Moving Early Stage Technologies

Phyl Speser, J.D., Ph.D.Foresight Science & Technology Incorporated

www.ForesightST. [email protected]

~ 401.273.4844, ext.35

LES Strategic Alliance Committee 2009 Seminar Series

1 Foresight Science & Technology www.ForesightST.com

mailto:[email protected]

Foresight Science & Technology www.ForesightST.com

The substantive process drives the cost calculationThe cost calculation, together with the revenue projections, drives the net value

2

Net Operating Income/Loss and Cummulated Cashflows with Breakeven

-50000000

0

50000000

100000000

150000000

200000000

250000000

300000000

350000000

400000000

3652

5

3725

6

3798

6

3871

7

3944

7

4017

8

4090

8

4163

9

4236

9

4310

0

4383

0

4456

1

Net Operating Income/(Losses)

Net Difference of Cummulated Cashflows

Process Contribution to Total Project Cost(excl. Investments)

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Res

earc

h

Fina

ncin

g

Des

ign

Impl

& E

ng

Test

Mgt

Mfg

Pl &

Ctrl

Prc

& Eq

uip

Log

& Di

sp

Man

agem

ent

Dist

& S

rvc

Cos

t in

% o

f Tot

al

2

Deals Have to PencilDeals Have to Pencil

3Foresight Science & Technology www.ForesightST.com

Technical and firm specific risk are the basis for the discount rate.

Market risk is a probability distribution for outcomes.

Cost vs. Delays for all Risks along Value Chain

0%

5%

10%

15%

20%

25%

30%

0% 5% 10% 15% 20%

Resulting DelaysR

esul

ting

Cos

t Inc

reas

es

3

Risk Reduces the Value of a DealRisk Reduces the Value of a Deal

4

Risk Level Approximate DR(%) DescriptionRisk Free 10-18 Existing product, high demand,

building more of the same

Very Low Risk 15-20 New well understood technology for an existing product

Low Risk 20-30 New features, well understood technology into an existing market

Moderate Risk 25-35 New product, well understood technology into market with competition

High Risk 30-40 New product, not well understood technology into an existing market.

Very High Risk 35-45 New product, new technology, new market

Extremely High Risk 50-70 New company, unproven technology, new market

Source: Richard Razgaitis, Early Stage Technology


4

Discount RatesDiscount Rates


Focus on the Significant Risks

55

Identify Risks that Defer Income Identify Risks that Defer Income or Raise Costsor Raise Costs


Targets and Means MatrixObjectives Action Plan

Obj

ectiv

e 1

(Red

uce/

Incr

ease

)

Obj

ectiv

e 2

Obj

ectiv

e 3

Obj

ectiv

e 4

Obj

ectiv

e 5

Resources Required Who? M

easu

re

J F M A M J J A S O N D Task 1

Task 2

Task 3

Task 4

Task 5

Progress

Time Line

66

Mitigating or Avoiding the Risks Mitigating or Avoiding the Risks Increases ValueIncreases Value


Any numbers in green found in the following fields can be changed and will be reflected in the tables below

Factor Rate Weight ImpactIndustry Norm 0.0% 0.0 0%

Significance (Breakthrough add 5-10%, Major add 0-5%%, Minor subtract 0-3% 0.0% 3.0 0%Refinement/Maturity of Technology (High add, Low subtract) 0.0% 2.0 0%Breadth and Strength of IP Protection (Yes add, No subtract) 0.0% 2.0 0%Portfolio, Not Single Patent Being Licensed (Yes add, No subtract) 0.0% 2.0 0%Exclusive Market Position in Field of Use Gained (Yes add, No subtract) 0.0% 3.0 0%Immediate Utility in Market (Yes add, No subtract) 0.0% 2.0 0%Commercially Successful (Already Successful in Market add, Not Yet Proven in Market subtract) 0.0% 3.0 0%Competition Exists which Will Inhibit Ability to Exploit (Yes subtract, No add) 0.0% 1.0 0%Foreign Rights (Yes add, No subtract) 0.0% 3.0 0%Sales Conveyed or Highly Likely (Yes add, No subtract) 0.0% 2.0 0%Duration (Over Ten Years add, Under Three Years subtract) 0.0% 1.0 0%Upfront Payment Required (Yes subtract, No or Conditional add, Standard neutral) 0.0% 2.0 0%Minimum Royalties (Yes subtract, no add, Standard neutral) 0.0% 2.0 0%Know-How Included in Deal (Yes add, No subtract, Standard neutral) 0.0% 3.0 0%Support/Training Provided After Initial Transfer (Yes add, No subtract, Standard neutral) 0.0% 2.0 0%Maintenance and Enforcement Burden (Licensee subtract, Licensor add, Standard neutral) 0.0% 2.0 0%Exposure to Liability (Yes subtract, No add, Standard neutral) 0.0% 2.0 0%Total 0%Add to Industry Norm 0.00%RATE 0.000%

7

Value ContributionValue Contribution Royalty RatesRoyalty Rates


Social Networking –

Monitoring and Collaboration

8

Licensing/SpinLicensing/SpinOut & TRLOut & TRL

http://en.wikipedia.org/wiki/File:NASA_TRL_Meter.jpg

HEV Batteries


9

Energy Storage for Electric & Energy Storage for Electric & Hybrid VehiclesHybrid Vehicles


10

Li-ion Battery Functional Decomposition

(B) Product Risks

B-1.0 Lithium Ion Battery

B-001 Available Energy

B-002 Calendar Life

B-003 Cold Cranking Power

B-004 Cost

B-005 Cycle Life

B-006 Efficiency

B-007 Equivalent Electric Range

B-008 Max. System Weight

B-009 Operating Temperature Range

B-010 Peak Pulse Discharge Power

B-011 Production Price

B-012 Regenerative Pulse Power

B-013 Self Discharge

B-175 Safety

B-014 System Recharge Rate

B-015 System Volume

B-016 Thermal Runaway

B-1.1 Cathode

B-017 Cost

B-018 Electrochemical Capacity

B-019 Ionic Conductivity

Red indicates a risk or common design hurdle without a quantified goal

Green indicates a goal with specific numerical values

Yellow indicates a goal or a characteristic without a specific value


11

Product Innovation Stage

Bundle of FeaturesStandard User Interface

Process Innovation Stage

Eliminate StepsImprove ReliabilityImprove Efficiency of Resource Use

Economic Paradigms and Economic Paradigms and Dominant DesignsDominant Designs

Revolutionary War: Local Markets, Water/Wind Power, Mail, Batch/Power Tool Assisted Production, Yankee (Knowhow) InnovationCivil War: Regional Markets, Steam Power, Mail, Mass/Semi-Mechanized Production, Tinkerer Innovation (Systematic Trial andError) World War I: National Markets, Fossil Fuel Power, Phone, Automated/Mechanized Production, Engineered Innovation (Structured Trial and Error)World War II: Global Markets, Fossil Fuel Power, Radio Communications, Continuous Production, Seed Corn Innovation (R&D Driven)Vietnam: Global Segmented Markets, Fossil Fuel Power, Digital Communications, Distributed Production, Managed Innovation (OpenInnovation)Climate Change: Electric Power, Digital Communications, Asynchronous Production, Network-Centric Innovation (“Floating Networks”™) Foresight Science & Technology

www.ForesightST.com12

Paradigms for the EconomyParadigms for the Economy Control Control

Over Power & CommunicationOver Power & Communication


13

Source: Wayne JohnsonVice President, HP University Relations, “Globalization: Implications for ERCs,”

Worldwide, November 17, 2005

Open Innovation Presumes a Open Innovation Presumes a Stable ParadigmStable Paradigm

Extension

Extension

Extension

CoreEnabling

EnablingCompeting

Time

Strategic

Bohn Knowledge LevelSkills/Know-how

Utility ≈ Value


14 14

A ProductA Product’’s Utility is Constrained s Utility is Constrained by the Dominant Designby the Dominant Design

Idea BasicResearch

AppliedResearch

ProductDevelopment

MarketIntroduction

ProcessEngineering

0$

CUM

ULA

TIV

E RE

VEN

UES

TIME


15

Climate Change: Electric Power

Impact of an Economic CrisisImpact of an Economic Crisis

16 Foresight Science & Technology www.ForesightST.com

Recessions Reduce the Ability to Recessions Reduce the Ability to Cross the Valley of DeathCross the Valley of Death


17

Embryonic/Emerging

Pioneering productsHigh productinnovation

Growing demandLow volumeProprietary focusMany new entrantsStandards wars

Decline/Disruption

New functionalitiesHigh product innovation

New demandMarket convergenceNew marketsNew competitionBarriers to entry dropNew business models

Growth

Dominant designMore processinnovationStabilizing demandHigher volumeStandards focusMany failuresAcquisitionsScale wars

Maturity

Generic productsHigh process innovation

Stable demandVery high volumeCost focusStable playersConsolidation and divestitures

Supplier wars

Low

High

Labor Skill

SalesElectric Power, Digital Communications, Asynchronous Production

Obama is Embracing Disruptions Obama is Embracing Disruptions of Dominant Designsof Dominant Designs


18

Based on Sanderson and Uzumeri, Managing Product Families, (Iwin, 1997)

Variety\Rate of \ Change

Slow or “One Time”

Rapid or “Faster- Paced “

Many Segment Driven Needs (Screwdrivers)Renewable Clean Energy Generators

Dynamic Needs(Fishing Tackle)Batteries

Few Infrastructure Driven Needs (Hoes)Smart Grid

Social Network Driven Needs(Cell Phones)Hybrid and Electric Vehicles

Obama Agenda is Accelerating the Obama Agenda is Accelerating the Rate of Change in Dominant DesignsRate of Change in Dominant Designs


19

Ease of Use

Paradigm Shifts Affect Freedom to Paradigm Shifts Affect Freedom to OperateOperate

Time

Yield

Requirement

S1a

Trajectory

Technology 1 S1c

Requirement

S1b

S2c

S2b

S2a

Trajectory

Technology 2


20

Disruption Creates Windows of Disruption Creates Windows of OpportunityOpportunity


21

ButtonManufacturer

ClothingManufacturer

ButtonManufacturer

ClothingManufacturer

MarketForce

Historical Example: The ZipperHistorical Example: The Zipper


22

Foresight Advanced Energy Storage Portal

http://batteries.foresightst.com

Energy StorageEnergy Storage

http://batteries.foresightst.com/

23

Extension

Extension

Extension

Li-IonEnabling

Lead Acid

Time

Li-Air


Enabling

Enabling

Extension

Network-Centric Innovation

Strategic Alliances are a Way to Strategic Alliances are a Way to Hedge Your IP PortfolioHedge Your IP Portfolio


24

CORE

Technology Familiarity

Mar

ket F

amili

arity

Control

Partner

Divest orMonitor

STRATEGY

Control:InternalDevelopment

AcquisitionsIn-License

Partner:Joint VenturesAlliancesInternal VenturesOut-License

Divest:AssignmentsSales

Monitor:Venture CapitalEducationalAcquisitions

Market Development

TechnologyDevelopment

Adapted from Roberts and Berry, SMR 1988.

Paradigm ShiftReduces Familiarity

Dominant Design Shift Reduces Familiarity

Network-Centric

Innovation

Sweet Spot for Alliances Expands Sweet Spot for Alliances Expands in Periods of Disruptionin Periods of Disruption

Provides management investment optionsInvestWaitAbandon

Useful where a progression (stage gate®) based on risk elimination can resolve return on investment

Market or technical uncertainties affect value of IPNPV is difficult to estimate or near zero


25

Real OptionsReal Options

Abi

lity

to r

espo

nd

Low

High

Likelihood of receiving new informationLow High

U n c e r t a i n t y

Roo

m fo

r M

anag

eria

l Fle

xibi

lity

Moderate Flexibility Value

Moderate Flexibility Value

Low Flexibility Value

High Flexibility Value

Marco Antonio Guimarães Dias, Petrobras and PUC-Rio, Brazil, 2003,www.puc-rio.br/marco.ind/


26

In Periods of Uncertainty the In Periods of Uncertainty the Value of Hedging IncreasesValue of Hedging Increases

http://www.puc-rio.br/marco.ind/


Six Sigma –

Licensing

Joint Venture, or Equitypossibly

leading to acquisitionFarm Teaming –

Cooperative R&DContracts with Right of First Refusal

Or Equity Investment

27

Traditional Relationship ModelsTraditional Relationship Models




\\PartnrPartnr\\

SME SME \\

Partner Partner Wants DealWants Deal

Partner Partner WalksWalks

SME Wants SME Wants DealDeal

$10m, $10m, $0.5m$0.5m

$0.0m,$0.0m,--$0.05m$0.05m

SME WalksSME Walks $0.1m, $0.1m, --$0.05m$0.05m

--$0m, $0m, --$0m$0m

28

Deals Make Sense When They Deals Make Sense When They Increase PayoffIncrease Payoff

\\PartnrPartnr\\

SME SME \\

Partner Partner Moves Moves ForwardForward

Partner Partner StepsSteps

PartnerPartner AbandonsAbandons

TTO Moves TTO Moves ForwardForward

>$15m, >$15m, >$10m>$10m

$5m,$5m,$0.05m,$0.05m,

$0,$0,++--$0.03m$0.03m

TTO StepsTTO Steps $5m, $5m, $0.05m$0.05m

++--$0.03m, $0.03m, ++--$0.03m$0.03m

$0,$0, ++--$0.1m$0.1m

TTO TTO AbandonsAbandons

++--$0.03,$0.03,$0$0

++--$0.01m$0.01m$0$0

$0,$0,$0$0


29

NetworkNetworkCentric Innovations Make Centric Innovations Make Sense Where They Increase PayoffsSense Where They Increase Payoffs

−

C

P (forecastedprice of the portfolio,P = Σ

1…n

IP x

x p)

NP

V (

mill

ion

$)

Linear Equation for the NPV (“Business Model”):

NPV = q

(P)-C

NPV as a function of P

• The quality of IP (q) affects the NPV line slope.• q measures the value of:portfolio average technology value at current TRL/

forecasted fair market value of current products•

q is a measure of potential utility that in the inverse of the discount rate

spreadsheet value

NPV = PV of Total Revenues –

Costs


30

Rate of NPV Capture is Related to Rate of NPV Capture is Related to the Quality of the IP Portfoliothe Quality of the IP Portfolio

If NPV = q (IP xp) − C = (0.2 x 500 x $18) – $1750 = + $50 million, do you develop the portfolio now if the Discount Rate is 10%?

E[P] = $18 / technologyNPV(t=0) = −

50 million $

E[P+] = $19 ⇒ NPV+

= + $150 million

E[P−] = $17 ⇒ NPV −

= −

$150 million

Rational manager will not exercise this option ⇒ Max (NPV−, 0) = zero

50%

50%

t = 1

t = 0

At t = 1, the portfolio NPV is: (50% x 150) + (50% x 0) = + $75 millionThe present value is: NPVwait

(t=0) = 75/1.1 = 68.2 > 50 so wait

Wait

Abandon


31

Suppose the same case but with a higher NPV. NPV = q (IP x p) − C = (0.22 x 500 x $18) – $1750 = + $230 million

E[P] = $18 / technologyNPV(t=0) = $230 million

E[P+] = $19 ⇒ NPV+

= $340 million

E[P−] = $17 ⇒ NPV −

= $120 million

At t = 1, the portfolio NPV is: (50% x 340) + (50% x 120) = $230

millionThe present value is: NPVwait

(t=0) = 230/1.1 = $209.1 < $230. Deep-in-the-money

(high NPV) means exercise the option

50%

50%

t = 1

t = 0Wait

Move Forward


32

University/Industry CentersRLDPs/LLCHedge Funds


33


34

Govt. orFoundationSubsidy

BUYER SELLER

http://upload.wikimedia.org/wikipedia/en/6/6b/PutWrite.png

http://en.wikipedia.org/wiki/Image:CallOption.png


35

Past Present Future

Strength of Intellectual Asset Portfolio

of

©

Foresight Science and Technology

High

LowRevenue From Entry Market Application

Long-Term Sustainable Competitive Advantage

Short and Mid-Term Competitive Advantage


36

Aggregate Technologiesfrom TTOs, Mature with SMES with:• R&D Awards• Other Subsidies•

Sales or Other Commercialization

Success

Take:

• Call Options for non-exclusive

or exclusive licenses

•Option fee fundsmaturing the technology

• If technology takes off, option isexercised.

•

Can sell option prior exercise date with approval to improve vale of option



37

Horizontal Alliances

RDLP or RDLLC

Vertical AlliancesJoint R&D Venture

1.

Spin-Out Joint Venture, License to LLC Member,

2.

License to Small Business3.

Sell Option4.

Abandon and Write Off

Early Stage Exit


38


•

Nothing happens without a sale.

David Speser

•

If opportunity doesn’t knock, build a door.

Milton Berle

•

A well-defined imagination is the source of great deeds. Chinese Fortune Cookie

Thanks. Phyl SpeserChair, Strategic Alliance Committee and CEO, Foresight Science &

Technology

39

Documents

Moving Early Stage Technologies