The Crowd Is Wise (When It’s Focused) (NYT)

The Crowd Is Wise (When It’s Focused)

By STEVE LOHR

FEW concepts in business have been as popular and appealing in recent years as the emerging discipline of “open innovation.” It is variously described as crowdsourcing, the wisdom of crowds, collective intelligence and peer production — and these terms apply to a range of practices.

The overarching notion is that the Internet opens the door to a new world of democratic idea generation and collaborative production. Early triumphs like the Linux operating system and the Wikipedia Web encyclopedia are seen as harbingers.

In the new model, innovation is often portrayed as a numbers game. The more heads, the better — all weighing in, commenting, offering ideas. Collective knowledge prevails, as if a force of egalitarian inevitability.

But a look at recent cases and new research suggests that open-innovation models succeed only when carefully designed for a particular task and when the incentives are tailored to attract the most effective collaborators. “There is this misconception that you can sprinkle crowd wisdom on something and things will turn out for the best,” said Thomas W. Malone, director of the Center for Collective Intelligence at the Massachusetts Institute of Technology. “That’s not true. It’s not magic.”

The Netflix Prize is a stellar example of crowdsourcing. In October 2006, Netflix, the movie rental company, announced that it would pay $1 million to the contestant who could improve the movie recommendations made by Netflix’s internal software, Cinematch, by at least 10 percent. In other words, the company wanted recommendations that were at least 10 percent closer to the preferences of its customers, as measured by their own ratings.

(Cinematch analyzes each customer’s film-viewing habits and recommends other movies that the customer might enjoy. More accurate recommendations increase Netflix’s appeal to its audience.)

The contest will end next week because a contestant finally surpassed the 10 percent hurdle on June 26, and, according to the rules of the competition, rivals have 30 days from that date to try to beat the leader. The frontrunner is a seven-person team, and its members are statisticians, machine learning experts and computer engineers from the United States, Austria, Canada and Israel. It is led by statisticians at AT&T Research.

The leading team is a very elite crowd, indeed, but it is also one that was made possible by the Internet. The original three AT&T researchers (one has since joined Yahoo Research, but remains on the contest team) made good strides in the first year of the contest. But to make further progress, they went looking for people with other skills and perspectives. So they reached out eventually to a pair of two-person teams, who were among the leaders in the rankings posted on the contest Web site.

“The leader board was right there,” said Chris Volinsky, director of statistics research at AT&T. “It was pretty obvious who the top teams were.”

Though leading, his team may not win. But the teams in close pursuit are similar collaborations of skilled researchers and engineers.

The Netflix contest has lured experts worldwide not only because of the prize money but also because it offered a daunting challenge. The contestants’ algorithms must find patterns nestled in a collection of more than 100 million movie ratings. What is learned in tackling such a large-scale data analysis and predictive-modeling problem could well be applied in many industries, like Web commerce or telecommunications. “It made sense for us both from the perspective of AT&T and scientific research,” Mr. Volinsky explained.

In the Netflix contest, the winning idea is simply the one with the highest score. But often, companies rely on a contributing crowd for ideas, though management then chooses. I.B.M., for example, conducts online brainstorming sessions it calls Jams — 13 over the last seven years.

I.B.M. used one session to guide its strategy for investing in new growth fields, starting in 2006. An estimated 150,000 employees, clients, business partners and academics participated. Management sifted through the ideas and committed $100 million to invest in several opportunities to apply technology innovations to energy saving, health care and smart electricity grids.

“It starts out as crowdsourcing and it is culled to a set of action items,” said Jeffrey T. Kreulen, a researcher at the I.B.M. Almaden Research Center in San Jose, Calif.

Open-innovation models are adopted to overcome the constraints of corporate hierarchies. But successful projects are typically hybrids of ideas flowing from a decentralized crowd and a hierarchy winnowing and making decisions. In Linux’s case, anyone can submit code, but Linus Torvalds and a few lieutenants decide what code will be included in the operating system, noted Mr. Malone of M.I.T. Even Wikipedia — produced by collaborating clusters of contributors focused on particular areas of interest — relies on administrators to make final judgments on whether to delete a challenged article, he added.

“Most of the interesting examples of collective intelligence contain many different design patterns,” Mr. Malone said.

In a recent paper, “Harnessing Crowds: Mapping the Genome of Collective Intelligence,” Mr. Malone and his two co-authors, Robert Laubacher, a research scientist at M.I.T., and Chrysanthos Dellarocas, a professor at the University of Maryland, use a biological analogy in calling the design patterns of collective intelligence systems “genes.” They studied the genelike building blocks in more than 250 examples of collective intelligence enabled by the Web. The intent, they write, is to provide a systematic framework for thinking about collective intelligence, so “managers can do more than just look at examples and hope for inspiration.”

OPENING the corporate doors to ideas and inspiration from the collective crowd holds great potential, but there are pitfalls, warns Henry Chesbrough, executive director of the Center for Open Innovation at the University of California, Berkeley. To succeed, Mr. Chesbrough said, a company must have a culture open to outside ideas and a system for vetting and acting on them.

“In business, it’s not how many ideas you have,” he observed. “What matters is how many ideas you translate into products and services.”

Collaborating for Profits in Nanotechnology (NYT)

Collaborating for Profits in Nanotechnology

By JAMES FLANIGAN

THE economic news in California has been pretty bleak lately. Its businesses, small and large, are becalmed by the recession. The state has taken to issuing i.o.u.’s in the wake of political wrangling over how to resolve a $26 billion budget deficit. Most ominous, the state’s once-great public universities and its community colleges and local schools face budget cuts that amount to critical surgery.

Yet in the midst of all that, there is a promise for the future in the collaboration by California’s university research centers, small companies and venture finance firms in an emerging area called nanotechnology.

Working with materials that are a thousandth the diameter of a human hair, nanotechnology companies do not produce finished products in any one industry. Rather, nano particles improve performance and open new possibilities in activities as varied as water purification, biomedicine, battery power, environmental repair and agriculture.

The universities have been essential in this development process. In some cases, they make direct equity investments in start-up companies. Other times, universities grant licenses to their research and give small companies access to expensive laboratory equipment in return for user fees. And some universities have set up incubators where small companies develop technological products and processes.

Why are universities investing scarce budget cash in start-up companies? “Partnerships with private industry are a way of making this new technology available for public benefit,” said Leonard H. Rome, interim director of the California NanoSystems Institute at the University of California, Los Angeles. Also, in times of strained budgets, such partnerships bring needed funds. The NanoSystems Institute, Mr. Rome said, “has attracted more than $350 million in research and development grants from industry.”

Moreover, the new nanotechnology industry demands interdisciplinary collaboration. “The medical school needs to be collaborating with the engineering school,” said Mr. Rome, who is also senior associate dean of research at the university’s School of Medicine. In fact, the institute was first authorized in 2000 as part of a $100 million grant from the state of California to spur university research.

Examples from several universities and fledgling companies demonstrate the potential. NanoH2O Inc., for instance, uses nano materials to improve the performance of reverse osmosis membranes in making dirty water clean or in desalination. Two years ago, the company licensed the membrane research of Eric Hoek, a professor of environmental engineering at U.C.L.A. Then it leased lab space in the NanoSystems Institute, which opened in 2007, because being at U.C.L.A. allowed the company to use expensive electron microscopes and other equipment.

“Being able to use the core facilities of the university couldn’t help but accelerate our progress,” said Jeff Green, chief executive of NanoH2O. It also helped attract $20 million in venture capital from Oak Investment Partners and Khosla Ventures. Now, NanoH2O is moving to a factory where it can manufacture membranes composed partly of nano-size elements of alumina and silicon. The membranes filter out salts and impurities yet allow water to flow faster, thus saving energy in desalination or water reuse processes.

Matrix Sensors Inc. is a new tenant at the NanoSystems Institute. The company is developing nano membranes that are so sensitive to resonance they can detect molecules of bacteria as well as proteins and DNA and thus diagnose early stages of illness. Matrix Sensors is working on licensed research of three professors, James K. Gimzewski of U.C.L.A., and Calvin F. Quate and Butros T. Khuri-Yakub of Stanford University. U.C.L.A. and Stanford have invested in the company, along with Miramar Venture Partners of San Diego, which has put in $1 million. That is a sign, said Michael Cable, chief executive of Matrix, that investors, even in the recession, are supporting nanotechnology.

QuantumSphere Inc., in Santa Ana, Calif., is approaching nanotechnology on a broad scale by making an array of catalysts that allow batteries to operate for longer periods, electronic displays to be manufactured at lower costs and ammonia fertilizers to be produced using less energy while also generating less carbon dioxide.

“It’s not a question of making nano materials alone but what applications are you using nano for,” said Kevin D. Maloney, president of QuantumSphere, a seven-year-old company that got its start with $100,000 investment from two angel investors: Jon Faiz Kayyem, a trustee of California Institute of Technology, and Marc H. Goroff, who has a doctorate from Caltech and is the founder of several companies.

The reason infinitesimal nano particles can give batteries more power is, paradoxically, “that at the nano stage there are more atoms available on the surface of a molecule proportionate to its volume, so there are more active atoms to store and release electricity,” said Douglas Carpenter, co-founder and senior science adviser of QuantumSphere. Mr. Carpenter designed rocket fuel for aerospace companies for many years and helped invent Quantum’s nano catalysts.

“At the nano level, elements change their properties,” Mr. Carpenter explained. Aluminum, for instance, cannot burn at micron levels, or one millionth of a meter, but burns and gives off an intensely glowing light at nano levels, or one billionth of a meter. QuantumSphere gets to do research on powerful microscopes and other equipment at the University of California, Irvine, paying fees to the university for each use. It has raised $17 million from private equity and venture funds, including $2 million from OM Group Inc., a specialty chemicals company based in Cleveland.

In an example of global collaboration, Rachid Yazami, research director of France’s National Center for Scientific Research, has done his work on battery technology since 2000 at Caltech. He is co-founder along with a Caltech professor, Robert H. Grubbs, of CFX Battery Inc., of Azusa, Calif., which makes lithium ion batteries that can power electric cars, medical devices, mobile phones and computers. The technology transfer office at Caltech invested in CFX and helped raise $15 million to get the company started.

“But lithium is expensive and coming into short supply,” Mr. Yazami said. So he is trying to develop a battery powered by nano particles of sodium and water. “You know the work of Jules Verne,” Mr. Yazami asked, referring to “20,000 Leagues Under the Sea.” “He wrote of using seawater as a battery.”

Find Funding in Your Backyard (Entrepreneur.com)

Find Funding in Your Backyard

Local, state and regional funds aim to keep local economies going strong.

By Lydia Dishman | July 13, 2009

URL: http://www.entrepreneur.com/startingabusiness/gettingfinancing/article202608.html

Creating a must-have product for a hot market is every entrepreneur's dream. Frank Greer had it. The president and CEO of Zipit Wireless developed a nifty little device with embedded technology to allow users to communicate via SMS texting without using a cell phone or a computer. Teens and tweens no longer needed to compete for time on the family computer to IM friends, nor did their parents have to worry about spilling over the texting limits of their cell phone plans.

There was one little problem. Greer needed funding.

Though initial response was strong, Greer's patents were expiring, just when he was ready to finesse a second-generation product. He was also ready to spin Zipit out from under its then-parent company's umbrella and resources. So he hit the road.

"I went to every venture capital firm and angel investor in the state of South Carolina," Greer says, adding that the doors he knocked on remained tightly closed.

A fortuitous networking encounter led Greer to the South Carolina Research Authority and, subsequently, to its funding initiative for startups, SC Launch. SC Launch's mission to provide seed money and business resources to new companies to facilitate applied research, product development and commercialization programs in South Carolina was just what Zipit Wireless needed to get to the next level.

"Without the $200,000 from SC Launch, we would not exist," Greer says, noting that the money helped Zipit obtain its patents, complete product development and seek manufacturing in Asia. In one year, "It got us over the hump and to market," he says.



Who Are the Funders?
As venture capital dwindles and angel investors continue to hold their purses tightly, local, state and regional research and economic development organizations continue to fund startups to keep the economic engines running in their backyards and beyond.

The unique, hybrid organizations that provide this kind of funding vary greatly in size and scope. For example, the Battelle Memorial Institute is the world's largest nonprofit independent research and development organization. Kef Kasdin, a general partner with Battelle Ventures, says the firm is an independent early-stage venture-capital fund that works closely with Battelle and the National Labs to commercialize technologies and resources, either by creating companies or accelerating growth of the fund's portfolio companies.

The Southern Appalachian Fund is one of six New Markets Venture Capital companies in the U.S. Formed to provide equity capital and operational assistance to qualifying businesses in Tennessee, Kentucky and the Appalachian counties of Georgia, Alabama and Mississippi, it promotes economic development and job opportunities in low-income areas.

The Southwest Michigan First Life Science Fund is allowed geographical concentration to make a big impact on a relatively small area. Managing director Patrick Morand says it has made 10 strategic investments in early-stage life science companies.

"The region is rich in life-science talent in therapeutics, devices and diagnostics, providing a robust environment in which companies can develop their technologies and value," Morand says, adding that Southwest Michigan First's portfolio companies operate in a range of life-science-related industries, representing a mix of homegrown firms and companies that have relocated to Kalamazoo, Mich.

What's Available?
Bill Mahoney, CEO of SCRA, says that SC Launch guidelines cap initial investments to individual companies at $200,000. "We are not intending to replace venture capital," Mahoney explains. Funding in the form of grants, loans and equity investments is available to qualified companies. Grants can help defray legal, financial, marketing and intellectual property protection costs as well as further applied research and development efforts for future growth and fundraising.

Entrepreneurs in the area funded by the SAF can tap into that organization's $12.5 million venture capital fund. Battelle Ventures has $220 million under management. Kasdin says, "The amount that we invest in a company is determined by its stage of development--seed, early stage, expansion--and a thorough evaluation covering numerous criteria. We could provide an initial investment as small as $100,000 and could invest up to $10 million in a company over its life."

Who's Most Likely to Get Funded?
This is the tricky part. Each of these organizations, and others like them, are looking at a company's growth potential. But there's more to it than that. Entrepreneurs seeking funding must apply and meet specific guidelines.

When Frank Greer applied for SC Launch seed money, he says the third-party firm hired to do due diligence put him through the paces. "Even if we hadn't gotten funding," Greer says, "We came out of it with a better business plan."

The reason Zipit Wireless made the cut, according to Mahoney, is because, "They had a proprietary technology that is protectable as intellectual property, in addition to potential for high growth." That, and the fact that Zipit's headquarters is located in-state.

Ditto for SWMF Life Science Fund. Locating facilities in Kalamazoo is critical, and life sciences are a must. Morand says the fund is "rather agnostic" about defining life sciences and has already funded therapeutic technologies, medical devices, health-IT, diagnostic and bio companies.

Who Won't Get Funded?
No matter how good the idea, Kasdin points out, "A startup that does not meet our criteria would not get funded." Mahoney concurs: "We've seen marvelous entrepreneurial ventures, but not in our sweet spot," which for SC Launch includes advance materials, nanosystems and alternative energy.

The take-away lesson for entrepreneurs: Do your homework. Research the funding source thoroughly, and make sure you fall within its guidelines.

How to Find Them
Both Kasdin and Morand say most entrepreneurs find them through word of mouth. "The fund's general partner, Southwest Michigan First, is a rich source of referral due to its efforts in attraction with companies and regions around the globe," Morand says.

Kasdin notes, "Battelle Ventures has a website that those searching for VCs would find, and we are also listed in various directories."

The International Economic Development Council is a nonprofit membership organization dedicated to helping economic developers and has a wealth of information about funding initiatives across the globe.

Home Field Advantage
After getting SC Launch funding, Frank Greer went on to raise more than $4 million for Zipit Wireless, including investments from venture capital firms. But he's quick to point out that organizations such as SC Launch have something of a home-field advantage. "A typical VC sees thousands of applications. A home state organization provides encouragement and resources, and is not purely looking at returns. They are more invested in fostering local economic development."