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The GoForward Plan to Scaling Up Innovation Part 3

5 Jun '09
Thomas Nastas, founder of Innovative Ventures Inc., is member, Board of Directors, Sotsgorbank and the Independent Directors Association (Moscow) and professor of marketing at the American Institute of Business & Economics in Moscow.

Innovation, SMEs, entrepreneurship and venture capital (VC) are ingredients in knowledge based economies; witness the successes of Silicon Valley in the US and replicated in France, Germany and elsewhere. Emerging country governments see these successes and they encourage their SMEs to attack world markets. This article presents a GoForward plan to building technology platforms in and around strategic assets vs. diversifying resources away from natural advantages; to catalyze a chain reaction in more domestic tech absorption. Once this base is established, governments can invest resources to assist/support their SMEs to take a seat at the table of global tech development.

Concluded, see Parts 1 and 2 in Features & Updates, May 8 and 27

Target Domestic Users First

SMEs and governments cite the low absorption rate of domestic users as the reason to pursue a GameChanging strategy.

Yet every country has industries that are knowledge based; some are clusters around a particular industry while others exist from natural advantages.

The automobile industry is a tech cluster with excellent growth in the CEE and the CIS as Ford, General Motors, Toyota, VW, Peugeot and others increase production in the Czech Republic, Hungary, Russia and Slovakia to meet customer demand. These auto multinationals need to build the domestic auto component supply chain to a Western equivalent to meet their business plans just as Shell, Chevron, LUKoil, KazMunaiGaz and others seek more and better oil field service suppliers in the CIS.

Both industries struggle to localize more purchasing and satisfy local content commitments. The local car industry is handicapped by the quality of local suppliers, who are far below world standards, said Carl Hahn, chairman emeritus of Volkswagen. Thats the most challenging part for our team Skoda chairman Detlef Wittig said.

Yet the GoForward plans of CEE and CIS governments are to build knowledge based sectors like IT, bio & nanotech, etc., but not tech investment for domestic needs in auto components, oil field services and mineral extraction/processing; sectors with immediate payoffs to catalyze a chain reaction in domestic tech absorption.

Israel is a powerhouse of GameChanging technologies for global markets. What are less known are its innovations for Israeli citizens, e.g., solutions for clean and pure water. Israel could have had a water shortage as its population surged from less than one million in 1948 to more than seven million in 2006. But it didnt due to actions of government planners.

To provide the fresh water needed for life, the Israeli Government sponsored R&D in low pressure irrigation systems (for agriculture), rain harvesting, wastewater treatment and desalination. The private sector built on these foundations to innovate water security/management, on-site biological treatment of solid waste, medical waste and biologically contaminated materials to name a few. While the focus was on domestic demand, pure water needs from global customers stimulated an Israeli export sector for clean water tech that exceeds $800 million/year.

With a proposed new government investment of $160 million over the next five years, Israeli firms are projected to increase exports of clean water tech to $2 billion by 2010, $5 billion by 2015 and $10 billion by 2020 in a world water market estimated at $400 billion a year with growth of 7%/year.

With citizens of Planet Earth forecasted to have a 35% water shortfall over the next 15 years, luck (opportunity + preparation) and timing again work to the favor of Israeli SMEs and their VC investors.

Other development approaches are possible to build tech sectors for domestic needs, when single technology hubs are less obvious, e.g., in logistics, where multiple technologies intersect. Latvia sits on the Baltic Sea with new technologies required in IT, warehousing and transportation to grow a nascent logistics platform into a regional distribution powerhouse.

Russian and international corporations are establishing back office administrative centers in Siberia, Budapest, Tallinn and other cities to escape high cost Moscow thereby stimulating new clusters and VC investment opportunities. The city of Kirov, a small Russian regional city 1,200 kilometers from Moscow is funding bio-clusters to manufacture creams, lotions and emollients used in the domestic production of everyday cosmetics.

Provide Mini-Grants to Document Business Opportunities

Once domestic tech hubs are identified, fund a mini-grant program to define the business opportunity for technologies. A mini-grant of $3,000 - $10,000 is not intended to fund an entire business plan, but a 3-4 page document detailing the technologys potential.

Capitalize a Proof of Concept Fund

Commercialization of new technology starts with R&D and product development to demonstrate proof of concept and the performance of novel ideas. SMEs can sell only when they present technology strengths (and weaknesses) to customers, conducted to a comprehensive analysis under different user conditions.

A proof of concept fund finances the testing of a technology and benchmarking it to direct competitors and alternatives. To invest capital wisely, mandate that developers benchmark technology early and often.

Inventory SME/Institute Technologies and Publish as a Database

Publish information that customers and investors need to consider technology from your country as an Internet database searchable by keywords like technology or market:

1. SMEs/institutes organized by technology, product and market segment, with full contact information
2. Benefits of the technology, cost and performance benchmarked to domestic and international competitors with data generated to international testing standards
3. Stage of development, i.e., R&D, product development, alpha/beta testing, ready-to-go, etc
4. Plan with timetable and milestone inflection points, line item budgets
5. Patents issued or filed, by country, date, number and competing technologies similar in form or function

Establish an IP Facility to Protect Your Countrys Intellectual Assets

The IP Facility pays legal costs of filing domestic or international patents with costs reimbursed through royalties generated from sales. Such repayments replenish the Facility so it becomes a revolving fund with a onetime investment.

Offer Targeted Business Development Support

Innovations too often sit on the shelf since scientists lack the knowledge to make the business case for the technology, the energy and drive to move them into the market. Many scientists and (some) SMEs lack the skills to transition from R&D to commercialization.

To overcome this problem, establish a business development office which scouts for opportunities in SMEs and academia. This office develops projects for financing by the mini-grant and proof of concept initiatives, and helps sell innovations from academia/SMEs to customers.

One responsibility of the business development office is to identify IP early and assist legal council to protect it. Researchers and businessmen are rightfully proud when they create new innovations. Yet they sometimes announce their solutions prematurely before protecting them and inadvertently weaken their legal rights. Business developers must educate scientists and SME management to IP, what can and cant be said in public.

Organize R&D & Supply Chain Competitions for Users of Technology

R&D competitions are used in combination with VC forums or a substitute when deal flow is too scarce to attract VC investors. R&D competitions present technology, to generate interaction between tech developers and the R&D staff from corporations. R&D competitions are organized in areas like nanotechnology, alternative energy, greentech, engineered materials, biotechnology, hydrocarbon E&P and so on. The audience is corporations and corporate venture capitalists, not financial VC investors.

Attracting large corporations to R&D competitions has many benefits. They are able to invest in promising technologies, guide its development with customer feedback, speed commercialization and help access opportunities in the supply chain.

Most multinationals hunt for technologies no matter where they come from, and they are able to benchmark technologies from your country to another, to help developers identify strengths and weaknesses of their technology to global competitors. Others have a strategic priority to integrate technology into the corporation as supply chain linkages, thereby stimulating innovation, growth and job creation in ways such as:

1. Be the technology platform that helps SMEs model and scale their solutions in advance of customer demands
2. Reduce development time and get to market quickly
3. Lower investment risk and help SMEs secure funding
4. Jump-start sales
5. Expand the market reach of SMEs by integrating them into corporate & international business ecosystems.

The venture capital arms of multinationals are especially helpful. Corporate venture capitalists Siemens, Nokia, Sony, Dow, Shell, Norsk Hydro, Intel, Sun, Motorola, SAP, Schlumberger, IBM, etc., invest into SMEs just like VC investors do. But they add value in ways that financial venture capitalist cant.

They take technology risks by investing in R&D and IP with right of use, to accelerate tech diffusion to markets and customers. Corporate VCs provide access to R&D budgets for tech funding at their earliest stage, before financial VCs are able or willing to invest.

Corporations help SMEs apply their technology to customer needs. As Esther Dyson, an investor in Russian and Eastern European startups remarked: One thing that the market requires is a more demanding customer base. They need to become better buyers and users. They have all the necessary technical skills, but they dont have the business experience to apply the technology as well as they should.

Concluding Remarks

Strange as it may seem, New Zealand is a fitting model of success. While it is not a developing country, it is small and remote from global demand. Its transition strategy from low-to-high tech is illustrative of how a domestic focus created technology SME industries.

In the mid 1990s, New Zealand government planners invested in biotech R&D to create more flavorful and different varieties of wine, cows and lamb with more meat and less fat. Their focus was on new solutions for domestic needs in agriculture and animal husbandry, not global biotech where New Zealand had little comparative advantage. Five years later, government initiatives yielded results and VC investors financed the commercialization of SME innovations.

Today New Zealand meat and wine are found in supermarkets and wine shops throughout the world. Their SMEs sell tech products and services to Australian, European, Japanese, Russian, S. African and US wine producers and animal growers, truly a win-win for all.

Build the deal flow; customers and investors will follow.

The opinions and sentiments expressed herein are those of the author only and not necessarily those of Marchmont Capital Partners or any other person. This article is abridged and translated from the published work of Thomas Nastas in the Harvard Business Review, Russian language edition, June-July 2007. It is reprinted here by permission of the author.
Oleg Kouzbit, managing editor: Im glad you join us here and take The Bridge walk for Marchmonts weekly review of the Russian regions innovative present and future. Stay close and youll find out more of how Russia is bridging the existing gap between its researchers and businesses.
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