Institute for Manufacturing 1 ELIZABETH GARNSEY Centre for Technology Management Department of Engineering MODULE 4E7 – ENTERPRISE AND BUSINESS DEVELOPMENT

1 ELIZABETH GARNSEYCentre for Technology Management

Department of EngineeringInstitute for Manufacturing

MODULE 4E7 – ENTERPRISE AND BUSINESS DEVELOPMENT

2004

Dr E. Garnsey

ENGINEERING TRIPOS PART IIB



Session 1Entrepreneurial problem-solving

and technology transfer

4E7 2004



Programme - Wednesday afternoons

1. Entrepreneurial problem solving and technology transfer

2. Growing a high tech enterprise

3. Operating in a turbulent environment

4. Business planning and finance

5. Making the most of your coursework

Not a “how to do it” course - see Centre for Entrepreneurial Learning

Here - principles of business development

How to find out and apply knowledge in changing circumstances.



Learning from experience

• Direct experience is best way to learn about enterprise.Learning from experience of others is next best. Hence case histories.

• Set these in broader context.Understand influences and outcomes - apply this knowledge as conditions change.



By the end of the session you will:

• Understand role of entrepreneurs in innovation

• Be familiar with use of case studies to apply and create mental maps (frameworks for analysis)

• Know why technology transfer from knowledge base occurs

• Identify different business models for spin-out ventures



How much time does 4E7 require?

4th year modules are scheduled to take 40 hours 14 x lectures / class activityOr 4 sessions of 3 hours [3.5 x 50 minute lectures]

+ 6 hours preparation: 2 of these in class (5th session) + 20 hours on a report to be completed by end MarchSee today’s hand out - course outline



Workshop Mode

• Model is executive training in companies– Often all-day workshops– Interactive

• An hour or two does not allow us to get into unfamiliar subject matter.– time for student participation– time for speaker to share relevant experience.

• A different learning mode from technical modules



Today’s Agenda• 2.00 Introduction

• The puzzle of the entrepreneurial breakthrough

• Creativity and innovation: three case studies

• 3.00 From lab to market: applying knowledge from research

• Business models for spin out

• IP and Incubation

3.30 SoftSound Spins out of CUED - Dr Tony Robinson

4.30 Technology transfer modes



By the end of the session you will:

• Understand role of entrepreneurs in innovation

• Be familiar with use of case studies to apply and create mental maps (frameworks for analysis)

• Know why technology transfer from knowledge base occurs

• Identify different business models for spin-out ventures



Part 1. The puzzle: how do entrepreneurial ventures make technical and business breakthroughs?

Intel (integrated circuit)Apple Computers (PCs) Genentech (biotech)Sun (work stations) Cisco (internet routers)Netscape ( browser)Hotmail (free e-mail)

CAMBRIDGESHIRESOUTH



Cambridge business breakthroughs include

CAMBRIDGESHIRE

•Aero research: plastic composites•Acorn Computers: high performance PCs•Domino: Ink Jet Printing•ARM: high performance, low power chip design•CDT: light emitting polymers•PlasticLogic:new semiconductor material



Long overlooked - now high profile

• “The ability to turn scientific discoveries into successful commercial products is vital if businesses are to thrive in the knowledge driven economy”

• White paper – Our Competitive Future - 1998



Is the personality of the entrepreneur the key to new venture breakthroughs?

Entrepreneurs have very diverse personalities.

Entrepreneurial role and process have more explanatory power than personality traits.

People who habitually engage in entrepreneurial processes and identify themselves as “entrepreneurs” share a certain

- orientation to opportunity- problem-solving repertoire



Innovative behaviour leads to breakthrough

• What is it to be innovative? Why are entrepreneurs innovative?

• Innovation - not an invention, need not be technical – Early commercial application of invention or idea– New products, processes, channels, organization, business

models

• Innovations can be incremental or radical

• Innovation does not guarantee diversity– Many innovations reduce diversity



Innovation and diversity

Life forms have 'extraordinary power to diversity, to adapt to opportunities as they present themselves and to create new opportunities in the process.' (Suzuki 2000. 124)

Enterprise plays a similar role in economic life.

Some creative process at work?



Creativity: cognitive and practical

• Start with vision• Implement

• Let’s look briefly at ideas



A Theory of Creativity (Koestler 1964)

• We rely on ways of thinking (rules, habits, associative contexts, matrices of thought) that have proved useful.

• Mind sets are like physical reflexes and skills in that they are applied unconsciously.

• Matrices of thought and physical reflexes are efficient. But once assimilated they limit flexibility

• Creativity overcomes inertia and the habitual.

A. Koestler “The Act of Creation Hutchinson, London 1964 - summarised by Rick Mitchell



The act of creation

• According to Koestler, the creative act is fundamentally the bringing a new, previously un-associated, matrix of thought to bear on a topic. (“bisociation”)



Collision of thought paths in two different matrices

Result: breakthrough in art; invention; humour



Is humour creative?

• Choose a joke• Analyse in terms of Koestler’s theory• Are there two matrices of association that collide

to provide the humour?



Usually strong resistance to change

To overcome this, benefits of change must be > C whereC = Perceived cost of change

D V P > C

D = dissatisfactionV = visionP = plausible plan or process (M Tushman - summarised by Rick Mitchell)



Example: TechnoDocDissatisfaction: poor quality of technical manuals - OpportunityVision: great user manuals

Plan (process):“ I don’t know how to use your equipment, but if youshow me how, I can provide a better guide for your customers than your programmers can produce.” Founder of TechnoDoc

Created value for customers and users.Achieved returns through:

Leverage of very limited resourcesEnlistment of others



Intellectual progress starts from a problem (Karl Popper)

• Effective innovation meets an unfilled need (someone’s problem) for something “different, cheaper, better.”

• Entrepreneurial process as a problem-solving process– First and second order problem solving

• Entrepreneurs solve first order problems (process problems) that have to be overcome in order to provide solutions to others (value creation).



Creative Activities

Idea

resources

new activity

returns

valuecreation



knowledge

nourishment

health

transport

communications

security

shelter

trade

recreation

Innovations represent ways to meet unmet needs. Important technologies meet basic needs.



Case examples of entrepreneurial problem- solving as creative thought and practice

• Oxford Instruments• Psion• Hotmail



Why was Oxford Instruments good at innovation?

Look for obstacles encountered by founders of Oxford Instruments.

What problem-solving approaches did they use to overcomethese?

Case Example



Problem solving at Oxford InstrumentsMarket opportunities limited in founder’s expertiseDetects and exploits new opening in his own specialism

Immature supplies of semi-conducting materials Ox. Instr. develops skills conferring competitive advantageSemi-conducting materials hard to work with. Competitors fail.

Competitor controlled liquid helium supply. Take on production of liquid helium. Acquire critical resource.



Problem solving at Oxford Instruments

Disorganized managementKey managers leave when pressed to improve performance and set up competing businessReorganize and outcompete them. Company growing too fast to retain creative cultureSegment into a Group of associated companies

Generalizing from this case:



Recognition of opportunity (D,V)

Action (P)

Entrepreneurs: Lack resources

Resist dependence

Innovativeness involves continual:



David Potter•Dissatisfaction of 80s: hardware outpacing software

•Vision: Improved software and new games•Process: make money on stock market

Set up new software activity in own company

•Changed direction when competition heated up• Shifted product to personal organizers• Market leader



Enlist others, economize, combine resources

Recruited former students to develop software:

Resource economy - clever and cheap HR

Partnership with Sinclair to provide software for his computers.

Enlist others now by offering share in future returns



Continual Opportunity Detection

• When competition intensified, switched to new opportunity.

• New product : Psion Personal Organiser.• What was the thinking behind product?



Own need helped people at Psion see market gap

“Time is most valuable of resources to professionals

Hand held computer can be used to help organize our time.

Other professionals will pay us to address same problem.”



25 years ago this involved an unexpected combination of ideas (“thought paths on two different matrices”)

Software development (advanced technique) + Computer games (play) = Margins (70-80+%)



What ideas and processes enabled Bhatia and Smith to innovate at Hotmail?

Look for obstacles encountered by founders of Hotmail?

What problem-solving approaches did they use to overcomethese?



Hotmail Corporation - free e-mail pioneer

The firm was founded early 1996 by two friends, Sabeer Bhatia and Jack Smith, young engineers who met as employees of Apple Computer in California.

1995: developed a personal, password protected database for the Internet called JavaSoft. Their business idea for Javasoft was rejected by 20 venture capitalists.

In 1995 they had the idea for Hotmail - when they were prevented from receiving personal e-mails at work (for sharing their business plan).

Founded byengineers

First productidea rejected

Solving their own problem



DevelopJavaSoft database

Do not impress funders No funds

Develop Hotmail concept / free e-mail on the Web, advertising revenues

Secure minimal funding $300k

Running out of cash before launch Persuade employees

to work unpaid

Use viral marketing

Collapse of serverCreate scaleable technology

Sale to Microsoft $400m

Cut down their resourcerequirements

1995

June 1996

Dec 1997

Youngengineers

Massive growth

Hugo and Garnsey 2002

Founders prevented from exchanging private e-mail at work



“My method of management is to keep the floodgates open, and use the flood as a forcing function to get engineering to do AMAZING things. It worked. In my book, business needs drive engineering deliverables.“

Jack Smith, founder of Hotmail, E-mail message, 29 Oct 2001

Pressure to solve problems leads to creation of valuable new resources



E-mail service provided free to subscribers (details to advertisers)

Database Management software for Web



Generalizing from cases:

Entrepreneurs pursue opportunities before they have the means to realize them.(Professor Howard Stevenson, Harvard)

When this entails risk, some entrepreneurs find ways to limit risk.

Our approach shows they choose to operate within constraints that force them to be creative and do new things.

Entrepreneurs promote innovation - and also renew diversity.



•Enlist others, create network to open opportunities& obtain resources

• Opportunitiescontinuallyscan and reassess

•Resource use:EconomyLeverageCombineCreate

Entrepreneurs match up resources and opportunities



Success Bias in our Analysis?

We have seen why entrepreneurial activity is innovative, not that their innovation necessarily succeeds.

There is a pattern of positive response to obstacles among the successful But luck plays a large part in success.Capitalism involves a struggle for survival for vulnerable young firms.

Many - most entrepreneurs - struggle and fail.

Waves of entrepreneurs pursue possibilities for change until finally breakthroughs are achieved. An evolutionary process.



• PART TWO• Spinning out companies from the science base



From research to business activity: convert knowledge into economic resource

Idea

resources

new activity

returns

valuecreation



Vehicles for academic-industry transfer

Privatecontractresearch,occasionalconsultancy

Patent,license

CorporateResearchPartnership

Spin-out Business

Academe Business

•Research & Consultancy • Development company

• Production company



Advantages of starting a business

• Tax concessions• Limited liability• Protect ownership through incorporation

• Demonstrate product viability• Embed learning in organization• Store resources

• Create a community; create jobs



Type of business activity among university spin-outs

Activity: sell, produce product, provide service, combination

through:Contract research, consultancy,License invention

Development Co.(e.g. biotech ventures)

Production co.e.g. BioRobotics



Are entrepreneurs’ resources sufficient to realize the business opportunity?

Consulting and contract research: easier to resource, based on current or accessible know-how.

To develop a product based on research knowledge(in a “development company”) Have to transform scientific knowledge into economic resource.

Instrumentation and software interesting cases: often have market applications (solve research problems)

A B



Development companies

Development companies are established to create future economic resources beyond scope of science grants.

Generic technology, further scientific work: costly gestation.

E.g. CDT, Plastic Logic, biotechnology venturesNeed manufacturing partners (provide them services)and venture capital

Development company can take licensing route/ eventually could become production company.



Production Company

Setting up a production company: a challenge toflexibility. Requires committed resources.

Hewlett PackardOxford InstrumentsPsionBioRobotics

BA



How to protect returns?

• Patent and license technology• Copyright• Design rights• Trade mark• Trade secrets

Idea

resources

new activity

Returns?

valuecreation



Patents for inventions - new and improved products and

processes that are capable of industrial application

Trade marks for brand identity - of goods and services

Designs for shape and appearance - either functional or

aesthetically pleasing articles or surface decoration, pattern or

ornament

Copyright for material - literary and artistic material, music,

films, sound recordings and broadcasts, including software

and multimedia

Source: www.intellectual-property.gov.ukThe Inventor’s Guide

http://www.intellectual-property.gov.uk/std/faq/trade_marks/what.htm



Commercial Returns from Research

Patent and license technology

Invention protected for a period from competitorswho have to pay inventor a license fee to use patent.

Patent Criteria: NovelNon-obvious to ‘one skilled in the art'

Practical (industrial application)Excluded under British Patent Act:

Discoveries



Other forms of protection Trade Secrets

Pre-registration IP

Employee Confidentiality

Consultant/Partner Confidentiality

Non-Disclosure Agreements

- Non Disclosure may provide better protection than patents

Source: www.intellectual-property.gov.ukIandiorio, 1997



License fees

Royalties increase with value added*Early stage innovation 1-3% of sales revenues

Biotech late clinical trials: 15%

New licensing model aims at multiple licensees for key technology

- e.g. ARM* “25% licensee’s additional profit” Anne Miller, TTP



Incubation of new venturesCase: St John’s Innovation Centre

Incubators can help firms overcome liabilities of

newness

Incubators attempt to create favourable spin-out

environment

www.stjohns.co.uk



St John’s Innovation Centre

• Founded 1987 by St John’s College

• Aimed at early-stage firms in high-tech

• Turnover £3.5m

• 90,000 sq. ft.

• 50 Tenants - 100 firms have “graduated”

• Failure Rate c. 15% p.a.

www.stjohns.co.uk



Features of SJIC• Flexible Tenancy

• Centre Facilities

• Management Support/Advice

• Credibility

• Contact with other firms

• No equity in tenant firms

• Centre for other Business Support

– e.g. European Innovation Relay Centre, Enterprise/Business Link



Recap• Enterprise involves the matching of opportunities and resources to

create value

• Advance is through a lead-lag dynamic of new problems forcing new

solutions

• Technologies address user needs - potential business opportunities

• Science base: knowledge converted into economic gain through

– spectrum of activities

• Protect returns through IPR?

• Incubators aim to create favourable spin-out environment

Documents

Institute for Manufacturing 1 ELIZABETH GARNSEY Centre for Technology Management Department of Engineering MODULE 4E7 – ENTERPRISE AND BUSINESS DEVELOPMENT