quite well. Fixation on any one path invites failure, and yet we see many examples of a rigid direction early in the project.

It is tempting to look to invention first. Much has been written about creativity and role of developing fundamental ideas.

Yet in-house invention is perhaps the least likely avenue to success because of the many unknowns and risks. That’s why Figure 2-1’s focus is on multiple sources and why it starts with looking at licensed existing technology and its inherent strengths of being technology already reduced to practice.

Licensing

Licensing as a source of opportunity begins with understanding how patent law works. Governments create a basis for protecting inventors’ intellectual rights to their ideas by issuing “letters of patent” (or a copyright for written materials). Either establishes a limited monopoly of use by the inventor. The theory is that the nature of invention is so fragile in its inception that it takes a period of time to realize the invention’s value to society. If this one element of risk can be mitigated by the government issuing patents, then the overall economy benefits and invention is encouraged. Within the realm of patent protection is the right to allow (license) others to use the patent’s domain. This is a powerful means of exploiting the patent’s value when the individual(s) to whom the patent is issued do not have the means or interest to commercialize it.

Before the merits of licensing are explored, it is best to look at the fundamentals of patents. This will help you understand the value of licensing as a strategy of sourcing ideas to commercialize.

Patent Law

A patent is an exclusive right issued by the federal government to an inventor(s) who claims a particular field of creative invention. It says that no one can infringe or copy the inventive fields claimed in the patent for a term of 20 years (in the United States). It is a monopoly for the use of the idea for that period.

Knowing where you are in that time period is relevant. More recently issued patents have the longer market potential for yielding value. Mature issuances are just the opposite. This particular aspect is considered by investors who attempt to establish a financial value of the IP portfolio when performing a due diligence analysis of a potential investment opportunity. They use a model of an “aged timeline” in their calculations.

The form of the issued patent is quite formal. It includes:

• Abstract of the invention
• Formal drawing
• Field and background of the invention
• Detailed description in which the claims of the patent’s scope are delineated

Conventional wisdom is that crafting a patent application is in the domain of attorneys. That is probably good information. This particular patent was issued to me while I was at Phoenix Controls (see Appendix A). Note the detail of the claims section. It is here where the scope of the patent is defined. Also, it is interesting to see how much information is revealed to the public. That is the tradeoff of the security gained.

There are privileges and responsibilities that go with the issuance of a patent. The first consideration is how formal and broad the protection offered by the patent is. If the claims are too broad, the patent becomes vulnerable to loss of novelty and rejection during the application process

The entry level of the journey to intellectual property protection is the provisional patent. Written informally, it gives the inventor time to establish the case for developing the invention/idea further while declaring the date (time) of the application. Its term is only one year. It is a simple exposition of an idea. Sometimes it is a copy of a scientific journal description or similar non-legal terms. It clearly describes the enabling technology but defers the argument or claims of inventions. That is left to the more formal utility patent. Expenses are not trivial. The fees for a provisional patent are about $1,500 to $2,500 to file with a lawyer. You can file your own provisional patent for less. The tradeoff of the provisional patent is that it is vulnerable to copying and alteration of the original idea.

The next step in securing the formality of patent rights occurs within one year of the filing of the utility patent (if filed). The utility patent is more structured and better defines the protection it enables. It is also a more elaborate and expensive process. You might pay $25,000 or more for this category of protection. The process is best accomplished with a registered patent attorney. The application process may take several years to complete. The final issued document is a structured device that has detailed drawings, a description of the patent’s intellectual property, and even more important, a listing of the fields of invention you are claiming.

This litany of the various aspects of the inventions is what describes the patent to the world. The detail and scope of the claims of the patent are the value added by a good attorney. If the claims are too narrow (or too broad), they weaken the area of intellectual property the patent is trying to protect.

The application process also tests the idea’s novelty (that is, that no prior art or publications exist) and whether the idea can be reduced to practice by someone knowledgeable in the art. Once the patent is granted, a number is issued and its importance to the commercial cycle can be examined. Traditionally, patents centered on fundamental inventions. Today, the field embraces biotechnology, software, and even aspects of the human genome. Where these will lead and their implications are uncertain.

As you are probably aware, patents must be defended. If others have infringed on the space defined in the patent claims, then they must first be put on notice. If they are noncompliant and do not desist the violation or infringement, they must be challenged in court to resolve the interference. It something like the eminent domain rule of real property whereby if you allow someone to walk across a section of your land and do not challenge it, you lose the right to deny use of the property. Failure to contest infringement may even invalidate the patent. Patents also require that you pay annual maintenance service fees to the government.

What has been described so far is the situation in the United States. But we live in a world of global competition and collaboration, and so there is need for establishing patent rights internationally. In 1970, a global conference was established in Paris to allow cross-filing of patents in multiple countries. It wrote the Patent Cooperation Treaty (PCT), which established rules and procedures for mutual filings around the world. It is now administered by the World Intellectual Property Organization (WIPO), located in Geneva, Switzerland. Under the PCT, patents are individually cross-filed in select countries where future business is anticipated. The patent can be amended within a period of 18 months to include additional countries. The cost of a PCT filing is significant. It can be in the range of $100,000. There are additional ongoing maintenance fees in each country.

Once IP is secured, an intriguing discussion evolves about the strategy and use of it as an asset. Some companies file for patent protection as a defensive strategy and accumulate large portfolios. Others file only when it is critical to specific applications and thus have lean portfolios. No one universal strategy has evolved.

One would hope that there was a nice, orderly global system for the protection of ideas. Unfortunately, the commercial world has not evolved that way. In certain emerging countries, like China and India, it is quite common for individuals and corporations to ignore the due process of U.S. and European patent law and challenge (and infringe) the intellectual property’s validity on a global basis. The future direction of those challenges is quite uncertain. In China, for example, there recently seems to be an increased awareness of the value of IP. This is particularly true in academic research sectors.

Patents are not limited to the utility patents just described. There are other broad categories of defensible IPs in the design and natural plant areas. There are specific patent formats for these. Also there are trademark and copyright categories where variations of protection are made over a period of time.

A Proprietary Alternative to Patents

There is an alternative to nurturing inventions under the protection of patent law. It is a strategic one that inventors or their organizations can utilize. It involves holding the technology (or idea) as an internal secret. The concept is called proprietary information. One penalty of the patent application process is the need to openly divulge an invention’s workings to public scrutiny in great detail. Securing the ideas as proprietary information provides the alternative of not doing so.

This alternative requires significant internal discipline and the possibility of error because of the secretive nature of withholding information. A great example is the Polaroid Corporation. This now-defunct pioneer of instant pictures created in a chemical process in the photo’s packaging that utilized proprietary information in a unique manner.

The company was co-founded by Dr. Edwin Land, a scientist who resided in Cambridge, Massachusetts. At its peak, Polaroid employed 16,000 employees in its R&D laboratories. Of them, only three trusted employees knew the overall chemical process, and the rest worked on the components. That is an astonishing ratio!

The magnitude of the use of proprietary information is not well documented because of the very secretive nature of its application.

IP and Innovation Commercialization

In 1980, the U.S. Congress passed the Bayh-Dole Act. Its impact was significant in that it allowed universities that receive federal research funding to “own” the resulting intellectual property (IP) that came from the funded research and thus receive a monetary benefit from the revenue generated by the license fees it creates. The Act was considered win-win legislation in that the government could benefit from the commercial use of the R&D it funds, and the universities could realize a new source of revenue. For those looking for creative ideas, it proved to be a robust new source.

Universities responded by creating technology licensing offices (TLOs) to promote user access to their research. It has become big business, with annual revenues in the hundreds of millions of dollars. MIT’s Technology Licensing Office, for example, is staffed by over 20 professionals. So what are the implications? In simple terms, it has accelerated the movement of science to the marketplace and fostered competitive economic benefits for the academic research once cloistered in the university labs.

Certainly, the effect of patent law protection reaches beyond universities to inventers and corporations. In companies, it has additional strategic value in what is referred to as in-licensing. That the owner of a patent can license others to use his or her technology is understood. With in-licensing, that success is defined by being integrated with other licensed IPs, yielding a combined effect. A new or innovative idea may require other technologies to complete it. Often it is the basis for collaboration and joint ventures. In early venture investments, funders assess the strength of the patent portfolio as an element in their valuation calculations. In certain cases, in-licensing allows early-stage companies to jump start their business plans.

An example of this is seen in a company called Phoenix Controls in Newton, Mass. It is a company I co-founded. To accelerate our entry into the market, we licensed a critical piece of technology from MIT that enabled us to start selling product to a limited segment of our customer base in our first year. The full system approach was not ready for several years. Otherwise, the internal R&D team would have taken several years to become effective in developing its own product solutions. Paradoxically, when the company’s equity was liquidated to a Fortune 500 company 10 years later, it was observed that early in-licensed technology contributed less than 5% of the company’s cumulative revenues. The value of the quick start, for market entry and brand recognition, was immeasurable.

In the case of university-licensed technology, R&D is funded by the government and is often accomplished by world-class research teams. Indeed, that is a plus. Some argue, however, that if the R&D is accomplished in internal company laboratories, it is more focused and can contain proprietary information. This debate of outside vs. inside is a dynamic and continuing one. Research lab managers are reluctant to give up resources while product-development folks are eager to move ideas to market. It is usually resolved by the strategic needs of particular projects.

Is there a downside to licensing? Of course. One obvious negative is that the theory of the patent’s invention and its method of reduction to practice are explicitly delineated in public documents. It can be argued that a competitive inventor can thus see the shortfalls of the declared invention and begin to invent an even better solution. It becomes a risk/reward strategic situation.

In addition, the learning curve of discovery (and mistakes) is held by the developing research team. This wisdom can become critical in developing follow-up products.

A second important consideration is the cost of the make/buy decisions regarding the patent license. Certainly, corporate funding of research is a significant expense. There is a continuing decline in attractiveness of this alternative. On the other hand, license fees can be significant as well. In addition to royalty fees, which are ongoing and absorb a percentage of the unit’s gross margin profits, there are both upfront payments and penalty fees that must be considered. They go directly to the company’s balance sheet and income statements. It’s best to warm up the accountant’s green eyeshades and sharpen their pencils! The cost/benefit must be carefully calculated and is best resolved in negotiating the license agreement.

There is an organization that gathers university and research organizations’ IP operating data and best practices. It is called the Association of University Technology Managers (AUTM). Each year, it performs a survey of their members and publishes the resulting aggregate data in an annual report. In the Fiscal Year 2013 annual report it noted that:

• 719 new commercial products were introduced
• 5,198 licenses were executed
• 1,356 options were executed
• 469 executed licenses contained equity as well as financial fees
• There were 43, 295 active licenses and options
• 818 new companies were formed from the issuance of university-based licenses, 611 of which had their primary place of business in the licensing institution’s home state
• 4, 207 startup companies were formed from university-based licensing and are still operating as of the end of fiscal year 2013

Still to be decided is whether this line of technology commercialization is appropriate to a given project. This will be discussed later in this book. Whatever the path, the magnitude of operational data from this source certainly argues for close consideration.

Professor Alexandra Zaby of the Tubingen University business school in Tubingen, Germany (Springer Verlag Berlin 2010) performed a detailed analysis of the topic for her book Decision to Patent and confirmed the marginal utility of the decision. According to Zaby, the costs and disclosure of the information may outweigh the advantages of the patent.

Operational Questions about IP

Securing access to IP is an intriguing alternative. But is it the right path for successful commercialization? Let’s look at some fundamental questions:

• Is there an inherent advantage such as time to market, market share, broader product offerings, and so on, as a basis to securing rights to a patent?
• Is there sufficient pricing marginality to support the additional financial burden of licensing fees and royalty payments?
• Would the risk of possible litigation be strong enough to move forward without IP? Lawyers refer to this as the “freedom to operate” and it points to the need to analyze whether the surrounding IP is too mature or weak enough in its competing claims to support the risk.

Licensing becomes a dynamic source of innovative technology for emerging project and new companies. In many cases the technology secured by IP may have been developed at a time and place that is no longer relevant. This is certainly true of university-based research, where the incentive to directly commercialize it is beyond the purview of the halls of academia. In certain sectors (such as biotech or nanotech), where the development cycles are long and expensive, the idea of transferring it to an emerging entity, such as a division of a large corporation (e.g. a major pharmaceutical company) becomes attractive. Internal R&D offers an alternative. It will be interesting to see how it converts to licensed ideas.

R&D: Beyond IP Strategy

Internal corporate R&D has been a cyclic and powerful resource for innovative technological change. In the 1950s, the landscape of R&D facilities seemed both lavish in design and endless. Architectural awards were granted to new, state-of-the-art research facilities. These labs were part of the draw to attract top talent. They were always featured in corporate annual reports.

Today, many of the dominant players no longer exist. Homer Research Labs at Bethlehem Steel, Sarnoff Labs at RCA, Bell Labs at AT&T, and PARC at Xerox all are examples of world-class research facilities that have been either decimated or closed. What happened? More important, what are today’s trends to replace their function? And of course, are R&D labs a viable source of ideas for technology commercialization?

According to Booz&Co.’s 2014 Global Innovation 1000 report,¹ the aggregate R&D spending in the United States is $637 billion. The number is not precise and includes government research facilities (minus classified projects) and not-for-profit organizations. As large as this seems, it is not the largest amount internationally as a percentage of GDP. Israel, for example spends 4.2% of its GDP on R&D, compared to the United States at 2.6%, according to a Battelle 2014 Global Funding Forecast.

There are other interesting notes about R&D spending. They include:

• The 11-year compound annual growth rate of R&D spending now equals 1.4%. The three-year rate is 9.5% (Booz&Co. report). The decline is significant.
• Three industries dominate the spending. They include computing and electronics, health, and automotive. These three sectors comprise 65% of all spending (Booz&Co. report).
• China and India are growing faster in R&D spending per capita than mature regions. Combined, they are growing at a 27.2% annual rate while the average for all other countries is 9.6% (Booz&Co. report).
• Sales and R&D spending of certain sectors and companies correlate to sales growth. However, R&D as a percentage of sales has been in steady decline for almost 10 years. It is now an average of 1.14% (Booz&Co. report).

This is a fairly dismal look at the U.S. R&D effort. One possibility is that alternative means of innovative development are being utilized and thus reliance on the classic R&D function is in decline. On a global basis it is clear that China is increasing its per capita R&D expenditures.

In September 2000, the National Institute of Standards and Technology (NIST) asked the National Research Council to assemble a committee to study trends in science and technology (S&T), industrial management, and how research and development would impact the introduction of technological innovation. The results were published in a report entitled “Future R&D Environments” (National Academy Press, 2001). As part of their findings, the council observed the accelerating change of the environment in which the research was being conducted. They noted that all of the following were changing the nature of the work—a move to decentralize research and conduct it at different locations in the world, the outsourcing of projects, new issues regarding privacy, the advent of biotech and genomic research, and finally the declining span of product lifecycles.

In the midst of this, the Industrial Research Institute in its 2013 R&D Trends Forecast found that licensing fees and hiring graduates seemed relatively flat, yet stable.

R&D Strategy

Putting this all together, it now becomes important to look at R&D as a source of ideas and innovations in the path to commercialization. In all of the studies cited, there appears to be a positive correlation between R&D and revenue. High fliers like Apple, Intel, and 3M are examples with expenditures of R&D as a percentage of revenue in the low teens. Mercedes Benz and other automotive companies were shown in the middle of the list but now show increases as they try to move to new technologies.

When financial and investor professionals look at income sheet expenditures in functional areas such as marketing and R&D, they coined a phrase called “comparables” (or “comps” for short). Comps relate expenditures of different categories in other companies with similar market or SIC sectors. Comps essentially argue that if you want to be in the fast-moving electronics business, for example, you must be prepared to allocate 8–12% of the corporate revenues to R&D. National averages of corporate research are closer to 1–2%. Were it that simple, it would be just a matter of upping the numbers of dollars invested.

Andy Grove was one of the founders of Intel. The company manufactured computer memories and operational microchips. Repeatedly, it was the leader in the manufacture of computer memories and later of processor chips. Andy was publicly quoted as saying that, “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” Ted Leavitt, the noted Harvard Business School professor who wrote the classic Harvard Business School case entitled “Marketing Myopia,” chided established businesses like the railroads to understand “what business they were in.” Railroads, argues Leavitt, failed because they thought they were in the railroad industry, not the transportation business.

Internally, we see that corporate culture and clarity of vision are needed to guide allocations of resources for the future in both R&D and capital improvements. Today, a new layer of constraints in regulatory issues, global competitiveness, and availability of material resources challenge research to be more nimble and more adaptive while certainly being more innovative.

As the economy moves to more science and technology-based platforms like biotech, nanotech, cleantech, and so on, the pressure to create internal R&D capabilities is reappearing. Look at Kendall Square in Cambridge, Massachusetts, for example. It features block after block of technology-based companies with almost incomprehensible biotech names. Certainly the proximity to MIT’s research labs impacts this approach. Some of these startup companies are doing very well indeed. An example is Novartis, which is currently going through a third major expansion of its Cambridge research facilities on Massachusetts Avenue.

Academics have certainly argued the case for and against internal R&D efforts. In an article published in Research Policy² entitled, “Internal R&D Expenditures and External Technology Sourcing,” Reinhilde Veugelers examines multiple variables such as size, diversity of projects, and impact of external sourcing on performance. He concludes that the real advantage of internal R&D is that it allows “absorptive capacity” to embrace new ideas both internally and through external collaboration.

In a 2009 Harvard Business Review case entitled “Merck (in 2009): Open for Innovation?” (MH 00009), the authors Alicia Horbaczewski and Frank Rothaeramel continued to explore Merck’s ability to innovate and stay competitive by reaching out to universities, research institutes, and other company collaborations. They observe that Merck’s total R&D expenditure was only 1% of the world’s effort in fields that were emerging rapidly but were too complicated for Merck to navigate alone.

In the March 2007 issue of The Economist, an article entitled “Out of the Dusty Labs” traces the development of the Corporate R&D labs to Vanover Bush (Franklin Roosevelt’s science adviser and later president of MIT). He published a paper entitled “Science, the Endless Frontier” in which he envisioned a cooperation between government-funded research in the universities, corporate labs, and the military. Indeed, all that happened.

After World War II, it seemed that big R&D labs became a luxury that only a few high-margin companies (like IBM and RCA) could afford. Yet, Noble prizes for the transistor and laser (AT&T) and for the mouse and computer graphical interface (Xerox) came from those labs. As the technology of information entered the arena, the larger vertically integrated labs no longer were required. Eric Schmidt, founder of Google, was quoted in the same article as saying, “[the] smart people on the hill” method no longer works. Instead, researchers have become intellectual mercenaries for product teams. They solve immediate needs.

Older pundits who poked at the R&D function used to say it was isolated by attitudes like NIH (Not Invented Here) and throwing ideas “over the wall.” (Note: One exception is IBM, where the research folks actually carry their ideas to manufacturing.)

Again, in The Economist article, John Seely Brown, the former director at Xerox-PARC is quoted as follows, “When I started running PARC, I thought that 99% of the work was creating innovation and then throwing it over the transom to dumb marketers to figure out how to market them. Now, I realize that it takes at least as much creativity to find ways of bringing ideas to reality. Knowing that, I would have spent my time differently if I had figured this out earlier.”

And people wondered what happened to the dinosaurs—PARC no longer exists! Perhaps corporate R&D will not be a leading candidate for commercial opportunities.

R&D: Question the Viability

All of this leads to a series of questions about a given organization’s R&D effort. For example:

• Are measurable R&D metrics such as industry-compatible expenditures, number of patents, number of peer reviewed articles, number of new products produced, and so forth, on a par with other organizations in their field?
• Is the evidence that the R&D function is “open for innovation” and has the absorptive capacity to utilize both internal and external sources of ideas?
• Is there a close, working organizational connection to marketing and corporate vision within the R&D function?
• Are long-term and short-term corporate needs for innovation, new ideas, and market competitiveness being met by the R&D function? Has there been a consistent funding pattern of R&D that transcends cyclical trends in profits and cash flow?

There are more alternatives to commercialization; it reaches beyond formal R&D and licensing others’ ideas. Let’s continue our search for alternatives.

Extending the Product or Market

Marketing and product design professionals have long known the value of extending the life of product or service design by using product and market extenders. In product lifecycles (see Figure 3-2), there is an inevitable decline in the products’ acceptance or market dominance. This can be caused by technology obsolescence, competitive forces, or simply newer and better ideas. There are both good and bad reasons for allowing the inevitable decay of the end-of-life portion of the curve.

If inevitable, there are distinct end-of-life strategies available. For example, retailers use clearance sales on a regular basis. It is those companies who do nothing that are at greatest risk of losses. On the plus side are simple economics of technologies that have significant frontend or tooling costs that are simply not cost-effective to change. In the cases where there is both a lack of nimbleness or attention to the need for change (lethargy) and a lack of market awareness, the probability of losses increases.

In either case, left unattended, the product fails. If this weren’t explicit enough, the concept can also be extended to corporate models—some organizations simply become irrelevant.

Can the severity of the inevitable product declines and incremental change be reduced? Of course. The most dramatic example is in the computer chip manufacturing cycle. A toolset, or “die” as it’s called, is used to produce multilayer computer chips. They are estimated to cost in the billions to fabricate. Clever designs actually build a family of products into a single chip. Business and market conditions determine when to enable features in a timely way that allows the products to have a new life. In that sense, they mitigate the end-of-life phenomena.

Hard good appliances and automotive designs sometimes use simple sheet metal alternations to imply that they are “new” products. Usually these changes are planned at the beginning of the product or service inception.

Perhaps the most prominent example of this process is the evolution of Microsoft Office. Certainly an older product, it has reinvented its feature set six times to its current offering as Office 2013. Each release offers new and extensive features. In a diabolical manner, the companies will not support over two earlier versions, thus ensuring demand for newer versions and upgrades. It is estimated that the true cost of the software is about $1,000 for the user to maintain its currency.

Although the powerful Office product offers thousands of features, the majority of users use only a small number of the functional attributes. Microsoft also saved the billions of research dollars (and time) required for new product launch. Today, the product’s dominance is being challenged by open software that seems fully featured.

Engineers coined a term called “feature creep.” It is enticing to endlessly add features to a product as it reaches its maturity. Certainly, it helps generate additional revenue. Like the little “I” of incremental innovation, it also draws resources from the need to innovate and change the environment of the product.

This issue is not constrained to software. An interesting example is the Sony Walkman. At its inception, it pioneered how we listen to CDs. Controls were simple and rugged. As the product matured, it became “jogger shock proof,” “waterproof in the rain,” and had auto-reverse features added in an attempt to differentiate the product. While doing all this, Sony lost sight of the fact that the CD had already reached its peak and that CD use was declining with respect to other forms of music transmission. What were they thinking?

Each path of the innovation journey has its plusses and minuses. Product (and market) extenders allow us to weigh the incremental gain (and incremental expenditures) against product obsolescence. That balance must also be compared to the risk of delaying disruptive and innovative change, a significant risk. Certain ideas will also be of benefit. It should be the strategy to ensure that they be added to the possible sources of commercial projects.

Some Questioning Thoughts: Product Extension Food for Thought

Consider the following when you view the opportunity to extend a product’s life in some manner:

• The product (or corporate) lifecycle predicts an inevitable end of life. Is there a plan for managing that process? Are you considering it? Are there anticipated options?
• Is there a way to utilize the mature products to your advantage?
• Does the product design incorporate a “platform” philosophy that anticipates families of products?
• Are the market cycles coincident with the product (or service) cycles?
• Can the product and service offerings produce adequate financial returns, or are they increasingly incremental?

Joining and Buying: The Role of Mergers and Acquisitions (M&As)

Venture capital as we know it has its roots in a model propagated by Georges Doriot in his launch of a venture fund called American Research and Development (ARD) in the 1960s. He preached the need for measured risk financing and “nurturing” early-stage companies. The concept was to appeal to large pension funds to become limited partners in ARD. The funds were conservative in their nature and reserved small percentages for high risk/high return investments to boost their portfolio’s performance. The Venture Capital Fund model serves this need well.

The concept relied on liquidation of the venture fund’s investments through an initial public offering (IPO) of the equity (stock) in their portfolio companies. The highest returns (10–20 times) were available through IPOs. IPOs, however, rely on an available marketplace for new issues. This market, in turn, fluctuates with stock exchange performance and is not always available to accept the IPO offerings. Indeed, this was the trend for several years after the recession of 2008.

So what happens to the investor’s need to liquidate their investments? They simply revert to another strategy, which is to encourage a company to buy another company in their portfolio (acquisition) or to merge with another in exchange of stock (merger). Neither of these alternatives has the potential returns of an IPO but are still quite attractive. In this category is the strategic sale, where there is a close alignment of market or technology interests. They have the highest premium.

The M&A Alternative: Questions

When you are considering a merger or an acquisition, find suitable answers to these questions:

• Is there a clear and specific objective to the M&A transaction beyond capital growth?
• Is there a post-transaction implementation plan? (Most M&A transactions unravel after the deal without a clear plan).
• The M&A transaction alters the balance sheet of both companies and raises the question as to whether the “newco” is strong enough financially to grow. This dilution is often mitigated by debt in what is referred to as a “leveraged” buyout. Is this good for the new entity?
• Possibly the most complicated issue of the post transaction is the alignment of the succeeding organizations. Overlapping jobs are eliminated. Good planning can mitigate the human carnage that goes with it. Is there a pro forma organizational model for the “newco”?

M&A emerges as an obvious strategy for growth and innovation. The basis for this activity can be strategic and allows options for new technology and market developments. The economic considerations flow from a belief that the target is undervalued and thus ripe for the transaction. Sometimes the motivation is less than altruistic and may be driven by ego or simply hubris. Investors see a decline in IPO activity and see an M&A as an alternative basis for liquefying their investment.

Invention/“Other”

This category of sources for commercializable ideas is possibly the hardest to define. Ideas that form inventions exist at the intersection of recognized problems, creativity, and irrational thought. It is characterized by an “a-ha” moment when useful ideas are generated. Thomas Edison said that, “There is always a way to do it better . . . find it.”

In a book entitled Innovate Like Edison, authors Michael Gelb and Sarah Miller Caldicott cite other comments Edison made. They include:

• “My philosophy of life is to work to bring out the secrets of nature and apply them for the happiness of man. I know no better service to render during the short time we are in this world.”
• “I start where the last man left off.”
• “To invent, you need a good imagination and a pile of junk.”
• “To have a great idea, have a lot of them.”

Edison went a bit further and proposed an additional five Competencies of Invention. They include:

• Solution-centered mindset
• Kaleidoscopic thinking
• Full-spectrum engagement
• Mastermind collaboration
• Super-value creation

There is significant explanation in the literature about Edisonian thinking. To suggest that it might be codified and set into rules is of great interest. Certainly, organizations should attempt to capitalize on it. Inventors have been characterized as loners and tinkerers. But sweeping, broad-brush descriptions don’t help to understand inventors as a group; it really doesn’t get you any closer to understanding how to embrace, extend, and capitalize on their skills and creativity.

There are multiple organizations to help those inventors who are willing to participate in group activities. In Springfield, Massachusetts, for example, there is a group called the Innovators Resource Network.³ They meet monthly in a local technical school and discuss a wide range of topics ranging from patent protection to new technological processes for making prototypes. It is a very applied and tactical group. Its membership, and alternate meetings, are closed to the public.

At the national level, there are organizations designed to assist both experienced inventors and those just starting out. The National Inventors Hall of Fame, located in the U.S. Patent and Trademark Office in Alexandria, Virginia, is an example. It showcases many ideas and projects to inspire and motivate invention. The organization sponsors meetings and workshops and provides informational resources. They also sponsor a camp to help younger inventors polish their skills.

Nurturing the Inventive Process

From federal incentive programs to state-level assistance and invention incubators as well as private incentive groups, there are numerous resources of space and mentor support available to inventors. Invention is considered the lifeblood of a vital economy and a source of a country’s ability to compete. Repressed societies are characterized by the country’s being noncompetitive and not economically viable.

There is a creative element to invention itself. It is that invention is almost like an art form of creativity. It differs from the innovative skills discussed in this text and so many current articles. At least one element of the inventive process is that inventors seem to require elements of solitude or at least distance from the conventional organizational structures.

When I worked for a company called Waters Associates in Milford, Massachusetts, there was very creative individual who in many ways was a disruptive element in the development of new products. He would challenge each step and attempt to change things at the last moment on a seeming whim. Yet, his ability to conceive bold changes in the core business model was, in the parlance of the kids, awesome! The eventual resolution of this conflict was to create a “skunk works” five miles from the central plant that was equipped with machine tools, small labs, and generally enough space to create next generation concepts. On the one hand, this was an expensive and organizationally awkward solution, but on the other, it allowed creative processes to flourish.

Dean Kamen, the prolific inventor and engineer, goes further. He believes the root of the creative process is created in the early education years. He said that he failed as a student because he always tried to invent answers to quiz questions that weren’t on the exam just to be creative. And thus his answers were judged as “wrong.” He attended WPI but left before his graduation. He went on the develop the digital infusion pump for controlled intravenous injections and later, the now famous Segway transporter.

In addition to these major innovations, he focused on early education and created a university/industry collaboration called the First Competition to foster curiosity in engineering and science. It featured robotics teams’ solutions to a statement of a given problem. The effort focused on high school grade levels. The impact of this project has been that tens of thousands of students and thousands of industrial collaborators have participated in these annual competitions.

There is an inherent conflict in the corporate model and the nurturing of invention. Within the corporate model, there are incentives for completing projects on time, within budget, and in an orderly manner. Creative invention requires almost the opposite. Some companies, such as Google, allow employees 20% of their time just to innovate and create. They do so within a structured environment that is based on eight “pillars of innovation” that allows for failure, provides café space for discussion, features open accounting-level data, and sharing and information systems that are dynamic and distributed widely in the company.⁴

Throughout the system is a pervasive culture of empowering its employees. Invention, as well as new ideas for products and service improvements, can be generated in multiple ways. Learning to be attentive to the random possibility of commercially viable ideas is important. “Other” represents a placeholder for those ideas not captured in more formal processes. To put inventions in perspective, consider several questions:

• Is the culture surrounding the inventive process encouraged and rewarded, or is the opposite true?
• Are there incentives for risk, thinking out of the box, and even paradigm change?
• Google is certainly an exception in the many ways it encourages innovation. What specific policies in a given organization are there do you have to encourage change and innovation?
• Is there a means for rewarding the change agents? In some companies even the issued patents are posted in a hall of fame.

Invention and “other” new ideas occur at almost any stage of an innovation’s entrepreneurship. The challenge seems to be to allow a culture or environment that encourages it and reduces the element of risk. “Other” is that delightful category of ideas that is spontaneous and brings the responsibilities of being open to those ideas that may be “outside the box” and counterintuitive. Those ideas may also be quite valuable.

The World of Ideas: Summary

Wow, we live in a world of many ideas that may come from diverse and unconnected sources. There are different strategies to achieve their commercial success. They can be used in parallel and in combinations. Opportunities can be found in multiple venues and at different stages of maturity. The first lesson of this chapter is that we must remain open to the ways that ideas can be generated and pursued. Like the pilot’s instrument scan, the risk of fixating on any one channel is failure. In succeeding chapters, you’ll look at how to distill the multiple sources of ideas to the ones that have the highest probability of commercial success.

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¹www.booz.com/media/file/BoozCo_The-2012-Global-Innovation-1000-Media-Report.pdf

²Vol. 26, Issue 3, October 1997, pp. 303–315.

³www.irnetwork.org/

⁴Google Think Insights in an article entitled “The Eight Pillars of Innovation” by Susan Wojcicki, July 2011.