Manual - Pearson Education
bringing new technology to market
Kathleen R. Allen
Instructor’s Manual
Table of Contents
Chapter 1 1
Chapter 2 8
Chapter 3 17
Chapter 4 23
Chapter 5 29
Chapter 6 34
Chapter 7 39
Chapter 8 44
Chapter 9 49
Chapter 10 55
Chapter 11 61
Chapter 12 66
Chapter 13 72
Chapter 14 77
Chapter 15 83
NOTES TO SAMPLE SYLLABI 89
SAMPLE SYLLABI 90
Chapter
1
Innovation and Commercialization
t
he process of taking an invention from idea to business concept and then to market is called technology commercialization. This dynamic process faces a unique set of challenges and opportunities in a fast-paced market. Consequently, products must be developed faster, prototyped earlier, and brought to market in record time. Small entrepreneurial companies are in a good position to do that as they tend to be more flexible and quick to respond to environmental changes. In contrast, large established companies have the challenge of breaking away from traditional strategic thinking and the inertia of success.
icon key
0. Supplementary Lecture Material
0. Additional Web Resources
0. Answers to Discussion Questions
It is important that students begin with a fundamental understanding of what is meant by technology, technological change, innovation, and commercialization. With a good ground and common terms, it will be easier to get into more detail later on. The focus of this book is radical innovation because I believe that every technology business at one time or another needs to engage in radical innovation to sustain its competitive advantage. Radical innovation presents a more complex and difficult challenge for the commercialization process. Therefore, if students can understand and have practice experiencing strategies for radical innovation, they can easily modify those strategies to accommodate the far less complex and challenging strategies associated with incremental innovation.
This chapter
• Discusses the effect of technological change on economic principles.
• Explores the foundations of technological innovation
• Presents key disruptive technologies for the new millennium
• Details the innovation and commercialization process
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Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Wireless Technology Hits the Dirt
Take a wireless Ethernet connection, a laser-based measuring device, a mound of dirt, and what can you do? You can estimate the cost of excavation of a building site, a task that has always been difficult if not impossible to measure with any degree of accuracy. The National Institute of Standards and Technology (NIST) is developing information networks that have the potential to automate every element of a construction project. The system can generate a 3-D model of a construction site’s terrain before excavation, which makes it easier to measure what needs to be excavated. It is expected that eventually the system will measure more than dirt; it will be able to track pipes, beams, and even hammers at a site. It should be ready by 2006. To learn more and find related stories, go to “Building Bots” by Kevin Hogan, Technology Review, May 2002.
Thinking Out of the Box
In 1974, Robert Langer, a professor of Chemical and Biomedical Engineering at MIT, began a postdoc at the cancer lab at Boston’s Children’s Hospital. Though he was out of his field of synthetic polymers among surgeons and scientists, he discovered that he could take what he knew about molding materials and come up with revolutionary medical cures. He has managed to build from plastic implantable dispensing machines for drug therapies. Not content to rest on his success, he is now delving into the field of tissue engineering where his synthetic polymers help researchers grow replacement body parts in the laboratory. The common thread is all of Langer’s inventions is biomaterials, any substance other than food or drugs that comes in contact with biological tissues or fluids. Dental fillings are a good example and, in fact, are the most common biomaterial in use today. Biomaterials have the potential to revolutionize the way we treat many medical problems with smart systems that behave like real body parts. What are the potential opportunities for this core technology?
Source: Antonio Regalado, “Ideas are Like Children,” MIT Technology Review, January-February, 1999.
Is Technology Taking Over?
Futurist John Naisbitt believes that technology is changing faster than humans can adjust. Will humans lose in the end? Naisbitt and others are not so pessimistic. In fact, they believe that humans are in a good position to shape their future. Until recently, technology had been driven by economics—the computer at the expense of the poet, in the words of Naisbitt. But now, instead of technology being at the forefront, it is becoming a ubiquitous part of everyone’s life. John Sculley, former CEO of PepsiCo and Apple Computer, believes that humans eventually will be “always on;” that is, they will wear wireless connections that keep them in touch with anything they want to stay in touch with. But this constant association with technology and the barrage of information it brings us is causing a syndrome that Linda Stone, former VP at Microsoft, calls continuous partial attention. It describes the way people cope with the deluge of information that hits them daily. She believes that to have a successful business, a CEO needs to tune out, pause, reflect, and focus. Is all the information that technology is providing helping or hurting? Will technology ever fall to the background as Bill Gates predicted it should?
Source: Jill Hecht Maxwell, “Stop the Net, I Want to Get Off,” Inc Magazine, January 1, 2002.
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Additional Web Resources
Invention Dimension: The Lemelson-MIT Awards Program. This is a great source for stories on interesting inventors.
Transistorized: The History of the Transistor. The transistor is arguably the most important invention of the 20th century. This site presents the story of the invention.
Innovation: Cracking the Code. This is a three-part series that features ground-breaking biomedical treatments and research. It contains original articles and animations that help explain the treatments, among other resources.
Innovation: The Magazine of Research and Technology. This magazine explores the latest in technology from a Pacific Rim perspective.
Films to Rent
“Biomedics”
How technology is helping doctors improve diagnosis and treatment to provide better health care. Includes a discussion of hip implants and digitized instruments
26 minutes
Item: BVL7553
Format: VHS
List Price: $129.95
Rental Price: $75.00
“Material World”
This program stresses the role of computer technology in the design and development of materials, and examines the evolution of materials engineering. Materials were the basis of the tiles on the space shuttle and many medical implants.
25 minutes
Item: BVL7551
Format: VHS
List Price: $129.95
Rental Price: $75.00
“Surviving the Technology Revolution: Promise or Peril?”
This program explores the impact of technology transformation on business and society, and explains how people can prepare for the relentless progress of the brave new digital world.
26 minutes
Item: BVL7554
Format: VHS
List Price: $129.95
Rental Price: $75.00
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Answers to Discussion Questions
1. Why is continual innovation critical to business success today?
Continual innovation is required to meet the demand for better, faster, cheaper technology products in a rapidly changing marketplace. Intellectual property, once a cost center for most corporations, has now become an important revenue center and a critical competitive advantage for the firms that hold it. However, as the text points out, incremental innovation will only carry a company so far. Radical innovation is critical for long-term sustainability, and this is where most companies have had far less success. Many companies have disappeared from the corporate map because they failed to innovate and were overtaken by their more agile counterparts. Fully 40 percent of major corporations in business in 1975 are not in business today due in large part to their failure to link emerging technologies with emerging markets.
2. In what ways has the product development process changed and why?
An increase in venture capital funding, in addition to the enormous infusion of corporate capital, is driving innovation and causing it to accelerate. Venture capital stimulates new competition and the need for companies to innovate and get to market quickly. This translates into faster product development times
and shorter product life cycles.
Globalization has increased the level of competition in the market and resulted in companies from all parts of the world imposing their standards on products and processes. But globalization has also contributed to the increase in innovation by providing new partners and cost effective ways to manufacture.
Customers are more sophisticated, which means that companies must differentiate their products on many levels just to compete. Customer demand superior performance and value-based pricing, which is difficult to achieve from a product development standpoint. Customers are also savvy about the value of incremental innovations and may refuse to purchase additional bells and whistles in favor of a radically new innovation.
Technology is changing at an increasingly rapid pace. But mainstream customers purchase technology based on its ability to solve a need or provide a solution. To compete and capture the attention of customers, companies must not only produce innovative technologies and their associated products, they must also develop innovative processes that are integrated with their products, making it difficult for a competitor to produce at the same quality level and at the same cost.
New products are subject to shrinking product development timelines. These shortened product life cycles are forcing companies to innovate constantly just to stay ahead of the game. They are also effectively shortening the temporary monopoly enjoyed by companies with proprietary technology.
3. When it comes time to commercialize an invention, what options are available to an inventor to navigate the business side of commercialization, and what are the advantages and disadvantages of each?
The answer to this question comes from understanding the overview of the commercialization process. It requires that students think about the requirements of commercialization and the expertise that a scientist/engineer inventor may or may not have. Three options come to mind: 1) the inventor handles the business side himself; 2) the inventor seeks partners with business expertise; 3) the inventor connects with a university or other organization that may be able to provide business expertise.
The inventor handles the business side himself. This approach is fraught with problems if the inventor is a scientist or engineer with no business experience. Understanding how to conduct feasibility analysis and answer all the questions related to deciding customers, entry strategy, first application, and so forth represent a domain of knowledge that the scientist/engineer generally does not possess.
The inventor seeks partners with business expertise. Here the inventor will look for a partner or partners that have experience starting and running businesses, or at a minimum have a degree in business. It’s important to bring this business expertise into the picture early in the development of the technology to make sure that the market and potential customers can provide input.
The inventor connects with a university or other organization that may be able to provide business expertise. Many entrepreneur programs in universities have courses in feasibility analysis and business planning with students who are eager to work on a real development team.
4. Choose one of the principal disruptive technologies for the next decade. What are two possible businesses that could be developed to exploit that technology that were not mentioned in the text?
The answer to this question will vary by student. This is an excellent question to get the students to move beyond the text and do an Internet search to read more about one of the disruptive technologies mentioned in the text: gene therapy, nanotechnology, and wireless technology. In their search, they will encounter a variety of potential business opportunities. Good sources are , , and ,
5. What are the advantages and disadvantages of a first mover or pioneering strategy? Under what conditions would first mover be essential?
The first mover or pioneer disrupts the technology that preceded it and requires customers to identify with a need they didn’t know they had. The primary advantage to this strategy is that it provides the pioneer with a temporary monopoly or quiet period in which to establish the technology in the market before competitors enter. This temporary monopoly is the result of intellectual property protections. The pioneer also has the opportunity to establish the technology standard and reap the enormous profits that ultimately come from successfully introducing a radical technology.
Disadvantages of the first-mover strategy are that it is more costly to execute (disruptive technologies often do not reap their full value until they achieve mass-market acceptance and the valley of death is much longer), the pioneering products typically display poor performance and address a latent need that the customer has yet to recognize, and, therefore, it’s difficult to get the mainstream market to switch to the new technology. Clayton Christensen’s research has studied the incumbent’s curse, which is the fact that incumbents, generally large companies, suffer from technology inertia or the fear of straying too far from their successes, so they are not very successful at the pioneering strategy.
Chapter
2
Recognizing and Screening Technology Opportunities
i
deas and opportunities are not the same concepts. An opportunity is an idea that can be turned into a business or commercialized in some manner. Today nearly every technology company is pursuing new opportunities and new ways to serve customers and solve problems. Opportunities typically come about when a need is apparent. But breakthrough innovations are normally the result of a serendipitous connection that, with experimentation, leads to a new technology and eventually a product in the market. This chapter is designed to help the reader understand the process of invention and opportunity recognition so that the reader can create an environment that encourages creativity, innovation, and opportunity recognition.
For students used to having an instructor tell them what to do and when, I find that understanding and practicing the creativity necessary to recognize opportunity is difficult and frustrating for many students. I suggest interspersing some creative exercises into the first few classes to break the ice and get the students thinking out of the box. I have put a few of my favorites in this section of the manual.
This chapter
• Discusses the role of creativity in innovation
• Explores how opportunity recognition comes about
• Presents some sources of opportunity
• Details how to screen technology opportunities
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Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Science Imitates Art
Professor Mark L Winston, of the Department of Biological Sciences at Simon Fraser University in British Columbia, tested the notion that someone who is well read in what he calls literary science or science-oriented prose will be more successful. In fact, he asked his biological science students on the first day of class what the first book was they had read outside of a textbook and was stunned to discover that hardly any of them had ever read a book about science. Most didn’t read at all outside of class. While everyone in the class was planning to become a professional biologist, few had ever explored the issues relevant to the field.
While many people attribute this lack of reading to television and Web surfing, Professor Winston believes that student’s education is too focused on data and the regurgitation of facts rather than on helping students improve their analytical and critical thinking skills. This is a serious problem when you consider that most scientific discoveries come about through connections of thing that are not normally associated with each other and through serendipitous insights. Reading in diverse areas can serve to precipitate new insights and connections. How many of your students read outside of class? What types of things do they read? Consider assigning a book outside the field and ask them to make a connection to your course.
Source: Mark L. Winston, “The Profound Moments in Science Often Lie in the Arts,” Creativity at Work
Sternberg’s Theory of Creativity
Many theories of creativity have populated the literature and often they don’t seem to fit with creative people we observe in the real world. Ronald B. Standler writes in a working paper “Creativity in Science and Engineering,” that the theory that seems to most reflect what we see in creative scientists and engineers comes from the work of psychology professor Robert J. Sternberg at Yale University. He believes that creativity requires the following essential elements to occur:
1. Intelligence. This includes synthetic intelligence or the ability to combine existing information in new ways; analytic intelligence, the ability to distinguish worthy and non-worthy ideas; and practical intelligence, the ability to promote one’s ideas and persuade.
2. Knowledge. This is the ability to recognize what is actually new. It also provides skills required to undertake experimentation and design new products.
3. Thinking Styles. Creative people typically challenge current thought and rarely passively accept conventional wisdom. So creative people also have a tolerance for conflict.
4. Personality. Creative people tend to be risk takers, are courageous, and seem to persist in the face of objection and criticism.
5. Motivation. Creative people tend to be intrinsically motivated, setting their own goals. They are less motivated by external or extrinsic motivators like money.
6. Environmental Context. Creative people place themselves in environments that stimulate their creativity.
Real creativity will not happen without all of these elements in place. Do you agree or disagree? Can you think of a very creative person who did not display these characteristics? Recall Drs. Yoshiro Nakamatsu and Claude Elwood Shannon from the case study at the end of the chapter. Did they display these characteristics?
Sources: Standler, Ronald B. (1998). “Creativity in Science and Engineering,”
Sternberg, R. J., Kaufman, J., & Pretz, J. E. (2002). The creativity a conundrum: A propulsion model of creative contributions. Philadelphia: Psychology Press.
Sternberg, R. J., & Grigorenko, E. L. (2002). Dynamic testing. New York: Cambridge University Press.
Sternberg, R. J. (1997). Successful intelligence. New York: Plume.
Sternberg, R. J. (1997). Thinking styles. New York: Cambridge University Press.
Sternberg, R. J., & Lubart, T. I. (1995). Defying the crowd: Cultivating creativity in a culture of conformity. New York: Free Press.
Why the Newest Products Succeed Best
The body of literature about what makes for a successful new product launch is growing. Recently, Schneider & Associates in conjunction with Boston University and Harvard University conducted a study focused on launches in the consumer packaging field. They interviewed 12 launch experts and then surveyed 100 corporate executives who had been working for at least five years in the field of consumer product launches.
The study found that “newness” was a key factor in determining the ultimate success of a new product at launch. Here “newness” was defined as products that were totally new to the company and those that were dependent on technology that was new to the company. The most successful products were more likely to be based on breakthrough technology than the less successful products.
They explained the findings by noting that, in general, more organizational resources are allocated to products that have the potential to be highly successful. Second, it’s easier to generate support internally for a new product that has huge potential. What do these findings suggest about the kind of environment that companies should create to ensure that they increase their chances of benefiting from “newness” in their product launches?
Source: Schneider, Joan. (2002). “The Launch: Why New Products Blast Off or Fizzle,” Visions Magazine.
My Favorite Creative Exercises
These exercises have been handed down and some form of them can be found in almost any book on creativity. Have fun with them and your students will too.
Creative Activity A: Find Your Team
Objective: To discover common backgrounds and form teams
In this exercise, the goal is for students to introduce themselves to as many people as possible in a two-minute time frame. At the end of two minutes, the instructor will ask them to form into groups of three. They have two minutes to find three things that they all have in common—they cannot be job related (ie. You all work for the same company). As soon as a group has its three common factors, it should shout out “we’re done.”
The discussion will revolve around looking at the types of commonalities found and the advantages/disadvantages of those commonalities for forming a team.
Creative Activity #2: Pass the Problem
Purpose: To discover multiple solutions and opportunities from a single problem.
In teams, each person should think about a current problem or concern that needs a solution or a need that hasn’t been met. Students should try to come up with a problem that the typical consumer or business is facing. They will have 5 minutes to think and write their problem or need on a piece of paper.
When the instructor cues the students, they should pass their papers to the person next to them. That person reads the problem or need just received and jots down below it the first thoughts that come to mind to solve the problem or address the need. The students have 30 seconds.
This process is repeated every 30 seconds until each person gets his/her own sheet back.
Discussion Questions:
1. Did anyone discover novel solutions that you had not previously considered?
2. Can you see any value in trying some of these suggestions?
3. Do some of these suggestions trigger other ideas or solutions for you?
4. What lesson does this teach us about reaching out to technical students to assist them in recognizing opportunities?
Creative Activity #3: Taking Advantage of a Disconnect
Purpose: To experience the opportunity creation process. To learn that one core invention can produce multiple applications and opportunities.
This exercise is based on the premise that many opportunities are created by going through a process that involves:
• Connecting dissimilar concepts
• Experimentation
• Inventing something new based on connections and experimentation
• Finding applications for the invention/opportunity created
Form groups of 3-5. Someone in each group should turn a piece of paper into a paper airplane. Then the group decides on a word that they are going to write on the paper airplane. It should be a noun. When all the groups have written a word on their airplanes, at the signal of the instructor, each group flies its plane to another group. It is that group’s job to add another word to the plane. This pattern continues for four rounds. On the last two rounds, the word may be an adjective, adverb, or noun.
Then each group takes the airplane they end up with that has four words on it and moves into Phase One – connecting the words in a relationship such that a potential invention opportunity appears. Write that opportunity on the plane and label it “opportunity.” Once all of the groups have completed this phase and at the signal of the instructor, each group will send its airplane to another group. Phase Two begins. It is the job of each group to consider the invention opportunity and enhance it by adding new information. Write it next to the “opportunity.” At the signal of the instructor, each group then sends their plane to another group. Phase Three begins. Each group will determine the final invention opportunity based on the information given them and write it on the airplane. At a signal from the instructor, Phase Four begins. Each group will send the airplane to another group. It will be that group’s job to find an application for the invention – in other words, how can it be used. At the signal of the instructor, each group will fly its plane to another group and that group will find a different application for the invention and write it as “Application 2” on the plane. This will continue one more time. The instructor will then ask the groups to report on the applications created for their inventions.
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Additional Web Resources
Creativity at Work. This site provides a reference guide to personal creativity and organizational innovation. It is designed as a resource for developing personal creativity and to explore the thinking and skills of artists, scientists, inventors, leaders and visionaries.
Creativity Pool. This site provides a searchable database of creative and original ideas. It’s free and encourages users to contribute new ideas.
Creativity Web. This site provides a variety of resources for understanding and using creativity, including idea recording, creativity kick starts, and an idea and problem bank.
Enchanted Mind. This site was created to help users develop their latent creativity through entertaining games and techniques.
Higher Awareness: Creativity This site offers programs, coaching, and resources for developing creativity. You can also sign up for a free weekly newsletter
Films to Rent
“The Deep Dive: One Company’s Secret Weapon for Innovation”
This film looks at how product development superstar IDEO uses a highly effective form of brainstorming called the “deep dive.” It is a type of focused chaos that in this film is used to redesign a shopping cart.
23 minutes
Item: BVL9249
Format: VHS
List Price: $129.95
Rental Price: $75.00.
“Intelligence, Creativity, and Thinking Styles”
This film explores how multiple intelligences and different thinking styles relate to IQ and the role that creativity should play in the development of intelligence. It includes an interview with Yale psychologist Robert Sternberg.
30 minutes
Item: BVL9173
Format: VHS
List Price: $129.95
Rental Price: $75.00
“Jamming”
This film is based on the work of John Kao in “Jamming: The Art and Discipline of Business Creativity.” It proposes that creativity can be stimulated inside organizations through innovative thinking and flexible improvisation.
41 minutes
Item: BVL7237
Format: VHS
List Price: $149.95
Rental Price: $75.00
“Oil on Canvas”
Here is a chance to think out of the box. This film explains and demonstrates the art and science of painting. The discussion of creativity and thinking skills is drawn from the masters of world art. This is a six-part series.
30 minutes each
Item: BVL7762
Format: VHS
List Price: $699.95
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Answers to Discussion Questions
1. Provide two examples that illustrate the difference between an idea and an opportunity.
The range of answers to this question is wide. If you consider the Leonardo Da Vinci example in the section “Understanding the Creative Process,” you see that the first two stages—connection and discovery—are really about the idea of managing water flows. The invention itself is the bridge to the opportunity, which is the application of the idea in the real world as a canal system—a business opportunity.
Any idea for a product is just that—an idea, until the inventor figures out a way to apply that idea or commercialize it with a business model. That is precisely why so many Internet businesses failed in 2000. They were simply ideas with no viable way to make money by selling something of value to customers. Selling groceries online was an idea with merit in some markets, but the idea involved delivering groceries free to the consumer, a concept that prevented the idea from becoming a viable opportunity because there was no way for the entrepreneur to make a profit under that kind of business model.
2. What two challenges do you face in becoming more creative? How will you deal with those challenges?
This question is designed to get students to look introspectively at who they are and the role that creativity plays in their lives. After asking the typical question, “are you a creative person?” and getting the typical response of no, it’s time to explore the kinds of environments that students put themselves in during the day. Generally, you will find that their work environments and educational environments do not inspire creative thought. In fact, these environments may actually stifle creative thinking.
Once students understand the nature of their individual environments, begin to explore ways that they can overcome them and provide for time each day for creative thought. Get the students to come up with ideas that go beyond those suggestions presented in the chapter.
3. Why is studying an industry one of the most important things you can do to find an opportunity?
It is generally agreed that increasing knowledge and experience in an industry in which the student is interested will enhance the chances that they will find an opportunity they want to pursue. In general most entrepreneurs discover their best opportunities in industries in which they have had experience. Trends, changes, and emerging needs in an industry present gaps or white spaces that can be turned into opportunities.
Learning an industry also means meeting all the players in that industry: suppliers, competitors, manufacturers, distributors, and customers. By getting involved in the industry and spending some time working in that industry, the student will develop a diverse network of strong and weak professional ties that will be needed once the opportunity is identified. Assuming they apply their newfound creativity to this industry, they are likely to become very opportunistic and discover many problems that need to be solved.
4. What do we mean when we speak of the economic life of a technology product? How does that compare with technology life and product life?
The economic life of a technology product is the length of time during which it can generate revenue for the business. As the chapter points out, that earning period is affected by
a. the probability that the competition will be able to design around the patent and develop competing product.
b. the probability that the patent will be challenged
c. higher than estimated technology development costs
d. the potential impact of new laws
e. the escalation of supply pricing or actual loss of supply
The technology life is generally determined by the patent period, which is 20 years from the date of application, although some technologies have survived far beyond their patent life.
The product life is the length of time that an application of a technology survives before it is made obsolete by new technology entering the market.
Chapter
3
Developing and Testing a Technology Business Concept
B
efore you ever consider starting a business, you need to develop a testable concept that can be proven in the marketplace with real customers. Absent that vital effort, the chances of failure skyrocket. A business opportunity is described through a business concept that spells out the product/service, customer, value proposition, and distribution channel. That concept can then be tested using an analytical tool and process called feasibility analysis to determine the conditions under which you are willing to go forward with the concept, that is, start the business.
It is difficult to understand how instructors can teach students to write business plans before making them go through the process of feasibility analysis. Without knowing that the business concept is feasibility, a business plan is an exercise in fiction writing. The feasibility analysis forces the student to carefully define the business concept and test the various components of it in the marketplace with potential customers. This chapter
• Discusses the development of the business concept
• Details the analytical tools of feasibility analysis
• Explains how to analyze an industry
• Discusses technological feasibility
• Details how to conduct a market analysis
• Explains how to evaluate a distribution channel
• Discusses the evaluation of the founding team
• Suggests how to present an effective feasible business model
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Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
How About Molecular Farming?
Who ever thought that the drugs that save our lives may have come from green plants? The reality is that for at least 16 years, we’ve been making human proteins from green plants that are as biologically active as those made from mammalian, yeast, or bacterial systems. One French company, Meristern Therapeutics, engineered corn to produce recombinant mammalian gastric lipase used in treating exocrine pancreatic insufficiency. Although molecular farming companies insist that they can produce more product than a cell culture facility at a fraction of the cost, there is still the question of what will induce biotech and pharmaceutical companies to adopt the technology? In other words, is molecular farming feasible in a commercial sense?
One of the stumbling blocks to the acceptance of genetically modified crops is environmental groups like Greenpeace who believe they pose a danger to animals, beneficial insects, soil microorganisms, and the food chain in general. Still, all the companies involved in transgenic plant-based manufacturing claim that it is far more cost effective than more traditional biologics manufacturing. One company says that it’s “plant-based production technology can make the same annual quantity of drugs with 200 acres of corn that a $300 million factory would produce using a mammalian cell-based system.”
With all these positives, why aren’t pharmaceutical companies buying? It appears that the companies does the transgenic development must develop more data to convince pharmas that the risk is small for using this process. In fact, the pharmas themselves are conducting feasibility studies to evaluate alternative technologies. Only time will tell if molecular farming will become the standard.
Source: Van Brunt, Jennifer, (Feb. 19, 2002) “Molecular Farming’s Factories,” Signals Magazine.
Spying on the Competition
Studying the competition is one of the most important tactics an entrepreneur can use to gather the market intelligence needed to successfully compete. In 1998, CEO and Chairman of office-supply superstore Staples, Tom Sternberg, spent at least one day every week dropping into one of his competitor’s stores as well as one of his own. He even visited the stores of retailers that didn’t compete with Staples because everywhere he went he learned something.
The purpose of “spying” on the competitors is not to validate what you’re doing but to find out what they do better than you and learn from it. How does your competitor treat its customers? Of course, there is a risk is copying your competitors, even what they’re doing right. Just because it’s working for them doesn’t mean it will work for you. What is equally, if not more, important is focusing on the customer and what the customer wants. That is where visiting your own outlets helps because you want to see your company from the customer’s point of view.
Source: Sternberg, Tom and Stephanie L Gruner, “Spies Like Us,” Inc Magazine, August 1, 1998.
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Additional Web Resources
RHK Telecommunications Industry Analysis. This site is the leading provider of research and analysis on the telecommunications industry. It is a good example of how you can stay up-to-date in a particular industry.
Corporate Information. This site provides a wealth of information and resources related to the energy industry as well as aerospace, automotive, chemicals, computers, construction, and electronics.
. This site provides industry analysis and resources on the biotech industry including genomics, proteomics, bioinformatics, biotherapeutics, bioengineering, drug discover, and immunotech.
Signals Magazine. This is the online magazine of biotechnology industry analysis. It provides analysis of trends of interest to those in biotechnology, medical device, and pharmaceutical companies.
. This site is a free source of market research information containing tools, articles, legislative information, and a directory of market research companies.
Films to Rent
“Interviewing the CEO, Part 2”
This film demonstrates how to gather primary data to help the researcher make an investment decision. It uses an interview with the CEO and CFO of Tambrands, a Procter & Gamble subsidiary.
23 minutes
Item: BVL11295
Format: VHS
List Price: $129.95
Rental Price: $75.00
“Adaptation and Innovation: Japanese Technology”
This film explores how the Japanese have learned from the West and in many cases overtaken their teachers. It focuses on the semiconductor industry.
30 minutes
Item: BVL2013
Format: VHS
List Price: $89.95
“ and the World of E-Commerce”
The first part of this program, filmed before the dot com bust, looks at and to see how they developed their competitive strategies. The second part examines the rise of dotcoms and their affect on society.
29 minutes each
Item: BVL10069
Format: VHS
List Price: $89.95
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Answers to Discussion Questions
1. Why is it important to define the business broadly but focus the business concept?
The business should be defined broadly enough to allow for change when the business environment changes. In the HeadBlade example in the text, Greene did not say that he was in the razor business because that would limit the potential of the business going forward. Instead, he chose to say that HeadBlade is in the consumer products business, which allows for the opportunity to move in a number of different directions as the company grows: accessories, apparel, and other branded items.
The business concept is another matter. It should be very focused so that the various components can be tested. The business concept is essentially the launch version of the business. With limited resources and the need to gain a foothold in the market and survive the challenging start-up phase, the business concept must be very focused and target the initial customer who will most likely purchase from the business.
2. You have developed a new software product that more effectively performs natural language searches through databases using voice recognition technology. What would your plan be for test this product with customers?
This question is designed to get students to think about the kinds of information they might want to capture from potential customers and how they will go about collecting and analyzing that information. The section on Market Research in the chapter highlights the critical information and suggests some ways to talk to customers. One of the issues with this particular example is the need to have a physical prototype of the product so that customers can actually use it in some form.
Any plan should include customer input at every stage of development of the product through beta trials with early adopter types. With this type of product, simply using storyboards to illustrate how the software works will not be very effective because customers will not understand the concept of voice recognition and how it plays into the uniqueness of the product.
3. Based on the product in question 2, what would you want to know about the industry to feel confident that you could enter it with a new venture? Be specific.
In general, you will want to gather evidence about the volatility, complexity, and uncertainty in the industry. Doing a Porter Five Forces analysis is one way to characterize the industry and its players. Any industry can provide opportunities for successful business entry under the right circumstances. For example, a stable industry with major players can still offer a new venture an opportunity if that new venture has defined a niche that is not being served or enters with a disruptive technology. As presented in the chapter, some of the key questions to be answered include:
a. Is the industry growing?
b. Where are the opportunities? Trends and patterns of change?
c. How does the industry respond to new technology?
d. How much is spent on R&D?
e. Who are the major competitors?
f. Are young firms surviving?
g. What are the long-term trends?
h. What are the threats to the industry?
i. What are the gross margins in the industry?
4. What are some ways that you can fill in the gaps in expertise and experience in the founding team?
This question will spawn a variety of responses including the following suggested in the chapter:
a. Find a partner with the required expertise and experience
b. Form an advisory board and fill it with people who have expertise in areas you’re lacking.
c. Outsource to another company for expertise you need.
5. Suppose you determine that there are not enough customers for the new product. What could you do, short of abandoning the product?
You need to reconsider the initial target market you defined to see if perhaps you missed a larger niche with customers who better understand your product. You would certainly want to get input from your customers as to how you might modify the product to encourage more sales. Finally, you should reconsider the business concept to see if you can modify the conditions in such a way as to make it more feasible from a revenue standpoint. Identify what is keeping you from gaining more customers and work to change it, whether it be the distribution channel, something about the product itself, or the value proposition, which may not have come across clearly to customers.
Chapter
4
High Technology Product Development Strategies
T
he product development process has undergone a number of important changes in the past decade including a new emphasis on business growth through R&D, market capitalization of companies based principally on intangible assets, more R&D resources being allocated to new business projects over basic research, and an increase in the number of strategic alliances and mergers and acquisitions for the purpose of acquiring technology. With all this activity being directed toward new product development, it seems odd that the statistics on new product success are not very encouraging. One in four projects started never sees the marketplace. Consequently, companies are constantly looking for ways to improve their success rate.
The product development process is nonlinear and iterative beginning with the discovery or recognition of an opportunity. This activity is followed by a period of technology screening and platform identification to determine which project the company intends to undertake. Once the technology is identified, technical and business feasibility activities take place simultaneously and lead to a period of in-house and limited market testing with customers. Today many companies outsource all or part of their product development activity to other firms with core competencies in areas they do not have.
Many texts skip the discussion of product develop, and I wonder how students ever understand how a new product idea goes from concept to physical product ready for the commercial market. Since the product development aspect of technology commercialization is so important to the ultimate success of the technology in the marketplace, the topic is worth of a chapter.
This chapter
• Discusses the new product development process
• Explains some metrics for product development
• Considers how outsourcing of technology innovation can be implemented
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Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Managing the Pipeline for Product Development Success
Pipeline management is the management of a company’s new product development capacity. Given that most companies have limited resources that must be allocated across a variety of projects, the ability to manage these resources becomes a critical component in successful new product development.
Most companies use an approach that prioritizes projects so that they come into alignment with the strategic goals of the company. But the reality is that many non-project demands also put pressure on limited resources. In fact, a recent study found that subject matter experts typically spend as much as 80 percent of their work week on non-project demands instead of the project for which they are responsible. The Theory of Constraints (TOC) was proposed to enable project managers to deal with non-project demands and to separate non-project from project demands. TOC provides for buffers or safety days, which are positioned at strategic points in a project, to give a measure of the status or health of a project at any given time. In this way, project managers more effectively manage their time as well as the project’s limited resources.
Source: Eugene Kania, “New Directions in Pipeline Management: A Theory of Constraints Approach,” Visions Magazine, January 2002. visions/print.php?doc=jan02/pipeline.html
When One Product is Enough
Jinny Crum-Jones thought her timing was impeccable. It was early 1999 and she was search for venture capital for her Internet software company, Persimmon IT, based in Durham, N.C. Her latest product, UnifyIT, was designed to streamline the management of clinical drug trials in the pharmaceutical industry and save millions of dollars. The problem was that Crum-Jones did just have that one product in development. She had three, targeting customers in different industries Why? Because she had received a sizeable investment from German technology giant Siemens who took a 20 percent stake in her company, so she felt confident that multiple products initially was the way to go. But the ramp-up in personnel caused her monthly burn rate to escalate to $500,000 and none of the products was ready for market when they needed to be.
Her efforts to find additional investment capital failed. Investors saw the company as unfocused and too risky. Friendly money to the tune of $10 million kept the company alive for a time. By April 1999, the company owed nearly $300,000 in back rent and was being evicted. In May, Crum-Jones liquidated the company. Each of the products was acquired by different companies. The lesson? In the early stages of a new venture, it’s important to focus and become the best at one thing. When the company has established a foothold in the niche it has created, it can begin to diversify its product line.
Source: Julie Carrick Dalton, “Start-Up’s Epitaph: One Product Beats Three,” Inc Magazine, February 1, 2000.
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Additional Web Resources
Glossary of Product Development Terms . Here you’ll find terms, phrases, and definitions contributed by the directors, editors, and authors of The PDMA ToolBook for New Product Development.
NASA Space Product Development site focuses on the commercial development of the space frontier. Here you can find out about NASA partnerships with business to conduct research in space and develop products that can be used in space.
Product Development and Management Association (PDMA) PDMA is a non-profit organization of corporate practitioners of new product development. This site houses a number of resources including Visions magazine with interesting and timely articles on issues related to new product development.
Product Development Benchmarking Association This is a free association of new product development organizations inside major corporations. The association conducts benchmarking studies to identify best practices among member organizations.
Product Development Forum This site is a source of information on new product development, concurrent engineering, integrated product development as well as a number of other relevant topics. It provides a searchable database of topics.
Product Development Institute Inc. This institute is dedicated to helping companies improve their new product development processes using the work of Robert G. Cooper. Recent articles and a description of the stage-gate process are provided.
Films to Rent
“Dr. Fad”
Dr. Fad is an unusual entrepreneur-consultant-professor who has the ability to recognize the next multimillion-dollar market success. This is a 60 Minutes presentation where he analyzes how these successes come about with numerous illustrations.
14 minutes
Item: BVL2087
Format: VHS
List Price: $69.95
“Tissue Engineering: Custom-Made Organs on Demand”
This film features experts from MIT, the Georgia Institute of Technology, and Advanced Tissue Sciences, a leader in tissue engineering technology. They discuss the industry challenges and the need for difficulty of forming strategic alliances for research and development.
22 minutes
Item: BVL11124
Format: VHS
List Price: $129.95
Rental Price: $75.00
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Answers to Discussion Questions
1. As a product developer, what are the three most important things that should be remembered when formulating a product development strategy?
In the section on Increasing R&D Effectiveness, the text points to
a. Forming internal links between technical and non technical groups recognizing that it takes the effort and input of all areas of a company to create a successful new product.
b. Involving customers and suppliers in R&D at very early stages of the process.
c. Measure the effectiveness of the product development process and make continual improvements.
2. In what ways can a company increase its chances of designing right the first time?
Entrepreneurs can increase their chances of designing right the first time by getting customers involved early in the design process so they can provide valuable input and insure that the company is building a product that customers will purchase. Involving the manufacturing, financial, and market areas of the business will make sure that the company has the capability to produce, market, and distribute the product and that the product design is congruent with those capabilities. Early prototyping will also contribute to fewer design changes later on.
3. Every R&D project carries with it some degree of risk. Suppose an entrepreneur is proposing to develop a wearable PDA that is unobtrusive and responds to voice commands. What are some of the risks in the development of this product? How should they be managed?
Risk #1: There is no market for the product
Manage the risk by doing extensive market research before committing significant resources to the project. See Chapter 3 for information about conducting market research.
Risk #2: The cost of R&D goes well beyond the budget due to design changes and re-engineering.
Getting customers and other functional areas of the company involved in product design at the earliest stages, as well as early prototyping of the product, will help to keep R&D within budget.
Risk #3: It takes too long to develop the product and get it to market.
Some ways to reduce cycle time include 1) documenting the workflow associated with the product development process to uncover duplicated efforts, potential bottlenecks, and other problems that might delay the process; 2) set goals for completion times; and 3) make the team accountable for its performance.
4. What are the major advantages and disadvantages of outsourcing innovation?
Advantages of outsourcing include:
a. Sharing the risk of product development with others
b. Lowering the cost of product development
c. Decreasing cycle times
d. Developing a network of expertise.
Disadvantages include:
a. Daily familiarity that often distorts priorities and goals
b. Internal groups want to protect their turf.
c. Informal discussions are often not formalized in writing and, therefore, may be forgotten or not implemented.
d. With the constant flow of ideas, the tendency to continually add new features and improvements may actually slow the development process.
e. Face-to-face meetings are cancelled more often than electronic meetings.
Chapter
5
The Concept of Intellectual Property
i
ntellectual property consists of all those proprietary rights in the form of patents, trademarks, copyrights, and trade secrets that are granted by the U.S. Patent and Trademark Office and the U.S. Copyright Office or through common law as in the case of trade secrets. These IP rights give the holder the right to exclude others from making and using the protected property. It is important that anyone involved in business understand the role of intellectual property because every business, whether product oriented or not, possesses some form of IP. This chapter serves to help the reader understand the fundamentals of IP in terms of the specific protections provided and the process for securing the protection. It also guides the reader in the decision of which IP is appropriate for a particular situation. In addition, this chapter
• Presents the theory behind intellectual property
• Discusses the nature of trade secrets
• Explains copyrights and how to obtain them
• Details trademark law
• Discusses patents and the process for acquiring them
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Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Software Piracy Does Not Pay
John Sankus, Jr., age 28, was sentenced to 48 months in federal prison for conspiring to violate the criminal copyright laws. Sankus was the leader of one of the oldest and largest piracy rings on the Internet. He was known by his screen name “eriFlleH” (HellFire spelled backwards) and was known for his ability to acquire new software and releasing it over the Internet. His group, known as DrinkOrDie, consisted of 65 members from 12 countries. The group used highly sophisticated technology and security devices to protect their transmissions and they believed they were invincible. They would typically acquire software from member “suppliers” days before it was released commercially by the victim company, companies like Adobe, Autodesk, and Symantec. Many times, the companies from whom they stole software were small start-ups that relied on the revenues from their software for survival. Then “crackers” would defeat the copyright protections and allow for reproduction.
Sankus was caught in the net of the US. Customs Service’s Operation Buccaneer, which is the largest international copyright piracy investigation ever undertaken. Why do young Internet users believe they have a right to make proprietary software free? What can companies do to protect themselves?
Source U.S. Department of Justice, Press Release, May 17, 2002.
Copyrighting “Look and Feel”
In 2000, the Walt Disney Co. paid $21 million to Internet site to settle a dispute over a green-light logo that it put on its web site that looked very similar to that on the site. Disney was infringing on GoTo’s trademark and the copyright of its Web design. This situation is not as straight-forward as it may appear on the surface as the whole issue of the “look and feel” of a Web site design is very muddy under the law. Copyright law does protect the “original creative expression” of ideas, not the ideas themselves. So you can’t copy the source code from a design and paste it into your site without violating copyright law. The question then becomes, how much is too much?
Source: Jill Hecht Maxwell, “Copying Web Design: How Much is Too Much? Inc Magazine, March 15, 2001.
The Status of the Doctrine of Equivalents
Over the past ten years, the Doctrine of Equivalents has been involved in a series of court cases that have served to weaken its impact. Patents can be infringed upon literally or under the doctrine of equivalents. A patent is literally infringed when the violator infringes on the claims of the patent precisely and unambiguously. The doctrine of equivalents was designed to prevent a potential infringer from simply making minor changes to the invention that were not specifically stated in the patent application. In general, anything outside the claims is considered to be in the public domain.
In March 2002, the Federal Circuit Court in Johnson & Johnson Associates, Inc. v. R.E. Service Co., Inc. ruled that technical material disclosed in the patent application but not claimed, that is, not specified as a claim of novelty in the patent application, is unclaimed and thereby public domain and does not fall under the Doctrine of Equivalents. The court ruled that using the doctrine of equivalents to cover subjects specifically left out of the claims would “conflict with the primacy of the claim in the defining the scope of the patentees’ exclusive right.” (Sage Products, Inc. v. Devon Industries, 126 F.3d 1420, 1424 (Fed. Cir. 1997)) Still, a patentee who mistakenly fails to claim disclosed subject matter is allowed, within two years of the grant of the original patent, to file a reissue application and enlarge the scope of the original claims.
The outcome of this ruling will be that inventors will need to file broad generic claims to attempt to cover all possible subject matter and to guess at every possible use or application of an invention and its various components.
Sources: Scott Fields, “The Final Coffin Nail in the Doctrine of Equivalents?” Patent Café: Technology Enterprise . May 8, 2002; Gregory J. Kirsch, “Narrowing the Doctrine of Equivalents in Patent Cases,” , May 21, 2002.
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Additional Web Resources
Copyright Web site This site is a portal that provides practical information about copyrights and many examples as well as current issues in copyright litigation.
Inventors. This page provides links to a variety of sources of trademark information including on to register a trademark and search the various classifications for trademarks.
Inventors. This is the companion site to the trademark site on . It provides some excellent links to information related to copyrights.
Patent Cafe. This site is a resource on a variety of things related to patents, trademarks, and copyrights including licensing, an IP magazine, inventor forums, and a young inventors site.
Films to Rent
“Human Genes Decoded!”
This film explores the issues surrounding the mapping of the human genome and whether aspects of it should be patentable. The perspectives are both private and public and address the uses and possible misuses of patents and licensing of gene therapies.
31 minutes
Item: BVL11198
Format: VHS
List Price: $129.95
Rental Price: $75.00
“Fred’s Story: Back in the Race”
Dr. Robert Klapper holds nine patents on an angled telescope and unique tools to perform an operation to avoid hip replacement surgery in people with arthritis. This is a Discovery Channel Production.
24 minutes
Item: BVL12024
Format: VHS
List Price: $129.95
Rental Price: $75.00
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Answers to Discussion Questions
1. An inventor has just developed a new type of collapsible furniture that will be useful for students in college dormitories where space is limited. What kinds of protections should the inventor consider for this product and the business that would be developed to commercialize it?
The inventor may be able to apply for a utility patent on the functionality of the furniture if the collapsible feature presents a novel approach. He may also be able to apply for a design patent to protect the appearance of the furniture. Certainly, the inventor will want to trademark the name of the company that will produce and market the furniture and may even trademark a name to describe the furniture. The inventor will want to protect through secrecy any proprietary methods for producing the furniture unless the process involves something unique and novel, which then may make it eligible for a process patent. Promotional materials can be copyrighted.
2. An inventor has developed a new financial software application. What will determine if the inventor may apply for a patent or seek copyright protection?
Software does not present a straight forward determination as to patentability. In some cases patents can be obtained; in others, copyrights are the only mechanism for protection. Recall that utility patents protect functional works whereas copyrights protect expressive works. Software is both functional and expressive. Software can always be copyrighted, but, in general, patents are more difficult to obtain. Manufacturers now protect their investments in software development of test functions, test methods, and failure-analysis systems through patents.
3. Why would an inventor choose to file a provisional patent application rather than a disclosure document?
The provisional patent is more powerful legally than a disclosure document and permits the inventor to label the invention as patent pending. Therefore, it provides the same legal protections as a formal patent application, whereas a disclosure document merely documents the date of conception of an invention.
4. For what reasons might an inventor decide not to patent an invention that is clearly patentable?
This question will spawn a variety of responses including the following suggested in the chapter:
a. the patent process is relatively lengthy and costly
b. The patent would not be strong enough to withstand assault by copycats.
c. The company doesn’t want the proprietary technology or process disclosed through a patent to the public.
5. What kinds of things are best protected through trade secrets?
a. novel and useful inventions for which the company chooses not to seek patent protection
b. computer source code
c. manufacturing processes
d. designs and drawings
e. technical know-how
f. business information such as customer lists, vendors, supply sources, marketing plans, and in-house talent
Chapter
6
Licensing Intellectual Property
T
oday more than ever before, companies are finding that they need to diversify their revenue streams so as not to rely solely on revenues from sales. They need to license their technologies and define the benefits of that technology to the licensee and conduct market research to determine if what the potential licensee says about the market for the technology is reliable. They also need to value the license agreement, which is a difficult task at best. The licensee must also do due diligence on the licensor and prepare a business plan to demonstrate the licensee’s ability to commercialize the technology. This chapter
• Examines licensing form the licensor’s point of view
• Explores licensing from the licensee’s point of view
• Details the license agreement
• Discusses a company’s licensing strategy
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Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
A Toll Bridge for the Web
For years, software developers have argued that what makes the Internet powerful is that it is free and its Web pages are available to any device that can connect to the Internet because they’re free. But concerns about whether that freedom will continue stem from the fact that many companies today hold patents on key components of what will be the next generation of Web standards. The MIT-based World Wide Web Consortium claims that its goal is to provide incentives for patent holders to participate early the in the standards process while still protecting independent developers and those who advocate open-source software.
One of the basic Web standards in common use is hypertext transfer protocol (http), which manages the communication process between Web servers where content is stored and browsers where it is displayed. Developers declined to collect royalties for their software out of concern for legal issues and the lack of a realistic way to collect the fees. Those on the side of free and open software argue that the best software will be developed where developers can take what someone else has developed and make it better. The opposing argument is if no money is forthcoming to recover the large R&D costs of development, the only developers that will play will be large companies and independently wealthy individuals. Where do you stand on this issue and why?
Source: Wade Rouch, “Web Tolls Ahead? MIT Technology Review, January/February 2002.
How Much Protection Does a Patent Really Give You?
If you owned a patent on your invention, could the government suspend that patent for period and require you to license it to the government at less than market value? The answer is most certainly yes. Recall in October of 2001 a debate arose over the drug Cipro (patent holder Bayer) needed to combat anthrax. The federal government questioned its right to override the patent and require Bayer to supply it to the government at a substantially lower price.
The precedent for government acquisition of private patents goes back to World War I when the airplane was a new technology. At that time, Wright-Martin Aircraft (founded by the Wright brothers) had a monopoly in the U.S. market. The Wright Brothers’ patent was threatening to prevent the government from producing aircraft to fight in the war, so the government demanded that the Wright Brothers license their broad patent for the airplane. The outcome was the development of the most successful aircraft of the time, the Curtiss JN-4D or “Jenny.”
In extraordinary times, should the government be able to take extraordinary measures to safeguard its citizens? And should those measures include violating the intellectual property rights of inventors?
Source: Seth Shulman, “Protecting People Above Patents,” MIT Technology Review, January/February, 2002.
DNA Patent was a Good Source of Revenue
In 1980, Stanford University received a patent for a “process for producing biological functional molecular chimeras,” also known as the Cohen-Boyer gene-splicing patent, one of the fundamental biological patents. It described a process for taking a gene from one organism’s cells and inserting it into a bacterium to produce a protein, and in 1974, its inventors, UC’s Herbert Boyer and Stanford’s Stanley Cohen, were not convinced that they should even apply for a patent.
Stanford University and UC took an unusual tact with this patent. It made it available to the world even before the patent was actually issued in the belief that the license should be non-exclusive and easily available to any company or inventor. The original license agreement called for a $10,000 up-front payment and a minimum annual advance of $10,000 to apply the patent. Royalties were in the range of 0.5% to 3% of sales. At the time the patent expired in 1997, the two universities had collected in excess of $200 million. For Stanford, the royalties represented about 62 percent of their licensing income; for UC, it was 29 percent.
In a side note, Herb Boyer later joined forces with venture capitalist Robert Swanson to start biotechnology giant Genentech, Inc.
Sources: Joan O’C. Hamilton, “Stanford’s DNA Patent ‘Enforcer’ Grolle Closes the $200M Book on Cohen-Boyer, Signals Magazine, Nov. 11, 1997.
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Additional Web Resources
. This site offers solutions to protect inventors from “aggressive competitive patents.”
Kohn on Music Licensing. This site is a free resource with answers to questions about copyright law and licensing music for use and distribution over the Internet.
Licensing Electronic Resources. This site presents “strategic and practical considerations for signing electronic information delivery agreements.” It also includes additional resources.
Films to Rent
“Biotechnology: Friend or Foe?”
The question raised in this film is “how should the knowledge of genetic science be used?” Presenting a balanced view of the biotechnology revolution, the film considers such issues as genetically modified food crops, gene patenting, and the use of transgenic animals for organ transplants.
55 minutes
Item: BVL11530
Format: VHS
List Price: $149.95
Rental Price: $75.00
(
Answers to Discussion Questions
1. Why is it important today for any technology company to have a licensing strategy?
A licensing strategy is important today because licensing speeds the adoption of the technology and stimulates further innovation. Furthermore, it is often more profitable for the owner of a technology to become a licensor than to try to develop and market all the possible applications of the invention. There are also non-financial reasons to have a licensing strategy in place. Licensing lets the original manufacturer enjoy the benefits of reaching multiple markets without the expense of setting up distribution channels.
2. From the licensor’s perspective, what would be important to have in place prior to speaking to potential licensees?
Prior to speaking to potential licensees, you would want to have completed a business plan for the technology that defines a customer and supports a need in the market for the benefit that the technology provides. You would also want to describe the ideal licensee for the technology and the terms of any potential agreement.
3. Suppose you have found a core technology that you want to license to develop and sell applications in your industry. In addition to the technology, what would you want to have transferred under the license agreement?
In addition to the technology, you would want to have the know-how transferred and receive assistance in implementing the technology. In general, you would want all of the information and tacit knowledge required to understand and use the technology.
4. Under what circumstances might a technology company not want to license technology it owns?
It may not want to license technology that it needs to maintain a competitive advantage in the market or technology that it uses in its processes to give it a unique advantage.
5. Why is it important to have a performance clause in the license agreement?
A performance clause specifies that the licensee must produce and sell a certain number of units by a certain date to meet the terms of the agreement. This clause is important from the licensor’s perspective to ensure that the licensee feels the urgency to move forward and sell units.
Chapter
7
Intellectual Property Strategy
I
ntellectual property is an increasing source of wealth, competitive advantage, and risk for companies. The potential to create new revenue sources from existing patents that have never been commercialized is enormous. At the same time, the need to defend IP against infringers has never been greater. For these reasons and more, companies need to have a well thought-out IP strategy in place that contains an arsenal of weapons, strategies and tactics, to strengthen their proprietary position in the market and protect all their forms of intellectual property. This chapter
• Discusses the value of developing and ways to develop a patent strategy
• Explores ways to create and defend a trademark strategy
• Considers issues in intellectual property strategy
(
Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Can a Yodeler Settle With Yahoo for Copyright Infringement?
Wylie Gustafson is a yodeler who performs with the band Wylie & The Wild West. Seems that in 1996, he sang a three-note yodel for Yahoo, the Internet search engine company, and was paid $590 for what he though was permission to use the yodel in a regional advertisement. Recently, he heard his Yodel for Yahoo during the Super Bowl and on a variety of other national broadcasts. That’s when he decided that he hadn’t been paid enough and filed a lawsuit. Yahoo quickly responded, settled the disagreement and now has permission to run advertising that claims, “Wylie Gustafson yodels on for Yahoo!”
Source: Associated Press, “Yahoo Yodeler Settles Lawsuit,” The Wall Street Journal, April 22, 2002.
Lawsuits as an Income Source?
Jerome Lemelson is known as one of the five most prolific investors of this century (he received an average of one patent a month for more than 40 years) and for being the individual patent holder who has earned more from licensing patents than anyone else, nearly $1.5 billion. And he has been deceased since 1997. More than 750 companies pay license fees on his portfolio of 558 patents, including companies like Alcoa, Ford, IBM, and U.S. Steel. His organization is involved in over 400 lawsuits for patent infringement.
But recently, the Lemelson organization faced a lawsuit of its own brought by a group of bar-code-equipment and machine vision manufacturers. Oddly enough, that is one group that Lemelson never sued. The leader of the charge is Robert Shillman, co-founder of Cognex, a machine-vision manufacturer outside Boston. Shillman himself holds 105 patents on the technology. His goal was to invalidate the Lemelson patents and seven other manufacturers joined him in the effort. No court “has ever made a substantive ruling on the validity of Lemelson’s machine-vision and bar-code patents.” If Cognex wins a favorable ruling in a case that goes to trial in August 2002, the Lemelson licensing program will probably end. If it loses, the 400 companies that are currently in litigation with Lemelson will likely begin to look at settlement. What do you think of this strategy for creating revenues? Advantages? Disadvantages?
Source: Nicholas Varchaver, “The Patent King,” Fortune, May 14, 2001.
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Additional Web Resources
A New Defense to Patent Infringement. This article by Jeffery Kuester, IP attorney, explores a recent doctrine of “separate patentability,” which is now recognized as a factor in “determining whether an accused product infringes another patent under the doctrine of equivalents.” Read more about this development at this site.
America’s Inventor. This site is devoted to the art and science of invention and contains a wealth of information and a tribute to Jerome Lemelson.
Chilling Effects. This site is a joint project of the law school clinics at Harvard, Stanford, Berkeley, and University of San Francisco and the Electronic Frontier Foundation. It explores issues related to online rights.
Films to Rent
“No More Privacy: All About You”
This interesting film starts with a camera crew that picks a car license number at random from a freeway and they shows what they were able to learn from public records in just half a day without permission..
59 minutes
Item: BVL4299
Format: VHS
List Price: $149.95
Rental Price: $75.00
“Selling the Future”
This film explores the electronic, technological, and conceptual world and what it means to be a human in the age of technology.
52 minutes
Item: BVL5803
Format: VHS
List Price: $149.95
Rental Price: $75.00
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Answers to Discussion Questions
1. In what ways can an effective patent strategy contribute to the success of a technology venture?
a. Give the company a temporary monopoly that lets it take advantage of a first-mover strategy in a market with no competitors. This position helps protect core technologies and leverage them to create a family of branded products.
b. Improve the company’s financial performance by better utilizing undervalued intellectual assets and finding new ways to generate revenues and cross-licensing agreements.
c. Increase the company’s competitiveness through cross-licensing and using patents as bargaining chips to avoid high royalty payments.
2. What is the value of developing a trademark strategy?
Trademark infringement is increasing at a rapid rate are companies are now having to exercise greater care in protecting their trademarks. Moreover, the growth of the Internet has made the protection of trademarks much more challenging. To protect a trademark against infringement, the chapter suggests that the company do the following:
a. Conduct an Internet audit of domain names and trademarks on the Web and the company’s email system to check for infringement.
b. Monitor the company’s domain name portfolio on a monthly basis
c. Perform a monthly audit of the Web, UseNet, and other areas where infringers are likely to operate.
d. Check to make sure that appropriate trademark and copyright notices are posted.
e. Make certain that the company is entitled to use any images or content that appear on its Web site.
3. What issues need to be considered when outsourcing innovation or collaborating on inventions?
As more companies outsource noncore competencies in an effort to speed up cycle times and reduce time to market, they leave themselves vulnerable to those companies for critical components of their business. Traditionally, companies have cross-licensed intellectual property to avoid patent infringement claims, but today more of them are seeking patent protections.
Trade secrets are far more difficult to protect under outsourcing arrangements. The company needs to albel trade secrets as such and take measure to preserve their secrecy. In the course of developing an intellectual property strategy, the level and type of protection required is determined, and of course, with outsourcing, extra precautions will need to be taken in the form of contracts and secrecy measures.
4. What steps should a company take if it suspects that an infringer is violating its patent?
If a company suspects that its patent is being infringed, it should do the following:
a. Have your intellectual property attorney review the potential infringement.
b. If warranted, send a cease and desist letter and, if appropriate, request for payment of royalties.
c. If there is no response to the letter, your attorney can file an injunction to prevent further manufacture or use of the infringing product. The attorney can also go to court and seek to enjoin or close down the infringer’s operation.
d. You can attempt to seek a settlement or agreement between the parties that involves an agreed-upon royalty in exchange for permission to use the patented invention.
Chapter
8
Building and Valuing the Business Model
T
echnology is only one piece of the equation. Equally important is the issue of how to make money and create value for shareholders, investors, customers, and value chain partners. The biggest challenge today is how to sustain a good business model over time and protect it from imitation that will dilute it. You have to think of the business model as a dynamic, evolving part of the business concept that provides for multiple streams of revenues and serves as a key source of the valuation of the technology and the company.
Many students confuse the business model with the business concept. The business concept is what you plan to do: customer, benefit, product/service, and distribution. The business model is the economic model, that is, how you’re going to make money, achieve a positive cash flow, and earn a profit. Today, more than ever and precisely because of the smoke-and-mirrors business models of the dotcom era, investors are looking for business models that are built are making a profit early in the business’s life.
This chapter
• Discusses radical innovation business models
• Explains the drivers of value
• Presents some typical financial models for assessing value
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Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Reality Sets In
Historically, entrepreneurs have relied on their intuition to tell them whether or not to start a business. In the up and down world of technology, intuition hasn’t always translated to survival as a business. When Larry Broderick was debating with himself about what it would take to get him to start a business, he came up with a list of 37 things, such as location, and gut feel for the idea. But the most important of the criteria in his mind were price stability of products and the ability to exit. That meant that he didn’t want to fall in love with a business idea; he wanted to do something that had a serious business model behind it. He didn’t want to rely on his passion over good judgment.
For Broderick, the list of criteria grew to 40 before he actually founded Denver-based SteelWorks in the early 1990s.. On the financial side, he had 11 items including ability to exit, margins, float (how fast would he have to pay vendors) and minimum rate of return on investment. His plan worked because by 2001, company sales had grown to $25 million.
Source: Joshua Hyatt, “The Rationalist: The Death of Gut Instinct,” Inc Magazine, January 1, 2001.
A New Business Model for Transplants?
Replacements for aging or dying body parts have been the dream of scientists for thousands of years. Certainly, contact lenses, peg legs, hook hands, and so forth were early versions of these replacement parts. Organ transplantation has not had as easy a path. There are far fewer organs than there is demand. So the future seems to lie in artificial organs from inert materials that will not be rejected.
All of these approaches require millions of dollars just to implement clinical trials with humans. For example, Denise Faustman, a professor of medicine at Harvard Medical School, discovered that her laboratory mice were regenerating their pancreatic tissue and were becoming independent of insulin. But it would take $1.5 million to make enough tumor necrosis factor (TNF) to conduct clinical trials. Most investors tend to prefer the mechanistic approach over the organic because the return on investment will come much sooner than with an organic approach. It is expected that the organic approach will take at least a decade more of research to find better ways to stop rejection and develop more easily transplantable animal organs.
Source: Thomas Maeder and Philip E. Ross, “Machines for Living,” Red Herring, May 6, 2002.
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Additional Web Resources
Valuation Resources. This site provides a wealth of business valuation resources that include publications, industry resources, economic data, public company information, and so forth.
Valuation: New York University.
This site provides good examples and explanations of various valuation techniques. It is searchable.
Films to Rent
“Optimizing the Value Chain”
This film uses an Italian clothing company to illustrate how value chains work and how benefit is added at each stage from producer to consumer. While it is not technology related, it does depict the concept of the value chain.
29 minutes
Item: BVL10834
Format: VHS
List Price: $129.95
Rental Price: $75.00
“Danger Behind Closed Doors: hidden Agendas and Power Plays”
This film uses the situation of a merger to expose how hidden agendas and power plays can derail a business deal. It also treats the issue of valuation.
27 minutes
Item: BVL30191
Format: VHS
List Price: $129.95
Rental Price: $75.00
“Fundamental Concepts in Financial Management”
This film explains the concepts of risks and rates of return, the time value of money, and bond and stock valuation.
40 minutes
Item: BVL5845
Format: VHS
List Price: $149.95
Rental Price: $75.00
(
Answers to Discussion Questions
1. What should an effective business model accomplish?
a. Provide for multiple revenue streams
b. Reflect the company’s position in the value chain
c. Reflect the company’s ability to defend what it is doing.
2. How do the drivers of value integrate with the business model?
The drivers of value are both tangible and intangible and they affect the valuation of the company at every stage. The rate of growth will affect the business model; high rates of growth require large infusions of cash through debt or equity vehicles. They also produce higher valuations. In general, R&D can provide annual returns of 20 percent or more. Building the business model for an emerging technology is a precursor to any valuation of technological intellectual property. The IP must be identifiable and distinguished from other company assets. It must also be capable of producing future economic benefits. A balanced portfolio also provides value because a diversified and balanced portfolio provides a lot of flexibility, especially if one project generates a lot of free cash flow. It can fund the launch of a new product. A solid licensing agreement can also enhance the value of the technology and the company.
3. Which of the financial models for assessing value are most appropriate for a new technology venture? Why?
Market value is the most appropriate assumption for new ventures. Therefore, the most commonly used tool for valuing early stage companies is the discounted cash flow model. It calculates the present value of the company’s projected cash flow for a period of 3 to 5 years. Several factors should be addressed with any financial model:
a. the economic life of the intellectual property
b. the economic life of the technology
c. the transfer capability of the technology
d. restrictions on commercialization
e. the cost of developing a substitute product
f. the return on investment commensurate with the type of technology
4. What is the primary disadvantage of cost-based valuation and how can it be rectified?
The biggest disadvantage of cost-based valuation is that there is no correlation between the amount of money spent on researching and developing a new technology and what the actual market value of that technology is. Cost-based methods are best used as hurdle rates coupled with other methods to provide more accuracy.
Chapter
9
Funding the Technology Start-up
N
ew ventures face the difficult challenge of finding the many resources they need. At the same time, resource providers understand the risk of start-ups and therefore are often reluctant to provide those resources. Seed capital is often required to finish product development and it generally comes in the form of friendly money and government grants. Once the business is operational, however, the need for larger sums of money often requires that the entrepreneur seek capital from outside sources like angel investors and venture capitalists.
Students, like many other people considering starting a business, automatically think that what they need is venture capital. Nothing could be further from the truth. While it is true that some high technology ventures with breakthrough innovations can secure professional venture capital in the first round, these ventures represent less than one percent of all new ventures started. It’s important to ground the students in reality before you begin to talk about what the possibilities are. It’s a rude awakening, but having put that notion to the side, you can get down to some creative thinking about what it really takes to fund a start-up and where that money will realistically come from.
This chapter focuses on funding a technology start-up. It
• Considers start-up risks and stages of financing
• Explores the issues related to seed and early stage capital
• Investigates government funding sources
• Discusses the cost of raising capital
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Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
MouseDriver: A Start-Up Experience
This supplementary material follows the diary of two young entrepreneurs and was presented in its entirety in Inc Magazine (see source below) and the Insider newsletters that can be found at the web site. In 1999, Harrison and Lusk started Platinum Concepts Inc, which makes computer mice “shaped like the heads of driver golf clubs.” Right away, the two unique entrepreneurs learned the value of networking as they shared their start-up story in real time with anyone who would read their newsletter. In fact, it was one reader who actually put them onto the vacant massage parlor that became their first official office.
At start-up they had no income, no venture capital funding, and their inventory was being financed by credit cards. By August 11, 2000, they had paid themselves a salary only three times in 13 months. They are still in business and still updating their clever and newsy dairy. What is important about these diaries is that they realistically depict the highs and lows of entrepreneurship in real-time as these two entrepreneurs were going through them.
Recommended use: Assign the diaries in three parts, beginning, middle, and end of the semester, for example. Then use each part as a basis for discussing the material being discussed from the text at that point.
Mike Hofman, “An American Start-Up,” Inc Magazine, February 1, 2001.
Start-up Funding for Medical Device Companies
The interest in medical device companies is increasing as the baby boom generation reaches the stage where healthcare becomes critical and enormous demands are placed on the healthcare system. This demand translates to opportunities for entrepreneurs to find ways to improve therapies, reduce costs, or improve the quality of life as we age.
Medical device start-ups are often funded with venture capital or other forms of outside funding. To attract the attention of funders, these entrepreneurs must demonstrate three things:
1. A compelling market of about $350 to $500 million per year at a minimum.
2. A technology that significantly improves on existing technology and is protected by patents.
3. An experienced team with a particular advantage in their market.
4. A solid business model with margins sufficiently large to overcome the costs of R&D, clinical trials, and distribution.
Having demonstrated these achievements, the entrepreneur must also plot out how much money is needed and when in the form of milestones. In general, the highest risk for the investor comes in the early stages of the company, so the cost of money will be substantial. Why are medical device companies more likely to get venture capital financing than other types of technology businesses? Do the requirements that investors look for in these ventures differ from what they require from any business they fund?
Source: Leslie Bottorff, “Funding a Medical Device Start-Up,” Medical Devicelink, January, 2000.
Putting Your Money Where Your Mouth is
When finding money becomes very difficult, you may have to look to your own resources to solve a cash problem. Vivek Wadhwa did just that when his new business, Relativity Technologies, began running out of money. He had tried the investor route but found the terms more difficult than he was willing to bear. On top of that, investors were giving the company a valuation that was below what it had been worth two years ago. It may have been a reasonable valuation for the times, but Wadhwa couldn’t accept it. Relativity Technologies produces software that brings older computer systems up to Internet standards. Instead of raising $5 million of outside capital, he decided to reduce spending and return to his original investors with a new deal. The management team offered to put up $700,000 against a proposed $1.3 million from the investors at a lower valuation than the previous year, but still significantly better than what the VCs were offering. Why did this strategy work for investors? Why do you suppose Wadhwa took this route?
Source: Lisa Bransten, “Techie Puts his Money Where His Business Is,” The Wall Street Journal Online, May, 2002.
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Additional Web Resources
Converge Network Digest . This site brings together information on companies in broadband and networking technologies that have received funding. It is a searchable site, you can look by type of company.
Raising Start-Up Capital Guide, Inc Magazine. This guide, written by Carole Matthews, provides an overview of financing sources and links to additional information.
Small Business Administration Start-up Kit, “Finding the Money You Need,” This site explains the various sources of start-up capital and directs the user to SBA resources. It also explains how to prepare a loan application.
Search Venture Capital Firms Online. Wall Street Journal Online.
Here you can search by industry for venture capital firms that invest in that area.
Films to Rent
“Andrew Carnegie: Maverick Millionaire”
Andrew Carnegie, once the richest man in the world, revolutionized the steel industry and then went on to become the world’s greatest benefactor when he gave all his money away.
52 minutes
Item: BVL5143
Format: VHS
List Price: $89.95
“Bootstrap Capitalism”
The premise of this film is that micro-lending to entrepreneurs with no collateral has value. The film talks about one such program and its business boot camp.
15 minutes
Item: BVL8615
Format: VHS
List Price: $69.95
“Dotcoms Gone Bust”
This film is a sequel to “The Internet Money Machine.” It tracks what happened to and after the dotcom bust
23 minutes
Item: BVL29093
Format: VHS
List Price: $149.95
Rental Price: $75.00
(
Answers to Discussion Questions
1. Suppose you want to launch a radical innovation. You have a working prototype and have begun to test the early adopter market. It will take a lot of capital to cross the chasm to mainstream adoption. What would your financial strategy be?
The amount of money needed and the cost of capital at any point in time is a function of the stage of the venture. During product development, the risks are generally related to the technical feasibility of the technology and whether an effective and efficient means of manufacturing is available. At this stage, friendly money, private investors, and government grants typically fund the activities of the company. Once the business is launched, the focus shifts to the market and the risks associated with entering the market and capturing enough customers to create a critical mass for product acceptance. That critical mass is required to push the product into the mainstream market. At this stage, private investors and venture capital come into play as well as strategic partners.
The response above presents the typical pattern and types of funding, but students should be encouraged to use their creativity and to apply the question to a particular industry or business to demonstrate that a financial strategy is a function of the industry, the business model, the stage of the business, and where it wants to go.
2. Compare the roles and goals of angel investors with those of venture capitalists.
Angel investors generally fill the gap between friendly money and venture capital up to about $1 million. Angel investors are private individuals, usually ex-entrepreneurs, who want to participate in the venture, so they are not passive investors, for the most part. Angels often band together in organizations to pool their resources. They also tend to mentor early stage companies more than venture capitalists do. They like to invest in industries with which they’re familiar and like venture capitalists, they place a lot of importance on the management team. Also like VCs, they need a way to exit the business, though they often stay with a business much longer than a VC would.
Venture capitalists manage professional pools of funds generally much larger than an angel investor would have. Recently we have seen several billion dollar funds emerge. What this means is that VCs typically make larger investments, usually in the second round when the risk is less. They are attracted to superstar businesses with a unique technology and a liquidity event such as an IPO or acquisition in its future. VCs require higher rates of growth and returns on their investment in a shorter period of time. They will require a big chunk of equity
3. What are the unique issues related to biotech start-ups that make them different from other high-tech ventures in the start-up stage?
One of the unique issues related to biotech start-ups is the extraordinarily long research and development period, about 7 to 9 years for a new drug, up to 5 years for a medical device. This means that the venture team is constantly in fund-raising mode, which can detract from its research efforts. Most biotech is licensed from universities and research institutes and not owned by the company. It’s also very difficult to calculate the value of biotech firms as their value is measured by intangibles such as their patent portfolio and the credibility of their scientific team.
4. What role does the government play in the commercialization of new technology?
Most radically new technology begins as basic research funded by government agencies. Government grants also serve as seed capital for prototype development and testing. SBIR and STTR grants as discussed in the section “Small Business Innovation Research Grants” are specifically designed to encourage the transfer and commercialization of technologies of U.S. companies with fewer than 500 employees.
5. How can strategic partners be used to speed up the process of innovation and commercialization?
Strategic partners can provide an infusion of capital or in-kind expertise and capability. Although cash from strategic partners is generally in smaller amounts, it can be the cement to a relationship that carries with it long-term benefits for the new company. Strategic partners can also supply a needed expertise that will help the new venture get to market more quickly: manufacturing capability and distribution, to name two.
Chapter
10
Funding Growth
G
rowth is one of the most exciting times in the life of a new venture, but it significantly strains the venture’s resources and generally requires infusions of capital from outside sources if the growth is rapid. Entrepreneurs raise capital by securing debt or selling equity stakes in their companies. Raising growth capital requires a plan with milestones, triggers, and strategies for achieving the milestones. Since venture capital is an appropriate source of funding for high technology companies, it is discussed in this chapter. The liquidity events that VCs seek in a funding deal are also discussed. This chapter
• Compares the advantages and disadvantages of debt and equity for funding growth
• Discusses how to prepare a financing strategy for growth
• Explains the role and nature of venture capital funding
• Discusses the private offering and how it is used to raise capital
• Walks through the initial public offering and discusses its advantages and disadvantages
• Explains how to present a business concept to investors
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Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Venture Capital Chinese Style
It was bound to happen. China needs Western technology to bring it into the 21st Century, and it needs capital to do that—venture capital to be exact. China now has two venture capital firms ready to do what U.S. venture capital firms do: bring new technologies to market. NewMargin Venture Capital (funded by the Chinese government) and San-Francisco-based Chengwei Ventures are bringing the best of Silicon Valley style funding to China. Both firms were started by Chinese who were educated abroad.
The Chinese market is attractive just based on its size, more than a billion people, but the reality is that about 250 million actually live in the major cities and have the income to purchase U.S. goods and services so many successful U.S. companies have failed at penetrating the Chinese market, companies like Qualcomm, Whirlpool, and BellSouth..
In an effort to attract the West to China, these new venture capital firms are offering an “alternative to traditional foreign joint ventures and wholly owned foreign enterprises.” They want to build companies that produce product for Chinese consumers. Since July 1999, NewMargin has considered about 2,500 Chinese start-ups and invested in 17 of them. Chengwei, which also invests solely in Chinese start-ups, chose to base out of San Francisco to maintain its ties to the Silicon Valley, although they also have an office in Shanghai.
Both companies face enormous challenges in developing an entrepreneurial spirit in China and that, in fact, may be their most important contribution. Both firms spend a lot of their time coaching would-be entrepreneurs.
Source: Blaise Zerega, “What Would Mao Think?” Red Herring, October, 2000.
Time for a Buyout
With IPOs running hot and cold, many entrepreneurs have considered buyouts as a way to grow because there appears to be money available to finance the purchase. Buyouts are also a popular vehicle for management (called an MBO) that wants to purchase the firm it works for, which is one way to get a business up and running more quickly than starting from scratch. As a sidenote, the term management buyout replaced the term leveraged buyout (LBO) when that term fell into disfavor after the junk bond excesses of the 1980s. In the late 1980s, Wall Street could identify only about six buyout funds with $1 billion to invest. Today it is estimated that there are at least 500 buyout firms with about $150 billion to invest.
A common scenario might be a new project team that, rather than spinning out of their company to start a new venture to commercialize their technology, decides to put together a buyout offer and purchase the firm for which they work so they can leverage existing resources for the new project and have control over the destiny of the company. So that this does not appear to be a hostile action, the entrepreneur typically approaches the own and suggests that if he or she ever decides to sell the company, the entrepreneur would be interesting in buying. Alternatively, the buyout firm could approach the owner on the entrepreneur’s behalf.
Here is the way a typical simple buyout might occur. Of course, there are many variations. The buyer:
1. Understands why he wants to do the deal and what he’s willing to pay for the business.
2. Determines how the company can make more money than it currently is.
3. Develops a business plan that is aggressive but achievable.
4. Negotiates an agreement with the seller, but with the help of an attorney. Since people like to negotiate, it’s best to come in on the low side of value.
5. Negotiates a deal with an equity investor (the buyout firm).
6. With the buyout firm’s guidance, arranges bank financing
7. Conducts due diligence on the company
8. Closes the deal
in
Source: Paul B. Brown, “Buyout,” Inc Magazine, June 1, 2001.
What Happens When an IPO is not an Option
Look at the numbers in 2001. Only 1 out of every 39 companies completed an IPO and the pipeline is rapidly drying up. Those that do succeed don’t seem to be pulling as much capital as projected. Yes, IPOs have seasons and they will come back but no one knows when, so entrepreneurs must consider the alternatives. In this new environment, the watchwords seem to be “grow smarter, not faster.”
Current advice is, if you think you need capital to grow, stop first and consider how you’re spending what you have. If you’re not breaking even, something is wrong and it’s not about more money. The quickest way to find money is to start with customers and a profitable business. It’s similar to the old adage about bankers—they’re most willing to lend you money when you don’t need it! Sometimes it takes creativity to get to the next milestone: getting upfront payments from customer, licensing your product to a major partner. The bottom line is you must get your business in order and profitable before you go knocking on the doors of investors.
Source: Rekha Balu, “(No) Exit Ahead?” Fast Company, April 2001.
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Additional Web Resources
Capital Growth Interactive This site is a news collection, publishing, and consulting business about private equity markets and growth company financing.
CNNMoney. Anything you want to know about money, you can probably find at this site including investment advice.
National Venture Capital Association This trade association represents the venture capital industry. It provides research and professional development for its members.
Women’s Growth Capital Fund This fund was established in 1997 to make equity investments in early and expansion stage women-owned and/or managed businesses. Though it is currently fully invested, the site provides information and resources.
Films to Rent
“Strategic Long-Term Investment Decisions”
This film focuses on cost of capital, the basics of capital budgeting, cash flow estimation, and risk analysis.
50 minutes
Item: BVL5846
Format: VHS
List Price: $149.95
Rental Price: $75.00
“Warren Buffett: The Ultimate Entrepreneur”
Buffet’s Berkshire Hathaway is one of the most profitable companies in existence today. This film is a rare interview with the founder, Warren Buffett.
25 minutes
Item: BVL9132
Format: VHS
List Price: $89.95
(
Answers to Discussion Questions
1. When growing a company, why would an entrepreneur choose debt over equity?
An entrepreneur might chose debt as a growth vehicle to avoid giving up control of their company by selling equity. But today with more companies having fewer tangible assets, it becomes more difficult to secure debt. Debt is advantageous when the returns on the business exceed the cost of borrowing the money, which includes search time interest, fees, and conditions. The entrepreneur’s company generally achieves a profit sooner with debt because they have to generate cash to service it.
2. What elements should an effective financing strategy contain?
a. vision of where the company will be in five years
b. identification of milestones for first customer, multiple customers, and multiple products.
c. trigger points or what must happen to achieve each milestone
d. amount and timing of money to achieve milestones and five-year goal
e. the sources of funding most appropriate for the business and at each milestone
f. the appropriate financial instruments
g. the least amount of money required at each milestone
3. What is meant by control rights and how do venture capitalists exercise them?
Venture capitalists protect their investment during high risk stages through control rights, which specify the allocation of control over the company and its decisions. Typically, VCs exercise s disproportionately large share of control over the entrepreneurs; control rights are not static but rather are changed and refined over time; where significant asymmetric information exists, greater control rights are assigned to the VC.
4. What effect does the timing of funding have on a growing venture’s success? Why?
Timing is everything. VCs typically stage an investment and tie funding to milestones to reduce their risk. If the entrepreneur achieves the first milestone, which is usually tied to profit and/or revenues, the VC will release the next stage of funding. From the VCs point of view, timing the funding helps the venture achieve a consistent pattern of growth without any stops and starts. From the entrepreneur’s point of view, it means planning growth in stages and estimating the correct amount of capital required at each stage.
5. What important tasks must take place prior to undertaking an IPO?
To undertake an IPO, the entrepreneur must have a compelling need to raise a significant amount of capital for a specific purpose. The company anticipating an IPO must immediately start acting like a public company; that is, it must begin to manage the expectations of its investors and improve its ability to accurately forecast earnings on a quarterly basis. It must also develop methods for communicating regularly with stakeholders. The entrepreneur should also consult with many people who have gone through the process and make sure that accounting systems and controls are in place.
Chapter
11
Moving From R&D to Operations
T
he move from R&D to operations is a difficult one that requires a completely different set of skills. Planning for operations is challenging for teams that have been comprised primarily of technology people. At this stage, the team is being pulled in a variety of directions as they grapple with unexpected technical issues at the same time as they are trying to launch a company. Now the team has to define and coordinate the various processes inside the new organization, in particular those that contribute to the manufacture of the product. The team also has to determine the legal form it will take.
Many instructors skip over the operations chapter in a book like this but that is a mistake. One of the biggest problems technology teams have is managing the transition from the laboratory to an operating company. Not only might they need a different management team, but different advisors and funding sources as well. In the laboratory, scientists and engineers had the luxury of failing, moving at their own pace, and being accountable to no one but themselves. Now the picture changes. The team is under pressure to generate cash flow for a business that has done nothing but burn cash during product development. Needless to say, understanding what faces the team once R&D is complete is critical to the success launch of a new venture. This chapter
• Discusses the transition from R&D to operations
• Explains the options for organizational models
• Details the legal forms of organization
(
Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Jazz Improvisation as an Organizational Form
In the past, product innovation found itself in the domain of the rational-functionalist paradigm, but that approach seems out of place today in a highly competitive and dynamic environment. What is needed today is a flexible model with minimal structure based loosely on jazz improvisation as in the world of music. Jazz improvisation involves composing and performing almost simultaneously, that is, acting without prior planning. Now, that may go against the grain of everything we teach because we tout the importance of planning, but the reality is that in the everyday operating environment of the business, things happen that can’t be easily predicted. Someone in the organization must be able to act and learn while doing; in other words, someone must have the ability to improvise.
Improvisation has three characteristics: it happens while you’re doing something, it is impromptu, and it’s deliberate. That word deliberate is important because improvisation is not chaotic. It takes place inside a minimal structure that gives all the players some common ground from which to work and everyone respects those norms. Within the common ground are social and technical structures that are implicit and tacit to the group. One of the early examples of this improvisational model was the skunkworks, a flexible organizational form existing inside but apart from a large organization with the freedom to respond and adapt to a changing environment.
Should the improvisational model be used inside an entire organization? What are advantages and disadvantages?
Source: Ken Kamoche, “Minimal Structures: From Jazz Improvisation to Product Innovation,” Organizational Studies, September/October, 2001.
The Many Reasons to Use an Attorney When Selecting the Legal Form
1. Contracts: The entrepreneur will need to sign contracts for space, supplies, services, not to mention employee contracts and contracts with investors.
2. Registering, licensing, and permits. The business may have specific legal requirements because of the type of business it is. At a minimum, a business license will be required.
3. Control: To avoid being responsible or liable or the wrongs of employees or partners, you must choose the right legal form.
4. Multi-state business. Doing business across state lines means understanding the requirements of the non-home state and what protections you have in your home state that are not valid in the other state.
5. Strict conformity: It is important to understand how strictly you must conform to the state laws governing your business or you may lose its benefits and protections.
6. Capital: The entrepreneur may need to raise money and will have to be fiscally responsible. Each legal entity has its own requirements regarding the raising of capital.
7. Variety of entities: There are many options within each general type of legal entity that determine important things like liability and taxing.
8. Autonomy: Sometimes the things you make decisions about are decided for you. Most states have Uniform Laws to fill in the gaps. You may not know these exist.
9. Tax. Each business form treats income tax liability differently and has different advantages and disadvantages.
10. Liability: Each form has different protections and personal liability risks associated with it.
Source: “Top 10 Reasons to Contact an Attorney Before Choosing a Business Form,” FindLaw.
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Additional Web Resources
American Management Association. , This site contains articles and resources related to the management of organizations. It is a trade association for those in the management field.
Informs Resources. This is a resource site of the Institute for Operations Research and the Management Sciences. It provides a portal to newsgroups, email lists, journals, and other resources.
Society for Human Resource Management. This is a resource site for members and non-members alike. It contains news, articles, and professional emphasis groups.
Films to Rent
“Reinventing the Corporation”
Using a hypothetical corporation, this film brings together a panel of experts to wrestle with the issues of effective corporate governance and maximizing shareholder value.
57 minutes
Item: BVL10430
Format: VHS
List Price: $149.95
Rental Price: $75.00
“Tom Peters: Radically Reengineering Business”
Tom Peters has some very radical views of how business needs to change itself. Using four case studies, Peters presents a compelling case for change.
59 minutes
Item: BVL9210
Format: VHS
List Price: $149.95
Rental Price: $75.00
(
Answers to Discussion Questions
1. What are the key challenges a technology team faces when moving from R&D to operations?
a. Operations require different skills than R&D, skills that most technical teams don’t have.
b. It takes a lot of planning to include manufacturing and organizational processes.
c. Lingering technical issues must be dealt with simultaneous to the operations issues.
d. The team may require different business partners
2. Why is developing a mission statement so important to the new venture? What is the strategy for constructing a mission statement?
Research has found a positive relationship between a company’s mission statement and its performance. It’s a four-part process that includes determining what stakeholders contribute to the performance of the company, identifying the components of the mission statement (customer groups satisfied, customer needs satisfied, and the way in which customer needs are satisfied), development of the mission statement, and communication to the stakeholders.
3. Compare the commitment organizational model with the Silicon Valley model. Which is more effective for a start-up company? Why?
The commitment model consists of an informal peer group that controls the activities of the organization and becomes the cultural center of the organization. The Stanford research discussed in the chapter found that the commitment model was the best predictor of an initial public offering. This model also had the highest success rate among all the models tested. By contrast, the Silicon Valley model relies on a mobile labor force, independent contractors, signing bonuses and stock options, and draconian working hours. In other words, it is a free agency model that does not encourage commitment, so it’s difficult to develop a sustainable corporate culture.
4. Why is the corporate form the most popular for high-tech ventures?
a. It is a legal entity so it can survive the death or separation of its owners.
b. It offers limited liability and multiple classes of stock
c. It permits employee incentive plans such as pension plans and stock options.
d. It gives the business more clout, which makes it easier to form alliances and raise capital.
Chapter
12
Marketing High Technology
H
igh-technology markets display a unique blend of market uncertainty, technology uncertainty, and competitive uncertainty. A market-driven approach relies on internal and external knowledge to find a solution to a customer need in the market. By contrast, a technology-driven approach puts technology in the driver’s seat without firm knowledge that a market even exists for it. This is the classic solution looking for a problem. A more effective approach combines knowledge about the technology with knowledge about customer needs and then tells a compelling story.
Breakthough innovations have a more challenging task because they address latent customer needs, that is, needs that customers don’t yet know they have. In this situation, entrepreneurs must seek out early adopters who are constantly seeking the latest technology. This chapter
• Presents the characteristics of technology markets
• Identifies the key decisions for technology-intensive markets
• Explains the value of understanding customer needs
• Discusses how to collect market intelligence
• Details how to price high-technology products
• Explains how to develop a marketing plan
• Discusses how to promote high-technology products.
(
Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Tales of Guerrilla Marketing
Guerrilla marketing is the entrepreneurial strategy for getting the most promotion for your company without spending a lot of money. It was first championed by Jay Conrad Levinson and now has a cult following. Here are some examples.
What do you do when you’re selling something that is not unique and there’s already a lot of it? You mix it with something else and create a new product, even if it’s a fish! Dennis Buchner was having trouble selling his minnows because the market was saturated with minnows. One day he got the bright idea of buying hybrid minnows from a thousand miles away and mixing them with other fish to create a brand new fish. He created a new fish that everyone now wants.
Another guerrilla, Scott Matthew, president of Realty Electronics Inc. in Wisconsin, developed what he calls a Talking House(. It consists of a small radio transmitter that sits in a house that is for sale. Customers can tune in on their car radios while they’re parked in front of the house to hear a customized marketing message.
It is generally assumed that every business today has a Web site, which is a good source of promotion. But helping people find your Web site is a more challenging task. David Gresser attracts people to his sheet music catalog site by searching for music sites and putting links to them on his site. Then he asks the webmaster of the site to which he provided the link if they would do the same for him. Without much more effort than that, he collected 50 links.
Source: Guerrilla Tactics
Forget About Benefits
Kristin Zhivago was hired by a software company to analyze its Web site and recommend how it could more effectively sell its products. She found the site to be well designed and it was easy to navigate, but when it came to content, all she found was hype, no substance. She soon discovered that the company had not talked to customers to find out what they wanted to see on the site so they weren’t giving customers what they wanted. Zhivago identified two reasons why the site was not effective.
1. The company thought it was supposed to be emphasizing benefits, but in fact, the benefits they touted were all cliché. Customers were told that their businesses would run more smoothly and given other promises that customers, who had heard them time and time again, didn’t believe. Zhivago believes that the company needs to answer the questions that customers have when they’re using the web site.
2. The marketing strategy made sense from the product point of view but not the customer’s point of view. Again, talking with customers and getting their feedback before the strategy is implemented will avoid this problem.
The bottom line is that technology companies need to get past the technology and focus on the customer. The customer will tell them what they need to do to market the product.
Source: Kristin Zhivago, “ReadMe.1st,” Technology Marketing, May 28, 2002.
Getting Technology Adopted
The work of Everett M. Rogers has provided some key ideas about what it takes to get a technology adopted.
• Relative advantage: This is the “degree to which the new technology is perceived as better than the idea it supersedes.” What that means is that customers readily see the advantage of adopting the technology.
• Compatibility: This is the degree to which the technology solves a real need and relates to previous technology customers are accustomed to using. If the technology requires that customer acquire a new set of skill, the switching costs may be too high.
• Complexity: If a technology is too technical, customers may shy away. Ease of use is a critical element to adoption.
• Testability: The adoption rate will increase if the technology can be tested by the customer for a limited period.
• Observability: This is the extent to which what the technology does can be seen. Customers need to “see” the benefits.
Source: “how to Get Your New Technology Quickly Adopted,” Tutorial. MarketingProfs .com
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Additional Web Resources
Dr. Jakki Mohr’s Useful Links. This is the author of Marketing of High Technology Products and Innovations cited at the end of the chapter. The site contains some good links related to technology marketing.
Guerrilla Marketing. This is the official site for Jay Levinson’s guerrilla marketing tips.
MindBranch. A community site for market research across multiple industries. This is a good source for research publications and free white papers.
Technology Marketing. This site contains news and reports on issues related to marketing in technology companies.
Web Marketing Info Center. Here you’ll find links to thousands of online articles about Web marketing.
Films to Rent
“Branding: The Marketing Advantage”
Using case studies of well-known companies, the film investigates the role of service and relationship marketing as well as how a company should approach globalization.
Item: BVL7229
Format: VHS
List Price: $799.95
“Creating Customer Value: The Essentials of Marketing”
This film deals with how companies successfully challenge industry leaders, turn around negative public perceptions, or secure a niche in a crowded market.
46 minutes
Item: BVL10804
Format: VHS
List Price: $149.95
Rental Price: $75.00
“Marketing Research and Information”
This film provides information on how to gather consumer data.
9 minutes
Item: BVL10140
Format: VHS
List Price: $89.95
(
Answers to Discussion Questions
1. How do the characteristics of high-technology markets affect the marketing strategy of a new venture?
a. Market uncertainty results from the difficulty in correctly assessing customer needs and matching those needs to a particular technology application. In addition, customer needs are changing at a more rapid pace and in unpredictable ways, co customers will not adopt a new technology until they’re certain it will be the standard. This means that entrepreneurs must be in constant communication with customers and develop a variety of niches and licensing agreements to establish the technology as the standard.
b. Technological uncertainty speaks to the question of whether the new venture can deliver on its promises and meet the needs of customers. Customers are also concerned that the technology will be rendered obsolete by new technology, given the rapid pace of technological change. The technology company must develop a careful marketing plan that secures its brand in the market and delivers on its promises to customers.
2. What is the most effective strategy for collecting market intelligence?
a. vision of where the company will be in five years
b. identification of milestones for first customer, multiple customers, and multiple products.
c. trigger points or what must happen to achieve each milestone
d. amount and timing of money to achieve milestones and five-year goal
e. the sources of funding most appropriate for the business and at each milestone
f. the appropriate financial instruments
g. the least amount of money required at each milestone
3. When pricing high-technology products, what factors should be taken into consideration?
Venture capitalists protect their investment during high risk stages through control rights, which specify the allocation of control over the company and its decisions. Typically, VCs exercise s disproportionately large share of control over the entrepreneurs; control rights are not static but rather are changed and refined over time; where significant asymmetric information exists, greater control rights are assigned to the VC.
4. What is the purpose of a marketing plan? What is the value of compressing the plan into one paragraph?
Timing is everything. VCs typically stage an investment and tie funding to milestones to reduce their risk. If the entrepreneur achieves the first milestone, which is usually tied to profit and/or revenues, the VC will release the next stage of funding. From the VCs point of view, timing the funding helps the venture achieve a consistent pattern of growth without any stops and starts. From the entrepreneur’s point of view, it means planning growth in stages and estimating the correct amount of capital required at each stage.
5. What role does branding play in the promotional strategy of a new high-tech venture?
To undertake an IPO, the entrepreneur must have a compelling need to raise a significant amount of capital for a specific purpose. The company anticipating an IPO must immediately start acting like a public company; that is, it must begin to manage the expectations of its investors and improve its ability to accurately forecast earnings on a quarterly basis. It must also develop methods for communicating regularly with stakeholders. The entrepreneur should also consult with many people who have gone through the process and make sure that accounting systems and controls are in place.
Chapter
13
Growing the High Tech Venture
G
rowth is one of the most exciting times in the life of a new venture, but it significantly strains the venture’s resources and generally requires infusions of capital from outside sources if the growth is rapid. Entrepreneurs raise capital by securing debt or selling equity stakes in their companies. Raising growth capital requires a plan with milestones, triggers, and strategies for achieving the milestones. Since venture capital is an appropriate source of funding for high technology companies, it is discussed in this chapter. The liquidity events that VCs seek in a funding deal are also discussed. This chapter
• Compares the advantages and disadvantages of debt and equity for funding growth
• Discusses how to prepare a financing strategy for growth
• Explains the role and nature of venture capital funding
• Discusses the private offering and how it is used to raise capital
• Walks through the initial public offering and discusses its advantages and disadvantages
• Explains how to present a business concept to investors
(
Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
Sustaining a Competitive Advantage
The goal of successful companies is not just to beat their competitors but to sustain supernormal profits over a long period of time. What exactly is a sustainable competitive advantage? It consists of a unique capability that makes a company stand out from the crowd. Usually that capability must relate to at least one of the product features or benefits upon which customers make their decision to purchase. Changing the rules of the industry from the bottom up is another way to gain a sustainable competitive advantage. When a company changes the rules, it puts itself in the unique position of being the only company that knows the rules. One way to write new rules is to invest in new technology before the rest of the industry understands that the current technology is about to be made obsolete. This idea was popularized in the 1986 McKinsey Quarterly article describing technology s-curves. What this theory says is that new technology yields a low return on investment in the early stages. Then it moves into a period of rapid growth, followed by diminishing returns as it moves toward commodity status and then obsolescence.
Some competitive advantages are worth more than others. To have real value, three things must happen.
1. There must be a perception of a difference that customers can see.
2. That difference must fill a capability gap.
3. The difference and the capability gap must endure over time.
Source: “Gaining Advantage Over Competitors,” The McKinsey Quarterly, November 14, 2001.
Partnering is Sometimes the Only Way to Grow
The technology may be feasible; it appears you have a market, but there may still be a fatal flaw in your growth strategy. Shazam is a UK-based company that lets a mobile phone user identify songs heard in public places like an experienced DJ and even forward a 30-second audio clip to a friend.
With $7.5 million in capital raised and a proven technology, it would seem that they are ready to penetrate the market. But for this concept to be successful, the company needs to develop a database of the music that people are most likely to hear in public, and that’s where the rub is. It would take about 40,000 titles initially to launch the company. This means scanning the most popular current music into the database. But the other problem is for Shazam to work, it needs to keep people on the phone and wireless services could easily begin to charge for the time it takes to send a 30-second music clip via a cell phone.
The record labels like the concept because it gets their music in front of more people. But no one seems to know how to place a value on the service, so Shazam can’t get the labels to sign with it. One of the issues is music rights; no one is certain exactly what rights apply to Shazam’s service. The music-rights people want to protect the right to use and distribute their content, but Shazam claims that its service is providing promotion for the music labels. It believes that it’s in everyone’s interest to form alliances to work out rights issues and help the recording companies reach more customers. It is only through alliances that Shazam can develop a business model that will let it make money. In the UK, mobile phone services have a three-way split: the operator, the service provider, and the tax collector. If a service like Shazam collects, say, $100 in call charges from the customer, a portion (17%) would go for taxes and the remaining $83 would likely be split between Shazam and the mobile operator. That $40+ would have to pay for Shazam’s continued development and overhead. If Shazam then had to pay rights fees of 15 percent, it could probably not make money.
It is clear that to grow this company, relationships will have to be cemented that provide for a win-win situation for all. Everyone will have to give a little for this to work.
Source: Michael Parsons, “I Got Music, I Got Algorithm,” Red Herring, May 9, 2002.
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Additional Web Resources
Capital Growth Interactive This site is a news collection, publishing, and consulting business about private equity markets and growth company financing.
Films to Rent
“Business and Industrial Growth, Part 1: From Boom to Bust”
This film explores the first three decades of the 20th century, from the mechanization of agriculture to the mass production of consumer goods. It is anchored by Peter Jennings.
29 minutes
Item: BVL10294
Format: VHS
List Price: $89.95
“Business and Industrial Growth, Part 2: Riding the Cycles”
In this film, Peter Jennings reviews the ups and downs of the U.S. economy, from the New Deal to the early years of the Clinton administration.
40 minutes
Item: BVL10295
Format: VHS
List Price: $89.95
(
Answers to Discussion Questions
1. When growing a company, why would an entrepreneur choose debt over equity?
An entrepreneur might chose debt as a growth vehicle to avoid giving up control of their company by selling equity. But today with more companies having fewer tangible assets, it becomes more difficult to secure debt. Debt is advantageous when the returns on the business exceed the cost of borrowing the money, which includes search time interest, fees, and conditions. The entrepreneur’s company generally achieves a profit sooner with debt because they have to generate cash to service it.
2. What elements should an effective financing strategy contain?
a. vision of where the company will be in five years
b. identification of milestones for first customer, multiple customers, and multiple products.
c. trigger points or what must happen to achieve each milestone
d. amount and timing of money to achieve milestones and five-year goal
e. the sources of funding most appropriate for the business and at each milestone
f. the appropriate financial instruments
g. the least amount of money required at each milestone
3. What is meant by control rights and how do venture capitalists exercise them?
Venture capitalists protect their investment during high risk stages through control rights, which specify the allocation of control over the company and its decisions. Typically, VCs exercise s disproportionately large share of control over the entrepreneurs; control rights are not static but rather are changed and refined over time; where significant asymmetric information exists, greater control rights are assigned to the VC.
4. What effect does the timing of funding have on a growing venture’s success? Why?
Timing is everything. VCs typically stage an investment and tie funding to milestones to reduce their risk. If the entrepreneur achieves the first milestone, which is usually tied to profit and/or revenues, the VC will release the next stage of funding. From the VCs point of view, timing the funding helps the venture achieve a consistent pattern of growth without any stops and starts. From the entrepreneur’s point of view, it means planning growth in stages and estimating the correct amount of capital required at each stage.
5. What important tasks must take place prior to undertaking an IPO?
To undertake an IPO, the entrepreneur must have a compelling need to raise a significant amount of capital for a specific purpose. The company anticipating an IPO must immediately start acting like a public company; that is, it must begin to manage the expectations of its investors and improve its ability to accurately forecast earnings on a quarterly basis. It must also develop methods for communicating regularly with stakeholders. The entrepreneur should also consult with many people who have gone through the process and make sure that accounting systems and controls are in place.
Chapter
14
Entrepreneurial Venturing Inside a Corporation
A
lthough it is often believed that large firms have the advantage when it comes to innovation because of their deep resources, the reality is that they don’t have a good track record, in particular when it comes to radical innovation. One of the biggest reasons is the inertia of success. Large firms are driven by current markets and rigid financial structures that influence the way they look at new product investments. Radical innovations are high risk projects that don’t make immediate financial sense. Still, established organizations have one critical resource that most new start-ups do not enjoy: the core competencies and tacit knowledge that have developed in the organization over time. As long as those competencies don’t become core rigidities, the large organization will still have some advantages over the new venture.
If you are teaching to a graduate population of students, the topic of corporate venturing will be very relevant because many of those students will already be working inside large organizations and they may have already discovered the processes and cultures that are not effective to move from idea from concept to market. They will also want to know how they can contribute to changing what may be a fairly bureaucratic culture to a more entrepreneurial one; therefore, the content and suggestions in this chapter will be able to be applied rather rapidly. This chapter
• Examines the nature of corporate venturing
• Discusses the role of change in facilitating corporate venturing
• Explores the paths to corporate venturing
• Suggests how to be successful as a corporate entrepreneur
(
Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
A New Role for CTOs
CTOs of large corporations have taken on the role of corporate venturers, managing large investment funds, incubating start-ups, spinning out companies with new technologies, and supporting active R&D departments. In times when no new ventures are in the pipelines, CTOs begin to look at strategic alliances and acquisitions to keep moving forward. For example, Kodak is beginning to play in the wireless personal area networks (WPANs) area and is supporting a new architecture for cost-effective memory chips by investing in a three-dimensional semiconductor known as CMOS developed by Silicon Valley company Matrix Semiconductor. Kodak believes that the only way to stay competitive is to invest in external R&D instead of relying on its own incremental innovations. The strategy also lets Kodak avoid all the disadvantages of in-house product development of radically new technologies, something that established organizations have not effectively done.
British Telecommunications is approaching its corporate venturing from a different angle. It has built a corporate technology incubator called Brightstar. Grandville, Michigan-based X-Rite, a manufacturer of color measurement instruments, uses online medical focus groups to find and sell new products.
Does BT’s incubator approach have advantages over Kodak’s acquisition strategy?
Source: Eugene Grygo, “Corporate Venturing on the Edge,” InfoWorld, March 11, 2002.
Gaining Access to New Technologies
Before it became fashionable to acquire small companies for their technologies, Ventana founder Tom Gephart had a goal “to link big business global enterprises with small entrepreneurial technology companies to build billion-dollar enterprises.” He figured that big companies need to find new technologies and small companies need access to the global marketplace. He established what he called a “culturally sensitive link” between internal strategic and financial investors and U.S. entrepreneurial companies.
From the beginning, Ventana’s investors came from all over the world. It tapped into the rapidly growing pool of corporate venture funds and offered them the skills and management expertise they didn’t have. Since 1984, Ventana has invested in more than 78 technology companies for its 76 global working partners in 20 countries, producing higher than average returns for its investors. Each deal amounts to between $1 million and $2 million and is often the seed round for the start-up. When it comes time for a second round, Ventana secures co-investors with larger funds.
Source: Business Editors, “Spotlight on Corporate Venturing,” Business Wire, June 20, 2000.
What it Takes to Innovate
Creating new innovations inside a large organization takes five different types of people who are equally important.
1. Idea people. Find the people who have the ability to think out of the box and give them the opportunity to use their talents to come up with new innovations for the company to exploit.
2. Corporate entrepreneurs. Next you need the people who know how to take ideas and turn them into opportunities. These people can recognize potential in a segment of the market that is not being served and know how to do the market research and gather the resources to make the opportunity happen.
3. The team. Every new venture requires a start-up team of entrepreneurial types who bring with them a wealth of different expertise and resources.
4. The champion. This is the person in upper management in the organization who has taken on this new project as his personal mission. This is the leading blocker and a significant decision maker in the company.
5. The climate maker. This is the person who, when forward movement falters or support for the project wanes, takes over and finds new sources of support and inspiration.
Source: “The Five People of Innovation,” The Pinchot Company.
Approaching a Corporate Venture Model
When a large company invests in external R&D, it finds a win-win situation. As an investor, it can access new technologies; as an investor in an in-house venture fund, it can send technology it doesn’t want to develop to a new company it creates. While these approaches are often used as examples of the benefits of the corporate venture model, rarely do you hear about the pitfalls of the model.
One of the biggest problems with corporate ventures is related to the economics of venture capital. A senior vice-president of a large corporation acting as general partner in a $300 million fund, if it’s successful and the partners receive 20 percent of the profit, which is common, could potentially earn more than the CEO of the parent company. Furthermore, it’s not uncommon for a fund manager to take his successes to the open marketplace and seek a new position.
Another problem is that in the current environment, there is a lot of pent-up capital looking for the best deals. That means that funds need to move quickly or lose an opportunity. This can also mean that it’s easier to make mistakes.
What this means is that large companies need to think carefully about establishing their own wholly-owned venture funds.
Source: Joseph Bartlett, “The Four Horsemen of the New Economy,” Fast Company, November, 2000.
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Additional Web Resources
Capital Growth Interactive This site is a news collection, publishing, and consulting business about private equity markets and growth company financing.
Intrapreneurship: Here is an article about the history of intrapreneurship. It serves as a value background to the field.
Intrapreneurship in Japan: Here is some interesting information about how Japan is using intrapreneurship to recover from its weak economy.
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Answers to Discussion Questions
1. How are corporate ventures distinguished from other projects inside large organizations and from entrepreneurial start-ups?
A corporate venture is distinct from other corporate projects in several important ways. A corporate venture is a project that is new to the company and carries a much higher risk of failure than other projects. A great deal of uncertainty is associated with the project, so it often managed separately at some point in time. Corporate ventures are generally undertaken to move the company in new directions, reinvent the company, increase sales, or to help the company become more competitive. Corporate ventures are distinct from start-up ventures in the depth of their resources, which gives the corporate venture a significant edge over the independent start-up. Their core competencies and the tacit knowledge they have developed over time give them a significant advantage over start-ups. The gestation period for a corporate venture tends to be nearly twice as long as that for an independent start-up, taking much longer to reach profitability. Also, in the corporate venture, the development schedule is usually set by people external to the project. In start-up ventures, the founding team normally has complete control.
2. What are some of the reasons that corporate venturing has had a relatively poor track record?
Corporate venturing has had a poor track record because for large companies, the projects undertaken are generally a much higher risk. Since large organizations are generally driven by current markets and rigid financial structures that influence the way they look at new product investments, they don’t normally fit well with the core competencies of the company. Senior management is bound principally to achieve the larger corporate goals, so it’s difficult to find a champion who will stick with a project. It’s also difficult to get sufficient funding to support the proof of concept.
3. What is the role of the venture champion in taking a new idea to the project stage and beyond?
Venture champions are the corporate entrepreneurs who are willing to take a high degree of risk to make the new venture happen. They have the technical skills and the negotiating talent to get the firm past its natural tendency to stick to its core competency and rely on incremental innovation. Venture champions are the keepers of the entrepreneurial spirit inside large companies.
4. Consider the three paths to corporate venturing discussed in the chapter (skunk works, strategic integration, and entrepreneurial immersion). What are the ramifications of each to the company in terms of level of commitment and difficulty?
| |Skunk Works |Strategic Integration |Entrepreneurial Immersion |
|Level of Commitment |Relatively low |Moderate level of commitment |High level of commitment |
|Level of Difficulty |Relatively easy |Moderate level of difficulty |High level of difficulty |
5. What are the critical factors in becoming a successful corporate entrepreneur?
a. An entrepreneurial vision with support for entrepreneurship at the top.
b. The customer on the team to help drive innovation.
c. Experimentation and the acceptance of failure as part of the process.
d. Time for innovation as part of everyone’s job description.
e. Resources available for innovation.
f. Cross-disciplinary teams
g. Champions or sponsors empowered to influence and support a project from start to finish.
h. Employee-flight incentives that give employees a stake in the new venture.
i. Core values but challenge everything else.
Chapter
15
Developing a Business Plan for Sustained Innovation
B
usiness plans are an essential part of any venture, whether that venture be an independent start-up, a rapidly growing company, or a new venture inside a large corporation. Business plans have a different purpose than feasibility analyses. Feasibility analysis is designed to test a concept in the market and determine the conditions under which the business should go forward. In contrast, the business plan is about designing a company to execute the business concept. The business plan answers the questions:
1) What is the need that is being met?
2) Is there a team that can serve the need?
3) Why should this business be done now?
4) Will the venture return enough on the effort and investment to make it worthwhile to do?
5) Is there an effective execution plan for the business?
I will never say that businesses have not been started without a business plan in place because chances are most businesses have not had them. But today’s business environment is complex, dynamic, and unforgiving. In these circumstances, entrepreneurs will enhance their chances of success if they go through the process of writing a business plan. This chapter
• Discusses the audience for the business plan
• Presents the components of the business plan
• Explains the timeline for start-up
(
Supplementary Lecture Material
The following material provides some “sound bytes” that can be used to stimulate additional discussion or to inspire the instructor to introduce a variety of new topics into the curriculum. As the field of technology commercialization changes rapidly, it’s important to supplement the foundational material in the text with current examples on a regular basis. For each of the supplements a resource has been given and I encourage you to explore the original source for additional information and links.
What’s Your Next Business
In March 2002, Inc Magazine decided to ask some of the movers and shakers in the business what business they would start given the economic climate at the time. Of the 12 people they talked to, only one said he would not start a business in the 2002 economic climate. Here’s a summary of what a few of them had to say.
Michael Dell, Dell Computer Corp. He would look for a different market where there wasn’t so much pressure in terms of efficiency and pricing.
Gary Hoover, Bookstop Inc. (now part of Barnes & Noble) and Hoover’s Inc (Hoover’s Online). He would consider something in financial services, health services, travel, and education. All of these are based on the aging of the baby boomers.
Paul Saffo, Institute for the Future. He advises looking for something that has been failing for about 20 years because it takes about that long before a new technology like wireless really takes off.
Bob Johnson, Founder and CEO of BET Holdings II Inc., the parent company of Black Entertainment Television. He would start a business aimed at the growing-older generation, perhaps a medical facility focusing on total wellness.
Terri Lonier, Founder and president of Working Solo Inc. She would start a business that helps people learn how to start businesses. It would have in-person centers and online programs.
Source: Thea Singer, “What Business Would You Start?” Inc Magazine, March 1, 2002.
Here’s a 60-Second Business Plan
The invention is a cross between a mountain bike and a pair of skis and it provides the ability to climb and steer on wheels while at the same time permitting the gliding and carving of skiing. Will Page patented the steering system and named the product Crosskates. His target customers are adventure oriented people in their twenties and thirties and it’s a billion dollar market, according to Page. But his research also discovered that Rollerblade, the industry leader, recently took its off-road inline skates off the market due to lack of interest and too small a market. Page claims that his product is superior and that his $750 price tag (twice that of Rollerblade’s model) is not an obstacle. Still, he understands that building a phenomenon is time-consuming and costly.
Page raised $200,000 from his personal savings, another $500,000 from angel investors, and $500,000 in bridge financing from current investors. What are his chances? Is this a viable business plan?
Some entrepreneur experts weighed in on the concept.
David Moross, CEO of Sports Capital Partner, a private equity firm, rated the concept a 3.5 on a 10-point scale. He believes the market is too small and the price tag is too high. He considers the product too high risk and faddish.
Marc Sani, publisher of Outdoor Retailer and Bicycle Retailer & Industry News, rates it a 5. Again, he believes it will only appeal to the hard core inline skaters and the market is too small.
Robert Carr, editor of Inside Sporting Goods, gave it an 8.5 saying that he thought the product was great and had the makings of a follow-up to Rollerblade, but it needs a lot of professional exposure. Like Rollerblade, this company will need to focus on marketing and a continual stream of improvements.
Source: Tahl Raz, “60-Second Business Plan: Downhill and Dirty,” Inc Magazine, February 2, 2002.
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Additional Web Resources
Center for Business Planning. This a library of resources and links to hundreds of sites containing research materials related to business planning.
MIT Enterprise Forum Inc. Here is a comprehensive collection of resources focused on writing a business plan.
Moot Corp Competition Business Plans. Here you can find examples of business plans written by MBAs from some of the best business schools in the world. These were selected by panels of investors.
Films to Rent
“Formulating a Business Plan”
This program has three modules that consider the process of creating a business plan from three perspectives: the market, the financial feasibility, and potential investors.
30 minutes
Item: BVL10841
Format: VHS
List Price: $129.95
Rental Price: $75.00
“Planning”
Here the direct of the Pennsylvania Small Business Development Center at the Wharton School looks at planning in businesses and how a business plan should be developed..
25 minutes
Item: BVL2003
Format: VHS
List Price: $89.95
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Answers to Discussion Questions
1. In what ways is a business plan different from a feasibility analysis?
Business plans have a different purpose than feasibility analyses. The feasibility analysis is designed to test a concept in the market and determine the conditions under which the business should go forward. In contrast, the business plan is about designing a company to execute the business concept. The business plan serves as a reality check for entrepreneurs to make sure that they are committed to the concept. The process of doing a business plan uncovers flaws and potential challenges that might not otherwise have been seen. The business plan is also a living guide to the business and a statement of intent for third parties.
2. How would an investor’s view of the business plan be different from a banker’s view? A strategic partner’s view?
Investor’s view: They are interested in appreciation of their investment, how they will reap the rewards of their investment (the exit strategy), and whether the management team can execute the business concept.
Banker’s view: They are most interested in the company’s ability to repay any loan, so they look at gross profit margins and cash flow.
Strategic partners: They look at the business plan to determine how much business they might get in the future. They also want to know that the new venture can pay for the work the partner does on behalf of the venture.
3. What is the strategic role of the executive summary?
The executive summary is perhaps the most important document relative to the business plan because it is the first document an interested party typically sees. It is designed to give a potential investor or other interested party enough information to stimulate their interest, but no enough to disclose anything proprietary.
4. How is a business plan for a growing company different from one for a start-up?
A start-up business plan focuses on the business concept, but the business plan for an existing business that is attempting to grow has a different focus. It must show how the business will use the capital is secures to grow the business to a particular milestone and it must demonstrate that the company has an effective and experienced management team in place.
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