Albertans’ new urgency to diversify their economy will require changing the way we do things. At a minimum, we will need to look beyond energy, construction and property, and start seriously developing the vast potential of Alberta’s high-tech sector.
The problem is, we’ve been supporting technology for decades and nothing seems to push it over the top.
Clearly there are many different problems in this under performing sector, including access to capital and other vital resources. But from my experience part of the problem is people related. There are some consistent management problems that plague technology; issues that an advanced understanding of intellectual property can help overcome.
The two most consistent management problems in the tech sector are misplaced competencies and inexperience about the process of commercialization. Both of these problems can be solved structurally, so long as all parties are willing to cooperate.
The world of technology is quite different from most conventional businesses. Innovation usually begins in a university laboratory or some such place, with highly sophisticated R&D (research and development) activities. After the euphoria of the initial breakthrough or new invention, the developers spin off the new technology. The resulting small, privately-owned companies are normally composed of the original technology development team and their hopeful investors.
This is where things get difficult; once outside the laboratory, money is hard to come by and the challenges shift from developing the technology to finalizing a commercially valuable product or service and then taking it to market. Predictably, these commercialization skills are not core competencies for most scientists and technology developers.
What normally happens is the new company raises money based on an (overly) optimistic business plan then, instead of using those resources to go to market, management uses the funds to do more R&D – condemning the venture to endless cycles of technology development with little or no chance of getting to profitability.
The venture capitalists (VC) and angel investors I know all complain about a lack of market focus in tech start-ups. Inevitably – if they invest at all – they’ll immediately begin a process to bring in new management, individuals with proven track records of success in taking products to market.
This often creates a fatal conflict of interest. Naturally, the R&D management team wants to focus on and protect their ‘baby’, the innovation they’ve spent years developing. Investors, however, are not particularly interested in protecting babies; they’re interested in profits. I’ve seen many a world-beating technology stall and finally die as a result of this conflict.
For VC supported ventures, the problems are compounded by the fact that these fledgling companies are expected to deliver significant results in a very short time frame and will probably need to be publically traded in order to deliver the return on investment VCs demand.
This creates a second level of misplaced competencies. Going public and managing public markets require competencies that even experienced commercialization teams lack. Therefore, there are now two different areas of misplaced competencies that need to be overcome before the technology venture can reach escape velocity.
How does intellectual property (IP) help overcome these chronic management problems?
Intellectual forms of property are unique in that they (generally) have global application and are infinitely divisible.
The successful tech start-ups I’ve witnessed have utilized two separate companies operating in tandem. They keep the core IP in the original privately-held company but then license various commercially important rights (global market and sales rights, or geographical/industry specific rights) into the second commercially focused company. This has two major benefits; it allows the R&D team to maintain ownership of their ‘baby’ and focus on technology development, while another specialized team can take the product to market unencumbered. If this is done expertly, the two teams can focus on their areas of expertise without internal conflict.
But there is another significant bonus. Handled properly from an accounting perspective, the full (and much higher) ‘enterprise’ value of the underlying technology can be captured on the commercialization company’s balance sheet, setting the stage for listing on public stock markets and access to the institutional grade finance that is so vital to success.
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.