Not every idea is a good one, and even those that seem possible on first glance may not bear fruit. Yet even a great idea may be destined to fade away in the files of the U.S. Patent Office unless it either finds its way to a company looking for a product or to a venture capitalist willing to purchase the intellectual property and fund its development.
Luckily for the creators of intellectual property, corporations are beginning to realize that internal research and development may not yield sufficient fodder for the neverending quest for a better product. So they are reaching out in different ways to bring in the ideas they cannot develop internally.
An article titled “A Buyer’s Guide to the Innovation Bazaar” by Satish Nambisan and Mohanbir Sawhney in the June, 2007, Harvard Business Review describes how innovative ideas and product-hungry corporations have begun to connect up. Sometimes corporations simply reach out directly to independent inventors, by way of contests, Internet sites, or innovation mediators. These mediators include idea scouts who find ideas and screen them for commercial potential on behalf of large firms, patent brokers who bring together inventors and firms interested in commercializing their patents, licensing agents who broker the licensing of patented technologies, and invention capitalists who buy patents and sell them to companies.
Sometimes firms will shop instead for market-ready products or technologies, and often the company that developed them as well. Intermediaries can include venture capitalists or university-affiliated business incubators.
A third path is that followed by invention capitalists, who focus on improving intellectual property and technological platforms and then seek a licensing or acquisition exit.
Neal Fryett, vice president of IgniteIP in Newark, will speak on “The Innovation Capitalist Approach to Technology Commercialization,” on Tuesday, June 17, at 11:30 a.m. at the Marriott Hanover, 1401 Route 10 East in Whippany. Cost: $55. To register, contact Clara Stricchiola at 973-631-5680 or firstname.lastname@example.org.
Traditional operating companies are built around technologies they develop into products with an eye to an initial public offering. One of IgniteIP’s current investments had this route in mind when the inventor of a new device turned to the firm. He asked them to invest so he could build the company, ramp up sales, and eventually try for an initial public offering. He decided instead to assign to IgniteIP the rights to the intellectual property and in exchange, the investors are funding development of his technology and intellectual property to the point where it will be attractive to Fortune 500 companies.
The innovative capitalist approach is more capital efficient than the venture capital path, says Fryett. “We are taking a technology and doing the minimum in order to get it adopted by a Fortune 500 company,” he explains. “They are the ones with the brand, the advertising money, and established channels into the marketplace.”
IgniteIP has been in business since 2002 and now has nine investments in different technologies that it is trying to take to market. Fryett emphasizes that IgniteIP’s portfolio companies are not “real” companies, but typically comprise one of the top technical experts in the technology involved as well as several top business development professionals.
Because most of the technology in its portfolio is very early-stage, IgniteIP has to make it look attractive. “We have to develop the core technology, which might mean taking it from prototype to a commercial-scale working demo,” says Fryett.
In addition, IgniteIP has to improve the intellectual property. Although for early-stage technologies, patent applications have usually been filed, chances are that they will get rejected as written, says Fryett. First of all, many inventors and intellectual property owners lack the expertise to modify the patents in a way that will be most attractive to the market. Second, these patents will not include the inevitable technical improvements that come in the move from lab-scale to commercial-scale testing.
“There is so much intellectual property out there that is based on lab-scale results,” says Fryett. “The problem is that the market is not interested in lab-scale results.” The move to a commercially viable demonstration, though, can be very expensive, involving development, patent improvements, and bringing on people who have relationships with large companies that would be interested in the technology.
Although IgniteIP sometimes uses consultants to find placements for its technology, it usually uses very high-level executives with lots of industry expertise, who have either retired or do projects on the side. “They are all over the place,” says Fryett. “You just have to have the right network to get hold of them.”
IgniteIP already had some relationships in place since its founders attended the Wharton School; others develop at different industry events; and still others have come through the career experiences of the principals — Vlad Dabija was a venture capitalist, Brandon Williams an investment banker, and Fryett was involved in several startups in Seattle.
Before investing in a company, IgniteIP approaches its connections in relevant Fortune 500 companies and ask them up front: Here is the core technology — if we demonstrate that it works at a commercial scale, would you be interested?
“It is a quick way to find out if several big players in the space are interested,” says Fryett. He will begin by reaching out to a highly place executives, for example, senior vice presidents of product development. If the technology is in their area of expertise, they will offer an opinion; if not, they will direct him to the people in charge of the appropriate division in the company. Once he has gotten input from 10 to 20 Fortune 500 companies about whether they find the value proposition interesting, he has a pretty good idea where the technology stands.
“If the response is ‘That’s incredible, come give us an introductory presentation’ and if we keep getting that feedback, it’s usually a good sign,” says Fryett. “We want the market to pull the technology in; we don’t want to try to push it in a market that has no interest.”
Compared to the venture capital model, the innovation capitalist approach requires a smaller investment, but also yields a smaller payoff at the end. IgniteIP seeks to invest $2 to $3 million into each of its portfolio companies, with the goal of an exit worth $20 million or more. The venture capital model takes longer and succeeds only one out of 10 times, but an initial investment of $40 to $50 million can yield $200 million when the company goes public.
Fryett grew up in Seattle, where his father has worked in different arenas, some of which could be called entrepreneurial. His father spent 20 years in the corporate world with Nordstrom’s, then spent 15 years developing a ministry to men and women who are leaders in the community and business. Now he is about to graduate with a doctor of divinity degree from Regent University. Fryett’s mother stayed at home and home schooled Fryett and his three siblings.
Attending Seattle Pacific University on an athletic scholarship, Fryett graduated in 2002 with a degree in business and economics. Between 1999 and 2005 he directed marketing and business development for three start-up companies: an outsourced network management company, a multimedia platform provider to Fortune 500s (acquired by Tartan in 2002), and a leading Internet content company (acquired by Vertical Response in 2004). He helped the companies to improve their annual revenues, with one moving from $250,000 to $3 million during his tenure.
In 2005 Fryett moved to IgniteIP, where he spends 80 percent of his time developing relationships with five different groups: intellectual property owners, including entrepreneurial communities; investment communities, through venture capital and investment-related events around New York City; top technical experts in the world for different technologies or key opinion leaders to help the portfolio companies to develop their technologies; high-level business-development executives; and Fortune 500 companies that IgniteIP wants to sell to. Fryett is also involved in many aspects of the investment life cycle for the portfolio companies.
Although IgniteIP is willing to look at any type of intellectual property, its three areas of focus are software IP, clean technology, and biopharma. The firm considers at least 500 investment opportunities each year and then makes 10 to 20 investments. The firm expects soon to begin raising a $150 to $200 million fund that will enable it to take on more investments and grow as a company. Currently IgniteIP has four employees in addition to the portfolio companies, which each employ between one and six people.
“IP is making up a greater and greater percentage of the balance sheets in large corporations,” observes Fryett, “and Fortune 500 companies are looking outside their own walls for innovation. “Back in the 1970s ideas came out of internal research and development labs; in the ‘70s and ‘80s, they came from venture-backed companies, and since the early ‘90s, there has been a new focus on IP, with a variety of ways to get innovative technologies to market.
The question is no longer whether companies will reach beyond their walls but how they will do that. Will they turn to IP brokers who don’t have funds but will take a patent, parade it around, and try to get the patent purchased? Will they run contests for new inventions? Or, asks Fryett, will they use the innovative capitalist model, which is “a combination of improving intellectual property and the core technology platform and then seeking out a somewhat early-stage exit.”