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October 17, 2006

The Art of Commercialization

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One of the consequences of a boomlet is that organizations like research labs, defense contractors, and aerospace companies are going to want a piece of the action. Their logic will go like this:

“The technology we invented for satellite imaging can be used for amateur video, so we could have created YouTube and sold to it to Google for $1.6 billion. Let’s find an investor to fund this since our budget is set for the year. How hard could it be to create a better YouTube?”

I’ve been on the other side of the table as these organizations try to negotiate a deal to spin out, license, or sell their technology. I can tell you that it’s almost always Mission: Impossible to get a deal done because most organizations try to stipulate the following conditions:

  • The startup can’t hire away any employees. It cannot talk to them because they don’t want them distracted from their Department of Defense contract work.

  • The sole contribution is a CD-ROM with their research findings. They’ll mail it to the startup when the deal is done. They repeat: Do not talk to the employees. Everything they think a startup needs is on the disk.

  • Their technology is so great that they aren’t offering any kind of exclusivity or perpetual license. They might find a better deal, and they will take it. This is what’s called vacuosity wrapped in pomposity.

  • Since their technology “is the company,” they want to own 80% of the spinoff. In addition, they want a 50% royalty structure with a $5 million advance. Unfortunately $5 million is twice the size of the first round of financing.

  • They want to restrict the markets that the startup can sell into because they know best who should use their technology and for what purposes. (Did you hear the story about the inventor of Novacaine who insisted that the drug be used for operations and not for dentistry because it was too important a discovery to be used for something as mundane as tooth extraction?)

There are three key flaws in most attempts to commercialize technology via a startup. First, organizations think that starting a successful company is easy and that the hard part—that is, the research—is already done. The truth is that it’s not easy to productize technology and to start a company; if it were, these organizations would do it themselves. You heard it here first:

Those that can do, do. Those that can’t do, license.

Second, patents are worth a lot of money. Patents are nice—in particular, they impress parents—but they don’t make customers buy a product. They could valuable if your company is successful and has enough time and money to litigate against infringers, but no startup’s mantra should be “patent, sue, collect.”

Third, the value of technology is directly related to the number of man-years (not to be sexist) it took to develop it. What’s more likely is that the longer it took to make something that hasn’t been turned into a product, the less it’s worth. It’s debatable whether technology developed in a cost-plus environment by cost-plus scientists can thrive in a market-driven market.

Sorry to be the bad Guy, but this is what it takes to attract an investment (and a management team) to some science. It won’t be easy, but it can be done.

  • The right attitude: Something is better than nothing. It might gall organizations to learn that their science is the basis for a multi-billion dollar exit, but that’s a high-quality problem. More or less, their research is a sunk cost—if not, indeed, something that taxpayers underwrote—so anything they get is upside.

    This means expectations for ownership in the new entity should be in the 10-20 percent range. Royalty, if there is any, is also in that range. Upfront payments should be zero—or less. Finally, very few investors are interested in backing a non-exclusive, short-term deal (where “short term” is defined as anything less than “forever”).

  • A product or a tactical path to a product. Customers buy “products” not “technology,” “science,” or “research findings.” Technology, science, and research findings are a long way from a product. The closer the technology is to an actual product the better.

  • Warm bodies. Technology is the first 90% of what is necessary to create a successful company. Unfortunately, the second, and more important 90%, is the employees who invented or discovered the technology. Simply giving a startup some CD-ROMs or white papers doesn’t cut it. The company needs the brains behind the science because it’s one thing to discover something in a lab, and it’s quite another to ship a product on a large-scale basis.

    These employees will have to reboot their brains, and they may choose to stay in their current jobs. (Or the startup may choose not to take them.) Here’s why:

    • They have to chose revenue over peer acclaim in scientific journals. The choice boils down to being famous or rich--although if you make enough money, you can be both. :-)

    • They have to pick “good enough” over Nobel-Prize-winning state-of-the-art. Most customers don’t care about being at the bleeding edge of technology and are happy if something simply worked dependably. Computer operating systems, for example, fit in this category.

    • They have to listen to, if not love, customer feedback. At the end of the day, either customers buy the product or they don’t. This isn’t the same as “submitting research findings to a journal.”

    • They have to understand that investors don’t invest on a cost-plus basis. The size of the bank account is limited, and the clock is ticking. And there's no politician who is trying to protect jobs by influencing budgets and cost over runs.

    To put this in a positive light, startups should find the gems who are frustrated that their work isn’t seeing the light of day, much less changing people’s lives. For them, a startup dedicated to commercialization is great news.

  • A hands-off attitude. The final ingredient is that organizations should either actively help or get out of the way of the startup. It’s tough enough dealing with customers, competition, investors, and the government. To add another stakeholder might be the straw that breaks the camel’s back. It might look like it’s fun to start a company, but it’s very hard work. Harder, in fact, than “doing research.”

Like I said, commercialization can be done, but finding and funding a junior member of the technical team who understands the magic, believes that she can improve it, and is willing to bet her life that she can commercialize it might be easier. She has to quit cleanly and legally—leaving everything at the office except her brain—but this path may be faster, cheaper, and easier.


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Comments

Hi my name is Joseph Fidelia I have a company called Us posting Inc. I'm trying to license out my properties I have alot of designs cartoons 80% people love.Here's my contact numbers cell call 2pm or 3pm eastern standard time my lunch break 860-5148587.My home 860-440-3689.

Wow. That's a huge post (content, not size). The "bad Guy" portion isn't bad at all. It's just common sense. Excellent points, all.

having once been a fellow on the other side, in a university's tech transfer office talking to just such people as you, mr kawasaki, I can only say that you are absolutely right - spot on- with your post and particularly your ending remark. thank you

Art & Science. The hard part is getting the two together to create something useful.

Mr. Kawasaki, you make valuable points in this post. However, I would suggest that until you have devoted a significant part of your life to "doing research" in science you can't know which is in fact harder.

When scientists make it to the position where they have and run their own labs, they are in a sense starting and running their own companies. And it's hard work.

Great post on what the majority of the technology/patent arena looks at for licensing. Your note highlights the need for a level of understanding on both sides of such technology transfer deals. Specifically, commercialization requires a certain magic and talent, and having the 'a-ha' moment is attained in a different environment with different kinds of people (that may not be the best to exploit it).

Such is the Open Innovation challenge for all people and companies. The winners will be the players that appreciate, align and reward along the innovation supply chain from fuzzy front end to sold product. I do see the idea to commercialization process unbundling and your post highlights the inefficiencies occuring in that transition.

As a provocative thought: How is technology license in the form of a patent license (plus a CD of information) different than selling a software CD (or a monthly web application access fee) for use in another company's business? I sure don't get the sense I have access to the software developer(s) to answer my questions and requests for refinements.

Having spent years in new business development, I know that I have way more "big ideas" than I can ever, ever, even if I live to be 1,000, bring to market.
Big ideas or hot technology aren't worth jack if they aren't commercialized.

Oh, and trying to play catch up is difficult. If the other product is in the market and you're at development stage, then you aren't really competing with the market product, are you? You're competing with the newest version that the competitor has in development.

"Third, the value of technology is directly related to the number of man-years (not to be sexist) it took to develop it. What’s more likely is that the longer it took to make something that hasn’t been turned into a product, the less it’s worth. It’s debatable whether technology developed in a cost-plus environment by cost-plus scientists can thrive in a market-driven market."


Guy, I have always greatly admired your work and there really IS a lot of truth in your article, but coming from you, those particular words are the saddest I've read all year.


Since I was a young man, almost everyone I've truly admired has told me that anything really worth doing takes time. Once, I remember a friend giving me a glass of extremely old brandy, it was exquisite. As I drank it, the thought occurred to me that the guy who put it down had been at the peak of his mastery, He was likely an older guy and he probably KNEW
that he would not live to actually taste the fruits of his very best work. That thought moved me.

However, such thinking is ridiculously romantic in the here and now, and you are, of course, completely correct. NOTHING should ever be done let alone funded that can't turn a gigantic profit in a single quarter. It's just not they way of things anymore.

Fortunately for us not everyone in our history has felt the same way and consequently we have the Mathematical and Scientific methods upon which we've built all of this wonderful technology. I know that it would be a little disingenuous to suggest that all this scientific progress was somehow magically disconnected from the fundamental principles of Economics. Gauss, Fourier, Tesla, those guys had to pay the rent too. Still do you really think they had quite the same emphasis on "Commercialization"? Moreover, do think that adversely effected their work?


The screaming irony is that the very technology that allows us to have
this debate was itself developed by "in a cost-plus environment by cost-plus scientists"


I take comfort in one thing. Written language is certainly one of the oldest and most refined technologies we possess. According to your third point, it must therefore be the most worthless. This assessment would then apply both to your article and my response to it. Although not necessarily to the thoughts behind either.

Regards,


Justin Cady

Guy, you say: ". . . finding and funding a junior member of the technical team who understands the magic, believes that she can improve it, and is willing to bet her life that she can commercialize . . ."

Unless this junior member is executed for failure, she's not betting her life. While a certain amount of poetic license is of course granted to weblog postings, this particular embellishment always drives me crazy.

Other than that, kudos, you're spot-on.

I've sold two businesses to Fortune 500 companies. One was a startup; the other a small business I developed at the one I sold the startup to.

Here's the problem "from the other side":

* Large companies already have income -- often lots of it -- and so the small dollars that a new business makes barely makes a dent percentage-wise. It isn't worth their time to strike deals. For example, each product manager at most large companies are responsible for about $10MM in annual revenue. When that's the case big companies don't understand at a gut level why ten people will create $1MM in their first year, even if that'll average out to $100MM/person in value over five years.

* Each employee that they're asking for is cranking money! Lots of money, usually. It's hard to find good employees and if they're trying to spin off their technology these employees are -- by definition -- good employees. They don't want to lose them.

* Launching a business is like launching a three-stage rocket. In the first stage you use 96% of your energy, withstand severe, uncomfortable, somewhat unpredictable, and uncontrollable external forces. Stage 2 uses about 3% of the remaining fuel, is way less risky, and is about positioning the ship for orbit. Stage 3 is orbiting: going around and around. BIG companies thrive in Stage 3. Some people can live with stage 2. Stage 1 terrifies them, no matter what they say, or they'd never be senior enough to be negotiating licensing deals. They don't want anything to do w/ it and think people that do are inherently reckless: that's why the steep demands -- they internally believe the whole thing is extremely high risk, run by maniacs, and likely to fail.

Ways to get around these issues (again, from experience -- and my apologies about writing a book but this is a subject that's near and dear to me):

* Get the employees on a sabbatical program for 1-3 years. They'll remain employees of the licensor company and that'll be part of the licensor's investment. If you're lucky the licensor will even keep them on payroll.

* Give the licensor options to buy more shares at set prices at key milestones. These can be firm dates, product milestones, or funding rounds.

* Don't do royalties: insist on ownership. Also up-front fees are just a negotiating ploy. But you already know this Guy!

Chris,

Your essay was great. If I had a nickel for every asshat who thought he could build the next google just because he has an MBA, wears really sharp-looking sunglasses, and can convince his business-school drinking buddies to toss ten million of someone else's money at him for start up capital...

One thing every engineer should do when deciding whether to take a job offer, even if they're paying with Real Money, is ask himself whether the business plan makes any SENSE. If not, he should know that he's siging up for a total Dilbert hell of a working envronment until the whole thing craters.


-jcr

heh you say: One of the consequences of a boomlet is that...


The question is when does the bust happen again?

:) for right now or

:( if you are on the other side of the boom

I have been in the process of commercialization before, and its most assuredly not a easy ride, unless you are with a flexible high energy crowd.

Guy,
My girlfriend consults with government funded tech transfer start-ups- I can't wait to recommend she make this required reading! They all want huge deals, complete control, don't 'believe' in marketing, can't delegate, etc. The interesting thing is that they're in denial all during the process but when they see the results (often simply a realistic assessment of their company)they're really grateful. There is hope...

Thanks for writing this! All too often I try to explain this and am rewarded with doubtful stares -- or indignation. It reminds me all too much of what some authors say they've experienced, having someone come up to them with a "great idea" that they'll split "50/50" so long as the author writes it up 'cause "coming up with the idea is the hard part". Sigh.

A completely different perspective about technology is what usually leads to leaps in understanding - I don't see bringing the same architecture that thought of the idea and mixing it with more money being as productive as an entrepreneur with a brainstorm.

Jon
Founder of myfoodcount.com - free & anonymous health monitoring
life: jon.legendarylife.com

boy is this post true, I was chief analyst at Starlab a European version of the MIT media lab. www.gogerty.com/starlab.mov

Most of my job was managing expectations and trying to take pure research to market. Wow talk about challenges, we worked across across life sciences, materials sciences, AI and info-tech with 70 independant researchers and PHD's and only 5-7 business dev people. It was tough, but I loved the job, putting brilliant people together with ideas and dreaming up market applications.

We had some amazing projects, but needed more business tie-ins. The model was unfortunately flawed from the time-line, capital and scope required. Imagine playing pre-seed stage VC investor without the business people, just oodles of ideas dropping on the floor everyday.

Nonetheless the learning in the role and people I met was an incredible personal reward.

Nick Gogerty
CEO inclue!

Productize?

Somewhat similar, but maybe more helpful, than my blog entry yesterday: Why I Won't Build Your "MySpace Killer" (about all those "Need a programmer, will pay with equity" idea-people out there).

I had no idea this type of stuff was going on. Sounds like a three-ring circus.

Good luck, scientists, startups & investors alike.

I like how you used defense contractors for this article. So true.

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