“Open Innovation – Corporate Venturing And Monetizing IP”

Thursday, June 18th, 2009
Open Innovation – Corporate Venturing And Monetizing IP
Fremont Hills Country Club
12889 Viscaino Place
Los Altos, CA

Heidi Mason, Bell Mason
Paul Greco, Ocean Tomo
Jim Anderson, President SVB Analytic
Timothy Lohse, DLA Piper
Andrea Mariotti, R&D Manager, Ricoh Innovations
Debra Baker, Deloitte & Touche

Moderator: CJ Koomen, Band of Angels, Former President Philips Semiconductor North America

Description: The old Corporate R&D paradigm has been shifting with an accelerating pace in the past 10 years or so. The world moves to open innovation where new ideas can come from start ups, spin ins, corporate venturing, M&A. Corporate R&D more and more has the task of helping to sift the good ideas from the bad ones. Corporate structure is changing too. The panel will address the various aspects of open innovation such as the new corporate innovation structure, the role of IP in consortia, how to monetize and protect IP in an open innovation environment and the role of start ups.

For more information, please see here

My thoughts
The topics we covered in this panel and that were most interesting to me were:

• the corporate innovation problem: this is a widespread challenge to big and medium size corporation alike and Patty Burke, speaking on behalf of Heidi Mason, had a terrific cartoon capturing the point. The cartoon showed a medieval army intent on fighting an open field battle with spears and swords when a guy with a white coat approached the general showing him a machine gun. The caption read something along the lines "We do not have time for new things, I am fighting a battle here!" This is a common scenario in most companies especially those dealing with manufacturing of goods. It is often the case that the current development organization has no bandwidth to take what comes out of the company labs, game changing as it may be. So what can companies do about it? One option is to perform an acquisition and de facto spin off your new product line that way. I am sure many other strategies could also be considered that are more appropriate for specific scenarios. My point? Awareness that your company is experiencing this problem is half the solution.
• product maturity and cost of research: this was actually my presentation. In a nutshell all product life cycles presents a cross over point where the cost of doing R&D to continue to improve such product will no longer yield the desired increase in market value. In other words, no matter how much money you spend in research, your product's price is on the downward slope to become a commodity. Apple is a master at preventing this from happening, just look at their laptop lineup and compare it to the competition. They are investing millions in research and they can still charge a premium for their laptops whereas Dell or HP have to sell theirs for half the price. My point? You can stretch the life span of a product that has reached maturity by continuing to invest in R&D but it is risky and you better be as good as Apple at it. The reader should note that sooner or later your product will become a commodity, it is unavoidable. The message here is to make sure you are aware where your cross over point is and redirect your R&D resources elsewhere before you spend your way out of business. Case and point, Nikon in the digital camera industry, they almost spend their way out of business as they though they could prevent (their) digital cameras from becoming commodities. Today they scaled back considerably and moved into a niche market of high end product only.
  
• IP issues for US market: each market is different when it comes to IP protection. One word of wisdom from the panelists was to make sure you have your inventors sign a release of ownership for everything that they work on. Failure to do so can be very expensive as we were told stories of disgruntled employees holding their former employer for ransom during an M&A. This is particularly important for start up where it is easy to overlook these matters with potentially disastrous financial consequences. Ye be warned.

A proposal for sustainable innovation and growth
Given the above I advocate that a sustainable model for innovation and growth is as follows:

1. use evolutionary user centric innovation (more on this in an upcoming post) to generate new business opportunities
   
2. channel the outputs from (1) into existing product lines if applicable. If not, identify adjacent players in the field of the new business opportunity you wish to pursue and consider M&A after your IP is protected
3. rinse and repeat. Note that as some of your product lines reach commodity status, now you have a strategy in place to keep a pipeline of new opportunities thanks to (1) and (2).
   

[special thanks to ACG's Micky Robledo for the photos]

The art of innovation

What do I mean by "the art of innovation"? Let's face it, innovation is another word for lucky guess. Sure there is a lot of hard work that can be done to make the guessing more likely to be "lucky" but it is still guessing. First, allow me to share what do I mean for innovation.

Innovation: an innovation is a better solution to a solved problem or a solution to a yet unsolved problem that can be monetized.

At this point I raise two controversial points:
- I compared innovation with lucky guessing
- I stated that innovation is only something that can be monetized.

Let' start with the guessing claim. Why is innovation so difficult? After all if all you are doing is solving a problem, it is just a matter of applying science to the problem. Be that as it may be, the guessing part is not in solving the problem necessarily but in finding the problem in the first place. That is unless your goal is to build a better mouse trap but that case has limited interests IMHO.

From this point on the reader should assume that I am focusing any further postings to the challenge of innovation according to the second half of the definition. A new solution to an unsolved problem. Therefore you have to identify the problem first.

Case and point? Twitter. Twitter has a problem, it cannot (as I write) monetize on its service yet. The problem is well understood but yet unsolved. You can solve it by trying existing solutions (build a better mouse trap) or you come up with a new approach. This is where the lucky guessing comes into play. Say that you have an idea on how to make Twitter profitable. It is innovative in the latter half of the definition therefore you are breaking new ground. How do you evaluate if your solution is going to be innovative? The short answer is that you cannot. The best you can do is remove as much uncertainty as you can, re evaluate and eventually face the dilemma whether you want to spend resources to try it out and get the feedback from your users, buyers and stake holders. That is the only thing that matter.

Sure I am oversimplifying things and sure you can make the claim that I am only thinking web 2.0 models but what product or business today is not tied to it in some way? Think about it. A barber shop can hardly afford not the have an online presence let alone any other type of business. Not to mention online entity such as Yelp that give your business an online persona whether you want it or not.

So Twitter monetization problem shows us that the challenge is that you cannot completely remove uncertainty from your innovative process in the confine of your lab or you would not be innovating in the first place. The answers are indeed out there.

Does this means that Twitter is not innovative? So far, it is not at least according to the definition I proposed above. It has the potential to be but they are not there yet. Why not? Simple, nobody knows what problem they are solving exactly. You do not believe me? Try to explain what Twitter is to someone who has never seen it before. Now try to explain what Facebook or Linkedin is to someone who has never seen it before. See the difference?

Is Facebook innovative? Well Facebook built a better mouse trap. MySpace was the innovative idea and they did have revenues and a well defined business model. As such both MySpace and Facebook are innovative according to the definition herein although as researcher I find it more interesting to study how MySpace came into existence than how did Facebook stole the show. Perhaps more importantly how did we all miss it? The all so famous "why did I not think of it?"

Let's do one more: was YouTube innovative? According to the definition, yes, by all means. They solved a well known problem and they did not just build a better mouse trap, they allowed the cost of sharing copyrighted material to drop to $0. As such they created value for their users and in turn they opened the door to monetization strategies including acquisition, as it were. In other words they broke the rules but gave users what they asked.

The reader should take a moment to ponder that innovation often *is* about breaking rules. We can have a whole other conversation as to which rules breaking behaviour is ethical and socially acceptable and which is not. Case and point the financial "creativity" in the real estate market we experienced in the last several years where banks, broker, realtors *and* buyers broke best practice (and common sense) for quick and easy profit.

This is a good point to address the second controversy, monetization. Sure there are plenty of researchers in the academia that may be displeased with my statement but the fact of the matter is that there is no "pure" research and therefore no "pure" innovation (as in "not tied to monetization") as long as you look closely enough at its dynamics for resource allocation.

All pure research is paid for by someone, a government grant, a private grant, tuition from students, etc. In any of those scenarios someone (or multiple someones) at some point in time sat around a table and decided which proposal to fund based on which one would bring more progress to humanity, whether in the form of knowledge or technology, or perhaps they decided based on some other parameters. My point here is that there was a decision process involved for resource allocation. In a nutshell, as long as you operate under scarcity you will run into money matters. Lets' see how.

Chances are that regardless of the parameters used, the research so funded will add value to the life of human being. How much value depends on the specific case of course but in case you did not noticed, we just proved my point with respect to monetization. How do you measure value objectively? With money, of course. This is the very basic of human social interaction since currency was introduced, whereas we are all decision agents operating under scarcity. We all have to decide what we are willing to give up from our quota of goods (tangible or not) in order to acquire a new something. Example: how much money am I willing to part in order to have the new iPhone 3Gs and what else will I not be able to afford as consequence of depleting my pool of cash. For most of us money is a finite set so every choice we make is driven by which goods do we want to acquire/use/enjoy and which we are willing to part or do without for a sensible amount of time.

My point? Even pure research is subject to the monetization model, whether explicitly or implicitly. So let's just embrace the fact that monetization matters and make it explicit.

Given the above, innovation in the private sector should never be disjoint from monetization. Sounds trivial but you will be amazed of how many companies are ignoring this simple fact. Case and point, Google (sorry guys, I love you but you need to hear this).

Google claims they are user driven when it comes to innovation. Sadly, they are not. What they do is a lot of technological innovation driven by statistical user analysis. That is a whole other story than being driven by users.

They claim they have so much data about what people do that they can ascertain if a new technology or product is worth developing. Yet, more than ten years since they started, Google has tons of products and virtually only one revenue stream. That is, they are still a one trick pony. You take away the search traffic and thus the ad serving business and they are gone. How can that be?!? Google has more PhD than NASA! Well simply put doing innovation based on statistical user behavior is like learning how to drive by looking at parked cars. It has its limitations. Sure you can tell a lot about the habit of drivers but that still does not teach how they do it or, more importantly, why they do it.

In conclusion we have established a constrained definition of innovation and we have shown how it actually encompasses research in both the private and academic settings. Further, we have shown that monetization must be one of the ingredients of innovation or you are very likely to engage yourself in an exercise in futility that can be quite expensive.

Why this blog

After sixteen years in the high tech industry and more than ten in Silicon Valley it was inevitable that I actually learned a few things. This is a output to share what I have learn, to share educated opinion and wild guesses with respect to the art of innovation. Please enjoy!