T2+2 Commercialization 101

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COMM 101
Overview
For almost three decades, Foresight Science & Technology has helped customers move technology out of people's minds and into practical
applications. We first disclosed our Technology Niche Analysis® method and an overview on its use in founder Phyllis ("Phyl") Speser's book The Art
and Science of Technology Transfer, (John Wiley & Sons, 2006), which remains a best-selling textbook.
The method and know-how we are teaching is called Technology Niche Analysis® (or TNA® for short) because technologies often cut across
traditional markets. A piezo-electric pressure sensor can be used to tell you if your car has a flat tire, if your blood pressure is in the normal range,
or if an earthquake is about to happen. Each application is a market niche. Understanding the market opportunity for the sensor requires
understanding all of these applications and their interaction.
TNA® can be used with any technology to bring it into one or more practical uses. When our goal in moving a technology into use is to make
money, we call that commercialization. So, the focus in this course is how to make money off of technology. That said, most of what you find here
is also useful for giving away technology should you wish to do that for the good of humanity, to save the planet, or some other reason.
In this set of lessons, we take the next step in opening up our methods. The focus of a typical textbook is on the methodology and its theoretical
underpinnings. Hands-on advice and tips are provided to illustrate the methodology. Here the focus is reverse. In this set of lessons, also authored
by Phyl, the emphasis is on how you actually do the tasks needed to find markets for technology and exploit them. The emphasis, in other words, is
on know-how, on how to do it.
Learning Objectives
As indicated by the proverbial “101,” this course is an introduction to commercialization activities. More specifically, it is in an introduction to market
research in support of deal-making, although there is an introductory deal-making section included. Commercialization 201™, which is currently
under development, will focus extensively on deal-making.
Commercialization 101™ is designed to be accessible to a broad range of interested parties, from students to entrepreneurs to staff in business
development and technology transfer offices.
Following good pedagogical protocol, the course is structured to attain specific learning objectives. By the end of the curriculum you should be able
to:
· Identify appropriate deal structures for bringing a technology to market
· Identify end-users and their needs to find potential market opportunities
· Analyze those opportunities to determine if the technology has a chance of successful market entry
· Develop recommendations for market entry strategy
· Identify licensees, investors, and other partners to implement that strategy
· Participate as a market analyst on a team capturing a sale, license, alliance, joint, venture investment, or engaged in other deal-making
Lessons
This course has 12 lessons. Six lessons focus on market research and six on market entry. This introduction and a conclusion are the bookends.
While content varies, the structure of each lesson is standard. Each lesson starts off with a brief introduction and learning objectives. The main
body of the lesson spells out these points. Topic material is summarized in the review section and is then discussed in relation to an example
technology. Lessons conclude with questions to ensure that the material is retained. Review questions will be based on resources available on the
internet and on topics discussed in the section. Later lessons in the series will draw on material learned in earlier lessons as relevant.
We designed each course so that it could be completed in one hour. How long you take to complete each lesson will depend upon how deeply you
delve into the material, and how much background you already have. Our main aim is to instruct, not to rush.
Part 1: Market Research (Lessons 1-6)
Lessons in this part of the course provide the building blocks for the second part of the course.
Lesson 1: Deals
My father David Speser, from whom I first learned marketing, teaches "Nothing Happens without a Sale." "Deal" is a generic term for any
transaction which moves rights in a technology, or a product or service made with that technology, from one party to another in exchange for
money. Since our objective in doing commercialization is to do deals, it helps to get our arms around just what that means upfront.
Lesson 2: The Technology
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If you are going to do a deal, you have to have something to trade. Here we focus on analyzing your technology to figure out just what it does that
might be of enough interest that someone will give you money for it.
Lesson 3: Intellectual Assets and Intellectual Property
We can only trade what is rightfully ours-- what we own. Intellectual means it comes from our minds. Assets are material things that can be used
to make money. Property is assets that we own, and thus we can call upon the police and courts to protect them from theft. Intellectual property
is something that comes from our mind, is reduced to material form, and can be legally protected from theft by others. If you want to do deals, it is
important to understand how to create those ownership rights in your technology. Otherwise, people can just take the technology without your
permission, and there is nothing you can do about it.
Lesson 4: Applications
Ok, so now we have a technology that does something and that we own. Who are we going to sell it to? Here is where we figure that out. The
people we sell to are called buyers. The people who actually use the technology are called end-users.
Lesson 5: Competition
Competition is anything that anyone else can sell that substitutes for what we are offering. In other words, in markets, buyers have choices. Here,
we identify and analyze those other choices in terms of what they offer end-users.
Lesson 6: Markets
To do a deal, you need a seller (you) and a buyer (someone else). Markets are where you meet and do the deal. Markets are not static. They
change over time as the buyers and sellers and their offerings change. They also change as (1) the factors influencing the behavior or buyers and
sellers change (2) the rate of change in what is being sold varies. Since your technology may not be ready to sell today, you have to understand
market dynamics to determine if there will be an opportunity for you in the future when you are ready to sell. You are like a farmer planting corn.
You plant in the spring, but you sell in the fall. You have to guess what the market will be like in the fall to know what kind of corn and how much to
plant this spring. In the case of technology, you have a technology at some level of maturity. As you finish up R&D and product development, you
have to guess about what the market will need when you are ready to sell in order to design your R&D/product development program.
Part 2: Market Entry Strategy (Lessons 7-13)
This half of the course presents the tools and information to make your market research part of a successful strategy to enter the market.
Lesson 7: Goals
Why sell (or license or seek investment) anyway? Goals are the answer. We want something we do not have now. Doing the deal is a way to get
that something. It may be money. It may be glory. It may be making the world a better place. Or it may all of those things and more. Whatever it
is, your goals determine what a good deal is and what it is not.
Lesson 8: Capabilities
You bring some things to the deal. These things include intangible assets (goodwill, capital, intellectual property and assets, etc.) and tangible
assets (materials, supplies, facilities, inventory, etc.). Here we focus on how to analyze your capabilities to determine your strengths and
weaknesses for bringing your technology to market.
Lesson 9: Launch Tactics
To meet your goals you have to get the technology into the hands of end-users. The strategy for doing that is called a market entry strategy. The
heart of the strategy is sometimes called the 4P's: product, price, promotion, and place. Product is what you are selling the buyers. Price is what
you are charging them. Promotion is how you make them aware of what you have and persuade them to buy it. Place is how you deliver it into their
hands. The 4P's are also called launch tactics. Once you’ve got a strategy and launch tactics in place, you can consider whether you have the
capabilities to go it alone or you need help. Knowing where you are weak points you toward the kind of help you need. The people and
organizations who can provide that help are your commercialization partners.
Lesson 10: Finding and Qualifying Targets
Targets are the investors, agencies, or companies that give you money for a technology. Everything up to now has been groundwork to help you
find the right targets and to land them. Now we focus on finding them, picking up the phone, and asking them if they might be interested in trading
rights in technology for money.
Lesson 11: Valuation
The estimated cash flow a technology will generate is the gross value of a technology or company, i.e. what it is worth if you wanted to sell equity
in the technology or company or sell it outright. We will also briefly visit how to figure out royalty rates.
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Lesson 12: Deal Making

This takes us back to where we started this course: deals. The lesson focuses on market research activities that support deal-making, as well as
some introductory material on the actual deal-making process.
Although some of this material can seem complicated, if you take your time and think it through, you will see that all the concepts are actually
quite simple at their core-- the trick is to understand how they all inter-relate. And just remember, technology transfer is all about making money
and improving the lives of people, both worthy goals. So have fun!
Deals
At the heart of technology commercialization is deal making. Without deals, nothing goes to market, and if a technology does not go to market,
there is no commercialization. Deals are simply swaps, like when you were a kid at school and traded your peanut butter and jelly sandwich for
someone else's dessert. In technology commercialization it is no different. We trade one thing for another. What is being traded (a product, a
license, equity in a company, etc.) for what (e.g. money, equity in another company, products, or raw materials, etc.) determines what kind of deal
we are talking about (e.g. license, investment of capital, sale of goods, joint venture, strategic alliance, etc.). But at the end of the day, it still
comes down to one party swapping something they want to give up with another party who wants that something and is willing to trade something
the first party wants. What makes this swap a deal is that it is done in a way that makes it legally enforceable in a court of law.
Before you do a deal, you need to know three things: what you want to get out of it, what you can bring to the table to trade, and what kind of
legal structure you want to use. Our lesson objectives are:
· Understand what are the elements of a transaction or trade
· Understand how transactions can be made into legally enforceable agreements
· Choose a deal type that will work best for you
Although we will address topics that touch on law, we do so from a marketing perspective. We emphasize that Foresight does not provide legal
advice. For legal advice, consult your lawyer.
Transactions
From the standpoint of commercialization, the transactions that interest us are trades that involve technology or rights to technology. Why would
someone make a trade for technology (or rights in a technology)? Seems simple enough. The answer is because they want that technology or
those rights. But actually the answer begs the question: What does it mean to want those rights or that technology? Why does anyone want
anything?
Of course, why people want things is one of those questions philosophers write books about. For our purposes, we can restrict the question to why
someone would want something for economic use. In other words, people want things they can use and to say they will use it means it has utility.
The utility might be that it keeps you alive, like food, or keeps you warm, like clothes. Or it may mean that it is something you can use to do a job,
like a hammer and nails if you are building a home.
We can measure the utility of something in a wide variety of ways. One way is to say how much you will pay for it. The presumption is you will pay
more for a good that has greater utility than for a good with lesser utility. Another way to measure utility is to think of a bundle of goods that is
equivalent in value to the initial good. Say we are looking at a book of sonnets by Shakespeare. Let's say you are 58, male, happily married. Let's
say you love football and, well, poetry is just poetry; and yes, you read some in college and it was OK. That book of sonnets probably does not
have a lot of utility for you. Maybe it is going to be as useful as, or give you as much pleasure as, a bunch of celery. Next time you go shopping,
look at the price for celery. Now you have a price point that measures the utility of that book of sonnets. But wait, it's your wife's birthday and you
really love that woman and you want to make her happy and you bought this really pretty necklace and you want to put a note on it that will bring
a smile to heart and a tear of joy to her eye. And what was that line from dim memory "Shall I compare thee to a summer's day." Yes, it was
Shakespeare, English 101 back in college. That is how you feel about your wife, who is "more lovely and more temperate" than a summer's day. Oh
to just have the rest of that poem. Now that book of sonnets has a different utility.
Utility is subjective and depends upon context. Value is less subjective because it is utility expressed in currency. We know what a dollar or a euro is
worth. The utility of any technology (or any good) is a matter for us to decide individually. But where markets exist and lots of similar things are
traded for cash over time, there emerges a typical price that we call the fair market value of that good. We can go to Barnes and Noble or Amazon
and search for Shakespeare sonnets and find out the range of prices for a book. We can look at deals done for technologies like the one we are
commercializing and get some idea of where the fair market value lies. The more our technology is like others in the market, the easier it is to find
a fair market value. If I am looking for the fair market value of a new battery for electric cars, I can compare what I have with the prices and
performance of lithium ion batteries and nickel hydride batteries and get a rough idea of a fair market value. That in turn lets me know what I
might ask for when selling my batteries. Similarly, I can look at license deals and see what are the upfront fees and running royalties for exclusive
licenses for batteries for vehicles and get some idea of how I might price my license offer.
Transactions rest on one basic assumption: deals take place where all the parties feel that the goods bought equal or closely approximate the value
of what is given to obtain them. The presumption is where equal values are traded, nobody’s utility should decrease, and ideally both parties utility
should increase as a result of the trade. Mathematically, the deal can be considered as:
X=Y or X≈Y
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In a commercialization transaction, the technology owner brings the technology (as described in documentation such as a patent) and associated
know-how. The ‘buyer’ brings consideration (monetary or in-kind) and other useful things for getting the technology to market, such as brand
name, distribution channels, marketing expertise, and engineering capacity. When each party agrees that what the other has, in form and quantity,
equals what they have to offer, both agree to trade. When they shake hands and hand over the goods to each other, a transaction has occurred.
While the easiest way to visualize this for customers in a capitalistic economy is with money, transactions can also occur with services or non-
capital tangible objects. For example, you can trade a haircut for a pumpkin pie.
Legal Agreements
Of course, a technology is not like a bunch of celery. Most technologies do not have ready substitutes, meaning you cannot simply take an infrared
carbon dioxide sensor and swap it for a micro-cantilever based sensor and have the same thing. Usually technologies, even if similar, are more like
houses. The folk singer Pete Seeger has a song about those suburban tract houses that all look alike. He sings about little boxes on the hillside,
little boxes made of ticky-tacky and they all look just the same. Even there, those houses are really not the same. They are different places on the
lot. After they have been lived in they are painted differently, have different fixtures, and so forth. So if you do a transaction to buy one and
the seller goes to back out after the deal is signed, you can go to court and sue for specific performance, meaning you can force them to sell you
that specific house at the price agreed upon.
So, how do you keep someone from backing out from a transaction to sell or license technology or make an investment? Same thing, you go to
court and sue them. It is no different with technology deals. If you do a transaction, you want to make it legally enforceable. To do that, you need
to hit the standard elements in a contract. There must be a meeting of the minds and there must be consideration; that is, each side must trade
something which is exchanged. The meeting of the minds is recorded, if you are not foolish, in a document that both sides sign. The consideration
is something of value. Now there is something to enforce in a court of law. However, every jurisdiction has its own rules on how contracts should be
written and what steps are needed to make them legally binding. This fact means the only way you can be sure you have a legally enforceable
agreement is to let a lawyer review it before you sign it. The lawyer should be admitted to the Bar in the jurisdiction where the agreement will
be enforced in case of a dispute. The good news is that if you choose your lawyer wisely, they can also look at the agreement from the standpoint
of whether it exposes you to risks and, if so, what they are. The lawyer's job is to tell you what risks are in the agreement and what courts will
likely to do if there is a breach of contract. Your job is to decide if you want to bear those risks and those potential actions of the courts.
That said, viewing technology commercialization transactions primarily as legal agreements is a mistake. A good transaction is one that does not
ever need to be enforced. It sets up a deal that is fair and in which both parties have a shared interest in seeing it go forward. In other words,
transactions set up relationships. Ideally, you do transactions that set up healthy business relationships. Healthy business relationships are the ones
where everybody can make money and nobody gets greedy or is trying to take advantage of the other party.
Fortunately, it is pretty easy to figure out if a relationship is likely to be a healthy one from a business perspective. First, you look at proposed
terms for the agreement. If they are fair and make sense, that is a good sign. Oh, there will be disagreements and people may negotiate hard, but
there should be a shared goal of doing a fair deal or one is very unlikely to occur. If everything is one-sided and there is no give and take in the
negotiations, worry. If the terms are "here they are, take it or leave it" but fair, the relationship can still be a good one to enter. Regardless, the
second thing to do is check out the people and companies or institutions you are negotiating with. What is their reputation? Honorable people are
likely to continue to act honorably. Again, there is nothing wrong with folks or companies being hard negotiators or pushing for the best possible
deal for themselves, so long as the final result is a win/win situation. I once asked a negotiator for Microsoft how they figured out the fair market
value for software they licensed from universities. He said it was almost impossible as their products have so much complexity and most software is
a tiny applet that fits within a much larger program. So they come up with a flat fee that they will pay and offer it. If it seems fair to the university,
they do a deal. If not, they do not. He was very honest that it was virtually (pun intended) impossible to figure out a fair market value for most of
the stuff he had in-licensed. It was more a matter of finding a price that seemed fair to everyone. That works for me; after all, that is what you
want -- a win/win situation. If it is, then it probably makes sense to do the deal.
Deal Types
OK. So now we have a trade of goods of equal value in a way that is legally binding but hopefully is fair, makes sense, and is win/win so no-one will
ever have to go to court. But just what kind of deal is it? The main kinds of deals are sales, licenses, equity investments (angel funding, venture
capital, going public, bonds or convertible debentures, etc.), and strategic alliances. Joint ventures can be viewed as a hybrid of an equity
investment and a sale or license. Cooperative R&D Agreements are a specific kind of strategic alliance. R&D contracts are sales.
Just what is being traded in a commercialization deal, from the perspective of the law, is a bundle of rights in the technology. You can slice and dice
those rights up in a lot of ways. You can cut them up by field of use. You can cut them up in time or geography. You can give exclusive or non-
exclusive rights. You can sell all the rights in a technology or just a product made by exercising those rights.
The following graphic illustrates how different kinds of deals trade away different levels of control (bundles of right) in a technology. The trick is to
think about what you want to keep and what you are willing to relinquish. The chart is from the perspective of the acquirer of a technology. They
gain the least amount of rights with a non-exclusive license and usually the most by buying the technology (an assignment or buying all rights in
the technology) or the company outright (an acquisition or merger) or at least part of the company (via venture). Next in control comes a non-
restricted exclusive license. The positioning is simply suggestive, the specifics of any agreement can move these deal types around on the chart.
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Graphic 2.1: Control Options
The following graph can be used to help figure out what kind of deal makes sense given who the party seeking a deal is. On the horizontal axis is
how familiar the party is with the technology and what kinds of R&D, design, production engineering, and manufacturing skills they have. By this
we mean the underlying scientific and engineering domains as well as the specifics of this technology. Included in these domains is engineering
knowledge concerning how to produce the technology for sale in the market. On the vertical dimension is what the party knows about the
market(s) the technology will be sold in, the brand name loyalty and goodwill of that party, and the marketing skills and commercialization
experience.
Graphic 2.2: Technology Market Familiarity and Strategy
1. Assignments
A sale of all the rights in a technology is called an assignment. In this case, the owner of the technology retains absolutely no rights for themselves.
Gone is the right to make, sell, support and/or distribute a product or service based on or utilizing the technology. A total exit from any intellectual
property rights in the technology occurs.
2. Sales
Sales here means the sale of goods or services. This kind of sale is different from an assignment as it does not involve selling IP rights. Here the
owner of the technology retains all rights to the technology and is exploiting those rights on their own. The sale is usually to the ultimate consumer
but need not be. Sales can also be to distributors, value-added resellers, etc.
This kind of sale is usually seen as the way to extract the maximum possible value from the technology since there is no need to share the revenue
stream with anyone else. Of course, this assumes the owner has the abilities to make and sell (and usually to some extent distribute and support).
If not, there are real costs involved in building those capabilities. In mature markets, breaking in can be hard and greater revenues may result from
licensing. In this context, see strategic alliances.
R&D contracts are agreements under which one party provides cash and the other conducts R&D and delivers the results. As in any contract, who
owns what is a matter of negotiation, but usually the work is a “work for hire” under which the funder provides cash in exchange for the intellectual
assets and any data generated. Under the Bayh-Dole Act (see http://en.wikipedia.org/wiki/Bayh-Dole_Act), small companies and universities
conducting R&D for the U.S. Government almost always receive a right to obtain ownership of inventions made under federal funding, though the
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Government retains march-in rights to use the technology for federal purposes and also to commercialize the technology if the performing
organization abandons the commercialization efforts. Among march-in rights are the ability of the Federal Government to license the invention to a
third party without the consent of the patent holder or original licensee where it determines the invention is not being made available to the public
on a reasonable basis. National security is another reason for the exercise of march-in rights. Executive order has extended Bayh-Dole to other
performers of R&D.
3. Strategic Alliances
Strategic alliances are organization-to-organization agreements to partner based on complementary strengths. Both companies invest resources, so
risks are minimized and benefits are shared. The basis of the alliance is a long-term R&D, co-marketing, or supply-sell contract. They can be used
early in the commercialization process to enhance product development and reduce costs, or later to expand capabilities in market penetration.
A widely used kind of strategic alliance is original equipment manufacturing, or the service equivalent. Where a manufacturer sells goods that are
then incorporated and resold under someone else’s name, the manufacturer is called an original equipment manufacturer (OEM). An OEM might
also sell a component, subsystem, or system that is incorporated into another firm’s goods and resold that way.
OEM agreements allow the manufacturer to leverage the marketing clout of the reseller, providing the good to the buyer by using the distribution
and sales channels of the reseller. Service, warranties, and training may also be provided by the reseller. Many firms sell both directly and as an
OEM. As we will see below, OEM agreements are not always straight buy-sell deals. Depending upon what each party needs to add value, the
contract may become a strategic alliance.
As noted earlier, Cooperative R&D Agreements (CRADA) are also strategic alliances. Here each party brings something to the R&D effort and usually
pays for the work of their employees and contractors or consultants. The parties share any new intellectual property (IP) emerging as a result of
the collaboration, although sometimes, especially with universities, the ownership of the IP will be with the university but the corporate sponsor
gets a right of first refusal to license on reasonable terms.
4. Licenses
Licensing involves transferring the right(s) to use, make, sell, etc. a technology to others in exchange for money, equity, technology, or some other
benefit. Where each party provides one of more licenses to the other, the transaction is called cross-licensing.
There are three basic types of licensing agreements:
1. Exclusive, in which only the licensee has the ability to exploit the transferred rights;
2. Sole, in which only one licensee has the ability to exploit the transferred rights, but the licensor retains the
ability to exploit all or part of those same rights; and,
3. Non-exclusive, in which the licensor transfers to the licensee the ability to exploit certain or all rights but
reserves the ability to transfer those same rights to anyone else it may choose and as many times as it may
choose.
What is transferred in the license is subject to negotiation. Some ways to restrict what is granted in a license are to limit the licensing agreement
by:
· Rights to make, use, and sell
· Territory
· Field of use
· Sublicensing right (the ability of the licensee to license to others)
These restrictions are not mutually exclusive.
Where money is provided in exchange for a license, it can be paid out as a one-time set fee or as royalties, or both. The up-front fee is often called
an issuance fee. Where royalties are paid out over time they are called running royalties. Royalties are typically calculated on net sales (gross
revenues minus discounts and returns) or net operating profit (net revenues minus cost of goods sold). In theory, the revenues due to the licensor
reflect the value contributed to the end-product by the technology at its level of maturity when licensed and with the IP provided. A wide range of
other factors also come into play. Those most commonly involved are found in Foresight's royalty rate calculator found elsewhere in T2+2®.
5. Investments
Investments are deals whereby one party agrees to give financial resources to another. The investment may be in exchange for equity (for stock) or
bonds (a kind of loan). It is wise to seek both legal counsel and the advice of a reputable accounting firm prior to seeking investment.
At the start of a project or company formation, you will need seed capital or zero stage money. This money gives you the cash you need to start a
firm. It often comes from relatives, friends, and colleagues. Sometimes a successful entrepreneur can be recruited for the team who brings funding
with her or him. Angel investors may provide this kind of capital. Angel investors are individuals that provide startup capital. “Angel investors can
usually add value through their contacts and expertise” (http://www.fundingpost.com/glossary/venture-glossary.asp). They typically are located
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near the firms they are investing in and they also typically are pretty hands-on as board members, which makes sense as the first money in has the
highest risk to bear. (For more information see the Angel Capital Association at http://www.angelcapitalassociation.org/.)
Zero stage firms are venture capital companies that invest in start-ups. One kind of zero stage fund is partially backed by the Federal Government,
Small Business Investment Companies. (See the National Association of Small Business Investment Companies for more information at
http://www.nasbic.org/).
Later rounds of funding come from other venture capital companies which usually are investing corporate or pension funds or other sophisticated
investor monies. (For more information on later stage venture capital firms, see the National Venture Capital Association at http://www.nvca.org/.)
Note: T2+2® contains a directory of US venture capital companies.
Another source of investment money is Initial Public Offerings or IPOs. An IPO is when a company offers stock to the public. This may be done on a
stock exchange or as a private offering to a small group of sophisticated investors. There are a wide range of state and federal laws covering stock
options so it is wise to consult both legal counsel and an underwriting firm when considering an IPO. (For more information see the National
Investment Banking Association at http://www.nibanet.org)
6. Joint ventures
Joint ventures can be considered strategic alliances where both parties join together to found a new business entity which they each own a piece of.
This new venture is a free standing business with its own profits and losses. These profits and losses are shared by the partners in accordance with
a formula set up when establishing the venture. Joint ventures make sense where the goal is not to conduct a single project or initiative, but rather
to set up a continuing business relationship. Because of the potential for clash of corporate cultures, loss of support by founding parties as priorities
change, and blurred lines of command and control over personnel loaned from founding parties, joint ventures have a reputation of being hard to
sustain over time.
7. Options
A quick word about options: options are rights to engage in a transaction later. Options are deals to do a deal in the future. They are ways of doing
deals that hedge risk.
For example, suppose you think you may want to issue a license but only if certain things happen. Or suppose someone wants to buy a license but
only if the technology can be matured a bit more. Options are useful in these contexts. A put option gives the intellectual property holder (licensor)
the right to license the technology at some specific time in the future but not the obligation to sell. A put becomes more valuable as the value of the
underlying technology license decreases below the strike price (the cost of license when issued). For the licensee, it may serve to prevent other
potential buyers from having access to the technology until the licensee agrees to let it go (right of first refusal). A right of first refusal provides
particular value to licensees where there is uncertainty as to whether the technology will perform as hoped. Alternately, a call option gives the
licensor the right to buy at some specific time in the future for a price set today. It becomes more valuable as the value of the rights transferred in
the license increase above the strike price.
How the specific time in the future is defined is flexible so long as the point in time can be specified. The license may include a specific date
when the option triggers, it can be when specified in terms of when well defined milestones are met, or it may be at the sole discretion of the
option holder over some period of time. Where the license does not indicate a price or agreed amount for payment for the option, a clause will
inhibit the option from taking effect until the parties come to agreement on the price.
Review
In this lesson, we have looked at deals. We have seen that the basis of a deal is a swap or transaction in which goods of equal value are traded.
The deals in technology commercialization are legally enforceable, but ideally negotiated to be self-enforcing because the goal is a win-win
situation. We have also seen that deals can be structured in a wide range of ways, depending on what kinds of control are to be exercised over the
knowledge and know-how behind a technology and how the fields of use of that knowledge and know-how are divided up. We saw there were five
main kinds of deals: Assignments, Sales of Products and/or Services, Strategic Alliances, Licenses, and Investments. We also discussed the hybrid
deal type called a joint venture and the fact you can do a deal to do a deal in the future (an Option). Just what makes the most sense for a specific
owner of intellectual property is a matter of their knowledge and capabilities with respect to the technology on the one hand and with respect to the
markets where it will be sold on the other hand. Options come into play when parties to a deal want to hedge their risk.
Review Questions
1. An inventor has a new distillation method for the manufacture of an important set of chemical intermediates, vinyl ethers. The technology has
patent protection and has been alpha and beta tested. While the inventor has the ability to test his technology, he cannot manufacture. What sort
of deal should he pursue?
a. Investment
b. Strategic Alliance
c. License
d. None of the Above
2. In the above situation, how could the parties settle on a fair price for the technology?
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3. A new vaccine is under development for chronic Hepatitis B. The inventor works as a research professor at a prominent medical school. His
testing to date has only been some preliminary work on laboratory rats available at the medical school. He is approached by a company very
interested in his vaccine and willing to pay for clinical trials. What sort of deal should he pursue?
a. Strategic Alliance
b. Sales
c. License
d. None of the Above
4. A gaming company has developed a new game for use in casinos. The company would like to serve as an OEM, providing marketing and support
for customers. Does this make sense?
Your Technology
The technology is what is being commercialized. On the one hand the technology is a tool for manipulating the physical with a known outcome that
occurs with some certainty or reliability. On the other hand, the technology is a tool for doing something useful or desirable. That something is a
task someone wants to do over and over and over again with a known outcome. Otherwise why acquire a technology?
In this lesson we look at how to link the ability of a technology to manipulate physical phenomena with the outcomes desired for some task. In
other words, what we want to do is understand how we find applications for a technology. By lesson’s end, you should be able to:
· Define a technology in terms of its functionality
· Develop performance, ease-of-use, price, and maturity metrics for a technology
· Develop a portfolio of related technologies
Functionality
Because we are animals, we are in a physical relationship with the universe. We walk upon the planet. We eat things. We feel the breeze and smell
the flowers.
Because we are animals, without manipulating the world, we die. If we are to eat apples, find a tree and pick up the ones laying on the ground or
figure out how to pluck one. Because we do things like pluck apples more than once, it makes sense to make tools which can make these tasks
simpler and easier to do. These tools are technology.
Technology is simply a tool that lets us do something useful or desirable. The ancient Greeks, who were big on the notion of thinking, not
surprisingly invented some pretty significant technology. After all, EUREKA is Greek. It means "I have it" or "I have found it." The ancient Greek
scholar Archimedes is supposed to have exclaimed "Eureka!!" when he got into his bath and noticed that the water level rose. The reason is he
realized he had just solved a perplexing problem. Hiero of Syracuse wanted to know how to determine the purity of an irregular golden crown.
There were scales, but they only measured weight, not the density of the gold in the crown. What Archimedes realized was that if he could also
measure volume, he could take the ratio of weight and volume and determine density. The density of a pure golden crown would be different than
the density of a less than pure gold crown. The trick was to drop the crown in water. The volume of water displaced would be equal to the volume of
the crown, just as was the case with his body. Suddenly he had a technology for measuring the volume of an irregular object. He was so excited,
according to the story handed down through history, that he leapt out of the bathtub and ran out naked into the streets of Syracuse to share his
invention.
Now let's look at this invention in more detail. Functionally, what we have is a way to measure volume. Practically, we can build a volume
measuring machine by making a vat with a fill line and a spout just above the fill line. The spout drains into a measuring cup with volume markings.
You fill the vat to the fill line. Put in an object. The water overflows into the cup. The amount of water is equal to the volume of the object you put
in the water.
Notice that this description tells us how to build the technology and how to use it. We can think of other ways to measure volume, which we should
note in passing is simply the measure of how much space an object takes. Xin Zhang, John Morris, and Reinhard Klette of the University of
Auckland do it by taking a laser range finder and a calibration cube. Once the laser is calibrated, they can scan measure the distance to surface of
the object at all points and calculate the volume. (See http://pixel.otago.ac.nz/ipapers/32.pdf for more detail.) Note this technology has an added
functionality -- the ability to measure the volume remotely. If you have something you do not want to touch, like a pile of nuclear material or some
Ebola virus, then this technology's added functionality makes it very attractive. Alternatively, if you are teaching the concept of volume to second
graders, who cares.
Because the concept of functionality is so critical to everything that follows, let's review it. Functionality is what a technology does. It measures
volume. It plucks objects. Where it does it and how it does it is not its functionality, although the functionality can allow a greater or lesser range of
opportunities for use. For example, both the water vat and the laser canner can remotely measure volume without any human contact. We build a
shelf, set the crown on it. Have a trained dog push it gently into the water, and watch from outside the glass enclosed containment system how
much water is in the measuring cup with the aid of a telescope. Unwieldy, but we can do it. Not entirely accurate because some of the water might
splash out and never get into the spout, but if the margin of error is acceptable, it can work.
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We spend so much time on functionality because functionality is what makes someone interested in a technology. If I want to measure volume and
the technology does not do that, I will never buy it. Suppose it's a car. It's a car that goes 200 miles on a 15 minute solar charge. Very attractive,
but it does not measure volume and if my problem is measuring volume, the car lacks the functionality I need.
Now once we have functionality, we can find applications for a technology. We look for end-users who need that functionality. Of course, the end-
users will want more than raw functionality. As our example with the dog suggests, if a technology does not perform well enough (e.g. is not
accurate enough) or too hard to use (e.g. you have train a dog) or just too expensive, it is unlikely to be adopted by the end-user. In other words,
functionality is necessary but not sufficient for finding an application.
Metrics
Functionality lets you do something. Metrics allow you to measure how well you can do it. The usefulness can be described in terms of performance,
ease-of-use, price, and maturity. In other words, if we want to know the volume of a gold crown, we want to know how accurate is the
measurement of volume, how hard is it to measure that volume, what will it cost me to do it, and can you give me a laser scanning volume
measuring instrument that I can use right out of that box that was dropped shipped to me after clicking buy on that Internet site -- or am I going
to have to write the software that scans the laser light and calculates the volume first.
Notice first that each of these sets of metrics can be measured. Performance can usually be measured on cardinal scales, but sometimes the best
you can do is an interval scale or even a binary scale. An example of an interval scale is the Fahrenheit scale for temperature. On it, equal
differences represent equal differences in temperature, but 60 degrees is not three times warmer than 20 degrees. A binary scale is yes/no, such as
will this run on a Firefox browser. Price is definitely measured on a cardinal scale. Ease-of-use criteria are often measured on ordinal or interview
scales. They are more or less. if metric is subjective (e.g. user-friendly) then it is likely an ordinal scale. If the metric can be operationalized into
something objective (e.g. we measure fragility by mean-time-between failure) then interval scales can be used and perhaps even, on occasion, a
cardinal one. Finally, maturity is an ordinal scale. A prototype is closer to something for everyday use than a concept but exactly how much farther
is hard to say.
We shall now look at each of these sets of metrics in a bit more depth.
Performance
Performance specifications measure physical parameters. To avoid uncertainty about just what your metrics mean, we recommend you use
performance that may be measured in standard international units or associated metrics whenever possible. Some metrics will describe the
technology as an object -- such as size, weight, power consumption, or our old friend volume. Other metrics will be tied to the functionality of the
technology and provide a quantitative measurement of outcomes from its use. For an influenza vaccine, a metric for efficacy might be the percent
of influenza virus blocked from entering a person’s system. For a sensor for Harmful Algal Bloom monitoring, a metric of efficiency might be the
amount of cells per liter of water. For bioethanol production, alcohol concentration matters. Occasionally a metric will be binary such as Microsoft
Vista compatibility.
Yield is a concept often used with performance. Yield is where a technology is with respect to a given performance specification. In the graphic
below we have three examples.
In the first example in the middle of the right side, we have a single technology with two different yields over time (labeled S1 and S2 for
Specification 1 and Specification 2). Note that S1 falls into a blue circle representing the yield desired by end-users. The point is that more is not
always better with yields. Usually there are trade-offs that need to be made between yields on various metrics. For example, a bigger battery might
provide power to your cell phone for a longer period of time, but at some point the size is to large for the phone to fit comfortably in your pocket.
In the next example, on the top left hand side, we see two different technology trajectories. This example highlights that often more than one
technical approach can be used to meet end-user requirements. For example, instead of a battery a super capacitor or mini-fuel cell can be used to
power the cell phone. Often the emergence of a new technology will spur innovation in an existing technological approach so that technology can
remain competitive. In the last example, a technology that was once competitive is no longer competitive because end-user requirements have
shifted over time.
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Graphic 3.1: Technology Yield Trajectories
Another concept often used is repeatability or certainty. For any specification, how likely is it that the technology will always have that trait or
deliver that outcome. For example, if you get in your car, turn the key, and it does not start, you think: DANG! BUMMER! If you open a piece of
software and your cell phone freezes, you think: Darn. Reboot.
This concept of repeatability can be captured using Six Sigma defect measures. Another way to view it is through a scale called the Bohn
Knowledge Levels, which measures the certainty of the science and engineering behind the technology. The control over phenomena can be
measured from none whatsoever through control over the mean and on to the ability to optimize control with the aid of feed-back and feed forward
loops. These capabilities correspond to Knowledge Levels 1, 4, and 7. Level 8, Complete Knowledge, is called Nirvana. :) For more on the Bohn
Knowledge Levels see http://books.google.com/books?
id=ItnyIjP6uUYC&pg=PA295&dq=The+economic+impact+of+knowledge+bohn&ei=l6HKSduDOIbUzATQ56XEBA#PPA299,M1.
Ease of Use
Ease-of-use characteristics measure the perceptions of the end-user about the difficulty of using the technology. Because it measures
perceptions, ease-of-use is often different for different sets of users as different sets of users have different experiences and training. A technology
with a high ease-of-use indicates that an end-user can operate that technology without having to overcome a steep learning curve. Ease-of-use
thus measures how the technology maps to the skills, capabilities, and resources of end-users.
Price
Price is how much it will cost to buy the technology. Price refers to the initial purchase of a technology. Note that while price is usually measured in
dollars, it can be measured other ways, such as the time to recover the purchase price once the technology is deployed.
A related concept is life-cycle cost. Here the focus is on all the costs associated with using the technology, including the purchase price. End-users
will often take into account other elements of cost when deciding upon an acceptable price. These include installation costs for a product or process,
training for the people who will use it, supplies and raw materials needed, special facilities to house it, maintenance and repair, and so forth.
Maturity or Technology Readiness Levels
Maturity measures how close a technology is to being able to be used in everyday activity. Traditionally maturity was measured on an ordinal scale
consisting of things like concept, research, proof of feasibility, prototype, product. The problem with such scales is that the terms mean different
things to different people.
To address this problem, the US Government developed a scale called Technology Readiness Levels (TRLs). The first TRLs were developed for space
technologies by NASA, subsequently the Department of Defense adopted them, and now a wide range of groups in a wide range of industries have
developed their own variants.
The fundamental notion of the scale is that the lower the readiness level, the further the technology is from use in its intended application or
applications. Here is an example of one such scale. As you review the scale, think about a specific technology and the kinds of deals one might do.
Note that if you are licensing, a technology can be commercialized at a lower TRL than if you are selling product. Similarly, venture or at least angel
capital may be feasible at an even lower TRL.
1. Basic principles observed and reported.
2. Technology concept and/or application formulated.
3. Analytical and experimental critical function and/or characteristic proof of concept.
4. Component and/or breadboard validation in laboratory environment.
5. Component and/or breadboard validation in relevant environment.
6. System/subsystem model or prototype demonstration in a relevant environment. This level is the ideal place to
be at the end of Phase I.
7. System prototype demonstration in an operational environment.
8. Actual system completed and qualified through test and demonstration.
9. Actual system proven in real situations.
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Graphic 3.2: NASA Technology Readiness Level (TRL) Meter
For complete definitions of each level, see the DOD Deskbook 5000.2-r,
Appendix 6, Technology Readiness Levels and their Definitions.
An interesting side light is that different customer segments may be feasible at different TRLs. For example, suppose we have our laser scanner for
volume. It may be possible to sell this unit into the academic market at a TRL of 8 as some researchers may want to program their own software
for it or adapt it for their unique experiments. On the other hand, for an industrial quality assurance application, a TRL of 9 is likely necessary.
DoD provides a downloadable TRL calculator for most technology, software, and manufacturing at https://acc.dau.mil/CommunityBrowser.aspx?
id=25811.
Science and Technology Acquisitions managers at the U.S. Army discovered very quickly that the TRLs intended to apply to all technologies did not
map well to medical technologies. Due to the regulatory approval process, risk mitigation is not linear across TRLs for medical technologies. Rather,
“the rate of risk reduction remains very low until very late….Similarly, although technology maturation is commonly perceived as a sequential
continuum of activities from basic research, through development to production and deployment, evolution of the TRL for a critical technology may
not be sequential, especially in those cases where FDA anchors are undefined. In cases of success or failure, the change in TRL may be greater
than a single TRL. For example, upon successful completion of a pivotal study, biomedical information technology readiness may move from TRL 3
or 4 to TRL 9.”
from document on Biomedical Technology Readiness Levels dated June 3, 2003, released by the DoD accessed via
https://acc.dau.mil/CommunityBrowser.aspx?id=23207&lang=en-US on January 22, 2013.
To reflect variances in maturity among medical technologies as a result of FDA regulations, four types of medical TRLs exist. These are
Pharmaceuticals (drugs), Pharmaceuticals (biologics/vaccines), Medical Devices, and Medical Information Management/Information Technology
(IM/IT) & Medical Informatics. Tables that show how these map against the nine original TRLs can be viewed in a paper on Biomedical Technology
Readiness Levels prepared for the U.S. Army Medical Research and Materiel Command. You may download the document from the following URL:
https://acc.dau.mil/CommunityBrowser.aspx?id=23207&lang=en-US.
Another set of medical TRLs that address FDA issues was developed by the USC Marshall Center for Technology Commercialization. These are found
at http://www.usc.edu/org/techalliance/pdf/CTC_TRI_Definitions-2007.pdf.
The original TRLs also did not work well for software technologies. Users complained of the TRLs’ tendency to blur or blend together multiple
components of readiness; their inability to deal with issues such as the “criticality” of a technology or product or the “aging” of non-developmental
product items; and varying sensitivities to different contributors to readiness experienced at different points in the development/acquisition life
cycles. In order to permit the use of a quantifiable unit in assessing maturity, DoD developed a separate TRL group to analyze software
technologies. The same ordinal levels apply, though the definitions for each TRL were revised to match the unique risks and risk mitigation issues
felt by the software industry. Again the USC Marshall Center for Technology Commercialization has its solution, found at
http://www.usc.edu/org/techalliance/pdf/CTC_TRI_Definitions-2007.pdf.
Portfolios
We began our discussion in this lesson by talking about functionality. Next we looked at how you measure the ability to accomplish a functionality.
Now we shift to how we clump or categorize sets of technology into functionality-based portfolios. The key here is understanding how equivalent
functionality is currently provided.
Let us go back to our volume measurement example. Suppose the only way to measure volume is via the Archimedean Water Method (the AWM).
Over time, people get used to using AWM. They expect if you are going to measure volume you will need a vat with a fill line and a spout and a
measuring cup. If we are selling volume measuring instruments, the AWM is our core technology, that is, it is what we build our product line
around.
Over time, innovations occur which improve on the AWM. To make the vat easier to fill, perhaps we make it out of glass so we can see more
precisely when we have added enough water to just bring it to the fill line. Switching from a clay vat to a glass vat is called an extension, that is,
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the innovation extends the functionality in terms of its performance or ease-of-use. After a while we realize glass is pretty fragile so we make
another extension, we go to plastic. Or perhaps once we go to glass we realize we do not need a bunch of people sitting around spinning pots.
Instead we can make molten glass and pour it into a mold and make vats less expensively and faster. This kind of innovation is called an enabling
innovation in that it enables us to make our core product or extension better.
To give another example, suppose we are trying to cross a river. We see a rotten log floating down the river and realize we can make a dug out
canoe. So we take our stone ax and start hollowing out a log. A year later we have a canoe -- a new core technology. Over time other innovations
can be added, such as an extension called a outrigger, which gives the canoe stability.
After a while, demand for canoes builds but our production process has not improved. It literally becomes a real pain in the neck. One day we are
out wandering the forest and a thunderstorm springs up and BOOM, lightning hits a tree and it bursts into flame. We have another epiphany and
realize if we take the coals and put them into a crack in a log, the fire will burn out the inside and then all we have to do is the finishing work and
we have a dugout canoe. The production process is an enabling technology. Enabling technologies are ways of making, delivering, providing, or
facilitating the use of a core, strategic, or extending technology
This is one other kind of innovation we have not yet mentioned. Recall our AWM technology. One day, these guys from Australia form a company
and wham bam we have competition from a whole new direction -- laser scanning. This technology is not based on our current core technology. It
represents a new core. If we are selling AWM, that new technology is a strategic competitor. It may also be our next generation product if we can
license it. Technologies which provide a new basis for competition are called strategic.
Strategic technologies usually involve a radical break with the current technology base, but they do not have to. GM's Volt electric car still looks like
a car and drives like a car. The radical break is in the engine -- for engine manufactures there will be a radical break as an electric motor is very
different from a gasoline motor. But from the standpoint of the features and functionality of a car, the break is actually not very radical at all. In
fact, it is a hybrid so it still has a gasoline engine in it.
We can now see how we can build a portfolio based on functionality. First we find a dominant design (for example the AWM, the canoe, or the
car), then we classify the technologies into portfolios based on whether they are extending, enabling, or strategic. Extensions give us product
enhancements. Enabling gives us process improvements, and strategic give us new members for a product family or a basis for developing new
product families.
This differentiation is useful because we can now commercialize these sub-portfolios in different ways. Strategic technologies we will probably have
to exclusively license or build companies (whether via venture capital or a joint venture). Enabling ones we probably will non-exclusively license
because it is hard to be sure someone has not copied a process technology if you cannot get into their factory or there is something about the
production process that means you can make something that cannot be made in any other way. Extensions are up for grabs depending on how easy
they are to design around and how much significance they have in the market.
Some core technologies become templates for how the functionality should be provided in a specific field of human use. Over time, people come to
expect a more or less well defined bundle of features to be associated with the functionality. If we say car, we have an image in our head that is
different from our image of a canoe or a computer. When we say mainframe computer, we have a different bundle of features and functionality than
if we say laptop computer. PDA or smart cell phone is yet another bundle of features and functionality. These bundles of features and functionality
we call a dominant design.
Review
In this section, we have learned that technologies can be described in terms of the functionalities they provide. Their ability to provide functionality
can be measured using performance specifications, ease-of-use characteristics, price and maturity.
Functionality provides a basis for sorting technologies into portfolios. Given any particular functionality, we can ask how a given technology
contributes to the provision of that functionality. If it is a currently existing way of providing the functionality, it is a core technology. If it is a way
functionality might be provided in the future, it is a strategic technology. Some technologies enhance the core or strategic functionality. These
technologies are called extensions or extending technologies because they extend the core functionality. Others provide ways of making, providing,
distributing or facilitating the use of core, strategic, and enhancing technologies. These are called enabling technologies.
Another way to sort technologies is to look at how the technology being commercialized relates to the current ways of providing functionality.
Dominant designs offer bundles of features and functionality we come to expect in fields of human activity. If we have an application or field of use
in mind, technologies can be sorted by the kind of innovation that they are. Using this approach we can differentiate between four kinds of
innovations: incremental, adaptive, radical, and disruptive. The kind of innovation, as we shall see in future lessons, helps us understand how to
commercialize a technology or a portfolio of related technologies.
Review Questions
1. You are presented with a novel method for extracting aluminum from metal ore that uses a laser-based molecular manipulation process. This
type of approach has never been used for metals extraction before. What type of innovation have you been given?
2. What information does performance, ease of use, and price give us about a technology when it reaches the market?
3. What is the utility of having separate technology readiness levels for software and medical technologies?
4. If a technology is an enabling technology, does that mean it is a way of making something? Use an example to illustrate your answer.
Answers
1. Strategic. This technology is the next generation way of extracting the aluminum.
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2. Performance tells us what precise outcomes a technology will attain, ease-of-use tells us how difficult it will be for end-users to deploy and
operate the technology, price tells us what they will pay to acquire it.
3. The way technologies move to maturity varies. Medical technologies, for example, have to go through clinical trials. Software is easier to fix
on the fly.
4. No. Enabling technologies can also be ways of delivering or providing a core, extending, or strategic technology. They can also facilitate its
use. A mould for making glass vats would be a way of making an AWM volume measuring instrument. A truck would be a way of delivering
it. The Internet might be a way of ordering it and if the AWM unit needed software, you could provide it over the Internet. Finally, a built in
hose would facilitate using it as it would be easier to fill than ladling water into the vat.
Intellectual Assets and Intellectual Property

To do a deal you need something to sell. What you can sell is property. Property based on ideas is called intellectual property. (If you are selling
product or services, you may not be selling intellectual property, rather your property is an asset used to make the goods you are selling.)
In this lesson we will be discussing intellectual assets and intellectual property. Assets are anything that can be used to make money. Property is an
asset that can be protected by law. PLEASE BE AWARE, JUST WHAT IS INTELLECTUAL PROPERTY AND HOW TO PROTECT IT IS A
MATTER YOU SHOULD DISCUSS WITH QUALIFIED LEGAL COUNSEL. WE ARE NOT OFFERING LEGAL ADVICE. Our goal here is to provide
you a basic overview so you can have that discussion.
To say something is an intellectual asset or property means its origin is in the mind. Intellectual assets are those creative ideas and expressions
that have commercial value. Intellectual property (IP) is an intellectual asset that can be protected legally as property. Property is, in a strict legal
sense, an aggregate of rights which are guaranteed and protected by government. The owner of bundle of rights has the unrestricted and exclusive
right to use, possess, or dispose of something and to exclude anyone else from doing that. Because the owner owns all the rights, they can parcel
those rights out in any way they see fit. They can parcel them out in time, as when you lease an apartment for a year. They can parcel them out by
use, as when your lease says you can live in the apartment but not run a business out of it or sublease it.
Over the course of this lesson you will learn:
· What types of intellectual property are commonly used in commercialization
· How you can protect your intellectual assets and intellectual property
Intellectual Assets
Intellectual Assets (IA) are defined as a corpus of know-how and knowledge. Any written, tangible, or physical embodiment, including presence on
a computer hard drive, of the know-how and/or knowledge of a university, group, or company may be considered an intellectual asset. A company’s
intellectual assets may include documents, drawings, programs, data, inventions, and processes. For example, the musical arrangement in a song
is the intellectual asset of a songwriter.
Intellectual Property
When the songwriter, or any other owner of intellectual assets, takes proactive steps to protect their assets, they can usually obtain legal protection
for their IA. This makes the IA also intellectual property (IP). Legal protection means you can go into a court of law and enforce your rights against
those who are making unauthorized use of your property. But we emphasize, you have to act in specific ways to create and maintain rights. We will
discuss these in the context of the following five types of intellectual property: patents, trade secrets, trademarks, copyrights, and masks.
1. Patents
A patent is a grant by a national government that gives the patent holder the right to exclude others from making, using, or selling the holder’s
invention within the jurisdiction of that country. To obtain a patent, the inventor or owner of the asset has to file an application. Once the
application is issued, the patent holder has to pay the maintenance fees to maintain the patent. Generally, a patent lasts for 20 years from when it
is first filed. Some countries extend the period to address delays in getting patents issued or due to long regulatory approval periods before the
products based on the invention can be sold. In the US design patents have a 14 year life.
Before a patent office will issue a patent, the asset owner must demonstrate that the invention is useful, novel, non-obvious, and reduced to
practice.
· To be useful, an invention must provide a benefit to the public without additional research being required.
· To be novel, an invention must neither have been known nor made by others. The invention can also not have been previously patented
or presented in a publication prior to the claimed date on which the invention was made.
· Non-obvious inventions are established with reference to what would be obvious to a person of ordinary skill in a relevant technology
area at the time of the invention. “Ordinary skill” can vary across technology areas. For example, for a more complicated technology,
developing at a great rate in a specialized industry, the skill level of a person would be considered high in everyday life but still
“ordinary” in the technology area. Non-obviousness is determined by examining prior patents, technical publications, and non-secret
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work being conducted. Basically if a person is skilled in the art and thinks the invention is clever, it probably is non-obvious.
· Reduction to Practice can be actual or constructive. Actual means you have built a prototype. Constructive reduction to practice means
you can provide sufficient information that a person skilled in the art could build a prototype themselves.
So what is patentable? Supreme Court held in Diamond v. Chakrabarty 447 U.S. 303 (1980), “Whoever invents or discovers any new and useful
process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to
the conditions and requirements of this title.” Essentially, if you can make an argument that the invention functions like a machine, it is probably
patentable. However, if the invention is more like the discovery of a law of nature, then it is probably not patentable. In other words, inventions
manipulate nature in ways it would not normally behave in the absence of that invention.
Historically, in the United States, patents have been issued to the first party to invent. In the rest of the world, patents are issued to the first to file.
The America Invents Act of 2011 has implemented first-to-file in the United States, as well, in addition to a post-grant review system.
In order to receive a United States patent, the inventor must file within a year from the time of first disclosure, use, publication, or sale of their
invention. However, elsewhere any disclosure can remove the ability to patent. So the takeaway is not to disclose your patent to anyone unless
there is a Nondisclosure Agreement in place.
When an inventor files a patent, he or she may choose from one of three types: utility, design, or plant. The two most common patent types are
utility and design. Utility patents protect the way an article is used and works (35 U.S.C. 101). They are “issued for the invention of a new and
useful process, machine, manufacture, or composition of matter, or a new and useful improvement thereof,” and a utility patent “generally permits
its owner to exclude others from making, using, or selling the invention for a period of up to twenty years from the date of patent application filing,
subject to the payment of maintenance fees.” Design patents, by contrast, protect the way an article looks (35 U.S.C. 171). “Issued for a new,
original, and ornamental design for an article of manufacture, it permits its owner to exclude others from making, using, or selling the design for a
period of fourteen years from the date of patent grant. Design patents are not subject to the payment of maintenance fees.” Finally, the US issues
Plant Patents:
“for a new and distinct, invented or discovered asexually reproduced plant including cultivated sports [sic], mutants, hybrids, and newly found
seedlings, other than a tuber propagated plant or a plant found in an uncultivated state, it permits its owner to exclude others from making, using,
or selling the plant for a period of up to twenty years from the date of patent application filing. Plant patents are not subject to the payment of
maintenance fees.” (See http://www.uspto.gov/go/taf/patdesc.htm)
For some technologies, inventors may receive both utility and design patents. Let’s look at software. A utility patent can protect a software
“machine,” which is code that functions as part of a hardware/software system to do something. Mathematical formulas (algorithms) per se are
seen as part of nature and, therefore, not patentable since they are not invented but discovered. Design patents can protect the visual features,
such as the look of the screen or monitor in the case of a graphical user interface (GUI).
2. Trade Secrets
Where the inventor does not want their intellectual assets known to unauthorized individuals or groups, they may choose to protect their IA with
trade secrets. A trade secret is a plan, process, tool, mechanism, or compound that is known only to its owner and to those who have agreed to
keep it secret. With a trade secret, there are no forms to fill out or registration required, although again Nondisclosure Agreements are necessary to
disclose it to others. So long as it is kept secret, it is a form of protected property, and the owner may sue those who steal it for damages. Business
examples include the formula for Coca Cola and the recipe for fried chicken at Kentucky Fried Chicken.
3. Trademarks
Trademarks can be used to protect words, names, symbols, devices, or any combination of these that are used to identify your technology or other
products or services. For example, Avis trademarked “Avis: We Try Harder.™” Foresight trademarked the name of this site feature, COM101™, as
well as the names of many of our products and training material. The trademarked identifier distinguishes them from similar goods sold by others.
In some countries, notably the United States, trademarks only protect product identifiers. Service identifiers receive a separate mark, called a
service mark or servicemark. If the trademark is registered, the symbol used is ®, such as for T2+2®; if it is not registered, the symbol TM or SM
is used. Unregistered trademarks are protected under Common Law. Registered trademarks have a higher degree of protection.
While a trademark does not protect the underlying technology, owning a registered trademark provides several advantages. The most important
advantages are:
· Giving constructive notice of your claim of ownership of the mark to the public;
· Creating a legal presumption of the ownership of the mark and your exclusive right to use the mark nationwide
on or in connection with the goods and/or services listed in the registration (important if there is a lawsuit);
· Giving you the ability to bring an action to enforce your rights with respect to the mark in federal court;
· Giving you a basis to obtain registration in foreign countries (if it is a U.S. registration);
· Preventing importation of infringing foreign goods (if it is a U.S. registration and filed with the U.S. Customs
Service).
Trademarks can potentially last forever. They only become ineffective when the trademarked term etc. loses its originality. This process accelerates
exponentially when no generic term exists for the trademarked material. An example is the zipper. Zippers today are a ubiquitous means of closing
pants, coats and dresses. A century ago, they had to compete against buttons. The technology managed to do so but, as the name “zipper” became
the accepted term for the technology instead of “universal fastener,” the company’s ability to keep rights to the trademark were removed.
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4. Copyrights
Copyright is a right to something that is written or composed and reduced to a material expression. It protects the form of expression of the idea,
not the idea itself. Copyrights also cannot protect titles, short phrases, and slogans; as we have seen, these are covered under trademark law. Once
obtained, a copyright grants the holder (usually a publishing or record company) an exclusive right to make copies of the copyrighted literary item,
publish that item, and sell it for the author’s life plus 70 years.
As with trademarks, one does not need to register the mark for courts to legally recognize that the IA is protected. In the U.S., a copyright is
automatically granted when an embodiment of an idea is made if the symbol ©, the name of the owner, and the year of first publication are added
to the expression (e.g., “© Foresight Science & Technology, 2003”). However, to litigate against infringers, the copyright must be registered with
the relevant national copyright office (in the United States, it’s the U.S. Copyright Office, a branch of the Library of Congress). If the registration is
made within three months of the first publication date, rights to statutory damages and attorney’s fees in suits against infringers can be obtained.
5. Masks
Masks are a form of copyright protection for semiconductor products, established through the Semiconductor Protection Act of 1984. Thus, masks
may be protected by filing with the Register of Copyrights at the U.S. Copyright Office. In the United States, only masks that have been registered
with the U.S. Copyright Office are considered valid. In Europe, masks do not have to be registered unless EU member states require it; if they do,
the creator must file at national patent offices. Masks or “mask work” (United States only) refer to a series of related images that define the three-
dimensional pattern of metallic, insulating, or semiconductor material on or removed from semiconductor chips. The term of protection for a mask
work extends for a maximum of ten years from the earliest date that the mask work is either 1) registered or 2) exploited commercially anywhere
in the world.
Protecting Assets and Property
Protecting IA and IP means setting up a means of controlling who has access to your IA and IP and which parts they have access to. Obtaining
patents, copyrights/masks, and trademarks provides some protection. In addition, you may prepare disclosures or require potential partners to sign
non-disclosure agreements, materials transfer agreements, and/or confidentiality agreements.
Disclosures
Disclosures are comprehensive, proprietary documentations of the invention and why it is significant. A good disclosure collects data that will
support patenting or copyrighting the invention. It clarifies who the inventors are, when the invention or creation occurred, what was invented or
created, and what proof exists for the act of original invention or creation.
Many universities and federal labs put their disclosure forms on the Web, providing templates for developing your own. Temple University posts
theirs at http://www.temple.edu/research/otdc/docs/ID_Form.doc. The University of Wisconsin at Madison provides theirs at
http://www.warf.ws/uploads/media/20011128124730196_Microsoft_Word_-_IDR2001final.pdf. Before you use a draft prepared with these
templates, the document should be reviewed by your IP counsel.
Nondisclosure Agreements
Nondisclosure agreements (NDAs), sometimes called confidentiality agreements, are contracts between a disclosing party and a receiving party
under which the disclosing party agrees to disclose and the receiving party agrees to keep what was disclosed secret and confidential. One of the
most important points to remember is to never disclose technology or information before having a signed confidentiality agreement or filing a
patent, copyright, or mask on the technology. Where neither form of protection is present, but there is still a need to generate interest in the
technology, technology developers are advised to disclose what the technology is and, if possible, does, rather than how it does it. Should the
inventor of the membrane technology be in this situation, he or she would say “my technology is a membrane for distilling bioethanol from
feedstocks,” but not disclose details of how the membrane manages to distill feedstocks into bioethanol.
NDAs usually have a time limit on how long the material or information or data must be kept secret. Five years is often used. They also typically
allow disclosure of things which have already made it into the public domain through no fault of the receiving party. Another allowed disclosure is
when the receiving party is compelled to do so by subpoena or order of a court of law. In other words, a good NDA has at least five elements:
· a definition of the confidential information
· exclusions to the nondisclosure from confidential information
· the precise obligations of receiving party for keeping the information confidential
· the time period it must be keep confidential
· any miscellaneous provisions specific to this situation

An example of an NDA for a university can be found at http://www.utexas.edu/research/osp/documents/ut_universal_nda_ver_6.pdf. Another
confidentiality template by Kansas State is at http://www.k-state.edu/research/forms/preaward/KSU-CDA%20template.pdf. Most university
technology transfer or sponsored research offices have their own form. A set of guidelines for the University of Texas at Austin NDA called Key
Elements of Terms and Conditions of Non-Disclosure Agreement can be downloaded by clicking on the title of the document. Obviously you should
only use an NDA approved by your own lawyers.
Materials Transfer Agreements
Materials Transfer Agreements (MTA) apply when you plan to transfer research materials to another institute or to receive research materials from
another institute. MTAs clarify who owns both the materials and any research results obtained through use of the materials. As with disclosure
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documents, university and federal lab examples provide guidance. For example, Oak Ridge National Laboratory Partnerships and Technology
Transfer division posts their incoming MTA at http://www.ornl.gov/adm/partnerships/docs/MTA-IN%20-%20REVIEW%20COPY.pdf and their
outgoing MTA at http://www.ornl.gov/adm/partnerships/docs/MTA-OUT%20(Non-Biological)%20-%20REVIEW%20COPY.pdf . Again, we caution
that any draft you prepare should be reviewed by your IP counsel before use.
Review
In this lesson, we’ve seen what counts as intellectual assets and intellectual property and how to protect them. Intellectual assets are the corpus of
know-how and knowledge which, as they have been documented in some way and the appropriate proactive steps taken, may be owned by the
organization. When that organization chooses to protect their intellectual assets, they become intellectual property. A “Glossary of Intellectual
Property Terms,” is found at http://www.america.gov/st/econ-english/2008/April/20080429233718eaifas0.3043067.html.
The table below summarizes the key points about the four types of intellectual property: patents, trademarks, copyrights, and trade secrets.
Type Protects Country Created By Duration Applicable Law

Patent Inventions that are novel, Australia (AU) Filing at the patent office of IP
Two types: standard National Law
useful, unobvious, well Australia. Further information patent up to 20 years;
described. can be found here. an innovation patent,
which can be obtained
more quickly, lasts a
maximum of 8 years.
Canada (CA) Filing a patent application 20 years from the date National Law; Patent
through the Canadian IP office; the application was first Cooperation Treaty
Information for international filed plus maintenance
patents can be found here. fees throughout the life
of the patent.
China (CN) Filing a patent application 20 years from the date National Law, Patent Law of
through the PCT or a Chinese the application was first the PRC, Patent Cooperation
patent agency. Further filed for inventions; 10 Treaty
information on the patent years from the date the
application process can be application was first
found here. filed for models and
designs.
India (IN) Filing a patent application 20 years from the date National Law, Patent
through the PCT or through the application was first Cooperation Treaty
the Indian Patent Office. The filed.; for applications
online form can be found here. filed under the PCT, the
20 years begins from
International filing
date.
Japan (JP) Filing a patent application. 20 years from the date National Law
Further information can be the application was first
found here. filed.
South Korea (KR) Filing a patent application. An 20 years from the date National Law
overview of the patent the application was first
application process can be filed.
found here.
United States Filing a patent application and 20 years if Federal Law
(US) successfully prosecuting maintenance fees are
(obtaining) it. An overview of paid, plus one
the patents process can be additional year if a
found here. provisional patent
application is filed.
South Africa (ZA) Filing a patent application. An A provisional National Law
overview of the IP system can application can provide
be found here. protection for up to
twelve months; most
South Africans are
using the PCT system
which provides
protection for 20 years
from the date of filing.
Copyright Copyright and Masks for Australia (AU) Obtained through registration Life of the author plus National Law
photolithography and the with Attorney General Office 70 years.
like Canada (CA) Created automatically under Life of the author plus National Law
common law, but registration 50 years.
can help provide evidence of
ownership in court. The
copyright symbol is not
required in Canada, but
advisable. Further information
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can be found here.

China (CN) Registration not required, but Life of the author plus Copyright Law of the PRC;
advisable. The full copyright 50 years; for works in accordance with the
law of the PRC can be found created by a company Berne Convention and the
here. or organization it is 50 Universal Copyright
years after publication. Convention.
India (IN) Registration not required, but Life of the author plus National Law, Indian
advisable. Must be filed at the 60 years. Copyright Act, Copyright
Registrar of Copyrights or by Rules, International
mail; online application not Copyright Order
available. Further information
can be found here.
Japan (JP) Registration or publication not Life of the author plus National Law
required, but the general level 50 years; for
of creativity required is higher companies and
than in the U.S. and most EU organizations, 50 years
member states. Further after publication.
information can be found here.
South Korea (KR) South Korea’s copyright laws Unavailable National Law
are constantly in flux. It is
advised that you pay close
attention to the rules and
regulations in place at the time
that you seek copyright
protection for your product to
avoid infringement charged.
United States Placing a copyright mark, Life of the author plus Federal Law
(US) either © or (C); additional 70 years.
protection obtained through
registration.
South Africa (ZA) Created automatically and Life of the author plus National Law,
applicable to all members of 50 years. Berne Convention.
the Berne Convention;
registration NOT possible. For
an overview of the IP system
click here.
Trade and Inventions that are novel, Australia (AU) Registering through IP As long as used and National Law; Member of
Service Marks useful, unobvious, well Australia; existing trademarks infringers are pursued. the Madrid Protocol
described. can be found at Australian
Trade Marks Online Search
System (ATMOSS)
Canada (CA) Registration not mandatory, Valid every 15 years Common Law, National Law
but advisable. Can be obtained and renewable every
through the Trade-marks Office 15 years thereafter
in Gatineau, Quebec. Further upon payment of a fee.
information can be found here.
China (CN) Must register through the Unavailable No Common Law protection
China Trademark Office. for unregistered
Further information on the laws trademarks. Trademark
and the trademark registration piracy is still a major
office can be found here. problem despite the
procedures for recourse
provided for trademark
owners.
India (IN) Registering through the Office 10 years from the date National Law,
of the Registrar of Trade Marks. of registration; may be Trade Marks Act, 1999, New
renewed (consult the Elements in Trade Marks
Trade Marks Act, 1999 Act, 1999
for more detailed
information)
Japan (JP) Trademark rights are not 10 years from the date National Law
conferred simply by use of the of registration; may be
trademark. Trademarks must renewed without limit
be granted by the JPO after as long as an
trademark registration. Find application is
further information here. resubmitted.
South Korea (KR) Submitting an application to 10 years from the date National Law
the Ministry of Knowledge of registration; may be
Economy. An overview of the renewed without limit
trademark system can be every 10 years.
found here.
United States Placing a trademark, either ™ As long as actively used State Law and Common Law
(US) or (TM), additional protection and infringers are for unregistered, Federal
by registering and placing ® or pursued. Law for registered.
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(R).The basics of trademarks

can be reviewed here.
South Africa (ZA) Registration not mandatory, Valid until contested by National Law
but advisable. An overview of another party.
the IP system can be found
here.
Trade Secret Valuable ideas that are not Canada (CA) Keeping the idea secret. As long as kept secret Common Law, apart from
generally known, not readily Quebec
ascertainable by normal China (CN) Keeping the idea secret. As long as kept secret Statutorily defined: Unfair
means, and proactively kept (non-public) Competition Law (UCL)
secret. There are country- India (IN) Actively keeping the idea As long as kept secret Common Law
specific conditions on what secret
can be considered a trade Japan (JP) Actively keeping the idea As long as kept secret Statutory protection: Unfair
secret. General standards secret Competition Prevention Law
can be reviewed in Article South Korea (KR) Actively keeping the idea As long as kept secret Unfair Competition
39 of the Trade-Related secret Prevention and Trade Secret
Aspects of Intellectual Protection Act
Property Rights (TRIPS) United States Actively keeping the idea As long as kept secret State Law and Common Law
Agreement (US) secret and the Uniform Trade
Secrets Act (UTSA).
South Africa (ZA) Actively keeping the idea As long as kept secret Intellectual Property Law
secret
International IP Law (Europe)

Intellectual Property rights on the international level are a complex network of both the traditional concerns of the foreign law (the law of the
nations) and international law that is applied across the board to all participating nations. As a result, International Intellectual Property rights are
primarily treaty-bound in order to enable the enforcement of private rights across borders. Thus, international IP law is most concerned not with
the rights in a work in its country of production, but rather in how and to what degree these rights are maintained in another country. Because
these rights are conferred and enforced through a matrix of treaty relations between nations that seeks to establish “mainstream” IP protection,
what follows is a list of important treaties and agreements that have been adopted on an international level in Europe.
Type Protects Treaties, Conventions, Agreements

Patent Inventions that are novel, Paris Convention (http://www.wipo.int/treaties/en/ip/paris/index.html)
useful, unobvious, well
described. Patent Law Treaty (http://www.wipo.int/treaties/en/ip/plt/index.html)
Patent Cooperation Treaty (PTC) (http://www.wipo.int/treaties/en/registration/pct/index.html)

Copyright Copyright and Masks for The Berne Convention (http://www.wipo.int/treaties/en/ip/berne/index.html)
photolithography and the
like Universal Copyright Convention (http://portal.unesco.org/culture/en/)
WIPO Copyright Convention (http://www.wipo.int/treaties/en/ip/wct/index.html)

Trade and Inventions that are novel, Paris Convention (http://www.wipo.int/treaties/en/ip/paris/index.html)
Service Marks useful, unobvious, well
described. Trademark Law Treaty (http://www.wipo.int/treaties/en/ip/tlt/)
Madrid Agreement and Madrid Protocol (http://www.wipo.int/madrid/en/)

Trade Secret Valuable ideas that are England, Germany and France protect trade secrets via common law of “breach of confidence” or via
not generally known, not unfair competition laws, though Europe is reluctant to consider trade secrets as property. The EU
readily ascertainable by policy of free competition tends to conflict with trade secret protection.
normal means, and
proactively kept secret. General standards can be reviewed in Article 39 of the Trade-Related Aspects of Intellectual Property
There are country-specific Rights (TRIPS) Agreement (http://www.wto.org/english/docs_e/legal_e/27-trips.pdf)
conditions on what can be
considered a trade secret.
Obtaining protection for your assets by filing for or granting yourself intellectual property rights secures you a monopoly only for a specified period
of time. Trade secrets may have a longer lifespan, but they do not protect you against independent invention of your technology. As all forms of IP
have some limit on their ability to protect your technology, there are additional documentation methods to provide protection in specific instances.
Disclosures protect your technology whenever you send an e-mail or other written material to a customer, or transmit data to an employee or
colleague who did not co-invent the technology with you. Materials transfer agreements provide protection to you when you transfer research
materials. Confidentiality agreements protect the idea itself and, therefore, prove particularly useful in protecting trade secrets.
Forming and safeguarding your IP portfolio are fundamental components to the successful commercialization of your technology. By doing so, you
provide yourself legal protection for sales and/or deal making, which affords a competitive advantage in the market.
Review Questions
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1. Define the relationship between intellectual assets and intellectual property.
2. What criteria must be met in order to file a patent?
3. For each type of IP, tell how long it lasts and where you can obtain it.
4. Which type of contractual agreement should be used when disclosing a technology protected by trade secrets?
Applications
Tools are made to be used. Otherwise, why make a tool? Where we use the tool is called an application. If I pick up a hammer and pound nails in
my deck, the application might be home repair or it might be commercial residential construction. If I am John Henry, the steel driving man of
legend, then the application might be building railroads. And if I am a folk singer, the application might be entertainment as I am using it as a prop
while singing "If I Had a Hammer."
Applications are tied to end-users and end-users are tied to one or more applications. Note that in each case, the person using the hammer is
different. This person we call the end-user. In the home repair example, it is a consumer. In commercial construction, it is a contractor or laborer.
And in folk music, it is an entertainer. In each case, the reason the end-user picks up a hammer is different; and thus, the hammer selected is
probably different. For a stage prop, I can use any old hammer. For pounding in stakes for railroad ties, I need that nine pound hammer. For
consumer or contractor use, the weight of the hammer's head may be similar but the quality of the hammer likely will vary as the consumer will
use it a few times a year, while the contractor will use it most working days.
From the standpoint of commercialization, what we want to know is who is the end-user, who is the buyer, and what is the application. If we know
this, we can then move on to study why the end-user will use a technology and why the buyer might buy it. And that is the focus of this lesson:
Why people buy and use technology.
In this lesson we will learn:
· How to identify applications
· How to identify the end-users and, if relevant, the buyers
· How to down-select to those applications, particularly the most promising ones
What is an Application?
Applications are simply activities in which a technology can be used. We find them by asking ourselves, where might a technology like this one be
used. To do that, we begin with a technology's functionality. What does it do? Let's take our hammer. It pounds things. We can ask who needs that
functionality. We can then look in more detail at the performance a technology offers and compare that with the functionality needed by the
application. In order to understand if a technology is a good fit for the application, we first determine if we can meet the needs of end-users and
then we re-examine the fit, putting more weight on the most important need for end-users. Often by making trade-offs, we can enhance the fit of a
technology with a set of needs.
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Graphic 5.1: Needs and Yields Tradeoffs
Let's use an example. I still have an all wood mallet from my days as a wooden boat builder around 35 years ago, although now its primary use is
as an object of art. Let us look at this mallet in a bit more detail. It has a function. It also can be measured in terms of metrics like size, weight,
and mass. Furthermore, the wood (e.g. Lignum-vitas or maple) has certain properties that make it more useful for some tasks, like caulking
planking on a historic boat or working with a wood handled chisel to shape a piece of wood, and less useful for others, like pounding iron stakes to
hold railroad ties in place.
One tool for thinking about where the functionality and performance of a technology might be useful is the Marioni Matrix. Don Marioni, a Foresight
Board Member, developed this heuristic tool to help our analysts think of new applications for technology. On one dimension is a variant of Maslow's
hierarchy. On the other is a supply chain. (The matrix can be adapted as desired.) Now look at the intersections. Ask where the technology might
fit.
Graphic 5.3: Marioni Matrix
If you are a T2+2® subscriber with access to the Data Warehouse, you can search on the technology of interest and then sort the reports by the
supply chain column. Instead of the Maslowian Hierarchy row, we use the Department of Census North American Industrial Classification System
(NAICS) to index reports. Either one or both will allow you to see some areas where related technologies have been applied.
Another trick for finding applications is to put into a web search engine key performance metrics or functionality with a term like "problem" or
"need" or "requirement." For example, if I search for "wooden mallet requirement," I find some applications which do not fit my technology, such
as drumsticks for marching bands, and others where my mallet may have use, such as wood carving.
Now admittedly, this is a very low tech example. But the same approach works with high tech items. For example, suppose I have a nanoporous
membrane. I toss that term into a search engine and find applications like filtering viruses. Using the Marioni Matrix I look at operations and
maintenance and move across and I may have the basis for a competitor to Gore-Tex® for clothes or tents. In disposal and power, maybe I can
filter out CO2 from coal plant emissions.
A final trick we use is called Star Trek Gap Analysis. We think about where a technology might be used on Star Trek, in Star Wars, or with any other
well known Sci-Fi show or movie. Then we ask if there is such a technology today. If not, we probably have an application - as shows and
movies like Star Trek and Star Wars shaped what people think should be feasible today. For example, an infrared based multi-chemical hand held
spectrometer is just a tricorder.
One caution: these are just brainstorming tricks to generate possible applications. You still have to check them out to see if they really are feasible.
It is to that task we now turn.
End-users
Once we have identified an application, the next question is: who is the end-user? Fortunately, finding the end-user is easy. It is the person who
literally uses the technology. Take a laptop computer. I am the end-user as I type this. I am not the end-user for the connectors that power the
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screen. The connectors are probably touched by a design engineer at the screen manufacturer, and an assembly person at that vendor to my
computer's manufacturer. To me, they are irrelevant. I do not care how they power the screen. All I care about is that I can see what is on it.
Once we find the end-user, we have the basis for what is called a market orientation. All that means is that we can understand why end-users
would or would not want to use this technology. Building on prior chapters, we want to know their price, performance, and ease-of-use
preferences.
We begin by asking five questions, which we call the 5 W's:
1. Why is the end-user using the technology? This question provides context. What is the motivation here? Is it to make money, meet
a health and safety need, secure the homeland from attack, or making it easier to plant flowers in your home garden?
The "why" points out two things. The first is UMPF. By UMPF we mean what makes it imperative for the end-user to acquire the
technology. There are lots of things that are nice to have. As there are always barriers to overcome when commercializing a technology,
we would like some deeply felt reason for why this technology is desired. The second thing pointed out is the minimum level of control
over underlying phenomenon the technology must provide to be commercialized. If I plant corn for my garden and it does not grow, it is a
bummer, but I run down to the grocery store and buy some. If I am disarming a land mine and the technology does not work, I could be
dead.
In general, the greater the health and safety issues or the more money at stake, the more certainty people like to have. (What varies is
the amount of risk someone will take. That may be different from person to person, but whatever their risk tolerance, people tend to take
less risk when there are higher the stakes.)
2. Who is using the technology? Literally, who is this person. What kinds of education and skills do they have? What are they paid?
What language do they speak? How old are they?
Understanding who the end-user is tells us much about how we have to design the user interfaces to make the technology easy-to-use.
Suppose I have a hand held unit to detect toxins in drinking water. If I am going to have a unit for home wells, it will be used by unskilled
consumers. I want a very simple read-out of a blinking red light that says STOP! DO NOT DRINK! GET THE HEALTH DEPARTMENT OUT
HERE! or a green light that says. OK. I do not want yellow lights. Any doubt, better to be on the safe side. The US Department of Labor's
Occupational Outlook Handbook at http://www.bls.gov/OCO/ is an example of a database that provides background on end-users. For
medical patients the US Center for Disease Control's index at http://www.cdc.gov/az/a.html allows access to useful information
Who the end-user is also provides insight into how mature the technology must be before it is brought to market. A technology designed
for research use can be less mature than one designed for general industrial use. Researchers may want to tinker with the technology.
Factory floor users will not want to have to tinker with it in the same way.
Note that if our new technology is a labor saving replacement for a prior technology, knowing what people are paid allows us to calculate
the cost saving and thus gives us an idea of what ceiling might exist for the price we can charge.
3. What are they doing? When the end-user picks up the technology, what do they do with it.
In the connector example, they may be inserting a male plug into a female plug attached to the screen. The nature of this activity tells us
more about the design and yields technology must provide. If I insert the CPU by hand, it has to be robust enough for me to do that. The
plug has to have a place I can grab it in order to push it in. So I also can start inferring some design features for my connector. Looking at
the drinking water monitor, if I just stick it under the faucet and let the water run over it, that is not to hard to do. If I have to collect
exactly two milliliters of water, then filter it using nanoporous membrane (that has to be cleaned with a special biocide after each), and
then blow the microorganisms with an airbrush onto a slide that goes under a microscope ... well I don't think that's for me. It's not going
to work for my family even if it does work in an analytical chemistry lab.
Note that here we get the another insight into what maturity is required. For everyday operational use, a higher Technology Readiness
Level (TRL) is desired. (See graphic from NASA for a summary of TRL levels.)
Graphic 5.4: Technology Readiness Levels Meter
Where the end-users work in different sectors of the economy, engage in significantly different activities, or have different traits, we talk
about customer segments. A customer segment is defined as a group of people who have similar needs. Depending on the reasons for
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segmenting, a variety of criteria can be used, In consumer markets, factors such as age, gender, interests, education, and household
income might be used. In technology transfer, we tend to segment by "field of use," career, the sector of the economy within which the
end-users work, or their education and skills. The point is even with the same basic use, here well-water microorganism monitoring, if
the end-users are different, there will likely be different price, performance, and/or ease-of-use needs.
4. Where is the end-user using it? This is a location question. We want to place the end-users in space. A computer designed for
military field use in the mountains of Afghanistan must be far more robust than one for office use in the Pentagon.
"Where" also brings insight into another set of performance metrics a technology must meet: environmental ones. Here heat and cold
tolerance, the effects of moisture, degradation due to corrosion, etc., come into play, as do other factors related to fragility. Another issue
"where" provides insight into is the infrastructure required to use the technology. If we are designing hydrogen storage units, there is a
big difference between a unit going in a car and one sitting in a secure building in an electric power substation. In the former case, we
have to worry about vehicles crashing into each other and exploding. While earthquakes might be a concern in the former, we have more
opportunity to design around the problem as human error is less likely a factor.
5. When is the end-user using the technology? Now we are placing the end-users in time. We want to know how often and what times
of day and what times of year.
If my tricorder is a hand held unit for rapid detection of toxins in drinking water reservoirs, I probably want the display backlit so I can
use it at night. Similarly, if I am looking into a load leveling unit for electric power utilities, it makes a big difference if I am designing for
today or five years from now. Today, there is not a lot of smart grid in America, so the grid cannot bring on a new power source within in
a second to compensate for another source cutting out. As the smart grid is built, however, more rapid switch over becomes possible.
That favors rapid fire technologies like ultra-capacitors over slower technologies like lead acid batteries.
In each case, what is called for to answer the 5 W's is empathy. We have to try to walk in the end-users' shoes. We want to understand the world
from their perspective, because if we can, we can understand whether we can generate pull-through for this technology. Pull-through exists where
end-users clamor for a technology. They seek it out because it meets needs they want met. If we can generate pull-through, the odds of a
technology getting to market are greatly enhanced. After a while, articles start showing up in the trades and other press, word of mouth starts
making other buyers aware of the good, and buying increases enough that the S-curve makes the first slope change and starts to soar upwards.
Be aware that end-users enter the market over time. Following Everett Rodgers' analysis in Diffusion of Innovations, (5th Ed., 2003), the first to
adopt technologies are called innovators. Innovators are the technology geeks who love to try the latest and greatest. Because of this fact, they are
not the best group of end-users to interview as their views may not represent more mainstream folks. Innovators often represent about 3% of the
market. The next into the market are called early adopters. This group tends to have characteristics closer to other end-users, but is distinguished
by having more education and being more cosmopolitan. They monitor more channels of information and thus become aware of new technologies
that innovators are using. They often function as thought leaders and opinion leaders for others. They tend to constitute about 14% of the market.
As they enter, a technology hits take-off. The next sets are the early and late majority, each of which typically comprises around 34% of the
market. These folks constitute the bulk of the market. Finally, the last to adopt are called laggards. What these categories suggest is when looking
to understand end-user needs with respect to commercialization, it makes sense to focus on the early adopter customer segment. These are the
folks who like to be on the cutting edge, but not on the bleeding edge.
Graphic 5.5: Technology Adopter Sets
Identifying the end-users and their needs is the key to commercialization. If a technology can be used to make a product or service that end-users
need enough that they will pay good money for it, then someone will likely be willing to make that money by selling that technology. Thus, it is
economically feasible to take the technology to market. All we need to do in order to commercialize is to figure out who is actually doing the
buying for those end-users. Then we trace the supply chain back from the buyer until we find the right target for commercialization.
Buyers
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In our hammer example, the end-user may or may not be the buyer. The consumer is definitely the buyer. The contractor and folk singer are likely
also the buyer. The laborer may or not be the buyer, depending on whether the laborer owns his own tools and brings those to the job or if he or
she uses the boss' tools. In the latter case, someone other than end-user is the buyer.
In consumer goods, end-users and buyers are usually the same people. When you go to buy a new home computer, you are also the person who
will use that computer. However, where the technology is a product or process used by a business or institution, the end-users and buyers are often
different entities or people. This distinction is reflected in Porter's Value Chain (see the open use graphic below from Wikipedia), where,
procurement is a separate activity from a primary activity like operations. Operations are where the end-users attach the connectors to the display
panel to make a computer screen subassembly. Procurement is where the buyers are.
In a situation like this one, the end-users probably do not control buying. So their needs are only one input, albeit a very important one, used by
buyers to develop the criteria for purchasing. Other needs may include company priorities, technology and vendor preferences, budgets, and so
forth. Nonetheless, if the end-users are to do their work, the buyers will have to buy the tools and supplies they need. Thus, as a first step for
finding applications, we focus on end-user needs and ignore buyer needs. Downstream when we are doing deals, the buyer's needs and
requirements soar in importance.
(Note that the below graphic highlights how in a corporation, a range of people can be viewed as touching a technology. That raises a new question.
When a lot of different people touch a technology, who is the end-user? The answer is all of them. The engineer who designs a screen using the
connectors is in Technology Development and the connectors may be handled as they are put in inventory by Inbound Logistics. For our purposes,
we focus on the main end-users that enable us to understand whether we have a shot of building pull through or not.)
Graphic 5.6: Porter's Value Chain
Porter's Value Chain is a heuristic tool that helps us grasp what is occurring in entities where end-users are not buyers. We have already seen that
different sets of end-users are likely to have different needs, which reflect the different tasks they are performing and the different organizational
contexts within which they work. So it is with buyers as well. They too have requirements that reflect the activities their organization engages in
and the context in which that organization exists. The dominant design for technology within an activity helps us get a handle on what buyers will
want.
The dominant design is the bundle of functionalities and features that has become the accepted market expectation for a specific kind of product,
process, or service. This design implicitly or explicitly provides a model and a benchmark for what a technology should be. For example, when we
say "computer" we think of something with a CPU, some memory and storage, and an input and output device than can manipulate and perform
math and logic with bytes. If does not matter if it is a smart cell phone or a server.
The graphic below illustrates how dominant designs work using another low tech example - dug out canoes. The photos are from Plymouth
Plantation. The graph is based on one by Boughn and Osborne that appeared in the Journal of Technology Transfer in the 1990s.
In the pictures below we have a low tech example. At some point lost in prehistory, people figured out how to cross rivers using dugout canoes.
This is product innovation. Making such a canoe with a stone axe, chisel, and hammer was literally back breaking work. Then some wise person
realized if you dropped coals in the cracks of an old log, you could burn out most of the center so you would only need to do the finishing work. This
is process innovation.
In this graphic, note that before a dominant design emerges, markets tend to be embryonic. The reason is end-users have not come to consensus
on what they want out a technology or product or service. In this phase of the market, many different bundles of features and functionalities
compete and product innovation occurs frequently. Prior to Henry Ford and the Model T, this was the situation in the auto industry. Once a dominant
design emerges, however, the focus of innovation shifts to process innovation. The focus is on how to make things faster, less expensively, and
more productively. There is still product innovation. An example today is the electric car market, where there are a lot of options, such as on board
generation gas/electric hybrids, plug-in gas and electric hybrids, and all electric vehicles. But most of the options on the market still look and drive
like cars. (There are a few variants which are based on the three wheeled motorcycle or tricycle.)
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Graphic 5.7: The Dominant Design
Where dominant designs exist, they can be used to develop a benchmark for how buyers will likely react to a new technology. Let us look at price,
performance, and ease-of-use in this context.
We begin with price. If the technology is a notebook computer, and we are commercializing a touchpad (let us assume it is the first touchpad), we
can pretty quickly estimate what will be considered a reasonable price. If there currently exists a way of providing the functionality, that is the
benchmark. We can get a price in two ways. One way is to call experts or end users and ask them what they think a touchpad is worth. The other
way is to look at the current way of providing that functionality and what it costs. So we get on the web and search for the price of a mouse. Due to
change-over costs such as the cost of buying new equipment, training, and the like, we try to be under the price of the currently used substitute by
around 20% or more. (Note that the retail price is not the price in volume to a computer manufacturer.)
If no substitute exists, we still have a method we can use. We look at the functionality provided by the technology, say the very first mouse, and
then look at the ratio of that functionality to the overall utility of the dominant design (here, the computer). If the mouse is, to make the math
simple, say 10% of the functionality and the machine costs $500, then the touchpad should be around $50. Using this method we can usually end
up within the right order of magnitude. We can then call a couple of experts and end-users and see if our guess is reasonable.
Turning to performance, we immediately know two things. First, whatever the Bohn Knowledge Level (degree of control over phenomenon) in the
dominant design, our technology has to at least match it or no-one is likely to be interested. After all, why would we want something to work less
well with a new technology than it did before. Second, the constraints on acceptable performance are established by how the new technology is
used with the dominant design. If I am providing lithium-ion batteries for cars whose engines have warranties of 10 years or 100,000 miles, my
batteries should last 10 years or 100,000 miles too. Alternatively, if I am providing a new kind of oil filter, my filter may only have to last 5,000
miles. Note that if my technology is for a functionality that has not existed before, I am likely to be benchmarked against an equivalent kind of
functionality; that is, disposables will be benchmarked against other disposables and capital equipment against equivalent kinds of capital
equipment, where equivalent refers to complexity or importance or some set of similarities.
Finally, we can see how ease-of-use plays out. Certain skills are required to use the current dominant design and its user interfaces. To the extent
those skills come into play and the interfaces are intuitive, the new technology is seen as easy to use.
What we are saying is this: since the current dominant design sets expectations for end-users and buyers, if we know how a new technology relates
to the current dominant design we get insights into how it will be perceived.
Where they exist, standards, certifications, and regulations usually help ossify dominant designs, although they can also have the reverse effect.
Standards are voluntary rules set up by players in an industrial sector to ensure compatibility between products, processes, and services. Standards
occur in the presence of a dominant design. They almost always support a dominant design because they usually document aspects of a dominant
design and define test protocols that buyers will expect to have been completed before they will purchase a new technology. The UL tag on an
electrical appliance is a well-known example.
Good places to start searching for standards is http://www.nssn.org or the standards listing in K2™ the T2+2® Wiki. When you search, you should
be aware of three kinds of standards. User interface standards “share” their look/feel in order to create network externalities. Network externalities
exist where the benefit of adopting a technology grows as more people adopt it. User Interface Standards are fully end-user developed and
maintained. In contrast, standards bodies maintain the other standard types, such as those concerning compatibility and safety. Compatibility
standards define how one part of a system or component fits with another part of the system or component. One example is the HTML and XML
Internet protocols. Another is the RS-232 interface between data terminal equipment and data communications equipment employing serial binary
data interchange. Safety standards define minimum acceptable performance to avoid harm to life and property. (Most UL standards have a safety
aspect.)
Certifications are seals based on test results that validate compliance with a standard. Certifications may apply directly to a product, process, or
service, such as when a process is ISO 9001 certified, or they may apply to people, such as when someone is a certified radiologist. Certifications
tend to reinforce dominant designs. If certifications are relevant for your technology, it is important to design for compliance or ensure that new
certification procedures are adopted prior to market entry. Certifications for skills often include testing on skill sets for using technology, such as a
certification to do radiography. That means technology cannot change too fast or the certification is useless.
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Regulations are constraints set by government bodies. They are enforceable in courts of law, although their impact is dramatically reduced if they
are unlikely to be enforced. Where enforcement exists, usually in the form of fines or injunctions, companies will usually comply. Where regulations
specify or prohibit processes or mandate test protocols and methods, they tend to strengthen the importance of a dominant design.
New standards, certifications or regulations that introduce new performance requirements without specifying processes or protocols and methods
may weaken the current dominant design, creating market opportunities.
Research Methods to Collect Data on Needs
There are two basic ways to collect data. One way is to get it from the end-users and buyers themselves. The other way is to collect it from
secondary sources. Both methods have their utility and our recommendation is to use both to check each other.
The best way to find information on end-user needs is to talk to end-users. Also useful is talking to experts, such as officers and committee
members of trade associations, consultants, trade journal editors, and government employees who track the industry. (A caution, unless you want
to talk about technology, try not to rely on university faculty as they usually have only limited first hand knowledge of what is going on in industry.)
Before talking with experts and end-users, make up a list of what you want to know. Use the list to structure your conversations. Ask about what
end-users will seek from a technology like this one and what unmet needs it might address, what metrics they will use to evaluate it, how
competitive your technology might be, who your competition is, and how they would get it into the market if they were commercializing it. Also,
inquire as to their views on standards, certifications, and regulations to be aware of.
Another set of people to speak with are stakeholders such as standards bodies, the media, government funding and regulatory agencies, suppliers,
and so forth. You want to know their views on how to get this into the market and how supportive they will be of a commercialization effort.
There are a variety of ways to collect data from end-users, buyers, and stakeholders. One way is informal discussions. Another is focus groups. A
third is a formal survey. You can also do a literature review by searching for articles in trade publications, blogs, and other web based sources of
information. Just be aware, the data you get from the web may not be accurate.
The best way to start collecting information about dominant designs and their evolution is to look for roadmaps. Roadmaps are projections of
technology needs, and often include what needs to be done to meet them. They are developed by government agencies, industry associations,
professional societies, and consortiums and coalitions. The most useful ones are the ones developed by authoritative groups. Below is an example.
This is a roadmap for universal freight manifests associated with intelligent transportation systems. It was found at the US Department of
Transportation at http://www.its.dot.gov/efm/longdesc_pres_marcia.htm. A catalogue of roadmaps is found in the T2+2® K2™ wiki.
Graphic 5.8: Universal Freight Manifest
Examining the sites of competitors and end-using entities is another good way to gain insight into what options buyers are likely to have. If you can
find a publically traded US company with a strong presence in the application or selling related technology, you can search their corporate filings at
the Security and Exchange Commission at http://www.sec.gov/edgar.shtml. Look at the 10-K or 10-KSB (for small business) annual filings first.
Skim the filing using the find function on your browser and searching for terms like "market."
Also very useful are the annual reviews of industry trends that many trade publications print. You can find these by searching on a relevant term,
like sensors or composites of medical devices till you find an on-line publication. Then search that site's archives.
Competitive Openings
When all is said and done, what you are looking for is a fit or coherence between what the technology can do, what end-users are likely to
need, and what buyers are likely to be willing to buy. Where this coherence exists, there is a competitive opening.
In the graphic below, the circle represents end-user needs. Note that there are three competitors who might satisfy those needs, each with a
slightly different positioning. We will focus on competition in a later lesson. For our purposes here, what matters is that your technology meets end-
user needs well.
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Graphic 5.9: Price, Performance, Ease of Use
Be aware that needs can change over time. Thus, the technology must not only fit needs well today, but for some period of time sufficient to
generate the return-on-investment needed to offset the costs associated with R&D, product development, and commercialization, plus make an
acceptable profit. Usually we find a five year horizon from the date of market introduction provides a good time-frame for assessing whether an
application is feasible.
Finally, we want to emphasize there may be no single best market opportunity. Rather, a number of applications may make sense.
Review
Once you define your technology, you can seek and choose an application to pursue. The best applications offer a good shot at successful market
entry. Successful market entry increases if your technology provides needed functionality with a price advantage, performance advantage, ease-of-
use advantage or some combination of these. Where functionality is provided with the price, performance, and ease-of-use desired, a competitive
opening exists.
Just what the metrics used to measure these things are, and just what the desired yields are, are things for end-users to determine. The end-users
are the folks who actually use the technology. Their needs and preferences drive the metrics. Keep in mind as you go that markets and needs are
dynamic. Indeed, technology innovation more often involves a process in which the idea of a tool and its uses evolves over time through interaction
with its users rather than a process of an idea being realized and simply inserted into an appointed slot, as if the innovation was like the tablets
carried by Moses from the mountain. Understanding what end-users want is called market orientation.
What end-users need is reflected in what buyers will seek. Buyers may or may not be end-users. Regardless, the buyers' preferences are shaped by
what kinds of technology are being deployed currently in an application. Where a technology is central for an activity and well established, we call it
the dominant design. By understanding how a new technology relates to the dominant design, we gain insights into the price, performance, and
ease-of-use expectations buyers will bring to the market. These expectations will be shaped -- and sometimes transformed-- by actual end-user
needs. Understanding dominant designs deepens our understanding of whether an application is likely to be feasible and improves our market
orientation.
Review Questions
1. What are the 5 W's and why do we care about them?
2. Which type of buyer is the most advantageous for holders of new technology to target?
3. How can you find out about end-user needs?
4. How does UMPF relate to pull-through and take-off?
Competition
Every technology has competition. Suppose you want to measure the length of a room. You can use a time of flight laser range finder, a tape
measure, a carpenter's ruler, a yard stick, an old school ruler, or you could just pace it off. Each of these is a way of measuring the length of a
room.
Just what makes something competition for a technology depends on what end-users want. Once we know what kind of performance, ease-of-
use characteristics, and price are desired, we can see if there are other ways of attaining them. Those other ways are the competition. The
technology that meets end-user needs best has an advantage in the marketplace in that end-users are more likely to buy it. We call this advantage
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a competitive advantage. If the competitive advantage endures over time, we call it a sustainable competitive advantage.
So finding a competitive opening is only the first step in locating a viable market opportunity. The next step is determining if the technology can
have a sustainable competitive advantage. As part of this task, we have to broaden our scope a bit. We do have to look at the technologies
themselves, but we also have to look at who is offering them and how those players are competing. It is to that task we now turn.
In this lesson you will learn:
* What is a competing technology or substitute

* How to determine if a technology has a sustainable competitive advantage
* What is a competitor
* How to determine the competitive landscape and understand its implications for a commercialization initiative
Substitutes
Substitutes are technologies or manual methods that provide the same outcome as a technology. A substitute may use the same technical
approach, but then again it may not.
Substitutes that do use the same technical approach are of particular interest for two reasons. First, if they pre-date the technology being
commercialized, the new technology may be infringing on the earlier technology if there is a patent filed. In that case, in order to practice the
new invention, a license is needed from owner of the pre-dating invention. Second, technologies using the same approach tend to be head-on
competitors. That usually means price becomes a lot more important in buying decisions because you can get the equivalent performance and
ease-of-use from others.
Where substitutes are already commercially available, they provide a benchmark for two things. The first is acceptable performance, the second is
price. Notice also that we just said "where substitutes are commercially available." Not all substitutes may be on the market today.
We can get a snapshot of the likely substitutes at any point in time by looking at four main sets of data.
1. The first set is technologies and products being sold today. If I am looking for a product, I toss it in an internet search engine and I usually
find it. So lets say I am looking for a laser diode for a range finder I am developing for gardeners who want to plant their seedlings a precise
distance apart. I toss "laser diode" into a search engine and find a bunch of manufacturers. I could also use a catalog website such as
www.thomasnet.com or www.globalspec.com. Or, I could call up people who should know something about laser diodes and ask them whom
to call.
If I am looking for technologies being licensed today, it is basically the same. This time I look at licensing sites. I search for university,
research foundation, and government lab technology transfer office web pages, technology licensing auction houses, and technology "dating
services" (where people are offering technologies for licensing on line).
2. The second set is technologies or products just entering the market or that could be sold in the near future. For these I search the trade
press for articles about what's on the horizon. Press release sites (Marketwire, Business Wire, PR Newswire, etc.) are another resource, as
are business and general media stories about what is showing up a trade shows. For example, the Chevy Volt has been on display at auto
shows even though you still cannot buy one at a car dealer.
3. The third set is technologies and products that may hit the market in the near to mid-term. This time I do a global patent search, looking at
both issued patents and patent applications. (For example http://worldwide.espacenet.com/advancedSearch, http://www.wipo.int/pctdb/en/,
and http://www.uspto.gov/main/profiles/acadres.htm.) I also look for advanced applied research by searching government sites for
things like US Government's Small Business Innovation Research (SBIR) and Small Business Technology Transfer Research (STTR) Phase II
awards and other government programs where the goal is to speed innovations to market. Also useful are the pop market science media like
Scientific America, Technology Review, New Scientist, Popular Mechanics, and Discovery.
4. The fourth set is technologies or products likely to emerge in the mid-term and farther out. Here I search the referred literature, such
resources like PubMed (http://www.ncbi.nlm.nih.gov/pubmed/), Science Direct (http://www.sciencedirect.com/), Google Scholar
(http://scholar.google.com/), and the numerous prepub archives and databases of government research reports that agencies maintain. If
you are at a university or other major institution, you may have access to fee for service data sets such as Web of Knowledge, Dialog, Lexis-
Nexis, and the like.
Notice that as we move down the list above, the items we are finding are likely to hit the market farther out in the future. Thus, in order to project
what competition in the future will be, we look at data sets containing technologies or products that are at a lower Technology Readiness Level.
While each filed patent moves technology to market at different rates, the fundamental principle remains. The lower the TRL, the farther out the
technology is likely to hit the market.
For any given point in time, we can create a table indicating what the competition is likely to be, at least in so far as we can tell from publically
available sources. In the left hand row under Customer Requirements, take the criteria (metrics) end-users want. Note that the chart below allows
you to weight these metrics in terms of their importance for end-users. If you do weight them, we recommend a very simple scale of low, medium,
and high (i.e., 1,2,3). Next, you move to the columns to the right of the Relative Weighting column. Notice the heavier black lines that break these
up into sets of columns. Each set is for a different technology. The first block is for your technology. The remaining blocks are for your key
competitors.
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Graphic 6.1: Competitive Advantage Matrix

Swamping
The most important competitors to identify are those whose technology might be superior to yours in terms of buyers’ criteria. Such technologies
possess the threat of swamping your good’s life cycle and preventing you from hitting your revenue and market share goals. By swamping, we
mean a substitute exists in, or enters, the market and takes away sales because it better meets end-user's needs, shifting the competitive
advantage from the technology you are assessing to the substitute. By doing so, it prevents you from “riding” the s-curve for your product. The
following graphic illustrates an s-curve and the effects of swamping.
Graphic 6.2: Revenues and Swamping
For our purposes, consider Product One your technology. Product Two is the substitute. Note that Product One sales rapidly decline after the
introduction of Product Two. The dashed line represents what would occur in the absence of the new substitute. IN a metaphor to sailing, we
consider the sales swamped and thus slowed by the competitive advantage of Product Two.
Given that competition exists, there are two strategies for responding that need to be considered. The first is intellectual property. Depending on
who has issued patents and how broad those patents are (or the patent portfolio is), your inventor or the competition may be able exclude the
other party from entering or continuing in the market without a license. In the graphic below, there are a variety of positionings for a technology in
terms of price and performance, noted by the circles labeled opportunity.
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Graphic 6.3: Technology Positioning Opportunities
As we identify competition and where it has patent turf, we note that some of the opportunities are blocked by closely related patents which would
be infringing if we practiced our invention. That means we either have to tweak our technology to design around the blocking patents, thereby
repositioning it to a spot where we are not infringing anyone, take a license or sublicense to the blocking technology, or abandon that opportunity.
In other words, freedom to operate is essential for commercialization, but the ability to block others from entering a positioning is even better.
Graphic 6.4: Freedom to Operate
Note that, as the graphic suggests, IP may not be the only reason we are blocked. Often a substitute exists and is already adequately meeting end-
user needs. That substitute may have already been through a certification process, such as Food and Drug Administration approval for a
pharmaceutical or medical device. Or it may be that the substitute is provided by a competitor with strong brand name loyalty. Whatever the
reason, understanding the substitutes and who provides them focuses on where we can and cannot position a technology if we want to gain
sustainable competitive advantage. It is to competitors we now turn.
Competitors
The competitive landscape for a technology has two components: the substitutes and the market presence of the vendors who are selling or
offering them. These vendors we call competitors. Market presence, as we use it, is a measure of a firm's ability to maximize its profitability via
sales. Competitors with strong presence have the flexibility to grab and maintain their market share. Firms with stronger presence can raise prices
and still maintain that market share or cut prices and grab even greater market share. In other words, market presence, as we use it, measures a
firm's ability to manipulate the price elasticity of demand for its goods in order to maximize its profitability. Several factors enable competitors to
have greater market presence. We will highlight a few here.
Vendors pursue strategies and invest in activities and capabilities that enhance their market presence. In general, it is a good idea to be able to
price competitively or below others, even if you do not exploit that ability. Hence many of the factors below have to do with reducing the Cost of
Goods sold. The others have to do with the ability to charge premium prices. By manipulating pricing, given some threshold of performance and
ease-of-use, firms capture or lose market share.
First mover advantages come from being the first to introduce a new technology, product, or service into the market. Because the first mover has
invested in building awareness, as well as getting any necessary certifications and approvals, that firm has a de facto monopoly position for a time.
This position can be leveraged to build stakeholder support among standards bodies, the media, etc., thereby making it more difficult for a new
competitor to enter. An example is an analytic tool for assessing water quality that has already been approved by federal and local environmental
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agencies competing with one that has not yet even begun the approval process.
Note that being the first mover means the firm may be able to leverage additional advances, such as moving down the learning curve, building
brand loyalty, or attaining economies of scale, scope, or network economies before others hit the market or at least earlier than competitors.
Brand name loyalty is the tendency of the buyer to look for a firm's goods because they have previously bought goods from them and were satisfied
with them. Brand loyalty arises from awareness and education programs, quality products, good customer service (both before and after a sale),
and a history of fair dealing and providing good value. Firms also can create loyalty by public service, such as donating a portion of their profits to
charities. As always, creating loyalty requires both time and money: time to develop a reputation, money to buy advertising, attend trade shows,
and perform other activities to promote your products, processes, or services.
Where brand name loyalty is very strong, firms can sometimes charge a premium for their goods. This ability to charge a premium can be
measured by determining just how much more can be charged over substitutable goods. The differential is a measure of goodwill.
Absolute cost advantage is a way of securing a lower Cost of Goods Sold that can be maintained regardless of what competitors do. The clearest
example is a broad patent portfolio. Anyone seeking to compete on turf protected by the portfolio has to invest in trying to design around the
existing patents. Other ways to obtain absolute cost advantages is by locking up raw materials or components so others cannot access them, or
only access them at higher expense. For example, a firm making lithium-ion batteries may have invested in a lithium mine and thus get preferential
pricing on their raw material. Another example is when a larger firm makes a venture capital investment in a start-up in order to get preferential
access to its goods, perhaps a new nanocoating for the anode of the battery. As the large firm's business takes off, its supply contracts are fulfilled
first, effectively cutting off supplies to its competitors. Note that simple contractual relationships can be used to obtain absolute cost advantage as
well.
Learning curve advantages relate to know-how gained by repetitively doing tasks. As firms ramp up production, they discover or learn “tricks of the
trade.” They also learn and discover how to avoid waste, rework, and scrap. The relative speed at which firm's progress down the learning curve
measures their advance in productivity until some point where learning peters out. Similarly, a firm may have a learning curve in sales as it gains
familiarity with a market and how to sell into it.
Relative cost advantages are Cost of Goods Sold reductions that others can attain by investing. Usually we focus on economies. Economies refer to
ways to reduce the cost per unit. Economies are obtained by making many items in a way that decreases the Cost of Goods sold per unit. In
distinction to learning curves, which involve gaining know-how, economies are based on equipment or processes. Economies of scale result from
making many of the same item. Usually they are obtained by developing or buying specialized production equipment, such as robots that move
goods between work stations and other robots that load CAD/CAM machine tools or automated test equipment. In other words, economies of scale
are usually obtained by replacing manual labor with highly specialized automated equipment. At some point, however, there are diminishing returns
in the strategy, creating a limit for the efficiencies that can be gained by scaling production to ever more units. For example, in the 2009, the global
recession suggested that scaling automobile factories for average runs of 200,000 cars may be overkill, as it reduces the ability to profitably
respond to changes in demand and eliminates flexibility to shift from large vehicles to small ones. An example from homes is a knife. Knives are
great for cutting up a pizza; however if you are going to have a large party and want to cut up a heck of a lot of pizzas, you might want a pizza
cutter.
Economies of scope are obtained by making many different, but related, things with the same automated equipment or processes. Here, for
example, one might spray nanopowder coating one day and a different coating the next day. Flexible manufacturing equipment is the key to
economies of scope. In office work, the computer is a good example of a flexible machine that increases the productivity of a range of tasks. As
with economies of scale, at some point a limit is reached, and then increasing the number of units produced does not result in reduced costs. To
continue our pizza example, if you are making a lot of pizzas, you might want to use a food processor to cut up the veggies. Another day, you
might use this same processor with a different blade to puree veggies for soup.
Network economies exist where once some threshold is crossed, each additional unit produced or added does not require any new infrastructure, so
the cost of carrying or making each unit drops as more are added. The classic example is cell phones. Once you build the cell towers and the
network, adding another phone does not increase costs by requiring building more capacity. So the cost of servicing a phone drops as more are
added until the network is saturated. Returning to food, consider baking pizzas. You have to pay a certain amount for electricity or gas to heat the
oven. Given that, the cost per pizza for is lower with two pizzas than with one.
The final factor we want to mention is corporate strategy. Firms try to adopt strategies that enhance market presence and lead to greater market
share. An example is hypercompetitiveness. Hypercompetitiveness is a business strategy that basically says go for the jugular. Because it is so
aggressive, it can backfire. Usually it needs deep pockets to sustain. Examples include price wars, harassing litigation (e.g. trying to set aside
patents or suing for infringement regardless of the merits), political pressure (e.g. Buy America clauses, earmarks to avoid the Competition in
Contracting Act in the US), negative advertising, and so forth.
Another example is technological leadership. This strategy involves investing in R&D and intellectual property in order to gain turf on which others
cannot compete. Technological leadership allows the vendor to leap onto first mover advantages when it is advantageous to introduce new
products. It is particularly attractive in markets with rapid change-over of products, such as computer chips.
In general, the strategies which build market presence are tied to the phase of the market. Market phases can be described in terms of the
emergence, evolution, standardization, and collapse of dominate designs. Emerging markets do not have dominant designs. Many designs are
competing to become dominate. Once a consensus develops and a dominant design begins to emerge, markets transition into a growth phase.
During this phase the dominant design evolves and becomes standardized. Many new buyers enter the market. As it does, markets shift towards
maturity. Along the way, the rate of entry of new buyers slows and shakeout occurs. As the dominant design becomes standardized (literally with
the emergence of standards and certifications), the market enters a maturity phase. Over time buying slows to replacement buying. Finally, as end-
user needs evolve, the dominant design begins to lose its saliency, and the market enters a period of decline, disruption, and sometimes renewal.
The following graphic indicates how this progression relates to strategies.
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Graphic 6.5: Market Presence Strategies
That said, just what strategy (or strategies) make the most sense for building presence is an empirical question which depends on what is
happening in a market and the market forces and barriers at play at any given time.
Competitive Landscape
The competitive landscape combines the technical analysis of competitive advantage (based on the fit of substitutes with end-user needs) and
competitor analysis (which looks at the market strength of the entities offering the substitutes). The following graphic illustrates these relationships.
Graphic 6.6: House of Quality
We begin with the analysis of needs and how well the technology we are assessing fits those needs when compared to its substitutes. Note that
substitutes may use the same technological approach or may achieve the same outcomes in different ways. Fit is assessed in terms of the yields on
metrics over time. In other words, one technology may have a competitive advantage at time T while a different one can have a competitive
advantage at time T+1.
The landscape is affected by how easily competitors can adapt their substitutes to attain competitive advantage. This is reflected in the trade-off
cap at the top of the graphic, which is a way of indicating the flexibility of the technology being assessed. For each intersection of metrics, you can
place a N/A if the enhancement of the first metric does not affect performance of the second one. Plus and minus or some simple numeric scale can
be used to indicate positive or negative impacts. (For the sake of simplicity, similar caps for each competitor are not portrayed.) By changing yields
via trade-offs, the overall competitiveness of a technology can be improved, especially if some needs are more important than others and yields on
higher weighted metrics can be improved by trading off with reduced yields on lower weighted metrics. Note that we have to consider whether the
ability to shift yields is blocked by patents.
Next we look at the market presence of the competitors offering goods. An unknown African company may make the worlds' best touring
motorcycle, but there is still a brand name loyalty for Harley Davidson that will lead Americans to buy them for at least the near term. In other
words, the technologically best fitting solution may have competitive advantage, but that may not matter in the market. The ability to exploit
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competitive advantage requires market presence. Firms that lack market presence must partner with others (out-license, form strategic alliances or
joint ventures, etc.) or use internal or venture capital to engage in activities and buy capabilities that build market presence.
Review
In this chapter we have focused on the two core aspects of a competitive landscape: competitive advantage and market presence. Competitive
advantage exists where a technology maps to end-user needs as they change over time. That technology which best fits end-user needs, as defined
in terms of price, performance, and ease-of-use, has the competitive advantage over its substitutes.
In order to know where competitive advantage lies and if it is sustainable, it is necessary to identify the substitutes for the technology being
commercialized. By looking at referred scholarly literature, patents, the trade press, and what is being sold today, we can get an idea as to what
substitutes are, and likely will be, in the market over a period of time. What we are particularly concerned about are technologies which might grab
the competitive advantage and thus swamp the revenue potential of the technology being commercialized.
The ability to exploit competitive advantage and implement swamping usually requires market presence. There are a lot of worth-while technologies
which never become embodied in products, services, or processes actually sold in the market. Market presence measures the ability of a firm to
generate profits through sales, which usually is related its ability to grab and sustain market share. That ability, in turn, is related to the ability to
control the Costs of Goods Sold and manipulate it to maximize profits on the one hand and leverage the price elasticity of demand for its goods on
the other hand.
Review Questions
1. What makes a technology a potential substitute?
2. Define learning curve.
3. What type of competitive advantage exists where end-user needs are not met?
4. What is the difference between a substitute and a competitor?
5. What makes a competitor a threat?
Markets
Markets exist where sellers compete to sell substitutable goods to buyers and buyers seek out substitutable goods from sellers. The Market in the
aggregate is made up of a lot of different markets, i.e. the places where buyers and sellers come together to do transactions. In this age of the
Internet, where physical markets are increasingly giving way to "virtual markets," numerous web sites are in the Market. Some have the lists of
buyers. Others have lists of sellers. The buyers and sellers themselves are scattered in various geographic locations. Indeed, the tangible physical
space of markets is mostly the wires of the Internet and servers and personal computers attached to them. But there are usually also more
traditional markets, such as trade shows, where buyers and sellers physically come together face-to-face.
In commercialization, there are two markets of interest. The first is markets where end-users and buyers are found. The second is markets where
licensees, investors, and other commercialization partners (whom we shall call targets) are found. These two markets are usually not the same,
although sometimes they are. Bio (http://convention.bio.org/) is an example. The product focus zones provide opportunities to find
commercialization partners. But buyers for medical devices, lab equipment, therapeutics also may be found browsing offerings.
Obviously, from what has been discussed in previous lessons, the most feasible markets for a technology are those where the technology has a
competitive opening (i.e., meets buyers' needs -- which reflect end-user needs) and a competitive advantage (i.e. compares favorably with all
substitutes). Further, since the goals in commercialization always include making money, a market cannot be viable unless you can actually obtain
enough sales to make commercialization profitable. This realization highlights two requirements: first, there must be enough buyers in the market
to make it worthwhile to try to sell, and second, the conditions have to be favorable for entry.
By the end of the lesson you should be able to:
· Identify markets where end-users and buyers are found.
· Estimate the market size for a technology.
· Analyze markets to identify market size, market drivers, and market barriers and use this data to determine if a
window of opportunity for market entry exists.
· Make an educated guess about the market share a technology can grab.
Market Size
Market size is the result of a mathematical calculation. When we say market size, we will always mean the total addressable market, unless we
indicate otherwise. The total addressable market is the maximum sales that can be obtained for all substitutable goods in a defined geographic
region over a defined period of time. Usually the geographic area is a country (i.e., the US), region (i.e., Europe), or the entire world. Usually
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the period of time is one year.
To calculate the total addressable market, you multiply the number of buyers times the number of units they will buy in that time span and that is
the market size. Just how big a market needs to be in order to be attractive depends on who is selling. When Foresight works for a company like
General Dynamics or Kimberley Clark, the markets of interest often are an order of magnitude larger than the threshold size for markets of interest
to small companies, government labs, or universities. Typically, markets where sales of $500,000 or more are unlikely are not worth considering.
One quick indicator: a quickie rule of thumb for a royalty rate is to start with 5% of net sales (sales minus discounts and returns). $500,000 in
sales generates $25,000 in royalties. When you consider patenting costs, the costs of doing a deal, and so forth, $25,000 in income does not
generate a lot of revenue to divide up after expenses are paid.
Markets get big enough to be of interest in two ways. If the product being sold is a commodity with a low price, then market size primarily depends
on the volumes likely to be sold. Either you need a lot of buyers or each buyer has to buy a lot of units. If the good being sold, however, is a high
priced one, the revenues per unit are higher and fewer units need be sold to make the market size big enough to be of interest.
There are two ways to calculate the size of a market: top down and bottom up. Bottom up is often easier to do and usually more accurate. Be
aware that all market sizes are estimates. All that varies is the amount of confidence we have in the estimate.
Top Down
In this approach, we know the size of a general market (carbon dioxide sensors) but not the size of the market for the chosen application (carbon
dioxide sensors for indoor air quality). We need to drill down to the application’s market size, assuming we can find an estimate for the general
market. Usually we can find a general market estimate in a Frost and Sullivan, Fredonia, Gartner, Hoover's First Research or some other market
research report.
To find the general market size, enter the name of what you are looking for and the string, "market size" (usually in quotes), into a search engine.
You will find market research reports. Open the hits and read them. Often a market research report will include some general market size data (and
often major market drivers) in the summary posted for potential buyers. If you see a report that looks good but you cannot find a summary, copy
the name of the report and search on it. If there are press releases or write ups in trade journals or on the authoring firm's site, they may have the
data you are looking for. The other way to get a general market size is to call experts and ask them what they think.
Once you have the general market size, you have to figure out how to slice it down to the market niche of interest. The trick here is to find some
empirical basis for making an assumption. Here it usually helps to have units or a way to cross walk to units. For example, suppose we know that
the CO2 sensor market is x units per year. If we can find the sales for a major player in indoor air CO2 sensors, we can make a guess as to the size
of that market niche. Suppose the player sells y units per year and we know that this player is one of four companies that control 80% of the
market. In the absence of any other data we can assume that they sell 25% of 80%, and with that information we can construct a ratio that would
give us the size of the market for CO2 sensors for indoor air quality. Notice that if we know that company's sales of CO2 sensors for indoor air
quality we can do our ratio in dollars without the need to convert to units sold.
Unless you find some data by searching the web or talking to people, the best way to get a company's data in the US is to search for Security and
Exchange Commission filings for publically traded companies. In other countries other official databases exist. Since the data has to be accurate for
a regulatory filing or the company can be fined, it is more likely to be accurate. Also useful are stockbroker sites and financial advisory sites that
track companies. What you want is a company that is exclusively in that business or that has a major part of its revenues coming from that product
family so it shows up in the filings or advisories from brokers.
With the calculation in hand, the next task is to validate it. Call one or two experts and bounce it by them. Ask them if it seems reasonable. If they
say no, ask them what does sound reasonable. People give much better guesses when they have something to react to. If asked how big the
market is, if they do not know, they have no basis for guessing. But if you say "does z sound right?," they usually can mull a moment and say if it
seems about right, high or low. Then you can ask how much higher or lower, using orders of magnitude (10s, 100s, 1000s) or half of an order of
magnitude to suggest the next number to react off of.
Of course, markets change over time, and so do market sizes. So you will want to find a growth rate and bounce that off your experts as well.
Usually you can use the growth rate of the overall aggregate market as a starting point, but if that seems off in light of the trends in the niche,
raise it or lower it.
Bottom Up
Bottom up calculations are done by asking where the product, service or process will go (i.e. in a commercial building), estimating how many will
be used (an average of one per floor) and multiplying it out. We can find commercial buildings in the country from government data (in the US
probably from Census or Housing and Urban Development). Here we need to make an estimate as to the number of floors. This can often be a
simplifying assumption. (Let's assume only 2 floors, which probably underestimates the market so is conservative). Multiply by price to get a
market size in currency. As before, growth rates should be taken into consideration when calculating across multiple years. Also as before, it is wise
to validate the estimate by bouncing off experts.
Threshold Analysis
If you are stumped, see if you can find a niche or sub-niche where you can make an estimate. For example, if we cannot find commercial buildings,
maybe we can find nursing homes and hospitals. When selecting the subset, it is desirable to choose one where buyers are likely to want the
technology or a substitute. This situation exists, for example, where the technology had lots of UMPF with that customer segment or where there is
a regulatory or certification requirement that CO2 sensors be installed. Calculate the market size for that customer segment using the top down or
bottom up method. (A customer segment is simply a definable subset of customers that will buy for roughly the same reasons. The buyers tend to
use similar criteria because of that.)
If the revenues from that customer segment meet your threshold value for making the market interesting for entry, you can justify trying to enter
the market. You know the market is larger, but the effort is worthwhile even if just this customer segment is the only one ever sold. It meets the
threshold. Everything else is gravy.
Impact of the Type of Innovation
Earlier we discussed dominant designs and the relation of a technological innovation to the dominant design. Recall we saw we could classify
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technologies into four categories depending on whether they used the same or different technological approach and whether or not they provided
the same functionality.
Same Features New Features
Same Technological Approach Incremental Innovation Adaptive Innovation
New Technological Approach Radical Innovation Disruptive Innovation
If we know the market size for current substitutes, we can adjust that market size based on the type of innovation we are assessing. The trick here
is to ask yourself if there is any motivation for a new customer segment to enter the market.
Incremental innovations are just more of the same, and give no reason for anyone who is not already in the market (other than those who likely
will have entered regardless of this innovation) to enter the market. Adaptive innovations provide additional functionalities. That new functionality
may be enough to entice a new customer segment into the market, so sales should be higher. Similarly, radical technologies may give an incentive
to buyers who did not like the old technological approach. Finally, with disruptive ones, all bets are off. There is no way to guess based on current
buying because by definition, everything is changing dramatically, making a prediction based on the past difficult. We can say that disruptive
technologies that succeed tend to increase the size of the market.
Knowing the type of technology also suggests the relative timing of take-off, should it occur. Incremental technologies can take off quickly, as it is
easy to educate buyers as to their advantages. Adaptive ones may take longer, as the utility of functionalities may not be clear and buyers may not
be looking for those functionalities without some awareness building. Radical ones are likely a wee bit slower to take-off than adaptive, as here the
buyers have to be educated as to the benefits of the new technological approach and convinced it is reliable, robust, and perhaps adaptive enough.
Finally, by their very nature, disruptive ones likely take the longest to take-off, because of the need to convince folks that moving away from the
dominant design makes sense.
(Before proceeding, one aside on radical technologies. Because these introduce new ways of doing things, they often open up new functionalities
downstream and thus migrate into adaptive or disruptive technologies. Consider the personal computer, which began as a calculating device and
word processor and now is a way to capture and send photos of the kids to grandma. There is a tip here: Since disruptive technologies are very
hard to commercialize, try to find a niche where the technology can be positioned as radical.)
The following chart illustrates the these concepts. The actual values are merely illustrative.
Graphic 7.1: Revenues over Time
Market Dynamics
Markets change over time. They change for three reasons.
First, the people in them change or their needs change. In the former case, one cohort of end-users and buyers replaces another. In the latter case,
the cohort already there changes its needs. For an example of the former, consider doctors who graduated from medical school in the 1960s and
those who are graduating today. Both sets of doctors may be enthusiastic about patient electronic health (EHRs) records, but for older doctors
trained to use dictation machines and clericals who typed the information into documents attached to files, EHRs are something that assistants will
maintain. Younger doctors who grew up using computers are likely to be far more willing to type the data directly into the record. For an example of
the later, consider the shift in weapons desired by the US military now that it is no longer fighting the Cold War but is fighting terrorism.
Second, markets change because the goods being offered change over time. CDs replaced 8-track tapes and cassette tapes. Today downloads are
replacing CDs for buyers who are not audiophiles and do not care that compression loses some of the sound quality.
Finally, markets change because stakeholders do things that influence what end-users and buyers need or what buyers and sellers can do. When
the federal government announced it was going to regulate CO2 as a greenhouse gas, it changed the market for new coal fired electric power
plants.
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We can look at the ways markets change in a variety of ways. From the standpoint of commercialization, it helps to look at whether the factor
driving change is a statistical tendency or a fact.
Market Forces
If the factor is a statistical tendency, we call that factor a market force. Just like the force that propelled Newton's Apple, market forces are vectors.
They have a direction and a magnitude. They operate over some period of time. Unlike the force of gravity, market forces are tendencies, so they
are statistical trends. These trends affect the buyers, what is sold, and what is permissible behavior. Examples are aging population (a force likely
to increase the market for Alzheimer's Disease drugs), increased funding for stem cell research (which could lead to discoveries for new
therapeutics for treating Alzheimer's), and increasing cuts in medical insurance payments for days in hospitals and nursing homes (which likely will
reduce the number of Alzheimer's patients in nursing homes).
Notice that market forces (which are also sometimes called market drivers) can be both positive and negative. We can determine how forces will
ultimately play out by using vector math to calculate their overall impact. The impact of market forces is to skew buying behavior. If we assume a
Gaussian distribution, forces "pull" the curve towards the present, "push" it farther into the future, or scrunch it away from a Gaussian curve.
When analyzing market forces and calculating their impacts, be aware that forces operate on two levels. On the macro-level are forces that affect
the overall demand for a class of goods. Aging population likely builds market demand for Alzheimer's Drugs in general. If exercise and social
interaction reduces the incidence of Alzheimer's, increases in this behavior among older people would likely reduce demand for Alzheimer's drugs.
Micro-level forces, alternatively, affect the choices between one substitute and another. For example, given the increasing loss of short term
memory among patients, a drug administered once a year by a doctor or a care-giver via an injection is likely preferred over a pill which must be
taken every day.
Market Barriers
As noted above, market barriers are facts. Market barriers are also called barriers to entry as they can keep you out of the market. Barriers
potentially eliminate an entire segment of buyers for some period of time. We say potentially, because barriers may or may not be implemented or
activated or accepted. Consider how enforcement of environmental regulations varies from Presidential administration to Presidential
administration. That is an example of a barrier being implemented. Now consider Microsoft's response when Netscape entered the browser market.
They used hypercompetitive behavior and gave the browser away for free. That is an example of a barrier being activated.
There are a wide range of barriers. Here we give four examples.
1. Structural
Structural barriers are intrinsic to the macro- or micro-economic context. A macro-level barrier to the rapid expansion of automobile use in America
was the lack of paved roads. Today, the lack of fueling stations inhibits the growth of sales for hydrogen or natural gas cars. On the micro-level is
the fact that US automobile factories are designed to break-even on production runs of one to two hundred thousand cars. Thus, as Abernathy and
Utterback demonstrated in their seminal book, The Productivity Dilemma: Roadblock to Innovation in the Auto Industry, the American
manufacturers were unable to respond to emerging demand for more fuel efficient cars during the 1970s oil crisis because they had just built
factories to produce gas guzzlers and had to sell enough of those to regain the capital needed to retool their factories.
2. Socio-Economic
Socio-economic barriers relate to the ability of end-users and buyers to pay for or use the technology, and thus to adopt it.
The ability to buy is pretty straightforward. The Great Depression and the Great Recession of this decade make clear what that means.
The capability to use a technology is called absorptive capacity in the commercialization literature. It refers to having the education, skills, and
competencies needed to use that technology. For example, it takes far less absorptive capacity to use an EpiPen® to administer an injection than a
traditional syringe. The EpiPen® comes preloaded with the drug to be injected. You take off the cap, position it by the outer thigh, and jab it in and
hold it in for 10 seconds. A normal syringe has to be filled, checked for air, and so forth. Much more difficult. So for a child who is at risk for
anaphylaxis shock, the EpiPen® is a better thing with which to send them to school.
3. Regulations, Standards, and Certifications
Regulations may forbid use of a technology or limit buyer's options. Of course, regulations that are not enforced may have no impact at all. The
existence of regulations, such as building codes, may make it impossible for a new and innovative technology to enter the market until it can
comply with the regulations. Standards operate similarly. In distinction to regulations, which are promulgated by government agencies and have
force of law, standards are promulgated by trade or industry associations or related groups and are voluntary. However, if everyone honors them,
they become authoritative. Certifications may be mandated by law or voluntary. For example, before a drug can be sold in America, it must be
approved by the Food and Drug Administration. A voluntary certification is obtaining Underwriters' Laboratory approval for a new electric plug.
4. Competition
Competitor induced barriers include absolute cost advantage, first mover advantage, or hypercompetitive practices that inhibit new entrants from
reaching relevant customers. Competitors may have a high degree of brand loyalty that keeps end-users from buying from others. Competitors
whose goods meet end-user needs better than the technology you are assessing are a big barrier to entry.
Depending on the phase of the market, competition may be more or less of a barrier. By phase we refer to where the market is in its life cycle.
a. Embryonic
In embryonic markets, dominant designs have not emerged. So the companies competing are usually small as there are not a lot of buyers. Product
innovation is rampant, so there is not a lot of head-to-head competition.
b. Growth
Growth markets emerge when a dominant design emerges. This is when the slope of the S-curve increases and take-off occurs. In these markets,
product innovation subsides and process innovation increases as more buyers enter. More companies enter the market, as they can offer goods that
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copy the earlier to enter players. As buyers are entering the market, this is a rising tide on which many boats can float. Competition tends to be
"friendly".
Over time, as buyers enter the market, economies of scale and scope and network economies come into play. Some of the firms in the market
develop these. Larger firms who already have them, enter the market to get a piece of the growth. Those that use them, and progress faster down
the learning curve, gain price advantages. Those that cannot get sufficient scale start to hit problems or become small niche players.
c. Shakeout
As the rate at which buyers enter the market starts to slow, competition becomes more cut-throat. Economies enable using price as a factor to grab
market share from weaker competitors, accelerating the separation into winners who are gaining market share and losers who are losing it. The
result is there is excess capacity in the industry serving the market and the inefficient players start to exit. Sometimes, where weaker players have
good products but inadequate scale or strong market presence with strategic customer segments, they are acquired or merged into larger players.
Consolidation occurs.
d. Mature
As the players in the market consolidate, the vendor pool shrinks into a small number of large players and a pool of specialty firms. A large part of
the buying by this time has transitioned primarily to replacement buying. This does not mean there is not innovation and new goods entering the
market. It does mean that these new goods usually enter in the context of product line and product family management. Competition becomes
more gentlemanly.
e. Declining
Over time, dominant designs lose their utility and buyers exit the market. For example, innovations in computing enabled buyers to switch to a
personal computer dominant design and move away from typewriters. Typically such moves are associated with new vendors entering the market
and a renewed period of product innovation. Sometimes, the old dominant design will have a flurry of innovation associated with it as existing
vendors try to keep their market and market share alive. Competition is often fierce.
These phases are simply tendencies that allow us to adjust the total number of possible buyers to get to the total addressable market. The phases
need not run linear.
Windows of Opportunity
The Window of Opportunity is the time period within which it is feasible to enter the market. In order to enter, the good must have saliency for
end-users and buyers and not be so redundant as to be ... well ... boring or obsolete. Windows exist when the good has competitive advantage, but
that is not enough. There cannot be market barriers that prevent entry.
Market barriers are always a bad thing for introducing a new technology. Fortunately, there are usually ways to avoid being devastated by barriers.
Recall market forces may be positive or negative. It helps to think of market forces as forming a force field. The trick is to sail through that field the
way NASA launches spacecraft to the outer planets or an America's Cup racer plays with wind to hit the finish line first. You design entry strategies
to leverage the forces to increase the attractiveness of your technology for end-users and buyers. Part of this approach to entry strategy involves
using market forces to overcome or circumvent market barriers.
Graphic 7.2: Market Forces
The graphic above is a force field map for the introduction of electronic health records. Note that the rise of the Internet and the universality of
computing means that skills now exist that make it easy for most healthcare professionals to work with EHRs. Also note that the reduction in price
for computing power on the one hand, and the rise of cloud computing on the other means that the inputs necessary to realize EHRs are now found
in (or easily can be provided to) most hospitals and medical practices. Finally, the strong support of President Obama means that funding has been
included in his Stimulus Package to help offset the costs of adoption -- a big market barrier.
Market Share
The total addressable market size for all substitutes comes from looking at the number of potential buyers for a good in light of the current phase of
the market. The share of the market that can be grabbed by a technology relates to the estimated possible magnitude of a technology's S-curve in
comparison to the total addressable size of the market on the one hand and to where on that S-curve sales currently are. In other words, we
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compare the technology's S-curve with the market's S-curve. Based on earlier lessons, we know the magnitude at any point along the technology's
curve is a function of its competitive advantage and UMPF.
Just where along it's S-curve a technology is at any given point in time is a matter of the number of buyers in the market. Five classes of buyers
are commonly found in the innovation literature, based on when people buy and the primary criterion they use when making buying decision. By
understanding which of these groups are likely to be buying within the time frame of interest, a rough approximation of the total possible market
share can be developed. The percentages used below are very rough approximations based on what appears in the commercialization literature.
Remember these percentages are across all technologies in all markets at all times so it is an empirical question as to whether they apply in any
market you are studying.
a. Innovators
When a new technology enters the market, it is most likely to be picked up by an geeks or techno-weenies or cutting edge folks -- whatever label
you prefer. Innovators are the people who like playing with the latest and greatest. These were the folks who bought the first portable computers,
the first MP3 players, and who fought over whether to use VHS or Beta. Their primary buying criterion is performance. They tend to constitute
around 3% of the market.
b. Early Adopters
Whereas innovators look strictly at performance, early adopters look at how valuable that performance is given its cost (that is, on best value).
These are the folks that tend to buy the second iteration of a technology, one that has been further developed and is therefore a little less risky to
invest in. They tend to be more cosmopolitan and better educated than later buyers. They often are opinion leaders or thought leaders for other in
the field. They tend to constitute around 13% of the market.
Early adopters are critical for market success. If they buy, the technology moves beyond slow growth and the slope of the cumulative revenue
curve starts to steepen as sales accelerate. Word-of-mouth kicks in as the technology, product, service, or process hits take-off. Pull through starts
in the best of situations. New vendors begin to enter the market to meet the demand unless patent infringement concerns or other absolute cost
advantages keep them out.
c. Early Majority
Members of the early majority are the first set of mainstream buyers in the market. Like early adopters, they buy on best value, but price is
increasingly important as options appear with more vendors. As they enter, the slope of the cumulative revenue curve continues upward,
encouraging other vendors to enter the market. This group constitutes around 34% of the market.
d. Late Majority
The late majority are more risk adverse due to financial or other considerations. Over time, price becomes an increasingly important buying
criterion, so long as some threshold performance is there. As the late majority enters the market, the rate of growth continues, but by this time
vendors have already attained economies of scale, and there has already been a shakeout in the market, so the vendor pool has consolidated. The
pricing of vendor "oligopoly" makes it difficult for new competitors to enter the market. This group is also around 34%.
e. Laggards
Laggards are just that, late in the market. At this time, the cumulative revenue curve's slope is moderating and leveling off. Price, and sometimes
availability, is the key criteria. Depending on the life expectancy of the good, by the time these folks enter, replacement buying may be occurring.
These folks bring the last 16% of the market in.
Market share estimates are guesses. How much of the possible market share actually can be grabbed depends on how much UMPF a technology is
likely to have and who is selling it. Brand name loyalty and other market presence factors discussed under competition come into play here. If the
developer lacks market presence, it may be obtained by partnering with a firm that does have it. For example, if Honeywell licenses and uses a
technology for home thermostats, that technology will likely generate more revenue than if a small unknown player licenses and uses it.
Review
In this lesson we focused on markets. We began by looking at how to find markets for a technology. The key here was the correspondence between
end-user needs and the performance, ease-of-use, and price of the technology. If we can find the application, we only need find where people buy
goods like the one's we are hawking in order to find the market.
We then described how to estimate market size using a top down or bottom up approach. We saw that we can use a threshold analysis to make a
quick determination if a market is worth pursuing. We also saw that if we know how big the market is for one or more substitutable goods, we can
get an indication as to whether the market for a technology we are assessing will be larger based on whether it is an adaptive, radical, or disruptive
technology.
We then discussed market dynamics by focusing on market forces (statistical tendencies) and market barriers (facts). The difference between
forces and barriers is highlighted in the next graphic.
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Graphic 7.3: Forces and Barriers
Review Questions
1. What data do you need to estimate market size using the Top Down approach?
2. What phases of the market likely makes the best one for entry if you have a choice?
3. How do we calculate market share?
4. How do market barriers affect our calculations?
Answers
1. For the Top Down approach, you need the size of the general market relevant to your technology and some way to determine the percent of
that market your technology represents.
2. The answer actually depends on the kind of innovation you have. For incremental innovations, mature markets are attractive, but growth and
shakeout also work. For disruptive technologies, emerging markets are best, but if the technology can be positioned as radical, then a growth
market may also work. Adaptive innovations work in growth, shakeout, mature, and declining markets. In general, growth markets are
most desirable because in a rising tide, many boats can rise.
3. First we determine the S-curve for a technology. To do that we look at its competitive advantage and UMPF. That suggests how much of the
total addressable market it can grab. Next we see where the technology is along its S-curve by looking at what categories of buyers are
currently in the market. By looking at the basis for competition in the market (the key criteria for buying) we can make a rough estimate of
who is buying and thus what percent of the total buyers are in the market at that time. Comparing the magnitude of sales at that point with
the total addressable market size for that time gives us the market share. Because we are making estimates without a lot of data, it is wise
to bounce our estimates off a few experts.
4. A market barrier eliminates a customer segment from the potential market share. Unless we can figure out how to overcome or avoid the
barrier by leveraging market forces, we have to subtract those buyers, which reduces the potential market share.
Goals
Deal making begins with goals. You make a list with three columns: MUST HAVE, NO WAY, and NICE TO HAVE. If a deal has all your MUST HAVES
and does not have any of your NO WAYS, it is probably a good deal. The NICE TO HAVES you use to for trading. They want something, trade off a
nice to have. The more of them you have, usually the more willing you are to negotiate the price downward so long as it remains above the MUST
HAVE threshold.
In this lesson we will lean how to:

· Set Goals
· Use them to figure out what are your MUST HAVES, NO WAYS, and NICE TO HAVES
Organizational Goals
Goals are simply what you want out of an action or set of actions. They define why you are doing something. Typically organizational goals are
defined in terms of the Vision Statement and Mission.
Mission and Vision Statements

Mission statements define why an entity exists. Missions are designed for two audiences: the public and the staff of the organization. In general,
they define the activities the organization will do and the approach it will take to doing them. The mission defines the high level goals for the
organization. If the mission is to do X, then the goal is to do it. Thus, they provide a criteria (or criterion) for choosing between directions and
strategies for the organization. For example,
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Foresight's mission is:
"Be the market leader in intellectual asset supply chain management by generating value for our customers, net benefits for people and our planet,
wealth for our shareholders and partners, and good jobs for our employees and contractors."
Vision statements are where an entity is heading in order to meet that mission. They are designed for internal use. They reveal how the mission
will be realized in some time period. That, by the way, highlights a key difference between missions and vision statements. Missions are enduring
until met. Vision statements change to adapt to changing conditions and progress towards meeting the mission.
Goals are operationalized and missions focused through vision statements. Using a balanced scorecard approach, you can look at the vision and
ask, what objectives have to be met in order to realize that vision, and how can we measure progress towards those goals? Here is a balanced
scorecard for a research company with the vision of being a product company that can enter the market. It has a number of strategic alternatives.
It could form a unit inside the company to make the products, it could spin-out a subsidiary, it could license, or it could do a joint venture. To
choose between these, it needs a framework for decision making which reflects its vision of where it is going.
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Graphic 8.1: Balanced Scorecard
Must Haves, No Ways, and Nice to Have

The metrics in a balanced scorecard point to what payoffs are desired from a deal. In the context of commercialization, clearly one objective will be
to make money. Other objectives depend on the mission of an organization and the personal goals of the people involved. The scorecard of a
company will look very different from that of a university. A company may have goals related to increasing market share, building goodwill, or
improving shareholder wealth. A university may have goals like enhancing the research reputation, stimulating local or state economic
development, and faculty retention. If the people in a company are investors looking to exit, the balanced scorecard will look dramatically different
than if they are a group of founders looking to get the company off the ground.
Below is a balanced scorecard for a commercialization initiative. Let us assume this is the same company discussed in the prior balanced scorecard
-- the one that wants to diversify to add products to research in their business mix. They are looking at a commercialization initiative and have
decided to out-license to raise money to support their diversification. So they think about what they want and come up with the following:
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Graphic 8.2: Deal Scorecard
Because they need money, money is going to be a criteria of any deal. Suppose they do some market research and come up with a value of $1
million as a fair market price for a license to their technology. (We will discuss how to do a valuation in a latter lesson.) Our first instinct might be to
view that figure, $1 million, as a MUST HAVE, None-the-less, the target of $1 million probably is not a MUST HAVE. For example, what if the other
side offered $999,999.99. For the penny, your instincts are probably to take the deal. But the money is also is not a NICE TO HAVE. Some money is
essential to do the deal. On the other hand, there is some value, say $700,000.00, below which it does not make economic sense to do the deal. So
below $700,000 is now a NO WAY. Thus, the target value can be maintained so long as it is understood anything over $700,000 is gravy.
Since the licensee is planning to diversify, they want to get their name out in the market. So press coverage to build market presence is desired.
Suppose they feel an article in the Wall Street Journal is the end-all and be-all. Ideally, the licensor (let us assume it is a big company) will use its
PR firm to get an article placed. Again, this is probably not a MUST HAVE but a NICE TO HAVE. Press in Forbes, Business Week, and on CNBC is not
press in the Wall Street Journal, but it's pretty good. Suppose there was no willingness on the part of the licensor to use its PR firm to place articles
on this deal. Would that be a deal-breaker? Probably not. So this is a NICE TO HAVE.
The last criteria, flexibility may be different. Since the vision is to diversify into product, giving an exclusive license is a NO WAY as it blocks the firm
from using its own IP for its own products later on. It might not even want to do a sole license as it does not want to give any one player that
much of an absolute cost advantage.
The point is this. The balanced scorecard helps the owner of the technology move from the vision statement to what it should be seeking out of a
commercialization initiative. The scorecard itself is a heuristic tool. It helps structure thinking about what the goals and objectives for that initiative
should be, and thus, what would make a good deal as opposed to a not so good deal. The process develops the metrics by which payoffs for deals
can be calculated. But in the final analysis, this is still a heuristic process and the results have to make sense to the decision makers who will
approve the initiative and any deals.
Review
In this lesson we have focused on using the Balanced Scorecard method for clarifying the goals and objectives of a commercialization initiative as
well as the deal-making associated with it. The process begins with examining the mission statement for an organization. Mission statements
explain why the organization exists. The strategic thrust or line of march to implement the mission for some period of time is provided by the vision
statement. Where missions are designed for both external and internal consumption, vision statements are designed for internal use only as they
help focus and define the range of strategic options open to an entity and thus provide important information about how that entity will compete.
The vision statement is operationalized into objectives and associated metrics for measuring progress or evaluating deals by developing a balanced
scorecard. These objectives and metrics can then be classified as MUST HAVE, NICE TO HAVE, or NO WAY to provide criteria for deal-making.
Review Questions
1. What makes an objective a MUST HAVE? Are the revenues from a deal a MUST HAVE, and if not, what are they?
2. What is a mission or mission statement?
3. What is the relationship between the mission and vision statements of an organization?
Answers
1. If it is critical for realizing the vision statement. NO WAYs are critical to avoid. Depending on how the revenue target is defined, it may be a
MUST HAVE, or there may be a threshold below which an offer is a NO WAY. We know deals tend to involve negotiation, and that negotiation
presumes starting positions of sell high and buy low. If the target is the initial offer, it will likely be above the threshold so it cannot be a MUST
HAVE. If it is set at the threshold, it is a MUST HAVE.
2. It is a declaration of why the organization exists.
3. Missions declare why an organization exists; vision statements define the strategic thrust that will enable that organization to meets its mission
over some time period.
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Capabilities
Capabilities are capacities that can be used for a specific purpose, or developed for such use. In other words, capabilities are assets that can be
deployed to support commercialization. In the context of commercialization, the most important capabilities are human resources, as the adage
"Technology Transfer is a Contact Sport" emphasizes. But other tangible and intangible assets are also relevant. Together, these assets are called
capital. In broad terms, capital is simply a set of assets that can be used by an organization to produce further assets.
In this lesson we will learn:
· What kinds of capabilities must human assets have to support commercialization
· How to obtain the human assets you need for commercialization
· What other tangible or intangible assets are helpful
Human Assets
Two sets of assets are critical for commercialization. First, you need some smart people who can develop and support the innovation being
commercialized. Second, you need people who can develop the market entry strategy and "sell" the technology, where by sell we include licensing
it, obtaining venture, and doing other kinds of deals in addition to being able to do direct sales.
The ability of people to work with a technology is called absorptive capacity. As the name implies, absorptive capacity is the know-how, knowledge,
and skills that make it possible to work with the technology and adapt it to meet human needs. We can further divide this capacity into two sets.
The first set, which we will call domain capacity, refers to the body of know-how, knowledge, and skills necessary to create the innovation and
manipulate it to do the intended work.
Domain capacity refers to the knowledge, know-how, and skills necessary to apply the innovation in some area of human endeavor. It can be
described in terms of bodies of scientific/engineering knowledge and technical fields or practice. For example, if the innovation involves a better way
of coating carbon on supercapacitor anodes and cathodes, we might talk about chemical engineering and vacuum deposition as fields, scientific
knowledge, and technological and industrial practice.
Context capacity is the knowledge, know-how, and skills necessary to "sell" the technology. Here we are concerned again with scientific/engineering
and technical capabilities, but our focus is different. We want knowledge about the domain capacity of the end-users in the context in which the
innovation will be used, but we also are interested in market forces and barriers, buying criteria and patterns, and other such information and
insight that can help us market and sell the technology. Higher context capability means one has such data and insight into what it means for
marketing and sales. Context capacity is more, however. It also includes the abilities to conduct marketing and sales, and to close deals. In most
young high tech companies and most research organizations, domain capacity is much higher than context capacity, which is one reason licensing is
a common means of commercialization. Licensing means the licensor leverages the context capacity of the licensee to generate revenues.
Graphic 9.1: Absorptive Capacity
Both domain and context capacity can be difficult to acquire and share. Following Eric von Hippel's book Democratizing Innovation, we use
stickiness to measure how difficult it is to pass knowledge, know-how, and skills from one person to another. The more sticky the domain
knowledge, the harder it is to toss a technology over the transom. That means if you license it, support has to be a part of the licensing deal or the
value of the technology is greatly diminished. On the other had, if the domain capacity is sticky, then the value the holder of domain capacity brings
to a a joint venture or strategic alliance is greatly enhanced. Similarly, if you are doing an OEM (original equipment manufacturing) agreement or
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other strategic alliance under which the other party will be selling your goods, you want high context capacity and some stickiness, as that means
your partner will have better odds of closing deals.
Note that for venture investments, a certain amount of stickiness is critical. If the domain and context knowledge is too easily transferred, it is too
easy to copy what is being done. Further, sticky knowledge gives a competitive edge to one management team over another, and a big factor in
venture investments is who is on the team and ensuring they have enough skin in the game (money and time committed) to ensure they do just
not walk away should things go bad for a while.
Getting the Human Assets You Need
It is critical to have a full team in place for commercialization. This team has several roles that need to be filled. The roles include:
· A decision maker who approves the commercialization strategy, sets the guidelines for it, and says yea or nay to the potential targets to be
markets, the terms to be offered, and the deals to be signed.
· A marketing person who develops the non-confidential and confidential marketing packages, finds the targets, and opens the door for
negotiations.
· A technical expert who helps put together the marketing packets and explains the technology to the other party.
· A deal-maker who draws up the term sheets and handles the negotiations.
· An accountant or other financial person who reviews the term sheets for sanity and checks out the deals to make sure they pencil.
· A contracts lawyer who briefs the team on risks likely to be encountered in the process and how to mitigate them, prepares the Non-Disclosure
Agreement, Materials Transfer Agreement, and Draft Licensing or other Agreement to be signed as part of marketing, negotiations, and deal-
making, and reviews any changes to them to provide an analysis of legal risks. This lawyer may also handle breach of contract lawsuits.
· A patent attorney if patenting is involved.
· An intellectual property (IP) lawyer who reviews the company policies and systems to ensure IP is adequately protected and handles copyright,
trademark, and mask. A patent agent may also handle the patent lawyers tasks. Intellectual property lawyers also advise on how to avoid
infringement and how to prepare to handle infringement by others. Where necessary, they handle IP-related lawsuits. This person often also
does the contracts lawyer's work.
Depending on the size of the deal, different numbers of people are needed. For small deals, two people may be enough- one person is an IP lawyer,
the other person does everything else. That said, use of outside people is a common occurrence in commercialization and it usually makes sense to
parcel out the tasks to the people who have solid domain and context capacity.
There are different ways to enhance your current team, beyond hiring additional personnel or consultants. These include adding people with
relevant experience to your Board of Directors, or establishing a Scientific or Technical Advisory Board and a Commercialization Advisory Board.
An option to consider is up-skilling employees. Associations like the Product Development and Management Association and the Licensing
Executives Society provide courses leading to certifications. If you do not care about certification, taking courses from, and participating in The
Association of University Technology Managers (AUTM) is also helpful. University business schools and engineering programs are increasingly
offering courses in commercialization or high tech entrepreneurship. Some now have masters level degree programs. Then there is independent
reading. Here we recommend our founder's book, The Art and Science of Technology Transfer (Wiley, 2006), http://www.amazon.com/Art-Science-
Technology-Transfer/dp/0471707279. The AUTM Technology Transfer Practice Manual is another good resource.
(http://www.autm.net/source/Orders/index.cfm?
section=Marketplace&task=1&CATEGORY=TTPM&DESCRIPTION=Technology%20Transfer%20Practice%20Manuals&continue=1&SEARCH_TYPE=find).
Other Assets
Tangible assets are things you can touch. Intangible assets are assets that have no physical aspect; they cannot be touched or held.
The most important tangible assets are liquid assets, that is, money you can spend. When you sell a product, process, or service — all of which
may be outputs of your operations — you will receive payments. These payments are your ‘revenue.' Unfortunately, you cannot use all the revenue
that you receive from a sale. To make that sale, you had to make various investments in your operations. Net cash flow plus interest plus equity
invested give us liquid assets.
Some part of this pool of money will be needed to commercialize the technology. As another old adage goes, you have to spend some money to
make money. For example, you will need to pay salaries for researchers and marketing people. They will need things like computers and phone and
internet access. Sooner or later there likely will be travel. Outside consultants like lawyers, accountants, market researchers, etc. may be
needed. In short, while deep pockets are not needed, you cannot have holes and a whole lot of nothing in your pocket either.
Liquid assets are converted into other tangible and intangible assets Tangible assets include fixed assets (buildings, etc.), utility payments, and
materials and supplies. In general, these costs are minimal. Labor and IP protection, discussed next, are usually the major expenses in
commercialization. Intangible assets include intellectual property and other intellectual assets, good will, and brand recognition. Recall that
intellectual assets include your organization’s corpus of documented know-how and skills that may be protected through one or more forms of
intellectual property protection, as well as those assets so protected (i.e., your actual intellectual property). In the context of commercialization,
clearly IP is a critical intangible asset, but brand name recognition and good will are important too. A reputation for fair and honorable dealing
makes commercialization a lot easier.
Review
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Capabilities are assets and the critical assets for commercialization are human assets. Human capabilities are your management and staff, together
with any contractors and consultants. A full team needs to be in place to support a commercialization initiative. This team has several roles that
need to be filled. The roles include: decision making, marketing, technical support, deal-making, financial review, and legal review and IP
protection.
After human assets, the most critical kind of asset is liquid assets. Talent costs money and the outlays do not stop there. You need to have an
adequate budget for your commercialization initiative if it is to succeed.
Review Questions
1. In this lesson, we’ve discussed several types of assets. What is the most important one?
2. What is context absorptive capacity?
3. What makes knowledge and know-how sticky?
4. What is the role of lawyers in commercialization?
Launch Tactics
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Graphic 10.1: From Market Orientation to Launch
Throughout our discussion of Market Research, we have highlighted the importance of understanding end-user needs. These needs provide the
benchmark against which competitive advantage can be assessed. We know competitive advantage is critical for downstream commercial success.
Indeed, a variety of research establishes it probably is the most important predictor of commercial success.
No matter how attractive or sustainable the competitive advantage, it means nothing if the end-users never acquire the technology. Launch tactics
are how end-users, and the people who buy for them, become aware of goods being offered and are about to buy them. In discussing launch
tactics, we shall, in effect, go back to the beginning- to the end-user and the relevant dominant design for the technology being commercialized.
This time, however, we shall use the market orientation to explore what kinds of information and advice will be salient for end-users and buyers and
how they obtain that information and advice. Once we know that, we can design strategies and tactics for marketing to end-users and their
buyers.
Just marketing, of course, is not enough. As our Chairman, David Speser, says: Nothing happens without a sale. So we also have to understand
how to sell to the buyers and deliver the goods purchased to them. Only then do we get to cash the checks.
In this lesson you will learn how to:

· Develop a Market-Pull, User-Driven strategy for marketing to the end-users and the people who buy for them.
· Determine the product, price, positioning, and placing for the technology in order to implement that strategy.
· Construct a persuasive sales pitch (value proposition) for the end-users of a technology and the people who buy for them.
· Determine the communication channels by which you reach end-users and the people who buy for them.
Technology Push and Market Pull Strategies
The working assumption in commercialization is that you have a solution looking for a problem. This situation is called technology push, as you are
pushing the technology out to the market. This is not really what you want. What you really want is market pull or pull-through. That is, you want
end-users clamoring for your solution to their enormous, difficult problem. In our lessons on market research, we focus on how to find applications
where market pull is feasible. The problem here is to create it in one of those applications.
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Graphic 10.2: Pull-Through
A Market Entry Strategy describes how to obtain pull-through and thus hit take-off. As the pull-though graphic above suggests, there are two
critical components in a strategy for converting tech push to market pull: attaining sustainable competitive advantage and attaining UMPF. Once
you figure out how that is done, you design the marketing mix, select a business, and start selling.
If there is no competitive advantage, there is nothing for end-users and opinion leaders to get excited about. Obtaining competitive advantage, if it
does not exist already, is a matter of trade-offs during product development. Whether you can obtain it or not is a technical question.
Recall the following chart from our discussion of competitive advantage.
Graphic 10.3: Competitive Advantage
This chart provides the core matrix in the center of the commercialization House of Quality, portrayed in the next graphic.
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Graphic 10.4: House of Quality
Using a spreadsheet, we can build out a model that lets us explore how to enhance the competitiveness of a technology based on meeting end-user
needs. The example below is for a portable battery powered toaster for tail-gate campers. It was built using QI Macros, an Excel add-in for doing
lean Six Sigma. (See http://www.qimacros.com/Macros.html). But much simpler models will work. The point is that (1) if we know what criteria
are important to end-users, and (2) we can relate those criteria to the physical properties of the technology, then we can see if we can make trade-
offs to better align with end-user preferences. If the end-users value rapid and even heating over a long-lived battery, we can sacrifice some
battery life to power a sensor and chip that will maintain average temperature within tighter tolerances.
Trade-offs may not be feasible. Suppose end-users want both more power and more rapid and even heating. If we cannot technically attain the
goal, sometimes we can redefine the product to do so. In this case we can define the product as a toaster with two battery packs. We might also
provide a plug that lets the end-user power the unit from a car battery.
Graphic 10.5: QFD House of Quality for Packable Camping Toaster
Once we know what end-users will want over time, attaining sustainable competitive advantage is a technical problem. We have to establish the
scientific and engineering feasibility of hitting the targets and then we have to do the research, development, and product design necessary to pull
it off. Either we can or we cannot. It is a matter of science, engineering, and know-how. Assuming we believe we can attain a sustainable
competitive advantage, the target yields on our metrics provide one definition of the product to be sold. They can be described in a one or two
sentence statement of the performance, ease-of-use, and price of the good being sold to the end-user. This statement is also called a value
proposition.
What has just happened needs to be highlighted. What trade-off analysis forces us to do is to stop thinking of the technology as a product, service,
or process we want to commercialize. It becomes a bundle of features and functionality that we believe end-users and buyers want. We now view
the good through the eyes of the end-user and from the perspective of what the end-user needs. That means we have attained a market
orientation. We have moved away from thinking in terms of tech push towards thinking in terms of market pull.
The second component we need is UMPF. Where UMPF exists, our value proposition resonates favorably with end-users. (Recall UMPF is what
makes buyers want to buy your good now rather than later.) UMPF is a function of enthusiasm. During market research, we got insight into the
likelihood of UMPF by talking with end-users and experts. Whenever possible, these individuals should have been "opinion leaders" or "thought
leaders", that is, people whom others respect and turn to for advice.
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Graphic 10.6: Getting Umpf
Another sign of UMPF is support from stakeholders, such as government funding agencies, government regulatory agencies, companies upstream or
downstream in a supply chain, and the media.
Graphic 10.7: Stakeholder Analysis
Concurrent engineering is a process in which a first cadre of buyers and cheerleaders are recruited to help with developing specifications for the
features and functionality of the product. When well-respected lead customers and authoritative thought leaders in the field help you improve your
plans by sharing their "wish lists," these individuals are more likely to buy the product downstream when it is available on the market. Because of
their standing in the industry, if they become customers, others are likely to buy the good too.
Concurrent engineering makes for more market driven products, and it generates "buzz." (Below we will discuss how to build the buzz further.) If
you can draw opinion leaders into a concurrent engineering process and make them advocates and champions for your goods, you will have primed
the pull-through pump, through which the money of commercialization success flows. Concurrent engineering literally brings the "voice of the
customer" into the R&D and product design process so they can speak for themselves about their perspective on things. (Concurrent engineering
also brings the "voices of manufacturing and customer support" into the R&D and design process.)
In the following graphic concurrent engineering occurs during the activities within the box.
Graphic 10.8: Concurrent Engineering
Be aware that the voice of the customer has consequences for more than product engineering and design. Defining the value proposition and the
technical specifications for the product provides the starting point for determining the criteria for the rest of the value chain and thus what supplies
and labor should be used and what production and support processes conducted.
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Graphic 10.9: Concurrent Engineering and the Value Proposition
Also be aware that using concurrent engineering changes the value proposition: it adds something. The price, performance, and ease-of-use offered
is one developed with the aid of people like the customers who face the same problems as those customers and have adopted this solution. In
other words, we can add that there really is UMPF in the value proposition.
Now if a lot of this is sounding familiar, that is good. Most of the work required to make the perspective shift was conducted during market
research. What you do here is apply that research to revise your technical plans with the help of people you previously interviewed and seemed
nice enough to help with concurrent engineering.
We now can define the goal of the market entry strategy. The goal is: attain pull-through. We can also define the general approach to be used to
attain the goal: be user-driven.
Marketing Mix
With the goal and approach defined, the next task is to figure out what and how to sell. This part of the entry strategy is called the marketing mix.
The marketing mix is often defined in terms of the Four Ps: Product, Price, Promotion, and Place. We add Sales Channel to the 4Ps. Otherwise the
buyer literally has no way to put their money down and purchase the good.
Graphic 10.10: The Four P's
The Product is what is being sold. As already indicated, what is sold is defined by the value proposition, not by the technology per se. Often the
"Product" is more than just the product. What is being sold may include a warrantee, regular maintenance, training, consumables, peripheral
devices, and other add-ons.
Price is what is charged. Again the way the price is presented can make a big difference. If buyers have limited budgets but agree the Product is
worth the price, then installment sales, leases, and other kinds of financing provide ways to bridge the gap between a fair price and a realistic
payment.
Promotion is how you make people aware of the technology. It includes both the communication channels to be used and the messages to be sent.
Communication channels connect information providers and information recipients. End-users, buyers, producers, opinion leaders, etc. all have
channels they usually monitor, which can be good places to put your message. Typical channels for promoting technology are:
· Trade magazines—a press release or new product announcement costs nothing in some magazines. Many publications also accept articles
on new technologies.
· Professional society and Trade association meetings—presentations, poster sessions, panel participation, etc. can be used to increase
visibility of your technology and company. Networking enables you to get to know stakeholders who can influence their colleagues to buy
your technology.
· Professional societies, trade associations, standards body committees—membership in these organizations is a great way to get yourself
and your product in front of potential buyers, and signals that you are a serious player.
· Trade shows—a booth places you in the path of your potential customers as well as advocates, stakeholders, and reporters.
There are numerous other options, such as direct sales, using sales reps, or using an e-commerce portal. Direct selling cuts the middleman out. It
also allows the producer to intimately know end-user needs and preferences for products. Often, the producer can tailor their product specifically to
an order. Direct selling entails complex logistics tied to promotion, selling, ordering, and shipping products, which makes this option poor for a small
company unless each sale nets high gross margins. Again, the best advice is to see what is common in the customer segment you are targeting and
to determine if you can use existing channels. Building new channels takes time and money.
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Which of these channels you choose and how you choose to promote depends upon the size of the customer segment and the complexity and
relative cost of the product being sold. (By relative cost, we mean the cost when compared to typical prices for equivalent goods.) Two rules of
thumb apply:
1. The number of people you want to reach provides a basis for calculating the promotional costs. For large numbers of people, impersonal
methods such as advertising, Web sites, direct mail or e-mail, etc. are attractive since they are usually more cost efficient.
2. The complexity or cost of the product makes it difficult to adequately describe via impersonal methods. Simple messages may easily be
transferred via mail or advertising. However, when you send complicated messages in this manner you risk confusing potential customers. If
you are buying an airplane, you probably want to talk to a salesperson. After all, most people do that for cars. Thus, the best mix of tactics
for sending a complicated message includes personal selling techniques like face-to-face meetings, telephone calls, and trade shows.
Place gets the technology into peoples' hands. It is how the good is delivered to the buyer. We refer to these channels as distribution channels. An
industrial good, such as a thermostat for a paper mill, might be sold by the manufacturer and drop shipped directly to the paper mill. It may also go
to a value-added reseller who bundles your thermostat with the drying equipment and a computer control system. A consumer good, such as a
thermostat for your house, might go from the producer to a wholesaler or, for a national vendor, a central warehouse, and then to the retailer.
A key factor for distribution channels is the importance of maintaining inventory. If inventory is an important consideration, then the question is
whether:
· to ship goods from the factory or production site to the customer (e.g. software downloads over the internet);
· to ship to one or more central warehouses with easy access to transportation and then reship from there; or
· to ship to retail stores or other distributed locations near customers.

What option is best is an empirical question, which can only be answered after examining transportation and storage charges on the one hand, and
the impact on convenience and cost to the customer on the other.
Sales channels are where orders are made, money changes hands, and orders booked. As with promotion and distribution channels, these can run
directly between the buyer and seller, or have intermediate connectors. In the age of the Internet, use of direct channels has skyrocketed. That
said, the higher the price, the more likely direct sales channels will be needed because people will want to "kick the tires" and play with a prototype
or beta test.
SWOT Analysis
SWOT stands for Strengths, Opportunities, Weaknesses, and Threats. In a SWOT, you identify the internal (strengths) and external (Opportunities)
positives for market entry and the internal (weaknesses) and external (threats) negatives that affect market entry. Focus on the major things. Try
not to have more than two to four items in each category, or the analysis starts to get unwieldy.
Strengths are internal factors that provide a competitive advantage. The capabilities that the organization controls and can use to give it an edge in
the market are strengths. These include intellectual assets, goodwill, capital, and domain capacity.
Weaknesses are found where there are gaps or voids in capabilities and capacities for commercializing a technology in a manner consistent with
your vision and mission. Examples include value chain functions you do not perform, yet are important for market entry; lack of cash, personnel, or
other resources; or a need to license someone else’s IP to practice your innovation.
Opportunities are external conditions that create a window for market entry and enhance the ability to sell products, processes, and services. They
are unmet end-user needs, favorable market drivers, a value chain interested in supporting your market entry, strong support for your technology
by stakeholders, and other factors that might make buyers aware of your goods and predisposed to buy them.
Threats are external conditions that hinder or prevent you from exploiting opportunities. They include barriers to entry, negative market drivers,
and the anticipated adverse actions of your competitors and other stakeholders.
The actual Strengths, Weaknesses, Opportunities, and Threats come from the market research already conducted. What is done next is to make a
grid, like the one in the graphic below.
Graphic 10.11: SWOT Chart
As you look through the intersections, ask yourself "what does the interplay of that cell suggest about any of the 4Ps?" In other words, in
conducting the SWOT you want to end up with a marketing mix that makes sense and has a good shot at succeeding. It does not matter if you can
actually implement the 4Ps. The capabilities you lack are clues for who is likely to make a good target. Finding and qualifying targets is discussed in
the next lesson.
Review
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In this lesson we begin with end-user needs. Market strategies can be based on having a solution looking for a problem or a problem looking for a
solution. We like the latter. They work a lot better and are a heck of a lot easer to pull off. When there is a problem looking for solution, and people
are actually looking for new technology, we call it a market pull strategy. The opposite is called a technology push strategy.
A market orientation is important for developing a user-driven strategy. Using market research data and concurrent engineering, goods are adapted
to better meet customer needs.
By focusing on what customers need and want, we can use the marketing mix or 4Ps, to determine whether the the sales channel is customer/end-
user driven. Various methods can be used to develop the 4Ps. One helpful way is to do a SWOT Analysis. To implement the 4Ps, we use already
proven communication, sales, and distribution channels between end-users and providers of technology. To prime the pump for pull-through, we
recommend that you use concurrent engineering.
Review Questions
1. How do we do a SWOT analysis?
2. Which channels are relevant to Place?
3. When is it best to include direct communication channels for a new product?
4. What can we gain by doing a stakeholder analysis?
Finding and Qualifying Targets

Our Chairman of the Board and cofounder, David Speser, has always told us: Nothing happens without a sale. So for Chairman Dave, all the work to
date only has value if one of two things happens. The first is that we quickly determine that there is not significant enough market potential for the
technology. In that case, it makes no sense to invest in commercializing it, and we either give it away or move on. The second is that we determine
there is money to be made, and that we should sell it. Of course, here we are using the term "sell" broadly to include any form of deal.
Later we will discuss preparing for and doing deals. Here we focus on finding the buyer for the technology, whom we shall call a target. There are a
lot of hunting metaphors used in selling. Often they are appropriate. After all, sales are where you bring home the bacon.
Note that targets are not necessarily the same buyers we studied in the context of end-users. In that situation, the target is the end-user or at
least in the same organization as the end-user, the technology is already productized, and the organization commercializing the technology is
already making and selling this technology or goods like it.
Far more common is where the target is somewhere upstream in the supply chain that takes raw materials and converts them into goods for the
end-user. For such buyers, technology is just another input into the production process.
· How to find a potential target
· How to determine if the target is a plausible one
· How to cold call the target and determine if it is worth chasing
Finding Targets
Finding targets is pretty straightforward. Look for companies already selling product lines and families relevant for your technology or using a
"dominant design" production process for which yours is an improvement or enhancement. They will lay somewhere along the supply chain getting
relevant goods into the hands of end-users. Examine each link in the chain till you find where the intellectual asset being commercialized likely fits.
Graphic 11.1: Intellectual Assets and the Supply Chain
To illustrate how this is done, suppose you are assessing a new way of injecting DNA into eggs in order to make a better production process for flu
vaccines. Even if you are confused about who the end-user is and erroneously think it is the nurse who administers the vaccine rather than
someone raising chickens and eggs, we can readily see supply chain analysis will reveal the right industrial sector in which to find targets. (The
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industrial sector can be defined in terms of the appropriate US Bureau of Census North American Industrial Classification.)
Clearly the nurse will not be interested in this technology. He or she administers shots. They do not manipulate DNA in eggs. We can,
however, move backwards from the nurse who administers the shot to the pharmaceutical company that sells the vaccine to the pharmacy,
hospital, or doctor's office. We can move further back to the people who supply the injectors for the shots -- a dead end -- or to the chemical
supplies for catalysts (who may want to sell the material to the chicken farmer) or to the chicken farmer and then back up from there to the
companies that sell feed, egg inspection equipment, and additives to feed. Either the catalyst manufacturers or someone selling either equipment
or food or drugs for chickens is the likely target.
When we find the relevant place on the supply chain to focus, we look for targets. Once we start finding them, we have to check them to see if they
really are plausible targets. The way we do this is to check whether they already have a product or tool analogous to what this technology offers. If
they do not have such a product, they are potential target. If they do have a similar product, they are not likely a target, as they already have what
this technology offers. After all, we should never forget targets need an economic incentive to acquire or invest in the technology. Business is
business and everyone has to make money, or why do the deal?
Be aware that the target is not necessarily a big company. Depending on the market size for the technology, different sizes of companies can
be appropriate.
It is even better if the target has a decent market share already. The reason we want market presence in the target is that it lowers market risk.
The technology is more likely to sell if a vendor who already has brand name loyalty is selling it. The only exception is when a well known and
respected company is diversifying into a new market. Assuming they have deep pockets and can afford the fight to get in, they can leverage their
goodwill and the competitive advantages of the technology to secure market share.
We determine technology fit with the target the same way we look for competition: we examine the trade press, patent databases, and databases
of referred literature. As before, we are looking for technologies that use the same technical approach as the one we are assessing, or which are
clear substitutes based on the metrics for performance, and if needed, ease-of-use and price too. But since we want to profile the target, we have
to search differently. This time, we begin with the target and focus our search tightly to see if they already own what we are offering. If they do
have that, a fit is unlikely.
Plausible Targets
Once we know they do not have a technology like the one being commercialized, or a substitute that is a competitor to it, our focus shifts to how
this technology fits with their portfolio.
The first question is, does the target have the domain absorptive capacity to uptake the technology and the context absorptive capacity to
understand how to create the right ease-of-use features? The domain capacity should be clear from looking at what they currently make and sell.
The context capacity should be clear from the target's market presence.
The second question is whether there is good fit for the technology being commercialized with the target's technology portfolio. That means the
technology we are assessing will:
· Not be redundant by --
o improving a current product, service, or process;
o filling a gap in the current product, service, or process lines being sold today; or
o providing a product, service, or process for the future; and,
· Not be irrelevant because --

o the target has already developed an equivalently performing technology or
o is heavily invested in developing one and hence not likely to be looking for new approaches.
We gain insight into their portfolio in three ways.
First, we find a search engine that lets us profile targets by patent classes. To do that, we need to be able to search on both assignee and patent
class simultaneously. This is a simple matter of counting hits. The portfolio spread and depth suggests where they are technologically stronger.
Then we examine how our technology fits within their portfolio in the relevant patent class. One way to do this task is to use a search engine that
can cluster patents by the terms they use. These sets make bins in the relevant patent class into which the patents protecting this technology will
fall. By looking at the other patents in the bins, a more precise positioning is possible. In order to make the above slices through the patent
literature easier to interpret, graphing the results using a spreadsheet helps.
Second, if the company is publically traded, we can pull the company's filings to the US Securities and Exchange Commission (cf.
http://www.sec.gov/edgar/searchedgar/webusers.htm). We can also look at databases maintained by regulatory agencies and agencies tracking a
sector (e.g., clinical trial filings reported to the US National Institutes of Health at http://clinicaltrials.gov/).
Finally, we can call experts and opinion leaders and ask them. Here, consider contacting trade publication editors and authors, trade and
professional association committee members, and people running R&D programs or test and evaluation activities. Other experts may be relevant,
such investment bankers, stock brokers, financial analysts, and market researchers.
To see if the target is plausible, we want to determine if there is a fit between the technology we are assessing and their likely needs for new
technology. One way to conceptualize this fit is to determine if the technology being assessed is a substitute for the current core technology of the
target or strategic technology. Core technologies are the ones critical for the competitive advantage of a firm's goods. Strategic technologies are the
next generation core technologies. It may also be an extension -- either an adaptive technology which adds new features or functionality or a
radical one which upgrades a component. An example of the latter is a micro-fuel cell rather than a battery to power a cell phone, an example of
the former which occurred a while back was adding text messaging. The technology could also be a enabling one, which provides either a new way
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of making the good. Take a wooden mallet for example. It could be hand chiseled and sanded or it could be formed on a lathe. A lathe is an
enabling technology for making wooden mallets.
Graphic 11.2: Technology Fit
Next we want to check for capabilities fit. By looking at market presence, you already have insight into the target's capabilities in sales and
customer support. The next question is does it have the capabilities to move the technology from the TRL level at the time you sell it to a TRL level
appropriate for market entry. If we think of ourselves as building a machine for commercialization, we want the gears to align, with the teeth of
one gear matched to the gaps of the other. After all, if some firm has all the capabilities it needs across the board, partnering is less likely.
The graph below is an example of how you can look at capabilities fit. Another way is to do a Porter's Value Chain analysis of the seller of the
technology and the target. Basically, where the seller is weak, the target should be strong. Otherwise the technology probably will not make it to
market as it does take a full set of capabilities to get there.
Graphic 11.3: Capability Fit
Ideally, budget allowing, we also want to check for risk alignment. Any new technology not yet commercialized has risks associated with it. We can
distinguish three kinds of risks that targets may perceive: market risks (i.e., the technology might not sell), technical risk (i.e., the technology
cannot be developed to maturity), and financial risk (i.e., management's willingness or ability to invest in commercialization will be lacking). By
examining press releases and the trade, general business, and financial media coverage concerning the company, some insights into its willingness
to bear these risks can be obtained. Regulatory filings, especially SEC filings, also can provide insights. For simplicity's sake we can rank their
tolerance on a scale of 1,2 and 3 with 1 being "OK," 2 being "some concern," and 3 being "unlikely to take risks." Note that unless you are investing
in serious competitive intelligence, these tolerance rankings are going to be general and not specific to this technology- possibly not even a specific
market.
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Graphic 11.4: Risk Tolerance
Targets Worth Chasing
There is only one way to find out if a target is really worth chasing: asking them. Our experience, and research by others, suggests the best way to
contact targets is to call them, explain what you have, and follow-up with an email. It is not that emailing first hurts the effort to connect, it is just
not likely to be very successful in this age of email overload and spam filters.
Before contacting targets, make sure you have a short piece of non-proprietary marketing material to send if that is requested. A template for
making a fact sheet is found under Supplemental Templates in T2+2®.
Where you don’t have the entrée of a social network or personal contact, you have to cold call. Cold calling scares a lot of people. It should not. If
you really have something useful for the vendor, they will want to know about it. The trick here is to find the right person to talk with. The best two
pieces of advice we can offer are 1) start near the top and work your way down, and 2) always have a name. The reason for starting near the top is
that higher-level executives often have a horizon scanning or gate keeping function as part of their job. They are usually evaluated on whether the
target makes money or meets other critical mission criteria. So they usually are more open to thinking about new technology. Furthermore, they
usually have staff whose function it is to scan the horizon for them.
To find these people, use a corporate directory service like Hoovers, a networking site like ZoomInfo or a financial site like Yahoo!Finance. If you
can access the membership directory of a relevant association, that may be helpful as well. You can always just see who shows up under
management or key people on the target's web site, or enter a term like "Vice President Marketing" or "Vice President Business Development" or
some other appropriate title with the target's name in a web browser. Call the general number and ask for that person or their assistant. You will
end up with an assistant in most cases. But the assistant knows to whom the boss would refer this kind of question, so they can direct you to the
right person.
The person you end up with may have a variety of roles in the target. The following graphic illustrates some of the possible ones. The trick is to try
to reach a potential champion who will fight for adoption and either (i) the project manager for acquisition or investment or (ii) the sponsor who is
the person who makes the decision to spend the money.
Graphic 11.5: Roles in the Target
When you reach them, do your elevator speech. This is no more than one paragraph (the time it takes to go a couple of floors on an elevator).
It consists of the value proposition for the technology and why you think the target should be interested. For example, "This is a new way of
inserting DNA into a fertilized egg and then harvesting antibodies from the egg, which allows for rapid and low cost development of new flu
vaccines to address potential pandemics like SARs or swine flu as well as providing major cost savings in making the annual flu vaccines." If they
say tell me more or seem interested, follow up with something that indicates this technology is real. That something can be performance
specifications, such as data showing that you can harvest an egg's antibodies two days after injection, or information on why anyone should believe
you, such as proof that performance was validated through testing at the poultry laboratory of Dr. Eminent Scientist at the Well Respected
University. Even if the technology is early stage, do the same thing, for example by saying "based on tests in mice we found that antibodies
harvested after two days had a prophylactic affect when they were infected with the sigma flu virus."
The size of your potential target’s organization will also play a role in identifying appropriate individual targets; smaller companies often require
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communications with the president. If you receive interest in your technology, asking the following questions will help you identify how long
negotiations will take and the viability of a relationship with the target company:
· Is the technology at an appropriate level of maturity for them?
· If they are not interested, why not and who might be interested?
· If they are interested also ask:
· What kind of deals do they prefer?
· How long is their decision-making process?
· What criteria will be important and why?
· What specific information or documentation will they want?
If the answers are encouraging, they are a target worth chasing. When you send any additional information requested, be sure to ask when you
should make yourself a tickler to call again for a follow-up.
If the answers are not encouraging, always be sure to find out why they do not have an interest in the technology. No, unless it is "go away and do
not darken my door again," is simply the opening of a new conversation in which you get clear what it would take for them to be interested. If you
can provide that at some point in the future, you can re-contact them. Sometimes it is some data you need to collect or a document they would like
you to provide. Ask if there is a good time frame for a follow-up to see if their needs have changed and there may be things you can do together.
Whenever you are told there is not interest, always ask who might be interested and if you can say that the person you are speaking with gave you
the new name.
Review
Targets are the people or organizations with whom deals are done. They are the immediate buyer for the owner of the technology, that is, the
seller. As such, they may or may not be the same as the buyer associated with the end-user.
To find targets, we search for vendors or other entities at appropriate places in the supply chain with relevant market presence. Once we find them,
we see if they have a good technology fit and appropriate capabilities. If they do, they are probably targets.
Graphic 11.6: Most Feasible Targets
We are even more confident they are a plausible target if we can find data that suggests they are not adverse to bearing the risks inherent in
commercializing a technology like the one being assessed. Once we identify a plausible target, we call them up and ask them if they are interested
in the technology. If they are, we have a hit. They are a target to chase.
Review Questions
1. What are the two things that make cold calling much easier?
2. What makes a target plausible or feasible?
3. What three kinds of risk tolerance give us more confidence that a target is a plausible one?
4. When is cold calling advisable?
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Valuation
The goal in valuation is to set a fair market value for a good. Of course, you need a lot of data to make such calculations. The reality is you never
have all the data you need. So you have to make assumptions, which is a polite way of saying you have to guess. Whether your guess is a highly
educated one based on talking with experts, reading market research reports and the like or one made by using gut instinct matters. The more
data and analysis, the more confidence we usually have in our guesses. But in the final analysis, we look for the dart board and toss the dart
hoping to hit it. The only real questions are, are we facing the board or have our backs to it, and are our eyes open or shut.
We can illustrate this point with a simple example. Suppose you are trying to place a value on a technology that will be licensed for a running
royalty calculated using net revenues (revenues minus discounts and returns). In this example, it does not make sense to spend a lot of time
figuring out the value of the technology. You do want to know if this will be a big hit or a little one in order to hone the negotiation strategy and to
ensure it is worth the effort to license. However, beyond that you can sleep soundly at night knowing that if you can get into the likely order of
magnitude for revenues, that is probably enough. After all, your money will come out of a cut of the revenues the licensee earns by selling the
product. This cut represents that share of the total value of the product that is due to the technology you are licensing at its current level of
development and market presence.
If the revenues are small, say $100,000, it does not make sense to spend a lot of time figuring out the valuation (including the royalty rate). If the
the cost of figuring out the value, plus all the other commercialization expenses (patenting, marketing, negotiations, etc.) are greater than the
revenues earned, you end up losing money. Losing money in business is what my grandfather, a successful entrepreneur, called stupid. Lets say the
royalty rate is 5%. That translates to $5,000. Not a lot of playing room there to justify a lot of market research to support the valuation. The
bottom line: if you are going to lose money licensing a technology, you are better off giving it away free.
Now take a different example. You have built a technology-based company with a strong IP portfolio. Say you are up to around $50 million in
annual sales. Mega-Big Co. approaches you to buy the company. You want to sell. The selling price should be based on the estimated cash flow for
the corporation. So you need a discounted cash flow over some period of years plus a residual representing the fact that corporations are
potentially immortal. The far-out years in the residual probably do not matter much, especially if all the patents expire by then. The reason is the
far-out years are so heavily discounted as to be negligible. But for the closer in years, say the next 10 years, the quality of the valuation makes a
big difference because this time you are selling for a one-time up front payment. Since the company is almost certainly worth one year's revenues
($50 million), the only question is what multiple of that it is worth. It makes a big difference if the multiple is 2 or 3 times, and a much bigger one if
it is 10 times. Kind of a shame to leave $50+ million on the table if you do not have to.
At the heart of valuation, as Aswath Damodaran, a professor at NYU Stern School of Business and a very wise man, said in one of his books, much
of the tedium in valuation comes from the necessity of estimating cash flows. Cash flow has two components: revenues and expenses. The trick is
to peg the budget, and thus the detail, for the valuation to the anticipated benefit to be reaped.
In this lesson we will:
* Learn how to calculate a discounted cash flow (DCF) valuation and why we prefer it over other methods
* Learn about ways to handle uncertainties in the calculations
* Learn how to find data to use in a DCF calculation and how to make guesses based on that data
Discounted Cash Flow and Other Methods
When potential investors evaluate a technology, they may use several methods for estimating value. We provide three examples to illustrate why
we like Discounted Cash Flow methods. In our discussion here we will focus on revenue estimates only. Later we will bring expenses back in.
Investment to Date: One way to calculate a value for a technology is to determine how much money has been spent developing it. The problem
with this method is that investment does not necessarily have any correlation with what people will pay for the technology or how many people will
buy it. So valuing a technology this way is irrational.
Value of a Substitute: The value of substitutes at least pins the valuation to a market price. The problem here is whether we are comparing
apples to apples and oranges to oranges, and what kind of apple or orange we are comparing to what kind of apple or orange. Inevitably there have
to be adjustments made, because if the new product or technology has the exact same value, it probably is the exact same product, literally. Two
similar products would reduce the total value of each because competition would mean some buyers likely purchase one and other buyers purchase
the substitute. Thus, it is still necessary to take into account differences between this technology and the substitute being used as a benchmark,
and adjust the valuation according. Again, the core to valuation is estimating revenues. That said, substitutes can be useful.
First, substitutes are useful for estimating the revenues for incremental innovations. As the innovation is similar to what is currently being sold, to
the extent that it is a replacement for a current product, it may be a drop-in that picks up the revenues of that product. Of course, there are always
many factors to consider. For example, let's say the product is a thermostat sold by Honeywell. A drop-in replacement for the product line that is
also sold by Honeywell might have similar revenues. However, it if is sold by a smaller unknown company, it obviously will not. Unless the smaller
firm offers a product with significant competitive advantages, and that probably includes a lower price, it will not grab market share from the
market leader, which has substantial name brand recognition and retail shelf space. But if the price is lower, then the units sold may ultimately be
similar but the revenues will be less. So while you can use an existing product as a benchmark, you will likely have to make adjustments to get a
realistic valuation, or at least make some assumptions, such as who the licensee or strategic alliance partner might be.
Second, substitutes are useful for estimating rates of penetration (the changing slopes of the S-Curve of cumulative sales), assuming there is
reason to believe the penetration rates will be similar. For example, a while ago we were estimating penetration rates for white light organic light
emitting diodes (OLEDs) into the household lighting market. One of the major competitive advantage of these OLEDs is that they are energy
saving. We looked around and decided the best benchmark to use for the penetration rates was the last major energy saving innovation, screw in
fluorescent bulbs for household lighting. We then spoke with a few experts to find out if it was reasonable to model the rates of penetration for
OLEDs on the prior innovation. They agreed it was.
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Discounted Cash Flow (DCF): DCF first estimates revenues that can be generated in the market. It then may estimate expenses incurred to
garner those revenues. The gross or net revenues are the cash flows.
The fair market value is what buyers should pay for a product. As a buyer you look around and say, well, this cell phone costs x and this cell phone
cost y and so forth, and pretty soon you can say a cell phone with this bundle of features and functionalities should cost me about z, where z is an
average price of all the cell phones with features and functionality like the one you want to buy. (Note that design quality can be a feature, as the
IPhone(R) demonstrates.) It does not matter if it is a house or a dog or a car. It is one of the basic tenets of capitalism that if there is a free
market and lots of transactions, over time the interaction of many buyers and sellers leads to a convergence on a fair market value.
The situation can be a little different with assets. Sometimes there is an open market on which the assets are traded alongside other, similar assets.
Where that is the case, we can look around and figure out the fair market value of the asset based on what people are paying for it. Of course, we
can ask: how do buyers figure out what they are willing to pay for an asset? The answer reflects the definition of an asset. An asset is a good that
can be used to generate revenues. So the most you will pay for an asset is equal to the net revenues it will generate for you (where the net
includes accounting for the costs of buying and deploying the asset in addition to the costs of using it), minus some hurdle rate for profit. (Hurdle
rates are the percentage of profit that must be made after calculating net revenues. They are the minimally acceptable Internal Rate of Return.) In
short, the fair market value of an asset is equal to the net revenues it generates. Add up the cash flows and you have a value for the technology.
However, this value, while equal to all the money the technology will generate, is not its fair market value, as the fair market value at any point in
time has to take into account the likelihood that you actually can obtain those revenues. The net revenues have to be discounted to the present to
account for the risk they might never be collected. They also have to be discounted to account for inflation, in order to account for the
decreased buying power of a dollar in the future as compared to a dollar today.
We can see there are two keys to doing a gross revenue DCF. The one is estimating revenues, the other is calculating the discount and inflation
rates. In the rest of this lesson, we will briefly examine how this done, but we caution, valuation is an art that must be practiced with care. You are
playing with financial numbers and if the debacle of Wall Street and the global recession of opening decade of the 21st Century teaches anything, it
is playing with financial numbers has real world consequences. So you need to think about what you are doing and be very upfront and transparent
about your assumptions and why you think they can be achieved.
There are many excellent texts and resources devoted to how to do valuation without screwing up. Our personal favorite is the work of Aswath
Damodaran. He has put together a truly wonderful website at http://pages.stern.nyu.edu/~adamodar/, devoted entirely to valuation. Click on
books to see his publications. The Manuscript The Dark Side of Valuation (Second Edition) is incredible and free on the website. It is very useful for
valuing companies. Damodaran on Valuation (Second Edition) and Strategic Risk Taking (Wharton Publishing) are books worth buying and taking
the time to plow through as they address valuation in general and how to value both technologies and companies in the former and how to manage
risks in the latter.
Estimating Revenues
In this section we provide a quick and dirty way to estimate revenues. This approach is useful for licensing on net revenues or to do a sanity check
on whether it is worthwhile investing in more methodical market research to value a company. For either a technology or a company, the revenues
need to include all the goods the technology will underlie or all the products and services the company will sell.
To estimate revenues, you need a way to pin the number of units that will be sold and what the market price of those goods will be. Be aware there
is something called demand elasticity, which means different amounts of units are usually sold when the price changes. The best price is
theoretically calculable. For most commercialization purposes, you figure out what is a likely price at which people will buy based on finding
substitutes and coming in 20% or more below, even if you have better performance. To estimate the number of units, it is usually sufficient to find
the penetration rates for an equivalent technology and then adjust from it. Without that information, the best way is to interview about six experts
concerning when the slope of the S-Curve will change and what the slope (that is the rate of sales per year) will be. You want the slope on
introduction, the slope for takeoff, the slope for growth, and the slope for saturation (replacement sales). Saturation is usually far enough out that,
because of discounting, you can just smooth out the decline in slope from maturity to saturation.
It helps to have some number to toss out for the experts to bounce off of. These numbers come from the market size calculation. For example, if
you did a bottom up calculation, you have already estimated the number of buyers and the units each buyer is likely to acquire . We can estimate
buyers based upon the number of organizations (i.e., number of municipal water departments, number of households, etc.), sites (number of wells,
number of buildings over 2,000 sq. feet, etc.), or people (number of handicapped people, number of chemical industry workers, etc.). These
numbers came from associations, state and federal data sets, or from calls to knowledgeable people. Once the baseline number of organizations,
sites, or people was calculated, you make an estimate of units sold per organization, site, or person. This provided a total addressable market. For
example, if we know there are “x” buildings over 2,000 sq. ft., and we estimate an average of five sensors per building, the saturation market size
is x times five. Sales per year come from taking the average penetration rate per category of buyers (that is innovators, early adopters, early
majority, late majority, laggards) and dividing the market share of the total addressable market for that category by some guess as to the number
of years they are buying. The guess is based on the UMPF of the technology, as suggested by interviews and other market research.
All we are doing here is preparing to talk to experts. We want to have a strawman consisting of some numbers and the assumptions behind them.
Our experts can then react to these and offer their insights. We use these to refine the number and assumptions. Do it serially, meaning talk to one
expert, revise, and then talk to the next expert. After a while fewer and fewer revisions are needed. At some point, based on how important the
deal is, you cut it off as good enough. An easier way, discussed above, is to find a similar good to use as a benchmark for sales. If the good being
sold is a replacement, the benchmark is the annual sales of what is being replaced. That benchmark is then adjusted to take into account the
differences between the goods and the markets and the fact that the new technology is very unlikely to replace 100% of the sales of the older
technology in the year of market introduction.
Another way to estimate gross revenues is to start with a market size estimate from a market research report and make some assumptions about
what share of those unit sales and revenues the technology being valued can grab. When trying to determine your market share, look at the market
phase. In embryonic markets, new customers and competitors are entering the market constantly, and there is usually no market leader with
control over a large portion of the market. This provides a better chance of capturing market share than in a shakeout or mature market where
there are few competitors and brand loyalty is stronger. Growth markets are in-between.
In addition, look at the type of innovation you are bringing to the market. Incremental innovations are readily understood and implemented by end-
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users and are purchased more readily. The technology can usually work with existing infrastructure, and there is less training required to use it
effectively. Thus, market takeoff is quicker. As might be expected, the more difficult it is for end-users to understand a technology, the longer the
period before takeoff occurs. Radical innovations often require more explanation, and there is often a lack of appropriate infrastructure. Thus,
market takeoff is later. In-between are adaptive technologies. Also be aware disruptive innovations are by definition impossible to predict.
Sometimes you can find a niche in which the technology can be positioned as radical innovation and do a threshold analysis as the basis for a
valuation.
Be aware that if you are estimating net revenues rather than gross revenues, you will have to calculate rates of return and discounts. The best way
to do that is to examine how robust the technology is for rates of return. If it is pretty robust and the deal is not that large, ignore the rate of
returns. Otherwise, you have to figure it out by conducting a predictability analysis. Here you look at how it is being made and typical defect rates
in that kind of manufacturing. For very big deals or venture investments, it probably pays to go further and do a formal predictability analysis. A
National Institutes of Standards and Technology funded Manufacturing Expansion Partnership Center is a good place to find help for doing this work.
See http://www.mep.nist.gov/.
Estimating Costs
There are only two reasons to get dragged into estimating costs. The first reason is you are claiming a process technology or service will generate
such great saving that no one believes it is possible. In this case, it makes sense to license it or sell it for a cut of the savings generated. That, in
turn, requires a model that be adjusted for each customer. The model calculates the gross profit before and after adoption. We use gross profit
because it is harder for the licensee or buyer to manipulate Costs of Goods Sold (COGS), as they are not as dependent on management decisions
and gamesmanship as other expenses like general and administrative costs or taxes. Another reason is that it is easier to get benchmarks for
COGS.
The other reason to estimate costs is that you are seeking venture capital. In this case, it is critical to know your costs as a multiple of revenues,
because this metric is often used for a back of the envelope valuation and the valuation differs dramatically between business models because of
the ratio of revenues to expenses. The more precisely you can define your ratio, the more accurate the valuation. COGS is sometimes called direct
costs because it is the costs directly associated with producing the goods. For a manufacturing company, COGS typically consists of labor, materials,
equipment, supplies, and factory overhead consumed directly in the production of the particular technology.
The second type of costs is indirect costs: operating expenses. These consist of the following components:
1. Engineering and R&D expenses include the salaries and equipment costs for product development, product engineering, and concurrent
engineering.
2. Marketing and Selling expenses include all market research and sales costs. Salaries, commissions, booths at shows, public relations, and all
other expenses associated with pre-sale awareness creation and education are included.
3. General and Administrative (G&A) expenses consist of costs necessary to operate the business unit. These costs include insurance, legal and
accounting fees, etc. If R&D, marketing and sales are not broken out as separate costs, they are also included in G&A. If customer service is
not a cost center (i.e., generating revenues), it is part of G&A. In this section you should also include payments to maintain your patent and
monitor/sustain your license.
Three ways exist for estimating both figures (COGS and operating expenses), separately or in aggregate. As with revenues, you can conduct a
bottom-up analysis. Here you determine the tasking, determine the labor category of the people who will do the tasking, estimate how long it will
take them to complete the tasking, and finally, determine the other resources needed. When you price the labor and resources, the result is a
budget (cost estimate).
The best way to calculate costs quickly is to find a publically traded company that only produces something equivalent to the technology being
valued. By equivalent we mean same kind of good, using similar production processes, and selling into the same industries. Then you find their
10K, or for small firms 10K-SB, filings on the Security and Exchange Commission's Edgar site at http://www.sec.gov/edgar.shtml. Other Western
countries usually have equivalent databases. Ideally you want to find young growth companies and mature ones as the cost structures are usually
different in different phases of corporate development. If you are using this technique, be aware that in multi-product or service companies, it is
often difficult to allocate expenses to particular operations or product/service families. Optimal scale of operations is another factor, for larger
operations may have different cost structures than smaller ones.
Another method of estimating costs is to call a few vendors and ask them what they would charge to conduct the task; these are called bids. When
you speak with vendors, explain you are not guaranteeing them any business. Instead, you are just looking for a quick “back of the envelope”
estimate. If you obtain and average three bids, you will have a rough basis for the Costs of Goods Sold. It is rough because there is a difference
between outsourcing and doing it in-house. The presumption is that if both firms have equal capacities and scale of production, outsourcing will be
more expensive. But that may not be true and the variance is almost impossible to guess.
Estimating Discount Rates
In the discussion above, we estimated the present costs and revenues for a technology. As noted in our discussion of discounted cash flow, the
value of money changes over time. To discount, we first estimate risk. Risk is simply the likelihood that net revenues will not be realized because:
1. They will not be obtained.
2. They will be obtained later than anticipated.
3. They will cost more to obtain than planned.
Since each of these outcomes can be measured in dollars and cents, risk is theoretically quantifiable. Practically, it is hard to set a precise number,
so we use percentages reflecting the likelihood of obtaining the net revenues.
We also distinguish between technical risk, firm-specific risk, and market risk.
Technical risk is the risk the technology will not work as hoped. It is usually a declining step function. You do some research, hit a milestone, the
risk goes down. You fail to hit the milestone, the risk starts going up. You can handle technical risk by tossing money at it, which of course affects
net revenues. You keep on tossing money until the problem is solved and the risk goes down or you run out of patience or funds. A useful tool for
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getting a handle on technical risk is the TRIMS software offered free by the US Department of Commerce/University of Maryland Best Manufacturing
Practices Center of Excellence at http://www.bmpcoe.org/pmws/trims.html.
Firm specific risk is the risk the capabilities of the set of companies, universities, labs, and other entities partnering to commercialize a
technology are inadequate in light of what has to be done to get the technology into the market successfully. The following graphic highlights the
set of tasks that have to be planned for and accomplished by the players.
Graphic 12.1: Willoughby Templates
Like technical risk, this risk is a step function. If the capabilities are not there, you toss money at the problem and buy them or you partner to gain
them. When you have them, risk goes down. If the people you thought had the capabilities turn out not to really have them, risk goes up until you
replace them, in which case it hopefully goes back down again.
Market risk is the risk the good cannot be sold. It is dramatically different from the prior two types, because it is not a step function. No matter how
much money you throw at it, you cannot necessarily control it. Market risk is a probability distribution of likely outcomes. Money can help
influence those outcomes, but because buyers are not under the control of management, the risk cannot be managed in the same way as technical
or firm specific risk. It is an external risk rather than an internal one.
Notice that we now set the discount rate. Ideally what we would do is calculate the technical and firm specific risk and set a rate for those. We
would then reduce net revenues by that percentage. The result would that be subjected to a Monte Carlo analysis or some other kind of probability
factoring to give us the final discount rate. Practically, the costs of figuring things out means we usually take a look at the various risks, lump them
all together, and use the common range of venture discount rates to take a stab at the discount rate for that year. The following table, based on in
"Early Stage Technologies: Valuation and Pricing," by Richard Razgaitis (Wiley, 1999), shows how you can use your technologies TRL and other
metrics to come up with a discount rate range.
!
Graphic 12.2: Discount Rates
We conceptualize each level of risk by comparing it to the technical innovation types and maturity scales we discussed in Lesson 3. Overall, we see
that as product familiarity decreases, the level of risk and corresponding discount rate increases. Thus, the least risky technologies are well known
to relevant buyers. We also see that the state of the market carries risk; this is more of an issue with new markets than with established markets.
Technical risk is expressed by technology maturity level: the higher the value, the lower the risk. The table above indicates new firm-specific risk
once, at the “extremely high” risk level; by extension, established companies carry less risk than new companies.
Handling Uncertainty about Assumptions

Discounting is one way we handle uncertainty in valuation. The discount rate captures our uncertainty about net revenues. But there are other
uncertainties that discounting does not capture adequately. For most commercialization work, the most important one is uncertainty about the
assumptions we make. Suppose we are performing a valuation on a medical device that needs FDA approval before it can be sold for human
medical use. Even if FDA approval is not obtained, there may be some sales, such as for research use. But they will be small. So we have a node
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with two possible outcomes: FDA approval or no FDA approval. There are two paths to FDA approval. The device may qualify for 510K substantial
equivalence certification, in which case it can hit the market quickly. Or it may have to plow through the entire FDA clinical trial based approval
process, in which case it costs a lot more to get to market and sales start much later, when the competition is more entrenched and has more
market presence. So revenues are certainly better with a 510K certification than otherwise.
If we just make solitary assumptions, we might assume certification is unlikely, as the odds are higher that the full set of clinical trails will be
necessary. However, we also can assume that if trials can be completed, approval is likely. If we could capture the probabilities of all the various
outcomes occurring, we would then have a better approximation of the current value. Thus, if we can assign probabilities to the likelihood of all the
alternative outcomes and calculate the DCF for each of the alternatives, we can calculate a value which captures our uncertainty. The following
chart illustrates this calculation.
!
Graphic 12.3: Probability Tree
It is a short step from this calculation to one which adds to the impact of managerial decision making. Such a decision tree is called a real option.
Real options are outside the scope of a beginners tutorial. They are difficult to do, and depending on the method used, you have to make some
assumptions that do not usually apply in technology deals. That said, real options are helpful where the amount of money could be large and
traditional DCF analysis suggests a value that is close to zero but you know in your gut that depending on what steps management might take, the
value could be significantly higher or lower. In real option valuation, management's potential decisions are modeled as options to be exercised or
not. The calculation process is similar to the one used for stock options: management always has three choices: exercise the option, pass on the
option, or, where the option has not expired, wait and see. For a primer on real options, see Damodaran's website at
http://pages.stern.nyu.edu/~adamodar/pdfiles/papers/realopt.pdf.
Valuations capture the DCF for a revenue stream or cash flow (whether net or gross) resulting from sales. However, frequently one technology is
not equal to 100% of the value of the product. To make the product, many technologies may have to be integrated. A better avionics bus is only
one piece of the overall value of a jet airplane. Similarly, a better carbon coating is one part of the value of an anode or cathode, which in turn are
only part of the value of a lithium-ion battery. In other words, we have to capture the share of the value of the product that the technology
contributes in order to understand its real value.
There are a variety of tricks for rapidly estimating shares. One is to look at the overall bundle of feature and functionality and ask what percent of
that would likely be due to the technology being commercialized. For example, suppose a new computer costs $2,000 and your technology is a
mouse device, perhaps a substitute for the pad used on many small notebook computers. When you think about the CPU, the memory, the CD
drive, the screen, the keyboard, the battery, etc., etc., is reasonable to assume the pad cannot be much more than two to five percent of the total
value of the machine. That suggests on a $2,000 computer, the pad is around $40 to, at most, $100.
Review
Valuation is an art more than a science. The mathematical formulas used to do discounted cash flow valuation are straightforward. For simple
discounted cash flows, they are found in the formulas that come with the spreadsheet. The art comes in when you have to estimate cash flows --
both revenues and where appropriate, expenses.
Realistically, most valuations do involve the use of some benchmark. The trick is to select a benchmark that is as reasonable as possible given the
use you will make of it. Then you have to find the data you need to pin assumptions about adapting and modifying the benchmark data to fit the
particulars of the technology or company you are valuing. Transparency is critical, as that way if someone disagrees with your assumptions they
know how to replace them with their own.
Valuations are not readily conducted by novices, so this lesson is one of those "don't do this at home" ones, at least not without some additional
reading and practice. There is, of course, Dr. Speser's The Art and Science of Technology Transfer. There also is Damodaran's website at
http://pages.stern.nyu.edu/~adamodar/. A number of spreadsheets are also found on his site. Another set of examples for both a company and
technology called "Intellectual Asset Valuation, Spreadsheet" is provided by Harvard Business School at
http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=801701&_requestid=46779. The spreadsheet is free, the
instructions cost $6.95 and are at http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=801192.
Spreadsheets are also in the T2+2® tool section. More on valuation is in the K2™ Wiki on T2+2®.
Review Questions
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1. What is discounted cash flow?

2. Which factors should you consider for valuing your technology?
3. What is a discount rate?
4. Why do we sometimes use probability trees when doing valuations?
Deal-Making
A deal is just a sale. If you have ever traded baseball cards, sold a car, bought a bicycle or shoes, you have been a party in a deal. Like any other
sale, commercialization deals involve a sales cycle. The first step in this cycle is usually some kind of sales plan, but as the graphic suggests, a
chance meeting can pop you into a sales cycle.
Graphic 13.1: The Sales Cycle
In this lesson you will gain an overview on what makes a good deal, how to plan for deals, and how to negotiate deals. What we are training on in
this lesson is how to think about deals and how to approach deal-making.
We will not focus on any specific type of deal -- such as a license, equity investment, joint venture, or product sales. Nor will we discuss specific
contractual terms, as these vary from deal vehicle to deal vehicle. The terms for a license are different from a product sale and both are different
from an equity investment, for example. Furthermore the laws, be they national, state or provincial, vary from jurisdiction to jurisdiction. All of this
highlights the importance of having two kinds of people involved whenever you do deals. The first is someone who has done deals before, the other
is a lawyer. If you do not have both of these in-house, hire them. Since the skills that make a good negotiator are different than the skills which
make a good lawyer, usually you need two people. Even where a lawyer also has good negotiation skills, if they are not a member of the Bar in the
jurisdiction where the deal will be done and enforced, you probably need a second lawyer who is. Please be aware that what follows is not legal
advice. For legal advice, consult a lawyer.

· What makes for a good deal
· How to plan for a deal
· When to break off negotiations and walk away
· How to conduct negotiations
For purposes of this lesson, we assume you have already identified your target and cold called them to establish they are interested in the
technology. If you have not, please see the previous lesson. Also, for more information on specific kinds of deals, please see the relevant pages in
the K2™ Wiki in T2+2®. Finally, in an overview course like COM101™, the most we can do is introduce the subject. To re-emphasize the point: if
you have never done a deal before and are about to get involved in doing one, get help from someone qualified who is smart and has relevant
knowledge, know-how, and experience.
Good Deals
Good deals are win/win. Both parties come out of the deal better off than they were before it. Good deals are also self-enforcing. That means good
deals make each party money and are fair. For both parties to come out financially better than they were before, the discounted net value of the
technology has to be greater after the deal than before. Let us look at how this can happen.
What the parties to a deal are looking for are payoffs. Payoffs can be anything that provides a benefit to a party, but the reality is that in
commercialization, payoffs are usually calculated in cold hard cash. The total money that can be made by both parties cannot be more than the
total value of the technology, but that total value post deal can be higher than pre-deal.
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Recall that the value of a technology is equal to the gross revenues generated minus discounts and returns (which gives us net revenues) minus the
cost of generating those revenues (which gives us net operating costs). The costs of generating revenues primarily includes the Cost of Goods Sold
(COGS), but other direct costs incurred along Porter's Value chain, such as legal review for contracts, legitimately can be included. The cumulative
net operating income is what can be divided up between all the parties to the deal.
Graphic 13.2: Cumulative Net Operating Income
It is important to reflect on the fact that costs are driven by the tasks which must be done to commercialize and sell the technology. Since the costs
are a function of what is necessary to develop, make, and sell the technology, the trick is to allocate the tasking between the parties in an
economically rational way. That means that the party which can most efficiently conduct a task should do that task. Efficiency should reduce the
cost of the task. The result is that this allocation principle reduces the overall costs associated with getting the tasking done. Surprise, surprise:
efficiency increases the net operating income and that increases the overall value of the technology.
Graphic 13.3: Process Schedule
Just what tasks have to de divided up depends on the Technology Readiness Level (TRL) of the technology at the time of the deal. Who gets them
depends on who is most competent to do them efficiently. We want competency because it has a second benefit. It also reduces risk and thus the
discount value we apply to calculate the present value of future net operating income. Risk is the fear of regret and in business the biggest regret is
losing money. In the context of commercialization, you lose money when delays push revenues further off into the future. (Revenues generated
later than anticipated have less value due to the time value of money.) Even more serious are cost over-runs, which also hurt net operating income.
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Graphic 13.4: Cost vs. Delays for all Risks along the Value Chain
The result is that all parties to a deal have a shared interest in determining, from among those competent to do a task, who is the most efficient
party to do the task and how to help each other identify and mitigate risks. If they can do this, the parties will increase net operating income.
Suppose they cannot increase the net operating income by doing a deal. Then doing a deal is a bad idea. Even if the net operating revenue remains
flat, the transaction costs of doing the deal mean you end up worse off after the deal than before.
Unfortunately, good deals are not enough for successful commercialization. Once signed, if the deal falls apart and the parties end up in court, net
operating income goes down because of legal fees or other costs associated with cleaning up the mess. Ideally, we want self-enforcing deals
because both parties gain greater economic benefits by honoring the deal than by breaking it.
If a deal is fair, it has a much better chance of being self-enforcing. After all, a fair deal treats each party well. In general, fair deals are self-
enforcing. Consider what happens if one party breaks a fair deal. The other party can go to court to enforce the legal agreement that constitutes
the deal. The presumption of the court will be the deal should be enforced unless there are reasons to set it aside. Assuming good drafting, when
fair deals are examined it is hard to find a reason to set them aside precisely because they are fair. So the party breaking the deal likely loses in
court and now not only has to honor the deal but also bear the costs of litigation. They are worse off having broken the deal than they would have
been by honoring the deal. Assuming the party breaking the deal are economically rational people, they will recognize that their action is just plain
stupid.
Fairness, as we use it, means a deal is balanced. This is a common sense definition of fair. Most people feel deals are fair when the benefits each
party receives are commensurate with the value that party brought to the table. If one person brings gold and the other person brings cash, we
figure out what the fair market value of gold on the day they want to do the deal, weigh the gold, multiply the weight by the price for gold, and
that is the amount of money the buyer pays in cash to the seller for the gold. In this transaction, the scales are in balance.
Graphic 13.5: Scales
The same principle applies to technology deals. Suppose we have three companies. The first company develops a technology. The second company
takes the technology and uses it to develop and design a product. The third company takes the product and then makes, sells, and supports it. In
this case, we would assume that the value of the discounted net cash flow from sales would be divided up into three shares. One share goes to the
R&D company, one share goes to the product development and design company, and the third share goes to the manufacturer who also sells and
supports the product. If we have no other allocation principle, we might divide the profits into three equal shares. Usually, however, we have some
way to determine the relative value of one contribution to the others. Thus, we divide up the shares in a way that reflects the relative
contributions. If we do this correctly, then the scales of justice are in balance and we have a fair deal.
Note that when we balance the scales this way, we assume each party is bearing the risks related to its activities. The R&D company bears the risk
that the technology cannot be matured to some relevant TRL for hand-off. The product development and design company bears the risk that a
product meeting end-user needs cannot be created from the technology. They also bear the risk of any intrinsic design flaws. The manufacturer
bears the risks associated with making actual products, selling them, and supporting them.
As discussed above, we want to assign task to those parties best able to perform them. As we saw, "best able to perform" has at least three
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components. The first is that the party is competent to do the tasking. The second is that the party is the most efficient at doing the tasking. The
third is that the party is the one best able to control and prevent risk.
Suppose the competent and most efficient party is not fully able to control for risk. Suppose the product development and design company is
instead a design class at the local university. Neither the professor and students nor the university want to be on the hook for any liability
associated with design flaws. They want the manufacturer to bear that risk. That means the manufacturer has to allocate staff and resources to
carefully review the product development plan and final design or it has to insure against liability caused by the class developing the product and its
design. Since we would normally expect the people doing the activity to do it right or bear the liability from not doing it right, the manufacturer is
entitled to be compensated for bearing extra risk of design flaws. We can measure the compensation they deserve by the cost of insuring against
the risk.
What this example highlights is that fair deals allocate net operating income (i.e., revenues minus costs) in accordance with the adjusted value each
party brings to the deal. The adjustment reflects costs that would normally be borne, such as the cost of insuring against any liability associated
with the activities conducted.
To clarify the concept of adjusting the value to account for risk, we will work through one more example. Suppose a university is licensing a new
material for making organic light emitting diodes (OLEDs) that more efficiently emit photons when excited. An LED manufacturer is going to license
this material and use it to make OLEDs to sell to companies making screens for computers. We would normally expect the LED manufacturer to
indemnify the university from any product liability claims associated with the LEDs, as the manufacturer is in the best position to prevent any
problems that could give rise to product liability. If the manufacturer expects the university to share any liability for product malfunction, the only
way the university can protect itself is to buy insurance.
(The reason we use insurance to protect against risk is that other methods are just not practical. What university is going to take the professor of
industrial engineering who teaches LED manufacturing and the professor of chemistry who invented the material and pay them to sit full time in the
factory to watch what is going on? Furthermore, their sitting there is pointless unless the manufacturer gives these two professors the authority to
stop any corporate activity that may be generating risk.)
If the values the parties bring to the table were not adjusted for the cost of the insurance, the university would find itself in the unfair position of
bearing an uncompensated additional cost: buying insurance. The added cost reduces the net revenues received, pushing the scale on their side
down below the value contributed by the university. On the other side of deal, the manufacturer receives unearned benefits as it does not have to
be as careful about preventing defects during manufacturing. The costs of doing that have been shifted to the university. The removal of the burden
lets their side of the scales rise above the value they are contributing. A "side payment" is thus required to compensate the university for the cost
of buying insurance and bring the scale back into balance.
Note that the impact of technical, firm-specific, and market risk will play out differently in different types of deals. In the next graphic, the green
line represents the threshold value for a venture deal. Look at where the IP portfolio and management capabilities were, are, and will be in the
future. Since the strength of an IP portfolio or the abilities of the management team are not absolutes but change over time as the company moves
closer to market introduction and other competitors do the same, we have to allow for some uncertainty. This uncertainty is represented by the
space between the two lines. Similarly, since marketability is a probability distribution, we have a range of possible outcomes.
Graphic 13.6: Possible Outcomes - Venture
For the deal to pencil, the investor has to able to make money. The only way to make money is to sell a product, service, or process. At some point
in time, sales have to occur, which is why the clear competitive advantage converges to a point in the future. It is obvious in this deal that the
opportunity is not suitable for an investment as there are too many risks. For no criterion are even 50% of the possible outcomes above the
threshold. Further, the competitive advantage at the time of market entry is not strong. That suggests the capabilities of the firm bringing the
technology to market are insufficient and not attractive enough for venture capital.
Doing a similar chart for out-licensing by the same firm might move the green threshold line downward, making that feasible. The reason is that
the fit of the technology with the other capabilities of the licensee makes it attractive, while as a stand-alone technology, it is just not attractive.
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Graphic 13.7: Possible Outcomes - Licensing
Our discussion clearly implies that the relative value of a technology in any specific deal is always related to how the party seeking investment or
the acquiring party will use it. In general we can distinguish between two types of uses. Swords allow us to grab market share. Shields let us
defended market share. By definition, incremental innovations are shields, while adaptive, radical, and disruptive ones can be either. The following
examples are from the perspective of licensing. However, we note that most venture investments take place for technologies fitting within the
Sword 1 or 2 categories.
Graphic 13.8: Licensing Plays
Planning for Deals
With this perspective on what constitutes a good deal, we can now look at how to plan for good deals. Our objective has to be to seek deals which
are win/win and fair. Within those constraints, we can try to obtain as much benefit as possible. However, whenever our effort to gain additional
benefit means the other party to the deal will lose money or have an unfair allocation of benefits given the costs and risks they bear, we have to
back off.
We have a second set of constraints on our planning. In an earlier lesson we discussed how it helps to have three sets of things in mind when doing
deals. The first is your MUST HAVEs, the second is your NO WAYs, and the third is the NICE TO HAVEs. If the deal has the MUST HAVEs and no NO
WAYs, you do the deal. Otherwise you walk away.
The first step in the planning process is to define our MUST HAVEs and NO WAYs. Usually the first MUST HAVE defined is money. This amount may
be a number or it can be a growth rate for net operating income. When it is a growth rate, it is called a hurdle rate. Say the hurdle rate is 5% for
seller and 15% for the buyer. For the seller, given the investment in the technology to date, if the discounted net cash flow generated by the
technology is equal to or below 5%, the seller's preference should be to wait for a better deal. If it is above 5% however, it should be to do the
deal. For the buyer, if acquiring the technology will not lead to an internal rate of return on the investment greater than 15%, it is not worthwhile
signing. It would be better to pass and wait for another, more attractive, opportunity.
We check the reasonableness of the amount of money by first doing a rough calculation of the value of the technology. Then we look at how to
allocate the value. There are three ways to do this: by ground-up analysis, by using comparables, or by consulting one or more experts.
To do a ground-up assessment of reasonableness, you value the technology assuming you do everything entirely on your own. As we saw in the
lesson on valuation, you first calculate the total potential value of the technology. Then, you set a discount rate that reflects the technical risk. For
this use, the risk is tied to the current TRL of the technology. Next you add to the discount rate a rate reflecting the firm-specific risk should you
take the technology all the way to market on your own. Usually, firm-specific risk is very high unless your firm has previously both commercialized
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and made and sold goods. Finally, you add in to the discount rate the market risk (or you run a Monte Carlo simulation on the value using the other
two rates added together). The result is a discounted net value. In theory, this is the value of the technology today. In practice, it is like tossing
darts and hoping you get near enough to the real value because of the intrinsic difficulties of forecasting value.
Because of these difficulties, most people try to find a "fair market value." This is done by looking at comparable deals and then adjusting the
values to account for the differences with your technology and your deal. Good places to look for comparable deals are databases of royalty rates,
payments, and other types of deals. Another place to look is press releases from publically traded companies. Announcements of deals mean the
terms may show up in a Securities and Exchange Commission (SEC) filing. These SEC filings can be searched on the SEC's Edgar database. You find
several royalty rates and/or payments for equivalent technologies and deal types. Then you adjust that rate or payment to fit the specifics of this
deal. Some factors to consider when making adjustments are:
· Significance of the Technology
· Current TRL
· Breadth and Strength of IP Protection
· Number of Patents, Copyrights/Masks, and Trademarks in Portfolio
· Duration Left on IP Protection
· Exclusive Market Position in Field of Use Gained
· Immediate Utility in Market
· Technology Commercially Successful Already in This or Another Field of Use
· Sales Conveyed or Highly Likely
· Competition Exists That Will Inhibit Ability to Exploit
· Foreign Rights Conveyed
· Upfront Payment Required
· Minimum Royalties
· Know-How Included in Deal
· Support/Training Provided After Initial Transfer
· Maintenance and Enforcement Burden on Licensee
· Exposure of Licensor to Liability
The final way to check for reasonableness is to poll a few experts or to hire an expert as a consultant, such as Foresight Science & Technology, Inc.
As noted, the value of a technology in any specific deal is tied to how it fits with the other party's IP portfolio and will be used by them.
As always, an example helps. In Mastering the Dynamics of Innovation (Harvard Business School Press, 1996), James Utterback notes that when
new technologies enter to compete in a market, older substitutes sometimes have a burst of innovative activity that results in the older
technologies remaining competitive. That is happening today with OLEDs. There are two kinds of substrates for making OLED displays: glass and
polymers. Polymers have some attractive advantages, such as the fact that they can be flexible and curved. Glass substrates have to be flat, are
heavier, and are more brittle. All other things being equal, this configuration suggests glass is on its way out as a substrate. There are other issues
with OLEDs, however. One issue is the lifetime of the organic molecules used to emit light. Thermal induced degradation is an issue. Coating the
glass substrate can reduce voltage needed to create the same illumination, thereby making less thermal stress, thereby allowing a display to last
longer before failing. Thus, for applications where the weight and brittleness of glass is not an issue, glass substrates become more competitive
again.
Let us assume that, in the graphic below, the technology being licensed is critical for revitalizing a core technology. That makes it a Sword 2 in the
chart above.
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Graphic 13.9: Extension Play
The major players in OLED intellectual property licensing are Kodak and Panasonic. Now suppose that you have a new coating for glass substrates
which is not currently in Kodak's or Panasonic's portfolio. You approach an OLED display vendor. Suppose your coating makes OLEDs competitive
with the life span of LCDs. There is a good likelihood makers of high-end digital equipment, such as research laboratory microscopes, will be
interested because OLEDs have other advantages, such as clarity and quality of the image. Thus, you offer a way for an OLED display manufacturer
using glass substrates to break out from the competition and counter the threat of plastic substrates, because their displays will have a duration
beyond those of other licensees of the Kodak or Panasonic patent portfolios.
Since there is a market opportunity for this technology, it is likely that a maker of glass OLED displays will be interested in licensing it. The value of
the technology will be equal to the period of extended life, which can be calculated by dividing the current life of an OLED display by the duration of
its life. That gives us an OLED price per year. Next we can calculate the price per year for glass coated OLED display at the current price. A higher
price could be used for the display if that is justified by market research showing customers will pay more for a longer-life display. For our
purposes, what counts here is that we can calculate a minimum price for the OLED coating technology based on the technology it will supplant. The
benefit of the coating is related to the extended life of the OLED display. What we end up with is a range. On the low side of the range is the sum of
the price per year for the number of extended years at current OLED display pricing. On the high side is the sum of the value of the extra years,
plus the increment in value of all the years provided by the current technology. We have to add in the increment in value for the current number of
years, as those years gain in value due to the synergy provided by the extra years. Alternatively, we can just allocate the entire increase in price to
the extra years.
Of course, in our discussion in the last paragraph, we looked only at gross revenues. The actual value is smaller, as we really need to look at net
operating profit. But for most licensing deals, we are less concerned with figuring out a precise value than getting a handle on what the order of
magnitude of reasonableness is. With the gross revenues we can usually make an educated guess as to whether the MUST HAVE expectation is
reasonable.
A very important takeaway of this discussion is that when we calculate value for purposes of planning a deal, we need to take our general
calculation of value as done in the valuation lesson and adapt it to reflect the value to both us and the other party to the deal. In other words, we
are calculating the value being contributed by the technology at its current level of development and given the rights being transferred, not the
value of all products that can be made by it. To use the OLED example above, we treated the technology as an instance of Sword 2 because the
licensee was an OLED manufacturer using glass substrates. Now suppose the licensee we are in negotiation with is Kodak. Our technology is, for
them, probably a Shield 2, not a Sword 2. That means the technology probably has a smaller value for them than the prior licensee. Similarly,
suppose our OLED manufacturer does not see the technology as a Sword 2 (a breakout technology) but rather as a manufacturing enabling
technology that allows them to put off for a few years the day when they will have to bite the bullet and invest in equipment to make flexible plastic
substrates. As a Shield 3 rather than a Sword 2, it again has less value because the period over which revenues can be garnered will probably be
less than when we viewed it as a breakout technology.
The next big item to consider is a NO WAY. This is the kind of deal you are not willing to do. We have already seen that we can get a quick handle
on what kinds of deals are reasonable simply by looking at the domain and context absorptive capacity of both parties to a deal.
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Graphic 13.10: Absorptive Capacity
Here we want to emphasize that each type of deal vehicle implies transferring a different bundle of rights from the buyer to seller. These rights
address the kind of control the owner of a technology is transferring to the buyer. The graphic below suggests there are a variety of deals you can
do, given your preferences for how much control (and thus what rights) you are willing to relinquish in the technology. In the graphic below, control
over use refers to both transfer of the ability to make, use, and sell on the one hand and field of use, geographic region, and time duration on the
other. Based on the type of deal and its reasonableness, you can tell if it is a NO WAY.
A NICE TO HAVE might be the TRL where you exit the technology. For example, many universities or small companies will develop a biomedical
technology through proof of concept and want to out-license the technology at that point. Traditionally, that TRL has been seen as too low for most
major corporations. They at least want some animal data as to efficacy. With the recession, the threshold level of maturity has risen. Now Phase I
clinical trial data is often desired. Unfortunately, the higher TRL threshold may mean that tasks are allocated between the partners in a less
economically rational way, as the developer lacks the competency for conducting, or managing a contractor who is conducting, clinical trials. Thus,
the overall value of the technology sinks below its potential due to higher costs and delays.
The problem is that the set of capabilities used to conduct R&D are different from the set of capabilities involved in product development,
production engineering, test and evaluation, making, and selling products. For this reason, commercialization deals involving institutions
specializing in R&D usually occur at the end of R&D. One way to explicate the different capabilities required is to note that at the end of R&D the
focus shifts from creating intangible property to creating tangible property.
This transition zone is often called the Valley of Death, as it is where many technologies die. Traditionally, the Valley of Death is defined as the zone
where risk has been reduced and now costs start to soar because R&D is less expensive than production and market entry. (See graphic below.)
More accurate is to note that the content of risk shifts at the same time that costs are rising faster.
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Graphic 13.12: The Valley of Death
What this suggests is that in developing NICE TO HAVEs, the objective is to identify potential risks you will have to bear, but which are not
significant enough and probable enough to make it into the MUST HAVEs or NO WAYs. Tools like the following can be used to clarify the risks.
Graphic 13.13: Risk Assessment Matrix
Next, identify what you need to do to address and mitigate the risk. If you cannot do what you need on your own and don't have access to the
necessary capabilities, what you need goes into the NICE TO HAVEs.
Note that through this kind of a process we can work through all of our MUST HAVEs, NO WAYs, and NICE TO HAVEs. Each time we add a new
criterion in any of the three categories, it will affect the payoff for the deal. We may not be able to calculate a single value, but we will get some
range of values and via a Monte Carlo simulation or equivalent probability based analysis come up with an approximate value for the payoff.
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Graphic 13.14: The J-curve
J-curves represent net operating income. The J-curve is always less than the S-curve because it subtracts costs from revenues. From a financial
point of view, the best deal we can do will maximize the cumulative value of J-curve so that it is as close as possible to the cumulative value of the
S curve. Between deals of equal fairness, the closer the match, the higher the "goodness" of a deal.
Term sheets are basic outlines for what you want out of a deal. The whole reason for making and analyzing the MUST HAVEs, NO WAYs, and NICE
TO HAVEs is to develop a term sheet and to be able to assess how to negotiate given that you will never get everything you want.
A term sheet is the initial offer in a deal. Term sheets should always be drafted with that old adage of markets in mind: Buy Low; Sell High. There
will be some convergence inevitably. Furthermore, term sheets must be drafted in such a ways as to ensure they are not legally binding offers. You
do not want someone looking at it, saying OK, and suddenly find yourself stuck with a contract you are not ready to sign. Alternatively, you may
elect to draft term sheets so they can be the basis for a contract, but then you are doing so intentionally. Bottom line: consult a respected and
competent technology transfer consultant or an intellectual property lawyer unless you are very sure you know what you are doing.
What this goodness metric tells us is every time we have a term for our term sheet we first check if it is fair./ If it is not, we abandon it as it will
make the deal not self-enforcing. If it is fair however, and assuming we want to be economically rational, given choices between terms (or deals for
that matter), we will select the one whose payoff is closest the cumulative value of the S-curve. Indeed, taking the fair option that makes you the
most money is a criterion that can be used for choosing between business models for deal-making (ex. license, joint venture, or spin-off), legal
agreements (ex. the University of Rhode Island's standard licensing agreement versus company x's), or specific terms in an agreement (ex.
indemnification against product liability).
Deals as Games
We can view deals as games. Deals usually are two party games, although there can be multiple players. For our discussion in this lesson, we
assume a two party game consisting of one buyer and one seller. What distinguishes deal games from such well known games as the Prisoner's
Dilemma (cf. http://plato.stanford.edu/entries/prisoner-dilemma/) is that deals should not be zero sum games. Because each party's reason for
doing a deal is to end up better off after the deal than before, deals are net gain games.
In game theory, you choose options based on maximizing your pay-off. The premise behind game theory is each party will act economically rational
and chose that option which gives it the best payoff regardless of what any other party might choose. When that happens we have what is called a
Nash Equilibrium. If everyone has the best possible payoff, that is as close to win/win as you can get. To simply things, we assume each party is
likely to have perfect knowledge about the other party and what they will do. In reality, that is obviously not the case. Anyone with teenage children
knows that.
Supposed we have the following game. There are two parties, the licensor and the licensee. They each have only two options: do a deal or walk
away. We assume the licensor is a university, federal lab or small company. The licensee is a big company. For sake of argument, we assume the
technology is worth $1 million and a fair deal has a 5% running royalty rate with no up front payments.
In the game below, there are two possible best outcomes. One is to do the deal, in which case everyone makes money. The other is to walk away
quick, in which case losses are minimized. Where one party or the other gets in trouble is when they want the deal but the other party does not.
Where the licensor wants it but the licensee does not the licensor can lose big as knowledge and know-how will slip away from the licensee to the
licensor. This will happen even with an NDA and scrupulously honest people. There is always a little leakage. The more you prepare all sorts of data
and analysis to try to convince the potential licensee the technology has merit, the more you spend.
Another factor encouraging walking away quickly from bad deals is transaction costs. The more time you go back and forth on drafts --whether or
not the lawyers are involved -- the more transaction costs. On the other hand, if you are going forward with a deal, there is an incentive to try to
make the game a repeated game. When you do multiple deals with the same party of the same type (license, equity investment, sales., joint
venture, strategic alliance, etc.), then a network economy can kick in to reduce the transaction costs of each singe deal. In other words, you focus
on negotiating a general set of mutually agreeable terms, and then you use an addendum to address the specifics of each transaction. It makes no
difference how many transactions use the agreement, but the contractual terms are not a wasting asset. Each new use simply reduces the per use
cost of those terms.
The notion of transaction costs highlights why most deals are based on an industry standard set of terms called legal boilerplate. The critical
negotiation activity occurs over the term sheet, which defines just what is being traded, for what price and how that price is calculated and paid.
Note that in repeating games, the payoffs may be different from one-time games. Technically, you have to assume it will be an infinitely repeating
game or each game may be the last game, which means you might as well play it like a one time game. That said, assuming both parties see
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downstream potential, the payoffs are different because walking away removes the discounted net present value of the unknown future
investments or licenses. Without some idea as to what opportunities might exist, we cannot put a value on them. But we if we believe they are
there, we know there is some value. The trick is not to get hung up on non-obtaniums and vaporware least you look like a Bernard Matoff investor
or AIG. You have to have a rational basis for believing something is coming. For example, you are a university and in addition not licensing this
technology, licensee company funds a cooperative R&D program with the faculty member. Clearly, the implication is we should plan our negotiating
strategy differently if we expect a repeating game.
Note that in this game there are two possible Nash Equilibriums. One is to do the deal, the other is for both parties to walk away. Game theory
gives us no guidance on which equilibrium to choose, especially if we relax the assumption about perfect knowledge of the other party. The reason
is we do not know the risk profile of the other party. If they are risk adverse, they will seek to minimize loss. If they are risk taking, they will seek
to maximize gain. We can that in the absence of any other data, given there is an attractive payoff that is win/win and assumable fair, we would
expect both parties to opt for doing the deal. That Nash Equilibrium we might expect in the absence of other insights we call the Shelling Point.
Licensor\Licensee DO DEAL WALK AWAY
DO DEAL $50,000\$1,000,000 -$1,500 \$10,000
WALK AWAY $1,000 \$10,000 -$1,000\-$1,000
What the game highlights is that given two choices: do the deal or walk away, you either want to do the deal or walk away quickly. Usually a sign
that you should walk away is an unfair agreement. Various things tip you off to likely unfairness. For example, the allocation of revenues makes no
sense or clauses are unbalanced. An example of the former is that they believe they will generate millions in revenues but tell you they have to
strike the clause stating you will get audited financials as to sales because they could not afford it. An example of the latter is that they expect you
to indemnify against negligence or wrong doing by employees and officers of you corporation but do not offer to indemnify you against negligence
or wrong doing by employees and officers of their corporation
Once you have your MUST HAVEs, NO WAYs, and NICE TO HAVEs and can calculate the basic payoffs from the various ways you can get to market,
you can select the team you will need to do the deal, assign tasking, and prepare marketing materials and term sheets.
We can use a flow chart to break down the tasks for deal making. Below is a flow chart for licensing. Be aware that this is a generic process.
Different companies will have their own processes for licensing, just as different angels and venture capitalists will have their own processes for
investing. The point is simply that you can chart what is likely to happen and then use your flow chart to prepare for negotiations.
Graphic 13.15: Licensing Flow Chart
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Negotiating
The basic premise of negotiations is to bring your payoff as close as possible, given fairness, to the cumulative discounted value of the S-curve for
this technology. We only want to do deals where:
1. the profit is high enough, and
2. the risk is low enough.
Secondly, whenever there are options, we eliminate options which are not fair and then select that option which maximizes our gross profit. We
can derive two principles from the discussion above to guide us:
1. minimize our transaction costs as much as possible, and
2. assign tasking to the most efficient, competent party that can control and minimize the risk.
We illustrate how to use these principles to negotiate within a game theory framework. The flowing chart presents what is called a game in
extended form. The extended form is a decision tree. We calculate the values for the nodes and then select the path which gives us the best value.
Let us use our coating for OLED glass substrates as an example. Recall that this technology can be either a Sword or a Shield. Let us further
assume that neither Kodak or Panasonic or anyone else is infringing the patent protecting the technology.
Graphic 13.16: Decision Tree
Using our decision tree, given no infringement, the best value comes from licensing without negotiations as this minimizes transaction costs. But to
do that we need a licensee with sufficient absorptive capacity to adopt and adapt the technology. As the example had us licensing to a vendor
already using glass substrates for LEDs, we will assume that exists.
We want to license the technology as a Sword, as we see that as having the best income potential. Our manufacturer sees it as a Shield. We are by
default probably viewing it as a combined Sword and Shield. Given that we are negotiating, we want to minimize our outlays, and thus propose a
simple intellectual asset package which consists of the reports we filed with the funding agency as we developed the technology. We tell the
potential licensee that they contain everything needed. The licensee, however, is concerned about manufacturing know-how not captured. He
proposes we send the professor to his facility to check out the equipment once it is installed and supervise the first few runs of the line. Assuming
we agree there is undocumented know-how, that makes sense. The real issue is the cost of doing that, as manufacturing is supposed to be the
licensee's expertise, not ours as the technology developer. One option is to propose a side payment consisting of a contract for few days of
consulting, or an up front fee in exchange for a few days of consulting. This proposal may be agreeable to the manufacturer, as they already
suggested they will get into production quicker and easier with the consulting than without it. The easier saves money and the quicker reduces the
impact of discounting a bit, so the difference hopefully pays for a few days of consulting. Thus the proposed modification to the intellectual asset
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package accompanying the transfer of patent rights can be accepted so long as the counterbalancing side payment is also accepted. The deal
remains balanced. Ideally the side payment is some amount smaller than the enhanced value but large enough to cover the costs of the professors
consulting, so that everyone wins. The university picks up the consulting fee; the manufacturer gets to market faster and cheaper. The overall value
of the deal for both parties is enhanced.
Of course, negotiations cannot always be resolved via finding ways to provide net benefits to both sides. In these cases, what game theory teaches
us is that the reduction in benefit cannot be so great that doing the deal is no longer the preferred option. We can add that if the only acceptable
option to the other side makes the whole deal unfair, it is time to walk away, as you have to worry about their commitment to a self-enforcing deal.
So much for the decision calculus. There is also a lot of "gamesmanship" in deal making. The gamesmanship makes it an art.
In today's world of on-line conferencing and email, negotiating may be face-to-face or virtual. Deal negotiations are always focused on legal
agreements -- a license, contract to sell, a contract to purchase equity, etc. This document is the focus for the negotiations.
Most repeat players in deal making will have standard agreements they use. In general, we recommend using the agreement of the more
bureaucratic partner as the starting point, as it is usually easier to get a modification through their lawyers than a ground-up new agreement. But
that assumes the template is basically a fair and balanced agreement.
It helps to know something about the other party -- both the organization and the people -- prior to negotiations. That provides tips on how to
approach them in order to facilitate a win/win agreement. Prior to starting negotiations, you should conduct a bit of market research to better
understand how this technology fits within their product families and value chain activities. It helps to see what kinds of deals they have done in the
past, as people tend to use those as models for future deals.
In the first negotiating session, spend some time getting to know who the people on the other side are and what their management has defined as
the objectives and constraints for this deal. A significant part of this discussion is finding ways to build trust.
Because trust is critical for deal making, people get wary when someone starts talking about how wonderful their technology is and how it will
garner over 25% market share on introduction and then skyrocket, making everyone uber-rich. Realism is a better approach. Similarly, if the other
side is talking pie in the sky but negotiating very hard and cut-throat over every penny, be wary.
Always remember: time is money. The focus in negotiations is to get to a deal. If the negotiation is face-to-face and your outside legal counsel or
accountants are in the room, be vigilant about keeping focus, as fees are usually on a time basis so you are paying for chat time.
The starting point for negotiations is a term sheet. Term sheets specify what is being sold and under what conditions. They are a general outline of
the financial transaction. A wide range of additional clauses will be added in the actual legal document to address warrantees and guarantees,
indemnification, limits on liability, vendee and methods for resolving disputes, auditing and what happens when errors in accounting occur, what
happens in case one party goes bankrupt, etc.
The key to making good term sheets and agreements is to be win/win and fair. The term sheet, and the agreement as negotiated, have to allow
both parties to make money, should not require uncommon burdens on either party, and should be designed to be self-enforcing, in the sense that
figuring out how much money will change hands is easy to calculate, paying it is easy to do, and there are clear incentives for both sides to honor
the agreement. Whenever possible, clauses should be parallel. An obligation, requirement or privilege granted one party should be offset by the
same or equivalent obligation, requirement, or privilege granted the other party. Remember, fairness is about balancing the scales.
To keep things moving in a timely manner, use questions as well as statements — but do not act like Socrates or a professor before a law school
class who is seeking to exert mental superiority over a student. Questions should be used to draw attention to items of concern or confusion in a
non-threatening way. Their goal should be to elicit information and insights so both parties can move forward to a fair deal.
It helps to define where the consensus is before addressing clauses where there is disagreement. Unless it is a MUST HAVE or NO WAY issue for
you, be willing to compromise. To help find resolutions, ask the other party to explain why there is a sticking point so you can view the issue from
their perspective and perhaps find a better resolution for all. Similarly, explain your concerns to the other party so you both can brainstorm
solutions together. If the sticking point has to do with data uncertainty, such as how much it will cost to make a good, see if there is some way the
requisite data can be obtained so that a resolution can be crafted.
Wherever there is an impasse, both parties share an interest in finding a solution path. If that is not the case, you are negotiating with the wrong
partner. In general, the solutions rely on “industry standard” practices or, on financial matters, fair market values, adjustments to industry standard
rates, or splitting the difference.
Whenever you do put forth a position, listen. You have made your offer. It is time for them to accept it or counteroffer. Do not undercut yourself by
falling back to your last resort position if they are silent. Give them time to reply. If they want to think, that is OK. Wait. If need be, suggest a
break so they can discuss how to reply in private. When the other side is speaking, be a good listener. Do not interrupt. Do not cross-examine like
you are Perry Mason in a courtroom. Periodically summarize what you heard to make sure you correctly understand.
Negotiations can get pretty stressful and tense. When and where it makes sense, try to diffuse the situation. You may try jokes when appropriate.
Never push so hard that the other side cannot save face. If changing positions, explain why you are doing that so the other side gets clued into how
you think. Ask them to explain why they change so you can understand better how they view things. Sometimes it is just corporate or national or
cultural norms that are the hang-up.
Be aware that we are all people, so look for non-verbal cues. If the other party is doodling, they likely are either bored or lost. Watch for body
language. Even on the phone you can listen to the tone of the voice, the pitch range and register, loudness, tempo, and duration of words and
sentences. Changes are clues that something is happening. The way people act when face to face are signs to what they are feeling. For example:
· Defensiveness (arms crossed on chest, pointing of fingers)
· Considered evaluation (head tilted, stroking chin, taking off glasses)
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· Suspicion (looking away, glancing sideways)
· Readiness and interest (sitting on the edge of the chair, moving closer)
· Nervousness (clearing throat, “whew” sound, fidgeting, jingling change in their pocket, covering the mouth with their hand when speaking,
perspiring)
· Frustration (short breaths, “tsk” sound, running their hand through their hair or on the back of the neck, wringing their hands)
· Boredom (blank stare, drumming)

In e-mail, we have to fall back on language choice cues, unless the other party is using capitals, bold, italics and the like. Be sensitive to meanings
and intent. For example, if you suggest a modification to a licensing agreement, the response “we will kick it around” carries a far different meaning
than “yes, that makes perfect sense.” Also realize that saying “yes, that makes perfect sense” does not mean the other party is accepting the
modification proposed. For that they would have to say something like "we accept that language" or "okay, that resolves that issue, on to the next
clause we are negotiating."
Avoid making the negotiations more difficult. Do not spring surprises on the other side. Do not grandstand, yell, engage in theatrics, threaten,
haggle, etc.
Finally, it is important to keep making headway, so do not be afraid to suggest mutually setting deadlines or time limits for discussions, so long as
there is enough time for each side to state its case. Sometimes you can use an event to provide an external deadline. For example, there may be
PR utility in announcing an agreement at a trade show or conference. Regardless, if there comes a point where headway is not being made and it is
unlikely it will not be made within a reasonable time — call it quits, shake hands, and walk away.
When negotiating deals, we recommend having at least three people involved. One is the negotiator, the next is the decision-maker, and the third is
a lawyer. The negotiator's job is to get a fair deal within the objectives and constraints set by the decision maker. The decision maker's job is to set
the must haves, no ways, and nice to haves. The lawyers job is to make clear the risks that may be borne because of each clause and how likely
those risks are to occur.
Note that to the extent the decision-maker and lawyer are not in the room (literally or virtually) means the negotiator can only agree to tentative,
not-legally binding clauses. That lack of legal signing authority gives time to think about things before agreeing or disagreeing to them. On the flip
side, if there is a short time fuse for doing a deal, bring the decision makers and lawyers into the room but be very careful about what you sign or
verbally state you unconditionally agree to. You do not want to slip into a deal without meaning to do so.
Where face-to-face meetings or video or phone conferencing are used, always have a second person there to watch for body language and to
provide perspective. (That person’s presence also gives you the opportunity to use a need to “huddle up” or take a bathroom break to slow down
the pace or halt temporarily to reduce tension.) Work to keep the emphasis on problem-solving in a mutually supportive climate. If you want a
relationship after the deal, act like it exists before the deal and negotiate from that perspective. That means you have to respond to requests for
information, empathize with concerns the other side raises, treat their negotiators with respect, and be willing to engage in provisional — which
means you need to be able to say things like, “Well, let’s explore a couple of options here and see what works best for all of us.”
Regardless, each draft should be circulated to a few people as many eyes help catch problems.
Negotiations either run on a reasonable time schedule or they never end. Getting a deal can take six to nine months as all the parties do their due
diligence and get their financial and legal reviews completed, but once the general time frame is agreed upon, they should not drag on and on and
on with endless loops due to one party suddenly having to change this or that.
Review
In this lesson we have discussed deals as a kind of sale. We have shown that we can use game theory approaches to structure our deal making.
That said, as the amount of money rises in a deal, the need for professional support does too. The most critical professional to involve is a good
lawyer. Someone who knows how to plan for, negotiate, and close deals is helpful as well. Bottom line, if you have never done a commercialization
deal, then deal making is one of those things about which you say: "Kids, don't try this at home."
What is important to remember? Hold up your hand. Look at your five fingers. Here is one take-away for each finger.
First, good deals are win/win and fair. Win/win means both parties make money. Fair means the deal is self-enforcing.
Second, good deals place tasking and burdens on the parties who are best able to perform them while controlling the risk involved. So, if you are a
developer of technology and the other party is going to make and sell it, you are not going to indemnify them against product liability, as that is
something they are better able to control. If they insist you indemnify them, only do it if they will make a substantial enough payment that you are
confident you can purchase a very large and “bullet-proof” liability insurance policy. The corollary is that if neither party can control the risk nor
insure against it, no one should promise to bear the risk. For example, never warrant that your patent is valid because it may turn out that
someone really did invent your gadget before you did. All you can warrant is that you are unaware of any reason why it would not be valid at the
time you make that statement.
Third, good deals give each party their MUST HAVEs and avoids their NO WAYs. Do your best to help the other side meet their hurdle rate (internal
rate of return) and other key requirements. (Of course, it is an open question if they will be up front about these.) After all, if they cannot satisfy
these necessities, they will have to walk away.
Fourth, good deals have provisions that ensure honesty. In licensing, for example, there has to be a way to ensure revenues are being reported
correctly for purposes of calculating royalties. In product sales, there has to be a way of knowing that claims about performance are real. Failure to
include common precautions (e.g. auditing in the former, a guarantee in the later) are reasons for caution. After all, if the other party does intend
27-09-18 15:20
to do just that, why would they not agree to the provision?
Fifth, good deals do not result from jerking the other party around. Worry if you are being jerked around. As you move through the agenda, send
out draft agreements that are clearly marked as drafts and have the date of preparation and the author identified. Every time an agreement is
modified, use track changes and leave the changes marked until all parties sign off on the changes. When agreements go back and forth with
changes made which are not acknowledged, it is either an oversight or intentional. Sloppiness or sneakiness are both reasons to be very careful.
Review Questions
1. What makes a good deal?
2. What three categories do you use when developing criteria for deals you will sign?
3. If you only bring in one professional to help you do a deal, who do you bring in?
4. How do you decide whether to accept or reject a proposed clause in a legal agreement or a modification to a clause?
Take-aways from Commercialization 101™

Take a deep breath — you’ve come to the end. That means it’s time to take stock of what we’ve learned during this course. Before highlighting a
few points, it is useful to pull back and take a look at the entire process. The way this chart works is you place your technology on the product life
cycle and then work down to see the milestones you should have accomplished and the stakeholders you have hopefully won over.
Graphic 14.1: Overview

Market Orientation
The single most important step in commercialization is to gain a market orientation. It is the single most important step because it is the hardest
one to do. The skills and personality which make for great researchers and inventors are not necessarily those that make for empathetic marketing
people. Yet somehow, someone must figure out who the end-users are and what would make them actually want to use this technology, that "what
would make them want to use this" is some clearly articulated needs. No need, no market. Need, potential. Need that you can meet means
a feasible market, which is also called a competitive opening. Need you can meet better than anyone else means a competitive advantage. Ability of
the technology to evolve over time to keep pace with end-user needs and continually meet them better than anyone else means sustainable
competitive advantage.
Pull-Through
So far what we are doing is technology push. We have a solution looking for a problem. Ideally we want a problem looking for a solution. Then we
have attained the closet thing to commercialization nirvana: pull-through.
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Graphic 14.2: Achieving Pull-Through
The process of aligning a technology's possible performance, ease-of-use and price with needs is how push becomes pull. Note that very rarely will
the technology, as conceived, fully align with end-user needs. As it matures the technology will need to be tweaked. This process of tweaking the
technology occurs through a constant dialogue with end-users. Initially this dialogue involves trying to understanding their problems and the arena
in which the technology will actually be used. Over time, as the technology hits early proof of feasibility (TRL 4), the discussion shifts to more
precise metrics and the yields that must be obtained to garner a sustainable competitive advantage.
Unfortunately, more is required to attain pull-through. The key stakeholders must also be supportive in order for "buzz" to generate and the UMPF
grow. The more radical or disruptive the technology, the more critical are stakeholders as end-users have to be informed of the new option and
educated as to the utility of switching from one technological approach to another one. Remember, change-over always has costs.
Graphic 14.3: Stakeholder Analysis

Deals
End-users do not do deals. Buyers do, although the end-user may be a buyer under another hat. There are three factors at play in deals.
The first one is, does the target make sense? Here we are looking at the presence of the target in the market where you hope the technology will
succeed.
The second one is, do the capabilities of the target align well with the capabilities of the party seeking to commercialize the technology?
!
!
Graphic 14.4: Technology Familiarity and Strategy
27-09-18 15:20
The third one is, what kind of control the does the buyer want and how much is the seller willing to give up?

T2+2 Commercialization 101

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· Identify end-users and their needs to find potential market opportunities

· Develop recommendations for market entry strategy

· Identify licensees, investors, and other partners to implement that strategy

Part 1: Market Research (Lessons 1-6)

Lesson 2: The Technology

Lesson 3: Intellectual Assets and Intellectual Property

Part 2: Market Entry Strategy (Lessons 7-13)

Lesson 9: Launch Tactics

Lesson 10: Finding and Qualifying Targets

Lesson 11: Valuation

Lesson 12: Deal Making

· Understand what are the elements of a transaction or trade

· Understand how transactions can be made into legally enforceable agreements

· Choose a deal type that will work best for you

Graphic 2.1: Control Options

Graphic 2.2: Technology Market Familiarity and Strategy

There are three basic types of licensing agreements:

· Rights to make, use, and sell

· Sublicensing right (the ability of the licensee to license to others)

These restrictions are not mutually exclusive.

d. None of the Above

d. None of the Above

· Define a technology in terms of its functionality

· Develop performance, ease-of-use, price, and maturity metrics for a technology

· Develop a portfolio of related technologies

Graphic 3.1: Technology Yield Trajectories

Maturity or Technology Readiness Levels

1. Basic principles observed and reported.

2. Technology concept and/or application formulated.

3. Analytical and experimental critical function and/or characteristic proof of concept.

4. Component and/or breadboard validation in laboratory environment.

5. Component and/or breadboard validation in relevant environment.

7. System prototype demonstration in an operational environment.

8. Actual system completed and qualified through test and demonstration.

9. Actual system proven in real situations.

Graphic 3.2: NASA Technology Readiness Level (TRL) Meter

Intellectual Assets and Intellectual Property

Over the course of this lesson you will learn:

· What types of intellectual property are commonly used in commercialization

Protecting Assets and Property

· a definition of the confidential information

· exclusions to the nondisclosure from confidential information

· the time period it must be keep confidential

· any miscellaneous provisions specific to this situation

Materials Transfer Agreements

Type Protects Country Created By Duration Applicable Law

can be found here.

(R).The basics of trademarks

International IP Law (Europe)

Type Protects Treaties, Conventions, Agreements

Patent Cooperation Treaty (PTC) (http://www.wipo.int/treaties/en/registration/pct/index.html)

WIPO Copyright Convention (http://www.wipo.int/treaties/en/ip/wct/index.html)

Madrid Agreement and Madrid Protocol (http://www.wipo.int/madrid/en/)

1. Define the relationship between intellectual assets and intellectual property.

2. What criteria must be met in order to file a patent?

In this lesson we will learn:

· How to identify applications

· How to identify the end-users and, if relevant, the buyers

· How to down-select to those applications, particularly the most promising ones

Graphic 5.1: Needs and Yields Tradeoffs

Graphic 5.3: Marioni Matrix

We begin by asking five questions, which we call the 5 W's: