At the Lux Executive Summit in Cambridge, MA, Lux Researchers outlined new funding structures that are changing corporations and emerging technologies.
The 1964 World’s Fair in Flushing, New York, presented a homogeneous image of tomorrow. All peoples, in all cultures, would be driving the same cars, using similar kitchen appliances, and living in houses or apartments that were uniformly modern. It was a vision that fit comfortably with an industrialized society looking at an economic model based on economies of scale, market share and innovation in manufacturing.
It is a vision that still haunts us.
A scanning electron microscope image shows carbon nanotubes aligned vertically like trees. Scientists often refer to such aggregations of nanotubes as "forests." (A. John Hart, University of Michigan)
Two things have dramatically changed:
- the specter of resource shortages–especially energy;
- and the high costs of bringing new materials based technologies to market.
In the nano world, four hours of time on a scanning electron microscope costs thousands of dollars, and time in an advanced clean lab to test a product even more. An efficient turbine for a wind farm can’t be built in a basement, or deployed with dollars from friends and family–or angels. And a smart grid that gives users control of their energy consumption requires the combined cooperation of large utilities, technology companies, homeowners and the government. Additional risks include real or potential government regulation and/or incentives, adoption by a conservative industry, and credibility–purchasers are likely to go with a name they know.
A seemingly insurmountable set of barriers, yet at the Lux Executive Summit in Boston last month, two researchers from Lux Research presented the new strategies in corporate board rooms and C-Suites that are changing how the US does business. Chris Hartshorn, PhD, and Michael Holman, PhD, work with both large corporations and startups. They sketched out a very new vision based on their work with successful companies. In brief, new directions include:
- Partnerships between start-ups and corporations are creating more diversified funding
- A less centralized innovation process is creating products that are developed and/or supported regionally
Partnerships between start-ups and corporations are creating more diversified funding
Holman pointed out that the VC funding model is no longer fueling innovation as it did in the 90′s. This observation was recently echoed by John Cage, from Kleiner Perkins Caulfield & Byers, who called 1996 the last “vintage year” for VC investors. In a dramatic slide, Holman showed how the old model worked, with each funding stage minimizing risk by creating a timetable for exit, and guidelines for when to reinvest, sell or hold:
- Angel investors [up to $1M] get products off the bench
- Venture Capital [$10s of Millions] get the product to scale
- Private equity [$100ds of Millions] gets the business ready for the markets
- Public markets [$100ds of Millions to Billions] keep it going–all within 10 years.
But then he showed the same slide with large red banners across each stage with “not enough money” or “not enough time.”
As established corporations are finding product development becoming prohibitively expensive, they are searching out new innovative ideas outside their traditional R&D efforts. From the company point of view, this approach minimizes risk since the corporation can play within several technologies, developing exit strategies as they prove—or don’t prove—their viability in the marketplace. Exit includes integrating the new technology into their business, spinning the company off as a subsidiary, creating a joint venture with other corporations or start ups, or outright sale. For the start-up, the corporation can provide not only capital, but expertise and experience as well as the much needed access to markets and policy makers.
However, both corporations and start-ups often eye each other with some skepticism. Holman went on to say that start-ups need to bring on corporate partners earlier in the process, noting that entrepreneurs fear that their ideas, if discovered too early, will be stolen by corporations with bigger budgets and more resources. Corporations, for their part, need to make interactions with start-ups a two-way street, creating an open innovation process that allows both sides to learn from each other.
In his remarks, Holman sketched out several case studies, expanding the model of how corporations and entrepreneurs are working together. As more projects move through the pipeline, they will create the templates which will help propel future innovations.
A less centralized innovation process is creating products that are developed and/or supported regionally
Hartshorn, for his part, discussed an even greater change happening: technology is facilitating a more modular, localized innovation process driven by the realities of a very diverse world. To use his term, a mountainous world drives hyperlocal patterns of adoption. By mountainous, he refers to barriers from differences in geography, wealth, resources such as water and infrastructure, weather, and governmental regulations and incentives. Companies with centralized, controlled innovation–pushed out through marketing to build market share–are adhering to the old model. The newer model:
- Capitalizes on local realities through data and boots on the ground.
- Enables local decision making, innovation and adoption.
- Distributes localized innovation through IT transfer, and then encourages local modification.
This process helps corporations ensure that new technologies are an appropriate application for the locale, within the right geographical constraints, and in a sector where there is need. The innovative photovoltaic that works so well in Arizona, is unlikely to work on large scale in Buffalo, New York; the infrastructure challenges in part of sub Saharan Africa are ideal for the development of cheap mobile technologies that may not appeal to fashion—and app hungry—Tokyo residents; the great new desalination technologies that makes Israel farming viable, may be too expensive for agriculture in a rain soaked area such as Maine, but useful for industrial use so that water returns to its source cleaner than before.
The process of obtaining local information and data becomes dynamic: the technology innovators use the data to design new products, and the local company, community or agency tests and helps the corporation develop the market. This information loop, facilitated by technology that speeds data transfer and deliberation, reduces the corporate risk of bad decisions, and helps the local site get access to newer technologies that solve problems and are appropriate for local conditions.
The future
Both analysts see shifting structures building the new, more complex and more collaborative forms of financing. What this means is that more people may well be involved in projects that design, develop, deploy and service the large, science and materials based technologies that are the hallmark of the green economy. While examples showed primarily the major players–the Fortune 500–adapting these strategies, their leadership is providing the insights that will fuel the economy for years to come.
About Lux Research
Lux Research provides strategic advice and on-going intelligence for emerging technologies. Leaders in business, finance and government rely on Lux Research to help them make informed strategic decisions. Through their unique research approach focused on primary research and their extensive global network, they deliver insight, connections and competitive advantage to their clients.
Visit www.luxresearchinc.com<http://www.luxresearchinc.com> for more information.
