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.

A Small-Business Guide to Intellectual Property (NYT)

A Small-Business Guide to Intellectual Property

By DARREN DAHL

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Quick Tips:

From Mark Blaxill and Ralph Eckhardt, founders of 3LP Advisors, an intellectual property consulting company in Boston, and co-authors of a guide to I.P., "The Invisible Edge" (Portfolio, 2009).

• Securing your intellectual property involves more than patents. Trademarks, trade dress and even Web site addresses are all part of I.P.

• Think strategically when it comes to international rights. Start with countries where you might sell.

• Don't sit on unused I.P. Use it to open additional revenue streams or bring about new partnerships through licensing.

Suggested Reading:

• The U.S. Patent and Trademark Office , for more information about I.P. for small business.

• The World Intellectual Property Organization , for more about international I.P. rights.

• An easy-to-use online global directory for I.P. resources.

• Use Google's patent site to perform your patent search. You can also search here and here.

• Patently-O by Dennis Crouch is one of the most popular blogs on the subject of I.P. law.

The two most precious resources for any small-business owner are time and money. That’s why when the subject of intellectual property comes up, many owners run in the other direction. They see images of expensive lawyers and use that as an excuse to ignore the topic, reasoning that it is a problem for big companies to worry about.

The trouble is, with the rise of competition through the Internet and on the global market, understanding intellectual property is more critical than ever for small-business owners. Let’s explore some of the common fallacies:

1. For small-business owners, it’s not worth the time or effort to secure intellectual property rights.

Daniel Lubetzky, chief executive of New York City-based Kind Snacks, had high hopes when he and his company attended the Natural Products Expo West in Anaheim, Calif., in March. And who could blame him, since his Kind Plus bars had been named the best new product at the Natural Products Expo East last October?

But it didn’t take long before Mr. Lubetzky knew something had gone wrong: He kept hearing how one of his competitors had copied the packaging, look and feel of his bars.

Fortunately for Mr. Lubetzky, he had secured crucial components of intellectual property like trademarks, trade dress (the look and feel of a product) and Web addresses after founding his company. Unlike a patent, which can cost up to $25,000 to secure, trademarks and Web addresses can be obtained relatively cheaply and without the aid of a lawyer.

With the legal documentation to back up his intellectual property rights, Mr. Lubetzky sent the offending company a cease-and-desist letter, which achieved the desired result. “Too many entrepreneurs forget there is more to I.P. than just patents,” said Mr. Lubetzky, who happens to be a lawyer.

2. Once I get a trademark, my brand is safe.

It may be. But consider what happened to Tracey Deschaine, who runs a restaurant called Dixie Picnic in Ocean City, N.J.

When Ms. Deschaine opened her business in 2006, she secured trademarks on her business name and logo and on the name of her signature item, “upcakes,” which are upside-down frosted cupcakes. The problem, she says, was that even though she had obtained the trademarks, someone monitoring the activity on the United States Patent and Trademark Office’s Web site had spotted her application and secured upcakes.com as the Web address, or U.R.L., before she could.

“I had no idea that even though I have a trademark, someone else could just go register the U.R.L.,” she said. “I wish I had planned ahead and bought the site before I did that.”

3. Having a patent gives me the right to produce something.

This is a very fundamental misunderstanding. Actually, what a patent does is give you the right to prevent someone else from producing what your patent covers. “Having a strong I.P. position helps ensure that other people pay you for your innovation like they would a toll on a road,” Mr. Kocher said.

But even if you do have a patent, there’s no guarantee that someone won’t try to get around it. There’s also no guarantee that you will win if you fight that person. But if you have your I.P. ducks in a row and a commitment to do whatever you can to defend those rights, you do have a fighting chance — even in a fight against a much larger company.

Consider the example of Cryptography Research, a 20-employee technology firm in San Francisco that specializes in data security. Beginning in 2004, the company made the decision to pursue litigation against the credit card giant Visa, which Cryptography asserted was infringing on its patents covering smart cards. To pursue the case against Visa, however, Cryptography’s founder, Paul Kocher, knew he needed a serious war chest in addition to his patent portfolio.

That’s why he decided to sell off another piece of his business, patents covering technology that protects Blu-ray discs from piracy, to Macrovision, which is now known as Rovi, in 2007 for $45 million. “All of a sudden we became a formidable opponent for someone who thought we couldn’t fight,” Mr. Kocher said. In the end, the gamble paid off, as the two companies settled out of court, with Visa’s agreeing to license the technology from Cryptography.

4. If I have a patent or trademark in the United States, I don’t need to worry about the rest of the world.

It depends on your business model. Intellectual property rights, which also include country-specific U.R.L.’s, need to be obtained country by country, some of which protect them better than others. The cost can vary, too.

In Japan, for example, it is notoriously expensive to acquire patents. In addition, the annual fees required to maintain the patents there are often prohibitively expensive for small businesses, said Gary Johnson, chief executive of Blue Spark Technologies, a manufacturer based in West Lake, Ohio, that makes small, flexible batteries used in things like radio frequency identification tags.

“What we have done is to develop a strategy to go after I.P. protection in a limited number of countries that we think we are most likely to sell or manufacture in, like the U.S. and China,” he said. “A lot of the choice comes down to what your business plan tells you.” To decide what your international I.P. strategy should be, consult a lawyer and conduct some cost-benefit analysis to see if expanding your I.P. rights makes sense.

5. People who collect patents but don’t actually make anything are “patent trolls,” parasites who can make money only by filing lawsuits against real businesses.

The term “patent troll” was coined in the wake of the epic lawsuit fought between NTP, a small holding company, and Research in Motion, which makes the hugely popular BlackBerry. The focal point of the dispute was a patent for wireless e-mail delivery held by NTP — something that R.I.M. eventually would pay millions of dollars to license. But what most people remember about the story is the lawsuits and the notion that NTP was somehow in the wrong for trying to enforce its patent, mostly because it didn’t make any products itself.

But consider that many inventors never set out to build a company, only to partner with someone who would bring their products to life. Thomas Edison, for instance, received more than 1,000 patents — many of which he licensed to other companies. “He created what we might consider the first innovation factory,” says Mark Blaxill a co-founder of 3LP Advisors, an intellectual property consulting company based in Boston.

A more recent example is Trident Design, a company founded by an inventor, Chris Hawker, which patented and then licensed the design for the PowerSquid. Like Edison, Mr. Hawker’s company invents products, builds an intellectual-property wall around them and then licenses them to other companies.

The PowerSquid is now manufactured by a division of Phillips Electronics and sold by a spinoff of Trident called Flexity. “Our entire business model is leveraging our I.P.,” Mr. Hawker said.

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."

Despite Odds, Cities Race to Bet on Biotech (NYT)

Here's a sobering news piece for our yet-to-be biotech industry. Bottomline: PR cannot and should NOT compete in this field. Money already programmed for this purpose (if any) would be better used in creating sustainable local industries to help PR replace some of the most expensive imports and maybe some day begin exporting.

Despite Odds, Cities Race to Bet on Biotech

By SHAILA DEWAN

KANNAPOLIS, N.C. — Where a textile mill once drove the economy of this blue-collar town northeast of Charlotte, an imposing neoclassical complex is rising, filled with fine art, Italian marble and multimillion-dollar laboratory equipment. Three buildings, one topped by a giant dome, form the beginnings of what has been nicknamed the Biopolis, a research campus dedicated to biotechnology.

At $500 million and counting, the Biopolis, officially called the North Carolina Research Campus, is a product of a national race to attract the biotechnology industry, a current grail of economic development.

Cities like Shreveport, La., and Huntsville, Ala., are also gambling millions in taxpayer dollars on if-we-build-it-they-will-come research parks and wet laboratories, which hold the promise of low-pollution workplaces and high salaries.

At a recent global biotech convention in Atlanta, 27 states, including Hawaii and Oklahoma, paid as much as $100,000 each to entice companies on the exhibition floor. All this for a highly risky industry that has turned a profit only one year in the past four decades.

Skeptics cite two major problems with the race for biotech. First, the industry is highly concentrated in established epicenters like Boston, San Diego and San Francisco, which offer not just scientific talent but also executives who know how to steer drugs through the arduous approval process.

“Most of these states probably don’t stand much of a chance to develop a viable biotech industry,” said Gary P. Pisano, a Harvard Business School professor and the author of “Science Business: The Promise, the Reality and the Future of Biotech.”

“You can always get a few top people,” Mr. Pisano said, “but you need a lot of critical mass.”

Second, biotech is a relatively tiny industry with a lengthy product-development process, and even in its largest clusters offers only a fraction of the jobs of traditional manufacturing. In the United States, only 43 biotechnology companies employ more than 1,000 people, according to BioAbility, a consulting firm in the Research Triangle Park in North Carolina.

There is no guarantee that if a blockbuster drug materialized, it would be manufactured and marketed in the same place it was developed and tested.

Joseph Cortright, an economist who has studied biotechnology clusters, gave the example of a promising anti-leukemia compound developed at Oregon Health Sciences University in Portland, where Mr. Cortright is based. “The economic impact in the Portland area is zero because the rights to manufacture and market this drug were owned already by Novartis,” Mr. Cortright said.

But the race continues.

The state of Florida and Palm Beach County used $510 million as bait for a research institute that will employ 545 people (and, officials project, spur the creation of 46,000 more jobs over 15 years). New York City has invested more than $45 million in bioscience infrastructure, and Kentucky matches federal research grants dollar for dollar.

Cities like Shreveport, where public and private money have built the InterTech Science Park, remain steadfastly optimistic, though a biotechnology manufacturing center at the park was occupied for only six months in 2001 before the tenant went under.

The building remains an asset, said Dennis Lower, the park director. The private sector’s willingness to invest in it helped persuade the state to invest $15 million in a second building. “Right now we have four companies that are interested in that building,” Mr. Lower said. “Three times in the last three years we have almost had a tenant in that building.”

Some economic development officials say the value of a biotech cluster cannot be calculated in dollars alone.

Larry Pelton, president of the Economic Development Council of St. Lucie County, Fla., said the millions that the state spent attracting the Scripps Research Institute to Palm Beach County started a chain reaction that brought a branch of the Torrey Pines Institute for Molecular Studies to Port St. Lucie.

The institute received state and local incentives worth $32 million, plus a building and land. That helped St. Lucie County, which has grown quickly and needed more hospital beds, persuade Martin Memorial Health Systems to build a 300-bed hospital, Mr. Pelton said.

The county’s research institutes have also enhanced science and math education and spurred creation of a charter school, he said.

To build a viable biotech cluster, some areas have expanded the traditional definition of the industry beyond genetics to biofuels, agriculture, medical devices — even bioterrorism research.

A good strategy capitalizes on a city’s existing strength, said Patrick Kelly, the vice president of state government relations for the Biotechnology Industry Organization, whether it is the presence of the Centers for Disease Control and Prevention in Atlanta, a highly educated work force in Huntsville, or experience running clinical trials in the Research Triangle.

In Kannapolis, the focus is on food and nutrition, not because of any expertise, but because of David H. Murdock, the health-obsessed billionaire who first envisioned the Biopolis.

To attract seven of the state’s universities, including Duke and the University of North Carolina, Mr. Murdock, a real estate developer and owner of the Dole Food Company, persuaded the state to invest almost $30 million a year in rent and operating expenses. Local officials approved the sale of $168 million in bonds to pay for infrastructure improvements around the 350-acre campus — up considerably from an original estimate of $7 million, said John D. Day, the Cabarrus County manager.

Mr. Murdock says he has spent half a billion so far on buildings, recruiting scientists, and equipment that includes the most powerful nuclear magnetic resonance spectrometer in the United States, which can help to study molecules.

Though the buildings are still half-empty and construction is slower than anticipated, the campus has attracted senior scientists like Mary Ann Lila, who left the University of Illinois to head the Plants for Human Health Institute, a North Carolina State University effort. Dr. Lila says she has had inquiries from scientists worldwide.

But some critics say the Biopolis is largely a real estate venture that can only increase the value of hundreds of additional acres Mr. Murdock owns in the area.

“It’s a single large developer, with substantial deep pockets, with a very specific agenda that doesn’t necessarily align with the interests of the state,” said Doug Baker, the chief executive officer of Kryosphere, a Research Triangle company that stores biological specimens.

Mr. Baker, whose company is considering expanding to Kannapolis, said the Biopolis could end up as an attractive, saleable asset for Mr. Murdock at the expense of other biotechnology clusters across the state.

“It’s a very large mall,” Mr. Baker said. “I don’t see the organic qualities.”

In Pitching to Angel Investors, Preparation Tops Zeal (NYT)

In Pitching to Angel Investors, Preparation Tops Zeal
By BRENT BOWERS

FOR entrepreneurs hoping to land start-up capital from angel investors, here’s what two recent studies found: Don’t get carried away when you pitch your product because the investors may lose interest faster than you can say “almost unlimited market.”

And one misstep — like stammering a vague reply instead of saying you do not know the answer — can also kill a deal, the authors of the studies say.

Angel investors are generally wealthy people seeking promising start-ups that are too small to attract the attention of venture capitalists. The estimated 260,500 active angels in the United States are the largest source of seed and start-up capital for entrepreneurs (not counting their own savings or money from family and friends), according to Jeffrey Sohl, the director of the Center for Venture Research at the University of New Hampshire.

Even last year, as the recession gathered force, these angels spent $19.2 billion on more than 55,000 ventures, he said, though that was down from $26 billion in 2007. The average investment for each deal last year was $346,500.

By contrast, venture capitalists made only 440 investments in start-ups last year, putting the bulk of their money in later stages of a company’s growth in deals that averaged $7.5 million, Mr. Sohl said. “Angels provide the seed and start-up funding that turns acorns into trees like Starbucks, FedEx, Amazon and Google,” Mr. Sohl said.

Typically, entrepreneurs make their initial pitch to angels in an informal session. If their idea is judged to have promise, they may be invited to give a PowerPoint presentation followed by a question-and-answer session.

With time at a premium, it is imperative for entrepreneurs to come prepared to both meetings with solid arguments about their product’s marketability and with evidence of their commitment to their company in the form of sweat equity and their own investment, experts say.

But enthusiasm is a different matter, according to a study that was presented last week at an entrepreneurship conference at Babson College outside Boston.

“That is the trickiest part,” said Richard Sudek, an angel investor and assistant professor of entrepreneurship at Chapman University in Orange, Calif., and one of the three authors of that study. “We like you to show some excitement, but don’t force it. Being authentic is much more important. There is such a thing as quiet passion. Anything that comes across as slickness is a negative.”

Cheryl Mitteness, a doctoral candidate in entrepreneurial studies at the University of Louisville and one of Mr. Sudek’s co-authors, was even more emphatic. “Show your passion,” she said, “but don’t try to be somebody that you’re not. Angels are very leery of too much enthusiasm.”

Another research paper, by Xiao-Ping Chen and Suresh Kotha of the University of Washington and Xin Yao of Wichita State University and published in The Academy of Management Journal in February, came to much the same conclusion. The effects of perceived passion, defined as cues like facial expressions, tone of voice and hand gestures, “were statistically insignificant,” the article said.

Ms. Chen, a professor at her university’s business school, called the findings “surprising,” especially since she and her colleagues often rely on such signals in their hiring decisions. “You can show your passion through preparedness, how well you’ve thought out your business plan,” she said. “But the style of your presentation doesn’t matter.”

What angels are looking for, authors of both reports said, is evidence of a market opportunity with growth potential, a strong management team and an exit strategy, including a list of possible acquirers, since the eventual sale of the companies they invest in is how they make money.

“Also, angels put a high value on trustworthiness,” said Mr. Sudek of Chapman, a former entrepreneur himself and the chairman-elect of Tech Coast Angels, the largest angel group in the United States. “If you don’t know the answer to a question, say so, and promise to get back to them. Don’t fake it.”

In fact, acknowledging gaps in your knowledge and other weaknesses, and letting angels know you need their help, can add to your credibility, he said.

Here are some other tips from the researchers:

¶Memorize an “elevator pitch” for your product and its potential in 90 seconds or less. It will bolster your confidence, and you can recycle it to win over customers, vendors and employees.

¶Consider hiring a speech coach, but only one familiar with angel investors’ thinking.

¶Attend “pitching contests” that many business schools and angel groups sponsor.

¶In presentations, be upbeat but realistic in your profit and revenue projections. Better yet, draw up optimistic, middle-ground and pessimistic projections to show how carefully you have thought them through.

Ted Ray, founder of Ted’s Tinctures Inc. in Mountain View, Calif., has some advice for fellow entrepreneurs, even though he is only now starting a quest for $500,000 in angel financing.

First, he said, have a product on the market. “Nothing speaks more loudly than revenue coming in,” he said. His two-year-old company, which makes an herbal remedy called FlyRight Jet Lag Formula, had sales last year of $25,000 and is on track to increase that by tenfold this year.

Second, do not ask other people for money unless you have spent your own. He has put $105,000 of his savings into his firm and raised $185,000 from family and friends.

Third, the business plan you show to potential investors should be concise. He suggested using software on Angelsoft.net.

Fourth, seek angels with a record of investing in your field — in his case, consumer products.

And finally, he says, explore every angle. “If an angel says no, ask him for the names of four other angels who might say yes,” Mr. Ray said. “My goal is to get 100 introductions to get 10 meetings to get three presentations to close one deal.”