Ian Maxwell

1st World Product Development & What The Customer Really Wanted

Ed: This post came about after a number of tongue in cheek posts on Ian Maxwells personal blog that got funnier as they went along (it makes me laugh regularly), it might be poking a little fun at a lot of entrepreneurial tendencies, you might recognise some of your own mistakes, I did…

DotCom Icon

Ok I admit defeat. A couple of years ago I bought myself a (near perfect) replica of the Herman Miller Aeron office chair – an icon of the original dot-com era.

In the dot com boom, there wasn’t a start-up CEO or a VC who didn’t have one of these beauties.  (ED: Often the first sign of startup funding was a truck delivering these to some brightly coloured office with slippery slide between floors and a wacky name like Spike or Peakhour).

I was hoping for great things. After years of frustration it’s either going into the garbage skip or I will find a charitable cause (one of my unsuspecting engineers) to give it to.

The primary issue that I have with the replica Aeron? I keep sliding down in it and I just can’t stop it. One minute I am perched in the Stepford position. The next, my head is level with the desktop, with visibility to the monitor obscured by a slab of Ikea.

I do plan to video myself because there is some sort of extra dimensional other-universe thing going down where I do not perceive this Euclidian transition.

I have tried quite unsuccessfully to adjust the thing so all of this doesn’t happen. There is no position that works, and adjusting the Aeron is one of the most frustrating procedures one could endure.

I have decided that it was designed without any consultation with either an engineer, an ergonomics expert or with anyone in the room with a shred of honesty (‘seriously Herman, it’s shit’).

Who let the dogs out of the Bauhaus?

Searching online I discovered that I am not alone. Many hate the Aeron for a variety of reasons. There is even a collective of overweight American men that wear Chinos and have fat wallets in their back pockets that have found that the Pellicle material rips their pants.

And, in their disgust, they have found each other! Thank Christ for the internet.

And then I started thinking; this problem represents a perfect Gen Y product opportunity. The Y’s can overthrow this darling of the baby-boomer’s office obsessions.

They can take a first world problem that very few have noticed, and then solve it with existing technology together with a smartphone app, and then slap it on Kickstarter.

Here is the proposed product spec:

  • An office chair.
  • A bunch of electric motors in the seat for adjustment, borrowed from the automotive industry.
  • A rechargeable lithium ion battery to drive the motors.
  • An inductive charger receiver in the base of the chair to power the battery.
  • An inductive charger transmitter in an accompanying floor mat, plugged into mains power, to drive the inductive charger receiver in the base of the chair.
  • A smartphone app, connected via Bluetooth 4.0 (low power) to the chair, for remote adjustment of the chair settings.
  • Biometric sensors in the chair to monitor heart rate, body temperature, body posture and the like.
  • The app will then suggest improvements to the user such as ‘time for a break’, ‘time for some exercise’ and ‘straighten your back’.

Here is the kickstarter concept.

Chair

The app will calculate daily calorie usage and also integrate with the user’s favourite exercise app and wrist-band monitor to measure, report on and help control, a large fraction of the user’s daily activities. This technology can be extended to the user’s bed and sofa (our next product ideas) for near 24 hour coverage.

A customizable vibration feedback mechanism will be built into the chair so that the user can set up alerts such as ‘get your hand off it’ or ‘your girlfriend is calling’.

The user will be able to get, via the internet, alarms when an intruder has used the chair in an unauthorised manner. The sensors will detect use by a non-owner (through, for example, weight and biometric signatures) and alert the user, wherever they may be on the planet, so that they can then phone or message back to the office for corrective action (‘get out of my chair’).

The user will also receive remote alerts via the app if the chair has been, or is being stolen.

And in a ‘gamification’ effort via the app, users will be rated against other users of these chairs for various metrics such ‘most time spent in the chair’ and ‘most calories used while doing nothing’.

A large database of user information will be collected and sold to people and companies that want to sell them stuff. Seriously, knowing where the customer is and what they are doing is a big deal.

The database will also be plundered using learning algorithms for health information on the business classes, which will be on-sold to health technology companies, government agencies, insurance companies, food delivery companies and the like.

The biometric data will be sold as a real-time service to online payment system companies and similar, as a means of authentication of the user in any online transaction.

Further technology enhancements are also in development.

Massive Opportunity

This is what we told our local incubator when we moved in.

Screen Shot 2014-10-29 at 8.18.44 am

 

Here is the actual alpha prototype.

Alpha-milkcrateseat

 

Here is the actual beta prototype.

Beta-chair-621x414

 

 We raised funding

Here is the General Release product – unfortunately we got Tier 1 Silicon Valley VC funding and things got out of hand.

space_saver_emperor_chair_619x357-slideshow

 

Because the thing was so complex we had to install an emergency seat in case of malfunction.

Swissball

Should there be a need to use the emergency seat, the user retrieves it from under the seat, then removes the plastic cover.

Inflation is achieved by pulling on the red tabs and to inflate it further there is a mouth piece to blow in.

The user can then punch buttons on the app to connect to our messaging help service in India.

 

What the customer really wanted

ED: After the Smart Chair Startup failed the investors went back and spoke to the potential customers, apparently this is what they wanted 

Woodenstool

 

 

Grants Aren’t Helping Australian Tech Companies But Patent & Taxation Reform Could

Industry Minister Ian Macfarlane has floated the idea that government grants be linked to the number of patents a university registers, rather than the papers it gets published.

The suggestion comes at a time when Australia is rapidly going backwards in the development of technology products for export despite all of the federal government incentives into R&D tax concessions, venture capital, grants to industry and university grants aimed at commercialisable outcomes.

Between 2001 and 2011 Australia’s GDP grew by 270% whereas high-technology exports grew by just 40%. In 2011 high-tech exports represented just 1.5% of all exports.

CSRIO - WIFI Patent - Arguably one of the most valuable patents in Australia's history

Image from CSRIO – WIFI Patent – Arguably one of the most valuable patents in Australia’s history

The cause? We have almost no large companies exporting technology solutions to global markets. Without large companies investing and promoting technology solutions there cannot be a thriving technology sector because large companies, like the big trees in a rain forest, provide all sorts of high level cover and ground level support for a technology sector.

Australia’s woeful patent track record

Australia’s 20 largest listed corporations have just 3,400 patent between them. Thirteen of these companies have less than 20 patents in total. By comparison the 20 largest US listed companies hold many hundreds of thousands of patents and they collectively file over 20,000 patents year. Google alone owns 51,000 patents and IBM has a similar number.

This discrepancy between Australian and US corporations is primarily due to the focus of large Australian companies on exploiting their “protected” share of the local market rather than exporting technology solutions.

This bias against innovation has a knock-on effect that flows all the way through our economy, down to our SMEs and universities. Despite claims to the contrary, our universities lack useful inventiveness. Consider this; in 2008 Australian universities and research organisations managed to publish 3.18% of the world’s research publications but only an estimated 0.15% of the world’s patent filings.

More worrying is that in 2010 about 220,000 patents were granted in the United States whereas only 16,000 were granted in Australia. The owners of about 204,000 US patents couldn’t be bothered filing an Australian-equivalent patent. The is because Australian patents have little commercial value due to the difficulties in enforcing patent rights in Australia and the low financial penalties for patent infringement.

This is reflected in the fact that 80% of known cases of patent infringement in Australia are not pursued by the patent owners. Further, owners of one-third of all Australian patents are aware of patent infringement and yet less than half a percent (per year) of Australian patents are the subject of court enforcement. These are not the signs of a well-functioning patent system!

What can we do about this? Government incentives, aimed at universities, CSIRO, SMEs or venture capital, will not have any impact until we figure out how to get some of our larger companies into the innovation game. And we have a weapon choice right in front of us, the patent system, which can be considered as a very “lazy” asset. What we need to do is make patents more valuable as assets and make patents cheaper to create and own. We can do this by taking three very simple steps.

Fixing the system

Firstly, the value of Australian patents can be increased by lowering the costs of patent enforcement and increasing the awards for successful patent enforcement. Quite simply we have to make our courts look a lot more like the US where damages for patent infringement are high and court costs are not awarded against losing parties. Success in these endeavours will be measured by the emergence on contingency lawyers for patent enforcement.

If these changes are made, it would’t take very long for Australian corporations to be the subject of patent enforcement. This would then focus the boards of these companies onto their own patent positions. They would then act to protect themselves by investing in the internal development of patents, licensing patents from other parties, buying patents, joining defensive patent funds and the like.

The Patent Box can work in Australia

Secondly, we need to introduce a “patent box” scheme where a tax break is given to companies for the sale of products or services that are protected by patents. The patent box is one of two major tax incentives for new technology development; the other is the R&D tax concession. Put together the R&D tax concession and patent box systems are designed to encourage the investment into the development and commercialisation of higher-quality new technology platforms.

A patent box scheme could be carefully crafted to avoid pitfalls seen in other countries. Most importantly, the patent box scheme must be reserved for cases where the original R&D behind the patents is performed in Australia and where the patents are owned by the company claiming the tax break. There also needs to be an audit process to ensure that products of a patent box tax claim have substantial patent protection instead of some ancillary patent claims not central to the market success of the product.

If a patent box scheme was introduced Australia’s large corporations would immediately start looking at means to innovate so that they could claim the patent box tax incentive. The end result of these R&D efforts would be world-leading products and services with export potential.

Patent application is part of the R&D process

Thirdly, the general tax treatment of the costs of patenting makes no distinction between the process of developing and applying for patents and the maintenance costs related to granted patents; they are all capital expenditure.

But, like research expenditure, any patent application expenditure is highly speculative because there is no certainty future economic benefits will flow to an entity which owns a patent application. Since patent applications have no value prior to the granting of a patent I propose a tax treatment for patents that allows all patenting cost to be expensed for tax purposes up until when a patent is granted (in a jurisdiction) whereupon further costs (of maintenance over the life of a patent) should be treated as capital expenses.

I would go further and allow costs associated with patent applications to be eligible for the R&D tax concession. This would be a key enabler for bringing the patenting process properly into the R&D process, where it belongs but where it often fails to be. Treating patent application costs as R&D expenses would reduce the perceived costs and risks of patenting and hence encourage both innovation and patenting.

 This is a summary of a longer piece published here.

Photo by Internet Archive Book Images

ian-maxwell-linkedinIan A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as a partner at Zetta Research and an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian

Bored with Board Meetings? Here is a new board game that can also add value to your company

© Ian Andrew Maxwell

Introduction

For almost twenty years now I have been ‘enduring’ board meetings. This is a phenomenon that is rarely discussed by those of us that regularly sit on boards; most of us just silently ‘suck it up’.

For some people, e.g. independent board members, a board meeting can be an interesting monthly or bi-monthly diversion from their usual activities.

However for professional investors, such as venture capitalists, attending a board meeting can feel like Ground Hog Day.

For executives the preparations for a company board meeting can offer a useful opportunity that enforces a reporting and planning structure that otherwise just naturally drifts.

Yet even for executives, after a couple years in the job and when pushed on the subject, very few will admit to really enjoying board meetings; these are just seen as a necessary and unavoidable part of business.

So are board meetings always boring?  Not always. Occasionally you get an entertaining one and the contrast to the run-of-the-mill meetings can highlight just how boring they usually are.

Here are some examples of when my board meetings got really interesting:

  • A technology start-up was raising venture capital funds with a big ‘down-round’ in valuation and some nasty ‘pay-to-play’ terms for existing shareholders. There were some non-participating (and very angry) shareholders that led a day-long shouting match. It was hugely entertaining and very hard to forget.
  • An operating company was going through an exit via a trade sale. There was a difference of opinions between board members (and the shareholders they represented) and the CEO as to whether the deal represented good value. Control rights in this particular company were pretty messy and some board members were ‘playing’ the situation in order to get certain concessions. This ended in days and days of board meetings with threats of legal action; it was one very large memorable game of ‘chicken’ (any hint of the dispute and the potential acquirer might have walked away).
  • A board had got its act together sufficiently to decide that the ‘problem’ in the company was the CEO. However they went about the process of firing the CEO without bothering to first secure a replacement. This can only be described as ‘juicily messy’ or as a ‘slow moving train wreck’.
  • A board decided to put a company into voluntary liquidation when it was still arguable that it was solvent and could (in a very, very unlikely scenario) trade its way out of its issues. The ‘pro’s’ argued that an orderly windup enhanced their (the liquidation preference shareholders) chances of getting full value for the assets. The ‘cons’ argued that they were going to get nothing anyway and they would prefer to give the wildcard option a go. This had to be the pinnacle of board-level emotion and an occasion like this is certainly not to be missed in any board career.
  • Sometimes interesting board meetings occur out of the blue for no good reason. I remember one board meeting where a bunch of board members spent two hours debating a slight change to the company logo for no good reason other than it was the first thing in a year that they felt like they could contribute to. It’s the downside of having the wrong board members, experience-wise. After two hours, had there been a baseball bat in the room, I assure you there would have been blood on the video-conference screen. Entertainment of sorts!

The less in charge the Chair is at these ‘interesting’ meetings the more ‘interesting’ the meetings get.

The genuinely interesting board meetings must represent less than 1% of all board meetings. This means that, in order to be a participant in the interesting meetings, the price one pays is to sit through the other 99% of boring meetings. Talk about a long tail!

It was in this context, one day a couple of years back, that I was sitting in a board meeting that could have been a carbon copy (note to Gen Y’s – this is what ‘cc’ stands for) of the previous five board meetings of this particular company, wondering what we as a board weren’t doing (other than turning the handle over and over and over) and why we weren’t doing anything different to what we have done before.

The answer was of course ‘the board members’. They (and me included) were just politely going through the processes, ignoring the fact that this company was missing some great opportunities for growth.

Of course in order to grab these opportunities we would have needed a new CEO, lots of new equity investment, and some working capital debt. At least half of the board members and the chair would have had to go and there would likely have been a shareholder stoush or two if we tried that on!

Which led me to wonder why the board members at this company were collectively so ineffective at challenging the status quo?

The self-interest of some of the board members partially answered the question. They were more focused on their golf or their sinecures.

For the others, well they (including me) were very busy people and none of us felt like we had the time or energy to muster up the collective interest to force a consideration of change. In any case this is a fraught process with many downside risks.

But after consideration I decided that there was more to it. Fundamentally it seemed to me that it was all about group dynamics and personality types.

Firstly I noted that many people can behave quite differently in a board meeting compared to at other times.

For example, your wise old coffee-drinking colleague might become an outspoken monster in board meetings. Or the extroverted venture capitalist may never say a single world in a meeting (a habit based on hard won experience maybe) until he shuts his notepad and says ‘I am done here’ and walks out never to be seen again.

People often ‘change’ in front in an audience – it seems to be human nature.

Therefore for the purposes of judging people as board members, personality types have to be measured in the context of participation at board meetings.

And of course there is the old saying ‘You can’t manage what you don’t measure’. So I decided to develop a way of measuring board-meeting personality types.

And this in turn led me to develop a whole structure (I had almost four hours after all) in which to evaluate the board members, their personalities at board meetings, and their efforts at participation at board meetings.

Below I will share the results of this four hour session, namely a structure for measuring personality types at board meetings together with some suggestions on how to use this information.

At worst, this structure offers a template for useful personal entertainment at boring board meetings and, at best, it will highlight what is wrong with your board and what you can do about it.

A Structure for Board Membership and Participation

What I developed in that boring board meeting is primarily aimed at a process to deliver the following outcomes:

  • Identifying the different individual board member types in order to see why they form sub-groups of self-interest, and
  • Checking if board membership is properly balanced for optimal outcomes, and
  • Ensuring that appropriate board leadership is in place

The basic structure that I came up with follows that of the well-known Myers Briggs Typing[1], although noting that there is no connection with Myers-Briggs at the psychology level (I checked with someone who claims to know this stuff).

I have used an analogous structure to that of Myers-Briggs because it has proven successful, with enough complexity to differentiate different personality Types, but not too complex such that it becomes unwieldy.

My Board Member[2] Types

  1. The Process Types

Bureaucrat (B) – Pragmatist (P)

People fall in between two extremes in the context of the process of the board meeting. Firstly there is the Bureaucrat (B) Type who believes the process which governs how a meeting is held is more important than the purpose of the meeting. The opposite of the Bureaucrat is the Pragmatist (P) Type who believes the process should be a slave to the purpose of the meeting.

  1. The Outcome Types

Utilitarian (U) – Factionalist (F)

With regards to the desired outcomes of the meeting there are two extreme Types. The Utilitarian (U) Type believes in creating the greater good for the greater many (as defined in the broadest sense for the company and its stakeholders). Whereas the Factionalist (F) Type believes in the greater good for a small faction, typically one he or she is involved with.

  1. The Group Dynamics Types

Individual (I) – Consensus (C)

With regards to group dynamics there are those who revel in being outspoken individuals and/or being different from the majority of the group – this is the Individual (I) Type. Others however prefer not to stand out, they seek agreement amongst many members, they associate with the collective view, and they like to go into a meeting having previously had ‘one-on-one’s’ to ensure that there is no board conflict – this is the Consensus (C) Type.

  1. The Strategy Types

Strategic (S) – Tactical (T)

With regards to the conduct of a meeting or any group decision-making process there are those who prefer to consider longer-term strategic issues, the Strategic (S) Types. Then there are those who prefer the meeting to dwell on the very near term issues, and these people are Tactical (T) Types.

 

A Summary of the Group Types

Bureaucratic
Utilitarians
Bureaucratic FactionalistsPragmatic
Utilitarians
Pragmatic
Factionalists
BUISBFISPUISPFIS
BUITBFITPUITPFIT
BUCSBFCSPUCSPFCS
BUCTBFCTPUCTPFCT

 

The primary Types are the Process Types and the Outcome Types. The primary Types describe fundamental psychological or learned preferences that determine behaviour in the group/meeting setting.

The secondary Types are the Group Dynamics Types and the Strategy Types. The impact of the secondary Types can be attenuated by good team leadership, mediation or self-awareness.

Just like Myers-Briggs, on any specific dimension of Type an individual can be anywhere between 0% and 100%. For example one individual may be 100% Bureaucratic Type whereas another might measure 60% Bureaucratic and 40% Pragmatic.

I haven’t gone to the effort of putting together a Myers-Briggs style questionnaire because of two reasons. Firstly, when you start thinking about people in terms of the structure it’s pretty easy to estimate their Types with some accuracy. Secondly, I have many other better things to do.

 

Commentary on Group Types

It must be stressed that there are no ‘good’ or ‘bad’ personality Types for board members.

I believe that all Types have a role in boards but that a self-awareness of one’s Type will certainly help an individual contribute more positively.

I suspect that problems arise when there are imbalances of the Types of people on boards. For example when there are too many similar Types or there are inappropriate Types in certain key roles.

Here are some common problems with board membership that I have observed:

  • The Affinity Group Problem: When boards get into ‘group-think’ it is likely that they are dominated by Factionalists and Consensus Types, possibly also with a shorter term (Tactical) views. If this is the case the tendency towards Consensus behaviour prevents any Individual questioning whatever the group believes, especially if there are no Individual Types to question the orthodox view. Similarly Factionalist Types are more likely to be aligned to a shared view so long as they represent the same faction of interest. Longer-term thinking associated with Strategic Types leads to behaviours which challenge group-think, specifically the introduction of ‘scenario analysis’ of short-term tactical choices in order to test how these might impact the probabilities of the achieving the desired long-term strategic outcomes of the company.
  • The Wrong Chair Problem: The best Chairs of boards are in my opinion the Pragmatic Utilitarian Consensus Strategic (PUCS) Types. Pragmatism in a leader ensures the process does not get in the way of the purpose of the board. However, a good leader must also ensure that due process is followed so that other members respect the ‘institution’ of the board. Therefore I believe that the best Chair is ‘just’ a Pragmatic Type over Bureaucratic Type. By being the Utilitarian Type a Chair is motivated to ensure that factional interests do not dominate. Consensus Type behaviour is important in a Chair; however the best Chairs are also outspoken and bossy when they need to be and in this context the best Chairs are ‘just’ the Consensus Type over Individual Type. And finally a Strategic Type leader will allow others (e.g. the Tactical Types) to detail the short-term needs but at the same time ensure the board and the company has a longer-term strategic focus.
  • The ‘Ignore the Shareholders’ Problem: When a company board is not serving shareholder’s interests very well it usually because the board members are serving their own needs first. This is usually because a bunch of self-serving Factionalist Types have control of the board. The problem is exacerbated if there is a weak (e.g. Bureaucratic Type) Chair and also if there is an absence of any outspoken Individual Types to ‘call’ the issues.
  • The Loudmouth Problem: We have all been on boards where you get that one BFIT (Bureaucratic Factionalist Individual Tactical) Type that drives everyone mad.Outspoken, self-serving, process-driven and with short-term thinking; you would think that such a person should be sent to a salt mine in Siberia. But even so, with appropriate leadership and team balance these individuals can make useful and unique contributions. They just have to be very well managed.
  • The ‘WTF?’ Problem: For the boring 99% of your board meetings it doesn’t really matter who is on your board – you could have a bunch of soft toys and it would make little impact, either positive or negative. However it is those one-percenters, the ‘interesting’ meetings, when the big decisions are made that you might be surprised at the irrational or self-serving behaviour of one or more of your board members. The whole purpose of a board is to serve all of the shareholders’ needs (or ‘stakeholders’ for the organic types) using collective wisdom rather than individual greed. Because many people reserve their dark-side behaviour for the times that ‘matter’ the only defence against this unknown is to structure your board appropriately so that the collective is armed and ready to shoot (the misbehaving individual(s)).

There are many other common board problems and most of them can be tracked back to the behaviour and personality of board members; what they are willing to do and what they are not willing to do.

The primary purpose of the structure I have documented here (apart from providing a template for board ‘sport’ if you are bored in a board meeting) is to help set up boards with the optimal balance of membership, or to identify when boards have issues relating to their membership.

Now here is the universal truth – the best time to address these issues is before the company itself has issues!

Now here is the universal truth – the best time to address these issues is before the company itself has issues!

But if the company is a victim of, say board group-think, how do you even get the board to accept that they have a problem?

One option is to introduce a formal process under the guise of good HR practice. Possibly using a mediator, the imbalances can be formally identified. This is the first required step before any change can be effected.

A mediator could for example ask every board member to identify their own four Types and also those of the other board members. This process could be very quick and it would provide a complete 360 degree view of the board.

In terms of processing the data from such a review these would be the key outcomes:

  • Any disparities between self-assessment and the group’s view of an individual would help that individual realise their shortcomings
  • When a whole board or team is in denial about their Types, then the outside assessment from the mediator (or even a stakeholder) should highlight this and drive the process to address it
  • If there are too many similarities of Types then there may be an ‘affinity group’. These are much less effective than a well-balanced team because of the missing capabilities that balance board efforts
  • A board should have appropriate leadership in place – preferably a Pragmatic Utilitarian Consensus (PUCS) Type or similar

Of course the best time to consider all of this is when boards are first being formed. I have had one opportunity to do this.

On this particular occasion I quietly used this Type structure to ensure that the board membership was well-balanced and had an appropriate chair (me).

In the process we got to avoid a few ‘clangers’ (board members that would have been disasters) and the board, since formation, has performed very well.

This is really worth doing!

 

[1]   The Myers-Briggs Type Indicator (MBTI) measures psychological preferences in how people perceive the world and make decisions – see http://en.wikipedia.org/wiki/Myers-Briggs_Type_Indicator

[2] I say ‘board’ but the Types I describe pretty much exist in any group meeting. Boards just happen to be where the personality traits impact most because boards usually operate without reference to the ‘rules’ of an organisation which often are designed to attenuate the impact of personalities on meeting outcomes.

All articles on Startup88 are the copyright of their authors © Ian Andrew Maxwell

Photo by tiarescott

Ian Maxwell

Ian Maxwell

 

Ian A. Maxwell is a Technology Entrepreneur and Investor. He is currently CEO of BT Imaging, Chair of Instrument Works and

Co-Founder of Accordia IP and Ian Maxwell Consulting, as well as an Adjunct Professor at RMIT. He has a PhD in Chemistry

and has either founded or worked at Memtec, Allen & Buckeridge Venture Capital, Redfern Photonics (Venture Capital),

Sydney University Polymer Centre, Eindhoven University, DuPont, James Hardie, Viva Blu, Enikos, Wriota and RPO. You can

connect with him on Linkedin au.linkedin.com/in/maxwellian

Many start-up entrepreneurs think that patents are a waste of time; the data suggests otherwise

I was recently asked why so many entrepreneurs and investors in the modern era appear to have no interest in patents and sometimes are actually quite negative on the value of patents in start-ups.

So I did a ‘soft’ survey of a few entrepreneurs and investors in my home city of Sydney.

What I heard back was that patents are a ‘waste of time and money’ in this era of software and internet start-ups.

The arguments to support this position were typically very qualitative, full of apparent misinformation and certainly using data-points that were cherry-picked.

As were the counter arguments proposed by parties with vested interests in patents (such as patent attorneys).

I have previously written on the subject of why start-ups should have patents[1] but in doing so I had assumed that the rationale for having patents would simply be accepted by any entrepreneur or investor that had at least finished high school.

It seems that I have been wrong in this assumption. So I turned to Google to put together a quick summary on the financial value of patents in start-ups, from the perspective of both entrepreneurs and investors.

Of course all the data is already there; it just doesn’t seem to have been brought together nor analysed in a simple-to-digest fashion. Firstly, a quantitative study by Mann et al[2] (the Mann study) has shown that software start-ups that develop patent portfolios have much better returns for investors and entrepreneurs.

The 2007 study examined 877 venture-backed software companies in the US that received venture funding between 1997 and 1999.

Only 9% of these companies obtained a patent before their first financing but many may have filed unpublished patent applications beforehand.

In line with this assertion, by 2005 over 24% of the companies in the study had at least one patent.

This correlates well with the industry norms; at that time about 30% of top 500 largest software companies in the US also held patents (it would likely be much higher now).

It makes sense for mature start-ups to own patents at roughly the same proportion as the industry giants that they wish to be acquired by, or to compete with (take note entrepreneurs!).

The key results from the Mann study were that:

  • Companies with patents received about 73% more funding than those without patents, representing an average funding gap of $10.7m
  • Companies without patents are twice as likely to go bankrupt compared to companies with patents
  • 13% of the companies in the study with patents went to IPO compared to only 3% of companies that did not have patents. That is, the companies with patents were more than 4x more likely to go to an IPO!

Unfortunately the Mann study did not appear to have access to data on the financial returns (by IRR or multiples on capital) to investors in, or founders of the companies in the study.

However we can be sure that the companies with patents had a higher financial return because of these four factors:

  • IPOs usually represent the most lucrative return for venture investors; for example the median IRR for investors from IPOs was 3.2x greater compared to IRR for exits via trade sales for a selection of 531 start-ups in the period between 1971 and 2003.[3]  In addition the median dollar value of the exits by IPOs was over 4x greater than exits by trade sales in a study of 3,047 exits in the US for a period up between 1997 and 2004.[4] That is, startups with patents are 4x more likely to go to an IPO where the financial returns are 4x greater; does this point need to be made any clearer?
  • The much lower rate of bankruptcy for companies with patents means better portfolio returns for venture investors. Typically it can be difficult for venture capitalists to get their funds to “profitability” (typically requiring anIRR greater than 20%) where there are multiple bankruptcies within a portfolio (composed of, say, between 10-15 companies).In fact it is my personal experience that, in the instance of portfolio company bankruptcy, patents offer the highest value assets to help recoup investment losses; especially considering that most venture capital investments are in liquidation preference shares (meaning all proceeds from liquidation of assets go to the investors up to a figure representing at least the investors’ cumulative investment in a company).
  • In the original study by Mann et al. the software companies with patents received 73% more funding.This is because these companies with patents represent much better business investment opportunities, both on the upside return and also on the downside risk. Venture Capital funding flows based on perceptions of risks versus return; because these perceptions are self-correcting, through the impacts of fund profitability and the follow-on impact on capital raisings into subsequent VC funds, it can be argued quite unambiguously that companies with patents are much better investment opportunities with better risk and return profiles.

I would also note that, on average, the companies with patents in the Mann study had just 3 patent families. The cost of developing 3 patent families is typically not more than $50,000 per annum which is effectively inconsequential when compared to the extra $10.7m typically raised by these companies.

I find this data so compelling that I would advise entrepreneurs to only invest their time and effort into businesses (internet, software or otherwise) where it makes sense to patent certain inventions.

That is, they should only invest time and effort into segments of the market where it is possible and likely to achieve significant patent protection for new business opportunities (and related products and services).

Unlike their investors, entrepreneurs usually have only one business opportunity in a single time period (typically this is 5 years or more) and therefore it is incumbent upon them to only invest their time in the highest value business propositions.

The outcomes for entrepreneurs are unfortunately quite binary; either they get a financial return from their businesses or they do not.

Unlike investors there is no protection as offered by a portfolio of business investments nor is their ten years’ worth of management fees.

The data presented here clearly shows that the highest returns and lowest risks are achieved for businesses with patents and any entrepreneur that chooses to invest their time and energy into a business that cannot or does not have patents is wilfully destroying financial opportunities for themselves.

Shame on them.

For investors the same advice applies with the additional benefit that, in the instance of the bankruptcy of a portfolio company, start-up patent portfolios offer a good opportunity to recoup losses through the monetization of patent assets.

This can be done by the sale of patents, licensing from a holding company, or even enforcement of patent rights against operating companies (often in partnership with specialist law firms in the US).

Indeed I would argue that the patent assets of a start-up not only offer the benefits to a start-up as described above but in the modern era they also represent an alternative higher value business proposition to that of an operating company.

There are numerous examples of start-ups that have reinvented themselves as Patent Assertion Entities (or Patent Trolls) and gone on to make more than $1b for their investors.

Another thing that worries investors is patent assertion against their start-ups by patent trolls;[5] this can represent a substantial loss of time and money for start-ups. A start-up with patents is going to be far more aware of the patent landscape it is operating in and will be far more insulated against spurious assertion by avoiding certain infringing activities, by licensing key technologies, by creating corporate partnerships, by seeking indemnity insurance against patent infringement, or by joining defensive patent funds. Patent awareness is the key here, and this reduces unnecessary risks of investment.

I can already hear the counter-arguments coming my way. The main one will be that the data I have used is almost a decade old and that the business world has ‘changed’ in the interim – the main area of investment is now in ‘internet and mobile’ space.

Well this can’t be helped – this type of data can only be collated sometime after the fact because the average period from seed investment to exit is about 7 years.

My gut instinct is that with the uptick in patent assertion by the major companies in the key areas of current venture investment that the value of patents to start-ups has only increased in recent times.

For example the number of patent infringement suits filed in the U.S. increased 59 percent between 2001 and 2011 — from 2,520 cases in 2001 to 4,015 cases in 2011.[6] In the same period the number of patents granted increased by 35 percent; most of those gains in exactly the same market segments that venture capitalists are ploughing their funds into.

To investors and entrepreneurs that still want to argue against the data presented in this essay I would remind them that relying on subjective arguments in the venture capital and start-up space simply adds unknown and unnecessary risks.

Of course I have also been asked whether the relationships between startup success and patents, as documented in the essay, are ’cause or effect’; the answer is both, and complex. However I believe that it comes down to one key factor – great patents can only be achieved in technologies areas that are new or ‘white space’. These areas also happen to be where there are the highest returns on investment, which in turn attract the best teams and the best investors. That is, patents are a proxy for the ‘experience’ of the team and investors of a start-up.

And yet, for any entrepreneur out there I would say that the only way to get the right experience, in the context of patenting, is to start patenting even if it’s new to you. The process of patenting will teach you much, much more than just how to go about getting patents. And this is what a lot of people who decry patents simply do not understand.

And, finally, I would note that patents are a necessary factor for maximising start-up returns and reducing risks, but by themselves they are not in any way sufficient.

[1] IP Strategy for Start-ups, Ian Maxwell, http://zh.scribd.com/doc/105435827/IP-Strategy-for-Startups

[2] “Patents, venture capital, and software start-ups”, Ronald J. Mann, Thomas W. Sager, Research Policy 36 (2007) 193–208

[3] “A pecking order of venture capital exits – What determines the optimal exit channel for venture capital backed ventures?”, Carsten Bienz, http://www.wiwi.uni-frankfurt.de/finance/common/brownbag/04_SS/papers/venture_exit.pdf

[4] “Value Creation in Venture Capital”, Hellmann et al., 2005 http://strategy.sauder.ubc.ca/hellmann/pdfs/Value_Creation_in_Venture_Capital_Hellmann-Egan-Brander.pdf

[5] “Patent Demands & Startup Companies: The View from the Venture Capital Community”, Robin Feldman, 2013 – http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2346338

[6] “Myths of the Patent Wars: An “Explosion Of Patent Litigation” Greater Than Any in History?”, David Kline and Bernard J. Cassidy, http://ipstrategy.com/2014/05/12/myths-of-the-patent-wars-an-explosion-of-patent-litigation-greater-than-any-in-history/

Photo by The U.S. National Archives

 

 

Ian Maxwell

Ian Maxwell

Ian A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian

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Corporate Venture Capital – an Acquired Taste for the Discerning

Introduction

Before I start here is a disclosure. I have now been involved in eight start-up companies as a manager or founder, six as CEO, with exits valuations ranging from zero to a listing on the NYSE. In addition I have made many more investments as a venture capitalist.

Whilst raising funds for start-ups I have, on many occasions, taken investment from corporate venture capital groups, including Intel, BASF, Applied Materials and LG Display. In addition, as an institutional venture capitalist I have co-invested with a bunch more corporate venture capitalists.

Credit: Lumapartners.com

Types of corporate venture groups

In my experience there are three extreme forms of corporate venture capital groups:

1. Those driven purely by financial return

2. Those driven purely by ‘strategic’ returns to their operating organizations. ‘Strategic’ means that an operating group of the corporation in question has serious interest in working with a start-up, or licensing and/or buying its technology, or even acquiring the start-up at some stage

3. Those driven solely by marketing and publicity outcomes
In reality, most corporate venture groups fall somewhere in between the lines; each and every corporate venture group could in principle be positioned as a dot on a three-axes ‘radar’ plot.

My impression is that, in the current era, corporate venture seems to be more biased towards strategic interest or marketing interest and not so much on financial return; although this is difficult to monitor since most corporate investors do not disclose their investment thesis, sometimes because they haven’t even articulated it to themselves.

In principal, corporate venture groups should tailor their investment choices, the investment management models, and the choice of management staff to their specific investment thesis (i.e. the relative degree of strategic versus financial versus publicity motivation), and this is where some corporate venture groups get it horribly wrong.

In addition many corporate venture groups are continually changing strategic direction. Sometimes they even go out of existence only to reform later on. As an outsider it can be very confusing to watch and this constant change doesn’t engender any sense of confidence in these groups as ‘stable’ investors.

As an entrepreneur one of the wonderful things about institutional venture capitalists is that, whilst they don’t always behave in ‘good’ ways (at least from an entrepreneur’s perspective), they pretty much always behave in predictable ways. The same cannot be said for corporate venture capitalists.

Those last few paragraphs sound a little negative, so I would like to go on record and say that there are some fabulously professional corporate venture groups that are a dream to work with.

For example, Intel Capital and the Applied Materials Venture Group, both in Silicon Valley, have been plying their trade for decades and can offer a very amenable experience to the entrepreneur, if somewhat different to institutional venture capital.

The key is to be aware of those differences.

Now I would like to go out on a limb and suggest that the high-quality corporate venture groups are in the minority and the majority of corporate venture groups are a much riskier proposition as a source of capital.

Why so? Well many corporate venture groups are quite young and haven’t yet been through a few cycles of investment whereby they hopefully engineer out many of the inefficiencies in their investment model. Even some of the older groups seem to be able to ‘forget’ their hard-earned lessons when they go through ‘restarts’ associated with corporate restructuring.

Being an entrepreneur in a tech start-up is all about having a great idea, lots of capital, great enthusiasm and luck, a ton of start-up experience, deep industry knowledge and also the ability to reduce all unnecessary risks.

In this context corporate venture capital is often considered an unnecessary risk, not just by entrepreneurs but also by institutional venture capitalists when looking at co-investing in deals with corporate venture capital groups. Given this I often wonder why startup companies ever take corporate venture funds.

There are three simple answers:

1. They don’t know any better, or
2. They have no choice or,
3. There are overwhelmingly good strategic and/or operational reasons to work with a specific corporate venture group that sufficiently offset the implicit negatives

They don’t know any better

I am sure that many readers have seen inexperienced entrepreneurs that are very excited to have done a seed round of funding with a large corporation only to find out that the this funding ends up choking any opportunities for the start-up.

I won’t labor the point other than to say that the inexperienced types tend to find each other in the venture capital world. And it rarely works out well.

They have no choice

There are two types of companies that may have no choice but to accept corporate venture capital.

Start-ups in many of the older industry segments have for some time struggled to find institutional venture capital support. Primarily this is because average returns on investment in these industry sectors do not warrant institutional venture capital investment.

This is a reflection of a number of factors including:
1. These are low-growth and mature industries
2. The products in these sectors have relatively low margins
3. There are relatively fewer opportunities for new platform technologies and the customer base can often choose to simply ignore any revolutionary changes
4. There are low multiples for M&A transactions and IPO’s, and
5. The start-ups in these sectors typically have high capital requirements and long times to exit.

In contrast, Internet and Smartphone App startups, by way of example, have few of these problems and are now very much the focus of mainstream venture investment. In these and other sectors there are higher returns that justify institutional venture investment and this fact exacerbates the problem of getting investment into older industry sectors.

However I would note that whilst being unfashionable and of lower return, good technology companies in older industry sectors sometimes have a less facile operating environment with much less competition.

With an informed and experienced corporate venture team I would argue that older industry sectors can sometimes offer an interesting alternative (as measured by risk and return) for an entrepreneur when compared to the current over-crowded and clustered institutional venture sectors.

Another reason why companies might have no choice but to accept corporate venture capital is that they are operating in odd geographies (like Australia and most of Europe, for example).

Because of the poor venture capital deal flow in these places (the good deals go directly to Silicon Valley) and the consequential absence of sufficient institutional venture capital, there is often an opportunity for corporate venture groups (which tend to be less scared of foreign investment than institutional venture capitalists) to pick and choose investments in these geographies.

There are overwhelmingly good strategic and/or operational reasons to work with a specific corporate venture group

Sometimes a corporation is, for example, so well placed in a market that they offer the very best market partner or even thesole exit opportunity. In these cases it can make good sense for a start-up to work with the venture capital group of the corporation, so long as there are experienced managers on hand to minimize the downside risks of such an involvement. Even so, the question should always be asked as to whether an operational agreement can be done with the corporation in the absence of a corporate investment deal.

Working with corporate venture capital

If, as a CEO of a start-up, you find yourself compelled to take money off a corporate venture capital group for one or more of the reasons (as listed above) then here are some simple guidelines (in no particular order) that should be considered that may help to reduce any unnecessary risks to your business.

1. I believe that the primary interest of a corporate venture capital group should be a strategic interest because this is where they have an unfair advantage (e.g. market presence and technology awareness). And if they don’t have this then why take their money?

2. Sometimes, just sometimes, the market presence of the corporate group is so overwhelming that investment by their corporate venture group is seen as compelling due diligence into the opportunity. This can help in getting co-investors on board. Often however, institutional venture capitalists can be very nervous about the idea of co-investing with corporate venture capitalist, especially ‘global’ companies without many years of experience investing through a Silicon Valley office.

3. It is always good to understand how a corporate venture group measures the ‘performance’ of its corporate venture fund. Is it purely based or IRR, or is this offset by ‘strategic value-add’ to the corporation? Are the corporate venture managers on a salary with a bonus or is there profit share system in place? These things really matter and you should know the answers.

4. It is always worthwhile understanding the experience base of the corporate venture people you are talking to. I have met people that have three years of work experience in a corporation as a junior finance manager followed by an MBA, where after they have walked straight into a corporate ‘VC’ role; clearly they will make mistakes. On the other hand I have worked with corporate venture managers that have done the hard yards as associates and principals at institutional venture capital firms; these people have bothered to learn the venture capital trade and their corporations have respected that venture capital is a trade.

I like to make an analogy to blue water yacht racing – you can read all you like about venture capital and blue water yacht racing in text books but in neither case will it help you stay alive in the water without also doing the years of apprenticeship.

5. Your company should be developing new ‘platform’ technologies, rather than new products off an existing platform. I believe that operating corporations are best placed to develop new products off existing platforms but, due to internal processes, are often less able to fund risky new development of platform technologies, and indeed often do not have R&D people with the required pioneering mindset. Whilst not their only role, this is the gap in the market that start-ups fill on behalf of corporations.

6. Any corporate venture investment should have strong support from within the operational groups of the investing corporation. Preferably this includes C-level support, and is based on alignment of the start-up company’s technology and the current strategic intent for growth or profitability of the corporation. Within the corporation it is a good idea for there to be an ‘acquisition’ thesis. Although this rarely works exactly to plan, it can be a living document that helps create and maintain internal support for a strategic investment.

7. Companies that receive corporate venture investment must have more exit opportunities other than acquisition by the single investing corporation. That is, they must be ‘real’ companies with great management, and not just spin-out R&D groups tied to the mother-ship. In fact the more tension there is between an acquisition by the investing corporation and the start-up’s efforts to create higher-value alternatives for itself, the faster is the development of the technology, products and sales. It is a good problem to have.

8. As ever, a start-up should not take investment off a corporate venture capital group unless the corporate venture capital group has the financial capacity to be there for the whole journey. And planning for the journey to exit must include delays and detours and extra rounds of funding, as is always the case for start-ups. Associated with this, in the older industry sectors it is often the responsibility of the lead corporate investor to round up interested co-investors, including other strategic investors, VC’s and venture debt providers.

9. For a start-up, taking money off a corporate investor can create all sorts of issues that can possibly diminish enterprise value at exit. For example, the relevant market might see the start-up as ‘aligned’ to the corporation and be less likely to work with the company as a true independent supplier. Indeed this issue of alignment can lead to much fewer exit opportunities in an M&A scenario.

10. Also, competing corporations often do not co-invest in a start-up of joint interest, and this can lead to fewer funding opportunities for the start-up.

11. By working with start-ups, corporate operating groups often risk IP ‘contamination’ which also reduces alternative exit opportunities and exit value for the start-ups. Contracts and investment pricing must be well managed to offset this risk.

12. Often investing corporations want first and/or last rights of refusal on the sale of the start-up or its key assets. This reduces alternative exit opportunities and should be avoided at all costs.

13. Another issue is the continuity of the investment manager role in corporate venture groups. All too often, three years into a deal a venture manager at a corporate venture group simply changes jobs or leaves the corporation altogether. This is a serious pain in the butt for the entrepreneurs and institutional venture capitalists because it takes quite some time to get boards to be functional and trustworthy. If this change of personnel happens at a critical moment, e.g. a round of funding or an exit, then it can have serious consequences.

14. Related to the last point I have had experiences with corporate venture groups where because of a restructure, or a change of strategic interest, or change in investment managers, or even a change in lawyers, it has simply been impossible to get a signature from the corporation. This can be extraordinarily frustrating when, say, a round of funding is being held up. Do not believe any guarantees by corporate venture groups that this will not happen; if they offer such a guarantee ask them for a ‘power of attorney’ in the instance they won’t provide a signature in a certain timeframe. Of course they will never agree to such a thing!

15. A key strategic issue that corporates need to understand is that corporate venturing only works when they themselves are developers and vendors of technology solutions. Corporations that are simply users of technology usually do not have the appropriate insight to start investing in alternative technologies in their own supply chain. For example, Oracle is well placed to understand the market potential of a new data mining technology, whereas one of Oracle’s customers, say a large supermarket chain, while capable of being enticed by a new data mining opportunity certainly does not have the skills to understand the risks of investing in the same. They will invariably subtract value from the investee – there is no neutral impact on startups by investors!

16. A good corporate investment group has a specific set of policies for dealing with start-ups, which also includes an investee education process. Ultimately it is simply a matter of ensuring that any lower returns to the founders of startups (by association with corporate investment) are off-set by lower risks of failure with more guaranteed, if lower, returns. Another benefit of upfront education and communication on these complex issues is time saving; what needs to be avoided, for example, is 6 month negotiations over simple supply agreements where matters such as IP sharing become sticking points. After ‘shareholder behavior’ and a shortage of capital, ‘wasted time’ is one of the greatest risk factors for start-ups.

17. A good corporate venture group needs to ensure that it is in ‘control’ of the relationship between the start-up and its own corporate operating groups. The operating groups will naturally try to ‘tie-up’ the start-up they are working with, using all sorts of complexities, such as IP contamination, exclusive license agreements, tough financial terms and the like. On a deal-by-deal basis this may seem like good practice, but averaged out over a few years it creates an environment that experienced CEOs and founders (who make these opportunities ‘real’) avoid altogether. It is really up to the corporate venture groups to create a perceived environment where start-ups are treated well, and where the balance of risk and return is for some deals equivalent to or better than the institutional venture capital sector. Rather unfairly, it takes years to build up a reputation as a corporate venturing group that is worth working with, yet one sour deal , say where a corporate operating group has behaved badly, can trash that reputation overnight in the incredibly networked entrepreneurial world.

18. A normal investment round for any start-up is effectively a two-party negotiation between the common stock holders and the participating venture capitalists. However if you introduce a corporate venture capitalist into the mix you then get a three-party negotiation because corporate venture groups have different needs and goals to institutional venture capitalists. An extreme example is where a corporate venture group wants a start-up company to execute a Covenant Not to Sue, or a first and last right to acquire the company, or some market-focused operating agreement. Each of these reflects a transaction of considerable value and hence it is unreasonable to ask a participating institutional venture capitalist to pay the same price per share as the corporate venture capitalist that is insisting on these side benefits. If and when this happens you can expect months of wrangling before a deal is closed.

19. There is a type of corporate venture groups that I think should be especially avoided and these are the ones that solely have a marketing or publicity interest. They are quite easy to spot. First they typically have super-small ‘funds’ (they actually usually invest off the corporate balance sheet) of say $5-20m. Secondly, they tend to be companies such as supermarket chains, bank or telcos that are users of technology and not suppliers of technology solutions. The reason they invest is usually to generate local publicity. Rarely do they offer any strategic value. These small corporate venture groups can act to slow down a company’s growth via offering only small seed funding rounds – in our fast moving world even 6 months of delayed capital spend can spell the difference between success and failure. In addition, without relevant venture capital apprenticeship the investment managers in these ‘funds’ can be guaranteed to distil the worst of the behaviors described in this article.

In conclusion, to entrepreneurs looking at corporate venture as a source of funds I would say three things. Firstly, there are good and bad corporate venture groups out there and it’s worthwhile checking the quality of the one you are about to deal with. To do this you simply talk to other entrepreneurs that have taken money off a specific group. Secondly, you need to understand their investment thesis and strategy, and be comfortable that is sufficiently aligned to your company and also to the interests of the other investors. And finally, keep cycling through my ‘cheat-sheet’ of critical issues as listed above to see the ‘gotchas’, either before you do a deal or after you have their money.

Or, you might just reconsider the idea altogether.

Ian Maxwell

 

Ian A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian


 

 

 

 

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Schrodinger’s kangaroos

Sometimes I feel like an eskimo in snowstorm; there aren’t any like-minded souls out there…

This from the Business Insider “The association which represents Australia’s venture capital and private equity firms has come out swinging over today’s Commission of Audit report …AVCAL is worked up because one of the seven bodies the commission has marked for abolition is the Innovation Investment Fund. While the other program AVCAL was hoping to sneak through unscathed, the Commercialisation Australia program, also made the grants to be abolish list.”

Well I have a different view entirely. I think that getting the sick, sick patient (the Australian tech sector) off the drip will either force the patient’s immune system to kick in and we will see a recovery. Or the patient will die and leave room for some new organism to thrive, undistorted by the sins of the past.

I have documented the 30-year failure of government investment in venture capital. Seriously, did they expect the government to spend another decade in attempt to achieve the record of the longest failed experiment in the global history of all experiments in any field of science, technology or business? Actually I think they already have the record!

Just as an aside the longest successful experiment in science, technology or business is also Australian. It was started in 1927 at the University of Queensland. It’s just pitch dropping very slowly from a funnel. Since the experiment started there have been 8 drops of pitch of which only a couple have been observed. Which begs the question did the others really fall? So you see, it’s not just an ignoble experiment in stupidity but a philosophical experiment! Who would have guessed.

I guess the government, directly or indirectly, sponsored both programs, the longest successful and the longest failed experiments in science, technology and business. Which is in itself an interesting philosophical puzzle. Why us?

Commercialisation Australia (CA) on the other hand has had only a brief existence on this planet. It was introduced by one of the previous Labor governments (probably Rudd, after the magnificent 2020 Summit) and pretty much replaced the old COMET scheme. Somewhere in their makeup both of these organizations started with the assumption that (a) startups companies in Australia have great ideas, but (b) our entrepreneurs are babes in the woods, and therefore (c) the COMET/CA selective input of time and money will fix all of their problems and they will go onto to becomes the next global technology giants. Yeah that worked, not!

Whereas I could stomach taking money off COMET (and there is no reason not to take free money off the government if it is on offer) I could never get myself to seriously try with CA. There were simply too many hoops to go through and too many conversations with patronising ‘consultants’ advising me on how to run my startups. Worst of all was the weirdness in the selection process; you had to simultaneously prove that you deserved and needed the money but couldn’t get it off anyone else, but that you had tried. This was some odd version of Schrodinger’s cat in a box experiment, once again proving our government doesn’t mind sponsoring philosophical experiments in the guises of science, technology and business.

Well in this instance, my friends, the cat is well and truly dead!

Photo by bugflickr

 

 

213016548_80_80

Ian A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as a partner at Zetta Research and an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian

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Uber New World

 

Ian Maxwell

Ian Maxwell

Ian A. Maxwell is a veteran Technology Entrepreneur and Venture Capitalist. He is currently CEO of BT Imaging, Chair of Instrument Works and Co-Founder of Accordia IP as well as a partner at Zetta Research and an Adjunct Professor at RMIT. He has a PhD in Chemistry and has either founded or worked at Memtec, Allen & Buckeridge, Redfern Photonics, Sydney University Polymer Centre, James Hardie, Viva Blu, Enikos, Wriota, RPO and Instrument Works. You can connect with him on Linkedin au.linkedin.com/in/maxwellian

I have just started using Uber in my home city of Sydney, which most of you will know is a taxi booking app used in 35 countries and over 100 cities around the world. Like most overnight start-up successes it was started about 5 years ago in San Francisco and has raised over $300m from Tier-one-ish Silicon Valley VC types.

This app is just that much better than all the others I have used. Finally there are enough cars using the Uber system in my home town for it to be a useful addition to my smartphone. Unlike many people I am vicious at killing apps on my phone that don’t meet my expectations of value. But Uber does and it’s a keeper.

The Uber differentiation is based on three things – some simple customer-focused ideas, great execution and a lot of capital.

The simple ideas are:

  1. There are four classes of cars (low cost private, taxi, black and lux) with progressively increasing costs. You choose depending on your budget and mood, and also the availability of cars.
  2. You can see where the available cars (in each category) are on a map which also allows you to set up your pick-up position (either where you are as detected by GPS or anywhere else). The app also gives you the ETA of the closest car and offers you the shortest pick up time.
  3. Once you select a type of car and book it, you then get to watch it on the map as it moves towards you, showing its ETA. I generally have better things to do though. Also you can cancel a booking with no ramifications if you change your mind.
  4. The driver doesn’t know where you are going so there is no sense that unfavourable fares are avoided. Indeed drivers seem to be rewarded on the number of jobs they do and their star rating (see below). The reward system for drives is in the customer’s interest
  5. On this point, all the Uber taxis and private cars seem to be very clean and tidy and certainly a notch above the standard. I am not sure if this because they vet their drivers or whether it’s just the star rating system in action
  6. When you arrive at a destination you just get out of the cab. The tax invoice is emailed to you. No stuffing around waiting for the printer to work. And the driver doesn’t have cash so isn’t a target for thieves. You also get charged the meter rate plus a $2 fee, and that’s it.
  7. When you look at your receipt you also get to rate the car and driver. Each driver then gets an average rating – when a car accepts your job you get to choose the booking and you also see the driver/car star rating beforehand.
  8. You can use the system in many cities all over the world and there is no setup required for any different geography. Often when travelling I find that negotiating local taxi ‘rules’ can be daunting. Melbourne for example, appears the same as Sydney, but it can be bloody hard getting a cab there sometimes for reasons I have never properly understood.
  9. There is the usual social media-like system in place that rewards users if they sign up new users
Uber App

Uber App

For any entrepreneur reading this, in order to execute a service like this you need:

  1. An insider’s  knowledge of the industry and an open-minded user-based experiential understanding of what is wrong with the status quo
  2. This drives the founding team members to define and refine a new service, using new technology
  3. An ability to execute the software and the back-end,  and also the business relationships needed to get the business moving
  4. An access to lots of capital to buy market share and momentum
  5. Luck
  6. First-mover (or thereabouts) advantage
  7. A hell of lot energy and big balls

Now here is some commentary on the default competition. The taxi industry in NSW has been accused of being an old school rent-seeking cartel (see for example, http://www.smh.com.au/nsw/call-to-end-taxi-industry-cartel-and-cabcharge-levy-20100602-wzun.html)

What should be an untaxed form of public transport is in fact an expensive service stuck well back in the 20th century. It has been argued that this is because of vested interests which have the ear of state politicians, who have in turn enacted many laws and rules to protect the cartel from competition. To wit, there is a controlled number of cabs on the road and their ‘plates’ have high asset value. Taxi users pay government-mandated exorbitant fees, most of which go to three recipients;  government as a form ‘user-pays’ tax, the cab plate owners, and the taxi payment system owners, with a small profit or loss left over for the drivers.

Enter Uber and a host of other similar apps. These are using the availability of the internet, mobile phones and back-end services to disintermediate the taxi cartel in Sydney, and other places all over the world.

Today Uber offered me a ‘low cost’ option which uses private drivers and private cars at about half the cost of taxis. I expect the ‘taxi council’ to attempt to use their influence to make such a service illegal, probably on the basis of some concocted public safety concern or some-such (it’s happening already – see http://www.smh.com.au/digital-life/smartphone-apps/uber-ridesharing-service-under-investigation-as-public-warned-off-app-20140425-zqzed.html). To this I would say that there is nothing like an online social networking system with a star rating to weed out the issues – think of Ebay for example. I also note that all Uber drivers seem to have a dedicated iPhone from Uber which could be stuck to the window and would offer an opportunity for real-time passenger ‘safety’ monitoring, if this becomes an issue.

In fact Governments and those with a vested interest taxis will pull out all stops because Uber’s ‘low cost’ service effectively makes taxis obsolete. With technology like Uber’s we simply don’t need coloured cars with lights and signs all over them. Private cars are ‘lazy assets’ already paid for by their owners but often massively under-utilised – the Uber system allows them to be monetised at lower cost than taxis but still at profit for their owners. One wonders if the Uber system, once in place, can’t also be used to disintermediate other services that rely on local capital equipment like taxis.

Any cartel or monopoly relies on three things to maintain its position:

  1. Information asymmetry – in the case of taxis in the old days the users had no idea where taxis were at any time. Drivers couldn’t easily connect with users. Taxis had to be colourfully labelled. There was no technology available to cut out the middlemen; this has changed.
  2. Control of government – excessive profits are partially reinvested into the political process to maintain a control over any threats that arise, or to increase profits by enacting further customer-gouging rules.
  3. A capital barrier to entry – for taxis, in the past capital has been required to buy ‘plates’ (in NSW) in order to acquire any scale as an operator. For backend booking and payments system significant capital has been required to setup a phone booking system.

Haven’t mobile phones and the internet changed things? Every single product and service industry in this world has, is or will go through total restructure. I don’t expect our politicians to properly understand this and they will continually attempt to stand in the way of change, despite all the evidence that this is a waste of time.

But looking forward a few decades, when it’s all done and dusted, the Ubers of this world are simply trying to establish themselves as the next monopoly. The basic idea is to replace a bunch of local middlemen with one global middleman (themselves) or ‘One Asshole in the Middle’, as Jim Clark laughingly described them (and himself).

And since these new middlemen will be global we can expect their power, greed and arrogance to be substantially greater than today’s mob. Today’s disintermediating heroes may, in our lifetime, be the most hated ‘big brothers’. This is probably human nature and it’s going to take some remarkable entrepreneurs to resist the urge to over-exploit their opportunities once they have won the market.

In the meantime, keep up the good work Uber!

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Ideas Man

 

Ian Maxwell

Ian Maxwell

Yesterdays guest post from James Altucher “The Ultimate Cheat Sheet for Becoming an Idea Machine” got a lot of emails replies.

Ian Maxwell one of our long time contributors and possibly one of Australia’s experienced tech, medtech and hard sciences entrepreneurs posted us this reply.

Ideas Man

I read an essay this morning which was quite long. As usual the message can be parsed into one paragraph, namely:

Force yourself to come up with ten new ideas a day, on any subject and care not about quality. Then when you really need a good idea you will be practised in the art and it will come to you.

This was in the context of technology startups.

It’s useless advice for me because I have had hundreds of great ideas a day, forever.

In fact my advice is quite different; do not propagate your own ideas but pick up the quality ideas of others.

Why?

First, there are over 7 billion people on the planet and a lot of good ideas out there. Restricting yourself to your own ideas is quite limiting.

Secondly, I tend to give my own ideas away (by email, by blog, by essays and by conversations) because I don’t trust myself to appraise my own ideas with total honesty.

I don’t think any one can.

Having said that, I suspect that the practice of coming up with your own ideas will VERY much help you properly assess the ideas of others. This is just a hunch.

Photo by Capture Queen ™

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