Federal Lab Technologies: Investor-Ready?

I’m skeptical of most government efforts to catalyze innovation, but there are several interesting lessons in a book recently given to me by my business partner, Alex, in his attempt to make me ‘well-rounded’. The book is Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It, by Josh Lerner, published in 2009.

I highly recommend Lerner’s book for anyone involved with public entrepreneurial initiatives, as it discusses how federal/local governments can interact with the entrepreneurial and investment communities in order to maximize innovation and economic growth.

The book goes in-depth in discussing the history of public initiatives and their impact on the creation of various startup communities, as well as the venture capital industry. Lerner also provides a brief, but solid overview on what investors look for in a deal.

A subset of the book’s basic premise is right up our alley — how can research institutions and taxpayer ‘funds’ increase the potential for commercial success of federal lab technologies?

In this post, I will try to connect the venture investment diligence process to the commercialization of technologies at research laboratories from across the nation. I will not discuss if/how the public should invest in these initiatives — more on that topic in future posts.

In Chapter 3 of his book, Lerner references analyses performed by Steve Kaplan and Per Stromberg, where they grouped key venture capital investment decision-making criteria into three categories: (1) internal factors, (2) external factors and (3) difficulty of execution. Internal factors include the quality of the venture’s management team, influence of other investors, current performance, etc. External factors include environmental risks, competitive threats, market size and growth, ability to exit, etc. Difficulty of execution can range from the complexity of the technology to the feasibility of the business model.

It’s clear that most research technologies — especially at the DoD — are not ready for venture investment. I mean, there’s not even a team or company (internal factors) formed yet, let alone a commercially-viable and market-ready product! I’ve seen so many feeble attempts to get researchers to present their raw technologies to the venture community with very limited success. But at least they can say they did something, right? Government loves ‘activity’.

But I digress…

Within the context of the three categories outlined above, we should ask ourselves, “what can the research labs and ecosystem participants do to help de-risk federal lab technologies for potential downstream commercialization stakeholders and future investors?”

Let’s begin with the labs themselves.

For Defense (DoD) technologies, I argue that there’s not much that labs can (or should) do related to internal (company) or external (market) factors. The Defense labs are public organizations with a mission to arm the warfighter and secure the nation. That’s it. When it comes to commercial interests, the labs are very limited in their knowledge. For the good of the market and national defense, they should probably stay out of private market commercialization altogether.

However, under the investment category of difficulty of execution, the federal labs can be an enabler of the commercialization process in three crucial ways: (1) publicize all known knowledge about their technologies and current stages of development on a common platform for the world to see, (2) give unlimited access to the technology and IP to the potential venture(s)/licensee(s), including lowering the barriers to access to a license as much as possible, and (3) allow the researcher the freedom to lend their tacit knowledge and capabilities to the licensing organization(s), within the confines of their existing government responsibilities.

This unrestricted access to the technologies can go a long way in alleviating transactional costs and development complexity, thus reducing the difficulty of execution for downstream market stakeholders.

So, if the labs have little to no role beyond giving access, where does that leave the de-risking of the very important categories of internal and external factors for the technology opportunities?

For years, our solution was to create new startup ventures based on lab technologies to help investigate the market’s external factors and mold the company’s internal factors.

My first medical device startup, HeartSounds, was a product of this model. Our product was based on university IP and research, and fortunately, as MBA students, we could afford the time to iterate on our business model and optimize our organization as we uncovered newfound or varying external factors.

Alex and I initially concluded that this success, along with a few dozen other federal lab technology startup successes that we’ve been involved with, pointed to a student startup model for commercializing lab technologies. So we tried this with the Air Force.

As we worked with partners to scale this ‘startup creation’ model via the AFRL Commercialization Academy and Technology Acceleration Program (TAP), we recognized that not everyone could (or should) pivot into different spaces as external factors were uncovered, nor could we rely on the participants to spare the time and resources to go through this process. Although we had some success, it turned out that the startup creation model in isolation was not as scalable or as impactful as predicted.

We now understand that we need to uncover external factors (market size/growth, regulatory environment, competitors and customer willingness to buy) prior to creating a new startup, or pairing with an existing one, to tackle the technology.

I think there’s an analogy here about carts before horses… it seems so obvious now…

So, if we’re not creating startups yet, what can we do to uncover external factors for each opportunity? It turns out that the lab’s community and network partners can play a major role.

First, by having broader and deeper content related to the lab’s technologies on a visible and accessible platform (e.g. our ArchiTech platform), existing startups or potential industry licensees who have experience in those markets (i.e. have the right internal factors) may jump on these technologies.

But even if the technologies don’t find an immediate home, local ecosystem partners can get involved to de-risk and add substance to the lab’s technologies. ArchiTech offers Application Discovery programs for community partners to investigate and prioritize the variety of potential market applications. ArchiTech also offers entrepreneurial courses for universities that leverage students to assess the relative value of technologies within the context of the current market environments.

The output is a market assessment for technologies, along with a commercial pathway, thus de-risking the external factors and difficulty of execution for each technology.

Ok. That’s great and all. But is the output really all that good? It’s just university students and a few random people providing insights. And what about internal factors? Isn’t ‘team’ the most important investment criteria? But you said…

Ok, calm down. I understand your objections.

One of the great things about using a crowd-sourced, web-based platform in assessing an opportunity is that the activity and content generated is captured for all to see. We want to leverage inputs, not just from local students or researchers, but from across the nation. In doing this, we increase the number of serendipitous moments between the technology owners and potential licensees — increasing the probability of solid licenses and commercial products.

In addition, by tracking content on potential customers and competitors, we can better refine the list of target licensees for the technology transfer folks, thus increasing the probability of finding the right team in the right community, who have the right internal factors, that are ripe for continued development and investment.

We have some evidence that this may be a more complete and effective model.

In 2014, we hosted the Commercialization Academy Showcase in Utica, NY, with Air Force Research Laboratory technologies, presented by NY college students and their startups. Amazingly, as a result of that one event, there were more licensing requests to the AFRL from outside parties than there were from the 5 startups created during the 3-month program!

The greatest impact for the lab? The AFRL had the most licensing requests they have ever seen in a one-month span. And that was just one event — imagine a continuous process with constant interactions!

There is a ton of value in assessing technologies via local commercialization activities, including researcher workshops, incubator/accelerator programs and university courses, but it is even more valuable to make this activity visible to the world and crowd-sourcing additional outside knowledge on a shared platform.

In summary, most of the technologies in the federal and university lab system are not ready for investment — not even close. But there are roles for research laboratories, researchers, local communities, students and national partners to get engaged with the lab’s technologies to make them more suitable for downstream investment. By giving access to the technologies and researchers, labs can help start the process of creating an investable opportunity, which can then be picked up by the local community to assess, followed by a national network to help commercialize. Only then may we see investible entities with the right internal and external factors.

But we all need to be a part of this network in order for it to work. In 2016, we’ll be deploying ArchiTech and community programs across the nation. Let’s unlock the potential of federal lab technologies together!

Sign up today at ArchiTechPlatform.com