FLYWHEELS
AND THE NEXT SONY WALKMAN: NEW TRENDS IN THE GLOBAL
COMMERCIALIZATION OF TECHNOLOGY:
Jim
de Wilde
Speech to MBA class on Venture Capital Strategies
Rotman School of Business, University of Toronto
December 6, 2005
www.jimdewilde.net
jim_dewilde@yahoo.ca
Introduction: Global Venture Capital in 2006
The
next stage of global venture capital is going to focus
on the commercialization of new inventive sources and
new creative sources which have been fop the last few
years increasingly globalized. The commercialization
of technology which was the hallmark of European, Silicon
Valley and Japanese growth in the 1990s has now become
globalized. The challenge is to design an appropriate
strategy for Canada in this global mix. World-leading
business strategies require that Canadians develop links
to new networks of creative talent and inventive sources
that are on the threshold of being converted into significant
value. Graduate
students in Brazil are capable of innovations in life
sciences. Graduate students in Korea are capable of
innovations in materials science. The nature of internet
driven scientific publishing (see Rechargeable Batteries
and Collaborative Knowledge on www.jimdewilde.net) has
fundamentally transformed the nature of intellectual
property and wealth-creation in knowledge industries.
The business models of 2005 are, by definition, not
the same business models as those which worked a decade
ago.
Just as Copenhagen became the centre of research on
educational toys (Lego www.lego.com ), and Vancouver
became the global centre for commercially-oriented fuel
cell development (Ballard www.ballard.com ), the geographical
constraints on innovation have been removed by collaborative
knowledge, internet-based scientific publishing and
the capacity of world-class scientists to be nomads.
To illustrate these trends, let’s start with
some venture capital strategy case studies:
1.
Siemens has over 400 portfolio companies in its venture
capital operations (www.siemensventurecapital.com).
2.
Phil Davis writes in an excellent piece in www.ft.com
September 19th, 2005 “Nanoscience potential has
investors pouring in” citing an Innovest report
(www.innovestgroup.com)
that there are 700 private companies and 200 listed
companies involved in nanotechnology research and development.
3.
Microsoft, SONY, NOKIA, Apple, Google and Intel are
investors in Nathan Myhrvold’s www.intellectualventures.com,
a pure commercialization engine that the former director
of research at Microsoft has assembled.
4.
Nestlé’s announces that its former CFO,
Wolfgang Reichenberger will head up a $500 million SFr
fund to commercialize science and nutrition. (read
more...) (*)
Siemens
portfolio of new-growth opportunities differentiates
it from companies like GM and Bombardier who have failed
to leverage their advantage in key manufacturing sectors
to position themselves in next-generation growth activities.
My great advocacy of corporate venture capital has been
a subject of previous lectures at Rotman (see “The
Segway Seeks a Market” on www.jimdewilde.net)
and I don’t want to belabor the point today. The
point is that without companies like MDS, Siemens, Alcan,
Ballard, Nokia, and Intel which can organize their financial
and intellectual capital to position themselves in the
next generation of commercialization, local economies
may stagnate. The task of policy makers and financial
decision-makers is to ensure that these “head
office” functions continue to exist. The test
of B-Schools is to help the next generation of decision-makers
to focus on the next generation of commercial opportunities.
In
this regard, the potential for nanosciences as discussed
in Davis’ piece is a key emerging trend in venture
capital investments. The direction of Nestlé’s
toward a commercial venture strategy which positions
it to lead in the commercialization of the intersection
between agricultural sciences and nutrition is another
growth-leading trend and the willingness of top global
corporations to back someone like Myhrvold who knows
how to perform the careful alchemy of turning research
into innovation shows the global nature of this kind
of activity. The question today is how Canada, and Toronto,
fit into these economic projects .
(
* ) I strongly recommend the Ann Grimes piece “Where
the Bets Are” in the November 21, 2005 Wall Street
Journal, available to subscribers at www.wsj.com. Her
coverage of the venture capital industry should be recommended
reading for MBAs and her analysis of trends is extremely
perceptive: (1) The China Strategy; (2) Clean Tech,
(3) Digital Living Room; (4) New Kids on the Block (new
players); (5) Rock Stars; (6) Web 2.0; (7) Older and
Wiser; (8) Adopting orphans); (9) Telecom Comeback;
(10) Late Exits) .
Part
One: Flywheels and energy storage - the next transformative
technology?
A first step for Canadian investors is to ensure that
in areas where a global competitive advantage exists,
resources are allocated in a manner which creates the
preconditions for success. One such area is in the management
of knowledge-enhanced energy production and management.
Toronto
is potentially the hub of a network about energy technology
markets. The financial expertise of Bay Street has long
been recognized in the global marketplace for its sophistication
about the nature of energy markets and the impact of
oil and gas on mature industrial economies. There is
within the inefficiently-fragmented Canadian marketplace
a tremendous amount of knowledge concerning utility
manage net, energy conservation, alternative means of
energy generation and energy management software. This
is beginning to become a part of the national venture
capital and investment community, reflected in the portfolio
Ventures West, the expertise in ARC Financial (www.ventureswest.com,
www.arcfinancial.com) and the recent interest in Canada
of investment firms like Enertech (www.enertechcapital.com).
This has long been a cornerstone of the Quebec venture
capital and investment communities, revolving around
the activities of the Hydro Quebec venture capital group
(www.hqcapitech.com).
The
demand for new energy technologies has created a significant
appetite for areas where only specialized venture capital
firms concentrated in the last decade. Venture firms
like Enertech, www.nthpower.com, www.sam-group.com and
Hydro Quebec are being joined by the mainstream venture
firms which are exploring new investment categories
generated by both environmental considerations and the
new price-structure of energy resulting from oil and
gas price rises and a global sense of energy insecurity.
The question for MBAs studying venture capital strategies
is how to establish a presence in areas where there
is potential for a significant breakthrough. The question
for policy-makers concerned with competitiveness is
(entering the same room through a different door) how
do we convert a unique domestic competitive advantage
into a corporate presence in an area of rapid growth
technology commercialization?
There
are some obvious business models for new companies,
e.g. energy pricing and energy auctioning around the
delivery of specialized clean power as in. www.bullfrogpower.com.
There is a constant demand for energy efficiency and
power quality management business models. There is also
an appetite for new energy sources, biomass, incineration,
solar power, wind power, nuclear in a variety of forms
and applications, fuel cells. There are several examples
of successful Canadian companies operating in these
areas: Enghouse, www.enghouse.com has built on energy
management software. Carmanah www.carmanah.com
built on an expertise on solar-powered lighting on buoys
to grow a highly successful British Columbia company.
One option is to build a portfolio based on a suite
of similar type of companies whose potential is enhanced
by the changing nature of energy production, management
and consumption.
There
is, however, a more ambitious strategy, where venture
capitalists try to fill the gaps in the new advanced
technology driven energy market. . At the centre of
the new energy issues, the key issue is how portable
power and distributive energy requires a significant
innovation in terms of power management or energy storage
technology. . Portable power requires different kinds
of batteries or stored energy. A decentralized grid
requires that we organize new technologies of energy
storage. For this to work, however, there has to be
a very different capacity to store energy for future
usage. Enormous amounts of research and speculative
investment have gone into the commercialization of existing
electrochemistry and the search for clean energy generated
from fuel cells. Despite all the rhetoric in environmental
circles, this market is just starting to take shape.
Imagine the early days of Cisco and Intel and the equivalent
uncertainties about the marketplace that was developing
in semiconductors and internet routing technology. The
venture capital market in 1982 was preoccupied with
the highly visible PC market. This new process of commercialization
of university research was taking place, but it would
be a decade before its full significance would be recognized.
The energy storage sector is at a similar stage today.
A breakthrough in this area will be as big and economically
disruptive as was the development of portable refrigeration,
the development of a silicon chip for data-storage,
and the development of a router to steer the traffic
on the internet. So how does one assess the scientific
research in this potential market? How does a venture
capitalist build in Toronto (or Canada as a whole) the
GE, Intel or Cisco of this new space?
Canada has long had a competitive advantage in energy-related
research, with the portfolio of Hydro Quebec (www.hqcapitech.com)
and the innovative investment strategy of Ventures West
following on the success of the Ballard investment (www.ventureswest.com,
www.ballard.com). This advantage has not been fully
maximized because there has not been the kind of concentration
and creation of scale which might have resulted from
a network of private utilities structuring research.
The innovative venture capital model of Chrysalix www.chrysalix.com
produced some global linkages for Canadian investing
in the Clean Energy space and the syndication of companies
in the latest round constitutes an interesting mix of
(http://www.chrysalix.com/news/fmu_news_more.php?NID=11
) WestAm, Conoco, Mitsubishi, Teachers, Shell Hydrogen.
In a similar vein, the development of a complex network
of corporate venturing activities best highlighted by
ChevronTexaco www.chevron.com/technologyventures and
Norsk Hydro www.hydro.com/en/our_business/oil_energy/new_energy/venture_fund/ntvs_team.html
has made this an extremely dynamic sector, where the
Canadian role can still be defined by a mix of public
utilities and private companies with world-leading expertise
in energy investing.
The challenge here for the next generation of Canadian
venture capitalists is to pick areas where a concentration
of resources and expertise can build from commercialized
technology one of the future Ballards.
The next generation of growth is held up by the difficulty
of storing energy that is produced by portable power
sources and then sold back to the grid. The next generation
of company-creation in the energy sector requires a
concerted effort to create a capacity to commercialize
research in electrochemistry and nanotechnology. A world-leading
energy storage capacity company could become the Intel
of the portable power and clean energy breakthrough.
The work being done globally in this area ensures that
GE, Siemens and other companies with a clear presence
in energy development will be significant players in
this space However, there is a clear opportunity for
a Canadian company to commercialize Canadian research,
apply this to a rapid-growth market and then use its
global market position to obtain the acquisition currency
to expand globally. Key players are already shaking
out. One such example is power storage. Pentadyne, VRB
Power, and Active Power are all case studies of public
companies in this space.
There is no guarantee that venture capitalists can “pick
winners” in this or any other space from competing
technological innovations and patterns of scientific
activity. Flywheels are popular for short term energy
storage and represent an intersection of nanotechnology
and practical application to energy needs. There have
been incremental innovations in electrochemistry and
battery technologies, but no breakthrough of the type
which revolutionizes a sector, despite many anticipated
new product developments. The lack of substantial innovation
in batteries has long been commented on by analysts.
A shrewd strategy requires risk-spreading and the capacity
for an innovative company to make acquisitions in areas
where there are reasonable prospects of breakthroughs,
a strategy which served Cisco well in its early stages
of growth into the company we recognize today.
The opportunity for Canadian venture capitalists to
concentrate expertise in an area of demonstrated competence
is the kind which we need going forward to ensure that
there are 10 Ballards and 10 RIMS for each occasion
in which the natural circulation of the capital in the
global marketplace results in a major Canadian assert
being acquired and integrated into the operations of
companies in other countries. With an understanding
of the competitive space in power storage technologies,
one of those global players could be designed by Canadian
venture capitalists operating at the cutting edge of
the energy technology space. The following web-links
help to navigate that space:
http://www.wired.com/news/business/0,1367,63639,00.html?tw=wn_tophead_2
http://www.pentadyne.com/News2004Nov22.htm
http://www.electricitystorage.org/tech/technologies_technologies_flywheels.htm
http://www.beaconpower.com/products/EnergyStorageSystems/flywheels.htm
www.vrbpower.com
http://www.smalltimes.com/document_display.cfm?document_id=3730
www.mhtx.com
www.angstrompower.com
(www.ventureswest.com)
www.pentadyne.com
http://www.wired.com/wired/archive/8.05/flywheel_pr.html
www.activepower.com
www.energyinnovations.com
http://www.sandia.gov/news-center/news-releases/2003/renew-energy-
batt/betterlithium.html
http://finance.yahoo.com/q/bc?s=VLNC&t=5y
(Valence stock chart)
Part
Two: Ontario as a Hub of Global Technology Commercialization
The development of an energy storage company requires
a sophisticated approach to building the networks required
for the commercialization of technology. The competitive
advantage of Silicon Valley has long been the way the
skills of commercializing technology are recognized
and developed. Similar developments around Cambridge
in England require that decision-makers take a deeper
look at the category of commercialization of technology,
which is the key to the next generation of competitiveness.
There are several models for technology commercialization
which can now be assessed : www.msbi.ca in Montreal,
www.teic.co.il in Israel, www.gate2growth.com in Europe,
and www.ut-astec.com in Japan, Only if we understand
where the global standards are can we be competitive
in the commercialization of technology and use that
kind of knowledge-based economic strategy to construct
sustainable competitiveness in Canada.
There have been frequent attempts to jump-start innovation
and growth creation in the Canadian economy. Unfortunately,
most of them have proven to be underperforming because
they focus on spending money rather than on developing
disciplined strategies. There is no real shortage of
capital for next stage technology commercialization.
There is, however , an extraordinary difficulty in developing
the incentives necessary for developing world-class
management teams in areas where a Canadian competitive
advantage could exist. We are at a critical juncture
in the establishment of a competitiveness strategies
based on converting knowledge to sustainable prosperity
in the Canadian context. Contrary to frequent misperceptions,
the Canadian capital markets have been very good at
creating “new ventures”. There are a large
number of specialized Canadian companies that have either
through RTOs or IPOs successfully launched new ventures.
There are a large number of companies on the CVX that
have resulted from this, ranging from specialized electrochemical
innovations to specialized materials in asphalt, rare
earth commercialization, geological surveying technologies,
robotics, marine biology research. The problem comes
from growing these companies in a manner which provides
them with acquisition capital and the kind of management
expertise and global reach which enables them to build
sector-leading brands like a Bausch in commercialized
opthamological research.
The new program for the commercialization of technology
requires a much more global approach. There is scarce
point in the reinvention-of-the-wheel approach to research
funding which suggests that a local community gains
from producing the 115thn best research programme in
some aspect of genomics research. Nevertheless, frequently
that is exactly what happened in publicly-financed scientific
research. I have proposed a project entitles 50TECHNOLOGIES.com
which would attempt to address this problem and create
a new dynamic in the relationship between scientific
research and venture capital.
The concept: A web-enabled on-going web-site (50TECHNOLOGIES.com)
which would provide an organized framework for examining
the commercial prospects of research technologies globally.
It is also predicated on the assumption that not all
the technologies being developed in global research
institutes have been appropriately assessed in terms
of their commercial potential. The example used below
of the commercialization of marine biology is intended
to make the point that genomics is not the only scientific
discipline on which venture capitalists should be focused.
The
operating model: Canadian B-School students would be
involved in assessing the commercial potential of and
commercial activities in up to fifty areas of scientific
research and technological development.
The
market: There would be free-services provided on student-written
case studies and updates. A gate-accessed service for
investment banks and venture capital firms would provide
a more value-added activity.
The
object: To brand a consortium of Canadian B-Schools
as the center of global information on the commercialization
of technologies and to offer a now non-existing service
about the commercial potential of avenues of research
to the global scientific community.
An
example: In a field like marine ecology , there are
very few examples of successful commercialization. It
would assess all major existing commercial activities
with analyst quality data ( e.g. www.marbio.com,
TVX-listed spinoffs from Canadian university research).
It would look at existing research in the academic discipline
of marine ecology It would look at market-demand as
in existing activities (spending on fish-stock maintenance,
research budgets on aquaculture investments etc.)
The opportunities for commercializing university research
on a grand scale involve three sets of activities:
(i) Conventional venture capital activities, building
companies around specialized research activities and
developing portolfios regardless of specific category;
(ii) Strategic venture capital activities, where significant
trends, like energy storage can be combined with research
activities galvanizing the activities into a stronger
commercial presence. This often goes hand-in-glowve
with corporate venture strategies where the expertise
of a partyocualr compoany is applied to commercializing
researcgh in a rekated area of scientific endeavor ;
(iii) The longer-term interaction between commercial
skills and research skills which would come from a social
network like 50Technologies.com. Acoustical engineers
working with venture capitalists to discern market needs
for noise-blocking technologies, recognizable warning
signals (like car-alarms) etc. change the nature of
scientific research to reflect more realistically the
way in which research activities take place, in a less
remote series of activities and one which is much more
interactive with market trends.
Is it credible that Toronto could become a hub for global
technology commercialization? The next innovations in
the global economy have, in many cases, no natural place
of geographical origin. Is the next SONY Walkman being
invented in Sony’s labs or is it a product that
is being engineered in Finland, combining wireless payment
capabilities with access to original content providers
in a number of satellite locations? SONY’s venture
capital portfolio (www.sonyvc.com) covers a spectrum
of new technology areas on which future growth could
be predicated. Is the next breakthrough in agricultural
biopesticides being developed by a Chinese PhD student
in a McGill laboratory using Swiss research money? How
will these innovations be financed or commercialized?
How will the entrepreneurs who want to back them be
backed by venture capitalists? It in inconceivable that
a growth strategy for innovation-based economic development
can take place in any jurisdiction without a strategy
for technology commercialization. It is also inconceivable
that there be a strategy for technology commercialization
which can succeed without understanding the global nature
of research and providing all the stakeholders with
a roadmap and a rankings. It is increasingly apparent
that there can be no economic development without great
universities and that great universities are indispensable
because of their ability to provide networks where ideas
intersect: entomologists and agricultural land-sue planners,
marine biologists and economic development strategists.
To have a realistic chance of success, there has to
be an Ontario-based approach to technology commercialization.
It requires three things:
(a) encouraging science-based and innovation-based Ontario
companies to participate in corporate venture capital,
commercializing the next generation of growth;
(b) the development of a blue-chip fund with a specialized
expertise in commercializing technology, along the lines
of MSBI in Montreal, where venture capitalists can be
incented to create companies that commercialize world-leading
research;
(c) a commitment to an innovative approach to facilitating
the activities of researchers and venture capitalists
by bringing researchers into contact with thinking about
commercial benefits and bringing venture capitalists
into contact with early-stage research and creative
innovation. While 50TECHNOLOGIES.com is not an idea
cast in stone, it is a potential model for achieving
precisely this objective
If this is done, Toronto, as a capital-market could
become a global leader. I
believe that it can only be a capital market city which
delivers this kind of economic leadership, because it
is the capital markets where “research”
in economic activities is world-leading. It certainly
provides the University of Toronto with a unique vantage
point on these type of economic innovations, the kind
of vantage point which can only be matched in New York,
Zurich, London or Amsterdam.
Conclusion:
10 Future Ballards and 10 Future RIMs
The task of public policy and capital markets in a country
with the economic architecture of the Canadian economy
is to ensure that thereat are 10 Ballards and 10 RIMs.
In 1987, I wrote of Nortel that the choice was between
playing in a farm team economy and playing to be a global
champion. For almost twenty years, we have successfully
commercialized technology but failed to grow these companies
into well financially-engineered national champions
which could be sustained by foreign investment (e.g.
the classic case study of the role of longterm German
capital in the financial engineering of Ballard). There
are dozens of companies listed on the TVX, which commercialize
everything from brilliant university research on biopesticides
to CO2 processing technologies. The challenge is not
to “create” companies. It is to grow them
to a size necessary where they can, in the standard
metaphor of venture capitalists, be the hatched leatherback
turtle which makes it from the beach to the sea.
For almost twenty years, Canadian companies have been
disadvantaged in their global growth strategies by the
difficulty of using acquisition capital to integrate
compatible companies in Europe and Asia. Our investment
banking expertise has been limited to domestic deal-making
and has resulted in a situation where we lose head offices
rather than build global players. As the next generation
of debate about the commercialization of technology
takes shape in boardrooms and political offices, it
is imperative that we focus the public policy debates
in Victoria, Edmonton, Queen’s Park, Quebec City
and Ottawa on the real issues. The problem is not the
availability of capital for start-ups, an issues which
has distracted decision-makers when they focus on the
commercialization of the next generation of technology.
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