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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
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 metrics, 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.
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 wants. 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.
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.
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.
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