Prepared by BizLogx LLC September 30, 2004 Copyright 2004 BizLogx LLC Mr. Patrick Valente Mr. Norman Chagnon Technology Division Ohio Department of Development Columbus, OH 43054 Dear Mr. Valente and Mr. Chagnon, We are pleased to deliver this Technology Commercialization Framework. In the form of the Third Frontier Project, the State of Ohio demonstrated great foresight in making available over $1 billion to fund activities ranging from applied research to product development. As stated by Michael Weitzman, however, “the limits to growth may lie not as much in our ability to generate new ideas, so much as in our ability to process an abundance of potentially new seed ideas into usable form.” To address this challenge, the Ohio Department of Development recognized the need for a framework to help optimize technology commercialization activities and investment decisions. The ODOD therefore requested that we develop this Framework. We based the Framework on an extensive review of the leading literature on technology commercialization. The Framework includes a map of the commercialization process and an analytical approach to help optimize commercialization activities and investment decisions during each of the five primary phases of commercialization. The Framework is not a cookbook or a list of best practices. Rather, we designed the Framework to assist research institutions, investors, economic development entities, businesses, entrepreneurs and others in optimizing the investment of scarce resources in context of transforming ideas, research and intellectual property into successful products and services. The Framework takes a practical approach to commercialization. While interim progress and milestones can be meaningful, the Framework focuses on transitions - the acquisition of the resources required to engage in the next phase of technology commercialization. In-phase activities have a single purpose – the generation of the proof required to convince resource providers to provide the capital and other resources necessary to engage in the activities characterized by the next phase of commercialization. The Framework measures success one transition at a time. The Framework also expressly acknowledges that contextual factors frequently have a greater impact on the potential success of a project than do the merits of the particular technology or commercial application. For example, the regional presence or absence of experienced investors, a large number of companies in the target industry, or providers of required expertise can prove determinative to success or failure. We believe that the thoughtful application of the Framework can help economic development organizations, businesses, entrepreneurs, institutions, investors, and others optimize investment decisions and improve the likelihood of success. We look forward to supporting ODOD and other participants in the Ohio economy in furthering commercialization projects and programs. Michael J. Mozenter Stephen F. Berger EXECUTIVE SUMMARY 4 INTRODUCTION 16 Purpose of this Report 16 Scope of this Project 16 Project Team 16 How to Use this Report 17 1 – BACKGROUND ON TECHNOLOGY COMMERCIALIZATION AND INNOVATION 18 The Importance of Commercialization and Innovation 18 How Technology Commercialization Creates Value 19 Fundamental Aspects of Commercialization 20 Process Resource Providers Proof Context Validation Measurement Success Drivers 22 The Commercial Concept New, Smart and Meaningful Money Champion Organization and Culture Networks of Resources Communication 2 – THE COMMERCIALIZATION PROCESS ROADMAP 26 The Technology Commercialization Roadmap 26 The Concepts of Phases and Transitions A Measurement Framework Level A Metrics Level B Metrics Copyright 2004 BizLogx LLC Level C Metrics Imagining the Commercial Opportunity 31 Phase Description – Imagining How Value is Created in the Imagining Phase Activities in the Imagining Phase Proof of Principle Business Case Resource Providers in the Imagining Phase Transitioning to the Next Phase – Incubating Metrics for the Imagining Phase Incubating to Define Commercializability 40 Phase Description – Incubating How Value is Created in the Incubating Phase Activities in the Incubating Phase Reduction to Practice Business Plan Resource Providers in the Incubating Phase The Early Stage Funding Gap Early Stage Funding Sources Transitioning to the Next Phase – Demonstrating Metrics for the Incubating Phase Demonstrating Products and Processes in Commercial Context 49 Phase Description – Demonstrating How Value is Created in the Demonstrating Phase Activities in the Demonstrating Phase Resource Providers in the Demonstrating Phase Transitioning to the Next Phase – Market Entry Metrics for the Demonstrating Phase Market Entry to Prove Commercial Viability 54 Phase Description – Market Entry How Value is Created in the Market Entry Phase Activities in the Market Entry Phase Resource Providers in the Market Entry Phase Transitioning to the Next Phase – Growth and Sustainability Metrics for the Market Entry Phase Growth & Sustainability to Generate Financial Returns 58 Phase Description – Growth & Sustainability Technology Commercialization Framework Page 2 3 – THE ANALYTICAL FRAMEWORK 59 Introduction to the Analytical Framework 59 How to Use the Framework 59 Step 1 – Identifying the Phase Technology Development Commercial Concept Development Step 2 – Identifying Potential Resource Providers Step 3 – Determine the Proof Requirements Step 4 – Identify the Contextual Factors Product Market Sales & Distribution Channels Competition Step 5 – Determine Success Measures Step 6 – Develop a Plan to Produce the Proof and Execute Transition REFERENCES 74 Cited References 74 Other References 75 APPENDIX 89 Evolution of the Process of Technology Commercialization 89 BizLogx LLC project team bios 92 Technology Commercialization Framework Page 3 INTRODUCTION Government, private industry, academics and practitioners are increasingly focused on the critical role that technology and information play in creating wealth and competitive advantage. The stakes are high and the rewards are growth and prosperity. Silicon Valley, Route 128 in Boston, Austin and the Research Triangle in Raleigh are the most commonly cited examples of technology commercialization driving significant economic transformations. Citing these examples, many states, Ohio included, believe that one of the keys to long term economic success is the evolution of a manufacturing-based economy to a technology and information-based economy. To this end, federal and state governments are channeling millions of dollars into commercialization efforts, venture capital funds, early-stage business assistance organizations, research and development organizations, business attraction and retention programs and related activities, all in the hopes of sparking Silicon Valley type successes. Despite the obvious rewards and several high profile success stories, the path from idea generation to commercial success remains a relative mystery. No existing roadmap, process or model provides the guidance necessary for government or private participants to predictably and efficiently use investment dollars to transform techno-market insights into commercial successes. Faced with this problem, the Technology Division of the Ohio Department of Development (ODOD) retained BizLogx to develop this Technology Commercialization Framework1 (referred to as “the Framework”). The Framework serves as a guide for the thoughtful analysis of technology commercialization initiatives (and related investments) at each phase of commercialization, from idea generation to commercial success. The Framework helps answer the following questions: • In which phase of technology commercialization is a particular project located? • Who are the most likely providers of the resources required to move to the next phase of technology commercialization? 1 Although we use the term “technology commercialization”, the commercialization process described in this report applies equally to “technology- enabled commercialization”, which includes the application of existing technologies to improve existing products or services or to create new ones. Technology Commercialization Framework Page 4 • What proof will the resource providers require as a condition to investment? • In addition to the challenges of proof generation, what additional challenges will the project face in attempting to transition to the next successive phase? • How should participants and investors measure progress during each phase when proof of commercial success may be years away? To answer these questions, BizLogx conducted an extensive literature review. The literature review spanned hundreds of the leading articles and books on the topic of technology commercialization.2 BizLogx did not conduct case studies or primary research, although the literature did include the results of many empirical analyses. Based on the literature review, BizLogx’s team of experts and practitioners3 developed a map of the commercialization process as well as an analytical framework to help government and private participants optimize their investments in technology commercialization. The Framework is not a “how to” manual or a detailed list of best practices. Rather, the Framework helps to improve the quality of decision making and investing at the project level by integrating into the analysis contextually specific challenges and opportunities that directly affect the likelihood of resource acquisition. Although many of the principles we discuss apply equally well to product, service or process innovations that are not based on new technology, the Framework is focused on technology and technology-enabled commercialization. THE TECHNOLOGY COMMERCIALIZATION PROCESS We developed the following roadmap from our extensive research into the literature on technology commercialization processes. We adopted certain terminology, concepts and graphics from the work of Vijay Jolly in his 1997 book Commercializing New Technologies: Getting from Mind to Market. We augmented Jolly’s work with the thinking and research of leading academics and practitioners. As applicable, we reference these academics and practitioners throughout this report. 2 A list of all sources is included in the Reference section. 3 Team members and biographies are in the Appendix Technology Commercialization Framework Page 5 The Phases The follow diagram illustrates the primary phases and transitions in the BizLogx roadmap of technology commercialization4: Figure 1. The Process of Technology Commercialization In sequence, the five phases of technology commercialization are Imagining, Incubating, Demonstrating, Market Entry and Growth & Sustainability. We did not invent these terms or the five phase model. Numerous experts use a five phase model to describe the technology commercialization process. We simply integrated certain terminology and definitions to create the model we use in this Framework. The Imagining Phase begins with the techno-market insight - the linking, if only in concept, of a technology and a market opportunity (often referred to as a “job to be done”). Activities focus on the generation of a “proof of principle” – the demonstration in a laboratory setting of critical components of the technology and the development of a related business case. The providers of resources for the Imagining Phase activities include, but are not limited to owners/entrepreneurs, corporate R&D budgets, university departmental budgets, and, directly or indirectly, government funding. Given the extreme commercial risk at this early stage of development, third party private financing is rare. The primary objective for Imagining Phase 4 Adapted from the commercialization process model of Vijay Jolly (1997) Technology Commercialization Framework Page 6 activities is the generation of the proof required to attract the resources necessary to move to the next phase – Incubating. The Incubating Phase is characterized by the following activities: definition of technical and product performance specifications, validation of technical capabilities in the context of the performance specifications, and further validation of the market and related commercial concept/business plan. Often referred to in the literature as the “Valley of Death” or the “Darwinian Sea”, the Incubating Phase is, more often than not, the end of the road for commercialization initiatives. Insurmountable technical and market roadblocks frequently surface. Perhaps even more challenging, however, is resource acquisition. Because of the technical and market uncertainties, Incubating continues to embody enormous commercial risk. Unfortunately, this risk is coupled with the need for an increased level of resources. As a result, private money is scarce. Typical suppliers of resources for Incubating activities include the federal government, state governments, owners/entrepreneurs, corporate R&D budgets, university R&D budgets, and, to a limited extent, angel investors. Given the lack of tangible market validation, and open technology questions relating to issues such as manufacturability, private investors generally do not fund projects in the Incubating Phase. The scarcity of resources only increases the challenge of generating the proof necessary to attract the resources required to move to the next phase – Demonstrating. During the Demonstrating Phase, project teams attempt to generate technical and market proof within a more defined commercial context. Activities focus on product development and market acceptance. Working prototypes, performance to commercial specifications, and manufacturability within defined cost and quality standards characterize the goals on the technical side. On the market side, Demonstrating Phase activities focus on generating evidence that customers will buy the product. The mix of resource providers now begins to include private sources. Corporations and angel investors are two of the primary contributors to Demonstrating Phase activities. Early stage venture capitalists sometimes invest in Demonstrating Phase projects, but more commonly save their resources for the next phase (Market Entry). As with the prior phases, the Demonstrating Phase represents an insurmountable obstacle to a large percentage of commercialization initiatives. Those resource providers who fund market entry projects require more refined and tangible proof of product feasibility such as technical, performance, manufacturing, and market feasibility. Technology Commercialization Framework Page 7 In the Market Entry Phase, participants enter the market to validate the commercial opportunity. Activities are those typically associated with an ongoing business – production, service, distribution, sales and marketing. As noted, venture capitalists and corporations are the primary providers of the resources required to fund Market Entry Phase activities. To move to the final phase, Growth & Sustainability, or to generate a financially attractive exit for earlier resource providers, the opportunity must generate positive business results (e.g. sales, growth and evidence of profitability). If the evidence indicates that the product/technology can fuel a wide variety of new products and opportunities, Growth & Sustainability Phase resource providers, such as venture capitalists, banks and the public equity market itself, will provide the resources necessary to advance. If, however, the opportunity generates positive business metrics, but is unlikely to serve as a platform for a variety of new products or spin-off opportunities, then an exit is the more likely result. Certain private equity firms as well as strategic buyers/acquirers provide the resources for the exit. The Growth & Sustainability Phase involves the execution of a comprehensive business plan to increase market share and/or total revenue and profit in context of a self-sustaining business. The goals, value creation mechanisms and resource providers are those generally associated with a thriving business seeking to identify opportunities for growth and profitability. While the challenges are substantial and worthy of extensive discussion the Growth & Sustainability Phase is outside the scope of the Framework. Transitions to Mobilize Resources A Transition is best described as a sales process whose primary objective is to convince resource providers to invest in the activities of the next phase of commercialization. All transitions have two components – the acquisition of resources (the event) and the activities that culminated in that event. The event occurs when resource providers provide the investment necessary to perform the activities defined by the next phase of the commercialization process. Transition activities begin during the phase as proof is generated. The exact point in time (early or late in the phase) is dependent on nuances of the industry, project and resource providers. In this sales process, participants use the proof generated within a phase to convince resource providers to make an investment. Especially in the earlier phases, the risks are high and the proof is more an indicator of progress than a determinant of commercial opportunity. As a result, transitions are extremely challenging processes. To accomplish an effective transition, participants must clearly understand the needs/desires of the targeted resource providers and, Technology Commercialization Framework Page 8