Science and TechnologyJoint written evidence submitted by the UK Innovation Research Centre (UK~IRC) and the Centre for Business Research (CBR)

1. Introduction

1.1 This submission relates to the commercialisation of breakthrough technologies from science base to viable commercial applications. Breakthrough technologies emerge from novel and discontinuous innovations that result in significant and irreversible changes. These innovations are based on new, under-or un-exploited physical, chemical and biological phenomena, that allow order of magnitude improvements in the performance of existing products and/or the creation of entirely new ones. These novel innovations may entail the development of “new technology platforms” with applications across a range of products and markets. Many of the resultant applications are not envisaged at the time of the initial innovation. This class of commercialisation breakthrough is frequently asserted to suffer from a “valley of death” problem which requires public sector subsidisation of private sector suppliers of finance and, in particular, of venture capital finance to fund early stage high technology business development. In the UK small and medium sized businesses in general are, in normal times, able to get most of the finance they need (Cosh et al 2009) whilst formal venture capital (as opposed to informal angel Finance) has played a negligible role in early stage financing in either the UK or the USA. In the USA, moreover, angel finance has been embedded in a system in which direct public sector funding and financing by large corporations together account for around twice as much finance as informal venture capital funding (Hughes (2007) Connell 2007). The evidence shows that financing the early stage commercialisation of technology breakthroughs from the science base involves sustained public sector support, multiple sources of finance with long time lines and many feedback loops. A better analogy for this process is competitive selection in a Darwinian sea rather than passage across a single valley of death (Auerswald and Branscomb (2003)). This process and the role for policy support is best understood in the context of specific examples of commercialisation processes from the science base. This submission therefore seeks to address the questions raised in the “Bridging the Valley of Death” inquiry by drawing on evidence relating to the commercialisation process in of a sample of major breakthrough technologies in the UK.

1.2 The submission draws on evidence from seven historical case studies of breakthrough technology development carried out as part of an EPRSC funded research project (Sharpe et al (2010)). The case study technologies are Liquid Crystal Displays (LCD), Light Emitting Diodes (LEDs), Optical Fibres, Photovoltaics, Inkjet Printing, Giant Magnetoresistance (GMR) and Microelectronic Mechanical Systems (MEMS).

2. How do commercialisation patterns emerge for breakthrough technologies?

2.1 The commercialisation patterns of breakthrough technologies are characterised by progress that is cumulative and slow up to a certain point of discovery or breakthrough when dramatic and quick evolutionary change takes place and sees the emergence of a new technology with new potential applications, markets and industrial direction. (Adner and Levinthal (2002)) This process involves long time lines; breakthrough technologies are comparatively rare events and involve the interplay of multiple actors in the public and private sectors. There is no single “silver bullet” route.

3. What are the key factors in these commercialisation patterns?

3.1 The case studies allow the identification of two transition periods in the commercialisation of science-based technology; the transition from science-base to pre-commercial environment, and the transition from pre-commercial to commercial environment. Factors that drive technology from the science base to the pre-commercial environment include interdisciplinary interaction, time (often decades), a background of “blue skies” or curiosity-driven research activity that is sheltered from the business cycle, technology champions that spread the word of the potential applications and luck.

3.2 Key factors from the case studies associated with transition from the pre-commercial environment into the commercial environment include the development of niche applications for/and existence of non-price sensitive customers. These build the reputation of new technology and non-price sensitive customers and allow engineering/manufacturing techniques to be developed where unit cost is not the primary consideration. Another key factor in transferring from the pre-commercial environment is corporate strategy. Firms (mainly large) make numerous strategic decisions to resource new technologies in the pre-commercial phase. These cover market entry; creating internal capability in technology; cultivating external links; cannibalising existing products with new technology; vehicle of commercialisation (start-up, spin-out or corporate unit); and mechanisms for funding technology development R&D contracts, and R&D programs (usually cooperative), internal revenue or external sources such as “money clubs” funding arrangements that include subscriptions or annual payments made by firms (usually potential customers and suppliers) to other firm/s to fund technology development and risk capital.

4 How is Breakthrough Technology Funded?

4.1 The case studies reveal a variety of funding strategies for the development of pre-commercial technology. There is no simple “Valley of Death” story based on the absence of venture capital. Venture capital is absent at this stage, because it is not designed to meet the needs of that stage. The funding strategies used include government R&D programs and contracts, existing corporate revenue, and gathering external funding support from customers. Venture capital funding plays a small role, and we comment further on why this is so in Section 9 below.

5. What is the role of Government R&D contracts?

5.1 Government R&D contracts were an important source of pre-commercial technology development in all of the cases analyzed. In the LCD case R&D contracts were for military applications in display devices (mainly for aircraft cockpit displays). In fibre optics development government contracts were frequent as a result of the telecommunications function still being under government control and/or government monopolies in most countries. There were, however, other R&D contracts for the development of solutions for military use (such as ship communication systems). Photovoltaics early development was largely funded by the space program in the US and the need for remote power applications in other countries (remote telecommunications in Australia, and coastal lighthouses in Japan). In the more recent case of GMR development government (US military) contracts supported the development of magnetic sensors for land mine detectors. In each of the government contracts the activities supported were pre-commercial technology development generally, and for development of specific niche, high cost, low volume applications primarily for military use. The use of these contracts varies greatly between countries. The US has the most prevalent activity in these types of contracts.

6. What is the role of Government R&D and related programs?

6.1 Many governments outside the UK support technology through specific R&D programs aimed at pre-commercial support in technology and market development around a group of applications. These provide R&D support and subsidies for specific technological areas; access to specialized equipment; forums for the establishment of standards; direct financial support for establishing new industries; public procurement by military and health departments especially of R&D services; acting as deep-pocketed first customers and procuring first quantities of technologies.

7. What is the role of Corporate funding?

7.1 Corporate funding from internal revenues is alongside the public sector the other significant funding source for pre-commercial support. Much of the breakthrough technology analyzed in these case studies emerged from large corporates. Ensuring a critical balance of engagement between large and small firms in the commercialisation process is a central policy issue. The case studies do show that corporate venture capital can be important, though not simply as a means of funding start-up businesses. The growth of open innovation policies amongst large corporates is associated with a growth in corporate venturing as a means of knowledge acquisition, with mixed consequences for high technology start-ups.1

8. What is the role of Customer and related funding mechanisms?

8.1 In a number of cases studies, novel funding mechanisms, such as “money clubs” emerged. Corning used a group of international cable providers (potential customers) to support their earlier research on single mode optical fibres. Elmjet, (a spin out firm from Cambridge Consultants) developing binary deflection continuous inkjet technology invited potential customers in different market segments to join a user council with an annual membership fee of £50,000. Membership gave access to information on technology development and priority ordering for emergent product. These activities reinforce the need in policy terms to link users to the commercialisation process.

9. What is the role of Venture Capital?

9.1 The technologies investigated in the case studies revealed few examples of the use of venture capital. This should not be a surprising result given the breakthrough nature of the technologies examined. Venture capital is a source of funding for a limited number of firms with very specific characteristics in terms of technology development and market opportunity. Firms that seek equity investments are typically small firms rich in intangible assets such as technology and specialist knowledge but lacking in other forms of assets that provide the means to access other forms of external finance such as debt finance. Venture capital funds are typically looking to invest in firms that have a great opportunity for extraordinary profits and the ability to make a return on investment (equity share returned back to the fund in form of cash) within 10 years. As a result venture capital funds would look to invest only in technology applications that were in the commercial environment.

9.2 In examining the long periods of time that typical breakthrough technologies spend in the pre-commercial environment the limited activity of venture capital in these breakthrough technologies is therefore not surprising. This is not to say that venture capital is unimportant in commercializing technology. Successive waves of innovation and application development of breakthrough technologies once they are established in the commercial environment may be supported by venture capital financing. Issues with the availability of venture capital in this environment for new technology based firms are well known as are activities by governments aimed at increasing the supply of venture capital finance.2 Government activities aimed at increasing the supply of venture capital finance to new technology based firms can only play a specific and limited role in the commercialisation of science-based breakthrough technology. This is because venture financing is a suitable means of funding technology development for a specific set of firms operating towards the end of the overall commercialisation cycle.

10. How does the UK perform in the commercialisation of breakthrough technologies?

10.1 Assessing the performance of the UK in science-based commercialisation is difficult even in the context of the specific technologies examined in the case studies. Breakthrough technology development is a global phenomenon involving actors from many countries. The case studies highlight numerous examples of UK participation; in particular UK organizations played a major role in the commercialisation of liquid crystal displays, optical fibres, light emitting diodes (particularly organic light emitting diodes) and Continuous Inkjet printing (CIJ). The UK continues to show technology leadership in CIJ and emerging elements of the LCD industry (for example Zenithal Bi-stable LCDs) and the LED industry (continuing in organic LEDs).

10.2 Achievement in these areas however needs to be set against the initial established criteria of success. Taking the example of the LCD industry, it is true that the UK government (through military research, grants and contracts) invested in the development of liquid crystal materials in the 1960s and 1970s. This led to a dominant position in the global supply of liquid crystal materials and the creation of key intellectual property relating to twisted and super twisted nematic structures. However, the UK’s (through British Drug House (BDH)) global position in materials was overtaken by another European counterpart, and the eventual parent firm of BDH, Merck, still holds this position today.

10.3 It could be argued that the LCD industry was a missed opportunity for the UK, but the UK industry was primarily focused on military customers; highly specialized applications, low production quantities and high per unit costs. The UK LCD industry was never in a competitive position to enter the consumer display/electronics market. Success in the consumer market was never the aim of the UK research programs, rather superior military applications, which were delivered.

10.4 The ability of public policy to support long standing technology leadership in a breakthrough technology field is in need of further research. The cases show numerous examples of policy assisting in the creation of technology leadership, but the leadership is not sustained for a period long enough to also capture adequate value from the initial leadership.

10.5 The role of wider government policy and regulation on technological leadership is also shown in the case of optical fibres. UK organizations were at the forefront of the majority of technological innovations that led to the development of optical fibre communications. The 2009 Nobel Prize for physics to Charles Kao for his work on optical fibres in the 1960s at Standard Telecommunications Labs and David Payne of Southampton University’s Millennium Prize in 2008 for erbium-doped fibre amplifiers, attests to this.

10.6 The British Post Office, which in the 1960s had the responsibility for communications services in the UK, largely initiated and supported the scientific and technical advances made in optical fibres in the UK. Their role was critical in accelerating development by providing seed funding for research programs, bringing together the science and advanced techniques of glass manufacturing and telecommunications research, and creating industrial panels to assess and test the resulting equipment.

10.7 The first fibre optic communications network was established at Dorset in 1975, less than a decade after Kao and Hockman presented their radical theoretical thoughts on the potential of fibre optics as a communications medium. Telecommunications deregulation worldwide, and particularly the restructuring of the British Post Office in the late 1970s and then privatization of their telecommunications function in 1982 dictated subsequent developments, highlighting the effect of the macroeconomic, social and political environment on the development of technology.

10.8 Ownership structures and changes also feature in the CIJ case. The UK maintains a dominant global position in continuous inkjet technology, through a cluster of firms located in the Cambridge area. These firms can be linked to the technology consultancy Cambridge Consultants (CCL). CCL conducted research and development activity (sponsored by ICI) in the late 1970s and developed technological leadership in the CIJ field. This was exploited through a number of spinouts over the next two decades.

10.9 The inkjet printing case study provides the examples of the use of equity funding and associated ownership changes including acquisition activity by a major Japanese based conglomerate of three UK based CIJ firms. These altered the development and commercialisation trajectory by accelerating transition into the commercial environment by providing resources (financial, marketing, human) and pathways to market (access to supply chain). Change of ownership however also alters the appropriation of value across national boundaries so that adequate benefits may not accrue to those who supported the technology previously.

10.10 National programs of research in breakthrough technologies has a strong influence on the eventual commercial outcomes of the research; in the LCD case the goal of UK research programs was not consumer electronics production (as it was in South Korea and Taiwan) but (the much narrower) goal of superior and specialized military applications. This shaped the eventual commercial outcomes. In the case of LCD technology, the goal was not consumer applications therefore resources were not directed into creating links with electronics firms or the production and manufacturer of materials beyond the LC materials.

11. Some policy implications

11.1 The case studies reveal the significance of the creation of multi-disciplinary teams working in close proximity which is more effective than individuals working in isolation in the transition process. This should be recognised in the delivery of public support. Innovation policy should include the active creation and support of this type of environment. This should include investment in critical mass organisations building on the recently introduced TIC or Catapult Model.3

11.2 Public sector procurement is an essential component of the pre-commercial environment. The UK should continue to support its core investments in the science base with the development of the SBIR model. The Government should continue to support the Technology Strategy Board to expand the current efforts in this area. Public procurement policy should support innovation policy and wherever possible provide first use demand for innovative products.

11.3 Innovation policy should be part of a wider strategic industrial policy. This should attempt to ensure that policies aimed at supporting the development and commercialisation of new technologies are reinforced by other policies (eg taxation, energy pricing), standards and regulations and are based on a strategic assessment of the scale and form of support required.


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Sharpe, S, A Cosh, D Connell and H Parnell (2009) The Role of Micro Funds in the Financing of New Technology Firms. London, NESTA (National Endowment for Science, Technology and the Arts.

February 2012

1 See for example Mina et al (2012) and Cosh & Zhang (2011).

2 See for example Sharpe et al (2009) and Mina & Lahr (2011).

3 Mina et al 2009.

Prepared 11th March 2013