The Whole of Commercialization Approach to Innovation
Victor Bivell
This is the outline of
a presentation given to the Intelligent Polymer Research Institute at
Wollongong University in November, 2009.
Thank you for the invitation
to speak here today. I’ve chosen as my topic The Whole of Commercialization
Approach to Innovation. As I don’t know any of you, I’m not
sure if I can tell you something that you don’t already know. So
what I would like to achieve today if I can is to perhaps give you a little
more understanding, a better appreciation, of just how hard it can be
to commercialize technological innovations; and leave you with a little
more respect for those who try it and succeed, and for those who try and
don’t succeed.
I say that because it seems
almost everyone has underestimated how difficult commercialization really
is. In 1984 the government severely underestimated how long it would take
to set up a venture capital industry and 25 years later its future is
still uncertain. Entrepreneurs continually underestimate how long it will
take them and how much it will cost. And so do venture capitalists and
other investors.
In the 15 years I spent as
a venture capital editor, one of the sayings about commercialization I
came across that I really like is - what ever you may think it is going
to take, double the money and triple the time; and it works the other
way too: double the time and triple the money.
This is so true. It happens
time and time again. With few exceptions, success usually takes far longer
and costs far more than everyone initially believes. Maybe the early optimism
is necessary to get started because the time and the cost and the task
can be very long and very high and quite daunting. And it applies to environmental
innovation as much as to any other sector.
What We do
So what does Eco
Investor magazine do? I started Eco Investor in 2005. Our readers are
mainly high net worth investors - people who manage their own share portfolios,
such as through a self-managed super fund, private company or family trust.
We also have institutional investors - mainly environmental and venture
capital funds rather than the big institutional fund managers who are
less interested in small and innovative companies and have their own resources.
We have a surprising number of entrepreneurs and chief executives of eco
companies, and I suspect this is not just because many are high net worth
investors with an interest in the sector, but also because they want to
keep up with what other innovative companies are doing and want to be
a little closer to investors in the sector. We also have a good range
of advisers: financial advisers for investors, business and corporate
advisers for companies, government advisers also for innovators, and lawyers
and accountants with clients in the sector. Overall, a good balance of
subscribers across the environmental sector.
What do we do for our subscribers
- who are our clients and readers?
I think the first thing we
did when the magazine started was introduce some rigour into the sector.
Being an ‘environmental’ company is desirable and fashionable
and many call themselves one. But how do investors tell the difference
between a genuine environmental company and one that’s more interested
in marketing itself?
To do this I developed a methodology
with three criteria.
1. Environmental activity.
This is where the core business activity is a solution to an environmental
problem. Identifying environmental problems is not hard. Many have been
around for a long time and scientists and the media and others are telling
us about them all the time. The difficulty is finding solutions or partial
solutions to these.
2. The second criterion is
environmental focus. I like to see a company that is focused on its environmental
solution. But that is not always possible. Some funds and investors say
they will go as “high” as 50 per cent on environmental activities;
that is, the company must have at least 50 per cent of its revenue or
assets in environmental activities; whereas I will go as “low”
as 50 per cent, although at that level I prefer to also see some other
positives. So we have a high standard.
3. I also like to see a commitment
from the company and management that they want to be an environmental
company; that they understand what is means and see it as important. This
gives some comfort that when they make decisions they will take the environment
into consideration. What we don’t want, for example, is where say
the price of oil goes up so a company decides to race off and become an
oil explorer.
So by international as well
as Australian measures, Eco Investor has high standards, and we have to
because so do our readers. They are not afraid to ask why this or that
company is included when they think the company may be doing something
of dubious environmental value. And when they ask, we need to be able
to justify it or change our call.
What is ‘Whole of Commercialization’?
Among the other
things we do as a magazine - news, analysis, opinion etc, a key one is
helping our readers manage the risk/ return profile of environmental investing.
We do this through what I call a Whole of Commercialization Approach.
The Whole of Commercialization
Approach is sorting companies by their stage of development into categories
from ideas through to publicly listed companies. The categories are:
• Ideas and R&D
• Unlisted Companies
• Initial Public Offerings
• Micro Cap Companies
• Emerging Companies
• S&P ASX 300 Companies. The ASX 300 companies can be further
subdivided into S&P/ ASX 200 and S&P/ ASX 100 companies.
Each of these categories is
a stage of development where businesses tend to share their own set of
characteristics and risk and return profiles.
Separating them out in this
way helps the reader to understand and manage those risks and the potential
returns. The last thing I want to do, for example, is jumble up unlisted
start-up companies next to ASX 100 companies and perhaps convey that they
are similar investments. They are not. Separating investments into categories
based on their stage of development avoids this and encourages the reader
to think about and understand each category.
Source: Eco
Investor
For completeness and because
they are of interest to investors, we also write about unlisted funds,
international funds, and on occasion international companies. If we depict
this Ideas-to-Stock Exchange model for innovation in quantitative terms,
it can be seen as a pyramid. That means there are a huge number of ideas
at the base and the quantity diminishes as they make their way to a relatively
small elite group of companies on the ASX.
We can also represent this
process as a funnel.
Source: Eco
Investor
With the diagram of the Funnel
I have tried to give some idea of the relative quantities. Although no
one has precise data on these ratios, based on my experience and reading
I have no doubt that the general impression conveyed by the use of a funnel
is correct. What we have is a massive quantity of innovative ideas that
are ruthlessly culled at each step of the innovation path, from ideas
generation to ideas selection, research and development, commercialization
and public listing.
For completeness and to show
that not all successful ideas end up as listed companies, I’ve also
included established unlisted companies, not for profit organizations
and government owned enterprises as these are other possible homes for
innovations.
Let’s now look at each
stage.
Ideas and Research and Development
On ideas generation, I don’t think we should underestimate how
many ideas get generated. Humans are the ideas species. As a species we
have this wonderful gift of generating ideas and everyone has it - from
the so called ‘genius’ to the so called ‘village idiot’.
We all generate ideas, starting at everyday things like what to have for
dinner or where to have our holiday and including, among every topic imaginable,
ideas for research, innovations and businesses.
This is why idea selection
at the personal level is important. Each of us needs to have some ability
to sort through and select our best ideas so we can progress them to the
next level, which at some stage is likely to involve scrutiny and selection
by others. For scientists, for example, some of these ideas turn into
research projects and then development projects.
At Eco Investor, we group ideas
and research and development
stories together and publish them under the heading The Future. We publish
mostly Australian stories about research and development projects, innovative
new products, and new business ideas. These are sourced from universities,
CSIRO, and corporate R&D. We also include some of the more interesting
overseas stories.
This section has several purposes.
It informs investors of what may be coming down the development pipeline,
alerts them to developments and new business ideas that may impact their
investments, and gives them a sense that technologies and businesses are
not fixed but in constant change and that they need to keep up.
This whole area is very interesting
with much happening and there is no shortage of stories to publish. It’s
a very enjoyable section to edit.
Unlisted Companies
Out of the population’s ferment of ideas, and the research community’s
ferment of R&D projects, some make it to the next stage and are deemed
suitable to commercialize into products and businesses.
Commercialization puts them
into early stage land or venture capital land although only a select few
will ever get venture capital.
The vehicle of choice for commercialization
is the unlisted company.
Having compiled venture capital
statistics for 12 years, for me a fundamental distinction is between prerevenue
companies and first revenue companies. This helps give us our standard
venture capital business stages:
Business Stages for Unlisted
Companies
Seed (Pre Revenue) - Early Seed and Late Seed
Start-up (First Revenue)
Early Expansion (Additional Revenue)
Expansion or Established
Mature
How these stages are played
out can vary from industry to industry but with environmental innovations
the early seed and late seed stages encompass company formation, intellectual
property, proof of concept, prototypes, demonstration plants, team building,
market research and so on.
Start-up is commercial start-up,
where the decision is made to proceed to manufacture or service provision
on a commercial scale with the aim of having a product or service to bring
to market and sell for a profit. Building a first factory, setting up
distribution, and taking initial orders are examples of start-up activities.
A company must have something
to sell to be in business. If a company doesn’t have something to
sell, it is still at the pre-revenue or seed stage. It is still doing
its homework. It is these early stages, the seed stage and the transition
to the start-up stage or moving from prerevenue to first revenue, that
so many people have so dramatically under-estimated both in the length
of time and the amount of capital required.
Even if companies are able
to make this transition, and many don’t, success is still not assured.
All they have done is bring a product to market. They still need to show
that there is a market for the product, that they can supply it at a price
that people are willing to pay, that they can survive and prosper among
the competition or other hazards.
Early expansion is where the
company seeks to grow its revenue, either by new markets, new products,
acquisitions etc.
If it does well at some point
it will become an established business and further down the track a mature
business.
Many inputs are needed to move
along this path, and one of the most crucial is capital. At the R&D
stage, most funding comes from government grants. But it’s a different
world at the commercialization stage when government grants are not sufficient
and equity funding is needed. The company needs to go out into the real
world and find investors prepared to risk their hard earned capital.
The usual pool of potential
investors are:
* The Entrepreneur
* Family & Friends
* Angel Investors
* Venture Capitalists
* Corporates
* Stock Market.
Once companies have revenue
they also have access to other funding options such as cashflow, debt
and private equity, but at the very early stage it is usually the entrepreneur
and family and friends, with a lucky group also able to access angel capital,
venture capital or a corporate joint venture partner or shareholder.
Eco Investor runs an Unlisted
Companies section where we highlight specific companies that are fund
raising and developments in companies we have written about previously.
This is also a way to help raise the profile of the unlisted companies
sector. The reality is
that Australia’s formal venture capital industry is not large enough
to meet the demand for capital and it is the angel investor market that
is more likely to grow in the short to medium term. Australia needs more
high net worth individuals to take in interest in and to get good at investing
in unlisted companies, particularly early stage companies. As well as
providing investment opportunities for our readers, the Unlisted Companies
section is a way that Eco Investor can help grow the pool of angel investors.
Micro Cap Companies
Some companies raise capital by listing on the stock market, which
also acts as a defacto venture capital market. These are mostly early
stage companies that share many of the characteristics of pre-revenue
unlisted companies
The global financial crisis
means the IPO window has been shut in recent times, but during the boom
Eco Investor was writing about up to four or five environmental companies
per month listing on the ASX. It was hard work to keep up.
At present there are about
100 environmental micro caps on the ASX. These are companies that meet
our three criteria mentioned earlier.
Eco Investor uses the term
micro cap because it helps convey their key characteristics for investors
- that they are small, early stage companies and therefore high risk,
speculative investments. Most are prerevenue and need capital because
they are developing a prototype, a demonstration or pilot plant, or want
to move on to first production. Some have early sales but are still operating
at a loss.
They are usually innovative
companies and many have intellectual property. They also range across
many industry sectors. While some of these companies may fail or go nowhere,
I am certain that some will be successful and become substantial businesses.
But their investors need patience.
Emerging Companies
I set up a category for Emerging Companies because it was clear that
there was a group of good companies that were more advanced than micro
caps but were still outside the S&P/ ASX 300 Index.
Eco Investor’s criteria
for emerging companies is that they must have sales and they must have
profits. I also like to see that they pay dividends, but this is not essential.
Please note that these criteria
are different from the S&P/ ASX Emerging Companies Index that was
set up just recently. The Index’s key criteria are market capitalization
and liquidity, as it is designed to suit institutional investors who invest
large sums and need liquidity to move freely in and out of stocks. Eco
Investor’s criteria suit our high net worth and retail investors
who are generally not concerned about liquidity as they invest smaller
amounts, and are more interested in a company’s progress as a business
- hence the focus on sales, profits and dividends.
At present we have 14 companies
classified as emerging companies. Many of these emerging companies are
still in a growth phase, and some have high growth. But there are also
some that are languishing. In general however, issues at this stage are
not about the technology but about finance, markets or internal company
issues.
S&P/ ASX 300 Companies
Eco Investor has an ASX 300 Companies section because the S&P/
ASX 300 Index is said to be the widest measure of “institutional
grade investments”. Of the 300, Eco Investor classifies only 20 as
environmental stocks. So there are not a lot to choose from at the top
end of the Australian environmental investment universe. This number has
grown since Eco Investor started and I believe it will continue to grow.
But it also highlights the process of ruthless culling I mentioned earlier
as ideas turn into businesses and move to R&D, commercialization and
public listing.
Despite their presence in the
ASX 300, there is still a wide variety in the investment fundamentals
of these 20 stocks.
For example, among them are
companies like Geodynamics and Ceramic Fuel Cells that I would call large
micro caps as they are still at the pre-revenue stage; they are seed stage
companies that happen to be listed, relatively large and with good liquidity.
They rub shoulders with companies such as Energy Developments and Tassal
which have established sales and profits and pay dividends.
It is when we get to the S&P/ASX
200 Index that most of the companies are suitable for institutions and
‘mum&dad’ investors. At present only one of these is a large
micro cap. The others such as Infigen Energy, APA Group, and GWAInternational
are large, substantial businesses with multiple products and a history
of sales, profits and dividends.
These features are even more
evident in the ASX 100 stocks. For example, AGL Energy and Origin Energy
are leading national utilities while Sims Metal Management is the world’s
biggest metals recycler. Arrow Energy can be classified as a growth stock
but it is also Australia’s largest pure play coal seam gas stock
and has growing international operations.
At this level, the businesses
are a long way passed being one product businesses and may have up to
hundreds of products and services. They are large and substantial enough
to be providers of multiple economic and social benefits: products for
consumers and industry, employment for staff, taxation for governments,
and capital growth and income for investors.
Examples
I’ll now give some examples of companies that are at various
stages along this innovation funnel. The main example is Ceramic Fuel
Cells, which recently became and ASX 300 company after five years as a
micro cap.
If we look at the technology
side first, Ceramic Fuel Cells is commercializing a fuel cell that converts
natural gas into electricity and heat. It grew out of CSIRO research and
was established in 1992 - that is, 17 years ago. Remember what I said
earlier about the long time frame to commercialize many technologies.
The company listed on the ASX
in 2004, having already spent $128 million over 11 years developing its
technology. Remember what I said earlier about how expensive commercializing
technology can be.
The company also listed on
the London Stock Exchange’s Alternative Investment Market in 2006.
This was to give it access to additional investors in Europe who understood
the technology.
If we look at the company now,
it has world leading technology. It claims to be able to convert gas to
electricity with 60 per cent efficiency, the highest in the world. In
contrast a coal fired power station has about 22 to 30 per cent efficiency
after transmission losses. The technology gains another 25 per cent efficiency
through the creation of heat which can be used for hot water - giving
it a total efficiency of up to 85 per cent.
The company’s commercialization
model is to make fuel cell units or stacks that manufacturers will then
incorporate into combined heat and power appliances for home and larger
buildings.
But the technology is not yet
in the market. In October 2009 the company opened a factory in Germany
to produce fuel cell modules on a commercial scale and it expects first
sales of its BlueGen system in about March 2010. The BlueGen is a mini
power station about the size of a dishwasher. It will sit in your home
and produce enough electricity to both run the home and feed power into
the grid, and enough heat to provide hot water for the home. It will also
substantially reduce greenhouse gas emissions compared to coal-based grid
power.
And being distributed energy,
it is wonderfully subversive as each of us will have the choice to bypass
the grid and be a producer of power rather than a just a consumer and
help reduce the need for coal fired power stations.
So overall the conclusion is
that the technology is terrific. But, and it is a very big BUT, it has
taken a very long time and has been very expensive to develop.
This can be seen if we look
at the company’s financials, which are far more mixed.
Ceramic Fuel
Cells - Share Price Since Listing
Ceramic Fuel Cells listed at
$1 per share, and a capitalization of $109 million. But remember that
by then it had already spent $128 million over 11 years developing the
technology. So some one was wearing a loss.
I’d guess it was the government,
which with its various grant and other schemes is by far the biggest venture
capitalist in Australia. But the equity investors couldn’t have been
too happy either, as prior to the IPO contributed equity was $71.2 million
and after accumulated losses of $61.6 million net equity was only $9.6
million.
I checked the company’s
ASX announcements and since listing to the present it has raised another
$142 million. That’s a total of about $272 million - and without
having brought its product to market.
At 30 June 2009 it was still
operating at a loss. In fact by then it had accumulated losses of $185.4
million. That’s a huge amount for any investors to live with. Ignoring
the grants, contributed equity was $230.4 million, yet its net assets
were only $48.5 million.
So if you were an investor,
the financial picture up until now has not been encouraging.
Yet, and it’s a big YET,
the company’s future is actually looking very promising. I mentioned
the technology but it has other positives too.
In September 2009 the company
entered the S&P ASX 300 Index, which would have given it a much higher
profile among fund managers. By November its share price was 25 cents,
giving it a market capitalization of $257 million. And in March 2010 it
should start to collect its first serious revenue.
But even when it starts sales
next year, all it will have done, if I can put it that way, is bring its
product to market. Recall my earlier point about making the transition
from pre-revenue to first revenue. It will have taken 18 years.
But that is not the end of
it. It needs to prove there is a market for its product. That people will
pay their hard earned money to buy it. And that it can survive in the
commercial world. The company also has other milestones to meet. When
will it become profitable? When will it start to pay dividends? These
are important questions for investors as for some years to come the company
is likely to remain a consumer of capital rather than a payer of dividends.
However, at some point the
stock should be re-rated by the market. When? - is a good question.
Overall, if all goes well,
it looks as if the company has a promising future.
But the early investors have
a long way to go before the company proves to have been a good investment.
We can see this by looking at its share price since listing.
Although it listed at $1, if
you invested in the IPO and wanted your dollar back, there was only a
short window of a couple of months in early 2007. The rest of the time
the shares have been underwater. And thanks to the global financial crisis
they hit a low of around 5 cents in March 2009.
Now look at it from an investor’s
pont of view. When would you have prefered to invest? Back in 1992 when,
unknown to you, first sales were 18 years away and there was no guarantee
they would ever happen? In 2004 at the IPO, when unknown to you the $1
shares would spend most of the next six years at the least in negative
territory? Or in March 2009 when the shares were 5 cents, the R&D
work was behind it, and first sales were only a year away?
The market thinks so too, and
as the chart shows the volume of trading since March has been unprecedented
and very high.
This is why it is so hard to
set up a venture capital industry, so hard to find long term investors
for early stage technologies, so hard for investors to make money out
of innovative technologies. Those who are interested want to invest when
the company is only a few months from first sales, or when the shares
are only five cents. No one wants to put their money in way back in 1992
when nothing is certain and first sales, let alone profits, may be 18
years away.
My first point was that historically
just about everyone has underestimated how long it takes and how expensive
it is to commercialize technology. 18 years and still commercializing,
as shown by Ceramic Fuel Cells, is by no means unique or unusual, In fact,
in many cases it is the norm.
If you are interested in the
process of commercializing innovation and looking at it from a whole of
commercialization approach, other very interesting examples are: Cochlear,
ResMed, CleanTeQ Holdings, Intec, Phoslock Water Solutions, AnaeCo, BluGlass
and Carnegie Wave Energy, among many others.
Cochlear and ResMed are both
medical companies. They are two of Australia’s outstanding technology
successes and very important to the local venture capital industry. Both
came out innovations by academics, one in Melbourne, one in Sydney.
Cochlear has commercialized
technology to help the deaf hear. It began with an idea in the 1960s,
first product in the 70s, venture capital in the 80s, and a public listing
in the 90s. It is now an ASX 100 company and a multinational with sales,
profits and dividends.
The Cochlear
technology has made the transition from idea to ASX 100 company. Above:
Cochlear’s new Nuclear 5 System.
ResMed has commercialized technology
to help people with sleep apnea. The technology began in the early 80s,
the company received venture capital in the early 90s, and listed in the
late 90s. Now it is an ASX 200 company with a dual listing in the US.
As well as illustrating the
full commercialization process, both Cochlear and Resmed have seriously
helped many thousands of people and are wonderful success stories.
Back on the environmental front,
Clean TeQ Holdings has an interesting twist as its main technology was
developed in Russia and it has the licence to commercialize it outside
of the former USSR. Clean TeQ began in 1990 and listed in 2007. It is
an emerging company with sales and profits.
Intec is commercializing a
technology that can better refine copper and other ores and extract metals
from waste. I first wrote about the company in the early 1990s when it
had been going for only a few years. It received venture capital in the
1990s and listed in 2002. The company is still in the early days of commercializing
its technology, yet to make substantial revenue from it, and still running
at a loss. But overall it is making progress and still intends to succeed.
Phoslock Water Solution has
a technology that can reduce chemical nutrients in large water bodies
and eliminate blue green algae. The technology was initially developed
by CSIRO in 1994 and the company listed in 2002. Fifteen years since the
initial innovation, the company is only now beginning to make sizeable
sales, mostly overseas, but it is still running at a loss.
AnaeCo is commercializing its
DiCOM technology for processing organic municipal waste into biogas and
compost. The company listed in 2007 but by then the technology had already
been under development for seven years. The company is part way through
developing its first plant, and with no real revenue still operates at
a loss.
BluGlass is commercializing
technology out of Macquarie University that can be used to manufacture
high tech LED lighting, which is very energy efficient. The research began
around 1996 and the first patent was filed in 2002. The company floated
in 2006, which gave it a much needed capital boost. BluGlass is making
progress and hopes to achieve first revenues in about another 12 months
time. If it does it would have taken around 14 or so years.
Carnegie Wave Energy is commercializing
a wave energy technology first developed by a Perth inventor in 1999.
Ten years later the company is about to commence its first small scale
commercial demonstration project, which will be the first commercial scale
wave energy plant in Australia. If successful the company’s next
step will be a large scale commercial project and first sales in 2011.
There are many other very interesting
examples of exciting technologies at all stages along the funnel of commercialization.
Conclusion
These and many other possible examples illustrate my points that
commercializing technology is an extraordinarily difficult thing to do,
and that for investors to make good returns from commercializing innovation
can also be extraordinarily difficult.
Using the ‘Whole of Commercialization
Approach to Innovation’ as outlined here can help improve the chances
of success as it gives investors, entrepreneurs and others an understanding
of the entire commercialization process - the full range of business stages
- and of the risk and return characteristics of innovative technologies
at each stage of the process.
The Whole of Commercialization
Approach is a big picture strategy that complements and is compatible
with other forms of business and investment analysis. When a company’s
position along the commercialization path has been identified, the gamut
of other analytical tools can be applied that are appropriate to that
stage.
I’d like to concluded
with the question - what is success? We’ve seen that there are different
types of success. There is research success in the laboratory and science.
There is technological success, where a prototype or product is shown
to work. There is commercial success, when the product makes it to market
and proves it has a market. Investor success is crucial; not necessarily
at the beginning as it is likely to need patience but it must appear at
some stage otherwise the flow of capital will slow or stop and so too
will commercialization. There is social success, when others tell the
innovator that their innovation is useful and worthwhile. And there is
personal success, where each person needs to be satisfied with their outcome.
Because success in technology
can be a long time coming and cost more than was ever imagined, over my
22 years as an editor and journalist I have learned to respect everyone
involved in commercializing technology. I have no doubt at all that as
a society we need to better understand, respect and honour those who achieve
success and those who tried.
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