Editor’s note: The RTP Product Pipeline is designed to help entrepreneurs, business leaders, educators and inventors better understand the product commercialization process. Montie Roland and Tom Vass are co-founders of the RTP Product Development Guild, Inc.
RESEARCH TRIANGLE PARK — In their research entitled, “Success Factors in New Ventures: A Meta-analysis,” Michael Song et al., cited their statistics on new venture success rates. “In our most recent empirical study of 11,259 new technology ventures (NTVs) established between 1991 and 2000 in the United States, we found that after four years only 36 percent, or 4,062, of companies with more than five full-time employees, had survived. After five years, the survival rate fell to 21.9 percent, leaving only 2,471 firms still in operation with more than five full-time employees.” [i]
After conducting a statistical factor analysis, the authors identified eight critical underlying factors that contribute to the rate of success for new firms:
(1) supply chain integration
(2) market scope
(3) firm age
(4) size of founding team
(5) financial resources
(6) founders’ marketing experience
(7) founders’ industry experience
(8) existence of patent protection
The language that they use for the most important factor of success for new technology ventures is “supply chain integration.”
Linking Ventures to Larger Organizations
In the earlier columns in the RTP Product Pipeline on deal-mapping, this term was related to how latent entrepreneurs can investigate the intermediate and final demand-supply chains in RTP’s region’s industrial clusters to find gaps in technology that may lead to new product ideas.
Applied in the context of deal creation, this same term means using professionals within the regional supply chains to provide advice and guidance on the product design and development during the fuzzy front end of product commercialization.
In the context of commercialization, the supply chain integration in the regional industrial cluster performs two essential functions. First, the local supply chain acts as the market demand for the new product by connecting the product to the intermediate and final demand markets. Second, the supply chain connects the new venture to the global corporations who may provide the exit path by buying the new venture.
Research provided by the U. S. Department of Commerce’s Technology Administration explains the logical connection for a new venture between the regional product design community and the future exit event that may occur with a global corporation.
As they explained the issue, at global corporations, there is a growing reliance on outsourcing of early stage research. The chief technology officer of a large machinery manufacturer told us, “as a result of the de-emphasis of earlier stage R&D investments and the move to a more conservative investment posture by most established firms, the responsibility for developing breakthrough technological advances rests disproportionately on the shoulders of startups and universities.” [ii]
Another executive added, “Sourcing ESTD and earlier stage R&D from the outside works well for discrete technologies and small, very-focused inventions. But coordination becomes enormously difficult with larger projects requiring infrastructure or business model changes.”
In other words, from the perspective of senior managers at global corporations, it is very difficult to manage the innovation process outside of their corporate organization. Recognizing this difficulty for corporations, a new venture would include the local professional design community on the fuzzy front end to provide the coordination between the new venture and potential future corporate buyers of the new venture.
Going Forward Alone or Through Cooperation
The empirical evidence of this new trend related to global outsourcing of early stage technology development has been reported by Giuri et al, (2005).
They report “that in sectors like the semiconductor, the biotechnology, the medical electronics, the small firms managed to grow by focusing on the technology development activities and by establishing supply or cooperative agreements with large firms … a general message that can be drawn is that large firms commercialize their noncore technologies while protecting their core technologies, except for the cases in which they need to gain access to external technologies through cross-licensing (or in which the revenue effect is larger than the rent dissipation effect).” [iii]
The function of the metro regional product development guild is to act as the community coordination liaison between new entrepreneurial ventures and the global corporations that are searching for technological innovations.
Giuri found evidence that this process is becoming more pronounced. She noted that, “Large firms often fund research conducted in small firms also with the intention to acquire the small firms developing promising technologies. Small firms seek to be acquired by large firms, to sell their technologies or to start joint research and development, manufacturing or marketing. Only in a very few cases new small firms became successful in the product market.”
The ultimate fate for a new venture in the RTP may not be in becoming a global corporation, but neither is it automatic that the technology being developed will be bought by the large corporation. Therefore, from the very early stages of deal creation, at the fuzzy front end, the new venture requires the coordination help of the metro regional product design community to plug the new venture into the global value chain and put the new venture on the radar screen of the large corporations.
This type of social business networking requires the implementation and operation of a deliberate regional innovation economic strategy that plugs new ventures into the regional supply chain. The contribution made to future regional economic growth by new venture creation requires both the informal and more formal approaches to social organizations that promote innovation economics. It is the single most important factor in contributing to entrepreneurial success rates.
Right now, in the RTP, there is a gap between what types of social business networks needed to promote innovation economics and what exists in the way of regional knowledge business networks, such as a local chambers of commerce.
The main focus seems to be on what piece of the economic pie existing businesses can steal from someone else, not on how to let new companies get a bite of the pie.
As the economy in North Carolina continues to spiral downward, and the traditional sources of economic development that rely on industrial recruitment incentives continue to come a cropper, it will eventually become apparent that the only source of economic growth for the future is new-venture creation. That is why the entrepreneurial success rate in the RTP matters to you.
[i] Song, Michael, Podoynitsyna, Ksenia, Van der Bij, Hans, Halman, Johannes I. M., (2008), “Success Factors in New Ventures: A Meta-analysis,” Journal of Product Innovation Management. 25 (1).
[ii] Auerswald, Philip E., Branscomb, Lewis M., Demos, Nicholas, Min, Brian K., (September 2005), Understanding Private-Sector Decision Making for Early-Stage Technology Development: A “Between Invention and Innovation Project” Report, NIST U.S. Commerce Department’s Technology Administration.
[iii]Giuri, Paola, Luzzi, Alessandra, Lem, S., (May 2005), Commercialisation Strategies of Technology based European SMEs: Markets for Technology vs. Markets for Products, Anna School of Advanced Studies, Laboratory of Economics and Management, Pisa.
Editor’s note: the opinions of the author are his own and do not necessarily represent those of WRAL Local Tech Wire.
Questions? Comments? Send them to Rick Smith (email@example.com). Smith is editor of WRAL Local Tech Wire.
The RTP Product Pipeline is a feature written for WRAL Local Tech Wire. Its purpose is to help entrepreneurs, business leaders, educators and inventors better understand the product commercialization process. Montie Roland is a founder of the RTP Product Development Guild. Roland is also the President Emeritus of the Carolinas Chapter of the Product Development Management Association. Roland is the President of Montie Design product design firm in Morrisville.