New Models inCollaborative R&D

Chris Roberts

Founder and CEO, PixSell Inc.

croberts@pixsell.com

NASA: Turning Goals Into Reality

June 10-12, 2003

Williamsburg, VA

2

Technology Transfer FromGovernment to Business:

Entrepreneurial Perspectiveÿ Innovation = Invention + Exploitationq Invention = Creative Process, Laboratory Discoveryq Exploitation = Develop and Deliver Application of the

Invention to One or More Users or Markets

ÿ Innovation is a Slow ProcessÿDifficult to Innovate ConsistentlyÿHigh Risk- High Reward: How Government Can

Help Manage Risks

3

Business Risk Categories

ÿTechnical Risk

ÿMarket Risk

ÿFinancial Risk

ÿPolitical Risk

ÿPersonnel Risk

4

Patience Is a Necessary Virtue

ÿ Innovation Process Can Be Very Slowq Internet invented 1969,

• Mosaic Browser 1992• DotCom Business Boom late 1990s

q Transistor Invented at Bell Labs 1949• First Commercial Product 1959

ÿReasons for Slow Pace of Innovationq Cultural Conservatism: It’s Not Broke, So Don’t Fix Itq My “Paradigm”is Just Fine Thank Youq Cost vs. Benefit Is Not Apparentq Not Invented Here Syndrome

5

Charity Begins in the Lab?

ÿ Inventing Lab May not Benefit Directly FromSuccessful Innovationq ATT/Bell Labs (Transistor) (Fairchild, National

Intel, TI)

q Xerox PARC (Ethernet, Mouse, GUI) (3Com,Apple)

q DARPA (Internet, Distributed Interactive Simulations)DotComs, NetScape, Computer Games

q Sandia Labs (Clean Room Technology)

6

Failure Is Always An Option!

ÿ90% of All Small Businesses Fail withinFirst 5 Years (Remember the Dot.Bombs)ÿMIT Study Found 90% of HighTech

Businesses w/Technical Management TeamsFailedÿBUT – 80% of HiTech Businesses

w/Business Management Teams SucceededÿInventor May Not Benefit from Innovation

7

Winners and Losers inTechnology Innovation

ÿThe Superior Technology Does NotAlways Prevail in the MarketplaceÿBetamax vs. VHSÿMS Office vs. Lotus, WordPerfect, Harvard

GraphicsÿDOS/Windows vs. Apple OS, CPM, OS2,

Linux, Unix,ÿAmiga, Macintosh vs. IBM PC

8

Critical Success Factors forG2B Collaborative Innovation

ÿStaffing

ÿMetrics

ÿFinancing

9

Key Players on a SuccessfulEntrepreneurial Technology

Venture

ÿ Idea Generator: Technical Lead, Scientist,Creative Thinkerÿ Product Champion: Entrepreneur, Idea-Exploiterÿ Program Manager: Business Support and

CoordinationÿResource Sponsor: Financier, Coach

10

Program MetricsGovernment vs. Business

ÿ Government Metricsÿ Process and Programmaticÿ No. Agreements Signedÿ No. VC Investments madeÿ Total VC dollars investedÿ $ From Tech Licenses

ÿ No. R&D projects w/Industry ÿ Political and Economicÿ No. New Jobs Createdÿ No. $ Invested Locallyÿ No Embarrassments

ÿ Technicalÿ Benefit to Agency From New Productsÿ Advance in State of the Art

ÿBusiness Metricsq Revenue

q Profit

q Market Share

q Growth Rate

q Time to Market

q Return on Investment

q Liquidity for Investors

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Financing Innovation inStages

ÿ Financial Lifecycle Stagesÿ Requirements Usually

Grow over Timeq Seed or Startup: Product

Development, MarketResearch

q First and Second Stage:Begin Product Roll-out,Full Scale Operations,

q Third Stage – Majorexpansion, new products

q Mezzanine, IPO

ÿ Sources of Moneyq Personal Assetsq Friends and Familyq Angel Investorsq Venture Capital Fundsq Banksq Strategic Partnersq Public Markets (IPO)q Contracts, Grants, SBIRs

ÿ Introduction to Moneyq Investment Bankersq Accountants and Lawyersq Venture Forums

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Welcome to Venture Capital

ÿWhat is a Venture Capital Fund?

ÿWhere Do they Get their Money?

ÿHow Much/How Little Will VCs Invest

ÿWhat do VCs Look For in an Investment?

ÿHow Do VCs Make Money?qRule of Thirds

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Recent Trends In VentureCapital Investments

Venture Capital Investments

0100020003000400050006000700080009000

1990

1992

1994

1996

1998

2000

2002

Year of Investment

Number of Deals

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Recent Trends In Size ofVenture Capital Investment

Size of Venture Capital Investments

02468

101214

1990

1992

1994

1996

1998

2000

2002

Year of Investment

$Millions

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Total Annual Venture CapitalInvestments

Total Venture Capital Investment by Year

$0$20,000$40,000$60,000$80,000

$100,000$120,000

1990

1992

1994

1996

1998

2000

2002

Year of Investment

Investment $Millions

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Venture Capital Trends Overthe Last 5 Years by Quarter

Venture Capital Transactions by Quarter

0

500

1000

1500

2000

2500

1997

-1

1997

-4

1998

-3

1999

-2

2000

-1

2000

-4

2001

-3

2002

-2

Investment Date

No. Deals

Average Venture Capital Investment by Quarter

$0$2$4$6$8

$10$12$14

1997

-1

1997

-4

1998

-3

1999

-2

2000

-1

2000

-4

2001

-3

2002

-2

Investment Period

$Millions

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What Does Venture CapitalCost?

Seed or Startup Stage: 50-60% ROI – 10 times investment in five years

First & Second Stage: 30-50% ROI - 5 to 7 times investment in five years

Third Stage & Mezzanine: 20-30% ROI

Percentage Ownership of a Company that a VC Requires to Make 30% Annual

Annual Return On Investment

Based On Estimated Market Value of the Company After 6 Years

Co.Value ($M) $20 $40 $60 $80 $100

Investment ($M) 4 96% 48% 32% 24% 19%6 N/A 72% 48% 36% 29%

8 N/A 96% 64% 48% 38%

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VC Equity OwnershipDemand

$20 $40 $60 $80 $100

$4 Million

$8 Million0%

20%

40%

60%

80%

100%

Company Value

VC Equity Ownership %

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Venture Capital inAerospace

ÿVery Few Sources

ÿMature Market

ÿSlow Growth Rates

ÿLarge Investments Required

ÿLong Time to Market

ÿLarge Number of Failed Ventures

ÿAbsence of Pool of Happy Investors

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Different Approaches toCollaborative R&D

ÿNASA/State of MS Joint Venture: MSCIÿNASA SBIRsÿNAVY – Center for Commercialization of

Advanced Technology (CCAT)ÿDepartment of Energy Labs –Outsourcing

(Battelle, Lockheed Martin)ÿCIA - In-Q-Tel [Quasi Venture Capital]ÿArmy – Applied Communication and Information

Networking (ACIN) [Defense Incubator]ÿGPS

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Observations on SBIRs

ÿAdvantagesq No equity dilution

q Retain IP ownership

q Customer focused

q Follow-on potential inphase 2, phase 3

q Leverage of privatecapital encouraged(DOD Fast Track)

ÿ Disadvantagesq Topics Selected by Govt.

q Multiple Program Objectives

q Limited Phase 1, 2 Funding

q Lengthy decision cycle

q Low Probability of Award

q Complex Application Process

q Fixed Schedule ofProcurements

q Slow Payment

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Think Orthogonally!

ÿDo not confuse the source lab with the end market

ÿGood technology can be applied anywhereq Cryogenic quenching turbine blades vs. cutlery

q Microwave amplifier tubes Radar vs. Kitchenappliance

q Rocket motor technology consumer ceramics/BBQ,electronic packages, GNC > automated securitytracking systems

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Recommendations forGovernment Programs

ÿEmbrace Risk, Help to Mitigate Technical,Financial, PersonnelÿMake Decisions FasterÿSeek Out and Work With Entrepreneurs,

Business Schools, Investor Groups,Venture Forums, Business PlanCompetitions