James Surowiecki on business, the markets, and the economy (New Yorker)

Here's an interesting interview that discusses a few of the current problems around innovation: education and incentives (min 16:00).

This is a solution that could/should be further closely examined in both the US and in PR if both countries are serious about continuing (and introducing it in the case of PR) development of innovation in their respective economies.


Summary:

James Surowiecki speaks with Dan Vasella, the chairman and C.E.O. of the pharmaceutical company Novartis AG, about the current state of the industry, the company’s shift away from the traditional model of profitability, and the growing influence of countries such as China, where Novartis plans to open a billion-dollar facility. They met last month at the Harvard Business School.

Read more: http://www.newyorker.com/online/blogs/jamessurowiecki/2009/12/video-dan-vasella.html#ixzz0ZbdGJkPf

Recession's latest victim: U.S. innovation (CNN)

Patent filings fell in 2009 for the first time in 13 years, worrying Silicon Valley that it is losing its place as the leader in global innovation.

By David Goldman, CNNMoney.com staff writer

Last Updated: December 11, 2009: 10:34 AM ET

NEW YORK (CNNMoney.com) -- U.S. innovation slowed this year for the first time in 13 years as the recession cut into budgets, and costs to protect inventions rose.
The number of patent filings in the United States fell 2.3% in 2009 to 485,500 from 496,886 last year, according to a preliminary estimate by the U.S. Patent and Trademark Office. That makes 2009 the first year since 1996 in which businesses and inventors filed fewer patents year over year.
"That's unfortunate because [patent filings] are a reflection of innovation," said David Kappos, director of the Patent Office. "Innovation creates so many jobs and so much opportunity for our country. It is absolutely key to our long-term success in the global economy."
At the same time, U.S. patents issued to inventors and businesses in foreign nations jumped 6.3% for the year. That's a worry for Silicon Valley, which has been a global leader for decades.
Most blame the recession for the drop in U.S. filings. As a result, many companies are opting to hold off on bringing new ideas to market until the economy improves substantially.
"Our patent filings were down 25% this year, and it was a direct macroeconomic issue," said Joe FitzGerald, deputy general counsel for tech security firm Symantec. "The overall company reduced spending, and patent filings are a very controllable expense. We might have filed four patents, but we filed three and made sure they were strategically significant."

Cost constraints

The application, processing and legal fees average about $15,000 per patent, but the cost to defend those patents in court after they've been granted typically runs between $3 million to $6 million, according to Bijal Vakil, partner in White & Case's intellectual property team in Palo Alto, Calif.
"Once you have a patent, you also have to go out and defend your own turf," said Henry Nothhaft, chief executive of Tessera, a San Jose, Calif.-based company that licenses its electronic miniaturization technologies to consumer electronics companies. "That has become more expensive lately due to the complexity of technology and globalization of economy, and it has caused some products not to come to market."
It could also become disruptive to American businesses down the road as filings from abroad pick up.
"We are in a dire economic situation, so its not unreasonable for businesses to have to cut their budgets," said Vakil. "But this trend could spell financial ruin for some U.S. companies. We've lost our competitive edge, and other companies from other countries stand to benefit."
If that trend continues, it could also spell trouble for the American worker, especially given the weak U.S. labor situation. The Obama administration has contended that the economic rebound will rely on innovative U.S. companies to hire workers to develop new technologies and ideas like clean energy and smart transit systems.
"Our top priority is to see jobs get created, and we need patents to get through the patent office to help create those jobs," Kappos said.

The system is broken

Pushing patents through the system is easier said than done: The decline in filings this year has brought to light a number of problems with the antiquated American patent system.
The Patent Office does not receive any taxpayer money. It is completely funded by fees levied on patent filing, processing and awarding. The Patent Office also hasn't changed its fee structure in decades, so it continues to charge a flat rate (roughly $1,000) for patent applications, regardless of the idea's complexity or the amount of work that needs to go into processing the patent.

0:00 /0:53Nokia sues Apple

As filings have dropped off, so too has the Patent Office's revenue, which sank by $200 million in 2009. As a result, the Patent Office has initiated a hiring freeze, stopped all overtime, cancelled a necessary IT upgrade and has lost between 40 and 50 patent examiners every month this year, said Kappos.
That means longer wait times for patent approvals and a growing backlog of filings. Currently, there are 740,000 patents pending, with an average wait time for approval of 40 months. The Patent Office isn't even able to look at applications for three years because of the backlog. That's an eternity for tech inventions, which tend to cycle through product generations in a year or so.
Ultimately, it creates a vicious cycle, since a large lag time only further discourages patent filers.
"People are looking at the system as it is now, and they're saying that waiting 40 months for a patent may not be worth it," said David DiMartino, spokesman for the Coalition for Patent Fairness, a group representing major Silicon Valley companies' desires for patent reform.
Another discouraging trend has been the rise in patent disputes. By June, there were already 15% more "post-grant" patent reviews filed by competitors to the filing company than there were in all of 2008.
Those cases are expensive to defend, and are sometimes used by large companies to delay smaller companies' technologies from coming to market or to prevent them from being released at all, according to Brian Pomper, executive director of the Innovation Alliance, a coalition of mostly small high tech companies in support of strong intellectual property rights.
As a result, the Patent Office, lawyers and companies alike are clamoring for patent reform. Bills in the House and Senate, which are on schedule to be passed in the spring, would give the Patent Office the authority to adjust its patent fee structure and give juries direction on setting awards for patent disputes, among other reforms.
Some advocates argue that the bills are far from perfect, particularly because they could make it easier for big companies to repeatedly bring smaller innovators to court. But for the most part, businesses and government officials are eager for Congress to act.
"The American innovative spirit is stronger than ever. If we're able to get patent reform through, we absolutely can take processing times way down and get innovations through to the marketplace," said Kappos, who estimates that legislation will help reduce the average wait time to as little as one year. 

delanceyplace.com 11/20/09 - innovation

And the question remains, what is Puerto Rico has done and is doing to ride this wave of innovation?

As to what PR has done? Evidently very little as more than 90% of what is consumed in PR is manufactured elsewhere. Additionally, the industry of intellectual property is virtually non-existent in PR.

As to what PR is doing? I haven't heard of any government policies to foster innovation or promote the manufacturing of local products.

As to what can be done? A good place to start could be Jane Jacob's concept of "import replacements" (more information here).

In today's excerpt - historically, 85% of the increase in per capita GDP (gross domestic product or wealth) in the U.S. economy has come from innovation - the
invention of new products and services or the invention of better ways to make existing products and services. It follows that any durable and sustainable
program to create jobs in an economy would focus foremost on innovation:

"Since the 1950s, economists have understood that innovation is critical to economic growth. Our lives are more comfortable and longer than those of our great-grandparents on many dimensions. To cite just three improvements: antibiotics cure once-fatal infections, long-distance communications cost far less, and the burden of household chores is greatly reduced. At the heart of these changes has been the progress of technology and business.

"Economists have documented the strong connection between technological progress and economic prosperity, both across nations and over time. This
insight grew out of studies done by the pioneering student of technological change, Morris Abramowitz. He realized that there are ultimately only two ways of increasing the output of the economy:

(1) increasing the number of inputs that go into the productive process (e.g., by having workers stay employed until the age of sixty-seven, instead of retiring at sixty-two), or

(2) developing new ways to get more output from the same inputs.

Abramowitz measured the growth in the output of the American economy between 1870 and 1950 - the amount of material goods and services produced - and then computed the increase in inputs (especially labor and financial capital) over the same time period.

To be sure, this was an imprecise exercise: he needed to make assumptions about the growth in the economic impact of these input measures. After undertaking this analysis, he discovered that growth of inputs between 1870 and 1950 could account only for about 15 percent of the actual growth in the output of the economy. The remaining 85 percent could not be explained through the growth of inputs. Instead, the increased economic activity stemmed from innovations in getting more stuff from the same inputs.

"Other economists in the late 1950s and 1960s undertook similar exercises. These studies differed in methodologies, economic sectors, and time periods, but the results were similar. Most notably, Robert Solow, who later won a Nobel Prize for this work, identified an almost identical 'residual' of about 85 percent. The results so striking because most economists for the previous 200 years had been
building models in which economic growth was treated as if it was primarily a matter of adding more inputs: if you just had more people and dollars, more
output would invariably result.

"Instead, these studies suggested, the crucial driver of growth was changes in the ways inputs were used. The magnitude of this unexplained growth, and the fact that it was exposed by researchers using widely divergent methodologies, persuaded most economists that innovation was a major force in the growth of output.

"In the decades since the 1950s, economists and policymakers have documented the relationship between innovation - whether new scientific discoveries or incremental changes in the way that factories and service businesses work - and
increases in economic prosperity. Not just identifying an unexplained 'residual,' studies have documented the positive effects of technological progress in areas such as information technology. Thus, an essential question for the economic future of a country is not only what it produces, but how it goes about producing it.

"This relationship between innovation and growth has been recognized by many governments. From the European Union - which has targeted increasing
research spending as a key goal in the next few years - to emerging economies such as China, leaders have embraced the notion that innovation is critical to
growth."

Josh Lerner, Boulevard of Broken Dreams, Princeton, Copyright 2009 by Princeton University Press, pp. 43-45.

Tinkering Makes Comeback Amid Crisis (WSJ)

By JUSTIN LAHART

The American tradition of tinkering -- the spark for inventions from the telephone to the Apple computer -- is making a comeback, boosted by renewed interest in hands-on work amid the economic crisis and falling prices of high-tech tools and materials.
The modern milling machine, able to shape metal with hairbreadth precision, revolutionized industry. Blake Sessions has one in his dorm room, tucked under the shelf with the peanut butter on it.
The Massachusetts Institute of Technology junior has been using the mill to make prototypes for a bicycle-sprocket business he's planning. He bolts down a piece of aluminum plate, steps to his desk and, from his computer, sets the machine in motion.

Tinkering With Technology

View Slideshow

Alex Welsh for The Wall Street Journal

Jason Euren, an anthropology student at the New School University in Manhattan, worked with a soldering kit at the Brooklyn hackerspace Resistor recently.

• More photos and interactive graphics
• Econ: Innovation's Role in the Economy

"It's kind of a ridiculous thing to have," says Mr. Sessions, 20 years old. But "in today's marketplace you can't only offer a technical aptitude. You have to be able to provide something more."
Occupying a space somewhere between shop class and the computer lab, the new tinkerers are making everything from devices that Twitter how much beer is left in a keg to robots that assist doctors. The experimentation is even creating companies. With innovation a prime factor in driving economic growth, and corporate research and development spending tepid, the marriage of brains and brawn offers one hopeful glimmer.
Engineering schools across the country report students are showing an enthusiasm for hands-on work that hasn't been seen in years. Workshops for people to share tools and ideas -- called "hackerspaces" -- are popping up all over the country; there are 124 hackerspaces in the U.S., according to a member-run group that keeps track, up from a handful at the start of last year. SparkFun Electronics Inc., which sells electronic parts to tinkerers, expects sales of about $10 million this year, up from $6 million in 2008. "Make" magazine, with articles on building items such as solar hot tubs and autopilots for robots, has grown from 22,000 subscribers in 2005 to more than 100,000 now. Its annual "Maker Faire" in San Mateo, Calif., attracted 75,000 people this year.
"We've had this merging of DIY [do it yourself] with technology," says Bre Pettis, co-founder of NYC Resistor, one of the first hackerspaces, in Brooklyn. "I'm calling it Industrial Revolution 2."

Journal Community

• discuss

“ Maybe it's time to bring my old white board out of retirement, and rethink some of those old projects. ”

— Richard Tomalewicz

The financial crisis played a role in taking a nascent trend and giving it increased urgency, says Michael Cima, an MIT engineering professor. "I've been here 23 years and I definitely see this trend back to hands-on," he says. "A lot of people are pretty disappointed with an image of a career in finance and they're looking for a career that's real."
Access to the tools to tinker is getting easier. "Computer numerical controlled," or CNC, tools -- which cut metal and other materials into whatever design is plugged into the computer attached to them -- now cost as little as a tenth of what they did a decade ago. Mr. Sessions, the MIT student, says he first looked at such mills on a lark, assuming the price would be well out of his reach. But his mill cost about $7,000 to buy and set up.
He sees the bike-sprocket business as a springboard for developing more complex products, such as a device to increase mobility for arthritis sufferers or an energy-efficient car transmission. He thinks his interest in tinkering will give him an advantage in a global marketplace.

"If it doesn't have that creative aspect to it, it may not be worth doing, because your job can be outsourced," he says.
Innovation in the U.S. is peppered with examples of tinkerers who started out small, but came up with big ideas, says Naomi Lamoreaux, an economic historian at the University of California, Los Angeles. "The really dynamic times in our history are times when you have lots of ordinary people who think they have a chance to make a difference."
Through much of the past century, however, developing new products required increasingly complex and expensive tools that were out of reach of most individuals -- the Wright brothers built an airplane in their bicycle shop, but the first jet-powered aircraft were built at well-funded corporate and government labs. As a result, large firms came to dominate innovation.
That trend was disrupted in the 1990s when low-cost computers allowed Internet and software start-ups to compete with giants. But when it came to developing innovative physical products, high prices kept high-tech machine tools and materials out of most tinkerers' reach.
"There have always been hobbyists, but it was really hard to go from being a hobbyist who built hot rods to becoming a car company," says Erik Kauppi, a member of at A2 Mech Shop, an Ann Arbor, Mich., workshop where tinkerers pool tools they own. "But now, all of a sudden a guy or a couple of guys have a lot more leverage."
The electric scooter that Mr. Kauppi, who is 49, developed at the workshop is now in production. His business, Current Motor Co. in Scio Township, Mich., plans to begin shipping its scooter, with a starting price of $5,500, this month.
At engineering schools, the drop in costs is putting tools once accessible only to senior researchers into the hands of undergraduates. The Hobby Shop at MIT, once mainly a wood shop, has been accumulating advanced equipment, some castoffs from MIT laboratories, some bought.
"Now you can build sophisticated robots and things like that with all these new pieces of equipment they have," says Greg Schroll, 23, a 2008 MIT engineering graduate.
He hopes to eventually start a company around a spherical robot he built at the MIT shop, which he sees being used to gather information in places too hazardous for humans. Projects made by MIT students in the Hobby Shop now in commercial production include a LED system to create lighting effects for film and a machine to salt the rim of a margarita glass.
Hands-on is catching on at other schools. There were 27% more undergraduates who earned mechanical-engineering degrees in 2008 than in 2003, according to the American Association of Engineering Societies. Over the same period, the number of computer-engineering graduates slipped by 31%.
Students at Carnegie Mellon University asked to stay at school for a week after exams last spring so they could hang out and build things. Ed Schlesinger, a professor there, says that after a long period where theoretical work dominated at engineering schools, "when students talk to each other now, it's 'So, what cool project are you working on?' It's not enough to say I took these classes and got an A." Stanford University's Product Realization Laboratory, where students learn machining, welding and other hands-on skills, has seen membership jump to 750 from 450 over the past five years.
As a junior at Stanford in 2004, Carly Geehr thought she was headed for medical school. Then she took a course on manufacturing and design at the Stanford workshop.
"I'd never held a drill in my life, but working with the milling machine -- I was just blown away," says Ms. Geehr, who is 24. She changed her major to engineering and, as a doctoral candidate in engineering, is now a teaching assistant for the course that gave her the bug to build. On a recent day, she cheered students on as they prepared molds for sand-casting bronze, occasionally donning a protective fire suit to skim red-hot dross from the crucible before pouring molten metal into the molds.
Giulio Gratta, a senior in Stanford's engineering school, has been using the workshop to build a panoramic camera. Even though Stanford is in the heart of Silicon Valley, he says software and Internet development don't hold as much interest as before. "It's no longer the thing to do," says Mr. Gratta, who is 21. "People have to figure out something else. Maybe...physical things."

From hacker spaces to profitable businesses, tinkering is experiencing a renaissance. WSJ's Andy Jordan explores some of the "stuff" people are making with new devices that encourage hacking and creativity.

Until the 1950s, economists thought how fast the economy grew was mostly a matter of how much money was spent and how much work was getting done. But in a 1957 paper that helped him later earn a Nobel Prize, MIT economist Robert Solow showed capital and labor only accounted for about half of growth. The remaining half he attributed to innovation -- an area where the U.S. has long had an advantage.
In recent years, however, U.S. spending on research and development has led some economists to worry that innovation will no longer provide the boost it once did. Corporate R&D spending grew an average of 2.6% annually from 2000 to 2007, down from an average of 6% in the 1980s and 1990s, according to the most recent figures from the National Science Foundation. Chief financial officers surveyed in September by Duke University's Fuqua School of Business and CFO Magazine said they expected their companies' R&D spending to grow by just 0.4% over the next year.
Tinkering represents innovation outside such figures. TechShop in Menlo Park, Calif., for example, is a for-profit workshop and operates like a gym, except that the members who pay $100 a month are milling iron rather than pumping it.
Founder Jim Newton tallied a list of all the tools he could imagine needing. Now TechShop, opened in 2006, has $500,000 worth of lathes, laser cutters and other equipment.
There are 600 members at TechShop's original location, up from 300 a year ago, and it has opened workshops in Durham, N.C., and Beaverton, Ore. Projects under way include a liquid-cooling device for computer servers and an electric two-wheeled car.
NYC Resistor, the hackerspace in Brooklyn, is funded by members and fees from classes it offers. It opens to visitors every Thursday. Recently, a group gathered around Ben Combee, who demonstrated the laser cutter. He put a piece of Plexiglas into place, started the air compressor, pushed a button and shouted, "Fire the laser!"
At a table strewn with laptops, wires and circuit boards, Eric Skiff showed off a robotic arm that twitches when a hand is passed near it. In a corner is the Barbot, a robot that, when it works, pours and stirs an absinthe cocktail called a Sazerac.
Such projects -- not to mention a giant Lite-Brite and a toy piano that plays Philip Glass's "Modern Love Waltz" -- may seem frivolous. But Zach Hoeken Smith, a NYC Resistor cofounder, thinks something important is going on. The computer kits sold by companies such as Apple in the 1970s were demeaned as toys, he says, but ended up launching the personal computer revolution.
Mr. Smith, 25, studied computer science at the University of Iowa, and worked as a Web developer. But a few years ago, he started playing with an "Arduino" -- an open-source microcontroller. These are used as the "electric brains" for everything from wall-avoiding robots to a hat that pokes the wearer's heads if the person stops smiling. "I was hooked," he recalls.
Intrigued by the idea of making a machine than can build its own parts, Mr. Smith got interested in "rapid prototyping machines" -- 3D printers that lay down layers of materials like plastic to form objects. The technology is used by manufacturers to make prototypes, with industrial machines typically costing tens of thousands of dollars.
Mr. Smith's NYC Resistor friends Mr. Pettis and Adam Mayer joined the project. Using off-the-shelf electronics and parts, along with a laser cutter, they came up with a machine. Now they're selling kits to make 3D printers.
Their company, MakerBot Industries, has shipped 350 of the $750 kits so far. They hired two employees, started paying themselves, and are building another 150 kits for their next shipment.
Adam Elkins and members of a hackerspace in Philadelphia, called Hive 76, bought one kit and built the machine. Mr. Elkins, a 28-year-old system administrator for a software company, says he doesn't have access to a lot of space, so he goes to the hackerspace to build. "There's no man-cave I can go to and do things."
The first thing he made on the 3D printer was a black plastic ring topped off with white plastic jewel. Last month, he presented it to his girlfriend, along with a marriage proposal. She said yes.
Write to Justin Lahart at justin.lahart@wsj.com

Everybody in the Pool of Green Innovation (NYT)

By MARY TRIPSAS

A POPULAR children’s song has a refrain — “the more we get together the happier we’ll be” — that may sound like a simplistic formula for solving the complex challenges of climate change and sustainability. But if any area is ripe for sharing and collaboration among organizations, it’s green innovation.
“We all want to save the planet, and the problems are bigger than any one firm, sector or country,” says Dr. Sarah Slaughter, coordinator of the M.I.T. Sloan Sustainability Initiative. In that spirit, several major corporations have taken inspiration from the open-source software movement and are experimenting with forums for sharing environmentally friendly innovations and building communities around them. The first such effort, the Eco-Patent Commons, was started in January 2008 by I.B.M., Nokia, Pitney Bowes and Sony in collaboration with the World Business Council for Sustainable Development.
The concept is straightforward: Companies pledge environmental patents to the commons, and anyone can use them — free.
Many patented environmental technologies are not strategic, so sharing maximizes the social benefit without sacrificing competitive advantage, says Wayne Balta, vice president of corporate environmental affairs and product safety at I.B.M. For instance, I.B.M. contributed a recyclable cardboard packaging insert that requires less fossil fuel to create and transport than the foam inserts that are now commonly used.
Other examples include a DuPont method for better detecting pollution in soil, air or water by using a microorganism that produces light when exposed to a pollutant. There are also methods from Xerox for removing toxic waste from contaminated groundwater, as well as a cleaning technique for semiconductor wafers from I.B.M. that uses ozone gas and eliminates chemical contaminants that result from other processes.
By assembling these patents in one easily accessible location — anyone can search through them on the council’s Web site — the hope is to encourage their widespread adoption, particularly in the developing world. Since its start, the commons has grown to 100 patents from 31, with 11 companies now participating.
Although there are no formal mechanisms for tracking who has used the commons, participating companies are sometimes contacted by users. For instance, Mr. Balta said that Yale had put into effect an I.B.M. method for decreasing the use of hazardous solvents in its quantum computing device research.
The Creative Commons, a nonprofit organization that previously developed licensing programs to help in sharing creative and scientific content, is also planning to branch out into the environmental arena.
In collaboration with Nike and Best Buy, it plans to start a sharing initiative, the Green Xchange, in early 2010. The program will include both patented technologies and forums for continuing exchange of innovations such as Best Buy’s system for rating the sustainability of a supply chain. Companies that contribute patents to the Green Xchange will have the option of charging users a fixed annual licensing fee and can also restrict any licensing by rivals or for competitive use. In addition, even if no annual fee is charged, patent users must register so there is a record of who is using what technology.
Though more complex than that of Eco-Patent Commons, the structure of Green Xchange will yield greater numbers of high-quality inventions, says John Wilbanks, GreenXchange coordinator and vice president for science at Creative Commons.
“We don’t depend on altruism,” Mr. Wilbanks says. “This system helps the environment while enabling a firm to make money from patents in applications outside its core business.”
For instance, Nike’s air-bag patent for cushioning shoes is crucial to its core shoe business, but may have environmental benefits in other industries — perhaps in prolonging the useful life of tires. Green Xchange could enable Nike to license the air-bag technology selectively to noncompeting companies.
ACCORDING to Kelly Lauber, a global director in Nike’s Sustainable Business and Innovation Lab, sharing technology can have tremendous environmental impact. By sharing its water-based adhesive technology and working with footwear makers, Ms. Lauber estimates that average levels of environmentally harmful solvents used by Nike’s suppliers have decreased to less than 15 grams per pair of shoes from 350 in 1997.
Perhaps the biggest upside of Green Xchange may come from the development of communities that collaborate in innovation and the exchange of ideas. To encourage that kind of interaction, Salesforce.com will provide a search engine, making it easy to find patents. And collaboration platforms from companies like 2degrees and nGenera should make it easy to identify companies with common interests.
Despite the obvious advantages, sharing patents isn’t as easy as it might sound.
“Numerous features of the intellectual property system, particularly the ability of companies to claim large swaths of technology through patents, play havoc with collaborative efforts,” says Josh Lerner, a professor at Harvard Business School.
Henry Chesbrough, the executive director of the Center for Open Innovation at the University of California, Berkeley, says it is surprisingly hard to give away technologies. “If it is not done carefully,” he said, “the companies that use a donated technology might find themselves liable for infringement of another company’s patent.”
Both the Eco-Patent Commons and the Green Xchange pose organizational challenges for participating companies.
“Deciding which patents to pledge or license to a commons,” says Andrew King, a professor at the Tuck School of Business at Dartmouth, “requires that the legal counsel, R.& D. staff, business unit and corporate sustainability groups all work together, and most organizations just aren’t set up for that.”
Weaving corporate togetherness, it seems, isn’t so easy — though green innovations offer many more reasons to try.

Mary Tripsas is an associate professor in the entrepreneurial management unit at the Harvard Business School.

Ingenio de goma (Endi.com)

Tecnología ambiental patentada por un boricua tiene buena acogida en el Oriente Medio

Valentín comenzó en1998 a desarrollar la tecnología que serviría de base para crear Sofscape.

Por Marie Custodio Collazo / mcustodio@elnuevodia.com

Una tecnología inventada por un boricua está ofreciendo una solución creativa a la acumulación de neumáticos desechados en Oriente Medio. Lo irónico es que Puerto Rico tiene el mismo problema, pero Sofscape no ha logrado ser profeta en su tierra.
José Valentín, presidente de Sofscape, comenzó en el 1998 a desarrollar una máquina que convierte neumáticos triturados en coloridos adoquines. En el 2006 instaló la tecnología ya terminada y comenzó la producción en una fábrica en Vega Baja.
“Desarrollamos una tecnología que produce 500 adoquines por hora, y eso nadie en el mundo lo puede igualar”, asegura el empresario.
Valentín estudió un bachillerato en ingeniería de plásticos y polímeros de la Universidad de Detroit, en Michigan, luego de lo cual trabajó en varias empresas en Puerto Rico.

La experiencia que adquirió con procesos de moldeo por inyección en Harvey Hubell Caribe, en Vega Baja, y en Microsoft Puerto Rico, en Humacao, alimentó su idea de desarrollar tecnología ambiental eficiente, específicamente de reciclaje de neumáticos.
En ese tiempo, Valentín se dedicó a investigar maquinaria existente, y se encontró con Moses Glick, un empresario amish de Pennsylvania, que tenía el concepto para masificar la producción de adoquines de goma triturada, usando un proceso de moldeo dinámico, en lugar del estático que sólo permite hacer una pieza a la vez.
Fe en una idea
El sanjuanero le propuso un negocio difícil de rechazar, trabajaría gratis aportando su conocimiento técnico y químico para dar con la fórmula correcta para los adoquines y la máquina más indicada. A cambio, si la empresa tenía éxito, Glick le daría los derechos del producto para Puerto Rico, el Caribe y Florida.
“Llevaba mucho tiempo planeando esa aventura, y ahorré mucho dinero, en preparación. Vivía con mis padres y ahorraba todo lo que me ganaba. Asumí que necesitaba estar como dos años sin trabajar para dedicarme a desarrollar la tecnología, pero tomó mucho más”, cuenta el ex gerente de ingeniería para Microsoft en la Isla.
Según los informes de gastos que lleva cuidadosamente, invirtió $129,000, todos sus ahorros, más tres años y medio de su tiempo.
Valentín relata que el negocio de Glick tenía dos problemas, la formulación química y la comercialización.
En el aspecto químico, dice, Sofscape mezcla los neumáticos triturados con resina, para obtener piezas compactas que no se afecten con el agua ni el calor. El problema radicaba en que “hay miles de resinas, y debíamos saber cuál usar y en qué cantidad”.
Eso le requirió mucha investigación y pruebas, ya que las teorías científicas sobre los materiales no siempre resultaban en el escenario real.
Una vez tenía la formulación correcta, Valentín se enfocó en realizar las pruebas correspondientes para que los adoquines de goma recibieran las certificaciones de amortiguamiento de caídas, entre otras. Contar con dichos reconocimientos, señala, facilita el mercadeo para proyectos específicos, como parques infantiles.
Realiza el sueño
Pero la aventura de Valentín no concluyó cuando consiguió perfeccionar la fórmula y la máquina de los adoquines de goma. Conseguir el financiamiento para establecer la fábrica en Puerto Rico le tomó otros 4 años y medio.
“Hice mi plan de negocios solo y fui a reunirme con cerca de 20 inversionistas y nada. También les presenté el plan a los grupos de capital de riesgo y, ¡olvídate!”, relata sobre su búsqueda de financiamiento, mayormente en Puerto Rico.
Finalmente, Spectrum Group, que agrupa a 12 angel inverstors, se interesó en el proyecto, lo analizaron y pensaron que era mejor comenzar importando el producto que fabricaba Glick en Pennsylvania, para auscultar el mercado.
Así, Valentín consiguió un capital inicial de $200,000 en el 2004, y un año más tarde el grupo invirtió otros $800,000 para iniciar la operación de la fábrica.
A través de un préstamo del Banco de Desarrollo Económico (BDE), el empresario consiguió los $1.2 millones que le faltaban para completar los $2 millones necesarios para realizar su sueño.
“Desde el principio, el BDE ha visto el potencial de exportación mundial que tiene Sofscape, lo que no ha visto Pridco (Compañía de Fomento Industrial, en español) ni la Autoridad de Desperdicios Sólidos. Tengo una deuda de por vida con el equipo del banco”, asegura el empresario.
En el 2006, comenzó a operar Sofscape Caribe en Vega Baja, con la primera máquina comercial patentada por Valentín y Glick.
“Nosotros tenemos la patente y los planos, pero no la capacidad para hacerla, así es que contratamos una empresa que construye máquinas industriales”, cuenta Valentín.
Sofscape se estableció finalmente en un edificio industrial privado, ya que le indicaron que las propiedades de Pridco no estaban disponibles para actividades de reciclaje.
Obstáculos para crecer
Una vez estableció la empresa, el camino ha sido difícil. Para empezar, el área en la que se encuentra la fábrica en Vega Baja, no tiene instalación eléctrica, por lo que Sofscape funciona con un generador.
Además, cada vez es más difícil conseguir los neumáticos triturados, que constituyen la materia prima para los adoquines. Tras el incendio que quemó en agosto la empresa Rubber Recycling and Manufacturing (REMA), en Caguas, Valentín se quedó prácticamente sin un suplidor local.
A pesar de que en Puerto Rico se desechan alrededor de 6 millones de neumáticos al año, Sofscape está importando el material para cumplir con los pedidos que tiene.
En el 2008 comenzó una crisis por la acumulación de neumáticos desechados, cuando el Gobierno dejó acumular una deuda de $6 millones con los gomeros y las empresas que se dedican al reciclaje de gomas. Actualmente, en Puerto Rico se cobra un impuesto de $1.65 por cada cambio de neumático. En la distribución del dinero, 15 centavos son para el Gobierno, 50 centavos le tocan al transportista, 72 centavos van dirigidos a la fábrica que tritura los neumáticos, al final, el que recicla el material para convertirlo en un producto nuevo carga con 28 centavos.
Al cierre de esta edición no fue posible contactar a la Autoridad de Desperdicios Sólidos para que indicara qué ocurrirá con las gomas usadas, ahora que REMA, única empresa que realizaba la tarea no está operando para triturarlas.
La fábrica local tiene capacidad para fabricar 1 millón de pies cuadrados de adoquines, el equivalente a 800,000 neumáticos reciclados. Sin embargo, la limitación eléctrica y la falta de materia prima la tienen produciendo el 25% de su capacidad total.
“Por la falta de electricidad, no podemos operar tres turnos. Lo más que he tenido son dos, pero ahora sólo tengo uno por la falta de materia”, explica el ingeniero de polímeros.
Esto también limita la capacidad de la empresa para generar empleos. Actualmente sólo hay 12 empleados.
Incluso, durante la visita de Negocios a las instalaciones de Sofscape, la máquina estaba detenida, en espera de los neumáticos que ahora le compran a una empresa de reciclaje en Florida. Los empleados del único turno de producción estaban instalando los adoquines en un proyecto en la zona sur del país.
“Como también saben instalar, los estoy ocupando en eso para no despedirlos”, indica Valentín.
Reconocimiento afuera
En el 2007, Valentín adquirió todos los derechos sobre la patente y los productos de Sofscape, lo cual le abrió múltiples oportunidades alrededor del mundo.
Los adoquines de goma de la empresa son reconocidos en Estados Unidos por lo innovador del proceso de producción y el diseño. Aparte de que se consideran más seguros para parques infantiles.
El empresario explica que el grosor de su producto evita que se levanten las esquinas, como ocurre con las losas de goma tradicionales, y que pueden causar accidentes. Además, la superficie se seca bastante rápido, gracias a un sistema de drenaje que permite que el agua fluya por unos canales en la base del adoquín. También está certificado para amortiguar caídas de hasta cuatro pies de alto.
Los adoquines de Sofscape tienen una certificación ADA (American with Disabilities Act), porque permiten la accesibilidad de personas con impedimentos físicos, a diferencia de otros productos amortiguadores que se usan en los parques infantiles, como la arena.
Esta característica motivó a Miracle League, una liga de béisbol para niños con impedimentos, a recomendar los productos de Sofscape para los parques especiales en los que se celebran sus juegos. Al presente hay 10 de estos parques en EE.UU. y uno en Puerto Rico.
Además de Vega Baja, la empresa tiene oficinas de ventas en los estados de Florida y Pennsylvania.
Noches árabes
El prestigio que ha ido ganando Sofscape la puso en el ojo de la empresa canadiense Tactical Connections, que ganó un contrato para desarrollar un programa amplio de reciclaje en el emirato árabe de Sharjah. Como parte del componente para atender el problema de disposición de los neumáticos, la máquina inventada por el equipo de Sofscape fue instalada en un enorme edificio, donde procesarán el material y fabricarán múltiples productos con aplicación comercial e industrial.
Sólo el programa de neumáticos requirió una inversión de $18 millones, de los cuales cerca de $2 millones fueron a la compra de la tecnología de Sofscape.
“Cuando en Puerto Rico el reciclaje de neumáticos no arranca por falta de compromiso formal del Gobierno, en Sharjah la solución gubernamental ha sido una alianza público-privada para el manejo, procesamiento, y reciclaje de los neumáticos desechados”, señala Valentín, y añade que el vertedero de neumáticos en el que se instaló la máquina tiene alrededor de 7 millones de gomas, un millón más de las que produce la Isla en un año.
Durante cuatro semanas, él y otros dos técnicos de su equipo estuvieron en Sharjah para instalar la máquina. Fue una tarea ardua debido al choque cultural, a las condiciones ambientales y a que sólo habían armado una máquina antes, la que está en Vega Baja.
“Requerí seis vagones para transportar toda la tecnología de Sofscape. Todo el tiempo fue un proceso de aprendizaje”, relata Valentín sobre el inicio de la odisea.
Al llegar a Sharjah se dio cuenta de que el calor intenso hacía difícil trabajar ocho horas, y mucho menos durante el día. Así es que el equipo de dos boricuas y un estadounidense laboraba de 4 a.m. a 11:30 a.m.
Luego estuvo el factor de que el terreno era arenoso, por lo que los vehículos se quedaban estancados y en lo que conseguían moverlos se atrasaba el proceso.
“Tenemos que regresar para probar la máquina porque todavía no tenían electricidad cuando terminamos”, cuenta.
La inauguración del proyecto será en diciembre y se espera que los jeques de los demás emiratos árabes asistan. Valentín confía en que eso le abrirá las puertas para aumentar las ventas de la tecnología de Sofscape.
Actualmente, indica, ya tiene una posibilidad fuerte en Qatar -otro de los emiratos-, y en Colombia. En el país suramericano le pidieron que Sofscape maneje todo el proyecto de reciclaje de neumáticos, en lugar de sólo vender e instalar la tecnología.
“En otros países admiran tu tecnología, y aquí te ignoran”, dice frustrado, “es increíble que una isla con un desastre ambiental esté exportando tecnología ambiental al resto del mundo”.

The New Rules of Angel Investing (NYT)

The New Rules of Angel Investing

By KERMIT PATTISON

Angels still have wings, but they aren’t flying quite so high.

The rules of the game of angel investing have changed in the post-crisis world. The average deal size shrank by 31 percent in the first half of this year, according to a recent study by the Center for Venture Research at the University of New Hampshire. The study shows that total angel investments fell to $9.1 billion in the first half of 2009, a 27 percent decline from the same period last year, but the number of companies getting venture investments actually increased by 6 percent, to 24,500.

Angels are still financing deals, but at lower valuations and with more specific milestones. They have grown more picky and less tolerant of risk. “What you’re seeing now is a real flight to quality,” said David S. Rose, chairman of New York Angels. “If you are the real deal, you can get funded.”

What’s the real deal? Angels are looking for companies with more modest capital requirements. They seek companies that bootstrap, beat quicker paths to profitability and have proven management teams. “The most striking change is angel investors are way more discerning about where they deploy their capital,” said Bruce Cerullo, a Boston-based angel investor who specializes in health care. “Now groups like ours are looking for more fully baked ideas that are much closer to revenue generation.”

Do It Yourself

There has been a sea change in risk sensitivity; the more self-sufficiency a company demonstrates, the less risky it appears. “Bootstrap it as long as you possibly can to validate your business model and to get some traction,” Mr. Cerullo said. “The more traction you have, the more leverage you are going to have in a valuation negotiation with an angel or private equity investor.”

Entrepreneurs should find ways to finance their own growth: working without salary, moonlighting, seeking grants, running lean operations and focusing on an aspect of the business that can generate revenue.

Bear in mind that the worst of times for the economy can be the best of times for starting a company. Labor is cheap and plentiful. The costs of starting an Internet-based company have fallen sharply thanks to cheaper technology, including open-source software. “Work hard to figure out if there’s a business plan you can pursue where your capital requirements are zero,” said Ian Sobieski, founder and managing director of the Silicon Valley-based Band of Angels Fund. “The easiest way to raise money is to not absolutely have to raise money.”

Angels are looking for companies that can get to break even on the angel investment. In return, they are willing to be more patient, Mr. Rose said. In the old days, angels invested with the idea that they would finance the company at an early stage, then venture capitalists would step in with a large injection of cash that allowed it to blast off on a hockey-stick growth trajectory.

“Now we’re prepared to give up the immediate hockey stick in exchange for you being able to reliably get to break even on our cash while building value for the company,” Mr. Rose said. “The minute the market comes back, we can inject V.C. cash — and then you have the hockey stick.”

Be Realistic About Valuations

Valuations have fallen sharply — as much as 40 percent, Mr. Rose estimates. The upside is that the costs of starting a company have fallen, too.

Yet some entrepreneurs still cling to over-inflated valuations. They get hung up on achieving the highest valuation without regard to how it may undermine their long-term prospects.

“The biggest error they make, in my experience, is they focus solely on this round and take money based solely on whether they can fill out the round at the absolute highest valuation,” said John Huston, who invests with Ohio TechAngels and is chairman of the Angel Capital Association. “They do not select investors who know the market and are willing to write follow-on checks.”

Unrealistic valuations will make serious investors roll their eyes. Even if entrepreneurs can get above-market valuations, they run the risk of getting a lower valuation on a subsequent round, a phenomenon known as the “deadly down round.” Mr. Huston said inflated valuations are a sign that the company picked the wrong investor and “took money from neophytes who were only attuned to this round and the promises of grandiose success.”

Lay Out Milestones

Mr. Huston warns that entrepreneurs should beware of “one-check Willy” — the angel who finances just one round. Instead, entrepreneurs should look for angels who are willing to discuss long-term plans with milestones and follow-on investments that guide the company “from here to liquidity.”

The exit market has changed drastically because of a decline in mergers, acquisitions and initial public offerings. As a result, venture capital firms increasingly are concentrating on their existing portfolios and forcing angels to support start-ups for longer.

Many angels now expect to write checks for follow-on rounds because they can no longer count on V.C. money being available down the road. John Morris, chairman emeritus of Tech Coast Angels in Southern California, said that angels were now keeping reserves of 200 to 300 percent — up from zero a few years ago.

“That’s probably the single biggest difference in angel land,” said Mr. Morris. “Angels are learning about reserves and the need to parse out the money in a series of tranches, keeping some dry powder for the next round.”

Practice Your Pitch

Get good at pitching the same way major leaguers do: practice, practice, practice. Entrepreneurs should be ready to present a full business plan, a 20-minute PowerPoint, an executive summary and a two-minute elevator pitch (which is what gets you in the door in the first place). Rehearse with anybody who can offer good advice. Go to industry events. Many angel groups hold quick-pitch events where entrepreneurs are invited to make brief presentations.

Susan Preston, general partner of CalCEF, a clean-energy angel fund in San Francisco and author of two books on angel investing, said entrepreneurs might have to pitch to 50 or 100 investors before they got venture funds: “In tight times, only the absolute stars rise to the top to receive funding. If they want to have a chance, they’ve got to be well prepared.”

Know Where to Look

Angels often don’t advertise themselves because they don’t want to be deluged by suitors. And lists or directories have their limits (although this one from the Angel Capital Education Association can help you get started). “Look farther, network a little harder,” said Jeff Sohl, director of the Center for Venture Research. “Turn over those rocks like you should have been doing all along, rather than taking the easy route of Googling and looking at the first 10 hits. That might have worked in the go-go times of 2000, but it doesn’t even get you close now.”

Consider both lone-wolf angels and organized groups. Angels tend to focus on regional companies but increasingly are specializing in niches like medical devices, technology and clean energy.

One classic mistake is to look at angels solely as sources of cash. Ms. Preston considers money to be an angel’s third most important contribution after expertise and networking. She urges entrepreneurs to scrutinize potential investors: What expertise can they provide? How do their strengths complement your weaknesses? Who can they introduce you to?

Coached by an Angel

Murat Ozsu weathered the recent sea change in angel investing — and survived to tell about it.

Mr. Ozsu had spent more than two years bootstrapping his Long Island-based start-up, innRoad, an online platform that helps independent hotels manage guest bookings. He had moved to a smaller house, borrowed from family and friends, worked out of his son’s bedroom and spent many nights laboring into the wee hours so he could coordinate with his software development team in India. He pitched to hundreds of angels before he attracted the interest of a few investors who began coaching him. Just when he had built up a base of customers and was poised to get financing, his plans hit a major snag: the financial collapse of 2008.

Mr. Ozsu took his plan and ripped it apart. On the advice of his angels, he recalibrated for leaner times and cut his capital requirements in half. “These are all guys who have run their own companies,” he said, “and they’ve all been through this before. I’d much rather learn from other people’s mistakes. I’m going to make my own mistakes, so why make theirs?”

Ultimately, innRoad won the backing of 15 angels and a New York State investment program and raised $1.2 million — twice its goal and, surprisingly, the same amount it had planned to seek before the crisis. InnRoad recently did a second investment round of $300,000, which Mr. Ozsu said would sustain the company until it reached breakeven next summer.

Along the way, he said he learned to think like an investor — often a difficult step for entrepreneurs who have poured their souls into their companies. “Trying to raise money is not the goal,” Mr. Ozsu said. “The goal is a business plan that makes sense on its own merits. Money is just one of the tools that you need.”

Quick Tips:

• Bootstrap as long as you can. Finding early ways to get revenue.

• Get to break even quickly and remember that VC financing has gotten harder to obtain.

• Be realistic about valuations. Be coachable.

• Practice pitching and be prepared to make your case to dozens or hundreds of angels.

• Look for angels who complement your strengths and can help you with more than money.

Suggested Readings and Resources:

• An overview of angel investing and a list of resources from Angel Capital Education Foundation.

• What Entrepreneurs Should Know About Angels from the Angel Capital Education Foundation.(pdf)

• A directory of angel investors from the Angel Capital Education Association.

Patent Auctions Offer Protections to Inventors (NYT)

Patent Auctions Offer Protections to Inventors

By STEVE LOHR

The world can be a rough place for independent inventors. They can often find themselves in court, battling big corporations, spending piles of money on lawyers and leaving it up to judges and juries to determine the value of their hard-won patents.

That could be changing. Wrangling over patents is beginning to move out of the courtroom and into the marketplace. A flurry of new companies and investment groups has sprung up to buy, sell, broker, license and auction patents. And venture capital and private equity is starting to pour into the field.

The arrival of these new business-minded players, according to patent experts and economists, could lead to a robust marketplace for patents, where value is determined not so much by court judgments but by buyers and sellers, perhaps, someday, like eBay.

And patents, after all, are ideas. Any market mechanisms that speed up the process of figuring out what a patent is worth should hasten the flow of ideas into the economy, accelerating the pace of innovation, policy experts say.

“What you want is a market that can promote innovation and reduce the huge costs of litigation,” said Robert P. Merges, a professor at the University of California, Berkeley and a director of the Berkeley Center for Law and Technology. “And that market is starting to take shape.”

A classic small-inventor firm, Zoltar Satellite Alarm Systems, is planning to sample that market by auctioning off its patents next month. Professor Merges and other patent experts point to it as an intriguing case to watch.

To date, the Zoltar story has been one of innovation, persistence and litigation. One founder of the company, Dr. Daniel Schlager, got his inspiration nearly two decades ago, crouched in medevac helicopters flying over Northern California. Locating people in distress was often difficult and costly, in time and lives. What was needed, he figured, was some sort of personal alarm device that transmitted a person’s location.

He sought out an old high-school classmate, William Baringer, a computer scientist and telecommunications expert. Using global positioning technology seemed promising, even though it was clunky and expensive at the time. They came up with a solution, and filed their first patent application in 1994 for a “personal alarm” device that used GPS technology. A year later, Zoltar was founded, and it filed for a patent on personal alarms with navigational receivers in cellphones that was granted in 1997.

Zoltar’s prospects got a lift after the Federal Communications Commission in 1996 required most wireless phones to be able to identify their location during 911 calls by 2001. The move opened a large potential market for Zoltar.

The two men designed and built prototypes, hired a patent licensing expert and showed their technology to cellphone equipment makers in the late 1990s in the hopes of licensing it. “It’s an industry with huge companies who crosslicense patents with each other and tell little guys to take a hike,” said Robert Megantz, a former general manager of licensing for Dolby and the consultant who worked with Zoltar in the late 1990s.

Eventually, Zoltar’s founders say, their ideas and designs started to turn up in big companies’ products. They raised money, mostly from friends and family, hired lawyers and went to court.

In 2001, Zoltar sued Qualcomm, the cellphone chip-set maker. After three years, a jury found that Zoltar’s patents were valid, but that Qualcomm was not infringing on them. The two sides settled in 2006.

In 2005, Zoltar sued several handset makers including Motorola, LG and Samsung, and settlements were reached with all of them by 2007.

By now, Zoltar has spent millions in legal fees, and collected millions in settlements. The company is ahead financially, Dr. Schlager said, but some of its 60 investors have not been paid back. Mr. Baringer remains a full-time consultant engineer, and Dr. Schlager is still an emergency-room physician, though he does not practice full time.

Today, the fast-growing makers of smartphones like Research in Motion, Apple, HTC and Nokia have no agreements with Zoltar. Dr. Schlager said he did not plan to sue them. Instead Zoltar will sell its patents in an auction, hoping for a faster, simpler and less risky payoff.

“We felt this was the way to go,” Dr. Schlager said. “It’s an option that wasn’t available a few years ago.”

The auction will be run by Pluritas, a patent broker based in San Francisco. Robert Aronoff, its managing director, says Zoltar has strong, court-tested patents that apply to a huge industry, at a time when there is an increasingly brisk market for intellectual property. “They are entering into this vastly changed marketplace with a hot property,” he said.

Whether the patents will prove to be a hot property is not clear. “They were certainly innovative over the years, but I do think there is a question here if the industry and technology has passed them by,” said Professor Merges of Berkeley.

Mr. Baringer insists this is not the case. “We continue to see our designs and concepts implemented every day” in smartphones, he said.

In an auction, of course, the patents’ value will be judged by bidders, which could be handset makers, but also patent-buying groups like Intellectual Ventures and Rational Patent Exchange and Allied Security Trust, a nonprofit organization.

Other players in the emerging patent marketplace are specialized investment banks, brokers and licensing companies including Acacia Technologies, Altitude Capital Partners, Intertrust, IPotential, Ocean Tomo, Rembrandt IP Management and Thinkfire. Venture capitalists are also interested in this field — Kleiner Perkins Caufield & Byers, for example, is backing Rational Patent Exchange, a company that buys reservoirs of patents in crucial fields and charges fees to corporate “members,” who participate as a defensive tactic to limit potential patent litigation costs.

The long-term vision at Rational, said Randy Komisar, a partner at Kleiner, is to become a marketplace or clearinghouse, perhaps the way Ascap is for copyrighted music, collecting fees and distributing payments to artists.

“The goal is to be a place where the patentholder is fairly compensated, but the corporate users have access to technology with minimal transaction costs,” Mr. Komisar said. “It has the potential to make innovation more efficient and less risky for both sides.”

But some patent experts question how far the marketplace model can be extended to patents. They note that patents are typically trickier to value than financial investments like stocks or bonds.

“Yes, you can move in the direction of trading markets for patents, but these are complicated assets that are individualized and hard to value,” said Josh Lerner, an economist at the Harvard business school. “They are more like works of art than stocks.”

Biotech Tries to Shrug Off Setbacks (NYT)

Biotech Tries to Shrug Off Setbacks

By JAMES FLANIGAN

FROM one perspective, the life sciences industry — the biotechnology companies that develop drugs and treatments to combat disease and the biomedical firms that create medical devices — is a picture of expanding horizons and confidence.

Young companies are taking advantage of advances in medical and computing sciences to develop new ways of dealing with intractable health problems.

One new company has developed a disposable device with software that would help surgeons to perform knee replacements with greater accuracy. Another has a microscopic device implantable in the eye that would continuously release medicines to alleviate glaucoma or macular degeneration.

Other companies have developed potential vaccines against staphylococcus infections and drugs to preserve cardiac function after a heart attack. Indeed, the biotech industry is spreading globally to India and China, where capital is abundant and research is increasing.

But even as the industry seems to be making progress, its biggest benefactors are pulling back. The traditional providers of venture capital in the United States are university endowments and pension funds, whose assets have been reduced sharply over the last year in the collapse of financial markets.

Even a successful investor in the life sciences industry sees danger now. Domain Associates, a company based in Princeton, N.J., and San Diego, raised $500 million for a new venture fund in August. It is the eighth such fund Domain has started in 24 years, and in that time, it has backed more than 200 life sciences companies. But few other venture funds were able to raise money, said James C. Blair, a Domain partner.

The people investing “in our area are hurting, and this will have long-term implications for venture capital in general,” he said. Without new communities of capital, he said, “we worry about where we will find other investors to participate in our best opportunities in two to three years.”

He is not alone in worrying. The PricewaterhouseCoopers MoneyTree survey of venture capital recently reported a surge in financing for life sciences in the second quarter of this year. Yet the firm also reported that venture fund assets were down to levels of the mid-1990s, before the last decade’s financial expansion.

The Southern California Biomedical Council, an organization of 240 companies in life sciences in the Los Angeles area, has set “ways to cope with the current drought of capital” as the agenda for its annual investors conference starting Thursday. So is the outlook bright or gloomy? Most companies, even those that have had difficulties, say it is still bright. “We’re seeing the coming together of information technology and medical science,” said Sharon Stevenson, a co-founder of Okapi Venture Capital, a three-year-old company in Laguna Beach, Calif.

Okapi this year backed OrthAlign Inc., a company founded in 2008 that is awaiting approval from the Food and Drug Administration for a palm-size disposable device that attaches to instruments used in knee replacements to help surgeons do more precise cutting of the bone to improve the fit with the joint replacement.

“There are about 550,000 knee replacements every year in the United States, and that is expected to grow to 3.5 million by 2025,” said Pieter Wolters, president of OrthAlign. More people, he said, want an active lifestyle into late age and “technology allows longer lasting function of knee replacements.” OrthAlign has received $7.2 million in venture financing from Research Corporation Technologies of Tucson and Okapi Venture Capital.

Replenish Inc. of Pasadena, Calif., was founded in 2007 on technology developed at the Keck School of Medicine and Viterbi School of Engineering at the University of Southern California as well as the California Institute of Technology. Replenish plans to enter trials for F.D.A. approval next year for a refillable and programmable pump that would be implanted in the eye to feed medicine for glaucoma or for age-related macular degeneration.

The Replenish device can last more than five years before replacement, much longer than current treatments, said Dr. Sean Caffey, chief executive of the company. Replenish is backed by a $10 million investment from a large pharmaceutical company, Dr. Caffey said, and the Stevens Institute for Innovation at the University of Southern California and Caltech have acquired small equity ownerships for their licenses.

In 2005, six scientists from the University of California, Los Angeles, who were working at LA BioMed, a nonprofit research institute, founded NovaDigm Therapeutics. There, they have developed a vaccine that could prevent infections acquired in hospitals, including candida and staph infections, said Fred Haney, a venture capital investor and chairman of NovaDigm.

The company will begin its initial clinical trials for F.D.A. approval next year. It is backed by $18 million in venture investments from Domain Associates and has received grants from the National Institutes of Health and the United States Army to support its research.

Clinical trials extend over three phases and can take years, making investments in life science companies prohibitively long term. “But, in reality it is not so long,” Mr. Haney said. “If we can demonstrate safety and strong immune responses in phase one or two, we could then enter a partnership or merger with a large pharmaceutical company and obtain long-term financing.”

In a possible sign of major things to come, the Zensun Science & Technology Company, based in Shanghai, has raised $30 million to perfect a treatment to strengthen cardiac structure after a heart attack. Zensun is backed by Morningside Investments of Hong Kong and the Shanghai city government, said Jack Z. Chen, chairman of the Transworld Capital Group, a consulting firm based in Arcadia Calif., with offices in Beijing and Shanghai.

Zensun was founded in 2000 by Dr. Mingdong Zhou, who earned a doctorate at the State University of New York, and Dr. Xifu Liu, whose doctorate is from the Genetics Institute at the China Academy of Sciences. Its heart treatment is now in phase two F.D.A. trials, which measure effectiveness.

Such trials are demanding and sometimes treatments do not win approval. The Orqis Medical Corporation spent nine years perfecting a system of increasing blood flow to help damaged hearts but did not receive F.D.A. approval. So backers decided last year not to invest fresh capital. The company is for sale to any firm that would continue development and try again for F.D.A. approval.

The president of Orqis, Kenneth Charhut, said he regretted the setback but remained positive about the industry outlook. “Given advances in technology and growing needs of aging populations,” he said, “this is a time to invest in life sciences.”

This column about small-business trends in California and the West appears on the third Thursday of every month. E-mail:
jamesflanigan@nytimes.com.

Priced to Sell (New Yorker)

Priced to Sell
Is free the future?
by Malcolm Gladwell July 6, 2009

At a hearing on Capitol Hill in May, James Moroney, the publisher of the Dallas Morning News, told Congress about negotiations he’d just had with the online retailer Amazon. The idea was to license his newspaper’s content to the Kindle, Amazon’s new electronic reader. “They want seventy per cent of the subscription revenue,” Moroney testified. “I get thirty per cent, they get seventy per cent. On top of that, they have said we get the right to republish your intellectual property to any portable device.” The idea was that if a Kindle subscription to the Dallas Morning News cost ten dollars a month, seven dollars of that belonged to Amazon, the provider of the gadget on which the news was read, and just three dollars belonged to the newspaper, the provider of an expensive and ever-changing variety of editorial content. The people at Amazon valued the newspaper’s contribution so little, in fact, that they felt they ought then to be able to license it to anyone else they wanted. Another witness at the hearing, Arianna Huffington, of the Huffington Post, said that she thought the Kindle could provide a business model to save the beleaguered newspaper industry. Moroney disagreed. “I get thirty per cent and they get the right to license my content to any portable device—not just ones made by Amazon?” He was incredulous. “That, to me, is not a model.”

Had James Moroney read Chris Anderson’s new book, “Free: The Future of a Radical Price” (Hyperion; $26.99), Amazon’s offer might not have seemed quite so surprising. Anderson is the editor of Wired and the author of the 2006 best-seller “The Long Tail,” and “Free” is essentially an extended elaboration of Stewart Brand’s famous declaration that “information wants to be free.” The digital age, Anderson argues, is exerting an inexorable downward pressure on the prices of all things “made of ideas.” Anderson does not consider this a passing trend. Rather, he seems to think of it as an iron law: “In the digital realm you can try to keep Free at bay with laws and locks, but eventually the force of economic gravity will win.” To musicians who believe that their music is being pirated, Anderson is blunt. They should stop complaining, and capitalize on the added exposure that piracy provides by making money through touring, merchandise sales, and “yes, the sale of some of [their] music to people who still want CDs or prefer to buy their music online.” To the Dallas Morning News, he would say the same thing. Newspapers need to accept that content is never again going to be worth what they want it to be worth, and reinvent their business. “Out of the bloodbath will come a new role for professional journalists,” he predicts, and he goes on:



There may be more of them, not fewer, as the ability to participate in journalism extends beyond the credentialed halls of traditional media. But they may be paid far less, and for many it won’t be a full time job at all. Journalism as a profession will share the stage with journalism as an avocation. Meanwhile, others may use their skills to teach and organize amateurs to do a better job covering their own communities, becoming more editor/coach than writer. If so, leveraging the Free—paying people to get other people to write for non-monetary rewards—may not be the enemy of professional journalists. Instead, it may be their salvation.

Anderson is very good at paragraphs like this—with its reassuring arc from “bloodbath” to “salvation.” His advice is pithy, his tone uncompromising, and his subject matter perfectly timed for a moment when old-line content providers are desperate for answers. That said, it is not entirely clear what distinction is being marked between “paying people to get other people to write” and paying people to write. If you can afford to pay someone to get other people to write, why can’t you pay people to write? It would be nice to know, as well, just how a business goes about reorganizing itself around getting people to work for “non-monetary rewards.” Does he mean that the New York Times should be staffed by volunteers, like Meals on Wheels? Anderson’s reference to people who “prefer to buy their music online” carries the faint suggestion that refraining from theft should be considered a mere preference. And then there is his insistence that the relentless downward pressure on prices represents an iron law of the digital economy. Why is it a law? Free is just another price, and prices are set by individual actors, in accordance with the aggregated particulars of marketplace power. “Information wants to be free,” Anderson tells us, “in the same way that life wants to spread and water wants to run downhill.” But information can’t actually want anything, can it? Amazon wants the information in the Dallas paper to be free, because that way Amazon makes more money. Why are the self-interested motives of powerful companies being elevated to a philosophical principle? But we are getting ahead of ourselves.

Anderson’s argument begins with a technological trend. The cost of the building blocks of all electronic activity—storage, processing, and bandwidth—has fallen so far that it is now approaching zero. In 1961, Anderson says, a single transistor was ten dollars. In 1963, it was five dollars. By 1968, it was one dollar. Today, Intel will sell you two billion transistors for eleven hundred dollars—meaning that the cost of a single transistor is now about .000055 cents.

Anderson’s second point is that when prices hit zero extraordinary things happen. Anderson describes an experiment conducted by the M.I.T. behavioral economist Dan Ariely, the author of “Predictably Irrational.” Ariely offered a group of subjects a choice between two kinds of chocolate—Hershey’s Kisses, for one cent, and Lindt truffles, for fifteen cents. Three-quarters of the subjects chose the truffles. Then he redid the experiment, reducing the price of both chocolates by one cent. The Kisses were now free. What happened? The order of preference was reversed. Sixty-nine per cent of the subjects chose the Kisses. The price difference between the two chocolates was exactly the same, but that magic word “free” has the power to create a consumer stampede. Amazon has had the same experience with its offer of free shipping for orders over twenty-five dollars. The idea is to induce you to buy a second book, if your first book comes in at less than the twenty-five-dollar threshold. And that’s exactly what it does. In France, however, the offer was mistakenly set at the equivalent of twenty cents—and consumers didn’t buy the second book. “From the consumer’s perspective, there is a huge difference between cheap and free,” Anderson writes. “Give a product away, and it can go viral. Charge a single cent for it and you’re in an entirely different business. . . . The truth is that zero is one market and any other price is another.”

Since the falling costs of digital technology let you make as much stuff as you want, Anderson argues, and the magic of the word “free” creates instant demand among consumers, then Free (Anderson honors it with a capital) represents an enormous business opportunity. Companies ought to be able to make huge amounts of money “around” the thing being given away—as Google gives away its search and e-mail and makes its money on advertising.

Anderson cautions that this philosophy of embracing the Free involves moving from a “scarcity” mind-set to an “abundance” mind-set. Giving something away means that a lot of it will be wasted. But because it costs almost nothing to make things, digitally, we can afford to be wasteful. The elaborate mechanisms we set up to monitor and judge the quality of content are, Anderson thinks, artifacts of an era of scarcity: we had to worry about how to allocate scarce resources like newsprint and shelf space and broadcast time. Not anymore. Look at YouTube, he says, the free video archive owned by Google. YouTube lets anyone post a video to its site free, and lets anyone watch a video on its site free, and it doesn’t have to pass judgment on the quality of the videos it archives. “Nobody is deciding whether a video is good enough to justify the scarce channel space it takes, because there is no scarce channel space,” he writes, and goes on:


Distribution is now close enough to free to round down. Today, it costs about $0.25 to stream one hour of video to one person. Next year, it will be $0.15. A year later it will be less than a dime. Which is why YouTube’s founders decided to give it away. . . . The result is both messy and runs counter to every instinct of a television professional, but this is what abundance both requires and demands.

There are four strands of argument here: a technological claim (digital infrastructure is effectively Free), a psychological claim (consumers love Free), a procedural claim (Free means never having to make a judgment), and a commercial claim (the market created by the technological Free and the psychological Free can make you a lot of money). The only problem is that in the middle of laying out what he sees as the new business model of the digital age Anderson is forced to admit that one of his main case studies, YouTube, “has so far failed to make any money for Google.”

Why is that? Because of the very principles of Free that Anderson so energetically celebrates. When you let people upload and download as many videos as they want, lots of them will take you up on the offer. That’s the magic of Free psychology: an estimated seventy-five billion videos will be served up by YouTube this year. Although the magic of Free technology means that the cost of serving up each video is “close enough to free to round down,” “close enough to free” multiplied by seventy-five billion is still a very large number. A recent report by Credit Suisse estimates that YouTube’s bandwidth costs in 2009 will be three hundred and sixty million dollars. In the case of YouTube, the effects of technological Free and psychological Free work against each other.

So how does YouTube bring in revenue? Well, it tries to sell advertisements alongside its videos. The problem is that the videos attracted by psychological Free—pirated material, cat videos, and other forms of user-generated content—are not the sort of thing that advertisers want to be associated with. In order to sell advertising, YouTube has had to buy the rights to professionally produced content, such as television shows and movies. Credit Suisse put the cost of those licenses in 2009 at roughly two hundred and sixty million dollars. For Anderson, YouTube illustrates the principle that Free removes the necessity of aesthetic judgment. (As he puts it, YouTube proves that “crap is in the eye of the beholder.”) But, in order to make money, YouTube has been obliged to pay for programs that aren’t crap. To recap: YouTube is a great example of Free, except that Free technology ends up not being Free because of the way consumers respond to Free, fatally compromising YouTube’s ability to make money around Free, and forcing it to retreat from the “abundance thinking” that lies at the heart of Free. Credit Suisse estimates that YouTube will lose close to half a billion dollars this year. If it were a bank, it would be eligible for TARP funds.

Anderson begins the second part of his book by quoting Lewis Strauss, the former head of the Atomic Energy Commission, who famously predicted in the mid-nineteen-fifties that “our children will enjoy in their homes electrical energy too cheap to meter.”

“What if Strauss had been right?” Anderson wonders, and then diligently sorts through the implications: as much fresh water as you could want, no reliance on fossil fuels, no global warming, abundant agricultural production. Anderson wants to take “too cheap to meter” seriously, because he believes that we are on the cusp of our own “too cheap to meter” revolution with computer processing, storage, and bandwidth. But here is the second and broader problem with Anderson’s argument: he is asking the wrong question. It is pointless to wonder what would have happened if Strauss’s prediction had come true while rushing past the reasons that it could not have come true.

Strauss’s optimism was driven by the fuel cost of nuclear energy—which was so low compared with its fossil-fuel counterparts that he considered it (to borrow Anderson’s phrase) close enough to free to round down. Generating and distributing electricity, however, requires a vast and expensive infrastructure of transmission lines and power plants—and it is this infrastructure that accounts for most of the cost of electricity. Fuel prices are only a small part of that. As Gordon Dean, Strauss’s predecessor at the A.E.C., wrote, “Even if coal were mined and distributed free to electric generating plants today, the reduction in your monthly electricity bill would amount to but twenty per cent, so great is the cost of the plant itself and the distribution system.”

This is the kind of error that technological utopians make. They assume that their particular scientific revolution will wipe away all traces of its predecessors—that if you change the fuel you change the whole system. Strauss went on to forecast “an age of peace,” jumping from atoms to human hearts. “As the world of chips and glass fibers and wireless waves goes, so goes the rest of the world,” Kevin Kelly, another Wired visionary, proclaimed at the start of his 1998 digital manifesto, “New Rules for the New Economy,” offering up the same non sequitur. And now comes Anderson. “The more products are made of ideas, rather than stuff, the faster they can get cheap,” he writes, and we know what’s coming next: “However, this is not limited to digital products.” Just look at the pharmaceutical industry, he says. Genetic engineering means that drug development is poised to follow the same learning curve of the digital world, to “accelerate in performance while it drops in price.”

But, like Strauss, he’s forgotten about the plants and the power lines. The expensive part of making drugs has never been what happens in the laboratory. It’s what happens after the laboratory, like the clinical testing, which can take years and cost hundreds of millions of dollars. In the pharmaceutical world, what’s more, companies have chosen to use the potential of new technology to do something very different from their counterparts in Silicon Valley. They’ve been trying to find a way to serve smaller and smaller markets—to create medicines tailored to very specific subpopulations and strains of diseases—and smaller markets often mean higher prices. The biotechnology company Genzyme spent five hundred million dollars developing the drug Myozyme, which is intended for a condition, Pompe disease, that afflicts fewer than ten thousand people worldwide. That’s the quintessential modern drug: a high-tech, targeted remedy that took a very long and costly path to market. Myozyme is priced at three hundred thousand dollars a year. Genzyme isn’t a mining company: its real assets are intellectual property—information, not stuff. But, in this case, information does not want to be free. It wants to be really, really expensive.

And there’s plenty of other information out there that has chosen to run in the opposite direction from Free. The Times gives away its content on its Web site. But the Wall Street Journal has found that more than a million subscribers are quite happy to pay for the privilege of reading online. Broadcast television—the original practitioner of Free—is struggling. But premium cable, with its stiff monthly charges for specialty content, is doing just fine. Apple may soon make more money selling iPhone downloads (ideas) than it does from the iPhone itself (stuff). The company could one day give away the iPhone to boost downloads; it could give away the downloads to boost iPhone sales; or it could continue to do what it does now, and charge for both. Who knows? The only iron law here is the one too obvious to write a book about, which is that the digital age has so transformed the ways in which things are made and sold that there are no iron laws.