The Next American Economy - Pittsburgh

BLUEPRINT FOR A REAL RECOVERY

THE

NEXT
AMERICAN
ECONOMY
Carnegie Mellon’s
Technology Commercialization
AUTHOR OF WHY GM MATTERS Ecosystem
WILLIAM J. HOLSTEIN

WilliamJHolstein.com

THANK YOU FOR YOUR SUPPORT
Many thanks to those here at Carnegie Mellon
University who took part in the book:

Red Whitaker Raj Rajkumar


OUR COMPETITIVE EDGE
‣ I’ve been studying wealth creation for many years, since
my early days in China and Japan beginning in 1979.

‣ I’ve crisscrossed America, seeking answers to what we do
better than they do.

‣ The answer is:
America’s unique brand of innovation


THE PROBLEM
But we have lagged in recent years in actually
commercializing our innovation. We’ve been
swept up by:

‣ Easy money
‣ The myth that manufacturing does not matter.
‣ Now the financial bubble has popped, the economy
is not going back to the way it was.

‣ Consumer spending, real estate, construction and housing
was fueled by easy borrowed money.

‣ That has permanently changed.


CRITICAL FACTORS
‣ We need to acknowledge the need
for structural change in our
economy, not just cyclical. All of
which means we have to drive up
the technology food chain.

‣ We need to agree on a national strategy to create new
industries on U.S. soil. This is a structural change. A
huge piece of the response is at the microeconomic
level, in places like here in Pittsburgh.


MACROECONOMISTS JUST CAN’T HELP
US…
‣ They don’t know anything about HOW wealth
is ACTUALLY created!

‣ I believe the key is in our idea factories


WHAT IS AN IDEA FACTORY?
It can be a university, research institute, large
hospital, national weapons laboratory or a large
private sector company.


WHAT IS AN IDEA FACTORY?
It is characterized by:
‣ Sustained Interactions
‣ Both Formal and Informal
Between:
‣ Different disciplines
‣ Different cultures, nationalities
With A Mix of Basic and Applied Research

Mostly Funded by Government and Corporations


HOW DO IDEAS LEAVE THE
FACTORY?

HOW DO IDEAS LEAVE THE FACTORY?
The key is the technology licensing and patenting
office.

‣ Under what terms does the office allow
development on favorable terms?

‣ Does it facilitate robust exchange of ideas
between "inside" and "outside?"

‣ What resources does it possess?


DISINCENTIVE
Unlike MIT, at one point Carnegie Mellon’s
technology licensing office wanted to retain
majority control of any company created here.

‣ The office insisted on nondilutable positions.
‣ Thisinvestors alike.
and
was a major disincentive for entrepreneurs


COMMERCIALIZATION
ECOSYSTEM:
5 STAGES

THE ECOSYSTEM
Then ideas enter an “ecosystem,” created by
governments, universities, foundations, angel
and venture capitalists, incubators, large
companies, mentoring networks, etc.

‣ No one can control the ecosystem. It is shared.

‣ The ecosystem depends on various institutions and
personalities finding overlap of interests.

‣ What Brookings calls a “thick network of formal
and informal relationships” across institutions.

‣ I’ve borrowed the five-stage concept used by big
companies to describe the ideal of how commercialization
works


STAGE 1
START UP

SETTING
UNIVERSITY

FINANCING
LARGE CO’S
GOV’T

TEAM
SCIENTISTS &
RESEARCHERS STAGE 1
ONLY ‣ Professors or graduate students have an
idea.
‣ They receive funding from the government
and perhaps some from large companies.


STAGE 1 STAGE 2
START UP DEVELOPMENT

SETTING
UNIVERSITY INCUBATOR STAGE 2
/ HALFWAY
HOUSE This is where it gets tougher.
‣ Here, the scientists need to
FINANCING move off campus and start
LARGE CO’S building a team of people with
GOV’T GOV’T (SBIR) broader skills.
ANGELS
FOUNDATIONS ‣ Mentoring and incubators are
critical at this points.
‣ Note - Government funding for
TEAM basic research begins to
SCIENTISTS & TEAM GROWS: change. It is not SBIR funding
RESEARCHERS - MARKETING that might become more
ONLY - FINANCE important than NSF.

OTHER - MENTORING
‣ Also Note - Angels or
foundations might be involved
KEY - INCUBATORS
INPUTS: - SKILLED LABOR in funding the research at this
- NETWORKING MECHANISMS stage.


STAGE 1 STAGE 2 STAGE 3
START UP DEVELOPMENT MARKET
FACING

SETTING
UNIVERSITY INCUBATOR OFFICE
/ HALFWAY
HOUSE
FINANCING
LARGE CO’S
GOV’T GOV’T (SBIR)
ANGELS
FOUNDATIONS
VENTURE
CAPITALISTS
TEAM
SCIENTISTS & TEAM GROWS: PROFESSIONAL
RESEARCHERS - MARKETING CEO MAY BE
ONLY - FINANCE REQUIRED
OTHER - MENTORING
KEY - INCUBATORS
INPUTS: - SKILLED LABOR
- NETWORKING MECHANISMS


STAGE 2 STAGE 3
DEVELOPMENT MARKET
FACING

SETTING
INCUBATOR OFFICE
/ HALFWAY
HOUSE
FINANCING STAGE 3
LARGE CO’S
GOV’T (SBIR) At some point, and I’m theorizing
ANGELS that it occurs in Stage 3, the team
FOUNDATIONS has to start facing the market and
asking tough questions about
VENTURE what customers really want.
CAPITALISTS
TEAM ‣ The science experiment is
TEAM GROWS: PROFESSIONAL over.
- MARKETING CEO MAY BE ‣ It may be time for more
- FINANCE REQUIRED professional managers,
including a CEO.
‣ Angels and foundations start
dropping out and Venture
Capitalists start moving in.


STAGE 1 STAGE 2 STAGE 3 STAGE 4
START UP DEVELOPMENT MARKET VALLEY OF
FACING DEATH

SETTING
/ HALFWAY
HOUSE
FINANCING
LARGE CO’S
ANGELS
FOUNDATIONS
VENTURE
CAPITALISTS
TEAM
SCIENTISTS & TEAM GROWS: PROFESSIONAL CEO + FULL
RESEARCHERS - MARKETING CEO MAY BE FINANCIAL
ONLY - FINANCE REQUIRED TEAM
- MANUF.
OTHER - MENTORING - LOGISTICS
KEY - INCUBATORS - SALES


STAGE 3 STAGE 4
MARKET VALLEY OF
FACING DEATH

SETTING
OFFICE

FINANCING STAGE 4
LARGE CO’S
The infamous valley of
ANGELS death. At this point, the team
FOUNDATIONS is having to rapidly gear up
VENTURE spending before being able
CAPITALISTS to sell enough product to
cover those ecpenses...
TEAM perhaps even before it can
sell any product
PROFESSIONAL CEO + FULL
CEO MAY BE FINANCIAL Many entrepreneurs do not
REQUIRED TEAM make it through the valley of
- MANUF. death.
- LOGISTICS By this point, there is very
- SALES little government funding of
any sort.


STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5
START UP DEVELOPMENT MARKET VALLEY OF FULLY
FACING DEATH COMMERCIALIZED

SETTING
/ HALFWAY
HOUSE PROFIT
GENERATION
OR IPO
FINANCING
LARGE CO’S
ANGELS
FOUNDATIONS
VENTURE
CAPITALISTS
TEAM
- MANUF.


STAGE 4 STAGE 5 STAGE 5
VALLEY OF FULLY Finally the product is
DEATH COMMERCIALIZED commercialized. We can define that
in different ways:
SETTING ‣ The company goes public and
OFFICE raised enough capital to continue
expanding.
PROFIT
GENERATION ‣ The company actually achieves a
OR IPO profit
FINANCING Note who complex this whole
LARGE CO’S process is:
ANGELS ‣ The physical setting keeps
FOUNDATIONS changing.
VENTURE ‣ The source of funding keeps
CAPITALISTS changing.
TEAM ‣ The nature of the team
CEO + FULL developing the ideas keeps
FINANCIAL changing
TEAM This is what makes the process so
- MANUF. difficult.
- LOGISTICS
- SALES But I don’t believe
commercialization and growth have
to occur by accident.


STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5
START UP DEVELOPMENT MARKET VALLEY OF FULLY
FACING DEATH COMMERCIALIZED

SETTING

E
/ HALFWAY

H
HOUSE PROFIT

T
GENERATION

E
OR IPO

R
FINANCING
LARGE CO’S
GOV’T
R E A
GOV’T (SBIR)

W HE
ANGELS

? ??
PS
FOUNDATIONS

A
VENTURE

G
CAPITALISTS
TEAM
- MANUF.


WHERE ARE THE GAPS?

‣ We now know how to analyze these ecosystems
and look for “gaps.”

‣ We can also look for overlaps, meaning similar
institutions attempting to do very similar things.
‣ Sometimes overlaps are just as debilitating as
outright gaps in the ecosystem.

‣ Where are the possible gaps in the Carnegie
Mellon Ecosystem?


GAP #1 - TECHNOLOGY LICENSING
OFFICE
‣ I understand it has been improved, but is it as strong as
MIT or Stanford?

‣ Does it have the resources to build robust connections
between people on the inside and people on the outside?


GAP #2 - FINANCING
Pittsburgh faces an obvious absence of venture
capital.
‣ The financing that comes from foundations may or may
not be the right sort of money.

‣ Entrepreneurs need “Smart Money” that comes with
management expertise.

‣ Despite their best intentions, foundations don’t necessarily
know how to build businesses.


GAP #2 - FINANCING
The good news is that there are ways of
attracting venture capital:

‣ One absolute key is the tech office’s policies -- those
absolutely get the attention of the VC crowd.

‣ Another is the presence of angel investors


GAP #3 - ACHIEVING SCALE
The gold standard for any university is creating
companies of at least $1 billion in annual sales.
Here in Pittsburgh, that seems to be a challenge.

‣ One obvious reason is the absence of venture capital.
‣ But another is a gap in how scientists find CEOs
‣ Red Whitaker found Eric Close to run Redzone
Robotics, but it wasn’t easy. Other clusters like
Boston and Austin have mechanisms for
networking and making introductions.


GAP #3 - ACHIEVING SCALE
Another key would be examining the role of big
companies that are paying for research here, like
General Motors or Caterpillar.

‣ Are they investing in any companies?
‣ Are they sitting on any boards?
‣ Are they mentoring any of your young CEOs?
Large businesses can play a role throughout all five stages
of the commercializations ecosystem. They can help fill
crucial gaps.


GAP #4 - INCUBATORS
These are hugely important but they come in a
variety of different flavors:
‣ Some want to encourage entrepreneurs to leave the nest
as soon as possible.

‣ Others want to keep occupants as long as possible,
perhaps to continue receiving rent.


GAP #4 - INCUBATORS
So we have to ask ourselves:
‣ What are the precise mix of incentives in an incubator?
‣ Are they in favor of commercialization or are they in favor of
obtaining new research grants?
‣ Are PHDs and professors incentivized to commercialize?
‣ Or are they encouraged to continue their fascination with the
technology alone?
‣ What is the net impact of National Robotics Engineering
Consortium (NREC)?
‣ Some CEOS in Pittsburgh told me they think it is skewed
toward keeping people and ideas in the research mode --
not in moving ideas to commercialization.
‣ That’s a discussion you should have.


GAP #5 - GENERAL
Of all the players involved in your
commercialization ecosystem, are some of them
competing with each other?

‣ This is a particularly acute problem in older states, with
overlapping agencies and non-profit players.

‣ Do your key institutions cooperate?
‣ Does information flow smoothly between them?
‣ Are they staffed by the best professionals?
‣ Is politics involved?


GAP #5 - GENERAL
You at Carnegie Mellon can’t possibly control this
entire ecosystem.

‣ But you can engage in dialogue with the other players
‣ You can look at best practices at this microeconomic level
- across the country - and seek to influence others.

‣ What’s your incentive to do that?


IN CONCLUSION
Ultimately, Carnegie Mellon will be stronger in so
many respects if you are surrounded by a healthy
ecosystem of commercialization.

‣ The community would be better off.
‣ The state would be better off.
‣ The whole economic climate would be better.
‣ You would start a virtuous cycle upward and attract more
funding and more talent.


IN CONCLUSION
There is clearly self-interest at stake in finding more overlaps
with these other institutions.

What we’re talking about here is a smarter form of American
capitalism, with institutions finding better alignment of interests. I
am not advocating socialism. I am not advocating any ism other
than pragmatism.

The pragmatism to look around the country at what works and
what doesn’t work.


IN CONCLUSION
Based on the research for this book and based on the research
of a lifetime, I am convinced that there are conscious steps you
can take at the microeconomic level to improve the ecosystems
that commercialize technology.

I believe that’s what is going to create the next American
economy and respond to our global competitive challenge.


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THE

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AMERICAN
Visit
ECONOMY WilliamJHolstein.com
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AUTHOR OF WHY GM MATTERS

WILLIAM J. HOLSTEIN

The Next American Economy - Pittsburgh

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