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.