Investment in Research & Development

September 8th, 2001 Business News, Tech, Tech Features

Part 1

From the wheel to fibre-optic cables, satellite communications and the industrial particle accelerator, all deployed Research & Development has one thing in common, the very reason R&D exists in the first place — it solves a problem. The way we say that in modern, white-collar terms is that a system or device ‘has a market’.

With most of humankind’s basic necessities now met (however unequally they’re distributed throughout society — a matter of economics and politics rather than R&D itself), advances in technology since the industrial revolution have been driven by commerce instead of an ideal of serving humanity.

Years ago an industry established itself and prospered to identify markets for new products or services — the R&D industry — and together with big commercial company such as mining and energy, Research & Development in IT is at the forefront of WA’s economy.

In many ways it seems there’s never been a worse time to develop or invest in IT&T, not just in WA but all over the world. Fallout from the dotcom collapse is still reverberating through the global employment market as industry giants like Cisco, Lucent, Motorola and Compaq continue to slash jobs and profit forecasts.

But that most powerful of human institutions — the idea — continues to prevail. Many an engineering or technology student (literal or metaphorical) still spends lonely hours on the PC or garage workbench hoping for the next Amazon.com, Windows XP or Palm Pilot, and it’s from these quarters that true technological innovation springs. Indian-born US immigrant Sabeer Bhatia developed the model and software for Hotmail with a modest venture capital investment and 18 months after its launch, Microsoft paid the 30 year old technology graduate US$400m for it.

Perth is a long way from Seattle or Silicon Valley, but the IT vine is ripe with ideas waiting for commercialisation. As Peter Why, Chief Executive of Netherlands-based venture capitalist Zernike Australia explains, "There’s money on every street corner. If someone came along with a great idea that had a market, it would be financed locally without a doubt."

Of the R&D landscape for IT in WA, the one thing everybody talks about is support — the fact it exists, how much there is and how much more there should be. The R&D field is a community of contacts with a level of intimacy unheard of in most industries, from the university and back shed breeding grounds of tomorrow’s inventor/engineer/programmers (IEPs) to the mentor-style ‘incubators’ and billion dollar funds that invest in them.

"At the beginning it’s very lonely, sitting in your garage or your room upstairs," says Pieter Struijk, General Manager of Entrepreneurs in Residence, a seed capitalist and incubator located at Bentley’s Technology Park, "We provide support with things like office space, but more importantly, within our network — people we know worldwide to who they can sell their products."

"There always needs to be more sharing of resources," Why agrees, describing a local IEP who needed development software that he located in Sheffield, UK. "We have an office in Cambridge," Why explains, "and were able — on his behalf — to negotiate a license for the software at a damn good price. That support was available within our network."

Collections or ‘clusters’ of organisations such as Technology Park (alongside Curtin University) are ideal environments for R&D because of the intellectual, physical and financial resources available. Their success, according to Peter Why, depends on density — the more people are together, the more resources they can share. "Someone buys a $7000 LCD projector," he says, "What do you use it for, maybe one hour a day? The start-up next door buys the same thing. Why not hire out the ones available at the incubator? You’d be better off spending $7000 on developing your product."

He also believes we need a more liberal approach to forming networks. "In Europe governments and universities are participating in [cluster] parks and seed funds. Amsterdam Science Park is owned by the University of Amsterdam, City of Amsterdam and Rabo Bank. Imagine the uproar if the Town of Victoria Park contributing to a seed fund? It’s a matter of changing that thinking."

Sooner or later production and marketing also come into play. The modern IEP, having developed the latest gadget or program everyone needs, comes up against two problems, according to EIR’s Struijk; "The first is financial — they run out of money," he says, "and they don’t know where the market is."

Once again, networking is king, and R&D partners like an incubator, seed or venture capitalist will have open doors to some serious mass-production and marketing muscle long after a lone inventor’s resources would have dwindled.

And despite facing consistent government cuts, universities are still hotbeds of creativity. Gareth Cottam of Curtin University’s ITSSA (Information Technology and Systems Students Association — think of a school club with industry-level knowledge, contacts and focus) believes our learning institutions are full of outlandish inventions and projects (such as a Coke machine taking commands over the Internet).

"While people are studying," he says, "they’re putting their knowledge to good use in student clubs and associations, and by the time some people graduate, they can tell employers they’ve already managed a mail server or built an Internet firewall or some cool machine."

At the coalface of managing trade and industry promotion overseas is the government. Bodies like the Small Business Development Corporation, Business Innovation Development Scheme and the Western Australian Innovation Support Scheme provide a backdrop that the industry welcomes and appreciates. But, as most people in the know agree — the government should remember its place.

When asked if government grants encroach on venture capitalists’ territory, Peter Why explains the role he’d like to see the government maintain; "The government needs to provide a prosperous business environment. In Europe, some regional governments have found it better to contribute to seed funds than giving subsidies or grants to companies — private sector management of seed funds is very focussed on creating successful businesses."

"I wouldn’t suggest they sit on the boards of companies," EIR’s Struijk adds, "they’re not trained in doing business like that."

But the first step is always the biggest. The seed of the R&D forest is the idea, and in the next part of our series, we meet some people who’ve had them, ask them how they went through the process of bringing it to market and how new IEPs should go about it.

Part 2

Despite our reputation as a mining state, there is an abundance of creative talent in IT in universities, business parks and backyard sheds. Plenty of people have commercialised their dream — and made a successful go of it.

People like Jason Barber, an ex police officer who saw the need for a particular program in the force, left to develop it, and is about to run with it in the marketplace. Or Paul Kristensen, who developed a 3D television system (for which Samsung Korea paid a one million dollar licence in 1995) that spawned a successful 3D technology company.

So what do you do if you’ve got a great idea?

According to people in the know (from former developers themselves to funding bodies), there’s just three things to remember; support, support, support.

"The idea is the easy part," Says Brian Kasten, Managing Director of KDC Systems. "Ideas don’t necessarily translate into reality."

While KDC isn’t involved in IT, Kasten has the unique standpoint of overseeing his own invention through to its current commercial position. "There’s a lot of support out there," he says, "but the biggest problem most inventors have is they don’t want to tell anyone."

Phil Harman, DDD’s Chief Technology Officer, agrees that pig headedness or secrecy will get you nowhere. "Inventors want to do everything," he says, "they want to be chief scientist, company secretary, marketing department and head of finance. Generally inventors don’t have much business acumen so they have to be prepared to give away a lot."

And support need not be hard to come by. Most agree not only how vital it is but how much exists. As Pieter Struijk, General Manager, Entrepreneurs in Residence, explains, "We know a huge network of companies."

And outside accepted structure of the R&D field, KDC’s Kasten believes you can rely on people’s basic good nature; "People in general are very helpful if it’s not impinging on their business."

While your passion for your idea might seem out of place in the world of market investment, it’s very much a ‘people’ industry, and investors are buying your enthusiasm as an inventor/engineer/programmer (IEP) as much as they are a potential IT winner.

DDD’s Harman — while highlighting what he calls the ‘New Baby’ syndrome of keeping your idea jealously close to your chest — admits it’s a good thing; "I think it’s a positive thing because it’s indicative of someone who’s inspired by what they’re doing."

And, as Peter Why, Chief Executive of Dutch-born Venture Capital firm Zernike Australia, explains, don’t forget what people are investing in first and foremost; you. "It’s very hard to work with people you don’t get along with," he says.

"We invest in people," EIR’s Struijk agrees, "We support them. This means little things like how to get your company on a correct legal base."

DDD, like most investors in technology, has even seen good work go by the wayside. "Over the years a lot of inventions have come my way which were terrific and should have seen the light of day," Harman explains, "but because of the extreme characteristics of the inventors, business people walk away from it."

Part 3

After the hours spent on your IT project, where do you go for money to develop it? Why bother with venture capital when a simple bank loan would suffice?

The answer is that venture capital’s about more than money. The vital component venture capital firms offer is their network. A venture capitalist will have pre-existing avenues for production and marketing, often through overseas parent companies, and simple advice because they’ve been there before and know both success and failure intimately.

But that’s how the industry works, and also the reason not to approach simple financial institutions, according to Rob Newman, a successful R&D marketer and board member, Entrepreneurs in Residence.

"A venture capitalist will invest $500,000 in five companies, and four might lose the money, but the fifth might pay off and return $5m," he says, "Banks assume low risk and want very high guarantees."

Venture capital isn’t just giving money to a startup before it hits the market — they can be a partner through the whole R&D cycle.

Seed capital is, as described by Pieter Struijk, General Manager, Entrepreneurs in Residence, hands-on. "The seed area is where you go from a good idea to a tangible product, he explains, "A seed capitalist will normally make their hands dirty. It’s not just providing cash."

Venture Capital is a more serious injection of funds where an operating business is established with a view to expanding modest sales, in some cases by managing an IPO.

"The VC will look at the human side, who’s involved, the marketability of the product, how close it is to market," explains Peter Why of Dutch-based Zernike Australia, "We work hand in hand with a startup, even putting a project manager into the company to work with them."

So is it easy to get money out of venture capitalists? The pervading image is of a cash-strapped industry deathly cautious after the still-unfolding tech wreck. As it turns out, Australia and Europe weren’t as badly burned as the US has been, and we have the advantage of learning their lessons.

A recent Internet news service article claimed that European dotcoms are healthier than ever thanks to a ‘new focus on cost control and a willingness to re-examine business models.’ 90% of those surveyed a year ago are still operating, with around half showing profitability.

Opinion on how easy it is to get venture capital in Australia (and Perth in particular) is divided depending on who you ask. "It’s no longer difficult finding a venture capitalist," says EIR’s Struijk, "They’re more open themselves."

However, when asked if there was any reason why an IT developer wouldn’t stay in Perth rather than go to the US or eastern states, the Technology Manager of one successful R&D company unhesitatingly said ‘no’.

It also depends on the individual case. "You need independent credibility," says Phil Harman, Chief Technology Officer, DDD. "Investors will come in during the early stages but they want to know if someone besides the inventor thinks it’s a good idea. It’s good to get an endorsement or get it used by a household name." (DDD’s 3D TV was licensed for $1m to Samsung Korea in 1995).

Another big plus for local IT developers is that venture capitalists are people too. "The most precious commodity for a venture capitalist is time, not money," says Rob Newman of EIR, "In Silicon Valley they never invest further than an hour’s drive away. It’s very hard to get money from the US unless you move your business there."

Newman goes on to suggest not putting all your eggs in one basket. "Get some funding locally and some from over east," he says, "You get local support but if you get venture capital from Sydney they will open up marketing opportunities and contacts you’ll need over there when you expand."

But the most important reason Perth is great for IT development isn’t rocket science. "It’s a great place to live and we have a great knowledge base," says EIR’s Struijk, "This is one of the few places where you can say ‘I need a specialist in this or that’, and they’re available."

Or, as Zernike’s Why explains, "Because of communications you can do business from anywhere. People stay in Perth because it’s a good place to work. Lifestyle is a key element."

Part 4

In research & development, necessity is truly the mother of invention. It isn’t enough to have a great or cool idea. Customers won’t part with their money just because you have something new.

In advertising they teach an important rule concerning the practice of selling; people aren’t interested in a product per se, just how it will benefit them. The most successful ventures aren’t just great ideas — they solve problems.

"Marketability," is the response given by Peter Why, Chief Executive of Zernike Australia, when asked what an inventor/engineer/programmer (IEP) should think about before anything else. "Look at the market. What are you doing? Is it a solution to a problem? Is it a breakthrough technology? And then work back."

Critical to the success of any R&D venture then (in some ways as important as the invention itself), is marketing. Not so much the promotion that comes after your product or service hits the shelves (or airwaves), but market research — producing something which will make people’s lives easier or better, rather than just a nifty gadget.

And don’t just research your market — know it. Brian Kasten, General Manager of R&D outfit KDC Systems, spent time with the people he’d be servicing, finding out what they wanted and identifying their needs from what he was told. "You’ve got to know what their problems are to solve their problems," he explains.

A typical IEP will have created his/her own product or service, but the entrepreneurial spirit doesn’t always strike the technically gifted, and you might need outside help to develop your prototype.

As there’s no ten-point plan for commercialising an R&D project, the first steps of production might not be obvious. The agreed ideal from all sectors of the industry is to get networked — decent seed/venture capitalists or other mentor-type investors will have the contacts you need.

But not many people invest in an idea. "You have to bring it close to fruition," says KDC’s Kasten, "You’ve got to have a product that people can see, feel or use. Ideas are hard to sell."

So where do you go to make your idea a reality? Pieter Struijk, Entrepreneurs In Residence, explains; "At first, universities are good for further research. Secondly, semi-government organisations like Software Engineering Australia WA have their own pre-incubator and can help people meet the first challenges. In the last phase when you come to the point of real production and commercialisation of the product, the reliability of a commercial operation is essential."

Stories of internet-connected soft drink vending machines and robotics abound from our university sector. Students are busy building, organising, and programming, and by the time many hit the workforce, they’re already armed with formidable industry knowledge in technology-related fields that can be ideal for IT development. As EIR’s Rob Newman says, "Unis are good for core technologies."

The other choice facing IEP’s of technology is when (if at all) to sell or licence. If it’s a labour of love, you and your investor(s) might wear the management hats long-term (although as many venture capitalists cautioned, many inventors are good at inventing but not at forming business plans or running companies).

Or you could bring your R&D project to the cusp of market realisation and attract a big player with the resources and funding to make it a commercial success. As industry leaders well know, the great ideas come from the backyard sheds and home PCs of the world — those who cement market dominance in the IT sector simply buy it.

But wherever you are in the process, make sure you’ve taken care of the fine print. If your investors are worth their salt they’ll be connected with legal or intellectual property resources. If you’re going it alone, invest in an intellectual property solicitor.

Don’t patent too early — renewing patents can be very costly — but protect your intellectual capital. The historical picture of Thomas Edison as of one of the founding fathers of modern technology working for the good of the people is the Hollywood version. In reality he was a voracious marketing manager, having lodged almost 1,100 United States patent over a 50-year career.

Part 5

One of the most important players in the R&D field in any industry is the government. When times are good, we look to them to set competition or deregulation policies, provide a good climate to invest in and avenues for export.

When things are like they are now, with thousands shed from the technology sector every week, we look to the government for help — everything from protective tariffs to making sure the welfare system can cope with the downturn.

There are too many government and government-directed bodies, schemes and grants to describe in detail, but more important is what the industry (both R&D and investment in R&D) thinks of them. The two questions that come up; exactly what should the government provide, and are they doing enough?

Asked what responsibility the government plays in R&D in IT in Western Australia, Professor Leyland Pitt of Curtin University’s Marketing Department is emphatic. "An enormous one," he says, "Giving the tax breaks that will encourage individuals and corporates to fund and engage in research."

Peter Why, Chief Executive of Dutch Venture Capitalist Zernike Australia, agrees with the need for the government to act faster in response to the R&D industry — especially the breakneck pace of IT. "The state government needs to improve in the area of knowledge based industries," he says, "I still think a lot needs to be done in commercialisation at the start-up level."

But Brian Kasten, General Manager of successful R&D operation KDC Systems and something of a self-described market liberal, cautions against expecting the government to hold the industry’s hand, placing more faith in the spirit of commercial development.

"I don’t think the government should be the sole source of support," he says, "If you take away the entrepreneurial market, you end up with a nanny state. If people don’t help themselves they don’t deserve any help. You shouldn’t expect handouts."

Phil Harman, chief technology officer at 3D technologies developer DDD, goes one step further to suggest that there are some areas the government doesn’t belong in simply because they can’t cut it.

In the analogy of an inventor/engineer programmer (IEP) visiting a leading Manhattan venture capitalist, you’re unwittingly two minutes into your pitch during the elevator ride upstairs. By the time the meeting is underway in the boardroom, the manager will have already decided if they like you or your idea.

Harman believes it’s that contact which is missing from the government’s way. "Doing it locally, filling out a form, dealing with people who don’t have that expertise of making their mind up about you in a short time because they can see how passionate you are about your project is a really negative thing," he explains.

So where does the government’s responsibilities lie? Nimal Jayaratna, Professor of Information Systems at Curtin University, favours a stakeholder-driven approach, where the government, investors and consumers have an equal financial stake in the success of a product or service and will take more interest in (and demand results from) the machinations of investment. But, as he illustrates "There should be more government incentives. The government hasn’t recognised the development of intellectual capacity to contribute to the Australian economy."

Zernike’s Peter Why describes the government’s duty not in direct injections of cash but making R&D a good thing to get involved in. "The government needs to provide a prosperous business environment," he says, "In Europe, regional governments contribute to seed funds rather than give subsidies or grants — private sector management is focussed on creating successful businesses."

KDC’s Kasten agrees. "The government should provide support, but to industry that affects inventors, not just as a department that gives inventors money."

And while tax incentives and other mechanisms designed to help the industry prosper are all well and good, Rob Newman of Entrepreneurs in Residence thinks the government should know its place. "I wouldn’t expect the government to handle R&D in IT," he says, "but we do expect them not to create impediments."


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