The Next American Economy - Pittsburgh

A U T H O R O F W H Y G M M A T T E R S

BLUEPRINT FOR A REAL RECOVERY

WILL IAM J . HOLSTEIN

N E X T A M E R I C A N E C O N O M Y

Carnegie Mellon’sTechnology Commercialization

Ecosystem

WilliamJHolstein.com

Many thanks to those here at Carnegie Mellon University who took part in the book:

THANK YOU FOR YOUR SUPPORT

Red Whitaker Raj Rajkumar

OUR COMPETITIVE EDGE

‣ I’ve been studying wealth creation for many years, since my early days in China and Japan beginning in 1979.

‣ I’ve crisscrossed America, seeking answers to what we do better than they do.

‣ The answer is:

America’s unique brand of innovation

But we have lagged in recent years in actually commercializing our innovation. We’ve been swept up by:

‣ Easy money

‣ The myth that manufacturing does not matter.

‣ Now the financial bubble has popped, the economy is not going back to the way it was.

‣ Consumer spending, real estate, construction and housing was fueled by easy borrowed money.

‣ That has permanently changed.

THE PROBLEM

‣ We need to acknowledge the need for structural change in our economy, not just cyclical. All of which means we have to drive up the technology food chain.

CRITICAL FACTORS

‣ We need to agree on a national strategy to create new industries on U.S. soil. This is a structural change. A huge piece of the response is at the microeconomic level, in places like here in Pittsburgh.

‣ They don’t know anything about HOW wealth is ACTUALLY created!

‣ I believe the key is in our idea factories

MACROECONOMISTS JUST CAN’T HELP US…

WHAT IS AN IDEA FACTORY?

It can be a university, research institute, large hospital, national weapons laboratory or a large private sector company.

With A Mix of Basic and Applied Research

Mostly Funded by Government and Corporations

WHAT IS AN IDEA FACTORY?

It is characterized by:‣ Sustained Interactions‣ Both Formal and Informal

Between:‣ Different disciplines‣ Different cultures, nationalities

HOW DO IDEAS LEAVE THE FACTORY?

The key is the technology licensing and patenting office.

‣ Under what terms does the office allow development on favorable terms?

‣ Does it facilitate robust exchange of ideas between "inside" and "outside?"

‣ What resources does it possess?

Unlike MIT, at one point Carnegie Mellon’s technology licensing office wanted to retain majority control of any company created here.

‣ The office insisted on nondilutable positions.

‣ This was a major disincentive for entrepreneurs and investors alike.

DISINCENTIVE

COMMERCIALIZATION ECOSYSTEM: 5 STAGES

Then ideas enter an “ecosystem,” created by governments, universities, foundations, angel and venture capitalists, incubators, large companies, mentoring networks, etc.

‣ No one can control the ecosystem. It is shared.

‣ The ecosystem depends on various institutions and personalities finding overlap of interests.

‣ What Brookings calls a “thick network of formal and informal relationships” across institutions.

‣ I’ve borrowed the five-stage concept used by big companies to describe the ideal of how commercialization works

THE ECOSYSTEM

STAGE 1

START UP

UNIVERSITYSETTING

FINANCINGLARGE CO’S

TEAMSCIENTISTS & RESEARCHERS ONLY

GOV’T

STAGE 1‣ Professors or graduate students have an

‣ They receive funding from the government and perhaps some from large companies.

STAGE 1 STAGE 2

START UP DEVELOPMENT

UNIVERSITY INCUBATOR / HALFWAY

SETTING

TEAM GROWS: - MARKETING- FINANCE- MENTORING- INCUBATORS- SKILLED LABOR- NETWORKING MECHANISMS

GOV’T (SBIR) ANGELSFOUNDATIONS

OTHERKEY INPUTS:

GOV’T

STAGE 2This is where it gets tougher.

‣ Here, the scientists need to move off campus and start building a team of people with broader skills.

‣ Mentoring and incubators are critical at this points.

‣ Note - Government funding for basic research begins to change. It is not SBIR funding that might become more important than NSF.

‣ Also Note - Angels or foundations might be involved in funding the research at this stage.

STAGE 1 STAGE 2 STAGE 3

START UP DEVELOPMENT MARKET FACING

HOUSEOFFICE

SETTING

VENTURECAPITALISTS

TEAM GROWS: - MARKETING- FINANCE

PROFESSIONAL CEO MAY BE REQUIRED

- MENTORING- INCUBATORS- SKILLED LABOR- NETWORKING MECHANISMS

OTHERKEY INPUTS:

GOV’T

STAGE 2 STAGE 3

DEVELOPMENT MARKET FACING

INCUBATOR / HALFWAY

HOUSEOFFICE

SETTING

VENTURECAPITALISTS

TEAMTEAM GROWS: - MARKETING- FINANCE

STAGE 3At some point, and I’m theorizing that it occurs in Stage 3, the team has to start facing the market and asking tough questions about what customers really want.

‣ The science experiment is over.

‣ It may be time for more professional managers, including a CEO.

‣ Angels and foundations start dropping out and Venture Capitalists start moving in.

STAGE 1 STAGE 2 STAGE 3 STAGE 4

VALLEY OF DEATH

HOUSEOFFICE

SETTING

VENTURECAPITALISTS

CEO + FULL FINANCIAL TEAM- MANUF.- LOGISTICS- SALES

OTHERKEY INPUTS:

GOV’T

STAGE 3 STAGE 4MARKET FACING

VALLEY OF DEATH

OFFICESETTING

VENTURECAPITALISTS

TEAMPROFESSIONAL CEO MAY BE REQUIRED

ANGELS

FOUNDATIONS

STAGE 4The infamous valley of death. At this point, the team is having to rapidly gear up spending before being able to sell enough product to cover those ecpenses... perhaps even before it can sell any product

Many entrepreneurs do not make it through the valley of death.

By this point, there is very little government funding of any sort.

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

VALLEY OF DEATH

FULLY COMMERCIALIZED

HOUSEOFFICE

SETTING

VENTURECAPITALISTS

PROFIT GENERATION OR IPO

OTHERKEY INPUTS:

GOV’T

STAGE 4 STAGE 5VALLEY OF

DEATHFULLY

COMMERCIALIZED

OFFICESETTING

VENTURECAPITALISTSTEAMCEO + FULL FINANCIAL TEAM- MANUF.- LOGISTICS- SALES

ANGELSFOUNDATIONS

STAGE 5Finally the product is commercialized. We can define that in different ways:

‣ The company goes public and raised enough capital to continue expanding.

‣ The company actually achieves a profit

Note who complex this whole process is:

‣ The physical setting keeps changing.

‣ The source of funding keeps changing.

‣ The nature of the team developing the ideas keeps changing

This is what makes the process so difficult.

But I don’t believe commercialization and growth have to occur by accident.

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

VALLEY OF DEATH

FULLY COMMERCIALIZED

HOUSEOFFICE

SETTING

VENTURECAPITALISTS

TEAMSCIENTISTS & RESEARCHERSONLY

OTHERKEY INPUTS:

GOV’T

WHERE ARE THE

GAPS???

‣ We now know how to analyze these ecosystems and look for “gaps.”

‣ We can also look for overlaps, meaning similar institutions attempting to do very similar things.

‣ Sometimes overlaps are just as debilitating as outright gaps in the ecosystem.

‣ Where are the possible gaps in the Carnegie Mellon Ecosystem?

WHERE ARE THE GAPS?

‣ I understand it has been improved, but is it as strong as MIT or Stanford?

‣ Does it have the resources to build robust connections between people on the inside and people on the outside?

GAP #1 - TECHNOLOGY LICENSING OFFICE

Pittsburgh faces an obvious absence of venture capital.

‣ The financing that comes from foundations may or may not be the right sort of money.

‣ Entrepreneurs need “Smart Money” that comes with management expertise.

‣ Despite their best intentions, foundations don’t necessarily know how to build businesses.

GAP #2 - FINANCING

The good news is that there are ways of attracting venture capital:

‣ One absolute key is the tech office’s policies -- those absolutely get the attention of the VC crowd.

‣ Another is the presence of angel investors

GAP #2 - FINANCING

The gold standard for any university is creating companies of at least $1 billion in annual sales. Here in Pittsburgh, that seems to be a challenge.

GAP #3 - ACHIEVING SCALE

‣ One obvious reason is the absence of venture capital.

‣ But another is a gap in how scientists find CEOs

‣ Red Whitaker found Eric Close to run Redzone Robotics, but it wasn’t easy. Other clusters like Boston and Austin have mechanisms for networking and making introductions.

Another key would be examining the role of big companies that are paying for research here, like General Motors or Caterpillar.

‣ Are they investing in any companies?

‣ Are they sitting on any boards?

‣ Are they mentoring any of your young CEOs?

Large businesses can play a role throughout all five stages of the commercializations ecosystem. They can help fill crucial gaps.

GAP #3 - ACHIEVING SCALE

These are hugely important but they come in a variety of different flavors:

‣ Some want to encourage entrepreneurs to leave the nest as soon as possible.

‣ Others want to keep occupants as long as possible, perhaps to continue receiving rent.

GAP #4 - INCUBATORS

So we have to ask ourselves:‣ What are the precise mix of incentives in an incubator?

‣ Are they in favor of commercialization or are they in favor of obtaining new research grants?

‣ Are PHDs and professors incentivized to commercialize?

‣ Or are they encouraged to continue their fascination with the technology alone?

‣ What is the net impact of National Robotics Engineering Consortium (NREC)?‣ Some CEOS in Pittsburgh told me they think it is skewed

toward keeping people and ideas in the research mode -- not in moving ideas to commercialization.

‣ That’s a discussion you should have.

GAP #4 - INCUBATORS

Of all the players involved in your commercialization ecosystem, are some of them competing with each other?

‣ This is a particularly acute problem in older states, with overlapping agencies and non-profit players.

‣ Do your key institutions cooperate?

‣ Does information flow smoothly between them?

‣ Are they staffed by the best professionals?

‣ Is politics involved?

GAP #5 - GENERAL

You at Carnegie Mellon can’t possibly control this entire ecosystem.

‣ But you can engage in dialogue with the other players

‣ You can look at best practices at this microeconomic level - across the country - and seek to influence others.

‣ What’s your incentive to do that?

GAP #5 - GENERAL

Ultimately, Carnegie Mellon will be stronger in so many respects if you are surrounded by a healthy ecosystem of commercialization.

‣ The community would be better off.

‣ The state would be better off.

‣ The whole economic climate would be better.

‣ You would start a virtuous cycle upward and attract more funding and more talent.

IN CONCLUSION

There is clearly self-interest at stake in finding more overlaps with these other institutions.

What we’re talking about here is a smarter form of American capitalism, with institutions finding better alignment of interests. I am not advocating socialism. I am not advocating any ism other than pragmatism.

The pragmatism to look around the country at what works and what doesn’t work.

IN CONCLUSION

Based on the research for this book and based on the research of a lifetime, I am convinced that there are conscious steps you can take at the microeconomic level to improve the ecosystems that commercialize technology.

I believe that’s what is going to create the next American economy and respond to our global competitive challenge.

IN CONCLUSION

A U T H O R O F W H Y G M M A T T E R S

BLUEPRINT FOR A REAL RECOVERY

WILL IAM J . HOLSTEIN

N E X T A M E R I C A N E C O N O M Y

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