Sunday, 26 February 2012

Financial Support for Innovation - has the UK got it right?

One of the stories I like to tell to British people concerns a senior member of my staff at Occidental Chemical; this is now some years ago.  He was a long term employee and had accumulated four weeks annual vacation - you started with two weeks (to be taken after you had worked for a year) and then accumulated an extra day a  year.  Most Brits are appalled and disbelieving at this point, but it gets worse.  Sam (not his real name) was a family man and elected to take off the whole of August to take his large family camping.  For some reason, this came to the attention of my boss.  "Fire him," was his terse instruction, "if he can be away for an entire month, we don't need him at all".  I didn't do it, and although the US culture has gradually changed to slightly longer vacations, it still represents a rather dramatic difference between the US and UK work ethics.

The reason for telling this story is the announcement by the Technology Strategy Board that it is shutting down its Smart program for a month starting March 1st.  The Smart program used to be managed by Business Link, then it was taken over by the TSB, who changed its name to Grant for R&D, and has now changed it back to Smart.  It is not entirely clear why the TSB thinks it is OK to stop processing applications for innovation grants for a month, but no doubt they are making some important changes to make Smart smarter.

I applied for one of these grants once.  It was summarily rejected after review by a single reviewer.  It was a "novel" idea in his view, but not "innovative".  Among a myriad of other flaws he found in my proposal, his version of the risks involved was entirely at variance with my own.  There is no opportunity to question or rebut the assessors solitary views, but the applicant has an opportunity to resubmit a revised application - presumably to be reviewed again by the same rather narrow visioned individual.  Hint to the TSB - people are notoriously bad at assessing risk but a panel usually is more effective; come to one of Captum's Technology Valuation MasterClasses to learn more.

The TSB application was in stark contrast to my application a few years ago in the US to the NIH for a Small Business Innovative Research (SBIR) grant for a new medical device.  All US government research organizations are required to allocate a fixed percentage (it used to be 3%) of their budget for SBIR grants.  Another helpful hint - why don't all the UK government backed research organizations, EPRSC, BBSRC, etc, do the same rather than just fund university research?  My application, which was very much at the concept stage, without patents or an impressive management team (I'm being modest - aside from me I had two very well respected partners), was given a thumbs up by the assessment panel for a $100k grant, no match funding required.  However, because we didn't comply with the requirements for human experimentation - we planned to try out the non-invasive device on ourselves - we were asked to reapply at the next round.  Unfortunately, I moved to the UK before I could make that happen.

All of which takes me to the report issued this month by FINNOV  (Finance, Innovation and Growth)   a research collaboration between seven (high powered) European Institutions aimed at understanding the relationship between changing financial markets, innovation dynamics, and economic performance.   Among a number of recommendations, they suggest less emphasis on university spin-outs, which usually fail, and more investment on research (see my blog of 27 January); credit scoring criteria should be revised (19 February blog); public funding of innovation should be reformed to function as venture capital (also 19 February).  I always tend to agree with eminent bodies who recommend my own ideas, but I'm not totally convinced that FINNOV is right is asserting that the Green Economy is the next big thing after the Internet- energy technology will be a key issue as we run out of hydrocarbon deposits over the next 20 - 40 years..  I do think they have it right in asserting that what we need is Finance for Innovation, not Innovation for Finance. Let's hope that the UK government listens to that.. 

Sunday, 19 February 2012

The Case for a New ICFC

Do you watch Question Time on BBC1?  I watched the program last Thursday, and the last question was "How would the panel create growth in the UK?"  The short answer was: none of them had a clue!  Poor Julie Myers, who was mocked by David Dimbleby for using entrepreneur in every answer, suggested more internships.  John Prescott said that wouldn't help much, and then waffled for a few minutes.  The coalition representatives, Ken Clarke and Baroness Kramer, rolled out all the government measures, but noted "you may not have heard of them".  Too right, we haven't!  Someone called Owen Jones took the position that anything the government was doing was wrong.

The real answer is that growth will come from the small business sector but to fuel that it needs capital. Banks won't invest, the supply of business angels is limited, and the VCs have almost all gone upmarket. What the UK needs is a modern version of the old ICFC - the Industrial and Commercial Finance Corporation.  ICFC was set up after WWII by a consortium of banks to re-invigorate the small firms private sector.  It operated through a series of regional offices, each headed by a local director who was bit like bank managers used to be.  ICFC made small investments, from £25k up to a few £millions, and its usual scheme was a mix of loan and equity - "debt with an equity kicker". It evolved into 3i.  It was hugely successful, made a lot of money, which caused its banking owners to decide to float it as an investment trust, so they could access the cash.  Does that sound familiar? Post the flotation, the regional offices were closed down, 3i has gone up-market with the size of its investments, and is no longer making money for its owners.

Now we hit the political barriers.  The Governor of the Bank of England, among whose first actions on taking office was to terminate the Bank's work on small business finance, is unlikely to be a supporter, although just 1% of the last £50billion round of printing money (sorry, quantitative easing) would have set up new ICFC nicely.  Party politics is also in the way, because Lord Mandelson in the last government was working on the scheme back in 2009.  Is it anathema for this government to accept  that their predecessors may have had a good idea?

We're not talking about a lot of money - perhaps a few hundred £million.  It doesn't need to be run by the banks, or the civil service, but it does need to be started soon.  Wouldn't it be helpful if it made its investment decisions not on credit scoring (driving by looking in the rear view mirror) but by scoring on the Business Model Canvas (see last weeks blog).  What we need now is grass roots momentum to get the ball rolling.

Sunday, 12 February 2012

Business Models for Innovation

Innovation is the Olympic gold medal of the business world; many compete for it, but few are successful.  In the UK, one in three start-ups fail in the first three years.  Since 2002, the UK venture capital industry has returned 9.8%; you would have made double that return in the stock market by re-investing your dividends.  Why do we accept, perhaps not cheerfully, that technology innovation is high risk, and that it is difficult to make money from indulging in it?

I'd like to suggest that the time is right to re-examine the business models we use for technological innovation.  In the US, creativity in business modelling is a hot topic.  The Business Model Canvas, a creativity tool devised by Alex Osterwalder and Yves Pigneur, generates over four million hits on Google, but is possibly less well known and used in the UK.  BMC forces users to think about their model creatively, with a strong emphasis on customers, who they are, how to reach them, what is your relationship with them.  Only when you understand that can you think about the value of the product or service you offer to each of your customer segments, and the other elements needed in your business. By creating, building and testing robust, innovative business models, your enterprise can significantly improve its chances of surviving its first customer meeting,  and into year 3+.

I lead a MasterClass on Business Modeling for Innovation in Cambridge last week.  The audience was a tad smaller than I would have liked, but included representatives form big pharma, the NHS and the lone entrepreneur community.  In half a day, they managed to create an entirely new business for farm animals, multiple uses for a  new cryogenic technology and an impressive variety of market avenues for organic popcorn.  Certainly none of these were robust business models, but they were creative first steps, which provide the basis for the development of new business enterprise models with further research. 
At the MasterClass, we discussed the difficulty of getting these approaches adopted more widely, particularly in big corporates with their commitment to leading consulting companies, and variations on the BCG matrix. Using creative design methods, visualization techniques and learning to tell supporting stories are all helpful in overcoming the resistance of nay-sayers along the way.   Let's develop a culture of creative business model design for sustainable innovative enterprise?

Saturday, 4 February 2012

Investor Risk Aversion

My first job, after graduating from MIT with a bright, shiny, MBA in technology innovation management, was to head the R&D department for Occidental Industrial Chemicals Group.  This was daunting task, not just because I had never managed so many people before, but mainly the department had floundered without a director for 18 months.  I managed to sort out the people and program issues and we evolved a system in which we had a number of early stage projects (relatively inexpensive), a few which looked more promising (starting to spend real money) and a couple which were in pilot stage advancing towards commercialization (which cost mega bucks).  I was quite proud of this funnel system at the time, and only realized later that it was quite a usual management approach adopted, for example, by DuPont,  who were much better at developing new products than we were at Oxy.

Fast forward my career by a decade, and I joined a venture capital company in Boston.  I imagined, expected, that they would use a similar management system - lots of early stage investments, and some later stage ones in a portfolio.  But they didn't do that at all.  What they tried to do, was de-risk investments as far as possible, by buying into existing private companies, syndicating investments and other approaches to protecting their capital. Even that didn't work particularly well, and I still recall the chagrined face of one of my colleagues when he announced the write off of $2 million.

There was an early stage investment division at the VC, somewhat curiously named "Ventures", which looked for opportunities to get into the next Microsoft, but would never back a very early stage technology.  Ventures was looked down upon by the "real" VCs.

Which leads me to Red Script Ventures, started by Johnson & Johnson in 2009, a start-up accelerator program designed to bring one new venture a year into the company; reported by MIT's Technology Review -Inside Johnson & Johnson's Innovation Shop.  It is good to see that at least one major corporation recognizes the need to nurture high risk early stage ventures.  It's just a shame that the venture capital industry has forgotten what business it is in.