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Symposium 2013

Proposal - Something for Everyone: Building Incentives for Innovation Ecosystems

The Challenge

Innovation as the foundation of economic dynamism and prosperity is a complex process involving contributions from various players. In particular it deals with the transformation of basic science into ...

Innovation as the foundation of economic dynamism and prosperity is a complex process involving contributions from various players. In particular it deals with the transformation of basic science into rival proposals that improve the well-being of mankind. For more than 200 years technological innovation has driven economic development. All growth is based on innovation. The process of innovation involves complementary contributions from science, from entrepreneurs, from the financial markets, from the investment community and from government.

Healthy innovation economies are the main driver of prosperity in the 21st century. But the three players that have traditionally sponsored basic research and invention in those economies are no longer willing or able to perform that role. Corporate R&D has become increasingly conservative as concerns for profit push incremental, rather than radical, innovation. Governments are de-prioritizing funding for basic, blue-sky research. The days of massive, government-sponsored science and technology projects, such as the Apollo program or the military microelectronics investment that spurred Silicon Valley, are well behind us.

Even venture capital, the favorite alternative for financing disruptive technologies, is stumbling. The risk-reward ratio for boot-strapping deep-technology startups is no longer acceptable to most investors. The model works only when innovations are relatively cheap to implement and there’s a really large gain at the other end—a formula that is dependent on IPO market factors, interest rates and other externalities. Consequently, VC capital has fled from fundamental technologies such as semiconductors, optics, materials, medical devices and therapeutics and toward the next Instagram, Rovio or Facebook.

The startup model of innovation is insufficient to drive large-scale, long-term prosperity in any case. Even the most ambitious startup is necessarily constrained in the scale and scope of its mission. Meanwhile, the world is increasingly besieged by complex problems that cannot be solved by startup-sized solutions alone. These problems demand a coordinated effort among inventors, companies, industries, governments and finance mechanisms, all working toward useful innovation in a system that supplies incentives for all.

At Intellectual Ventures, we’ve had success with a model that’s commonly called an Innovation Ecosystem. As the name suggests, these ecosystems consist of a many different kinds of participants interacting to produce and deploy valuable inventions. At its best, an Innovation Ecosystem creates an environment where all the parties involved in driving innovation can thrive: everyone from the lonely genius hatching a new idea to the investor looking for the next big asset class, from the cash-strapped government trying to power up economic development to the company that wants to move product into white space.

Innovation Ecosystems work because they provide something for everyone. The incentive structure of the ecosystem must be as varied as the participants themselves, recognizing their very different priorities and needs. While all participants get something valuable out of it, no two may get the same thing. It’s no surprise that Innovation Ecosystems don’t arise spontaneously; in that sense, they aren’t “natural.” But if you can create a system of incentives that appeal to scientists, engineers, investors, companies, governments, universities, research labs and so on, then you can draw these disparate groups together and cause their natural behaviors to move in a certain direction: toward collaborative innovation and mutual prosperity.

That is what we’ve been doing at Intellectual Ventures, both with our funds and with many new projects we’ve started on the strength of our experience with this model. The following examples illustrate how Intellectual Ventures uses incentives to build Innovation Ecosystems and what we’ve managed to achieve with them.

1. Intellectual Ventures

Intellectual Ventures was created to maximize the efficiency of assembling high-value portfolios of inventions in very diverse fields, including healthcare, energy, information technology and materials. It uses several funds and operating companies to supply and balance varying incentives for the thousands of different parties involved. In a sense, Intellectual Ventures exists to construct a new ecosystem that connects these parties and provides ways for them to interact to their mutual benefit.

Such an ecosystem is not just a good idea—it is a necessary one, given the way the relationships among innovating principals have degraded of late. For over a century, individual inventors and small companies were the backbone of American innovation. These players were able to talk directly to manufacturers about turning their inventions into products. Edison and Tesla, for example, had invention organizations that licensed their inventions to large companies such as General Electric or Westinghouse in return for R&D contracts and royalty agreements.

In recent decades, however, the incentives for inventors and large companies have become misaligned. Today’s innovative products have become so complex and cycle so fast that many large companies have difficulty identifying the all potential sources of the inventions relevant to their business. Due to this uncertainty, they have also become less willing to pay royalties, and therefore most inventors have been shut out of conversations with the large companies that could be their best customers.

With its funds, Intellectual Ventures built an incentive structure that re-aligns the interests of inventors and companies. Its asset purchases provide short-term liquidity to inventors, allowing them to pay the bills and continue their R&D, often while offering them a percentage of future profits as well. The inventions Intellectual Ventures buys also become available to a global network of potential customers. Opportunities like these reduce the risk equation for inventors and provide them with powerful incentives to conceive and distribute new ideas.

To companies Intellectual Ventures provides organized catalogs of inventions and an ongoing survey of additional invention sources, all offered at a predictable cost. Intellectual Ventures can also organize acquisitions of new resources at scale and with multiple partners. The recent acquisition of Kodak’s digital-imaging portfolio by Intellectual Ventures, for example, involved more than a dozen companies around the world. The opportunity to secure invention rights with greater predictability and scale acts a powerful incentive for a product company.

In this way and others, the incentive system Intellectual Ventures established with its funds has filled gaps in the innovation marketplace that prevented both inventors and companies from accessing resources they need to connect and innovate. So far, this system has provided more than $400M in liquidity to inventors and tens of thousands of inventions to product companies.

Yet Intellectual Ventures’ innovation system would not qualify as an ecosystem if it involved just these two types of participants. Beyond the thousands of inventors and many companies in its network, Intellectual Ventures also attracts billions of dollars of yield-seeking investors and longterm investors, dozens of venture capitalists, hundreds of agents and brokers, a thousand subject-matter experts and hundreds of research organizations and universities all over the world.

It does so by balancing risk and reward for all its participants and by supplying the incentives they need to thrive. The careful design of incentive structures builds a functional and productive ecosystem of innovation.

2. Innovation MegaProjects

Intellectual Ventures also has a program that helps governments build their own Innovation Ecosystems, based on incentives that motivate and reward all participants. Because of the incentive structure, these systems not only solve hard problems but also become self-sustaining engines of economic growth. Intellectual Ventures calls this approach an Innovation MegaProject (IMP), and like our other programs, it fills a gap in the contemporary landscape of invention and innovation.

Like corporations, governments are no longer in the “innovation business.” They don’t have the expertise or connections to drive large innovation projects, and they can’t muster political consensus over the long time horizons needed to do so. Yet they must compete in a global economy driven by relentless innovation cycles and disruptive technology, while facing significant socio-economic and infrastructure problems at home.

An Innovation MegaProject builds an ecosystem of inventors, companies and financial partners that solve large-scale socio-economic problems while generating platforms for technological development that give the host government a competitive edge in the global economy. Each IMP is organized around delivering a long-term, high-level solution, such as affordable, quality healthcare for the elderly; energy-efficient buildings with infinitely renewable infrastructures; efficient city transportation for people, products and waste; new commerce infrastructure to support small and micro-businesses; or safe and efficient agriculture and food supply.

Like classical infrastructure megaprojects such as roads, dams and subway systems, these projects will likely require billions of dollars in investment, but they will create innovation economies worth many times that because IMP ecosystems deliver more than solutions: they also stimulate ongoing economic activity and problem-solving.

They do so by creating sustainable incentives for each and every participant in the ecosystem. Inventors who sell their ideas, for example, get a good chance that their invention will be deployed, a small amount of cash up front and the lure of a long-term return. Various financial investors are looking for IRRs and yields over a certain period of time. Governments can point to tangible successes as the project achieves significant milestones every year. Small businesses get a government guarantee of demand for the products they innovate. And both government and businesses can exert their influence beyond domestic borders by participating in an ecosystem of product and services that could expand to the global market.

Once again, there’s something for everyone. Moreover, the structure of an IMP ensures that all participants stay motivated to interact, even after the original target problem has been solved and the new technology deployed. By establishing open platforms for innovation, it creates an environment of ongoing experimentation, investment and implementation. The ideas and solutions that emerge from this environment are likely to reach far beyond the stated goals of the project.

Because of the efficiency of the IMP ecosystem, government investment is far less than that for traditional government-sponsored projects, but the state, its domestic companies and its citizens reap far more. Such multiplier effects are what happens when an Innovation Ecosystem takes on a life of its own. The old three-player game may be over, but fortunately for all of us, it’s no longer the only game in town.

 


 

Copyright © 2013 Intellectual Ventures Management, LLC (IV). All rights reserved.

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