ALTERNATIVES TO SILICON VALLEY HOW R&D SERVICES CAN PROVIDE A STEPPING STONE TO BUILDING NEW INDUSTRIAL CLUSTERS David Connell Senior Research Fellow, Centre for Business Research and UK Innovation Research Centre, Judge Business School, University of Cambridge Innovation Policy Challenges in the Regions of Europe Glasgow 16 October 2011
HOW SCIENCE AND TECHNOLOGY BUSINESSES START: THE CONVENTIONAL WISDOM Define product idea Write business plan Raise venture capital Develop and market product 12 CUMULATIVE 10 CASH FLOW 8 6 4 2 0-2 m MANY -8 1 2 3 4 5 6 7 8 9 10 11 12 YEARS -4 THE HARD START UP OR -6 SILICON VALLEY MODEL
THE ALTERNATIVE SOFT START-UP UP MODEL Form team with high level of specialist expertise Offer expertise and product concepts to target customers Sell consulting and development contracts Gradually expand team and take on more ambitious contracts Use deep market knowledge and customer contacts to identify generic opportunities Progressively harden the business model by licensing IP alongside contracts or developing standard products and platforms Complete transition to hard company
THE ALTERNATIVE SOFT START-UP UP MODEL 12 CUMULATIVE CASH FLOW 10 8 6 4 2 0-2 -4-6 m MANY -8 1 2 3 4 5 6 7 8 9 10 11 12 YEARS Typical Cash Profiles Max cash negative Time to cumulative profitability Soft company Up to a few hundred thousand pounds 6-18 months Hard company Ten million pounds 5-10 years plus 5-10 years
THE CAMBRIDGE R&D CLUSTER One of Europe s leading centres for science and technology 2009 was 800 th anniversary of Cambridge University 88 Nobel Prize winners more than any other university in the world Many companies have established research centres alongside the University or nearby Microsoft, Intel, Hitachi, Toshiba, Rolls Royce, Pfizer, GSK, Unilever, Philips Trinity College Major corporate and charitable bioscience R&D facilities in the area include GSK and the Wellcome Trust Sanger Institute Microsoft Cambridge Laboratory
1960 THE CAMBRIDGE CONSULTANCIES Cambridge Consultants 1970 PA Technology Centre 1989 1987 1987 Plextek Symbionics 1986 1986 The Technology Partnership/ TTP Group TOTAL DIRECT EMPLOYMENT APPROX 1200 Team Consulting Scientific Generics/ Sagentia 1996 1997 Cambridge Design Partnership Sentec
AN EXAMPLE: TTP GROUP Formed as The Technology Partnership in 1988 Management walk out from PA Technology 25 founders 2m start-up funding in first year; 40% from founders Profitable by year 2; further growth financed from retained profits 2009 Revenues 38m; 5.5m profits 300 employees
TTP s HARD COMPANY SPIN OFFS FLOATED, DEMERGED OR SOLD TTP Communications and ip.access 600 employees The Automation Partnership 150 employees Myriad c 50 employees STILL BEING GROWN WITHIN TTP GROUP TTP LabTech Tonejet
ACORN AND ARM Hermann Hauser (Cavendish Post -Doc) Chris Curry (Sinclair) Cambridge University students as contractors Apple Computers Inc Equity to fund development for the Newton Cambridge Processing Unit Ltd Acorn Computers Ltd Arm Holdings Ltd Internal development funding Microprocessor application Contracts for e.g. Ace Coin Equipment Mail order sales BBC computer literacy contract (plus bank overdraft)
MYTH 1: THE KEY FUNDING MODEL FOR NEW SCIENCE AND TECHNOLOGY COMPANIES IS SILICON VALLEY STYLE VENTURE CAPITAL Most Cambridge success stories have started with customer funding rather than venture capital and have raised venture capital later or not at all
THE BIG FOUR LISTED CAMBRIDGE COMPANIES Arm - no venture capital needed Autonomy - no venture capital needed Domino Printing Science - CCL spin-out Cambridge Silicon Radio - CCL spin-out TOTAL EMPLOYMENT 8000 PLUS
MYTH 2: ACADEMIC IP IS THE KEY DRIVER FOR NEW SCIENCE AND TECHNOLOGY COMPANIES Cambridge evidence suggests little or no use of academic IP by successful entrepreneurial companies (certainly outside biotech) Examples of VC backed university IP exploitation have been oversold e.g. Cambridge Display Technology $140m funding raised Sold to Sumitomo for $285m after 15 years 160 employees Cambridge companies frequently falsely described as university spinoffs e.g. ARM THE KEY DRIVER OF INNOVATION IS SOLVING CUSTOMER PROBLEMS IN A COMMERCIAL ENVIRONMENT
MYTH 3: THE BEST WAY FOR GOVERNMENT TO HELP FUND R&D PROJECTS IN COMPANIES IS THROUGH MULTI-PARTNER COLLABORATIVE PROJECTS Dominant policy for funding R&D in companies in UK and Europe Much less used in US and Japan (since failure to repeat success of 1970s semiconductor programme) Disliked or ignored by most successful SMEs Much less beneficial i than R&D/prototype t contracts t with lead customers Ongoing g value of academic IP to Cambridge technology consultancies quite limited
THE SOFT BUSINESS MODEL AND COMMERCIALISATION OF ACADEMIC RESEARCH AND IP RESEARCH UNIVERSITIES; CORPORATE RESEARCH EXPLORATORY DEVELOPMENT TESTING DIFFERENT APPLICATIONS MANUFACTUING SCALE UP AND YIELD IMPROVEMENT SCALABLE COMMERCIAL DEVELOPMENT HARD COMPANY MODEL REQUIRES COMMERCIAL ENVIRONMENT AND DISCIPLINES BACKABLE BY VENTURE CAPITAL ALONE
POLICIES THAT SUPPORT THE SOFT COMPANY MODEL 1. Grants to encourage private sector lead customers 2. Government procurement based innovation policies 3. Intermediate R&D institutions German Fraunhofer Institutes ITRI (Taiway), ETRI (Korea) etc. TICs?
US GOVERNMENT PROCUREMENT BASED INNOVATION POLICIES Small Business Innovation Research (SBIR) programme the lead federal government policy for small businesses Over $2 billion per annum in awards, linked to government needs: $100k for Phase I $750k for Phase II 100% funding plus profits; part up-front 1500 firms receive 4,000 awards per year; multiple awards common Transparent, competitive process 70% to companies employing less than 25 people $3-6 billion in further government R&D contracts for small businesses including Phase III SBIR
INTERMEDIATE R&D INSTITUTIONS Example; German Fraunhofer Institutes Grown since 1973 to 60 separate institutes 18000 staff Similar to Cambridge consultancies with industry or technology focus, but roughly 50% government funded less international ti customer base less successful so far in generating spin-outs more able to invest in longer term, or preparatory R&D Mainly supporting existing German companies
CLOSER TO HOME: Wolfson Microelectronics 1968: 131k Wolfson Foundation grant for new consultancy service linked to University of Edinburgh Electrical Engineering Department 1973: cash crisis; i cut to 2 staff and becomes an integrated circuit design services company under David Milne Run as a business with dedicated staff High degree of autonomy within the university it Academic credibility for marketing and high level consulting 1985: plateaued at 25 people and 2m revenues; break-even Management buyout with 300K investment
CLOSER TO HOME: Wolfson Microelectronics (cont) 1995 onwards: c 4m investment supports gradual hardening of business model addition of royalty streams through risk sharing projects in house designs and move towards fabless models 2000-2003: c 90m raised in pre-ipo and IPO round to scale up operations 2010 : $157 m revenues and 440 employees
KEY COMPONENTS OF A SUCCESSFUL REGIONAL INNOVATION POLICY EXCELLENT ACADEMIC RESEARCH CENTRES ALUMNI SOFT COMPANIES EXPANDING CLUSTER OF PRODUCT COMPANIES INTERMEDIATE R&D INSTITUTES INNOVATION CONTRACTS AND LEAD CUSTOMERS -Government procurement --private sector REVENUE AND NEEDS
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