Pathbreaking Approaches to Commercializing Technology
Chances are you've never heard of Teknekron Corp. Formed in Berkeley, Calif., in 1968 by disgruntled big-company refugees and a few Berkeley professors, it's been growing 40 percent a year, and now boasts revenues of $225 million. Founder and CEO Harvey Wagner suggests that his "open corporation" provides a useful model of how to swiftly move innovation from lab to marketplace.
Others, too, are breaking the mold on this thorny issue. Consider Thermo Electron Corp.'s novel approach: The $700 million high-tech company spins off new divisions to support each new product; then, after a spell, those units are taken public. Thermo retains a controlling interest in the spin-offs, but converting divisions to publicly traded companies helps keep the entrepreneurial fire blazing. (One of those public spin-off divisions has now spun out its own subsidiary.)
At upstart Cypress Semiconductor, T.J. Rodgers takes a slightly different route. To fight inertia, he creates new, independent companies with their own boards of directors. Cypress retains full ownership, but acts like a venture capitalist toward the new entity—and provides big, entrepreneurial incentives to induce maximum return from minimum investment. Rodgers recently told the Financial Times of London that one such group, Ross Technology, had "brought to market a chip set more powerful than the leading Intel 80486 microprocessor"—with only 22 employees and an investment of $7 million.
Rodgers, Wagner and their ilk find no shortage of breakthrough opportunities. "The main problem has been in moving innovation to the market," Wagner writes in the Summer 1991 California Management Review. He blasts our biggest companies for failing to commercialize "the transistor, the UNIX operating system, reduced instruction set computing (RISC), relational databases ... and user-friendly personal computers." In each case, a research lab in a huge company hatched the idea. But Wagner reports, "the development of large markets was left for others, usually American entrepreneurial start-ups." What's missing? According to Wagner, "an 'innovations transfer' force—some sort of catalytic agent—between the company's research laboratory and its product divisions."
Enter Teknekron. Wagner's formula, a genuine original, is to patiently develop young entrepreneurs by connecting them to sources and users of innovation. Typically, two young entrepreneurs, painstakingly recruited a couple of years after attaining an advanced technical degree, become the nub of a Teknekron start-up. If their venture thrives, several years later, at about the 25 employee mark, it becomes an "affiliated company." If that works out, then total spinout from Teknekron is the final step.
Today Teknekron averages three or four start-ups per year, related to information technology. Since 1968, 11 units have graduated to full-fledged "affiliated company" status: Four have gone public or been bought by large corporations (e.g., Litton, TRW); one was disbanded; and the other six are still growing as affiliates. (About a dozen other start-ups never achieved affiliated-company status.) The entire enterprise is guided by a lean central staff of less than 15, not including the entrepreneurs.
Why not make the ventures fully independent from the outset? "(It) misleads every one ... into believing that the venture has attained the maturity ... that one associates with a going concern," Wagner says. "I am convinced that new entrepreneurs should be led through a series of achievements that successively give them more autonomy and control." Wagner also has unshakable beliefs about incentives: "(A)ll rewards should follow performance, not precede it." Teknekron entrepreneurs are not granted equity until their unit becomes an affiliated company, though the parent does pledge that a "prescribed fraction of the affiliate's stock will be reserved for staff members," Wagner writes. "Who gets how much is a judgment made by the affiliate's president in consultation with its Board."
Teknekron's approach to the market also sets it apart. Rather than "developing, from the outset, a standard product for the end-user market," Wagner reports, the start-ups create customized, integrated systems "for inclusion in other, generally larger companies' product lines." Generic products come much later, if ever.
In Wagner's self-proclaimed "school for entrepreneurs," the start-up team quickly is thrust into the marketplace. "The initial focus on marketing," Wagner says, "immediately connects the entrepreneur to a user of innovation."
Teknekron also maintains special links with suppliers of new ideas. For example, Wagner and his colleagues try "to 'marry' the entrepreneurs in each start-up with compatible academics, who become academic principals of the new venture."
It's tough to imagine sluggish, giant firms coping with the "open corporation" approach. For one thing, Wagner concedes that a Teknekron start-up's characteristic eight- to 15-year gestation period is hard for a giant to abide. But there's no doubt that the Teknekron, Cypress, and Thermo Electron models warrant serious consideration by midsize and large firms alike.
(c) 1991 TPG Communications.
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