Just to prove that this blog is actually written by two separate people with their individual points of view, here’s a follow-up post to Alan’s Edible Robots post.
Alan’s hypothesis is that Pittsburgh’s technology sector is more heavily weighted toward research than commercialization, and that Pittsburgh’s startup community often seems to consist of researchers who think that a scientific breakthrough in itself is sufficiently important/valuable to merit the creation of a startup (and that VCs should flock to their door). [Alan - let me know if I mischaracterized your post]
First, let me say that I’ve certainly seen the situation that Alan describes, but I don’t know if Pittsburgh’s culture is any more heavily weighted toward this type of startup than other regions in the U.S. that have large research institutions. If anyone has a good source of data for this, please suggest.
Here’s what I do know: Innovation Works (IW), being a seed fund that only invests in the Pittsburgh region, tends to see a lot of the local startups when they are still pretty raw — oftentimes when they are still in the process of spinning out of a university. In a typical year, IW will see about 100-150 new startups (not counting companies we’ve seen before), and on average, less than 20% of them are built around university-licensed technology. Admittedly, I’m using a university license here as a proxy for having deep research, and of course there are plenty of other startups with deep research that do not eminate from a university – they’re just more difficult to objectively quantify, so let’s use the university figure as a starting point.
Sometimes it surprises people to hear that 80% of the startups we see in Pittsburgh are NOT formed around university-licensed research. Of course, this varies by sector — for example, life sciences companies are much more likely to have a university license, compared to software and IT companies. And, historically, life sciences companies have only accounted for about a third of the companies we see each year.
So does the predominance of non university-related startups mean that university research (and research in general) is less significant than typically thought? On the contrary. When we look at the companies that we have actually chosen to invest in, it turns out that a full 40% of them are commercializing university-licensed technologies — which is double the amount you would otherwise expect based on the percentage approaching IW each year. And the number gets even higher if you include non-university companies that started by developing broad technology platforms (another proxy for deep research), rather than point-specific applications.
Why the discrepancy? I’d argue that it is because of the hope/belief that these companies may be able to use their technology as a competitive differentiator…. in other words, that the stuff they’ve been working on in the lab for five years is really difficult to do and requires specialized technical knowledge, and it will be harder for future competitors to become fast followers. Also, if the technology is hard-enough to duplicate, a future acquiror will be more likely to buy vs. build.
All of that being said, I agree with Alan that scientific and technical breakthroughs aren’t sufficient for company success, and investors are rarely convinced by the number of technical citations for a particular research project. If anything, it’s just a starting point. To test this hypothesis, we looked at the likelihood of companies in our portfolio obtaining follow-on VC funding, as well as the resulting growth trajectories. We found that after several years, the university-licensed technologies in our portfolio were no more likely to obtain venture funding, and were equally likely to result in failure.
Of the five fastest-growing companies in our portfolio (which are also the five companies with the highest current valuations based on recent financings), two (40%) are commercializing university-licensed technology and three (60%) are not. Exactly the same percentages as our overall portfolio of 112 companies. But what do these five companies have in common? They are all commercializing platform technologies rather than a single application, all have built teams with strong industry experience, and their products all have compelling value propositions for customers and are well-differentiated versus their competitors.
So I guess my point is that university-licensed technology (and deep research in general) is a good starting point and may initially give a company a leg up – but it only really matters if the company can effectively leverage its technological advantage to solve a (large and lucrative) real-world problem and build a high-caliber team to execute on the vision. Similarly, Pittsburgh’s deep research capabilities should give the region a good starting point, but we can’t blindly assume that our strong research capabilities will necessarily lead to a vibrant, growing regional tech economy. Our ultimate success (or failure) will likely depend more on business execution than technical research.