Innovation, Risk & Failure

I include below my article this week in the Irish Times Innovation Magazine.   The Irish Times is,  I understand,  changing its online publication policy and thus whereas in the past,  I have rarely posted the full text of my articles for the newspaper to my blog,  I will do so from now on (I understand I retain copyright on my own articles :-)).

Innovation is riskful.   Innovation may fail.

Failure is an anathema.   We have had outrageous failures in our banks,  our health system,  the Roman Catholic Church,  in corporate governance,  in public procurement and in regulatory oversight.   Failure is devastating and unacceptable when a priori we have no reason to expect any deficiency.   Failure may however be acceptable,  if perhaps disappointing,  when we know in advance that a venture may fail.   For example,  we accept failure in sport is because we cannot reasonably expect perpetual success.

For professional engineers “failure is not an option”.

Scientific researchers by contrast expect occasional failures:  the 1887 Michelson-Morley experiment is one of the most celebrated negative results which nevertheless provided insight into the nature of light.

Entrepreneurs take calculated business gambles,  knowing that failure may occur.  Ventures may fail due, for example, to changing market conditions and competitor strategies;  insufficient balance sheet strength;  poor execution by the team;  or weaknesses in the assembled technologies.   However business failures result in experience and insight,  strengthening the competence of those involved and making their subsequent ventures more likely to succeed.

Publicly funded research is one pillar of the smart economy.  There is an understandable expectation that such research will usually provide a direct return for the taxpayer,  for example by way of royalties.  Yet research may fail.

We may consider universities such as Stanford and MIT as amongst the top scientific universities in the world,  and which also produce commercially valuable intellectual property.   Yet in 2008 the Stanford Office of Technology Licensing shows that only 2% of their annual $3,800M operating budget of the University came from license royalties.  MIT’s Technology Licensing Office for the same year produced just 4% of that university’s operating budget.  Cumulatively,  since 1970,  Stanford has disposed of its equity holdings in spinout companies to the cumulative value of $364M – of which its stake in a single company,  Google,  contributed by far the greatest share.   So 40 years of equity disposals by Stanford has yielded less than 9% of just a single year’s operating budget.

Dr. Burton Lee,  a colleague from Stanford, noted that from 1992 until 2001,  of the 10,530 start up companies which were backed by venture capital in the USA,  just 8% were spinouts from academia.  92% of venture capital was targetted to industry start-ups.

It thus appears that while curiosity driven research may provide insights for humanity,  it may not yield short term commercial opportunities.  Some argue that the primary economic benefit of publicly funded research,   such as the majority of the science undertaken in Ireland,  is more likely thus to be the development of an insightful and inquisitive graduate pool than of direct commercial value.

I believe that is a pessimistic view.

The competence of the research community,  especially principal investigators,  is nationally strategic.   Not only do they lead the development of the graduate pool,  and may produce new commercially applicable ideas,  they can solve tough technology challenges.  The ability of our research community to solve obstinate technology problems greatly strengthens our indigenous companies,   further embeds multinational companies in Ireland,  and can attract further foreign direct investment.

The Innovation Taskforce strongly urged a consistently growing number of start-ups to drive our economy.  In the case of start-ups from publicly funded research,  can we do significantly better than the top universities such as Stanford and MIT ?  I believe we can.

I believe that the key to increasing the number of successful academic start-ups is coupling insightful world class research with deep knowledge of specific global markets.  While we look to our principal investigators for the former,  our export led indigenous companies and our multinational sector should provide the latter.  An academically led start-up is more likely to be successful if it is guided to a global market opportunity.

Established companies,  both indigenous and multinationals operating here,  may believe it overly risky to themselves take unproven novel technology to the market:  it may be a distraction to their core business;  it may potentially damage brand and reputation;  and, in the case of multinational operations here,  the parent headquarters may frankly overrule it.

On the other hand,  it may be legitimate and prudent for an established company to enable a dynamic,  technology savvy,  start-up to take novel research and prove it in a nascent market.  If the start-up validates the new technology in an early market,  then the established company can further catalyse,  license or even acquire the junior partner.   If the technology fails in the market,  little damage has been caused to the established company,  the financial losses can be relatively modest,  and further knowledge and valuable market experience has still been acquired.

Ireland is in an absolutely unique economic opportunity.  We already have a healthy cohort of multinationals and indigenous companies.   We have,  particularly over the last decade,  built a strong confederate of scientific competence.   Our entrepreneurial base has strengthened,  with both experienced business angels and serial entrepreneurs.

We can reduce the risk of failed innovation by strong collaboration between established but risk-averse companies,  our academia,  and entrepreneurial start-ups.  Collaboration is possible immediately in Ireland which currently is difficult to put in place in other jurisdictions,  including in particular in both the home markets of universities like Stanford and MIT due to competitive mistrust.

Innovation is indeed riskful.  But Ireland is truly uniquely placed to enhance the likelihood of success.