Innovation and Incubation

Stephen DeAngelis

July 14, 2010

I have noted in past posts that for an idea to become an innovation it must have three components. Put in a mathematical formula it would look like this: innovation = new x valuable x realized. If any of those parts is missing (i.e., if any of those traits = 0) then you can rest assured whatever you’re discussing is not an innovation. Perhaps the most difficult part of that equation is the last part (i.e., getting an idea to market). To help creative people move their ideas from concept to reality, some companies and universities have established in-house “incubators” to guide innovators through the process. Among companies employing idea incubators are Boeing, Nokia, Hewlett-Packard, Boeing and UPS. Other companies offer their incubator services to innovators, who are often long on ideas but short on business experience. One such company is New York-based Betaworks [“In New York, a Tech Incubator Becomes a Hub of Collaboration,” by Jenna Wortham, New York Times, 2 May 2010]. Wortham begins her article with the story of an innovator named Iain Dodsworth, who created a software tool that organizes “tweets” into neat columns:

“He named it TweetDeck. Within a few months, it gained the kind of momentum most entrepreneurs only dream about. Tech bloggers praised it, and users flocked to it. Ashton Kutcher posted a video online showing him and his wife, Demi Moore, using the service. It wasn’t long before inquiries from investors began pouring in. ‘It was fairly scary,’ he said. ‘I was a one-man company being thrown offers left, right and center from people I didn’t know.’ But then Mr. Dodsworth received a message from a company he did recognize: Betaworks, a New York City technology firm known for its eye for emerging Web services. ‘Money is nice, but I actually needed expertise more than anything else,’ he said. ‘Betaworks had a track record in this field back when no one had a track record in this field.'”

Dodsworth’s experience is not unusual. A lot of people with good ideas have little experience with getting those ideas to market. That is why incubator organizations are so valuable. Wortham explains how Betaworks helps people like Dodsworth:

“In the two years since [the company starting helping Dodsworth], Betaworks has become prominent in New York technology circles for helping entrepreneurs fine-tune and expand their companies. The company has guided some entrepreneurs to lucrative sales and helped others raise cash from notable New York and Silicon Valley investment firms. Such incubators are familiar in more established tech hubs. Silicon Valley, for example, has the technology incubator Y Combinator, and Pasadena has Idealab. … [Betaworks] was founded by John Borthwick and Andrew Weissman, who worked at AOL in the ’90s. ‘I was there when AOL bought CompuServe and Netscape and did the first content deal with Amazon,’ said Mr. Weissman, chief operating officer. ‘You could start to see these new ways pieces of the Internet were coming together.’ He said he watched as one AOL project, MapQuest, gradually lost market share. Google Maps grew faster because it allowed other companies to add information to a map or use the service in other tools. ‘You could just see that model was going to be big,’ ‘We said, “We think this is it, and we want to invest in these kinds of companies.”‘

With a pretty good understanding of how the social web (or Web 2.0) was emerging, you can understand why Betaworks contacted Dodsworth and why Dodsworth responded. Wortham continues the tale of Betaworks beginnings:

“A little over three years ago, [Borthwick and Weissman] decided they wanted to create their own company aimed at that very idea [i.e., investing in Web 2.0 enterprises]. Thanks to tools like Amazon Web Services, Twitter and Google Apps, developers could more easily build and scale Web tools. ‘We knew there was a big fundamental change happening on the Internet,’ said Mr. Borthwick, Betaworks’ chief executive. ‘And we knew it was going to be social.’ They spent nine months deliberating over how to structure their company before settling on a hybrid of an investment firm and an incubator. ‘The venture capital structure is banking on finding that one super-duper winner, and there’s nothing wrong with that,’ said Mr. Borthwick. ‘But our goal is to create a network of companies with lots of connections between them that increases the likelihood of success between all of them.’ It’s not hard to see that spirit at work. The two dozen companies under Betaworks’ umbrella make a point of using one another’s creations and often incorporate them into their own services. At a recent meeting at Betaworks, about three dozen employees of Betaworks and its portfolio of companies crowded into a room, trading feedback, updates and the occasional good-natured zinger about their various products.”

Because Betaworks is a hybrid venture capital/incubator firm, it “is looking for entrepreneurs who have more than a vision.” Pure incubator firms take the eggs (i.e., unhatched ideas) and help them emerge — not Betaworks. “‘Anyone who shows up with an idea on a napkin, we’re going to tell them, “Thanks, but go build a prototype,”‘ Mr. Weissman said. Closer to a true incubator organization is the Deshpande Center for Technological Innovation [“The Idea Incubator Goes to Campus,” by Bob Tedeschi, New York Times, 27 June 2010]. Tedeschi begins his article with the story of an MIT professor who is not short on entrepreneurial experience but nevertheless understands the value of using the services of an incubator:

“Douglas P. Hart, a professor of mechanical engineering at the Massachusetts Institute of Technology who sold his last start-up for a tidy $95 million, is already on to his next big thing. On Tuesday, he expects to lock up $1.5 million in funding for his new start-up, Lantos Technologies. The company has developed a 3-D scanner that it hopes will streamline the current generation of earphones and hearing aids by precisely fitting them to the dimensions of the ear canal, right up to the eardrum. ‘We’re hoping people will be able to walk in the store and have their ears scanned like people get their ears pierced today,’ he says. ‘That’ll lower the cost because they don’t have to go to a specialty doctor.’ Unlike other academics often left to their own devices, Professor Hart was able to bring his hearing aid concept closer to reality with $50,000 in backing last year from the Deshpande Center for Technological Innovation, an M.I.T. entity originally funded by two private investors, Jaishree Deshpande and her husband, Gururaj. ‘I wouldn’t have known the first thing about doing all of this,’ says Professor Hart. ‘The people from the Deshpande Center led me through.'”

In a couple of past posts, I’ve discussed how leading universities have set up organizations that help faculty and students commercialize their ideas. These efforts are important for universities because they help them hold on to top-notch faculty as well as help them attract the best and brightest students. In addition, students and faculty that do well economically often turn into generous donors. Tedeschi continues:

“By providing academics like Professor Hart a bridge to the business world, M.I.T. is in the vanguard of a movement involving a handful of universities nationwide that work closely with investors to ensure that promising ideas are nurtured and turned into successful start-ups. At first glance, the centers look like academic versions of business incubators. But universities are getting involved now at a much earlier stage than incubators typically do. Rather than offering seed money to businesses that already have a product and a staff, as incubators usually do, the universities are harvesting great ideas and then trying to find investors and businesspeople interested in developing them further and exploring their commercial viability. In the jargon of academia, the locations of such matchmaking are known as ‘proof-of-concept centers,’ and they’re among a number of new approaches to commercializing university research in more efficient and purposeful ways — and to preventing good ideas from dying quietly. The first proof-of-concept center, the William J. von Liebig Center, was established in 2001 at the University of California, San Diego. So far, the von Liebig Center has helped start 26 companies that have created more than 180 jobs and attracted more than $87 million in financing. Among those companies are Mushroom Networks, a developer of online video technology, and, more recently, Biological Dynamics, a maker of early cancer diagnostic technology.”

In several past posts, I have highlighted some of the amazing ideas being explored by university students to help the developing world. Obviously, student-originated ideas aren’t limited to concepts that can help developing countries. Often the inspiration for ideas comes from creative professors who help students discover their interests and improve their minds. With such a rich source of ideas, Tedeschi explains why university incubators are catching on:

“‘Many of the great ideas get stuck in labs because scientists don’t have access to the kind of ecosystem’ that Deshpande and other proof-of-concept centers offer, says Amy Salzhauer, a founder of Ignition Ventures, an investment firm based in Boston and New York that works with scientists to set up companies. ‘This is a way to better harvest those ideas.’ While the von Liebig and the Deshpande centers are the highest-profile successes in this realm, similar entrepreneurial surges are occurring at other schools, like the University of Utah, Georgia Tech, the University of Kansas and the University of Southern California. It’s an expensive proposition. Not including the cost of the technology itself, it can cost investors roughly $250,000 to determine whether an idea will actually blossom into something that can be sold, Ms. Salzhauer says. Academics and others have a term for the chasm that usually separates a good idea from people who will invest in it: the ‘valley of death.’ An increasing lack of interest in initial public offerings over the last decade has left even less money for early-stage companies. But even in such a challenging fund-raising environment, analysts say many universities continue to embrace old-fashioned methods for supporting and promoting potentially lucrative in-house research. Many schools have what are known as ‘technology transfer’ offices that introduce businesses and investors to patented university research and help schools strike licensing deals. Corporate executives and investors complain that overly rigorous, or simply overwhelmed, tech transfer offices take too long to negotiate licensing agreements. And the offices often try to sell ideas with unproven commercial relevance.”

According to Tedeschi, the Obama administration has proposed “allocating $12 million among several institutions next year in what proponents hope will be a continuing effort to support and study proof-of-concept centers.” He notes that this could mark a dramatic change in how the federal government supports research and development at institutions of higher learning. He explains:

“The idea represents a shift in thinking about the federal government’s role in stewarding the more than $50 billion it gives to university researchers annually. Until now, that money has been for the discovery, not commercialization, of scientific breakthroughs. The idea of government-backed proof-of-concept projects has plenty of proponents, including W. Mark Crowell, a University of Virginia executive and past president of the Association of University Technology Managers, and Lesa Mitchell, an executive at the Ewing Marion Kauffman Foundation, which finances entrepreneurship research and programs.”

Not everyone, Tedeschi notes, believes the approach will work. He continues:

“Others believe that the experiment, while worth trying, isn’t likely to yield significant results. Toby E. Stuart, a Harvard Business School professor who researches social networks and entrepreneurship, noted that virtually every government wants to replicate Silicon Valley’s university-driven system of innovation. ‘But you can’t engineer it through policy means,’ he says. He thinks proof-of-concept centers would be more useful at universities other than the likes of M.I.T., Stanford and Harvard, which are already hubs in entrepreneurial clusters. ‘But in any significant way, it will happen organically,’ he says, ‘and not through some bureaucratic intervention.'”

There is often only a faint line between what is “organic” and what is “government-sponsored”; especially when proof-of-concept centers are found at state-sponsored universities. Tedeschi, however, seems to agree with Stuart. He continues:

“Indeed, organic progress is on display outside of some of the country’s big tech corridors. At the University of Utah, the Technology Commercialization Office helped arrange early financing and networking resources for 25 companies. The university’s president, Michael K. Young, aligned the office with the business school, and Brian A. Cummings, the office’s executive director, says the new arrangement allows researchers and business students to work together more closely. Last year, business and bioengineering students who worked with Mr. Cummings’s office drew up a short list of promising research discoveries. One was an idea for a feeding tube that is fitted with a tiny video camera to help surgeons implant it more precisely. Dr. John C. Fang, a professor of medicine, first came up with the idea in 1999. A team of graduate students then fashioned a business plan around the idea and shopped it to local venture capitalists. Dr. Fang says he expects to secure $1.25 million in financing for it soon. Mr. Crowell, at the University of Virginia, participates in proof-of-concept review sessions, where academics and investors evaluate ideas. He says several projects that attracted $100,000 seed grants from the Wallace H. Coulter Foundation Translational Research Partnership have generated commercial licensing deals. Among them is a project called HemoShear, which is developing a device that can decrease the time and cost needed to test new drug compounds. And in Pittsburgh, a state-financed nonprofit group, Innovation Works, has invested $45 million over the last decade to help the area’s university researchers — and anyone else — prove their ideas and showcase them with investors. The companies have attracted more than $800 million in venture capital and have gone on to create 3,000 local jobs, says Matt Harbaugh, the chief investment officer of Innovation Works. One company, Bossa Nova Robotics, is made up of Carnegie Mellon robotics researchers who had a commercial hit last year with a pair of toy robots, the Prime-8 gorilla and Penbo, a penguin.”

Even though faculty and students are often great sources of ideas, Tedeschi reports that not every professor with a good idea necessarily wants to become an entrepreneur. After all, they were drawn to academia rather than the business world in the first place. He continues:

“University executives say they sometimes struggle to find motivated entrepreneurial professors. Medical researchers with promising discoveries may plunge into the marketplace out of a sense of service. For others, though, the motivation can be as simple as the sight of a fellow professor in a new sports car — a behavior common enough that it is known in university circles as ‘the Porsche principle.’ When Professor Hart first thought of the technology for his most successful product to date, an oral scanner, he was focused on pure research, not profit. But he found that he wasn’t entirely immune to a financial lure after learning that old friends at the California Institute of Technology had struck gold with some of their ideas. ‘I was a little jealous,’ he says. ‘I thought I’d try it.’ Although he wasn’t sure exactly how to get started, the Deshpande Center had recently opened. Krisztina Holly, then the center’s executive director, sent a request for proposals to faculty members. After Professor Hart responded, he teamed up with Ms. Holly, who already had experience leading a pair of tech start-ups and had mechanical engineering degrees from M.I.T. After awarding Professor Hart a $250,000 grant, she also encouraged him to participate in a business-plan competition, where he mentioned his idea to a pair of Harvard M.B.A. students, Eric Paley and Micah Rosenbloom.”

University settings are ideal for creating what Frans Johansson calls “the Medici Effect” — the explosion of ideas that occurs when individuals from different disciplines get together to discuss challenges. Getting an engineering professor together with a couple of MBA students was a brilliant idea. Tedeschi continues:

“Professor Hart’s team incorporated the company as Brontes Technologies and tested more than 30 applications of his science, including technology for scanning faces in 3-D for security investigations. During that time, the team learned about the dental industry’s need for digital scanning technologies. So Brontes adapted the technology for use in an oral scanner that could create images of the mouths of patients who needed new crowns on their teeth. Next came an introduction to Jeffrey Bussgang, a partner at a Boston firm now known as Flybridge Capital Partners. Flybridge and two other firms invested $8 million in Brontes. In 2006, 3M bought the technology for $95 million and late last year it began the national rollout of a $29,900 product called the Lava Chairside Oral Scanner.”

Tedeschi notes that “Ms. Holly is now a vice provost and executive director of the Stevens Institute for Innovation at the University of Southern California, where a program called Ideas Empowered started in May. It has begun seeking proposals from faculty members interested in commercializing their research.” I actually posted a blog about her new assignment at Southern Cal back in 2007 [Southern Cal Gets Innovative]. Last December, I posted a blog that discussed Holly’s ideas about how to spur employment in America [An Innovation Agenda]. Tedeschi concludes his piece by noting that “Congress has yet to allocate the proof-of-concept funding, but a House subcommittee [has] held hearings … on improving ‘innovation ecosystems’ around universities to encourage the commercialization of taxpayer-financed research.” Professor Hart believes that university incubators are needed because too many ideas are now sitting in desk drawers with no way to get out. Since many universities are state-supported, he believes these fallow ideas represent enormous lost opportunities to get a return on investment for taxpayer dollars. He may be correct and $12 million seems like a very modest investment to find out if he is right.

To learn more about business incubators, read “Business Incubators are Growing Up” [BusinessWeek, 16 November 2009].