1

Evidence-Based Approach to Reduce Spinout Risk

Errol Arkilic (errol@m34capital.com)

Founding and Former Lead I-Corps Program Director

The views expressed in this material are those of the author and do not necessarily reflect the views of the National Science Foundation

2

Commercialization*

Commercialization is the process or cycle of introducing a new product or production method into the market.

*Wikipedia: July 2014

3

Entrepreneurship*

• Entrepreneurship is the process of starting a business or other organization. The entrepreneur chooses/develops a business model, acquires the human and other required resources and is fully responsible for it success or failure.

*Wikipedia: July 2014

The design, invention, development and/or implementation of new or altered products, services, processes, systems, organizational structures, or business models for the purpose of creating new value for customers and financial returns for the firm

Innovation*

*Innovation MeasurementA Report to the Secretary of CommerceJanuary 2008

5

Why is this hard?

Part IThe Unknown

The design, invention, development and/or implementation of new or altered products, services, processes, systems, organizational structures, or business models for the purpose of creating new value for customers and financial returns for the firm

Innovation*

*Innovation MeasurementA Report to the Secretary of CommerceJanuary 2008

7

NSF

Academia

Small Business

Investors

Industry

Valley of Death

Re

sou

rces

Ava

ilab

le (

$)

Discovery Development Commercialization

Level of Development

FromAngus Kingon

Technology Innovation Spectrum

(The Theory)I-Corps

Taxes

NSFSTTR

NSFSBIR

8

NSF

NSFSTTR

NSFSBIR

Academia

Small Business

Investors

Industry

Valley of Death

Re

sou

rces

Ava

ilab

le (

$)

Discovery Development Commercialization

Level of Development

FromAngus Kingon

Technology Innovation Spectrum

(The Theory)I-Corps

Taxes

9

NSF

Academia

Small Business

Re

sou

rces

Ava

ilab

le (

$)

Discovery Development Commercialization

Level of Development

FromAngus Kingon

Technology Innovation Spectrum

(The Reality)I-Corps

?

How do we explore the unknown

10

In general we look for a new law by following the following process:

Then, we compute the consequencesFirst, we guess it

Then, we compare the computation results to natureWe compare it directly to observationIf it disagrees with experiment, it’s wrongThat simple statement is the key to science

Or how smart you are, or who made the guessIt doesn’t make a difference how beautiful your guess is

If it disagrees with experiment, its wrongThat’s all there is to it

-Richard Feynman

11

Why is this hard?

Part IIThe Confusion

12

Entrepreneurship*

Entrepreneurship is the process of starting a business or other organization. The entrepreneur chooses/develops a business model, acquires the human and other required resources and is fully responsible for it success or failure.

*Wikipedia: July 2014

Startups Fail because they Confuse Search with Execution-Steve Blank

Execution:

• Repeatable Internal Processes• Knowns:

– Customers, Features, Channels, Pricing• Management:

– Formal / The Suits– Characterized by “Only the Paranoid Survive”

• Customer Creation + Company Building• Goals are set quarterly

Search:

• What Process?• Knowns:

– Runway• Management:

– No management, but founders with leadership/vision– Characterized by “Stark Raving Terror”

• Collecting and analyzing: Search and Pivot• Customer Discovery + Customer Validation• Goal: To get to a sustainable business model

Where are You in the Life Cycle

Search

Execution

17

Why is this hard?

Part III“Third-party” Risk

Business Model Canvas

?

19

Key Resources

• Access to: Capital• Intellectual Property• Service Providers• Facilities• Talent

20

Venture Capital

Angels / Friends & Family

Private Equity

Company Profits

Non-profits / Grants

The Government

Commercial Banks

Sources of Funding for Innovation

21

Venture Capital Threshold

Angel Capital ThresholdEconomicDevelopmentFunds Threshold

NSFSBIR/STTRThreshold

Technology Risk

Market Risk

People RiskFinance Risk

Friends,Family (and Fools)Threshold

What is your Enterprise Risk Profile?

Senior DebtThreshold

22

…and you say to your BOD

• The market never materialized• We ran out of resources before we got traction

• We couldn’t master the product market fit

• Our Channel partners were too slow to adopt our innovation

• Our customers couldn’t understand the value we provided them

23

Why is this harder than it should be?

Part IVThe Misunderstanding

24

Academia

Small Business

Investors

Industry

Valley of Death

Re

sou

rces

Ava

ilab

le (

$)

Discovery Development Commercialization

Level of Development

FromAngus Kingon

The World According to Vannevar Bush

Basic Research Applied Research

25

The World According to Donald StokesSe

arch

for F

unda

men

tal/

Dee

p U

nder

stan

ding

Consideration for Use

High

Low

HighLow

Pasteur’s Quadrant

“Anything that won’tsell, I don’t want toinvent. Its sale is proof of utility, and utilityis success ” -Edison

“Everything wecall real is made up of thingsthat can’t be regardedas real” -Bohr

26

The World According to Pasteur

There is no such thing as applied sciences, only applications of science.-Louis Pasteur, 1871

27

Five Takeaways

• Innovation contains the unknown (by definition)• Address unknowns using the Scientific Method• Use the Business Model Canvas (lab notebook)• Don’t Confuse Search with Execution• Do Use-Inspired Research

28

Thank You,Questions?