How High Tech Firms Find Replacement Technology

How High Tech Firms Find
Replacement Technology

Lessons from the new economy 
stars for all of us

Increasingly, high tech companies are investing through incubators and venture capital funds to develop new technology.  Easton Consultants recently completed a global study of twenty of the leading technology companies about how they found replacement technology.  We think there are a few things we all could learn from them.

First, that these companies feel they need to invest in new technology at all.  These are the firms that first shattered and then rebuilt the U.S. economy.  And now they’re looking for the new technologies that might replace theirs.

High tech companies have learned that the same Shiva-like microeconomics that propelled them to the top could be their undoing.  We’ve written about this before: exponential de­mand curves are getting sharper, tipping points—where a new technology takes off—are coming earlier in product life cy­cles, and core products are eclipsing even faster.  More importantly, high tech compa­nies know they’ll have trouble replacing technology internally:

“Organizations, like living beings, are hard­wired

 to optimize what they know and to not throw success away…  

An organization can cheer itself silly on its way to becoming 

the world’s expert on a dead-end technology.” 

–Kevin Kelley, Wired, New Rules for the New Economy

A few rules seem to guide companies choosing whether to develop a technology internally, create a full-blown venture fund, or compromise and develop an incubator.  The further away the new technology is from the core business technology, the longer term management’s perspective, the less need for control, then, the easier it is to establish independent venture funds.

• Corporate technology development usually invests to advance technologies to support the core businesses;
• Technology incubators leverage internal tech­nology initiatives not embraced by the current businesses, developing technolo­gies in a sheltered organization run sepa­rately from the corporation;
• Venture funds develop externally created technologies—with varying degrees of corporate in­volvement—which will spur demand for the company’s core products or may be­come the future core business. 

Incubators and venture funds let com­panies invest in high impact technologies not directly supportive of current core businesses.  Moreover, they can respond to rapidly changing technologies too dynamic to warrant traditional research investment. They also allow companies to respond to im­portant technological gaps (e.g., the Inter­net) not part of the company’s core busi­ness.

As one company said in the Easton Consultants study,

“We aren’t trying to identify good companies or good technologies – 

we’re trying to find good fields, markets with potential to reach 

$100 billion.  We look for the technology toll roads which all companies 

will be re­quired to pass.  If we own the toll road, then we 

will be well positioned to collect the toll.”

While the impetus for most technology incubators is strategic, many of the of the high tech firms are investing for financial returns from a portfolio of technology venture investments.  They can also lever­age sunk investment in internal technol­ogy.  Moreover, creating a “self-funding investment” is easier to justify to corporate management than an investment deliv­ering purely strategic benefits.

Putting together an incubator or ven­ture fund is not trivial.  How most compa­nies have organized to create incubators is the second important lesson.  The business model for a technology incubator’s ventures must be radically dif­ferent from that of an operating unit.  Man­aging an operating unit requires focus on optimization—new businesses do not.  In­stead, they require an inte­grated management approach—problems cannot be parsed out and managed sepa­rately.  The functional requirements of a new venture change rapidly—requiring equally swift adjustments from the top man­agement team.  

“Running a business is all about optimizing – cutting out a 

sliver of cost or grabbing a half a point of market share. 

Running a new technology venture is very different.  

It needs everything done pretty well and nothing done perfectly.  

There’s nothing to optimize yet.”

Because of this difference, most incu­bators operate independently from the corporation and look to external sources for leadership and management to establish culture and managerial leadership distinct from that of the parent.

Companies with incubators also look outside for advice and consultation, often by developing some level of partnership with the venture capital community for deal flow, advice, money, and exit.  Relationships range from informal contacts to tight op­erating partnerships similar to Texas In­struments’ venture with Hambrecht and Quist.

And companies have liked what they’ve seen at VCs.  Most corporate incubators are attempting to copy their structure and culture.  This re­quires some comfort with risk and the portfolio concept that not every investment will be a winner.  Individual ventures are evaluated for their (risk adjusted) potential returns, but due to the risky nature of technology development, most ventures are not (blindly) held accountable for their projections.  Said one high tech manager,  

“About 60% of everything we do will end in bankruptcy.  

Of what’s left, some will gener­ate a ten times return, 

some will get five times, some will break-even.”

Like venture capitalists, incubators be­lieve they need to adopt a fast-moving tech model and culture to respond to shorter technology half-lives and quicker decision time frames.

“Technologies used to be held by large, monopolistic 

corporations who could spin off business after business 

from them for a decade or more.  Today, technologies become 

obsolete in months, and we will have to emulate the fast-moving 

start-up model in order to compete in that world.”

Incubators usually populate ventures with the same researchers who created the technology (either internal or external to the corporation), while marketing and strategic roles are usually filled from outside the re­search organization.

Corporations typically staff the in­cubator/venture fund with personnel who can identify and evaluate technologies.  This requires a market-oriented view of broad technological trends and the ability to es­tablish the potential for commercialization and to scale financial commitment quickly.  Firms compensate venture staff to reflect the balance between the start-up nature of the venture and the relatively safe corporate harbor in which it resides.

With these conditions in place, we believe that adopting the incubator/venture capital model can lead to quicker, less risky product development.  One incubator manager believes his company is getting four times the yield through this process than traditional R&D.  They can provide the means of adapting to a technological discontinuity without disrupting the core businesses of the company.  Or they might lead to obtaining technologies that will support the core businesses in the long term.

Looking outside the company for technology is often daunting!  New ventures require a radically different business model, independent operations, culture and managerial leadership.  The incubator team must possess a fast and flexible venture capital mentality, and the company needs to have some comfort with portfolio risk.

Easton Consultants helps high and low tech firms create strategies for growth in the new economy.  Incubators are one of the many solutions we’ve helped implement.  Please contact us if you would like to discuss how we can use our insight into technology development to help your company.