Musings on Entrepreneurship and Innovation
Monday, May 28, 2007A Buyer's Guide to the Innovation Bazaar
In the June 2007 issue of Harvard Business Review, Satish Nambisan and Mohan Sawhney present a framework for understanding the differing roles of Invention Capital, Innovation Capital, and Venture Capital firms in the context of Open Innovation. In their article, A Buyer's Guide to the Innovation Bazaar, they observe, "Companies can shop for innovation in various stages of development - from raw ideas to market-ready products - with the help of intermediaries." Along this continuum, there are some key trade-offs:
- Risk and Reach - Licensing agents, patent brokers, electronic R&D marketplaces, idea scouts, and Invention Capitalists can help companies access a broad range of potential innovations, but the uncertainty related to such raw ideas is high. At the other end of the spectrum, business incubators and Venture Capital firms can provide access to market-ready products in which there is higher confidence regarding market potential. However, there are fewer such offerings to choose from.
- Speed and Cost - Raw ideas are inexpensive, but can take a relatively long time before they are ready for the market. Market-ready products, as the name suggests, are ready to go (or are already in the market on a limited basis), but are expensive to acquire. (Click here for the SpinBrush example.)
Per Satish and Mohan, the middle ground is the domain of Innovation Capitalists such as my firm, Evergreen IP. As I interpret the authors' hypothesis, the unique characteristics of the different intermediaries along the spectrum from raw ideas to market-ready products include the following:
- Invention Capitalists, licensing agents, idea scouts, and electronic marketplaces offer access to the Long Tail of the distribution of prospective innovations. They create options in an uncertain world.
- Venture Capitalists and incubators, on the other hand, are focused on the inflection point between the Long Tail and the Short Head of the innovation spectrum. The ability to commit increasing amounts of capital in order to progressively resolve uncertainty distinguishes the Venture Capitalists from other innovation intermediaries.
- Innovation Capitalists sit at the precarious intersection between the creation and execution of innovation options.
I say precarious, because I suspect that Michael Raynor is probably on to something with his theory of Requisite Uncertainty, in which Raynor concludes that the management of uncertainty (the creation of options) should be separated from the making of commitments (the execution of options). We at EIP constantly live with the tension between searching, screening, and refining ideas (creating options) and testing the marketability of such ideas by making increasing commitments of time, money, and relationships (preliminary execution of options). Nevertheless, despite the challenge, we believe that there is value to be generated and earned in the management of a portfolio of real options, including facilitating the selection of options for execution.
Furthermore, Satish and Mohan observe that the relationship between acquiring companies and Invention and Venture Capitalists is fundamentally transactional. On the other hand, they posit that the relationship between Innovation Capitalists and companies must be deeper:
Companies seeking innovation at the two ends of the continuum focus primarily on the type of innovation they want to buy, whereas in the middle they need to focus on the intermediary. That is, because of the nature of the innovation capitalist's offering, large client companies need to build and nurture long-term and trusting relationships with selected IC firms.
Satish and Mohan's work is suggestive in a number of ways:
- As an "intermediate intermediary" Innovation Capitalists such as EIP may stand to benefit from cultivating relationships with its counterparts on either side of the development continuum. We've certainly been doing just that in regard to upstream collaborators. And, we're in the process of exploring co-development relationships and other downstream collaborations in order to run rapid go-to-market experiments.
- An auction may be consistent with the transactional nature of the sale of raw ideas and market-ready products to an innovation buyer. On the other hand, full-on auctions may be counterproductive to the development of the kind of trusting relationships that Satish and Mohan believe are required for Innovation Capitalists. Again, we at EIP find ourselves walking a tightrope.
Who said it was easy? After all, Satish and Mohan call it the "innovation bazaar" for good reason:
Like a traditional bazaar, it can be chaotic and bewildering...Just contemplating a plunge into the hurly-burly of this space can be daunting.
Indeed.
