FAPESP Conference

”Creating Local Prosperity Through World-Class Science-Based Business Development”

Sao Paulo, Brazil, June 16, 2016

The Startup

Scaleup

Challenge for

Innovation

William B. Bonvillian

Director, MIT Washington Office

What’s the policy challenge and the emerging policy?

• What’s the US innovation system problem?

• Financial system model can’t measure value of modern

firm, i.e., its innovation capacity

• No metrics, so substitute a proxy: short term profitability

• Finance therefore drives US firms to focus on “core

competency,” to reduce vertical assets, go “asset light”

• This drives a reduction in firm research (basic and applied)

• Firm research fell to 26% in 2010-13 from near 30%

from 1985-2000 (as a % of total business R&D - ITIF)

• Firms do incremental development focus instead

• But for breakthrough research for innovation – large firms

increasingly buy startups2

The Startup challenge:

• But this “buy-up startups” option for big firms is

running into trouble:

• There is a decline in finance support for startup model

in most technology areas (other than software/IT)

• Creates a gap in the US innovation system

• Scale up challenge for emerging technologies into

production and implementation

• What policies are emerging? How can we fill this

gap?

• New “Innovation Orchards” concept

• Link startups and small manufacturers (US

Manufacturing Extension Program)3

Emerging Technology: Complicated story

U.S. likes to stand up new

technologies in “New Frontier”

Sectors – in Unoccupied Territory

– Limits competition in the

early technology stages

But most tech is in “Occupied

Territory” – New technologies

have to parachute in and will

be shot at on the way in

-- We do biotech, we don’t fix

health care delivery

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Related Problem: “Legacy Sector” Issuefor New Technologies

• New technologies that open new sectors typically introduce

“new functionality”

• There was nothing quite like computing before computing

• Can command premium price at entry because of new functionality

• Then over time drive down the cost curve

• But most technologies in complex established Legacy Sectors

• Initial technologies introduce limited new functionality

• Compete against established technologies

• Must compete on price on day one –

• No time to drive down cost curve

• Legacy sectors: well-defended castles

• Protected by technological-economic-political-social paradigms

• Legacy Sector R&D low – ex: Energy industry R&D = > 1% of

Annual Revenue – we will need startups for new energy technologies

•

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VC’s don’t like Legacy Sectors: Decline in VC Investment in Energy Startups

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Non-IT Technologies: higher risk/ lower return so no VC• From 2004-2008 VC new energy investment grew from $1B

to $5B (47%/yr.) – Then: After 2008: down to $1B • Energy: high risk, low return vs. software low risk, high return

• 2006-2011: $25B in clean tech VC $; less than half returned • (B. Gaddy, et al, “Venture Capital and Cleantech”)

• MIT Production in the Innovation Economy study - 2014 • Looked at 60 Boston-area startups that survived for more than

decade (focus on non-IT, BT)

• VCs stayed in past normal 5/7 years, didn't want to marginalize holdings, but put firms on income maintenance

• When startup got well into product design, called VC

• The VC reply: “we don’t do this, call our contract manufacturer or sovereign wealth fund in…” (you fill in the blank) • (E, Reynolds, et al, “PIE,” vol. 2, chapt. 4)

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Enter: Advanced Manufacturing Institutes

• The Issue: U.S. manufacturing in decline –

• hollowing out, employment cut 1/3 from 2000-2010 –

• affects U.S. innovation system because production is creative stage

• The Fix: advanced Manufacturing Innovation Institutes (MIIs)

• Advanced Manufacturing Partnership 2011 and 2014 reports: apply a Fraunhofer model

• 8 Institutes named; 2 through DOE (power electronics, advanced composites)

• But: Mfg. Institute model speaks to existing ecosystem –

• Collaborations of SMEs and major mfg’s. w/univ. and gov’t

• The Startup Scale-up problem isn’t really reached by Institutes

• What to do? 8

Another Answer: SunShot

• DOE’s SunShot program - national collaboration set up in 2007 to make solar competitive with fuels by 2020

• Goal: 6 cents/KW hour total, installed cost

• Have reached 70% of that goal; 30% to go

• Approaches: Driving down production costs, systems integration, driving down soft costs and installation (64% of total costs), incubator and startup programs

• Support for 61 startups since 2007

• $138m in early stage federal funds; leverage $3B in private support

• Includes: hardware innovation and manufacturing, software, cost-reductions throughout the value chain, and capability-related solutions – federal role: many stages, not just R&D

• Now: 2015, disruptive solar technologies (beyond solar PV) 9

SunShot’s Approach:

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X

X

XX

X – where SunShot helps

Trend in Price Reduction for PV & Capacity Growth, 1980-14

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Now What? for Startup Scaleup

• But SunShot is solar only and goal is price not helping startups

• And startups are outside the Manufacturing Institute model

• Is there a more systematic approach? Finance?

------

• US AMP 2014 advanced manufacturing study: • recognized the innovation system gap in financing for

scale up for startups • tried to find new financing mechanisms –• not a good time for expensive new programs - couldn't find

a workable one

• Now What?12

“Innovation Orchards”

• Rafael Reif, MIT - substitute space for capital

• “Innovation Orchards”

• Already rich innovation cluster in Boston, but scaleup issue

• Need: technology and equipment rich space for startups

• full of know-how – use regional support to build

• for: advanced prototyping, demonstration, testing - perhaps

small lot pilot production

• Gets startup down scaleup curve

• Derisking – get them into range of more traditional financing

• Could accelerate the innovation – better than VC fix13

Example: Cyclotron Road/LBL

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• IDEA: Park a bunch of energy tech

startups (16) outside fence of Lawrence

Berkeley Lab in intermediary space

• Pay them salaries

• Give them the keys – let them invade

• Access to advanced technology,

equipment, know-how

• New tech transition model:

- Old model – inside/out - get the

labs to transition their own technologies

- New Model – outside/in

• Better model? More DOE labs will do

Example: TechBridge• TechBridge – arm of Boston Fraunhofer for energy startups

• TechBridge Role: Prototype, Pilot Production, Test, Validate

• Link startups with industry partners, then prototype. test and

validate technology for production –

• use Fraunhofer facilities for test/validation,

• use industry partner who wants the innovation for scaleup

• So high grade industry level tech validation w/ scaling with

partner – Validation is key

• Match-udep model

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Does US law allow federal labs to help startups?

• IDEA – federal labs are underutilized assets

• for adv’d equipment. technologies, know how –

• get better utilization from them for startups –efficiency issue

• new outside/in tech transfer approach – low cost

• Can federal labs do this? Yes – Stevenson-Wydler Act of 1980 allows “Partnership Intermediary Agreements” (PIAs)

• state-ok’d non-profits (ex., state univ’s) to set up intermediary org’s. to link labs with tech transfer options

• can include startups who can use facilities

• DOD, NIST, Ag use widely

• SO: PIA model - allows entry to labs and tech transfer

• subject to export controls, other federal requirements16

But what does a federal lab know about manufacturing?

• A federal lab knows technology research and equipment

• But federal labs don’t know about production?

• So: NEW IDEA – a missing feature for innovation orchards:

• Incubator Greentown Labs in Somerville joined Mass.

Manufacturing Extension Program in 1 year pilot program

• Link scaleup ready startups with small manufacturers

• Don't have to go to the prototype shops in Shenzhen – can

find capabilities in your own backyard

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GreentownLabs/MassMEP

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•

Here’s what happened: IDEA They need each other - startups need

production, manufacturers don’t do R&D, need innovation access

• 46 startups a Greentown; 33 Startups were interested in linking to SME manufacturers from 7 different locations across eastern Mass.

• 83 Manufacturers were interested in working with and connected to Startups.

• 120 Connections were made between Startups and Manufacturers.

• People intensive effort – online matching won’t work

• 10 Workshops held by Greentown Labs

• Over 100 office hours held at Greentown Labs

• 8 outside startup support networks expressed interest in learning from the Initiative

• 16 Partnerships were formed between Startups and local Manufacturers.

• Basic training for startups on production could go online and scale; but personal relationship-building critical – it’s a marriage, love required

• (sources: Micaelah Morrill, Greentown, Peter Rossi, MassMEP)

Wrap-up: Role of Policy in Startup Scaleup

• So: innovation policy challenge: • Need to scaleup innovative startups for production of new technologies

• But financial support for non-IT startups in sharp decline

• Are new policy models emerging to fix this?• New Manufacturing Institutes and SunShot - impt., but don’t quite fit

• But: “Innovation Orchards” idea fits – substitute space for capital• Rich technology, equipment, know-how space for startups

• Help get them through advanced prototype, demo, testing, pilot production

• Cyclotron Road, TechBridge provide working models

• Another missing link: connect startups to small manufacturers • Can link startup incubators to startups with MEPs -- in every state –

Greentown Labs/MassMEP example

• Can this work? Feds – no new money, can’t create new programs• But these policy fixes are already authorized, have low capital costs, better

utilization of existing assets – labs, MEPs

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