Life's easier when you share
Working with competitors on collaborative R&D may not seem the most attractive way of getting your technology to the marketplace, but it is emerging as an efficient way of working and for picking up grant-based funding.
When Adam Smith completed 'The Wealth of Nations' in 1776, he set in motion a series of trends that would lead to today's fragmented, disintegrated world of business. He began with the plight of the pin-maker who knew all the techniques necessary to convert metal wire into finished pins. But the solitary, multi-skilled pin-maker would be out-competed by teams of specialists in the industrial revolution that followed.
In the second half of the 20th century, businesses themselves would discover the costs of trying to do it all. Smarter, faster specialists made it possible for corporations to trim their operations and become specialists themselves. But that specialisation took away some of the knowledge, skills and clout that let them drive markets as vertically integrated companies.
If you are a small cog in a big sector, what can you do? How do you gain the skills needed to see how one little component can drive a new market, and a way out of the current recession? Do you have to spend large on R&D to find out what others already know? No, you take another leaf out of the Adam Smith book and form a team. Collaborative R&D is the way to get the most from your budget, and guarantee interest from customers.
René Penning de Vries, CTO of NXP Semiconductors, argues that collaborative R&D has been the norm among chipmakers for many years. The US-based Sematech and European JESSI and Medea programmes were instrumental in bringing companies together to work on developing semiconductor processes and explore different techniques before each went off to implement the findings in their own way for production. NXP went further by taking a part share, along with Freescale Semiconductors, in the Crolles2 fab operated by STMicroelectronics in the first half of the decade.
"We did it mainly to reduce costs in the early stages of development. The investment to continue the technology race was going to be phenomenal. By teaming up with a company you would just share costs and build up the knowledge that the companies would have," says de Vries. "The JESSI and Medea frameworks were not so intimate. But they also allowed us to share the pain of doing pre-competitive work."
But de Vries adds: "The reasons for doing collaborative R&D are changing."
Working with competitors can reduce the risk of introducing a new technology, such as a more advanced semiconductor process. But the aim of collaborative research now is to increase the chances of that technology succeeding in the marketplace and "maximise the likelihood that your develop-ments will satisfy the customer downstream," says de Vries.
The push for this kind of downstream collaboration is partly a symptom of the way that vertical integration among companies have gone out of fashion. And it is partly driven by increasing complexity.
"If ever we want to improve the efficiency of the vacuum cleaner, it can be done with simple electronics. But the way that the processor has to be programmed is not something that is necessarily present in the company. But once we bring the guys at the vacuum-cleaner company together with the guys who understand the programming, you have a much more efficient vacuum cleaner," explains de Vries.
Collaboration can work more strategically. The management of NXP hopes that its pathfinding work on near-field communications (NFC) with Sony and mobile companies will see the short-range communications protocols become a standard feature of handsets.
"The NFC technology is ready. But to enjoy its value, you need companies further down the value chain to adopt it. To allow applications such as secure payments, you must have an operator to support it. And a card operator needs to decide that is the way to do a payment. There is an entire chain of businesses that you must get aligned to get success," de Vries claims. "If you manage this well, you maximise the income or the opportunity."
De Vries says it is too early to tell whether the R&D work and pilot programmes will result in final success for NFC, but points to Nokia's decision to design the communications protocol into some of its handsets.
At Alliance Boots, collaborative R&D with small to medium-sized enterprises rather than multinationals is a way for the pharmaceutical giant to expand the range of projects that it can take to its stores. Ged O'Shea, a board director of the Swansea-based Boots Centre for Innovation (BCI), and head of product development at Alliance Boots, says: "Traditionally our company has followed a closed innovation model. We do a lot of our own product development. We are continuing with the closed model. But people are moving to an open innovation model that is characterised by porous organisational boundaries.
"There are a lot of markets where not only are we not experts but where we don't want to be experts. And it is not lost on us that the most exciting things come from SMEs."
The BCI launched in April 2007 as a joint project between the pharmacist, venture-capital (VC) firm Longbow Capital and the University of Wales in Swansea. The decision to base in Swansea was driven by the close involvement of Swansea academic Professor Marc Clement. But O'Shea reckons: "It has some benefits in not being based in our headquarters at Nottingham. Inventors don't like to go to the headquarters because they think someone will come along and rip them off."
As well as providing a gateway into Alliance Boots for inventors and startups - the only gateway, insists O'Shea - the BCI can also be instrumental in raising finance for an early-stage company. "Companies can come to us without access to funding. Longbow, if they are interested, can provide the funding," he explains, "although there is no obligation."
The first product to be launched under the initiative was Incostress, a reliever for female stress incontinence and the brainwave of a nurse, Gaynor Morgan, who had developed the idea while caring for her mother. Made from medical-grade silicone, the device supports the bladder and pushes against the urethra, helping to control the condition and, in some cases, improve pelvic muscle control.
As well as taking the product into its stores last year, O'Shea says: "We provided a lot of advice to her on building a sustainable business.
"We are seeing all sorts of new technologies. We just didn't know how many new ideas would be out there. We have seen a lot of devices and a lot of SMEs are working in that field."
Although Boots sees a benefit in being able to get more products through R&D than it could on its own, O'Shea says there are benefits for technology companies in terms of development. "Having access to consumers is highly valuable to a small company. They may have a great idea but finding the market is the tricky part for them," he claims, adding that several products are currently in the R&D pipeline.
A big problem for SMEs is access to finance, particularly at the early stages of development, in an environment where VC money has gone into extremely short supply.
Jean-Yves Quentel, director of Go4Venture, said at a recent session for entrepreneurs at the Design Automation and Test in Europe conference in Nice: "I don't have much good news. VCs built a huge bubble of portfolio companies and the issue has become one of what to do with these companies that have not become break-even. VCs are sitting on piles of cash, but they don't know where to invest because they don't know where they will get an exit."
The paucity of VC funding coupled with a concern over when startups will provide their investors with profitable flotations or sales means that the VC model itself has come into question. Quentel warns: "We have probably hit bottom. You generally get stories about the VC model being broken when Google-type deals are being done."
Although the VC model may not be on its deathbed, no-one is expecting a rapid recovery. So, the search is on for alternative sources of money. And, once again, the answer can often be collaboration.
An important source of funding for R&D comes from European Union (EU) projects and national government grants. A lot of these grants revolve around the idea of doing collaborative, often pre-competitive work, which is not always that useful for startups keen to get something into the market. But, realising that the grant situation is dominated by large companies, the European Commission has been rewriting the rules of engagement, particularly for the wave of projects that come under the Seventh Framework Programme (FP7).
Tom Bo Clausen, project officer at the European Commission, says: "We have new rules in FP7, that are more favourable to SMEs. There is a big political movement toward making it more favourable to SMEs. Politicians want SMEs in the programmes. If you participate as an SME you get 75 per cent funding. It isn't 100 per cent, but still very high payback. It is better for SMEs then ever before."
But Clausen warns, it is not a string-free arrangement: "We have to balance. You can't give away public money without controls. There is a balance on what you have to provide."
Serge Maginot, CEO of Tiempo, lists a series of grant programmes and public funding options available in his home country of France. Parallel programmes exist in other nations, each one different. But there is a common theme to government funding: "You can't just pick one. Everything that is public funded allows you to get reimbursed only on part of your R&D cost. It is very rare for projects to reimburse more than half the cost.
"You need your own sources of funding to be part of these projects. So you need money from your two primary investors: customers and or investors," adds Maginot.
The glut of funding from VCs over the past 15 years made customers look less important as a source of money for development. But Maginot reckons putting the focus back on customers will be important for startups: "It is obvious that all investors are looking for money at a later stage. What they ask you to have before they invest is customers. And one of the best ways to get funding from VCs is to have customers.
"When you start an innovative company look first to the customer. When you have investors then you can apply for the collaborative funding: it is not the other way around," Maginot insists.
Getting money from customers when the eventual product does not exist does not sound like a good prospect, but there are often ways to make it work. Maginot says: "Often when you are doing work with customers at an early stage, the customer mainly wants the IP and to use you as consultancy."
This type of arrangement takes a bit of balancing. "You need to take less for the consultancy but that way you protect your IP," Maginot explains. The problem with charging the full rate is that the customer, unless you are an incredible negotiator, often winds up owning the IP. "If you are only operating in a service model then you might have a lot of good customers but you don't have your own IP."
Maginot reckons many customers will opt for the cheaper model and forego IP ownership because "most customers care only about time to market".
Operating as a services company used to be regarded with suspicion by VCs, remarks Brieuc Turleuche, CEO of Coupling Wave Solutions, a startup in the electronic design-tools space. "It used to be almost impossible to find money for a services company, but it was easy to find money for selling a product.
"But VCs want to make money and invest in people who have proved they can give them a return on investment."
Even if the option of pursuing government-funded collaborative R&D looks as though it involves too many conditions, those who have been through the process have found the access the project brings to be useful.
Clausen claims: "Before they start people always say the most important thing is money, not so much the research. Afterwards they say the most important thing was contacts. The last thing is the money."
"Studies of European research show that the benefit is access to the large companies," Clausen adds.
Germany-based Process Relations was formed on the back of an EU-funded project called Promenade, by people who worked at Cavendish Kinetics and the University of Siegen, two of the project's partners. CTO Dirk Ortloff, who joined from Cavendish, says: "Collaboration is very important. We had very valuable input from IMEC, the University of Vienna, Bosch and Silvaco. We were able to have a debate with IMEC and Bosch on what was really important.
"The funding was a minor issue. It was nice and partly essential or else the project would have been run on a smaller scale. But the first productive prototypes of the software were there even before the project was begun."
Process Relations is now working on ways for semiconductor companies to share information on manufacturing methods so that they can outsource more of their production. But without the input from key semiconductor operations, the job of getting the software into the right form, and even spotting the opportunity, would have been much harder. Adam Smith's invisible hand can also be helpful.