Entrepreneurship

Why Engineers Love the Smart City Works Actuator

So now it’s real! A fantastic Ribbon-cutting and Meet the Cohort event last Friday the 14th for the new Smart City Works Actuator at CIT, next door to our enormo2017-04-14 - SCW - 39 - DSC_9505usly successful and now four-year old cybersecurity accelerator, MACH37 (who also graciously hosted the event). The Governor came to get the 100 or so guests pumped up and glad to be Virginians. Thomas Smith, the Executive Director of the American Society of Civil Engineers spoke about our failing infrastructure and how the Smart City Actuator could play a role 2017-04-14 - SCW - 37 - DSC_9387in helping renew it. There actually was a ribbon, and the Governor was decisive in cutting it (look at the lever arms on those scissors!). And, in addition to civil engineers, we had electrical, mechanical, 2017-04-14 - SCW - 03 - DSC_9517transportation, and an aerospace engineer, computer scientists and data scientists, a materials scientist or two (graphene of course), and probably more. So why do all sorts of engineers love the Smart City Works Actuator? We can turn to the Laws of Physics for answers. Two laws that every engineer learns apply here:

F=ma, where a of course is acceleration,

and the formula for Kinetic energy (energy in action)

Kε=½m(v)**2

Now for our purposes we will let m represent the size of the mentor network, and v represent the volume of innovative companies the accelerator capacity can handle. By starting the Smart City Works Actuator, a has now become 2a, m has become 2m, and v is of course 2v. Substituting in our equations, and letting F represent the amount of fun we are having, any engineer can tell you the results:

2a*2m = 4F …four times the fun!

and

½[2m](2v)**2= 4Kε …four times the energy!!

Yes, its true. Engineers love the Smart City Works Actuator because, together with our MACH37 Accelerator, they can come and have four times the fun and experience four times the energy, all while helping build a better world. Q.E.D.

Of course the way we help Actuate a better world is by helping accelerate our innovative entrepreneurs, and the Smart City Works Actuator has some great ones!

IHT.   You no longer need to be a scientist to know whether your water is 2017-04-14 - SCW - 20 - DSC_9590safe. Using a patented new technology, Integrated Health Technologies’ Sensor BottleTM detects and relays water quality information to your phone to provide you with real-time peace-of-mind that the water you consume is safe to drink.  For cities, these bottles provide a crowd-sourced platform for real-time water quality detection and monitoring of municipal water systems.

UNOMICEDGE.  UNOMICEDGE is a Software Defined Network solution for securely 2017-04-14 - SCW - 51 - DSC_9580connecting the Cloud to devices at Network Edge.  It includes a network Hypervisor that not only enforces network security policies, but develops critical business and operational insights from user and device interactions. Smart cities rely on smart IoT devices at the Network Edge.  UnomicEdge not only reduces the cyber risk of IoT, but can provide valuable intelligence to make businesses and cities run smarter.

InfraccessInfraccess is powering up infrastructure investment by pr2017-04-14 - SCW - 24 - DSC_9570oviding easier access to trusted data so you can more efficiently discover investment opportunities, make quicker, better informed investments, and reduce overall investment risk. The Infraccess web-based workflow platform sources and transforms unstructured information into smart data and proprietary performance indicators to help unlock billions in investment opportunities in infrastructure.

Capital Construction Solutions.  Capital Construction Solutions creates mobile-based 2017-04-14 - SCW - 30 - DSC_9533risk management platforms for improving enterprise-wide accountability and transparency.  With Capital Construction Solutions deployed in the field, companies can immediately turn day-to-day operations into opportunities to reduce corporate liability, mitigate risk, and significantly increase profits.

 

 

PLANITIMPACT.   Design decisions can have significant and long-lasting2017-04-14 - SCW - 27 - DSC_9545 impact on business and environmental costs.  PlanITimpact has created a smart modeling platform to help building professionals better understand and improve performance, including energy, water use, stormwater and transportation, so owners, investors, and communities can better visualize project impacts and returns on investment.

GREATER PLACES.  Cities worldwide are investing in the next generation of buildings, infrastructure, transportation, and technology. But where can you turn to for readily finding the b2017-04-14 - SCW - 28 - DSC_9542est leading-edge solutions in this space?   GreaterPlaces creates a single web-based and mobile platform for bringing together the best ideas, inspirations, and practices for designing and governing cities—a marketplace and tools to connect people seeking ideas, products and services to transform cities worldwide.

Come join them and see what you’re missing!

 

All photos courtesy of Dan Woolley

 

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How Do We Know the Actuator is Working? Part 4 – Synthesis and Policy

Follow us @CITOrg or @dihrie or this blog for current information on the new Smart City Actuator.

Time to pull together the thoughts and data from the previous three posts. Three sections here: how do we know the Actuator is working; are there ways to improve the commercialization success of invention organizations such as Universities and National Labs; and, are there ways to improve the outcomes of the national R&D enterprise

The Actuator

OK, back to the original question..how do we know the Actuator is working? As a participant you will know fairly quickly how it is working for you, once you learn to smooth out the day-to-day highs and lows of being an entrepreneur. However overall at a portfolio level we also carefully track performance metrics against industry norms, and our performance here is very strong. We use these metrics to fine-tune the program content and focus and inform specific mentoring actions; this continued engagement over the longer term is a strong signal that the Actuator continues to work for you. In addition to investment metricReference model fulls, we will also track performance in terms of various paths to market that may or may not involve direct financial investment, such as revenue growth and job creation of the companies we mentor.

But those metrics for a portfolio can take 5-7 years to fully mature. In the intermediate term we track leading indicators of later success. Some of these include pilot opportunities, early customer adoption and similar measures of market traction, even things like press coverage. Where needed, we also use these metrics to indicate additional areas where the Actuator can provide ongoing support to our graduates as they mature their businesses.

For the short term the primary assurances are the combined experience of our CIT and Smart City Works staff in the specific market verticals we are addressing, our extensive direct experience in early stage investing, a deep understanding of accelerators and best practices about what it takes to help early stage companies, and the strength of our community of mentors and experts. As an Actuator entrepreneur you should experience all of these, and they are your clue that the Actuator is indeed working.

Inventor Organizations

In this category I would include organizations like Universities, National Laboratories, Government development organizations or programs and the like. Obviously not all of these organizations, and obviously not every one to the same degree, but the generalization here is that these researchers look first to develop the best technology, then only later think about possibilities for commercialization. In some ways this, along with our strong national basic research capacity, has been the jewel in the crown of American global competitiveness for decades. But as budgets have consistently tightened and questions about Return on our research Investment have grown, this open-loop system that grew up in the aftermath of World War II may need some tweaking.

I would proffer three possible fallacies in this development approach in today’s environment. First is the belief that the quality of the technology is what drives the success of commercialization efforts. We evaluate a lot of companies for potential investment, and a common rule of thumb is that about 50% of an investment decision is made on the basis of the entrepreneurial team, perhaps 30% on the market dynamics (size, competition, path to market opportunities) and only the remaining 20% or so on the technology itself.

A second fallacy is that the researchers or developers know what the market wants; they are as a group incredibly smart and talented people who have relied on their judgement for success throughout their career. Like our entrepreneurs, they are almost always wrong with their first guess on what the market wants. This is why most companies in the early stages of development “pivot”, meaning substantially change something in their original product concept. One of the reasons that commercial markets are so successful is their relentless, continuous pressure to deliver, deliver ever better products, and deliver only what the market will pay for. Responding to this pressure is what makes companies continuously improve, and developing technologies in isolation from this pressure only delays the inevitable reckoning.

The third fallacy, somewhat related to the first two, is that what researchers and developers do is “innovation”, and innovation is what the market wanInnovationts. Jon Gertner in his great book The Idea Factory, about the operation of Bell Laboratories during the development of our national telecommunications network indicates the Bell Labs working definition, shown in the Figure.

What researchers and developers do is often Invention by this definition, but Innovation is really the end result of what we now call commercialization activities. Perhaps markets do want innovation, but it is important to be clear about what that means.

Is there a way to address these issues and improve the innovation outcomes for these Inventor Organizations? I believe the answer is “yes”. We are now exploring ways to connect our commercialization expertise directly to the research, inventions and entrepreneurs within these Innovation organizations. Demonstrating success in valuing IP, in business models that appropriately share the positive outcomes of commercialization, and in partnerships that overcome the biases that each side brings may well help improve the ROI for our Invention community.

Federal Government

The Federal government and its interactions with the R&D community may be in need of the biggest update. Many people point to the very cumbersome Federal Acquisition Regulations (FAR) as a road block to innovation. In fact, our experience is that the government probably has most of the legal authorities and mechanisms it needs to be much more effective as an R&D enterprise, but long-standing practices and cultural norms are really a much larger impediment.RandD spend corp gov

One issue is that the Government in many ways still acts as though it is 1950 when Government R&D spending was the dominant source of funding and the Government was large enough to constitute the primary market for innovative companies. This is no longer true, and in fact the relative market positions of the Government and commercial worlds have essentially reversed. The commercial world now spends twice as much on R&D as the Government, and represents a much larger market for innovative companies with more rapid paths to success.

A second recurring issue is Intellectual Property. Government encumbrance of small company IP in exchange for $50K or $100K development contracts makes those companies essentially uninvestable. Yet there are mechanisms in the Government contracting arsenal that do not require this encumbrance, and the value to the Government of locking up IP at such an early stage is minimal at best. So why does this practice persist?

Finally there is the structural problem. In the commercial world a path to market is critical. In the Government market, development support dries up around the SBIR Phase III point (working prototypes at some degree of maturity), followed by limited transition support to the uncertain market of large procurement programs. Why an uncertain market? Government program managers are incentivized to be risk averse, and new technology is almost never operationally robust when it is first introduced. The path to market for these large programs is most often through big systems integrators, and this is inherently risky for that precious IP. And, Government procurements are notorious for delays in awards, changes in scope and similar vagaries that can put a small company out of business long before a contract is ever awarded.

Here too there are ways to improve these outcomes. Certainly more support for transition programs that take interesting prototypes and help mature them would be a step in the right direction. The Governmenthas numerous test and evaluation capabilities that could be appropriately harnessed for this purpose, well within the limits of current contracting comfort zones. Adoption of more commercial-like practices such as those employed by some successful Government programs (In-Q-Tel, SBIR for example) can help get early market feedback and sufficient market competitive pressure to foster continuous evolution of interesting ideas. Increased use of staged awards such as SBIR, where only Phase I recipients are eligible for Phase II and so forth would help level the playing field for small companies, instead of so much of the innovation dollars going to incumbents working to develop ideas in-house with only limited external review and pressure.

There are others. NASA has placed much of its software in the open source domain, providing both valuable initial IP to innovators as well as fostering increased interaction between NASA and the innovation community. Our EMERGE program with DHS adopted a “commercial-first” approach, transitioning commercial technology into Government uses instead of trying to push Government-developed technology out.

Even the Chinese might provide an interesting model. Their “Made in China by 2025” initiative may sound like industrial policy, but seems to rely on commercial development of commercially viable products within broad sector definitions established by the Government. The implied quid pro quo is that the Chinese Government will then buy products from the best of those commercial companies.

 

So there it is, the 4 Part series on the Actuator, Innovation, and the various sectors of our economy that provide innovation. Improving success in this arena is indeed a wicked problem but there is room for substantial improvement simply by thinking about our collective goals and improving some of our innovation processes. Both our commercial and our national interests may be at stake.

Next Post: Smart City Actuator Focus Areas – Transportation

How Do We Know the Actuator is Working? Part 1 – Commercial Programs

Follow us @CITOrg or @dihrie or this blog for current information on the new Smart City Actuator.

These days, when interviewing ventures for participation in our acceleration programs we typically get asked some variation on that question…what is your success rate? How do we know you will deliver what you promise? Like most reputable programs, CIT has a long track record of successful outcomes across a large portfolio of companies, and we are justifiably proud of that history. We will cite, as do others, some of the statistics on downstream funding and percentage of successful graduates and, along with a few anecdotes of the success stories, that usually answers the question.

But, while there are several listings of many of the accelerator and similar programs, it has been difficult to do direct comparisons of outcomes. For one thing, only a few programs such as TechStars and Y-Combinator publish fairly complete data sets; other data tends to be fragmentary. It is also true that different programs have different objectives, so no single metric is likely to be applicable across the board. Furthermore, how do you compare the outcomes of very early stage programs with those of, for example, A-round institutional investors where the success rates, returns and institutional imperatives are all different?

So, does the accelerator program you are in make a difference? The short answer is yes; the outcomes vary widely. The longer answer gets a bit wonky, so stick with me here. The results, both in this post and the next ones, point to some fairly significant findings as they relate to our national R&D enterprise.

We got the opportunity to study this in more detail during the DHS-funded EMERGE program, initially under a research grant from the USAF Academy. For this research grant part of the experimental design included standing up the EMERGE accelerator as a way to evaluate its effectiveness in technology innovation for the Government. The initial target market was defined as wearables for first responders. After a few months the outcomes looked quite positive, with the status charts showing lots of green indicators and very few yellow or red. Then the sponsors challenged us: those results look good, but can you prove the program is working, relative to all the other innovation activities we fund. Woo; tall order.

The key turned out to be the industry average model presented in the last post:

slide3

Would a comparison of individual portfolio performance against this yardstick provide a method for measuring success? [Spoiler alert] Apparently so. Of course any research study needs its caveats, and the big ones here are first the data were generally taken from publicly published data as of 2015, so results may have changed or may not be completely accurate; second, the analysis was at an aggregate portfolio level…a good graduate research project would be to re-do this type of analysis at an individual company level within portfolios; and third, the EMERGE data in particular were stated as being very preliminary data after only a few months of operation, whereas it generally takes 5-7 years for portfolio results to become reliable.

To start, we looked at internal programs. Using the above reference model, how did the early EMERGE data stack up against our own MACH37 cybersecurity accelerator, and against our GAP funds early stage investment program. The results were quite good (full methodology, references and data are documentedReference model CIT1 in the EMERGE 2015 Final Report). Since this original analysis the GAP fund results have continued to improve with additional later stage funding, the MACH37 results have remained steady as the portfolio continues to grow and mature, and the EMERGE results have declined somewhat but are still above the reference model benchmark results.

In fact these results were so good it looked suspicious. Could we explain how these different approaches got to similar outcome levels, or was there some flaw in the methodology? At a top level at least we were able to rationalize. MACH37 is widely known for the strength of its curriculum and the focused efforts of the partners to secure additional funding for the cohort companies. GAP is known for its highly effective due diligence and mentoring of early stage companies, with the resulting risk reduction making these companies more attractive investments for others. And because EMERGE did not make direct investments but was able to attract a lot of interest from early stage ventures, its cost per “shot on goal” was very low. Since each of these mechanisms is inherent in the model, the results at least passed the initial “sniff test”.

Next, to be sure the model could show some variations in results we added two more external accelerators where the data were available, TechStars and Y-Combinator, both well-known, highly successful, excellent programs. Surprisingly, both performed somewhat below the canonical model. One could hypothesize for TechStars that their global federation style of what are essentially franchises could produce enough geographic variability to explain those data. But Y-Combinator in particular was shocking since they are the godfather of the accelerator business and widely recognized as one of the most successful. What the heck?

Reference model CIT

A bit more research however told the tale. The published statistics for Y-Combinator at the time showed that 29% of their accelerator graduates received external funding, less than half of the industry average in the model. But, more than 7% of their accelerator graduates made it all the way to a Series B funding event, roughly twice the industry average, and with a Series B investment considered to be $40M or more, more than 4X the industry average. So, very high failure rate in the accelerator end of things, but off the charts probability of success for those who did continue on. In part this reflects their model of huge cohorts, more than 100 new companies at a time each receiving $120K initial investments…$12M investment per cohort! The accelerator essentially acts as a highly selective due diligence process, resulting in high quality deal flow for the Y-Combinator investors.

As Yael Hochberg puts it: “Y Combinator is cashing in on the name it made for itself…[t]hey’re talking about raising a multi-billion dollar late stage fund to take advantage of their model that selects great entrepreneurs rather than mold them.” [emphasis added]

This external validation finally convinced us that the methodology was fairly robust and could produce interesting results. The early stage venture program you are in does make a difference, and we continue to be very proud of the fact that CIT programs consistently perform very strongly in terms of outcomes on these types of objective measures.

The original research effort was funded to also look at the performance of Government research and development programs. How do they stack up? That is the topic of Part 2 of this post, along with some policy implications for the national R&D enterprise.

Next (Thursday 3/16): How do we know the Actuator is Working? Part 2 – Government Programs

 

 

Will the Smart Cities Actuator Make Me a Gazillionaire?

Follow us @CITOrg or @dihrie or this blog for current information on the new Smart City Actuator.

As they like to say in The Hunger Games, “may the odds be ever in your favor.” Meaning, that even though many people die along the way, and that your odds of hitting it big are likely smaller than you think, you never know, it’s the most exciting game in town, and what else were you planning to do with the next few years of your life anyway? Starting and running a business is sort of like that. What the actuator can do is substantially improve your odds of getting to a decent exit.

Here’s how it works. Firsfailure-ratet, the failure rate for new businesses is very high. Per the attached chart, almost 78% of all startups fail within the first 5 years…only 22% survive. The comparable number for accelerator graduates is that, after 5 years, 33% are still in business, an increased survival rate of 50% compared to the population of all new businesses.

Accelerator graduates also do maccel-funding-successuch better at fund raising. There are about 800 accelerator graduates on average per year nationally, out of a total of nearly 600,000 new businesses created per year, or roughly 1/10th of 1% of all new businesses. Yet according to Pitchbook, this small population of companies accounted for almost 33% of the Series A capital raises in 2015.

As part of my research into accelerator models I created a reference model, based on industry averages for funding at various stages of maturity, along with the likelihood that a company will move from one stage to the next.

slide3.png

For a new startup company entering a typical accelerator program (and receiving an average $100K investment to start), about 2/3 of those companies will go on to receive Angel round funding on the order of $250K. Half of those will raise a seed round of $1M, and so forth down the fund-raising line.

When you start stacking up those probabilities, here is what you get. For a single company coming out the end of the pipe with Series B funding, it takes three candidate companies who have raised a Series A round. Nine with a seed round, eighteen Angel round companies, and twenty-seven accelerator entrants needed to account for the successive attrition through the fund-raising rounds (very much in line with The Hunger Games odds, by the way!).

Now some companies don’t go through this entire process, and many of the outcomes prior to a Series B can be very nice outcomes for the entrepreneurs. But, the reality is that accelerator graduates do MUCH better than non-accelerator startup companies in terms of both survival and fund-raising, and yet even with these advantages the numbers show only about 4% of these companies go all the way to complete a Series B funding round.

One last consideration: the accelerator you’re in matters. Check out our next post for some more insight on metrics to help understand accelerator performance, and see the difference that a robust accelerator program can make.

In a perfect world, the odds will be ever in your favor, and perhaps the coveted Initial Public Offering (IPO) will occur. Home free at last! Gazillionaire, here we come!! But, life is never quite that easy. Check out this great story from the L.A. Times for some additional insights into the tricky internal company business of going through an IPO.

Next (Monday 3/13): How do we know the Actuator is Working?

What Are the Economics of an Actuator?

Follow us @CITOrg or @dihrie or this blog for current information on the new Smart City Actuator.

Running a successful Actuator, accelerator, incubator or similar early stage investment program requires finding the sweet spot where three sets of economics overlap: those of the early stage entrepreneurial ventures, the investors that support the ecosystem, and the actuator itself.

The economics for early stage entrepreneurial ventures is conceptually fairly gerbil-wheelstraightforward: when does the cash run out, and can I raise enough money before then to keep the company going? In the vernacular, this is the “runway”…how much runway do I have left. And the job of the early-stage CEO is almost always heavily tilted towards fundraising.

Two things make this more palatable. First, a successful accelerator will already include a number of investors in the ecosystem, and the program itself will help the entrepreneur better understand who to approach for funding, how and why. Second (the economic carrot in this plot) is the proverbial “exit.” At some point a successful early stage company starts selling enough product that somebody thinks the company has a great future, or the people are worth collaborating with, or the product is a good strategic fit.gerbil2 At that point they may buy the company, do an “acqui-hire,” or put in enough money that they bring in some new people to help run the company. Oh yes, and occasionally things can even appear so successful that they start selling stock to the public: the IPO.

Investor economics are also similarly straightforward: investors are alwaysreturns looking for good (or great) returns based on the amount of risk they take. Early stage investors make very risky investments, and so expect very good returns for their money. How risky? Well, the attached chart shows that roughly half of all venture investments lose money while only 5% generate about 1/3 of the total returns; not necessarily where people want to put the bulk of their retirement funds, for example.

On the West Coast this has in part led to the great Unicorn hunt, with big money trying to find or create the 1% of that 5% that turns into something like Facebook or the Snap IPO. But it does take big money; if 0.05% of your investments turn into unicorns, $1M investment per attempt takes $2B of investment capital. Things are a little more conservative on the East Coast, and the above chart also shows that half the returns come from investments that yield 2X to 5X the invested capital. And early seed round investments are more like $50K or $100K instead of $1M, meaning that this scales to be a feasible investment strategy for people with high risk tolerance but not quite as much investable capital as Silicon Valley.

For individual investors in this category finding a stream of suitable investments and assessing the risk of each one is a daunting challenge. However the Actuator plays an important role here as well, since a significant part of Actuator activity revolves around creating and evaluating a flow of interesting companies, and reducing the risk of those companies surviving and reaching market. This intermediary role for an accelerator in both reducing risk and matching investors and entrepreneurs is one of the characteristics that can make them so effective.

What about the Actuator economics? To understand that, these entities are best viewed as startup ventures themselves. The ones we have worked with around the country generally have operating costs in the range of $1M – $5M per year, accounting for salaries, facility and other associated operational costs. Where does that money come from? For many it comes from grants, or community or University funding, legislative appropriations or sponsorships, and these sources are critical for establishing and maintaining a program in the early stages.

But is there at least a conceptual model that would minimize or eliminate the need for these external funding sources over time? Yes, and it is very analogous to a startup gaining enough product traction to be self-sustaining on the basis of revenue generated from product sales. The “product” that accelerators “sell” is investment opportunity in early stage ventures. The quality of that product is directly tied to the quality of the incoming ventures as well as the ability of the accelerator to reduce the risk of those investments through mentoring and interaction with a robust ecosystem.accelerator-economics.png

One self-sustaining economic model uses equity investment returns of the accelerator to pay for operating costs, as shown in the figure. It takes 4-7 years or more to realize the value of these investments; the model assumes 5 years. It also assumes $2M/yr operating costs, a dozen investments of $50K per year ($600K total), and a distribution of outcomes consistent with those shown above. So after 5 years, 1/3 (four) of these companies are likely to have failed, we assume four generate 2X ($100K) returns, three generate 5X ($250K) returns, and one generates a 40X ($2M) return. Note that if your initial $50K investment was in exchange for 8% equity and no dilution occurs in between, the company value would need to be $25M for your piece to be worth $2M. As the economic model chart shows, under these somewhat optimistic assumptions (and assuming you can repeat this success year after year) the model can become self-sustaining.

While this is a challenging model, it is also helped by the fact that there are a number of secondary benefits that entice external groups to help defray some of the costs. For later stage investment groups this private source of vetted deal flow is attractive. For Universities the ties to entrepreneurship curricula make it a reasonable extension of those efforts. Opportunities for economic growth often entice legislatures, and strategic Corporate partners may see sponsorship an an inexpensive way to find strategically relevant innovative technologies.

Creating and sustaining a successful accelerator-type program requires the ability to thread the needle in a way that meets the economic imperatives of three major stakeholder groups: the entrepreneurs, the investors, and the accelerator itself. No wonder that many of these programs do not survive when the initial funding runs out. CIT has been fortunate to have both a successful investment experience with early stage ventures over many years, and much better than average outcomes in running accelerator programs directly. This proven success plus great partners, good timing, and a great environment for building business ecosystems is what will help ensure the success of our new Smart City Works Actuator.

Next (Thursday 3/9): Will the Smart Cities Actuator Make Me a Gazillionaire?

 

How Did the Smart City Actuator Originate?

Follow us @CITOrg or @dihrie or this blog for current information on the new Smart City Actuator.

With any activity of the magnitude of our Smart City Actuator there are numerous threads that lead to it’s creation. This post covers three threads among many, from the CIT perspective: the motivation, the mission, and the experience base that makes it possible.

The motivation is fairly simple. img_0982When I look out the window, the new Innovation Center Silver Line Metro station, two years in the making and now well along towards completion, connects via a new Innovation Avenue linking it to Rte 28 just north of Dulles Airport. It is not hard to imagine that buildings will soon replace the trees in the foreground as the property around the station is developed.

smart-city-pressThe full Silver Line extension reaches well past the airport into Loudoun County, and last summer it became public that 22 City Link, the developer of the Gramercy District station in Ashburn was intent on building a smart city. So the tactical motivation was obvious: what a great target of opportunity to build an innovation district along this Dulles corridor and perhaps beyond, connecting with similar-minded initiatives along the Silver Line and more broadly in Virginia and elsewhere.

The second thread is mission. As Virginia’s Accelerator, our CIT mission is to accelerate innovation commercialization and entrepreneurship across the Commonwealth. We do this through a number of programs, including grants (CRCF), direct investment (GAP), business accelerators (MACH37 and EMERGE), support to communities implementing new capabilities (Broadband) and others. Part of this effort involves looking forward to rapidly evolving technologies and how they will manifest in the market, and clearly the set of technologies around Internet of Things, autonomous everything, data analytics, and smart cities more broadly are an area of exceedingly rapid growth. Combined with the development happening literally on our doorstep, this was a no-brainer as a focus area that fits squarely in our mission sweet spot.

There is another aspect of our CIT mission that is also critical to this focus area: our Statewide charter. As we look more broadly across Virginia communities, many of them are interested in adopting some aspect of this technology set. Many businesses already support specific products or niches within the broader space. Virginia Universities have world-class research under way in many of these areas. And State Agencies, such as VDOT in the transportation space, are working to understand and provide leadership in this new set of technologies that will certainly change the face of many Government functions and services.

Two critical aspects for the success of a program like the Actuator are the depth of the mentoring community, and the opportunities to scale initial prototypes to a larger number of market opportunities. Our Statewide charter means that we are already aggressively pursuing partnerships with communities, businesses, State and local Government entities, and Universities to help harness this enormous set of resources. Through these collaborations we can help ensure the success of the Actuator and provide economic development opportunities throughout the region.

The third thread that led to the Smart City Works Actuator is the experience base we are fortunate to be working with to launch the Actuator. CIT of course brings ten years of direct investment and interaction with early stage companies through our various programs, along with direct accelerator experience via MACH37 and EMERGE; we know what it takes to build one, and how to make it succeed.

But the Actuator would not have been possible without the fantastic partnership we have formed with Smart City Works, and the leadership they provide. The Smart City Works team is in fact the lead operator for the Actuator with CIT support, and brings to the table the foundational knowledge in this vertical:

  • a large wealth of industry experience in construction and infrastructure that strongly complements the CIT technology base
  • large networks of contacts throughout the country that are again complementary and bring a large array of mentors, investors and other connections to the table
  • an experienced management team dedicated to the success of the Actuator and excited about the long term possibilities for smart cities

It was obvious from the very first meeting that a partnership between CIT and Smart City Works would lead to something special, and the preliminary activities to bring it to reality have only reinforced that initial impression. What you see is only the beginning!

Every now and again the stars seem to align in a way that dares you to ignore the possibilities. For the Smart City Works Actuator, the motivation, mission, experience base and timing have all aligned, and we are fortunate to be in a position to seize the opportunity.

Next (Monday 3/6): What Are the Economics of an Actuator?

CIT Launches Smart Cities Initiative

Follow us @CITOrg or @dihrie or this blog for current information on the new Smart City Actuator. Subsequent posts will provide our definition of a Smart City, and more details about an Actuator and how it will help enable the Smart City market.

In conjunction with our partner Smart City Works, CIT just launched a new Smart Cities Actuator, and APPLICATIONS ARE OPEN for the inaugural cohort beginning March 27 at the CIT facility in Herndon, VA. Here is the full Call for Innovation, seeking companies interested in participating in the cohort:

Smart City Works is Open for Applications for the Spring 2017 Cohort in the DC Metro Area to be held at the Center for Innovative Technology

SMART CITY WORKSTM is the world’s first business actuator and a premier business accelerator for improving livability and resilience in cities.  Our unique focus on the built environment aims to dramatically change the way we design, build, and operate civil infrastructure.  With unmatched capability and a world class network of technical resources and cities, we go beyond traditional accelerators to more rapidly move the best technology solutions cities need into the hands of city managers and solution-providing companies.  Our program, conducted in conjunction with the Center for Innovative Technology, is designed to equip companies with the skills, market awareness, and validated products to be highly competitive, growth oriented, and investment ready.

Call For Innovation (CFI): We are looking for entrepreneurs, startups, and companies with emerging products to apply for the Spring 2017 inaugural Washington DC metro cohort, to be held at the Center for Innovative Technology, Herndon, VA.  The program is open to startups globally whose visionary founders are willing to bring their ideas and passions to participate in person in a unique and impactful acceleration process.

In particular, we seek innovative commercial solutions that address significant social and civic challenges—safety, security, livability, and resilience—in urban environments across the United States and the world.

For the Spring 2017 cohort, your solution will focus on one of 3 key areas of the infrastructure challenge:

  • Transport – Solutions that reduce costs, extend serviceable life, reduce congestion, improve parking, improve inter-modalities (car, train, bus, bike, pedestrian), or leverage smart, autonomous, and intelligent transportation solutions to improve our transportation infrastructure network.
  • Resilience and Public Safety – Solutions and/or IoT technologies that address the safety and security of the urban public; that mitigate the impact of rising sea levels, extreme weather events, or other natural or man-made shocks; that protect critical infrastructure; or those solutions that allow cities to be more livable and sustainable.
  • Construction Techniques – Solutions that improve the design, construction, or maintenance of infrastructure; reduce lifecycle costs or improve safety, schedules, or margins.

Important Date: Smart City Works Application Deadline: Applications open now, March 1 we will begin selecting companies until the class is full. Final date for applications is March 10th, 2017

Where to Apply: [https://www.f6s.com/smartcityworks/apply        http://www.smartcityworks.ioFor more information: [innovate@smartcityworks.io ]

A Tale of Four Cities (Supplement)

In the original Tale of Four Cities post one point of discussion was: “Why on earth would you want to locate and operate a company in the outrageously expensive environs of San Francisco where none of your employees can afford to live?”

Apparently lots of people are asking that question. According to Indeed.com, “Tech workers are increasingly looking to leave Silicon Valley”, a trend “highest among people ages 31 to 40, suggesting that people are leaving to find better opportunities elsewhere or to settle down in more affordable areas where they can improve their quality of life.” One chart from the article shows the Share of outbound tech job searches from within the Bay Area among this demographic group. EkZc27psx

Of course lots of factors are likely at work behind these numbers, and the trend could as easily reverse. The data do continue to support the thesis however that successful innovation ecosystems need to balance the needs of all stakeholder groups (including startup employees), and that these factors can get out of whack.

Certainly Silicon Valley will continue to be the primary hub of global venture capital for the foreseeable future. But, writing in Forbes, Brian Solomon reported last year on the 2015 ranking of accelerator programs by researchers Yael Hochberg and Susan Cohen, which for the first time left off the archetypal accelerator, Y-Combinator. Hochberg and Cohen concluded that Y-combinator has evolved into a hands off seed fund, and is  “cashing in on the name it made for itself, [by] raising a multi-billion dollar late stage fund to take advantage of their model that selects great entrepreneurs rather than mold them.” [italics added]

Innovation occurs in many many places, including Silicon Valley, but if these nascent trends continue we may wake up one day to find that Silicon Valley has become primarily an investment center rather than an innovation center.

 

 

A Tale of Four Cities (with apologies to Dickens)

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…” Charles Dickens, A Tale of Two Cities

Since the beginning of 2016, it seems like the worst of times. We have seen a correction in the stock market as the Chinese economic bubble has popped, taking the global oil markets with it, and bringing back the all-too-recent memories of the Internet bubble of 2000 and the financial bubble of 2008 (watch out, 2024!). The misery has spread to the Tech sector. The unicorn, unofficial mascot of Silicon Valley, which had gone from being a rare beast in 2014 to a veritable population explosion in 2015, is once again on the verge of extinction.

Yet the economic talking heads tell us this is normal, that the U.S. economy is doing well and is reasonably insulated from both the Chinese economy and the negative oil shock. That corrections are a necessary part of the market, to restore balance after a period of irrational exuberance. So, what the heck is going on with Tech?

In 2015 I was Principal Investigator for a DHS-funded program called EMERGE, working to leverage commercial business accelerators to help commercially-focused innovative companies bring some of their technology to address needs of the DHS community. As part of this program we were fortunate to get an inside view of four different business accelerator programs in four different cities:

Here is what I learned. First, tech innovation does not occur in isolation; it is the result of effective regional innovation ecosystems that include customers, entrepreneurs, funding sources, a high concentration of expertise and ideas, and enough of a support infrastructure to help the entrepreneurs through the early pitfalls. Each of the four accelerator programs above has done an outstanding job of helping build and then leverage their local ecosystem as an integral part of what makes each region grow.

Second, Silicon Valley is not identical to the Tech sector. Although news coverage often glosses over this fact, innovation occurs in many places across the country. I will argue below that while Silicon Valley is indeed unique in many ways, generalizations based on that unique set of circumstances can often be wrong. In the current situation, the doom and gloom based on over-priced investments there is less relevant in other parts of the country.

And so, the four cities.

Dallas – Texas has several innovation centers including both Dallas and Austin. There is a diverse industry base, with concentrations in energy, health care/life sciences and tech, significant university presence, and a good concentration of wealth. Tech Wildcatters has successfully provided leadership to the region’s startup community with special programs in both health care and tech, and most recently going to a year-round program from the more typical discrete sessions. Dallas is a vibrant startup location, although it is unclear what effect the collapse of oil prices may have on access to capital in the region.

Chicago – political issues aside, Chicago has the benefit of a high concentration of Fortune 500 Corporate Headquarters, a robust investment sector and strong University presence. TechNexus has done a masterful job first in priming the innovation ecosystem development 7 or 8 years ago, and now tapping into the innovation needs of Corporate strategic partners who are looking to early stage companies as a source of new products and ideas. If the city can recover from its social strife it is certainly positioned to continue as a significant center of tech innovation.

San Francisco – San Francisco/Silicon Valley is the undisputed investment capital of the world for tech. According to Pitchbook in the third quarter of 2015 more than 27% of all the venture capital invested globally came out of Silicon Valley. China has risen rapidly as both a source and target of VC investment, Slide2although the collapse of the economy in China seems certain to be a major setback in this area, as the graph seems to indicate starting in Q4 of 2015. New York ranks third on this list, providing just north of 8% of the globally invested capital.

Yet with all that money floating around it appears that some Silicon Valley investors may have had more dollars than sense. If you look at the number of deals and the dollar amounts as compiled by Pitchbook, the dollars invested continued to rise in 2015 even while the number of deals plummetSlide4ed, leading to a rapid rise in median valuations.

Slide1By comparison, valuations in New York during this same time were only 10% of the San Francisco valuations, an enormous disparity. Slide3There are some possible alternative explanations for this disparity (bigger opportunities, move towards later stage investments, etc), but both the anecdotal evidence at the time (“too much money chasing too few deals” was a sentiment we heard more than once) and the subsequent down rounds of investment even for some of the high flyers indicates over-valuation on the part of investors was at least one primary cause of the disparity.

A second point. Why on earth would you want to locate and operate a company in the outrageously expensive environs of San Francisco where none of your employees can afford to live? ST AptsOr Palo Alto, where Palantir is driving out start-ups by snapping up office space at high rents. Well there are certainly some reasons: if you want to hang with the cool kids, California is the place you ought to be. If you need to raise a billion dollars or so, where else would you go? And certainly if you want frothy valuations during the good times, the target destination is clear.

A recent Harvard Business School study (http://www.hbs.edu/faculty/Publication%20Files/09-143.pdf) hinted at one possible evolution of this trend. According to the study:

“Venture capital firms based in locales that are venture capital centers outperform… [as a result of] outsized performance outside of the …firms’ office locations…”

That is, if you are a VC you want to be in one of the centers of VC activity because there is a strong ecosystem of investors…but, the big returns are to be found by investing in other places. Certainly Silicon Valley is not going away as the primary center of activity. Increasingly however, those investors seem to be syndicating with other groups in places such as Dallas, Chicago or…

Washington DC – The region centered around Washington DC is generally considered to include Maryland, Virginia (or at least Northern Virginia), and DC itself. The Federal Government is a large presence, along with some of the specialty areas such as cybersecurity and data analytics it has helped develop. Health care/life sciences is also a major player in the area, and there are multiple world-class universities that support the ecosystem. The region generally ranks in the Top 10 innovation areas of the country, and the area’s capital investments are growing, actually increasing in the 4th quarter of 2015 even while investments were declining nationally. One reason for this increase is the growth in cybersecurity, with the potential for more than a billion dollars in cybersecurity investments in the region in 2016. The two biggest areas were health care/bio and software (including cyber), and there is an organized, active ecosystem working to promote the growth of these and other industry sectors.

Conclusions – Clearly the stock market is in correction territory, driven initially by economic issues in China and the energy sector. While the tech sector also appears under pressure, the fundamentals here are very different. In the short term, what appears to be a broad retrenchment in the sector is actually mostly a correction of inflated valuations on the West Coast that are not indicative of the sector as a whole. As Rick Gordon, Managing Partner of the MACH37 Cybersecurity Accelerator puts it: “while Silicon Valley has been out on the great unicorn hunt, we have been building an army of cockroaches…small, fast, nimble, designed to survive a nuclear winter, and available at a reasonable price.”

The age of easy money from building the next mobile app may be behind us, but the advent of autonomous vehicles, personalized medicine, data-driven everything and more will ensure that the tech sector will continue to drive the next wave of innovation and economic growth for decades to come. But it is increasingly likely that the actual innovations will be found in places like Dallas, Chicago and the Washington region even if the investment capital still flows from New York and Silicon Valley.

CTO Smackchat: So, what do you do?

First published September 23, 2014 on Mach37.com

[Loosely adapted from an actual conversation with an investor at a networking event]

“So, what do you do here?”
[standing large] “I’m the CTO for Mach37”
“No, I know your title, I want to know what you do”
[uh-oh, better obfuscate] “I’m the Chief Envisionator of Strategery for Cyber-Futures”.
“I don’t even know what that means. What I really want to know is what you do on a day to day basis to add value to this organization”
—–
Being the CTO or Technical Co-Founder of a startup company is a role that requires extraordinary flexibility and humility. Sure, the early days are obvious. You’re the developer of the first product, the first Product Manager, and critical for Marketing, Fund-raising, running the new business, and whatever else it takes to get that business going.

With a little success though, an early round of funding, and employees five, six and seven are a Product Manager and two developers…what now? Still not too hard to envision, your role is less hands-on with the Product and more involved with the roadmap and the intellectual property and mediating customer feedback from sales and marketing with your development team.

As success grows, and you add a VP of Technology to manage the technical team, your role continues to morph. Your CEO Co-founder has kept his roles and grown with them, while you have been busy giving your early roles away. So, what do you do? Is there still a place for you in the company you helped start?

The answer comes down to Leadership. You are a Co-founder because you helped create the vision of product and market and the problems you knew you could solve. The technical team looks to your leadership even though you are not so directly connected as you once were. You know the market and you know many of the key customers. You play a key role managing the business while the CEO is out raising money.

How that translates into day-to-day action varies with your personality, the company and the situation. I have found that letting other people take responsibility for the more detailed daily operations frees up time to build the longer term initiatives, those critical new areas for company growth that take time and patience to nurture. I enjoy being out in the community, a visible representative and spokesperson for the company. Thought leader in the market? Sure, that too.

So, what do you do? Lead. Figure out what that means, and earn your place every day as a leader in the company you worked so hard to start.

David Ihrie is CTO of MACH37 and has been the lead technical person for six startup companies. He has a BS in EE/CS and an MS in Management specializing in the Management of Technological Innovation, both from MIT.