1 ‘SOFT’ COMPANIES AND R&D CONTRACTS; THE UNDERVALUED ENGINE OF GROWTH FOR KNOWLEDGE BASED ECONOMIES David Connell Director of TTP Capital Partners and

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‘SOFT’ COMPANIES AND R&D CONTRACTS; THE UNDERVALUED ENGINE OF GROWTH

FOR KNOWLEDGE BASED ECONOMIES

David ConnellDirector of TTP Capital Partners and Senior Research Associate,

Centre for Business Research at Cambridge University

19th April 2007

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TOPICS

• ‘Soft’ and ‘Hard’ Companies

• The Commercialisation of New Science and Technology

• The Role of Government Procurement of R&D in the United States

• Policy Implications

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SOFT AND HARD START-UP STRATEGIES

• There are a range of start-up strategies available to technology entrepreneurs

SpeculativeProductDevelopment

SubcontractSuppliers

ContractR&D

Consultancy

• Uncertainty

• Financial Investment

• ManagementDifficulty

RISK AND RETURN



ContractR&D

Consultancy

• Uncertainty



RISK AND RETURN

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HARDCOMPANIES

SOFTCOMPANIES



ContractR&D

Consultancy

• Uncertainty



RISK AND RETURN HARDCOMPANIES

SOFTCOMPANIES



ContractR&D

Consultancy

• Uncertainty



RISK AND RETURN

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HARDCOMPANIES

SOFTCOMPANIES

SPECULATIVE R&D

BESPOKE R&D



ContractR&D

Consultancy

• Uncertainty




SOFTCOMPANIES

SPECULATIVE R&D

BESPOKE R&D



ContractR&D

Consultancy

• Uncertainty



RISK AND RETURN

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• ‘Hard’ start-ups require substantial venture capital investment and if successful can grow very rapidly and deliver big returns for investors

• ‘Soft’ start-ups rely mainly on customer contracts to fund the development of technology that meets their needs

• Customer funding through the soft model also plays a key role in the early “exploratory” stages of exploiting new technology

• Soft company growth rates are limited and so they are rarely attractive as investments to venture capitalists

HARDCOMPANIES

SOFTCOMPANIES

SPECULATIVE R&D

BESPOKE R&D



ContractR&D

Consultancy

• Uncertainty




SOFTCOMPANIES

SPECULATIVE R&D

BESPOKE R&D



ContractR&D

Consultancy

• Uncertainty



RISK AND RETURN

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EXITSTTP GROUP PLC a private company

WAVEDRIVERWAVEDRIVER

Laboratory instrumentation

Wholly owned by TTP Group

Mobile terminal technology

IPO London Stock Exchange

October 2000

600 employees

Automated chemical synthesis

Acquired by Mettler-Toledo

December 1998

Pharma manufacture systems

Demerged

August 1998

200 employees

Automotive power electronics

Acquired by PowerGen

1997

Contract product development

Technology consulting

Proprietary IP exploitation

Wholly owned by TTP Group

300 employees

Tonejet high quality imaging

Vista low cost printing

BT Movio mobile TV

Dymo electronic label printer

Mosquito nanolitre dispenser

comPOUND storage system

Explorer µplate cytometer

DAB modules

Microfluidic lab-on-chip

Matrix low cost wireless comms

EXAMPLE OF A ‘SOFT’ CAMBRIDGE COMPANY

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EXAMPLE OF A ‘HARD’ CAMBRIDGE COMPANY

CAMBRIDGE SILICON

RADIO

• Fabless Bluetooth semiconductor spin out from Cambridge Consultants : April 1999

• $85m venture capital investment in 4 rounds

• First profit in Q3 2003

• IPO on London Stock Exchange in March 2004

• Today– 900 employees– $700 million revenues– 50% global market share

ORIGINS - spin out team of 10 people from Cambridge Consultants (similar to TTP)

- technical team had worked together for 10 years

- management team had worked together for 4½ years

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TOPICS





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THE ROLE OF R&D CONTRACTS IN THE COMMERCIALISATION OF NEW SCIENCE AND TECHNOLOGY

RESEARCHUNIVERSITIES; CORPORATE RESEARCH

EXPLORATORY DEVELOPMENTSOFT COMPANIES;

APPLIED R&D CENTRES

AND INSTITUTES

SCALABLE COMMERCIAL DEVELOPMENT

HARD START - UP COMPANIES;

ESTABLISHED COMPANIES

• Innovation is about problem solving; customers have problems and ‘wish lists’

• A development contract from a customer is the best market research a technology company can have

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THE ROLE OF R&D CONTRACTS IN THE COMMERCIALISATION OF NEW SCIENCE AND TECHNOLOGY

• Many successful ‘hard’ companies owe their success at least in part to the ‘soft’ company model:

In Cambridge : CSR, Domino Printing Sciences, Autonomy

In US : Intel, Qualcomm

• In Cambridge, ‘soft’ companies :

- are probably more important than the University as a direct source of spin out companies;

- have provided an initial training ground for technology entrepreneurs and venture capital investors;

- provide a stepping stone for young university scientists and engineers wanting to move into the commercial world.

CONCLUSION: GOVERNMENT EXPENDITURE IS ITSELF A KEY PART OF THE ECONOMY AND SO IT SHOULD SUPPORT SOFT START UPS BY PLACING R&D CONTRACTS AND TRIALING NEW TECHNOLOGY

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TOPICS





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HOW THE US FEDERAL GOVERNMENT USES R&D BUDGETS TO STIMULATE THE TECHNOLOGY SECTOR

• Key role of US Federal Government in national R&D system recognised since the start of the Cold War – pivotal in development of semiconductor, computer and other sectors

• Federal Government R&D expenditure approximately $105 billion in 2004/5, 20% with industrial companies

• Lead programme for smaller businesses is the Small Business Innovation Research Programme (SBIR), established in 1982

• Contracts aimed at meeting Federal Agencies’ requirements for new technology

• 1,500 firms receive 4,000 SBIR contracts worth $2 billion per annum

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KEY FEATURES OF SBIR PROGRAMME

• Aimed at meeting Agency’s requirements for new technologies as customers: usually specified in some detail

• Available to US businesses owned 51% or more by US citizens

• R&D contracts (plus some “grants” for directed research). 100% funding is the norm. No collaboration required. Companies own IP.

• Competitive process run by each agency 2 to 4 times a year. Agencies required to ensure ‘simplified, standardised and timely solicitations’

• Complete transparency of topics, award winners and amounts

• Organised as a seed fund not a set aside target

TOTAL SBIR BUDGET IN 2005: $2,034m

DoDNIH

DoE

DoEdUSDA

DHS

DoC

DoT

EPA

NSF

NASA

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KEY FEATURES OF SBIR PROGRAMME (Cont’d)

• Phased approach, typically:– Phase I $100k for a 6 month feasibility study– Phase II £750k for a 2 year development programme– Phase III Public sector implementation and further R&D funding

possible through Agencies’ non-SBIR budgets

• 1,500 US firms receive 4,000 SBIR contracts and awards each year; 70% to companies employing less than 25 people

• Firms can receive multiple contracts from different agencies in parallel each year

• Total R&D procurement from small firms probably $6-8 billion per annum

• In addition, goals for OVERALL Federal procurement from small US businesses ensured that in 2005:

– 25.5% went to small businesses directly– a further 20% went to small firms via prime contractors

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EXAMPLES OF SBIR SOLICITATIONS

• Speech recognition technology for air traffic control (Navy)

• Affordable advanced lighting systems (Navy)

• Smart scalpel (DARPA)

• Chip scale technologies for Gigaband signals (DARPA)

• Methods for innovative pharmaceutical manufacturing and quality assurance (National Cancer Institute)

• Diagnostic tool for von Willebrand disease (National Heart, Lung and Blood Institute)

• New capabilities enabling the massive sequencing of entire genomes of organisms (National Science Foundation)

• Data mining and management (National Science Foundation)

• Food science and nutrition; e.g. novel or rapid assay technologies for food constituents (US Department of Agriculture)

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SOME BENEFICIARIES

• Qualcomm, Amgen, Genzyme

• Photobit Technology Corporation (acquired by Micron Technology Inc in 2001)

– NASA research lab spin out 1995– SBIR contacts from US Army, NASA, DARPA,

Missile Defence Agency– Early development largely funded by

government contracts– Now leading supplier of CMOS image sensors for phones

and cameras ($1 billion revenues approx?)

• HNC Software (acquired by Fair Isaacs in 2002)– Predictive software solutions– 15 Phase I and 14 Phase II awards– 1500 employees at acquisition– Real time detection of credit card fraud

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TOPICS





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A US STYLE SBIR PROGRAMME COULD PERFORM A VITAL ROLE WITHIN THE UK AND EUROPEAN UNION



APPLIED R&D CENTRESAND INSTITUTES


HARD START-UP COMPANIES; ESTABLISHED COMPANIES

Corporate Sponsorship

GAPGAPResearch Councils

Technology Strategy Programmes

EU Programmes

DTI R&D Grants

• Venture Capital• Corporate Investment, Acquisition,

Licensing and Partnerships

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A US STYLE SBIR PROGRAMME COULD PERFORM A VITAL ROLE WITHIN THE UK AND EUROPEAN UNION



APPLIED R&D CENTRESAND INSTITUTES


HARD START-UP COMPANIES; ESTABLISHED COMPANIES

Corporate Sponsorship

GAPGAP

GOVERNMENT GOVERNMENT INNOVATION INNOVATION CONTRACTSCONTRACTS

Research Councils

Technology Strategy Programmes

EU Programmes

DTI R&D Grants

Commercial Customer Requirements and

Funding

• Venture Capital• Corporate Investment, Acquisition,

Licensing and Partnerships

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POLICY ISSUES FOR EMERGING KNOWLEDGE BASED ECONOMIES

• Opportunities for ‘soft’ companies with world class expertise serving international markets:

• Software• Chemistry for drug discovery• Etc.

• Partnerships needed for global marketing and commercial project management

• Transnational new company opportunities, e.g. Oxford Diffraction:

• Sales, marketing and finance in Oxford• Development and production based in Poland

• Public sector role:• Innovative customer• R&D contracts to solve real problems• Promotion of ‘soft’ and ‘hard’ company partnerships

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FOR FURTHER INFORMATION

• Copies of report available from:Centre for Business Research

University of CambridgeTop FloorThe Judge Business School BuildingTrumpington Street Cambridge CB2 1AG

• Website:www.cbr.cam.ac.uk

• David [email protected]

http://www.cbr.cam.ac.uk/

mailto:[email protected]

Documents

1 ‘SOFT’ COMPANIES AND R&D CONTRACTS; THE UNDERVALUED ENGINE OF GROWTH FOR KNOWLEDGE BASED ECONOMIES David Connell Director of TTP Capital Partners and