SOFT COMPANIES AND R D CONTRACTS THE UNDERVALUED ENGINE

‘SOFT’ COMPANIES AND R&D CONTRACTS; THE UNDERVALUED ENGINE OF GROWTH FOR KNOWLEDGE BASED ECONOMIES David Connell Director of TTP Capital Partners and Senior Research Associate, Centre for Business Research at Cambridge University 19 th April 2007 1

TOPICS • ‘Soft’ and ‘Hard’ Companies • The Commercialisation of New Science and Technology • The Role of Government Procurement of R&D in the United States • Policy Implications 2

SOFT AND HARD START-UP STRATEGIES • There a range of start-up strategies available to technology entrepreneurs 3

SOFT AND HARD START-UP STRATEGIES • There a range of start-up strategies available to technology entrepreneurs 4

SOFT AND HARD START-UP STRATEGIES • There a range of start-up strategies available to technology entrepreneurs 5

SOFT AND HARD START-UP STRATEGIES • There a range of start-up strategies available to technology entrepreneurs • ‘Hard’ start-ups require substantial venture capital investment and if successful can grow very rapidly and deliver big returns for investors • ‘Soft’ start-ups rely mainly on customer contracts to fund the development of technology that meets their needs • Customer funding through the soft model also plays a key role in the early “exploratory” stages of exploiting new technology • Soft company growth rates are limited and so they are rarely attractive as investments to venture capitalists 6

EXAMPLE OF A ‘SOFT’ CAMBRIDGE COMPANY EXITS TTP GROUP PLC a private company Contract product development Laboratory instrumentation Technology consulting Wholly owned by TTP Group Proprietary IP exploitation IPO London Stock Exchange October 2000 600 employees Wholly owned by TTP Group 300 employees Mobile terminal technology Dymo electronic label printer Explorer µplate cytometer Automated chemical synthesis Acquired by Mettler-Toledo December 1998 Tonejet high quality imaging DAB modules com. POUND storage system Pharma manufacture systems Demerged August 1998 Vista low cost printing 200 employees Microfluidic lab-on-chip Mosquito nanolitre dispenser Automotive power electronics Acquired by Power. Gen BT Movio mobile TV Matrix low cost wireless comms 1997 7

EXAMPLE OF A ‘HARD’ CAMBRIDGE COMPANY CAMBRIDGE SILICON RADIO • Fabless Bluetooth semiconductor spin out from Cambridge Consultants : April 1999 • $85 m venture capital investment in 4 rounds • First profit in Q 3 2003 • IPO on London Stock Exchange in March 2004 • Today – 900 employees – $700 million revenues – 50% global market share ORIGINS - spin out team of 10 people from Cambridge Consultants (similar to TTP) - technical team had worked together for 10 years - management team had worked together for 4½ years 8

TOPICS • ‘Soft’ and ‘Hard’ Companies • The Commercialisation of New Science and Technology • The Role of Government Procurement of R&D in the United States • Policy Implications 9

THE ROLE OF R&D CONTRACTS IN THE COMMERCIALISATION OF NEW SCIENCE AND TECHNOLOGY RESEARCH UNIVERSITIES; CORPORATE RESEARCH EXPLORATORY DEVELOPMENT SOFT COMPANIES; APPLIED R&D CENTRES AND INSTITUTES SCALABLE COMMERCIAL DEVELOPMENT HARD START - UP COMPANIES; ESTABLISHED COMPANIES • Innovation is about problem solving; customers have problems and ‘wish lists’ • A development contract from a customer is the best market research a technology company can have 10

THE ROLE OF R&D CONTRACTS IN THE COMMERCIALISATION OF NEW SCIENCE AND TECHNOLOGY • Many successful ‘hard’ companies owe their success at least in part to the ‘soft’ company model: In Cambridge Autonomy In US • : CSR, Domino Printing Sciences, : Intel, Qualcomm In Cambridge, ‘soft’ companies : capital into - are probably more important than the University as a direct source of spin out companies; have provided an initial training ground for technology entrepreneurs and venture investors; provide a stepping stone for young university scientists and engineers wanting to move the commercial world. CONCLUSION: GOVERNMENT EXPENDITURE IS ITSELF A KEY PART OF THE ECONOMY AND SO IT SHOULD SUPPORT SOFT START UPS BY PLACING R&D CONTRACTS AND TRIALING NEW TECHNOLOGY 11

TOPICS • ‘Soft’ and ‘Hard’ Companies • The Commercialisation of New Science and Technology • The Role of Government Procurement of R&D in the United States • Policy Implications 12

HOW THE US FEDERAL GOVERNMENT USES R&D BUDGETS TO STIMULATE THE TECHNOLOGY SECTOR • Key role of US Federal Government in national R&D system recognised since the start of the Cold War – pivotal in development of semiconductor, computer and other sectors • Federal Government R&D expenditure approximately $105 billion in 2004/5, 20% with industrial companies • Lead programme for smaller businesses is the Small Business Innovation Research Programme (SBIR), established in 1982 • Contracts aimed at meeting Federal Agencies’ requirements for new technology • 1, 500 firms receive 4, 000 SBIR contracts worth $2 billion per annum 13

KEY FEATURES OF SBIR PROGRAMME • Aimed at meeting Agency’s requirements for new technologies as customers: usually specified in some detail • Available to US businesses owned 51% or more by US citizens • R&D contracts (plus some “grants” for directed research). 100% funding is the norm. No collaboration required. Companies own IP. • Competitive process run by each agency 2 to 4 times a year. Agencies required to ensure ‘simplified, standardised and timely solicitations’ • Complete transparency of topics, award winners and amounts • Organised as a seed fund not a set aside target 14

KEY FEATURES OF SBIR PROGRAMME (Cont’d) • Phased approach, typically: – Phase I $100 k for a 6 month feasibility study – Phase II £ 750 k for a 2 year development programme – Phase III Public sector implementation and further R&D funding possible through Agencies’ non-SBIR budgets • 1, 500 US firms receive 4, 000 SBIR contracts and awards each year; 70% to companies employing less than 25 people • Firms can receive multiple contracts from different agencies in parallel each year • Total R&D procurement from small firms probably $6 -8 billion per annum • In addition, goals for OVERALL Federal procurement from small US businesses ensured that in 2005: – 25. 5% went to small businesses directly – a further 20% went to small firms via prime contractors 15

EXAMPLES OF SBIR SOLICITATIONS • Speech recognition technology for air traffic control (Navy) • Affordable advanced lighting systems (Navy) • Smart scalpel (DARPA) • Chip scale technologies for Gigaband signals (DARPA) • Methods for innovative pharmaceutical manufacturing and quality assurance (National Cancer Institute) • Diagnostic tool for von Willebrand disease (National Heart, Lung and Blood Institute) • New capabilities enabling the massive sequencing of entire genomes of organisms (National Science Foundation) • Data mining and management (National Science Foundation) • Food science and nutrition; e. g. novel or rapid assay technologies for food constituents (US Department of Agriculture) 16

SOME BENEFICIARIES • Qualcomm, Amgen, Genzyme • Photobit Technology Corporation (acquired by Micron Technology Inc in 2001) – NASA research lab spin out 1995 – SBIR contacts from US Army, NASA, DARPA, Missile Defence Agency – Early development largely funded by government contracts – Now leading supplier of CMOS image sensors for phones and cameras ($1 billion revenues approx? ) • HNC Software (acquired by Fair Isaacs in 2002) – – Predictive software solutions 15 Phase I and 14 Phase II awards 1500 employees at acquisition Real time detection of credit card fraud 17

TOPICS • ‘Soft’ and ‘Hard’ Companies • The Commercialisation of New Science and Technology • The Role of Government Procurement of R&D in the United States • Policy Implications 18

A US STYLE SBIR PROGRAMME COULD PERFORM A VITAL ROLE WITHIN THE UK AND EUROPEAN UNION • Venture Capital • Corporate Investment, Acquisition, Licensing and Partnerships Corporate Sponsorship RESEARCH UNIVERSITIES; CORPORATE RESEARCH EXPLORATORY DEVELOPMENT SOFT COMPANIES; APPLIED R&D CENTRES AND INSTITUTES SCALABLE COMMERCIAL DEVELOPMENT HARD START COMPANIES; -UP ESTABLISHED COMPANIES GAP DTI R&D Grants Research Councils Technology Strategy Programmes EU Programmes 19

A US STYLE SBIR PROGRAMME COULD PERFORM A VITAL ROLE WITHIN THE UK AND EUROPEAN UNION Corporate Sponsorship RESEARCH UNIVERSITIES; CORPORATE RESEARCH • Venture Capital • Corporate Investment, Acquisition, Licensing and Partnerships Commercial Customer Requirements and Funding EXPLORATORY DEVELOPMENT SOFT COMPANIES; APPLIED R&D CENTRES AND INSTITUTES SCALABLE COMMERCIAL DEVELOPMENT HARD START COMPANIES; -UP ESTABLISHED COMPANIES GAP DTI R&D Grants Research Councils Technology Strategy Programmes EU Programmes GOVERNMENT INNOVATION CONTRACTS 20

POLICY ISSUES FOR EMERGING KNOWLEDGE BASED ECONOMIES • Opportunities for ‘soft’ companies with world class expertise serving international markets: • Software • Chemistry for drug discovery • Etc. • Partnerships needed for global marketing and commercial project management • Transnational new company opportunities, e. g. Oxford Diffraction: • Sales, marketing and finance in Oxford • Development and production based in Poland • Public sector role: • Innovative customer • R&D contracts to solve real problems • Promotion of ‘soft’ and ‘hard’ company partnerships 21

FOR FURTHER INFORMATION • Copies of report available from: Centre for Business Research University of Cambridge Top Floor The Judge Business School Building Trumpington Street Cambridge CB 2 1 AG • Website: www. cbr. cam. ac. uk • David Connell dc@davidconnell. org 22