Archive for leadership
A book on World War II teaches a lesson for today on innovation. In Churchill and Orwell: The Fight for Freedom by Pulitzer-prize winning author Thomas E. Ricks (New York: Penguin, 2017), we learn about some of the reasons England struggled to defend itself effectively in dealing with Germany. A key problem discussed by Ricks was England’s poor state of preparation with inadequate machinery, feeble industrialization, weak supply chains, etc., that made it hard to fight a serious war and led to embarrassing disasters like the rapid loss of Singapore, their supposed fortress in southeast Asia. Close to home in Europe, Britain had a hard time just moving troops around — they often had to walk — and the Brits were amazed at how quickly their American cousins could mobilize when they came to the rescue. Why was England so poorly prepared?
England, as you will recall, was the birthplace of the Industrial Revolution, yet by the time of the War, they were awkwardly behind in many of the basic technologies they would need. How could this happen? Ricks comments are insightful:
Managed by family members more interested in reaping dividends than investing in new machinery and other gear, “British firms were unable to adopt modern, best-practice technology,” concluded business historian Alfred D. Chandler Jr. As a consequence, Britain’s brilliant university research generally did not make the transition into factories. Britain had led the first Industrial Revolution of coal and steam power, but generally sat out the “Second Industrial Revolution” of the late nineteenth and early twentieth centuries, built around oil, chemicals, metals, electricity, electronics, and light machinery, such as automobiles. By the end of the 1940s, it would have neither an empire nor an economy capable of competing with those of other major powers. As Correlli Barnett put it, the reality was that by the time World War II ended, the British “had already written the broad scenario for Britain’s postwar descent to the place of fifth in the free world as an industrial power, with manufacturing output only two fifths of West Germany’s.” Interestingly, Barnett was the keeper of the Churchill Archives at Cambridge University from 1977 to 1995. [Ricks, pp. 203-204]
Something similar happened in China, which once led the world in innovation and GDP, but from the Qing Dynasty until the late 20th Century, in part due to apathetic leaders unwilling to invest in or even open the doors to innovation and technology, China missed out on much of the Industrial Revolution. Only through massive reform and exerted effort in recent decades has China begun its return to a position of global leadership in innovation, IP creation, and economic growth.
In the paper industry, which I’ve been close to for many years, it’s clear that the American paper industry has largely fallen into the same trap that nearly cost Britain its freedom and did cost many lives unnecessarily. The American paper industry has largely failed to invest in new technology and relies heavily on antiquated paper machines and pulp mills that are decades behind what we have in Asia (China and Japan in particular). Their slower, less efficient machines and less efficient plantations put them at a distinct cost disadvantage. Instead of taking steps to compete better, the US industry too often tries to rely on protective legislation to raise tariffs on imported paper and make everyone in the nation pay much more for their paper than they should. The real problem is not Chinese competition, but American businessmen falling into the same pattern that nearly cost Britain the war: focusing on immediate profit and dividends while neglecting the future.
Each industry, whatever it is, needs to build for the future with investment in innovation and a willingness to boldly cope with the threats and opportunities of disruptive innovation. If your industry is dominated with leaders who feel like they can just milk their business as a cache cow with no need to invest in the future, that industry will fail.
Abraham Lincoln said that the patent system “added the fuel of interest to the fires of genius.” Today the fires of genius and the fire of innovation itself is getting doused with something less helpful than fuel. These fires are being cooled and, in some cases, extinguished with harsh attacks on the IP rights that once enabled and motivated lone inventors and small businesses to take the fruits of their genius to the market.
The owners of small businesses, the people who generate most of the innovation and business growth in the United States have good reason to be worried. Their ability to attract funding through valuable intellectual property is being compromised. Their ability to protect their products and innovations from the power of corporate giants is being whittled away. This has come from many quarters, but there is a widespread anti-patent movement driven by politics and misinformation. It’s the bitter fruit of a bitter anti-property rights movement that exaggerates the threat of a few bad actors to justify widespread weakening of property rights in ways that will hurt the economy and our society for years to come.
We have seen a recent series of Supreme Court cases that have made it much harder to obtain patents and enforce them. We have seen massive changes in US patent law that make it easier to invalidate patents after they are granted and make it harder and more costly to stop infringers if your patent survives. Now the bogeyman of “patent trolls” is held up as a threat to America that requires more sweeping “patent reform” to make it even harder to enforce a patent, and it looks like both parties are united in a quest to do “something big” to shake up the IP rights that helped drive the American economy for so many decades. Corporate giants benefit from this reform as it clears away the annoyance of other people’s IP rights standing in the way of their marketing muscle. But the economy as a whole and the rights of many are hurt in this process this amplifies innovation fatigue .
Several recent articles highlight just how serious the problem has become. Louis Carbonneau in “Toxic Asset: The Gradual Demise of the American Patent” (IPWatchdog.com, December 10, 2014), surveys the radical changes in the past two or three years:
On the judicial front, in 2014 we saw no fewer than 5 Supreme Court decisions going against patent holders on the various subjects of obviousness (a key test for patent validity), what constitutes “abstract ideas” (which now undergo a more stringent test for patentability), business method patentability, indefiniteness (how you construe claims), reasonable royalty (how you calculate damages), willful infringement (how you punish the “bad actors”) and fee shifting (making losers pay for winners legal fees). All of these decisions have collectively made it harder for patent owners to: i) maintain the validity of duly issued patents (previously presumed by law), ii) pursue infringement claims, ii) prove damages (let alone treble damages), iv) have open discussions with potential infringers prior to litigating, and have left the unsuccessful patent owner at risks of paying millions in legal fees to the other side if the judges so decides.
Parallel to judicial reform at the federal courts, recent US patent reform with the American Invent Act (AIA) introduced a new post grant review mechanism called Inter Partes Review (IPR) which allows a party to challenge the validity of any issued patent before the Patent Trial & Appeals Board (PTAB). Strangely, despite the PTAB being an emanation of the same USPTO that delivered all these patents in the first place, there is no longer a presumption of validity before the PTAB for the patents being challenged while other rules make it easier to invalidate patents based on prior art.
Finally, on the political front, in 2013 the US House of Reps. passed the Goodlatte bill, which would erode rights conveyed to all patent holders despite being primarily directed at NPEs. It is now expected that the new Republican led Senate will revive the bill -currently on hold- in early 2015 and, with a rare showing of bipartisanship from the White House, it is expected to be signed into law. At the same time, 27 US States have passed or are in the process of passing laws that make it harder for people to assert the patents they own.
Carbonneau goes on to explain that in recent Federal Circuit cases, patent owners are being crushed, and in Inter Partes Review (IPR) cases before the USPTO, nearly 80% of the owners of challenged patents are being told by the USPTO that their patents are not valid over the prior art that the USPTO itself supposedly considered before granting the patent in the first place. Carbonneau puts it rather wryly:
The most interesting statistics come from the PTAB [the USPTO’s Patent Trial and Appeal Board, which processes IPR cases] because it only focuses on validity issues based on prior art; the very same prior art patent examiners are supposed to have found and analyze prior to issuing a patent. Since patents going through IPRs are usually the same ones that being litigated, you would assume that owners did a lot of due diligence before investing in a costly patent lawsuit. Well, the PTAB is declaring 77.5% of reviewed patents invalid! And this is not limited to “abstract” software; patents related to biotech and pharmaceuticals, medical and mechanical devices, are being invalidated at an even higher rate! Remember, this is an offspring of the very same agency that inventors paid thousands of dollars in the first place to review applications and issue their patents. Now, after having to pay a quarter to a half million dollars in legal fees (average cost of an IPR procedure for a patent holder), the same agency is telling patentees nearly 80% of the time: “Very sorry we made a mistake; we would not have allowed your application had we looked more carefully for existing prior art. And no, there is no refund available.”
Personally, I cannot think of any industry that could survive more than a month with a nearly 80% defective rate, let alone by forcing you to spend a fortune for the “privilege” to confirm that indeed your title was invalid in the first place! Only a government can come up with such a broken system and get away with it.
The impact of these anti-patent efforts has been a surprisingly sudden break from the trend of increasing IP litigation, with litigation in 2014 down about 13% from the previous year according to a new 2015 PwC report on patent litigation. The problem of explosively increasing patent litigation, a common excuse to justify the slashing of patent rights, is not supported by the data.
Richard Lloyd, writing for the IAM Blog, draws this observation from the PwC report:
Of these three classes [of patent litigants considered], NPE [non-practicing entity] companies have been successful 31% of the time in patent cases brought since 1995; this compares with a success rate for universities and non-profits of 48% and a lowly 18% for individual inventors. Individual patent owners also do far worse with damages pay-outs, getting a median award of $3 million compared with $11.5 million for company NPEs and $16.2 million for universities/non-profits.
There could be many reasons for individual inventors doing relatively badly. Although the PWC study doesn’t provide any, it’s easy to speculate that small inventors may have lower average quality patents to begin with, while they probably don’t have the same kind of litigation savvy as other NPEs and are much less likely to have access to the same kind of litigation expertise that larger, better funded patent owners can turn to.
But what PWC’s numbers also strongly suggest is that the US patent litigation system is strongly stacked against small, patent owning entities. Bearing this in mind, it is worrying that the main packages of reform proposed in the House of Representatives (the Innovation Act) and the Senate (the PATENT Act) are only going to penalise them further.
Lloyd notes that potential irony now that many lone inventors, recognizing that they have little chance of winning and have almost no chance of affording the punitive legal bills they may face if they sue and lose, may be more likely to turn to NPEs (“patent trolls”) for help as the most practical way to realize any benefit from their work.
There is a need to rebuild an innovation climate in the United States, starting with educating our leaders about the need for IP rights and the value of patents. If we don’t teach this lesson from within, it will eventually be taught rather loudly from without, for Europe and China are both moving to strengthen IP rights and strengthen IP enforcement. Europe’s Unitary Patent system could be a boon to IP there, though much remains to be seen, but the changes in China are strong and dramatic. That nation has gone from no patents and no IP system in the early 1980s to the world’s biggest source of IP generation and IP litigation, with many changes steadily strengthening the nation’s IP system. There is a long ways to go for China still and there have been some setbacks, but at current rates we can see China becoming a leading source of global innovation while the US loses its lead.
Will the flames of innovation be largely quenched in that nation? Much depends on what we do with IP rights now, the rights that will shape our culture and economy for decades to come. May the fires of genius be encouraged with something other than the cold water Congress and Courts have been sloshing.
Many large companies take a tortoise approach to innovation and stay as hidden within their shells as possible, even some who advocate open innovation. Tortoise companies may have creative R&D staff, including many scientists doing good work, but they keep these inventors hidden in the shell rather than encouraging them to publish or present their work.
The hares, on the other hand, take greater risks as they frequently step out of their comfortable burrows. They let their inventors not just show up at conferences and other events, but take the podium and present. Or, when appropriate, publish their work in major journals. As a result, their inventors become known and get to know many others with related interests. It is that visibility that allows potential partners to find them, to learn about their work, and to come forward with proposals for partnership or further innovation. These visible minds become more highly connected and able to contribute more directly and effectively to the open innovation needs of the Corporation. They are connected to other industries and better connected to the market, and may be more likely to recognize ways to adapt their inventions for better success.
The extreme of tortoise innovator may well be the large body of government scientists that conducted high-tech R&D for decades in the old Soviet Union. One of my past open innovation activities at Innovationedge included traveling to Moscow to assist Russia (more specifically, ISTC: http://www.istc.ru/) in finding external partners for the huge body of invention that arose from government labs in past work (this public information: e.g., I am listed as a speaker on the published agenda of a biotech meeting in Moscow with a presentation entitled “Innovationedge Partnership to bring innovation from Russia to the U.S.”). Unfortunately, much of that work in the Soviet Union, in my opinion, was dominated by deep drilling into highly isolated wells of expertise, with advanced technologies that were unconnected to real-world industry and markets. Creating connections and finding market opportunities after the fact (as in “answers in search of problems”) is much less efficient that developing inventions tailored to meet real market needs in the first place. The scientists were some of the best in the world, but they were working in isolation, often in great secrecy, with little ability to discuss their work with outsiders and obtain needed feedback and insights to make their work more useful outside their immediate focus. Looking back in time at the fruits of past Soviet era R&D to me looked like closed innovation to an extreme.
My observation of the isolation of Russian R&D relative to industry and markets is consistent with the detailed observation and analysis by Dina Williams in “Russia’s innovation system: reflection on the past, present and future” in The International Journal of Transitions and Innovation Systems, Vol. 1, No. 4, 2011, p. 394-412, available via Academia.edu at http://www.academia.edu/1207385/Russias_innovation_system_reflection_on_the_past_present_and_future (free download with registration).
Success in open innovation and even in making conventional internal innovation more successful can be enhanced when innovators “get out more often” and increase their visibility in relevant communities. Innovation is frequently about crossing boundaries and making new connections, and open innovation almost by definition involves reaching past one’s own corporate boundaries to find solutions outside. What better way to do this than by having innovators physically or virtually stepping outside those boundaries and being visible to potential partners?
One of my favorite experiences during my days at Innovationedge involved seeing a technology go from an inventor’s garage to a multinational corporation where it is now being commercialized globally. A key event in that story involved speaking at technical conference where my presentation included some information about our client’s invention. Afterwards, I was approached by an R&D leader from a significant corporation who wanted to know more. There was much more work after this—open innovation success is rarely fast and easy—but that new connection took us on a path toward success. Related stories occur frequently when innovation is shared. But silent companies who rely on their tortoise shell eventually find that solid defense is irrelevant. Sometimes, the prizes go not to those who best hide behind their fortifications but to those who cross the finish line in the race for innovation.
The new intellectual property book by Nick Nssing, Patents and Strategic Inventing: The Corporate Inventor’s Guide to Creating Sustainable Competitive Advantage (McGraw-Hill, 2013) is a refreshing guide to help inventors and leaders in corporations. It is a collaborative work with a variety of contributors (myself included) providing a few chapters in addition to the excellent core material from Nick.
Nick has many years of inventing and IP strategy experience at Procter & Gamble and Monsanto, where he is currently the Biotech Strategy Lead. He is also founder of Luminosity LLC, a consulting firm focused on new product development and patent strategy for large corporations. He is also an adjunct professor at Washington University. I’ve known Nick for a number of years and have been impressed with his approach to IP strategy and his business sense when it comes to IP.
This book provides a rich variety of material to help corporate inventors. Too often corporate inventors just sit back and let the attorneys handle everything, but Nick’s book shows that much better results can be achieved when the inventors are educated in patent strategy so that they can invent more strategically and work with the attorneys more effectively.
Part 1 offers a sound introduction to patentability, patent searching, and the role of the corporate inventor, and then explores patents in light of the America Invents Act. Many highly practical nuggets are there such as Chapter 9, “Working with Your Attorney: Nine Steps to a Better Utility Patent,” which offers insights from Byron Olsen, assistant general counsel at Monsanto. This section provides very practical information including a recommendation that inventors work with the attorney to “superinvent,” adding new concepts and uses for the invention to greatly broaden and strengthen the patent.
Part 2 deals with Patent Strategy, followed by Part 3, “Strategic Inventing.” These two sections get into more advanced topics such as building portfolios, analyzing landscapes, life-cycle management of IP, disruptive innovation (that’s my chapter: “Intellectual Property and Disruptive Innovation: Strategies, Tactics, and Lessons from China”), TRIZ, and guidance on implementing patent strategy at the project level. Overall, I find the book to be fresh, original, clearly written, and a good example of how one expert author can add value by collaborating with other contributors.
For more information, see the book’s website, StrategicInventing.com.
As we discuss in Conquering Innovation Fatigue, the profit motive can be important for inventors but is often not the real incentive behind the quest to invent. Steps that eliminate the opportunity to profit from invention, though, can be serious barriers to a nation’s innovation potential. The profit motive can be important for prospective innovators. However, a focus on profits can be utterly destructive to innovation within a corporation, where the incentives to those who lead other would-be innovators can create new barriers that kill the innovation future of the company. Ironically, what can be a helpful incentive for innovation to an individual can easily become a disincentive once distorted by the internal workings of a corporation. This is illustrated in recent analysis from Clayton Christensen. See an overview in the article “Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy” at Forbes.com. Christensen argues that ratio-based metrics for profitability distort corporate thinking and reward behavior that ultimately destroys the future of the corporation by creating short-term benefits in apparent profitability. We illustrate a related problem in the book with the Apple Tree Analogy, in which metrics for short-term profitability for an apple harvester get a dramatic boost when the apple trees are toppled, making it much faster to harvest the fruit. The future, though, becomes barren.
Corporations need to carefully consider the metrics they use for profitability, as Christensen teaches, and unlearn some of the sacred concepts they were given in business schools. They should also go one step further an consider the impact of their metrics on not just the long-term growth of the company as a whole, but also the individual innovator and the innovation culture within the company. Listening to the voice of the innovator inside the corporation should be an important exercise for its top leaders.
I recently had the privilege of meeting Larry French, CEO of Griffon Aerospace (also see Wikipedia’s article on Griffon). He is an inventor, an entrepreneur, a pilot, and the brains behind several major product innovations, including the Lionheart 6-passenger airplane and a host of unmanned aircraft that are disrupting the aviation world with their high performance at very low cost.Griffon has made news recently with the success of its unmanned aircraft. These drones are playing increasingly important roles in military actions around the world and help save many lives (for the forces deploying them). The Broadsword, for example, is a large unmanned device that can carry numerous sensors and other devices to assist the military in many operations. New contracts have come in for that. They also recently won a 5-year contract for the production, maintenance, engineering and flight services for the Remotely Piloted Vehicle Target (RPVT) program. Their bread and butter seems to have been the Outlaw™, a 120-lb gross weight air vehicle that can carry 30 pounds of payload. If I understood correctly, they can manufacture and sell this aircraft for a about 1/5 of what their competitors have been able to do–a remarkable cost benefit that stems from vigorous innovation on many fronts. Larry began as a pilot and an inventor, creating efficient airplanes like the Lionheart in 1994. In 1994 he founded Griffon Aerospace to pursue the unmanned aircraft market. Keeping his operations close to him, with tight control over training of employees, materials, processes, design, and manufacturing has helped him to innovate across the supply chain and at all levels, resulting in significant cost reductions and competitive advantage. Griffon is based in Madison, Alabama (near Huntsville), where the launch of the 500-lb BroadSword was recently heralded by the Madison Weekly.
Larry’s journey as an entrepreneur and innovator has required that he face and overcome many of the innovation fatigue factors we describe in Conquering Innovation Fatigue. The ever-changing burdens of government regulation can be discouraging and expensive, for example. But he has found ways to cope, painful as it can be. The early years were truly difficult and required a lot of faith to keep the business alive. Now it is highly successful with over 50 employees and a bright future with valuable products that are changing the way we approach war, with far less risk to human pilots and crews. They can thank the pilot behind Griffon, the visionary innovator, Larry French.
Larry had this to say about launching his businesses:
For me I’m a “build it and they well come” business guy. I initiated and sustained the Lionheart development and marketing on 90% passion and 10% personal/investor funding. Without that 90% passion I would not have attracted believers willing to give me some of their money. Same with our current next generation of UAVs. The UAV market is in its infancy which means there are so many diverging opportunities that trying to select which of all the potential doors a winner is behind is nearly impossible. So, after reasonable absorption of the market trends, I follow my passion for the next aircraft. Fortunately now, unlike 10 years ago, I have the resources (passion, people, facilities, and finances) to convert idea to product.
Innovation never stops at Griffon. One of the next challenges on the aviation horizon is the heavy fuel engine, an engine that can burn heavy fuels such as diesel fuel or biodiesel instead of the lighter aviation fuel that can be so expensive in foreign theaters. (One energy expert told me that the delivered cost of aviation fuel in Afghanistan is $600/gallon. Wow. With diesel, local fuels could support the aircraft engine and greatly reduce costs. As heavy fuel engines emerge, I expect to see them used successfully by Griffon Aerospace, with their own added inventions.
During the CoDev 2011 conference in Scottsdale, Arizona, I was impressed with a speech given by a local CEO, John (“Jay”) Rogers of Local Motors in Chandler, Arizona. This small company designs exciting new vehicles using design contests that are open to the public. Their rapidly growing community (12,000 participants so far) contributes designs and feedback to help in the selection of potentially successful concepts that Local Motors will then build locally in a microfactory, with final customization of the appearance being achieved with an environmentally friendly and durable vinyl wrap that eliminates the need for paint and gives the owner freedom to have a unique look. The final assembly is done with hands-on help from the new owner, who becomes intimately familiar with the vehicle and with its maintenance.
I was impressed enough with what I heard that I changed my evening plans to drive down to Chandler and attend an open house at Local Motors hosted by Jay himself. He allowed photography, so below you can see some views of Jay speaking and some shots of his vehicles in various stages of construction. The Rally Fighter that I am standing by sells for $59,000. It’s an incredible rugged, safe, and fun car that is legal on the road but a load of fun off road as well. It’s able to do very nice jumps.
These cars weigh much less than other cars their size, offering a huge bonus in mileage. Great engineering and innovation at many levels makes this possible.
The microfactory concept involves assembly of a small number of vehicles at a time in sustainable, efficient processes.
“Quorum sensing” refers to the abilities of some organisms, especially bacteria, to sense the presence of others and begin collective action such as forming a biofilm. It’s a critical area of research in immunology. There are also lessons from quorum sensing that need to be applied to business and innovation. Quorum sensing, in a sense, results in “intelligent” collective decisions that are not made by a central brain but through the sharing of signals or other information between individuals, none of whom sees the big picture or understands the meaning of all the available data. The free market’s mechanisms for optimizing supply and demand through the collective information transmitted by price is one analogy in the business world. But let’s look at lessons specifically from the quorum sensing of one ant species that lives its life in a hostile, frequently shifting, rocky environment–sound familiar?–where constant change is required. This comes from Wikipedia’s article on Quorum Sensing:
Colonies of the ant Temnothorax albipennis nest in small crevices between rocks. When the rocks shift and the nest is broken open, these ants must quickly choose a new nest to move into. During the first phase of the decision-making process, a small portion of the workers leave the destroyed nest and search for new crevices. When one of these scout ants finds a potential nest, she assesses the quality of the crevice based on a variety of factors including the size of the interior, the number of openings (based on light level), and the presence or absence of dead ants. The worker then returns to the destroyed nest, where it will wait for a short period before recruiting other workers to follow her to the nest she found using a process called tandem running. The waiting period is inversely related to the quality of the site; for instance, a worker that has found a poor site will wait longer than a worker that encountered a good site. As the new recruits visit the potential nest site and make their own assessment of its quality, the number of ants visiting the crevice increases. During this stage ants may be visiting many different potential nests. However, because of the differences in the waiting period the number of ants in the best nest will tend to increase at the greatest rate. Eventually, the ants in this nest will sense that the rate at which they encounter other ants has exceeded a particular threshold, indicating that the quorum number has been reached. Once the ants sense a quorum, they return to the destroyed nest and begin rapidly carrying the brood, queen, and fellow workers to the new nest. Scouts that are still tandem-running to other potential sites are also recruited to the new nest and the entire colony moves. Thus although no single worker may have visited and compared all of the available options, quorum sensing enables the colony as a whole to quickly make good decisions about where to move.
The standard Corporate model of centralized new product development and decision making has its advantages, but also many limitations. When rapid growth or adaptation is necessary, innovation often works best when many minds can contribute their talents, insights, networks, and scouting activities to the search for fruitful new places to colonize. If decisions are fully centralized, they take forever and many good spots will be ignored. More rapid and efficient pursuit of innovation requires distributed authority and the involvement of many and systems that can tap and respond to the efforts of many without the endless waiting for one all-knowing top dog to sift through the data and make a decision. How flexible is your organization, really? How distributed and dilute is the power to act on innovation opportunities? What systems do you have to tap the knowledge, skills, and networks of all employees?One of the major concepts we discuss in Conquering Innovation Fatigue is the Horn of Innovation, a concept that turns the slow, inefficient innovation funnel around and yields a more efficient innovation system in which innovators, like the quorum sensing ants, are directly involved in all aspects of the innovation process. In our musical analogy, the innovators are able to shape and adapt the innovation in response to the feedback from the market and business leaders for rapid and efficient adaptation, rather than just tossing ideas into the black hole of a funnel and hoping somebody will do something with them occasionally. Innovators need to be included in healthy, robust feedback loops that are closer to the quorum sensing mechanisms than purely centralized, autocratic business systems. I’m willing to bet that it’s time your organization shelves its old, costly systems and implements improved paradigms for innovation. The lives and ants and the physics of horns can both teach us lessons about better ways to run innovation in a business.
Innovators and business leaders doing their best to achieve commercial success need to understand the set of innovation fatigue factors that they face. These include personal factors due to the bad behavior of individuals; corporate or organizational fatigue factors reflecting inadequate systems, culture, or flawed judgment; and external fatigue factors due to the burdens of legislation, taxation, and challenges in the patent system, for example. The first two categories are factors where innovators and corporate leaders are in charge. The external category is the most difficult one because the challenges come from outside our sphere of influence, where the best efforts on our part can still face seemingly insurmountable challenges beyond our control.
One of the effects of uncertainty regarding the regulatory climate that business faces is a dangerous reduction in venture capital that is often needed for start-ups to succeed. Consider this ominous news story from Yahoo! about the drop in venture capital funding recently:
Venture capitalists poured less money into U.S. startups in the third quarter and split this among more companies, signaling that investors are trying to be more economical with their funds.
According to a study set to be released Friday, startup investments declined 7 percent to $4.8 billion in the July-September period, compared with $5.2 billion invested during the same three-month period in 2009. A total of 780 startups received funding during the quarter — 9 percent more than the 716 companies that took slices of the investment pie last year.
The study, which was conducted by PriceWaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters, said that much of the decline stemmed from a drop in large investments in clean technology. Funding in clean-tech startups, which include alternative energy, recycling, conservation and power supply companies, has been mercurial lately. It fell every quarter last year compared with the previous year, but has been climbing this year — until the third quarter.
This is a genuine red flag, consistent with many red flags that we are seeing. The co-founder of Home Depot, for example, recently criticized the federal government in an open letter to President Obama in the Wall Street Journal (Oct. 15, 2010), explaining that Home Depot, founded during a past recession and now providing over 300,000 jobs to Americans, could never have been successfully founded in today’s climate where government, in his opinion, seems set on vilifying and punishing business rather than helping it to succeed.
We opened the front door in 1979, also a time of severe economic slowdown. Yet today, Home Depot is staffed by more than 325,000 dedicated, well-trained, and highly motivated people offering outstanding service and knowledge to millions of consumers.
If we tried to start Home Depot today, under the kind of onerous regulatory controls that you have advocated, it’s a stone cold certainty that our business would never get off the ground, much less thrive. Rules against providing stock options would have prevented us from incentivizing worthy employees in the start-up phase—never mind the incredibly high cost of regulatory compliance overall and mandatory health insurance. Still worse are the ever-rapacious trial lawyers.
Meantime, you seem obsessed with repealing tax cuts for “millionaires and billionaires.” . . . The wealth that was created by my investments wasn’t put into a giant swimming pool as so many elected demagogues seem to imagine. Instead it benefitted our employees, their families and our community at large.
Business leaders and innovators face many new burdens and uncertainties that can crush delicate start-ups and even thriving businesses. Increasing the burdens right now, whether through more regulations, higher taxes, or other measures with unintended anti-business consequences, seems likely to only increase innovation fatigue at this critical time in our nation’s history. I urge our leaders to carefully consider how small companies and start-ups are being affected, and how venture capital will be affected, by the changes that are being proposed and by the actions they’ve already taken.
It’s time for government to listen to the voice of the innovator.
I was reviewing some information from one Venture Capital firm that described their annual efforts. Far from the laid-back lifestyle that some people imagine, this successful VC firm spent much of their year traveling to meet with over 6,000 companies. A few hundred would be selected and screened more carefully, and then a dozen or so might be selected for funding. Whew, what an exhausting funnel. But they are looking for gems in the rubble of entrepreneurial activity, most of which is bound for failure.
The experience of skilled venture capitalists points to a few key issues that all of us can apply to increase the odds of success in our entrepreneurial efforts and help us be more selective and less fatigued in filling the limited funnels of our own innovation efforts. Mike Alder, one of my favorite gurus of start-up success, now head of the Technology Transfer Office at Brigham Young University, once told me that the most important thing in his experience was the management team. Great technology with a dysfunctional or incompetent team will go nowhere. It takes a good team and especially a good leader to have a serious chance of success. That’s been our experience also at Innovationedge, where we have worked with a number of start-ups to assist them in commercialization (though most of our focus is on helping larger companies with their new product and innovation efforts).
Inc. Magazine has a valuable little piece, “6 Thoughts Inside the Mind of a Venture Capitalist” by John Warrillow. Read the whole article, but here are the six key questions that many VC people consider when they hear a pitch. Even if you never deal with the VC community, you should be using most of these questions as you evaluate your own entrepreneurial activities and plans.
1. “Why you?” (Are you uniquely qualified to play in this space? Do you have the expertise it takes to have credibility and a chance to succeed?)
2. “Should your concept really be its own product?” (Or is it just a new feature for an existing product? If it’s the latter, you should be licensing your product to the existing players in the market, not launching a new one.)
3. “How much will it cost to get someone to buy your product?” (I’m often amazed at how many start-ups haven’t carefully considered this. Details of distributing the product, for example, are often neglected. Demand for the product is almost always wildly exaggerated.)
4. “Can I protect your idea?” (If you want to sell your company or license your invention and lack means to prevent direct copying, you’ve got an uphill battle. One VC leader told me that they are simply much more interested in technology with a patent, even if the patent isn’t rock solid. Of course, sometimes know-how from proprietary research can give you a hard-to-imitate-lead without a patent. Sometimes.)
5. “How much money do I need to invest before your company will be worth more than it is today?”
6. “Can I fill the holes on your management team?” (A related question: Are you located in a place that high-powered business leaders would never move to? Can I relocate you to a more interesting area?)
The questions begin and end with consideration of the qualifications of the team and its leader. If you sink in that area, the business isn’t going to float.
Screen your projects with the VC lens, and you’ll be less likely to plunge into futile innovation fatigue.