K.White book

Innovation for Business: a 21st Century Development Model for Russia

Part VIII

We continue discussing Russiaís new innovation economy, which can put Russia on a completely different development track. This is an important time in Russiaís history. It is the time, in which Russia needs to search for Smart Money. What does that mean?

If you look at a sophisticated innovation cluster in other parts of the world, there are people there who have made new businesses again and again and again. Over the past 50 years there have been many serial entrepreneurs. People who started their first business 40 years ago are today obviously very sophisticated as theyíve been through this cyclical process many times.

Therefore, just looking at a new project they can quickly understand the impact that this new technology may have on a wide range of markets, both domestically and internationally. They will be promptly able to determine the scope of change that can occur with this innovation, and this can give them a very quick understanding of the value of the project.

Inventiveness and market illiteracy: a gap still unbridged

I think Russia has an innate competitive advantage, which is creativity. But thereís a very serious problem here.

In its latest report a leading national business association, OPORA Russia, shows that Russia ranks very highly as an innovation initiator, but it ranks very low in all global comparisons as far as its ability to translate new innovative ideas into commercial products.

Thereís obviously a fundamental disconnect between the academic world and the innovators, between academia and investors.

I would like to give innovative entrepreneurs some insights into how they should think about the work they are involved in.

Itís so important to understand who needs your science and technology and the basic fundamental research that youíre doing. Why do they need it? Who cares? If you donít know the answers to those questions, if youíre only doing this research because someone above you told you to do so and you didnít ask him why, if you donít believe this is important and will change the world, then why work on it? Why spend time on it?

Most innovators that Iíve ever met love what they are doing, but they donít always know how their science will be applied. This is a question mark at the back of their heads.

Why?

Because their teachers didnít explain to them the existing market principles that can use those innovations. Because academicians themselves are not serial entrepreneursóunlike many Smart Money investors/university professors in the United States who are. They can quickly understand market applications, and they actually give tasks to their students to think in those terms.

What will your science bring about?

Science should not be an abstract toil of work to spend time on just for the sake of spending time on science; it should rather have a purpose. Solving commercially-driven problems could be one.

We have a global problem with some disease, or water, or ecology. People in laboratories around the world apply themselves to solve those problems. They are driven to work in collaboration with other like-minded people, and they want to make products to sell, which the humanity will benefit from.

Over nearly 18 years in Russia Iíve met hundreds, if not thousands, of innovators, students, professors who would come to me when I worked for the EBRD, for example, and present projects. They would say, ďI have an idea, this is a very exciting scientific theory.Ē

I usually asked if that was a technology aimed at triggering an evolutionary change, a revolutionary change, or it was going to completely disrupt the market. Unfortunately, very often people looked at me, having no idea what I was talking about. ďI donít know. This is just science. I have worked on this project for many years, and it is a project to purify water.Ē

My question was if that was an improvement of existing technology, or whether the project was based on a completely different approach to solving the problem that many had been working on, which is revolutionary, or if the person had been working on solving a problem that nobody even knew existed yet, which is disruptive.

Looking for a license buyer or altering the world?

If youíre thinking in terms of changing the basic rules of the game, then thatís something disruptive.

Hereís an example: you have at the top of the hierarchy IBM, Microsoft and Apple, and you introduce a company like Google. What happens? The move changes all the market players. People begin to alter the way they work with technology and interact with it.

As Microsoft grew, it overcame and completely changed the market position of IBM. As Apple has grown and introduced a new product that is intuitively much more attractive to different people, this has changed the dynamics with Microsoft and how people interact with machines and software. And now that Google has established itself as one of the clear global leaders, it is disrupting the entire structure; it is introducing new technologies, which will again change the entire market.

If a technology is evolutionary, itís going to have a certain value because someone may want to buy the license. Some existing companies that work in that field may see this as a better way of doing their job. This is a value of that.

For a revolutionary product, this also may involve a company buying the license for that, but theoretically, investors may say that this is a project they would like to support from the beginning to the end because that company, introducing this revolutionary change, may become a market leader.

An evolutionary technology doesnít necessarily become a market leader; it may be bought, and the value has a certain price range. A revolutionary idea may have a much higher value, so if your idea is truly revolutionary the value of your project may allow an investor to say, ďIím not going to invest just $200-500k in your project. I will invest much more and take a smaller position because I understand your firm can become a global leader.Ē

The same is true for a disruptive technology. A sophisticated investor may view it as potentially changing the world, and therefore an expected value for him may be rapid significant growth. If your idea is a disruptive technology, and youíre able to convince the investor that this is a disruptive technology, youíll get higher valuation.

In this world your objective as the innovator is to sell your idea as expensive as possible. Any investorís natural motivation is to spend as little as possible and get as much share as possible for your company. This is a natural conflict of interest.

To the degree that you understand the market implication of your product you can increase the value of that idea. If you donít know the market capability, and a mature Smart Money investor comes in, heíll simply buy your idea very cheaply. And youíll never even know.

16 Sep '10
 

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