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Innovation Creation
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
October 1, 2004


By Brent Holliday
Greenstone Venture Partners

Innovation Creation

“Changes come before we can grow,
Learn to see them before we're too old,
Don't just take me for tryin' to be heavy,
Understand, it's time to get ready for the storm” – Stevie Ray Vaughn, Couldn’t Stand The Weather

Conventional wisdom has it that the federal government’s drive to increase innovation in Canada (and the individual province’s efforts to do the same) will result in much larger quantities of inventions in the next decade.  The universities, centres of excellence, research facilities and large and small companies taking advantage of R&D credits will see and increase in commercializable technology through the stimulative money and programs.  Some even characterize the increase as a “flood of innovation”.  If this is true, then let’s explore a couple of dams currently in place that will hold the flood back from reaching the fertile business and consumer markets and the resulting wealth, jobs and taxes that the government would like to see.

Dam # 1 – If the inventions start coming at a rapid pace, I believe we currently lack sufficient sophistication in Canada to recognize a technology vs. a business.  There are a couple of reasons for this.  One is that we are technology lovers.  We fall in love with the technology and get blinded to its potential market acceptance.  The second, somewhat related, reason is that we don’t have enough of the experienced product managers, product line managers and product marketing managers that can see: a)whether a customer needs it, b) whether we can build it economically and c) whether someone else or some substitute technology will circumvent it in the market. 

A technology is something that, if unique and re-produceable, can be amalgamated into existing market solutions… as a feature or a new process or a tool.  At its simplest form, it is not a company.  It needs to be licensed into another company (or companies) because it relies on other existing or emerging technologies to become a complete solution a customer needs.  A business should only be started around a technology when it is a potential solution or a platform for potential solutions that customers will buy.

There is a grey area in which one entrepreneur might see a technology and some “off-the-shelf” existing parts coming together to make a solution that you can build a company around.  Another entrepreneur might see it as a licensable opportunity.  For instance, an algorithm usually does not make a company.  But the founders of Abatis Systems decided that IP packet classification could be embedded in an appliance (box) and become a product/solution that customers would buy.  Voila, a company. Many, many other algorithms have been licensed to larger companies to augment what their existing products do. 

The point is that a very experienced set of eyes on a technology can see the market opportunity, evaluate the cost of building it out for the market and know what else is out there.  We need many more of those experienced eyes today, let alone in the future “flood of innovation”.

Dam #2 – Proper seed capital.  The problem with our current path of financing innovation is not the lack of capital at the earliest stages of formation.  It is the sophistication of that capital.  The way in which many of these earliest financings happen today is that the innovator calls on people he/she knows and trusts and ends up talking to an angel or a VC… BEFORE they engage someone sophisticated in what I just talked about in Dam #1.  The innovator then gets talking about financing strategies, term sheets and the pros and cons of venture funding before really good, experienced people advise them on whether the opportunity is a technology or a business. 

Most of the innovators in Canada are first timers (and with the “flood”, there will be many more).  They have no idea what they are getting into.  Angels and VCs rush in and, because many of them lack the experience I talked about in Dam#1 (it is just impossible for any one person to have the necessary experience across a vast see of technologies and markets), a deal gets underway before much sober thought on whether this is a company or not.

According to most of what we hear today, the commercialization bottleneck is financing.  The proposed solution boils down to this: Throw a few hundred thousand dollars at tons of these new innovations and some of them will rise up and be great companies.  I beg to differ, naturally.  There is such a shortage of entrepreneurs (dam #1) that can see somewhat clearly from two guys and patent to large market opportunity being realized, that we would be throwing money down a hole.  Dam #2 is not lack of available capital… it is properly placed capital.  Further, if it is to be a business, it needs to get the best possible chance at success.  Clearly, the money needs to come with networks that will help the company get built. 

What do we do about these dams holding back the “flood of innovation”? The only thing we can do is gain more experience and expand our networks to allow interesting technologies to be evaluated by a broader, more sophisticated audience.  We need to involve the corporate folks who will find innovation in licensing opportunities and may get involved in financing some of those that become businesses (it’s sometimes beneficial to leverage R&D risk using other people’s money).  A level of trust about intellectual property is always an issue when corporate folks start seeing innovation at early stages… but that’s a whole other topic.

With many, many new technologies to look at in the coming years, I believe it will be hard to keep up.  As a result, we may see more un-sophisticated capital chasing early seed opportunities and/or many of these opportunities will end up as licensing deals to larger corporations (In fact, if many of these technologies become ill-advised companies and get stranded by lack of further financing, they may end up getting sold to corporations at low valuations anyway). 

Stimulating the creation of innovation is certainly a noble policy goal.  Countries that lead in innovation have been shown to lead in quality of life.  Effectively translating that increase in innovation to commercialization (which leads to the wealth that helps spur that quality of life) is not an easy task.  Just like you can’t just print money to make your economy grow, you can’t just increase the number of new exciting technologies and expect that they will all become big companies.  It all comes down to people.  People with experience and drive that early stage capital will happily back. 

What Do You Think? Talk Back To Brent Holliday

 



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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