Professor Len MiddletonDecember 5, 2014

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Discussion Points

• Innovation Today

• Michigan’s Past

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Current Environment

Confidential

Venture Capital FirmsA lot of funding and can’t do

small deals.Billion Dollar Funds

Medical Innovation CentersMost Centers offer

Innovation Conferences.Internal Research.

CorporationsMost started venture firms. CEOs worry internal R&D is slow, and interested in

working with Universities. Source: CEOs of large corporations

Gov’t and FoundationsWant more applied research.

Increased funding for interdisciplinary teams.

Source: NSF executive.

IncubatorsThe best models offer education programs and venture funding.

Examples: Tech Starts,Y-Combinator, and LA

LaunchPad.

UniversitiesEntrepreneurship is increasing and

is not a fad.Ross B-School– 21 courses.

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U.S. ChallengesThe US is facing three critical challenges:

1. US national labs and universities concentrate on scientific research stopping at the patent stage and have no development capability or charter to commercialize an innovation.

2. The US Fortune 100 corporations produce over 1,000 patents a year that are never developed. The companies require a greater than 30% ROI in the first year of sales before authorizing the development of a new product which is impossible to achieve.

3. Most Fortune 500 companies have limited or no resources to commercialize new products because they outsourced the development and/or production process to foreign suppliers. The Past Development Cycle (see below), shows how the linkage use to occur between the three processes allowing corporations to find new ideas or additional features from customers, suppliers, and employees during the production phase of the cycle.

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Technology ShiftsThe technology world is moving away from apps, software, and circuit hardware to data collection devices, learning tools, and medical solutions. Another paradigm shift is beginning in the technology development arena. The first “S” curve below shows how the current technological developments are slowing because of the current technologies are limited by new breakthroughs.

Te

ch

no

log

y D

eve

lop

me

nt

Time

Existing Technology

NewTechnology

NewerTechnology

“S”Curve

2000 2015 2025

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Industry

Experts

Internet Search

Journalists

Academics

Trend Process

Blog

SearchCompetitors

Conferences

Venture Capitalists

Trend Assessment Research Flow

Expanded Interviews

•

Distillation of Trends

TrendsFiltration

Compilation ofResearch and

Interview Results

Subject JournalsWeb ResearchBooks

Identification of Subject Experts

Conference Identification

Initial Interviews

Conference Attendance

Open Innovation model

8Source: Henry Chesbrough’s work (2003) on Open Innovation and Open Business Models

● Paradigm shift of Welcoming Outside Ideas into the Internal R&D Process

● Paradigm Shift of opening up boundaries to Outside World through licensing, spin-offs & divesting

● Every Idea has an Exit; Exit need not be to Kill the Idea

● Access to Variety of IP & Technology

● Wider Portfolio at a Lower Cost

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Open Innovation Model - Benefits

Source: Presentation PDMA 2009, adapted from Henry Chesbrough, Harvard Business School Press, 2006

Open Innovation Cycle

Limited Funds

Limited Resources

Internal

Ideas

Pipelined Products

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Broader portfolio

leads to increased

revenues and

reduced risk

New ideas and new

technologies feed

successful product

pipeline

More resources and

collaborators allow

access to wider

resource base

Focused innovation

leverages more

resources

● Suited for both Revolutionary & Incremental Innovation

● Effective Use of Resources

● Reduces Risk

Innovation Culture • Innovation Culture has to

Start with Leadership

• Set goals which can Only be Achieved using Innovation

• Infrastructure to adopt Innovation as a Corporate Culture

• Provide Resources (talent, cash and time) to Support Innovation

• Provide training in Innovation Framework

• Define and measure Innovation Metrics

Innovation Culture

Innovation Fund

Deal Sourcing

Screening Process

Portfolio Management

Portfolio Valuation

11* Innovation To The Core by Peter Skarzynski and Rowan Gibson

“Don’t just talk about innovation, be about it” *

Leadership Vision & Commitment

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Open Innovation Process

Innovation Accelerator

Open Innovation

Collaborators

Individuals

Startups

Universities

Biotech

Facilitators

CompanyStaff

Deal Sourcing

Valuation

Exit / Write-off

Licensing

M & A

Spinouts

Additional

Funding

Re-ValuationPortfolio Valuation

Investment Portfolio

Portfolio Management

Financial Fit

Analysis

Strategic Fit

Analysis

Quick Fit Analysis

Init

ial S

cree

nin

g

Stra

tegi

c F

it

Fin

anci

al F

it

Screening Process

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Open Innovation Fund - Needs

● Current R&D spending is Focused mainly on Incremental Innovation

● Current VC Fund is not aligned with R&D needs

● Goals of Current R&D Spending and VC funds are not aligned for Open Innovation

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Open Innovation Fund

Innovation Fund

Angel Investing Venture

Capital

Incubator

Line of Debt

Private Equity

Crowd sourcing

Outsourcing Debt Investment

Equity Investment

University Grants

Research Grants

Acquisition

Joint Ventures

Co-investments

Open Innovation Ecosystem

15

Exit

Alliance

Mgt

Financial

Fit

Balancing

Risk

Status

Report

Add’l

Funding

Quick

FitStrategic

Fit

Other

Funding

Sources

Portion

of R&D

Budget

Leadership

Vision &

Commitment

Innovation Fund

Innovation Culture

Portfolio Valuation

Portfolio Management

Screening Process

Deal Sourcing

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Discussion Points

• Innovation Today

• Michigan’s Past

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Implications for MichiganA profound effect on Michigan’s economy from 1946 to 1972, Willow Run Laboratories in the Ann Arbor area, was one of only six labs existing in the US

• Creating hundreds of companies like Merit Systems (internet), KMS Fusion, Sensors Inc., Clarke Instruments, and Irwin Magnetics

• Bringing thousands of jobs to Michigan

Succumbing to political pressures the facility was closed in 1972

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Traditional R&D Cycle

Description

• Considered as Closed Innovation

• Funding Depends on Year-to-year Profitability

• Limited to Internal Talent

• Essentially a “Make” strategy

• Fully Owned and Financed by the Company

Key Issues● Relatively Limited Portfolio

with Limited Number of Leads

● Can only fund Limited Projects

● Relatively difficult to get Radical Innovations

● Missing the opportunities to “Collaborate” and “Sell”

● Limited by Internal Processes, Technologies, Time Constraints, and Methodologies

Questions

Books List• The Innovator's Solution: Creating and Sustaining Successful Growth by Clayton M.

Christensen and Michael E. Raynor (Sep 2003)

• Making Innovation Work: How to Manage It, Measure It, and Profit from It by Tony Davila, Marc J. Epstein, Robert Shelton (August 1, 2005)

• Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business by Jeff Howe (Sep 15, 2009)

• The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation by A.G. Lafley , Ram Charan (April 8, 2008)

• The Myths of Innovation : By Scott Berkun (August 2010)

• Seeing What’s Next : Using the Theories of Innovation to predict Industry change by Clayton M. Christensen (April 2004)

• Innovation To The Core – A blueprint for transforming the way your company innovates by Peter Skarzynski and Rowan Gibson ( March 2008)

• Seeing What’s Next – Using the Theories of Innovation To Predict Industry Change by Clayton M. Christensen, Scott D. Anthony and Erik A. Roth (September 2004)

• The Other Side of Innovation -Solving the Execution Challenge by Vijay Govindarajan and Chris Trimble ( HBR Press 2010)

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