Patent to Market

Patent to Market

Challenges of converting research output into a commercial product: How to survive and approach the gap between research and commercialisation
David Weber

Of all the crazy things you can do, trying to convert some idea into a successful commercial product just has to be one of the craziest. It is one of those things that you would never do if you knew just what it was going to take to get it right. This being said, success is rather sweet – and success happens. And if you succeed, you get a licence to tell people like me ‘I told you it would work!’ and then flaunt your Porsche shamelessly. Note that I used ‘and’ between the taste of success and the rewards. 

Success in commerce is very different from success in academia. Academics measure success in journal papers, research grants and kudos from other researchers. In commerce, it is measured by the degree to which the product’s assets exceed its liabilities. And this means that not only is there a market for the product, but that it is suitable for that market, that there are no entrenched incumbents catering to that market and that the market has sufficient size to justify the expense of development.

One of the best ways of looking at how a product can develop is to study how things will look at the end of the entire commercialisation process. At this stage, the market will clearly understand the value that your product adds to their businesses and lives and will be happy to pay you a fraction of the value that you added to them. Your product is the dominant player in its niche and competitors are watching you with envy. And rather critically, the market is big enough to make it attractive. You won’t be able to get precise answers when you start on the process of commercialisation, but you should be able to get some idea of market size and the competitive landscape without a major investment. The earlier that you consider (apparently) mundane details, such as who is going to buy this and why, the better off you will be. And one can achieve a great deal of market knowledge with relatively little effort.

I am going to assume that whatever your research has delivered, it is a very clever scheme and that it works fiendishly well – at least in the laboratory. And you think there is a market because you tried to make the work commercially relevant.
So how do you proceed? Whatever route you follow, you will have to have good answers for the following questions:

• What value does it add? Can you quantify what a user of your device/system will gain? A good rule of common sense as a buyer is that the cost of the device must be a fraction of what it is going to save the buyer. A compact fluorescent bulb costs way more than an incandescent equivalent, but it is frugal on power and lasts for ages. This is compelling, especially if a 300 kg gorilla like Eskom is pushing for it.

• How big is the market? Here we mean how much money is available in the market for your product, not how many you will sell. Low volume niche products can have huge markets. You need to have a good idea of what type of people and enterprises will buy your product and why. Remember that they are not going to break down doors to get to your product, so be realistic.

• Who are the competitors? I often hear people say that ‘we have no competitors’! You always have at least one competitor – apathy. It is usually easier to just go with the status quo than it is to adopt something new and complicated. As well as this thorny competitor, you may be facing an incumbent or two. Not that this is a disaster; you must just be sure that your offering is compelling enough to dislodge them. Microsoft pushed IBM out the way, something that seemed totally impossible at one time. However, pushing Microsoft out the way will require a rather cunning plan. Use Google, search patents and ask people. Remember that investors can also use Google and will be disinclined to back you if you have made an obvious oversight in the competitive analysis.

• How much will your device cost to produce and maintain? We could be talking about a new type of cork for a wine bottle, or we could be talking about a new kind of electric power station. This does not change anything, as cost is important. Be realistic, as commercialisation is an expensive process and is very different from research.

• What are the risks associated with your product? You need a very clear understanding of what still needs to be refined and what can go wrong, both technically and commercially.

• How will the development process look? Do you have a plan on how to continue development and do you know what it will cost?

• What is your product vision? How will things look when you have conquered the world (or at least some small part of it)?

• What next? Any product has a lifespan in the market (ask Kodak about wet photographic film), so what can you start researching now in order to keep you competitive in five years’ time?

You can summarise all this in a prospectus or a business plan. Short documents are always better than long ones. You will need something when you knock on InnovUS’s door, or else you will just be given this brochure again and be sent back empty-handed.

So now you that you are armed, you are ready to proceed down the path of commercialisation. What do you do now?
There are many routes to follow, but all of them will require an investor of some sorts. The act of turning an idea into a research output was also an investment. This investment is usually made by the Government through some grant or even by the university itself. Just the fact that you have a lab and electricity implies someone invested in infrastructure for you. So investors come in various flavours, and I can promise you that none of them are in it for the pleasure of throwing money away. So let’s take a brief look at what you can expect to find.

Angel investors: These are private individuals who are prepared to take a bet on you. It could be family, a friend (careful here) or even a professional angel investor. They will want to take shares in your company and see a return. They are often prepared to provide seed and early stage funding, which is very useful.

• Venture capitalists: These are useful entities that are (at least in this country) only really interested in investing in businesses that are cash positive (this is a long way down the road from a scruffy prototype on a researcher’s bench) and can show a significant market. There are very few that provide seed funding as it is a good way to lose money. And yes, they will want shares in your company.

• Government schemes: There are several government schemes that are designed to stimulate innovation out there, including the SPII funding scheme, the Innovation Fund and various other stimulus packages. Use them by all means. Just remember that they need masses of paper work and can be a little inflexible at times. And don’t be surprised if they look for some shares in your company. After all, they need to generate revenue for other investments.

• Yourself: Self-investment is very common. Most people who follow this route will consult or do contract work and invest spare time and money into their product. It works, but it is slow. At least you get all the shares.

• Private equity and stock markets: These are for the bigger, more established players, but essentially they provide enterprises with cash in exchange for shares.

I am sure that there are other variations on these, and I am also sure that in the lifetime of the business you may draw on more than one of these types of investors.
There is one important consideration that many people in academia overlook. The commercial world is a different place from a university. It is big and brutal and does not always work by common sense. It relies enormously on human interaction through social networks and changes very slowly. Naivety is a common problem and you would do well to consider your position in the bigger scheme of things:

• You are probably very clever, but you are not the only clever person out there. I can guarantee that someone somewhere has already tried to do what you are doing and that someone has tried to commercialise it, or at least thought carefully about it. You need to really check out what is going on in the world in your field before you start your research.

• The commercial world does not really care about cool. Your invention may be wickedly cool and remarkably ingenious, but nobody is going to give it a second look as an investor just because it is cool.

• Creativity is scarce. Creative people with good brains and who work in an environment that fosters innovation are scarce. Use your privilege to the limit to open up new ways of doing things and always pick the road less travelled. It is what you have to offer the commercial world.

• Complex and intricate schemes are more difficult to commercialise than simple and elegant schemes. A Rube Goldberg machine for boiling eggs will never beat a simple pot on a stove, so strive for simplicity, not complexity.

• The world does not owe you anything. If anything, you owe the world a fair bit, at least for your education. Success implies monstrous quantities of work, ingenuity, investments and a pinch of luck and it eludes most who seek it out. Automatic backing and success is not a right that you are entitled to.

• As wicked as your research is, it is just a very small step along the way to commercialisation. Even a production-ready device is a long way from successful commercialisation. While technology is a critical driver of success in the market, it is generally easier to develop than it is to open up a good market segment and sell to it.

• People often have very high expectations of what they are worth in these deals. At the end of the day, you may be able to get a 3% royalty for a patent if you just license stuff. Or you may end up with a percentage of a company which commercialises the product. However, when all is said and done, you are unlikely to own even 25%. The value of an idea or a research output is rather low if you are not prepared to back it up with some damned hard work and take some significant financial risks.

Right, so what do you do next? At Stellenbosch, you are lucky enough to have an intellectual property office which can make deals and guide you in the process. And believe it or not, they are on your side! They have a mandate to look after the intellectual property developed at the university and see you as a good way to get the most out of it. So take your idea and summarised business plan to them. They can open doors and introduce you to various organisations that will be interested in what you have to offer. However, always remember that while they may help you open doors, you have to walk through the door yourself.

About the author
David Weber is the Chairman of Stone Three Venture Technology ( high-tech product development), as Director of Acorn, a private equity investment company. His primary responsibilities are at Acorn. He holds a PhD in Electrical and Computer Engineering from Carnegie Mellon University. When not dreaming up technology solutions or buying and selling companies, he rides his mountain bike, runs on mountain trails and maintains his private pilot’s licence.

Contact details
E-mail: weber@acornventurecapital.com
Web: www.acornequity.com