CHICAGO – This is the last part of a three-part series on innovation. The first part (“Concepts of Innovation, Invention Should Now Be Regarded Differently”) explored three basic points:

1. Innovation is different from invention.
2. Innovation is the realization of invention.
3. Innovation often results from a combination of inventions.

The second part (“Invention Needs to Be Left Free; Innovation Must Be Managed”) focused on fostering innovation and outlined the following three major points:

1. Invention needs to be left free, Innovation needs to be managed.
2. Invention is often isolated. Innovation is connected.
3. Marketing: For invention, product is key. For innovation product, placement and promotion, all need to be brought together.

This last point – namely the importance of marketing – is crucial.

As folklore would have it, invention is the product of the mad genius of innovation. However, invention is really the result of the even crazier market. G. Pascal Zachary wrote an interesting column (“The Risk of Innovation: Will Anyone Embrace It?”) in Sunday’s New York Times on this very topic. Here’s one quote from the article that makes this point:

Whether humans will embrace or resist an innovation is the billion-dollar question facing designers of novel products and services. Why do people adapt to some new technologies and not to others? Fortunes are made and lost on the answer.

Why Accelerate?

This last part of the series raises a few points about accelerating development. Once we’ve started to innovate and have mechanisms to foster innovation, how do we go about accelerating development of that innovation?

Why accelerate development? This may seem like an obvious question with an obvious answer. However, a development that is innovative enough to be accepted by the market may still be relatively valueless if it reaches the market too late.

The phenomenon of rapidly accelerating technology development and increasingly compressed product life cycles was the topic of a previous column (“Intellectual Property: Does it Matter?”). It pointed out that a strong intellectual property portfolio means nothing in the context of looming technological obsolescence.

Integrating the extracted value over the life cycle clearly means front-loading more market penetration in the front end rather than over expending efforts toward patent protection on the product life cycle back-end.

VC Financing a Barrier to Accelerating Development?

Though simplified for the purposes of this short column, there are two basic barriers to accelerating development. These are:

1. Rigid start-ups.
2. The innovation gap.

The Trouble With Rigid Start-Ups

Start-ups are not supposed to be rigid and bureaucratic. They are supposed to be nimble and adaptable. This is not necessarily the case, though, and the seed for such a paradox lies within the paradigm of venture capital funding that both drives and inhibits innovation.

It might be heretical to say the VC model inhibits development of innovative technologies. It is true that in the absence of funding virtually no technology will reach market and hence venture capital financing is crucially important – even catalytic – to developing innovation.

However, the current VC model can actually stunt development companies particularly in complex, multi-disciplinary fields such as biotechnology, medical devices and convergent medical technologies.

Every venture capitalist would like to fund the next Google. Based on that premise, the basic VC model is predicated on the concept that – out of 10 or so investments – one (perhaps two) will be a home run (à la Google or at least something like that).

Another one (or two) companies will yield middling returns while the remaining six to eight (more like eight) are likely to completely fail. In fact, failure is often seen as a good thing. According to the doctrine of “intelligent fast failure,” ditching projects early is one approach to ensuring appropriate returns on investment.

With this paradigm in place, the venture capitalist can be reasonably assured of “typical” VC returns of 20 percent to 30 percent averaged over the 10 investments. The flip side of this is often neglected namely that 80 percent of the companies and all the associated innovation, intellectual and human capital vanish in dust and smoke.

What can companies do to avoid such a demise? They can adapt, shift direction, reassess or do a variety of other reasonable measures in order to optimize their own survival (perhaps even reaching Google status). However, there is another angle to the VC paradigm. The chance of reaching a blockbuster outcome is most likely when a company and its management are absolutely laser focused on their goals.

While some degree of flexibility is necessary, venture capitalists want their holdings to stay on target. The “focus, focus, focus” mantra is absolutely essential to the overall success of the VC model.

This idea was developed in a little more detail in the previous column “So Far, Venture Capital Relatively Unsuccessful in Biopharma Market”. While VC financing is an essential catalyst to technology development, new concepts of innovation around adapting to market needs, partnering and otherwise expanding the scope of an entrepreneur’s vision need to be embraced.

The Innovation Gap

The innovation gap was the subject of the previous column “The ‘Innovation Gap’: Preventing Ideas From Untimely Deaths”. Like the rigid start-up idea, this barrier to innovation development arises from an unintended consequence of the current model of venture capital financing (especially in the context of biotechnology and medical technology development).

Again, while venture capital financing is essential for technology development, certain trends have inexorably led to a significant barrier: the innovation gap. The innovation gap represents the inability to take fundamental inventions at the level of the university research lab or an entrepreneur’s initial idea into at least the preliminary stages of commercial development.

Two major trends over the past five years have inexorably transformed the venture capital industry. One of these has been the increasing minimum size of deals. Most VC firms won’t really look at deals less than $5 million and most deals are going for substantially more than that. Due diligence as well as portfolio management costs have driven much of this necessary increase.

In addition, the fact that VC firms will often bet on the “jockey” more than on the “horse” means that investments are being made only in the context of top-dollar, full-scale management teams being put into place. It is simply too expensive and not practical for VC firms to look at small deals.

However, in biopharma and medical technology, $5 million and a full-blown management team are not necessarily required to make the leap from early technical and scientific development to preliminary market proof of concept.

Only few companies can secure the financing, and once that happens, they are on the inexorable track toward the rigid start-up model as described above. While “Google or bust” can be an appealing rallying cry, not all innovation development needs to take the road of the “charge of the light brigade”.

Roughly speaking, there are two underlying causes for the innovation gap: one financial and the other operational. The financial reason concerns a relative lack of funding for the phase between invention and innovation.

The operational reason relates to organizational, managerial and technical factors that tend to impede the leap from invention to innovation. While the two factors are certainly related to each other (one can think of it like the chicken or the egg issue), it is useful to address each one separately.

In order to bridge the innovation gap, both the financing and the operational barriers need to be surmounted. Gap financing mechanisms (e.g. those that leverage more efficient means of risk assessment) need to be considered. Perhaps most important for biopharma and medical tech are flexible systems of management that can literally bridge the chasm that has evolved out of the current system.

Previous Columns in 2007:
Invention Needs to Be Left Free; Innovation Must Be Managed (10/4/2007)
Concepts of Innovation, Invention Should Now Be Regarded Differently (9/17/2007)
The Deconstruction of Amgen: Company is Victim of Own Success (8/20/2007)
Integration of Medical Records Across Populations Still a Dream (8/6/2007)
Life Sciences Funding: Has the Private Equity Boom Peaked? (7/23/2007)
Analysis: Why the Abbott Deal With GE Healthcare Fell Apart (7/17/2007)
Stryker: The Surprising Implications of Hip-Resurfacing Implants (7/9/2007)
The Future is Bright For Life Sciences in State of Illinois (6/25/2007)
FDA: Tortoise, Hare or Something Else Entirely? (6/12/2007)
Call to Action: How to Accelerate Medical Technology in Illinois, Beyond (5/30/2007)
The ‘Innovation Gap’: Preventing Ideas From Untimely Deaths (5/29/2007)
The Diabetes Divide: Is Diabetes a Surgical or Medical Disease? (5/14/2007)
Unfolding Tragedy: ‘Balancing Act Between Innovation, Health-Care Access’ (5/1/2007)
Personalized Medicine, Tech Convergence Decisive Trends (4/16/2007)
KKR Buys First Data: On Private Equity, Pipelines, Development (4/2/2007)
What Patients Want: A Story of Choice, Trials, Evidence-Based Medicine (3/19/2007)
Gov. Blagojevich Announces IllinoisCovered to Insure 1.4 Million in Illinois (3/5/2007)
Medical Design Excellence Awards Offer Decisive Glimpse Into Future of Health Care (2/20/2007)
What’s More Important in Medicine: Diagnostics, Therapeutics or Prognosis? (2/5/2007)
Lance Armstrong and the Future of Cancer Care (1/22/2007)
Subtle But Powerful, Publication Bias Goes Beyond Financial Incentives (1/9/2007)
Click for 2006 column archive.

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