Process-Based vs. Product-Based Innovation: Value Creation by ...

Technovation 32 (2012) 179–192

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Process-based vs. product-based innovation: Value creation by nanotech ventures Elicia Maine a,n, Sarah Lubik b, Elizabeth Garnsey b a b

Beedie School of Business, Simon Fraser University, Vancouver, Canada Centre for Technology Management, University of Cambridge, Cambridge, UK

a r t i c l e i n f o

abstract

Available online 26 November 2011

Nanotechnology is frequently heralded as the next wave of technological advance, poised to enable radical innovation across many industries. But as yet little is known about how firms will ultimately create that value. We do know that nanotechnology is based on process innovation, a category of innovation less well understood than product innovation. And we know that new ventures are an important vehicle for commercializing radical technology. As new ventures seek to commercialize nanotechnology, they evolve value creation strategies to better link fundamental scientific advance with the creation of value for users and investors. This paper asks ‘‘How do the successful value creation strategies of technology ventures differ in process vs. product-based innovation?’’ An investigation of 12 ventures representing the extremes of value creation through process-based (nanotech) and product-based (fuel cell) innovation reveals significant differences in their value creation challenges, in the mechanisms of technology–market matching and alliance building, and in their levels of experimentation. Ventures exploiting process innovation faced greater uncertainty in their value chain positioning, market breadth, customization, and the changes required of their customers in contrast to product-based ventures. Our evidence shows that nanotechnology ventures benefit from prioritizing technology–market matching, alliance building and experimenting with technologies in new value networks. & 2011 Elsevier Ltd. All rights reserved.

Keywords: Value creation Nanotechnology Process-based innovation Generic technology Radical innovation Nanomaterials Technology commercialization Value networks

1. Introduction Process-based innovation requires different management and commercialization strategies from those of more frequently-studied product-based innovation (Linton and Walsh, 2008; Utterback, 1994). A product innovation typically refers to an assembled product, and can be sold to a customer when manufactured, whereas a process innovation enables new products or enhanced cost/performance attributes in existing products, and is at least one step removed from the final customer. A key example of this type of innovation is the emerging sector of nanotechnology. Many countries and companies have pinned expectations of growth and renewal on the prospect that nanotechnology will enable new or substantially improved products across many sectors of the economy. In 2008, national governments and corporations spent over $10 billion and over $8 billion respectively on nanotechnology research and development (R&D), and venture capitalists invested over $1 billion (Lux Research, 2009; Plunkett Research, 2008). But although investment in these companies is viewed as a stimulus to economic growth and as an enabler of

n

Corresponding author. E-mail address: [email protected] (E. Maine).

0166-4972/$ - see front matter & 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.technovation.2011.10.003

further technological innovation (Islam and Miyazaki, 2010; Sargent, 2008; Bhat, 2005), little is known about how their technologies can be successfully commercialized. The existing literature on nanotechnology commercialization does indicate that the commercialization environment has differences based on scientific intensity, interdisciplinarity, generic nature, and dependence on process innovation (Nikulainen and Palmberg, 2010; Linton and Walsh, 2008; Avenel et al., 2007; Maine and Garnsey, 2004). This paper aims to answer the question ‘‘How do the successful value creation strategies of technology ventures differ in process vs. product-based innovation?’’ To do so, we compare and contrast strategies from 12 ventures representing the extremes of value creation based on science-based process and product innovation; in this study, nanomaterials represent process innovation, and fuel cells provide an example of sciencebased product innovation. While large firms dominate patenting in nanotechnology (Avenel et al., 2007), they are often reluctant to initiate the commercialization of radical technology, preferring to acquire start-up ventures when they have successfully overcome market and technological uncertainty and proved commercial value (Maine, 2008; Chesbrough, 2003; Wield and Roy, 1995). And despite the dominance of large firms in nanotech patenting activity, in terms of the number of firms involved in nanotech R&D, there are many more small ventures

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experimenting with nanotech than there are large firms. In fact, of the approximately 2500 companies involved in nanotechnology R&D globally, it is estimated that 80% are new ventures (Lux Research, 2008). Thus, these ventures play a critical role in bridging the gap between scientific knowledge and wide-spread market acceptance. New ventures commercializing process technologies face daunting strategic challenges, some of which are not well understood by technology entrepreneurs or policymakers (Linton and Walsh, 2008; Maine and Garnsey, 2006; Braunschweig, 2003). This paper seeks to explore innovative commercialization strategies that address these challenges to see if they enable new ventures to exploit process innovation more effectively. We compare these to the strategies of ventures commercializing new product technologies, using fuel cells as our example. We begin with a review of relevant literature on which to ground the inquiry, followed by evidence from 12 technology ventures selected from a larger sample. These high and low value creating ventures are analysed to identify successful strategies for nanomaterials value creation and contrast them with effective strategies for product innovations. The observed value creation strategies are then discussed in the context of technology commercialization literature, and used to draw conclusions and recommendations.

2. Literature review In this section, we review the literature most relevant to our study. First, the literature relating to value creation by technology ventures is reviewed. Second, we review the sparse literature on value creation in sectors with process-based innovation. 2.1. Value creation by technology ventures The study of value creation is a growing field in management research, measured in a variety of ways (see Section 3.2) but generally linked to the strategic choices of the firm (Bowman and Ambrosini, 2000; Amit and Zott, 2001; Priem, 2007). We follow Priem (2007) in defining value creation as involving: innovation that establishes or increases the consumer’s valuation of the benefits of consumption (i.e., use value). When value is created, the consumer either (1) will be willing to pay for a novel benefit, (2) will be willing to pay more for something perceived to be better, or (3) will choose to receive a previously available benefit at a lower unit cost, which often results in a greater volume purchased. Thus, we consider value to be created by a technology venture when the importance of that technology to customers is demonstrated through sales, for which evidence is currently available (see Section 3.2); we recognize that later on this should be reflected in value capture and shareholder value. Key strategic choices of technology ventures in creating value are: (1) the selection of target markets and applications, (2) how broadly to attempt to commercialize technology, (3) whether to participate in the product market or the market for technology, and (4) whether to forward integrate along an industry value chain by acquiring or developing complementary assets. Market exploration and selection is a key capability of entrepreneurial companies (Penrose, 1959; Freeman, 1982). In particular, market selection is critical for ventures commercializing generic technology as different markets have different innovation ecosystems (i.e., all of the organizations who contribute to R&D, design, product commercialization and distribution for a new product and its complements) with differing levels of market uncertainty (Adner, 2006). Market uncertainty can be reduced by

choosing target markets and applications where no complementary innovations are required from other players before a technology can be commercialized (Adner, 2006), where the enabled product does not require new skill sets from customers, and where the enabled product attributes are easily observed and trialled (Rogers, 1983). Near term substitution applications also lower both technological and market uncertainty relative to emerging applications (Leonard, 1998). Thus these decisions greatly impact the uncertainty associated with technology ventures. Value creation is also influenced by the breadth of markets a new firm pursues. Neckar and Shane (2003) recommend attempting to commercialize technology in many distinct markets, arguing that this will improve value capture and reduce market uncertainty by giving more chances for success. Gambardella (2008) argues that a firm will maximize value capture by licensing broadly outside of its core market. In contrast, Davidow (1986) in a pioneering study recommended a narrow focus, and that a firm should only enter markets where it is confident that it can capture at least 15% of the market. However, financial constraints limit the number of markets most ventures can target, especially if they also need to forward integrate and if customer needs and industry ecosystems vary widely between those markets (Maine and Garnsey, 2006; Maine et al., 2005). The market for technology is the market for selling or licensing technology between firms (Arora et al., 2001; Gans and Stern, 1993). Participating in the market for technology generally captures less value for the firm than manufacturing products enabled by the technology, but is an attractive option for new technology ventures that lack necessary capabilities and complementary assets. Teece also argues that it allows a venture to share risk with its licensees 1986. Strong intellectual property rights are essential for this commercialization strategy (Arora et al., 2001; Gans and Stern, 1993; Teece, 1986). Gambardella (2008) recommends licensing a generic technology into any markets where it will not impinge on a firm’s core market profitability, and argues that licensing becomes more attractive in fragmented markets. Table 1 summarizes several scholars’ rationale for favouring the market for technology over the product market. However, entering the market for technology is not always an option for early stage firms, as their technology may not be sufficiently developed to entice other firms (Minshall et al., 2008). Technology ventures also make a strategic choice as to how far downstream to integrate into the industry value chains of each of their target markets. (By market, we refer to potential buyers (and existing sellers) in a unique industry segment, such as automotive, consumer electronics, biotech/healthcare, sporting goods, energy, etc. We define market in this way as the potential alliance partners and desired product attributes vary significantly between these divisions, whereas they do not vary as significantly between applications within, for example, consumer electronics.) Christensen et al. (2004) argue that there is an optimal degree of forward integration – the decoupling point – beyond which the design and manufacturing interdependencies in an industry value chain are more predictable. This decoupling point may shift over time, as a technology becomes better understood and fewer downstream interdependencies exist. To cite an example taken from the disk drive sector: the decoupling point was between the integrated computer system and the customer until the mid-1980s, then between the disk drive module and the computer for several years, later between the magnetic recording head and the disk drive, and then upstream to between the disk and the magnetic recording head (Christensen et al., 2004). Downstream integration of activities (as far as the decoupling point) reduces uncertainty as well as increasing scope for value capture. If decoupling happens to occur at the point where a firm can claim intellectual property in the technology, licensing would be optimal.

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Table 1 Technology commercialization recommendations for reducing market uncertainty. Context

Theory/empirical

Level(s) of analysis

Advice for reducing market uncertainty

Capturing profit from innovation

Theory

Innovation and firm

Innovation ecosystem

Theory

Value chain of innovation

Theory

Innovation ecosystem and firm Firm

Contract out, avoid commercialization until a dominant design has emerged (unless in a position to impact the dominant design) Pick innovation ecosystem with lowest market uncertainty

Product market vs. the market for ideas

Theory

Firm

Markets for technology

Theory and empirical Theory

Technology sector and firm Technology and firm

Align commercialization strategy with firm’s commercialization environment (in terms of IPR and Overturning/Reinforcing Incumbent Complementary Assets) NTBFs remain upstream and participate in the market for technology License generic technologies in multiple markets

Technology and firm

Commercialize in multiple markets

Product and firm Technology and firm

Pursue a niche market strategy Davidow (1986) Limit number of markets, choose near term substitution markets Maine and Garnsey with lower hurdles (2006) in terms of regulations, complementary innovation, and process innovation

Markets for technology University start-ups

Theory and empirical Marketing high-tech products Theory Advanced materials ventures Theory and case studies

Forward integrate to decoupling point

The uncertainty faced by a technology venture is impacted by all of these strategic decisions, but what outcome these choices may have is subject to debate. These decisions are challenging for all firms, but have distinct implications for firms exploiting process innovations. 2.2. Value creation in process-based innovation: nanotechnology and advanced materials Although process innovations are highly intertwined with downstream products, process-based innovation requires different management and commercialization strategies than the better studied product-based innovation (Linton and Walsh, 2008; Utterback, 1994). For example, process innovation in emerging fields such as nanotechnology is often associated with high levels of uncertainty regarding the eventual manufacturing costs, and steepness of the learning curve (Linton and Walsh, 2004). In addition, there is a need to convince customers to adopt complementary downstream process innovations (Maine and Garnsey, 2006). Nanotechnology can be characterized as process-based innovation (Linton and Walsh, 2008). To date, empirical studies of the emergence of the nanotechnology field have mainly relied on patents or scientific papers as an output measure (for example, Zucker et al., 2007; Avenel et al., 2007; Islam and Miyazaki, 2010). These studies, while identifying valuable trends and offering observation on firm formation and knowledge productivity strategies, do not offer any guidance on commercialization strategies. There has been some limited qualitative research offering such guidance. These include including studies into the manner in which incumbent firms innovate in the new field of nanotechnology (Rothaermel and Thursby, 2007), the knowledge acquisition and integration characteristics of research projects in bionanotechnology (Rafols, 2007); strategies for overcoming barriers to commercialization faced by nanomaterials ventures (Maine and Garnsey, 2004; 2007), business models for nanotech spin-outs (Lubik and Garnsey, 2008) and internal corporate venturing strategies for nanomaterials commercialization within incumbent firms (Maine, 2008). There is now a need to compare the commercialization strategy of nanotechnology ventures with that of other types of ventures in order to understand their specific challenges. It has been proposed that nanotechnology follows the patterns of innovation in other process-based sectors, such as advanced

Teece (1986, 2006)

Adner (2006) Christensen et al. (2004) Gans and Stern (1993)

Arora et al. (2001) Gambardella (2008) (DRUID) Shane (2004)

materials, more closely than product-based innovations (Linton and Walsh, 2008). Thus the related literature on value creation in advanced materials should be considered. First, value creation is a long term endeavour in this sector: the typical timeframe for an advanced materials venture to commercialize their first product is estimated to be 10–15 years (Maine and Garnsey, 2007). This timeframe does not fit well with most investors. Second, these delays entail uncertainty and high R&D costs. Partly to share such costs there is a high level of inter-firm partnership formation and industry–university partnership in the advanced materials sector (Baba et al., 2009; Hagedoorn and Schakenraad, 1991): industry– university linkages are also vital in the emerging nanotech sector (Darby and Zucker, 2005). As in other capital intensive fields, incumbent firms in advanced materials have been outsourcing more of their in-house R&D by monitoring technology ventures and acquiring the successful ones to renew their own technological capabilities (Pisano, 2010; Chesbrough, 2003; Wield and Roy, 1995). Third, the generic nature of advanced materials technology, which allows for applications in multiple markets, provides more potential for value creation, but amplifies the value creation challenges set out in Section 2.1. Technology–market matching, alliance building, raising financing and demonstrating value in specific applications are all proposed as critical to value creation for advanced materials ventures (Maine and Garnsey, 2006).

3. Methodology Value creation strategies for ventures with process-based innovations are identified by studying firms that have successfully created value and comparing them to successful product-based innovation ventures, using a case study method. The complex nature of value creation and firm strategy in an emerging sector suggest that context and depth are required to gain sufficient insight, thus making case study research appropriate (Yin, 2003; Eisenhardt and Graebner, 2007). The lack of primary data in the area of inquiry also points to the utility of case study research (Yin, 2003). From a larger sample of 33 firms the authors interviewed from the high-tech clusters surrounding Boston, San Francisco, Cambridge (UK), Vancouver, and Toronto, 12 ventures were identified as the highest and lowest value creators, suitable for case comparisons (discussed further in 3.3). Supplementary interviews

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were conducted with founders, CEOs, COOs and/or chairmen to gather further qualitative experiential data on commercialization challenges and quantitative evidence on the evolution of value creation metrics until 2008. Publicly available quantitative data (through such secondary sources as Lexis Nexis, Dun and Bradstreet, and www.uspto.gov) was also gathered including patents, employees, news releases on alliance partnerships and revenue estimates. The firms have been anonymized in accordance with confidentiality requests from the interviewees. The firms are, in all key respects, ventures, despite their wide of range of ages (5–35 years), because the timeframe to profitability is so much longer in a science-based sector than in other technological fields (Pisano, 2010; Maine and Garnsey, 2006). In the IT sector, Google and Facebook are very young and yet dominant firms: Google, founded in 1998, achieved a market capitalization of over $200 billion within a decade, and Facebook, founded in 2004, achieved an implied market capitalization of $15 billion within just 3 years. In stark contrast, the ventures we study here generated a median annual revenue of $12 million after a median time from founding of 12 years. 3.1. Operationalizing process innovation value creation model variables Based on a model of value creation in advanced materials ventures developed earlier (Maine and Garnsey, 2006) we identify the constructs relevant to our research question and operationalize these as variables, as shown in Table 2. From interviews,

we had objective values for process innovation, requirement for complementary innovation, target markets, value chain position, prototype development, and access to finance. From the website uspto.gov, we obtained objective measures based on patents which are used to represent ability to demonstrate value. We did not use prototype production for this purpose as it was not a differentiator: all but one of the ventures in our sample had created a prototype. From the databases Mint Global and Lexis Nexis, we supplemented our interview information on access to finance, by quantifying the amount of venture capital (VC) financing raised. The three variables which required coding by the authors (because the interviewees could not assess their own firm objectively relative to the other firms) were the nature of the technology (how radical), access to complementary assets, and lack of continuity, observability, and trialability of the technology. These were assessed by coding primary and secondary data. For the nature of the technology, we followed Leifer et al. (2000) in defining radical innovation as technology enabling products with ‘‘(1) wholly new benefits; (2) significant (i.e., 5–10 times) improvement in known benefits; or (3) significant reduction (i.e., 30–50% in cost.’’ Incremental innovation, on the other hand, was the category assigned to technology enabling products with small (i.e., o20%) improvement in known benefits or small (i.e., o10%) reduction in cost. Moderately radical innovation was in between the two. For access to complementary assets, the authors identified alliance partners as of 2006, assessed complementary assets held by different partner firms, assessed the depth of the partnership relationship indicated by the data, and translated

Table 2 Operationalization of value creation metrics.a Conceptual construct

Proxy measure

Explanation

Process innovation required by customer

Yes/no

Does the firm requires downstream process innovations by customers

Radical technology

H/M/L

H—drastically improved performance, production cost or both M—enable significant improvement in known attributes or cost reduction L—enable incremental improvement in known attributes or cost reduction

Upstream position in value chain Upstream/midstream/ downstream

U—two or more intermediaries between firm and final customer M—one intermediary between firm and final customer D—sell directly to end consumer

Requires complementary innovations

Yes/no

Does adoption of this technology rely on complementary innovations

Multiple marketsb

Number of target markets

1—Firm is targeting only a single market, i.e., a single unique industry segment, such as automotive, consumer electronics, biotech/healthcare, sporting goods, energy, etc., 2—Firm is targeting 2 markets x—Firm is targeting x markets

Lack of continuity, observability and trialability

H/M/L

H—difficult for the manufacturer and the consumer to trial before widespread use and discontinuous for customer M—difficult for the manufacturer or the consumer to trial before wide spread use L—relatively easy to trial and no lack of continuity

Access to complementary assets

H/M/L

L indicating no access to key alliance partners, M representing some access, (or full access to some assets but not to other necessary assets), and H for access to all required complementary assets

Access to finance

H/M/L

L indicates little access to finance, such as minor government grants or angel financing M indicates moderate access to finance, such as public venture funding or limited corporate investment H indicates high levels of access to finance, such as VC investment, and/or high levels of corporate investment, in addition to other forms of finance

Demonstrated value

Patents issued

Number of US patents issued

Value createdc

Revenue over time

Avg (2005–2008 firm revenue)/firm age

a

These variables are drawn from the Maine and Garnsey’s (2006) Value Creation Model. We define markets as unique industry segment with a distinct value network, such as automotive, consumer electronics, biotech/healthcare, sporting goods, energy, etc. The potential alliance partners and desired product attributes vary significantly between these markets, whereas they do not vary as significantly between applications within these markets. c Value creation proxy ¼average revenue from 2005 to 2008 divided by age L ¼0 to 1/2 median; L–M ¼1/2 median to median; M ¼median to 2  median; M– H ¼2  median to 4  median; H 44  median. b

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these assessments into a rating of no access, limited access or high access to required complementary assets. For example, a contract research partnership which had a component supplier or OEM downstream in one of a venture’s targeted value chains would qualify as having limited access to design, production and manufacturing complementary assets, whereas co-development and/or investment partnerships with two or more large component suppliers or OEMs in targeted value chains would qualify as having high access. Continuity, observability, and trialability of the technology was assessed through secondary sources and by the authors’ knowledge of the technologies. A high rating indicated that it was difficult for the manufacturer and the consumer to trial before widespread use and that the technology was discontinuous for the customer. An example here is carbon nanotube composites replacing traditionally formed steel fuel lines in automobiles. A medium rating indicated difficulty for the manufacturer or the consumer to trial before widespread use. A low rating indicated relative ease in trial and no lack of continuity. Two of the authors coded the data independently, according to the scoring system outlined in Table 2, and arrived at levels of intercoder consistency of 91%, 88%, and 86%, respectively, which meet the required level of intercoder reliability (Pries and Guild, 2007; Cohen, 1960). A mutually acceptable coding was agreed where there were initial differences. 3.2. Measuring value creation output Value creation, our dependent variable, has been measured in a number of ways, including the number and importance of patents, prototype development, product commercialization, employee growth, revenue generation, rate of growth of revenues and initial public offering (IPO) capitalization (Utterback et al., 1988; Cooper, 1993; Stuart and Sorenson, 2003; Katila and Shane, 2005; Hicks and Hedge, 2005). Revenues generated through market exchange are an objectively quantifiable measure of relative value creation and are stronger evidence of commercialization than alternative artefacts. For an investigation of successful R&D practices, highly cited patents are an excellent indicator; however, for an investigation of successful commercialization strategies, patents are not sufficient. As such, revenue generation and revenue growth are the preferred proxies for value creation by technology ventures (Utterback et al., 1988; Zahra, 1996; Almus and Nerlinger, 1999; Pries and Guild, 2007; Maine et al., 2010). Firm revenues are most appropriate as a metric when this revenue is reflective of value creation through the process and product innovations we are observing (i.e., not for a multidivisional or widely diversified firm), as is the case for our sample. Revenue is a practical value creation proxy for both process and product innovation ventures as it reflects how the innovation is valued by the market. Because of the emergent nature of this sector and the varied ages of the firms in our sample, we use revenue growth as our primary proxy for value creation. Our measure evaluates the growth in revenue which has occurred since the firm was founded. Because revenues are frequently irregular for early stage technology ventures, we took the average revenue over 4 years and divided that by the age of the firm. Hence, our measure becomes (avg. (2005–2008 firm revenue))/(firm age). This metric is similar to one used by Utterback et al. (1988) to assess long term success in technology ventures. 3.3. Case selection and comparison Value creation was measured for all 33 sample ventures, including 18 nanomaterials ventures and 15 fuel cell ventures. We excluded from the analysis firms that were acquired and

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integrated into the acquiring company during the study period and those which had not yet commercialized a product. The sample was then divided into 5 bands of value creation from low (L) to high (H). As the value creation performance of these companies is not normally distributed, categorizing their performance in relation to the mean was inappropriate. Instead we found the median value creation metrics and based value creation categories around that: L¼0 to 1/2 median; L–M¼1/2 median to median; M¼median to 2  median; M–H¼2  median to 4  median; H44  median. The companies creating more than twice the median value were selected for analysis, but two clearly stood out with more than 4 times the median value created: one nanomaterial and one fuel cell venture. These two high value creators, along with the three nanomaterials ventures and three fuel cell ventures rated ‘‘medium– high’’, were therefore selected as examples of successful value creation strategies. (One other firm originally appeared in this category, however, as it focussed on both nanomaterials and fuel cells, we could not categorize it as one or the other and chose to exclude it.) In contrast, of the ventures that had commercialized their technology, two nanomaterials ventures and two fuel cell ventures rated ‘‘low’’. These 12 ventures represent the extremes of value creation, and, as such, are enlightening for case study comparison (Eisenhardt and Graebner, 2007). While our sample and method do not offer statistical generalizability to the entire population of process-based ventures, using case studies to reveal patterns in cases selected with a clear rationale allows for analytical generalizations: development and extension of theory through empirical evidence (Gibbert et al., 2008). Brief case studies of the selected ventures present evidence on the relevant value creation variables (Maine and Garnsey, 2006) discussed above, and on each venture’s commercialization strategy and evolution. By analysing the case studies in the light of appropriate and consistent variables identified in relevant literature, we can closely adhere to the data during analysis in order to objectively identify patterns (Miles and Huberman, 1994; Eisenhardt, 1989). The technology characteristics and commercialization strategies of the high and low value creators are compared and contrasted in light of extant literature in order to identify key differences between strategies for process vs. product-based innovation.

4. Case study evidence The ventures in our sample were founded between 5 and 35 years before the study, with a median age of 12 years. Revenue ranged from $140 thousand to $190 million (in 2008), with a median revenue of $12 million. A range of patenting strategies are evident, with one venture holding no patents, one holding 150 patents, and most holding between 21 and 50 patents. The nanotech (process) ventures have been commercializing technology processes used in opto-electronics, conductive polymer composite automotive components, drug delivery, photovoltaics, medical devices, nanoparticle standards testing kits, and biosensors. The fuel cell (product) ventures have been commercializing fuel cell products for energy applications, from PEM fuel cell back-up power units to SOFC co-generation units. 4.1. Nanomaterials high value creator NM1 was founded to commercialize a radical generic nanomaterials process. NM1 was started with an in-house manufacturing strategy to sell nanoparticles and a broad market focus as the founder saw potential for applications in at least six separate markets. When a new CEO replaced the founder, he shifted more

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focus to alliance building and raising finance. Given high technological and market uncertainties and the economic downturn of 2001, NM1 experienced severe financial pressures in trying to enter multiple markets, and therefore the CEO adapted NM1’s commercialization strategy. He temporarily narrowed NM1’s market focus to a single market, raised finance, broadened their focus to two target markets, and restructured. In the restructuring, a parent company was formed with a licensing revenue model, while segmentation strategy was simultaneously pursued through market-specific manufacturing subsidiaries and spinoffs. Each manufacturing entity was able to focus on market-specific alliance creation, process and product development, manufacturing, marketing and financing. The ‘‘parent’’ firm held all of the IP and focused on the generic aspects of their technology development (such as scale-up of its key nanomaterials processes) and on assisting with alliance creation. NM1 then broadened its market scope further to four target markets. The IP umbrella firm was able to raise government grants and multiple rounds of VC financing. The market vertical manufacturing firms were able to raise financing independently, with exclusive rights to the IP in their own market. 4.2. Fuel cell high value creator The highest fuel cell value creator, FC1, was founded to commercialize products from its PEM fuel cell technology and expertise. FC1’s founder initially adopted a niche strategy with a view to later enter a broader market. While FC1’s technology was radical and faced established substitute products, the initial focus on a single market and absence of process innovation requirements for downstream parties kept the technology uncertainty at a moderate level. At founding, it was difficult to secure investment in fuel cells, so the decision was made to design test equipment necessary for fuel cell development. This ‘‘pick and shovel’’ niche strategy, to use a gold rush metaphor, allowed FC1 to grow in a smaller market. The revenue stream generated from the test equipment design and service model eventually allowed the company to return a small part of its focus back to the manufacturing of fuel cell technologies, such as back-up power, and to secure financing. FC1 also acted as a development partner in large hydrogen infrastructure and transport projects with a number of global players. The company’s hybrid revenue model, focused on test equipment, allowed FC1 to grow to a size where a mid-cap IPO was feasible. A few years later, the need to expand resulted in spinning-off a key division, and acquiring their main competitor. As the test equipment market became saturated and sales to their main customer began to drop off, FC1’s leadership team took the knowledge of players and technologies that they had accumulated as a service provider and began to shift toward a manufacturing strategy and specific markets. A new, more operationally-oriented CEO was brought on, and he completely phased out test equipment and test services in favour of standardized platforms in power systems which could fit into existing vehicles. 4.3. Nanomaterials medium–high value creators NM2 was a pioneering nanomaterials venture which consistently pursued an in-house manufacturing strategy from an upstream position in their targeted industry value chains. Rather than being formed around an already developed technology, NM2 was formed by a serial entrepreneur to exploit anticipated growth in advanced and nanomaterials. Key scientists were hired to develop the radical process technology. NM2 benefited from patient angel investment, from government grants, and from a highly respected scientific board of advisors.

The founder and management team of NM2 quickly chose an in-house manufacturing strategy, but had difficulty initially choosing target markets. To lower risk and uncertainty, they decided to focus on markets for substitute products and to follow promising alliance partners in their target market and application selection. In addition to patenting their IP, scientists at NM2 wrote journal articles and white papers and attended conferences to disseminate the attributes of their novel nanomaterials technology to potential alliance partners. NM2’s substitution strategy provided them with complementary assets and lowered their time to revenue generation. It took 10 years to commercialize a product based on their proprietary nanomaterials technology – the first was an automotive part – followed by success in the consumer electronics, power generation and communications industries. With continuing patient angel investment, the founder decided against venture financing, and instead paced NM2’s growth through retained earnings. Concurrently, NM2’s scientists developed IP for products in emerging industries. Although NM2’s founder and CEO remained throughout the observed life of the venture, significant operational, business development, and marketing influence was exerted by other experienced executives who were brought in at various stages in the growth of the firm. NM3 was founded as an advanced materials development company and moved into nanomaterials. The founders used their own money and angel investment to start the R&D company. Scientists at NM3 won several SBIR grants, and, as their R&D covered broad areas, NM3 began to operate as an incubator parent company, with subsidiaries and, later, spinoffs focussing on commercializing each novel process. NM3 pursued a licensing model from an upstream position in the space, aeronautics, transportation, eyewear, footwear, and biomedical device (biosensor) industries. The founder and CEO, a materials scientist with an MBA, brought experience with technology management, business development, and military contracts with a large materials science firm. He brought on experienced entrepreneurs as CEO of each of the spinoff ventures. Strong military partnerships, contracts and R&D grants provided them with all required complementary assets. NM3 was able to generate revenues from contract research for military and aerospace applications. The first commercialized products based on NM3’s nanomaterials process (through licensing) came 6 years after founding. NM4 was founded to commercialize several novel nanomaterials’ process technologies. With the founder’s prior entrepreneurial experience and connections and looking to capitalize on the emerging nanotechnology market, he was able to raise substantial VC financing into NM4 before commercializing any of its technology. A strong, large patent portfolio was rapidly developed, both with internal development and in-licensing from leading US university scientists. Several government grants and contracts followed. NM4’s leadership team initially pursued a licensing revenue model from an upstream position in the consumer electronics, communications, power generation and storage, and biosensor industries, with strong alliance partnerships and access to complementary assets in each of those industry value networks. They incorporated manufacturing, however, when they realized that they were not generating enough revenue with licensing and that they were better positioned than many of their alliance partners and customers to develop product components from their nanomaterials’ processes. 4.4. Fuel cell medium–high value creators FC2 was a fuel cell venture founded to commercialize PEM fuel cell technology. Revenue was generated within three years of founding through customization of demonstration equipment for

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larger firms. The company went public early in its life, and investor pressure would later influence strategic decisions. At first, a great deal of time was spent by scientist and engineers at FC2 on its upstream activities, working on its components to increase the reliability and dependability of the product. During these early years, the company focus was mainly on residential and remote power generation and later the decision was made to branch into power modules for materials handling. When reliable components became more readily available, the founder and CEO soon chose to position FC2 farther downstream and closer to the customer in potential markets in order to learn more quickly. Eventually, due to investor pressure for demonstrate profitability and consistency, the CEO felt the need to focus on a single market – materials handling – where the company could add significant value and achieve significant and consistent sales volumes with a range of ‘plug and play’ products. This led to a standardized product that could be used in applications such as forklifts in place of traditional batteries, with no or little modification to the rest of the customer’s extant systems. The founder remained CEO throughout the observation time. FC3 was founded by a former employee of a major power company in order to get involved in the significant potential he observed in unmet customer needs in portable and backup power. Maintaining a manufacturing with outsourcing model, the company was originally focused on back-up power solutions, and funded product development through partnerships and alliances. A few years later, FC3 acquired novel SOFC fuel cell IP from another small firm to branch into power generation. With inhouse knowledge, this new design was reinvented to fit with the perceived needs of the market, but more application specific design and integration skills were needed to get to market. A new CEO took over, and acquired a fuel cell venture with more application specific knowledge and product integration skills, and reorganized the venture to focus more on co-development and product sales. Initial fuel cell sales were to customers and partners in military mobile power, residential power generation, and remote backup power generation applications in order to demonstrate product performance, and also helped FC3’s development team to identify many of the most common problems that their customers face with regard to the adoption of SOFC fuel cells. With this knowledge, a standard product base was created. FC4 was founded in the mid-1990s to commercialize a proton exchange membrane (PEM) electrolysis technology for the production of hydrogen for energy solutions. Their early activities, and the resulting revenues, predominantly focused on project work with agencies interested in fuel cell products and hydrogen generation, with a small amount of lab equipment manufacturing. As the founders realized that widespread adoption of fuel cells and hydrogen powered cars was far in the future, they began focusing FC4 on other markets where hydrogen was traditionally used, such as power plants and fuelling. Venture funding, which also came with some investor pressure regarding firm direction, allowed the company to develop their technology, and a successful IPO allowed them to set up a manufacturing facility. FC4 continued to take on project work, but the senior management, still made up of several founders, realized that they were unlikely to become highly profitable if they did not standardize their product. They also began to limit project-based work to areas deemed to have with further commercial value. From the beginning, FC4’s strategy was based around selling a complete system based on dependable, high-quality PEMs, for which there was no appropriate suppliers. As such, they controlled many aspects of their value chain and created a nearly completely vertically integrated firm which sold directly to end users. The leadership team also reduced uncertainty by creating a

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number of standardized product lines, developed to be largely ‘‘plug and play’’. The company went private again near the end of this study, keeping the focus on standardization and beginning to focus on cost reduction. Partnerships with major incumbent firms and military allowed the company to refine their core technology and continue to be an important part of its strategy. At the end of observation, FC4 continued a small amount of work in back-up power for both industrial and military applications, keeping one military-specific fuel cell technology, but focused on PEM electrolysis and working with partners who could provide downstream fuel cell technology when required. 4.5. Nanomaterials low value creators NM5, a low value creator, was founded as a scientific instrumentation company and took on nanomaterials product development within that context. NM5 developed and manufactured micro- and nano-particles for use as reference materials in scientific laboratories. The founder’s strategy was to provide high reliability at a low price point, and lock in customers through high switching costs. Directly after founding, NM5’s scientists sourced the particles from a research institute, and separated, purified, and packaged them into reference products. Later, NM5’s scientists and technicians developed the requisite particle synthesis capabilities, and began manufacturing microparticles and later nanoparticles. Subsequently, they acquired new technologies and technical capabilities to build on their manufacturing expertise and product breadth. They sold their products into scientific laboratories, required no complementary innovations, and developed no key alliance partners. NM5’s scientists developed new techniques and technology and published several scientific papers. However, the founder chose not to patent their techniques because some of the procedures were in the public domain with expired patents and he preferred to avoid the expense of patenting. NM5’s reference materials were sold directly to its end consumers, from a downstream position in the value chain of its target market. No external financing was raised and the founder remained as CEO throughout the life of the venture. NM5 was acquired toward the end of the observation period by a multinational firm also selling scientific lab supplies. NM6 was founded to develop and commercialize their advanced materials and nanomaterials technologies in microand nano-filtration applications. Their target markets were wastewater treatment for municipalities and filtration in the energy sector. Having experienced success in developing and patenting new technologies and securing government grants, the founder of NM6 decided to pursue a contract research and licensing revenue model and occupy an upstream position in its targeted value chains. He chose a mainly substitution strategy. The scientists at NM6 were very good at procuring government grants. Revenue was also raised from contract R&D for corporate customers and small volume commercialization, but, despite decades of effort, NM6’s team was unable to commercialize their proprietary technology in large volumes or to attract angel or VC investment. The founder was a PhD scientist who remained CEO throughout the life of the venture and the venture maintained a research culture which helped with procuring and performing contract research but hindered further commercialization. NM6 began with a licensing and contract research model, experimented with 2 joint ventures, one of which did manufacturing, and returned to a licensing and contract research model when both joint ventures failed—one due to technical difficulties and a breakdown in the relationship with their co-investor/ alliance partner, and the other because it relied on a change in government regulations which did not occur. Eventually, NM6 was acquired by a much larger systems integrator in its main

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target market, in the hope of realizing the value that NM6 could not accomplish alone. 4.6. Fuel cell low value creators FC5 was founded with the intention of developing and commercializing PEM fuel cell power modules, with a focus on powering scooters and electric bikes. The founder, a PhD chemist and engineer, had previous experience at other fuel cell start-up ventures. The venture took on R&D in fuel cell membrane electrode assemblies (MEA), stacks, modules, integration into scooters, and hydrogen storage systems. The founder’s strategy was to develop and manufacture a drop-in replacement for batteries in electric bikes and scooters, with a target of meeting or exceeding all performance parameters, and significantly extending the driving range over electric bikes and scooters. In addition, they developed PEM fuel cell power modules for uninterruptable power supply. As an intermediate source of revenue, FC5 sold fuel cell stacks to competitors and customers further down the value chain. FC5 went public about 5 years after formation in a time of enthusiasm for fuel cells, but transitioned back to a private company when share prices lowered. A major shareholder (and later co-owner) was a Chinese fuel cell company with plans to manufacture FC5’s fuel cell products for sales in Asia. The founder of FC5 remained CEO throughout the observation period. Geographically, FC5’s founder first targeted the Asian market because of the tremendous market opportunity for powering scooters and bikes there. Their joint venture with a Chinese company enhanced their business development opportunities, but had not led to significant revenue generation during the time of observation. FC6 was founded to commercialize lab-scale PEM fuel cell applications, test equipment and generators for clients with specific needs. The company began with the intention of pursuing a licensing strategy but the founder soon settled on manufacturing with some outsourcing in order to fully develop the product. An early player in fuel cells, at first few components were available and there was a high learning curve among suppliers, so the company initially did a great deal of component manufacturing themselves, working with downstream integrators. Selling these components to others was one way to generate some early revenue; however, in order to reduce dependence on other players, reduce up-front costs and increase their own control over their product, FC6’s leadership team began shifting its offering toward an integrated system that could be sold to a significant customer in order to generate revenue. The transition from a more customized R&D company to a more commercial and market-focused entity proved challenging, particularly the ability to choose from among a number of possible markets and applications and engage a partner. FC6 went public at a time when fuel cells benefited from investor enthusiasm, but later found that being a prerevenue company in an industry with disillusioned investors created significant pressure. FC6 was acquired towards the end of our observation period, having maintained the same leadership from founding until acquisition, and not having created substantial commercial value.

5. Discussion and analysis In this section, we compare and contrast commercialization strategies of the high and low value creators, differentiating process innovation from product innovation across our key variables. Next, we analyse the value creation mechanisms used by the firms, then the evolution mechanisms they used to adjust their value creation strategies. Finally we compare our findings to the recommendations in current literature.

5.1. Process innovation vs. product innovation To examine commercialization strategies, we first compare and contrast the value creation metrics of sample ventures commercializing process innovation to those commercializing product innovation. As depicted in Table 3, all of the successful ventures commercialized radical technologies, required complementary innovations and encountered some barrier to making their technology observable, trialable, and use-continuous, the factors promoting diffusion. There were similarities in their approaches to overcoming these commercialization challenges. Both product and process ventures demonstrated value through the issuing of patents and the creation of prototypes. Both of the highest value creators (NM1 and FC1) had issued more than 20 patents, and had created product prototypes or demonstrated their process on a pilot scale before raising VC or public financing. Through partners, all of the successful ventures had strong access to the required complementary assets for commercialization, with the exception of FC4, which had only a medium level of access to required complementary assets. This is in strong contrast to the low value creators, who were largely unable to secure high access-to-resources through partnerships (Table 4). Lastly, all successful ventures had some access to finance beyond government grants (again, in contrast to the low value creators), although several made creative organizational and revenue model decisions based on increasing their access to financing. The firms that created value most effectively in both product and process innovation participated in the market for technology to help with access to financing and to demonstrate value, before scaling up their own manufacturing. NM1 began with an upstream, nanoparticle manufacturing strategy, which morphed into an upstream licensing model together with a midstream nanomaterials and component manufacturing model; the firm used its independent subsidiaries as a vehicle to attract additional financing and alliance partners. FC1 pursued a service revenue model initially in order to finance their core technology development, and then moved to a hybrid service and manufacturing revenue model. More broadly, 2/3 of ventures participated in the market for technology. There were also notable differences in commercialization strategy between process and product-based firms. All of the fuel cell ventures focused on developing products that were substitutes for incumbent technologies in existing applications, whereas two of four successful nanomaterials ventures also focused some of their R&D on enabling new/emerging applications. Each of the successful nanomaterials ventures targeted at least four markets while the successful fuel cell ventures mainly targeted one or two markets (one evolved to target three). All of the successful nanomaterials ventures customized their processes to each market and application, whereas the successful fuel cell ventures all standardized their products. All of the successful nanomaterials ventures required process innovations from their customers, whereas three of the four fuel cell ventures did not (and the one which did require process innovation did not require process innovation in all of its target markets). The fuel cell firms that succeeded in creating high levels of value appeared to engage in forward integration to the decoupling point of their targeted value chains to reduce uncertainty (for example, designing modular energy components which were drop in replacements for their substitutes, including a standard interface); while three of the four successful nanomaterials ventures positioned upstream, and one moved from upstream to midstream. Interestingly, the firm creating the highest value among the nanomaterials ventures started by operating at an upstream position and evolved into to an upstream generic parent company with midstream subsidiaries/spinoffs, manufacturing components for the value chains of its targeted markets. This organizational innovation and adaptation made it possible to attract substantial VC financing for

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Table 3 Value creation metrics for successful process-based innovation vs. product-based innovation. Venture

Nanomaterials (process)

Value creator Radicala No. of markets Customization Value chain position Obs., trial, continuousb Requires customer process innovation Complementary innovation Demonstrated value/ patents Access to comp. assetsc Access to finance Revenue modeld Application

Fuel cell (product)

NM1

NM2

NM3

NM4

FC1

FC2

FC3

FC4

High H 6-1-2-4 Customized UpstreamMidstream M Yes

Med–high H 5 Customized Upstream

Med–high H 4 Customized Upstream

Med–high H 4 Customized Upstream

High H 1-2 Standardized Downstream

Med–high H 1-2 Standardized Downstream

H Yes

M Yes

H Yes

M No

Med–high M 2-1 Standardized MidstreamDownstream M No

M No

Med–high H 2-3 Standardized Downstream-Midstream and Downstream M Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

21–50

51–100

1–10

21–50

101–150

1–10

1–10

51–100

H H M-L, M, MO

H L–M M

H L–M L, O

H M S-S, M-M

H L–M M

H M M, MO

M M S, M

Subst. and emerging

Subst. and emerging

Substitution

Substitution

Substitution

Substitution

H H L-L, M, MO Substitution Substitution

a

A measure of the level of differentiation of enabled product attributes and/or the decrease in manufacturing cost. A measure of the level of difficulty with observation, trial and continuity of the enabled product attributes. A measure of the venture’s access to the complementary assets required to commercialize their product. d L¼ Licensing, M ¼Manufacturing, MO ¼ Manufacturing with Outsourcing, S ¼ Contract Services, O ¼other. b c

Table 4 Value creation metrics for high vs. low value creators. Venture

Nanomaterials (process)

Value creator Radicala No. of markets Customization Value chain position b

Obs., trial, continuous Requires customer process innovation Complementary innovation Demonstrated value/patents Access to comp. assetsc Access to finance Revenue model Substitute/emerging

a b c

Fuel cells (product)

NM1

NM5

NM6

FC1

High H 6-1-2-4 Customized

Low M 1 Standardized

Low M 2 Customized

High H 1-2 Standardized

UpstreamMidstream M Yes

Downstream Upstream-MidstreamUpstream M M No Yes

Yes 21–50 H H M-L, M, MO

No 0 L L (no change) M Substitution

Subst. and emerging

FC5

FC6

Low H 1-2 CustomizedStandardized Downstream MidstreamDownstream M M No Yes

Low M 1 CustomizedStandardized UpstreamDownstream M Yes

No 11–20 L L S-L,S-L,S,M-L,S

Yes 101–150 H M S-S, M-M

Yes 1–10 L L MO, S-M, MO

Yes 1–10 M L L-M, MO

Substitution

Substitution

Substitution

Substitution

A measure of the level of differentiation of enabled product attributes and/or the decrease in manufacturing cost. A measure of the level of difficulty of observation, trial and continuity of the enabled product attributes. A measure of the venture’s access to the complementary assets required to commercialize their product.

NM1 and to exploit its generic technology more effectively. In contrast, among fuel cell ventures, the highest value creator venture generated much smaller amounts of self-financing through the sale of fuel cell test equipment before raising further funds through VC financing and financing through an IPO. Table 4 shows a comparison of value creation metrics between the highest value creators and the lowest ones in our sample. For the low value creators, lack of access to complementary assets and to financing was evident. Additionally, nanomaterials low value creators had a narrow market focus, targeting either a single market or two markets with substitution applications, compared with six target markets for the highest value creator. The lowest value creator among the nanomaterials ventures had a less radical

technology, manufactured products for a single target market, was fully forward integrated into that target market, pursued exclusively substitution applications, and failed to develop strong alliance relationships. This low risk strategy led to low rewards. The lowest fuel cell value creator cited finance as a key constraint, targeted a niche market, required both process innovation and complementary innovation in order to commercialize its products, and had insufficient access to complementary assets. These results clearly reinforce and extend Linton and Walsh’s (2008) proposal that process innovation differs significantly from product innovation. The most successful process innovation ventures all exploited the generic potential of their radical nanomaterials technology by focusing on four or more markets, from

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either upstream, or, in one case, midstream, positions in each targeted value chain. None of these high value creating nanomaterials ventures offered standardized solutions, instead tailoring their process to generate the attributes desired by each market and application. In contrast, the four ventures successfully commercializing product-innovation appeared to embrace forward integration to the decoupling point, developed substitute applications, and standardized ‘‘plug and play’’ products. These standardized modular systems allowed them to enter multiple markets with a more straightforward strategy than was open to the process innovation ventures and required less work for customers and partners. 5.2. Mechanisms for value creation Analysis of this sample revealed four value creation mechanisms found in the literature: technology–market matching, alliance-building capabilities, finance-raising capabilities, and demonstrating value (Maine and Garnsey, 2006). These mechanisms were observed in both process and product-based ventures, but differences were noted in the importance/difficulty of each mechanism for each type of innovation (Table 5). Technology–market matching, or picking an initial market, was difficult for both process and product-based ventures. However, the markets for product-based ventures were generally more obvious than those for process-based ventures. For example, interviewees in the process-based ventures recounted their initial ignorance as to which industries to target and which were appropriate applications for their technologies; they used technical conferences, publications, and tradeshows as major sources of customer leads and user innovation: We have considered dozens of different applications and the trick is to find different applications where the technology uniquely provides value, that is, where the price exceeds the costs of commercializing. (NM1) As for how they found about markets, [our founder] would go to tradeshows and customers would approach him looking for a solution to their problem. (NM5) In contrast, the market selection of product-based ventures was more straightforward, focusing on the level of demand and the profitability, rather than on the existence of markets: ‘‘We needed to find markets to demonstrate profitability and consistency.

We had to find out if there were markets where fuel cells make sense today, driven by investors and capital’’ (FC2). So, although market matching was highly important for both product and process innovation, the level of difficulty was higher for firms based on process innovation. Building key alliances is also vital to all of the sample ventures, but alliance building capabilities were of greater importance for process innovation-based ventures, as they targeted a greater number of distinct value networks and their demands on alliance partners were greater. The greater demands of process-based ventures on alliance partners result from their positioning higher up industry value chains, which make them more dependent on alliance partners for market and design information, and, secondly, because downstream process innovation is required of their alliance partners and customers if they are to adopt their radical process innovation. The CEO of the nanomaterials highest value creator, NM1, commented that, along with attending tradeshows and conferences to market their process technology, he had: developed a strategic marketing team which does opportunity analysis, looking at technology, markets and applications, and, after identifying promising opportunities, asking questions such as ‘where in the value chain should we play?’ and ‘who should we play with.’ The other successful nanomaterials ventures also put a great deal of time and energy into business development in terms of building strong alliance partnerships to align development objectives and to obtain access to complementary assets. The alliance partnerships of the product-based companies, on the other hand, were more about helping to obtain more accurate market information and to improve reputation and customer confidence: We pursued partnerships with customers who could also provide commercial direction. These have more appropriate time horizons and helped us move toward [specific markets]. (FC1) Our sales force spends a lot of time coercing and cooperating with people in order to make customers feel safer that there is an entire network of companies working together to make sure the product and all of the infrastructure needed will still be available 3–4 years down the line. (FC2)

Table 5 Value creation mechanisms and evolution mechanisms for process-based vs. product-based innovation.

Value creation mechanism Target market/value network selection Alliance building capabilities Finance-raising capabilities Demonstrating Value Evolution mechanism Experimentation with technical attributes Experimentation with value networks Experimentation with revenue model and value chain position Change leadership

Process innovation

Product innovation

Explanation for process innovation

More important

Less important

More important

Less important

Equally important Equally important

Equally important Equally important

More choices to be made because of broader range of market potential for ventures commercializing process innovation When higher in the value chain, more reliant on alliance partners. Partnership needs to withstand downstream process innovation requirements Longer time frame for process innovation, but often greater manufacturing plant costs for product innovation Access to finance and access to complementary assets dependent on demonstrating value in a specific application

More important

Less important

More to be done as process innovations are customized to each target market

More important

Less important

Of importance to some ventures

Of importance to some ventures

Of importance to some ventures

Of importance to some ventures

More to be done, as process innovation involves more markets. Also more difficult because relationships need to be stronger Experimentation in revenue model and value chain position happened in both successful and unsuccessful product and process-based ventures. May need to be paired with strong change leadership to be effective For experimentation with vastly different markets and moving organization from one priority and culture to another

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Thus, although alliance building capabilities were important to venture commercializing both types of innovation, the level of complexity was higher for process ventures. Building finance-raising capability is difficult for any sciencebased business (Pisano, 2010). The CEO of one of the unsuccessful process-based ventures (NM6) spoke of the difficulties with raising financing, citing ‘‘lack of money’’ as one of the biggest constraints to commercializing their technology and acknowledging that ‘‘[they] never had the capital to really commercialize the technologyy.’’ [and] ‘‘ythe technology is not an attractive investment for VC’s due to a long gestation period and lack of ‘sexiness.’ Raising financing is also interrelated with other aspects of commercialization strategy. One of the successful fuel cell ventures (FC2) suggested that ‘‘to investors, large markets are important, they make investors happy.’’ And one of the successful nanomaterials (NM1) ventures spoke of the constraints of VC financing, explaining: One challenge of this industry is the access of materials to new markets. VC backed ventures have a very short financial life in which to match product and manufacturing to an application because they may not match the company. It depends on the nature of the investors. (NM1) Thus the ability to raise finance, which is difficult for ventures commercializing either product or process innovation, needs to be linked to strategic choices such as technology–market matching, breath of markets, substitution vs. emerging markets, and revenue model. For example, both product and process-based ventures used creative revenue models to lower their external financing requirements. FC1 and FC4 both adopted a service revenue model that allowed them to generate the early revenue necessary to develop their technology with partner input. Four of the six nanomaterials ventures incorporated licensing into their revenue model (three high value-creators), for similar reasons. Demonstrating value in a specific application is difficult for both types of innovation. Although all but one of the ventures studied here had issued patents, and all had developed prototypes and commercialized products, the long time to commercialization for the process-based innovation demonstrates just how difficult it is. The CEO of the highest value creator of the nanomaterials ventures explained that ‘‘having a tool that can produce wonderful and varied chemistry’’ was like having ‘discovered a cure and y looking for a disease.’ An iterative process for matching technology and market must take place, alliances must be built, and then working prototypes need to be developed and adapted in order to demonstrate value. For several of the firms, both product-based and process-based, the inability to demonstrate sufficient value in one application led them to shift applications or even industries. As an example of this challenge: The first ‘‘disease’’ we identified and targeted was batteries for cell phones and laptops. However, the disease and the cure were not an ideal match. In this case, the need associated with the ‘‘disease’’ was energy time, whereas [NM1]’s ‘‘cure’’ was rate capability, so there was not a perfect fity. [NM1] was flexible enough to realize when the right ‘‘disease’’ can along that we had the ‘‘cure’’. In this case, [NM1] saw that within the medical devices space, the recharging rate was very important. For the fuel cell ventures as well, translating patented technology into working product prototypes and then testing those with potential customers is not straightforward, as evidenced by the moderate levels of observability, trialability and continuity of their technologies, and the need for complementary innovation by all of the successful fuel cell ventures.

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5.3. Evolution of value creation strategy Those ventures which adapted their value creation strategies did so through experimentation and change leadership. Experimentation was observed along three dimensions: technical attributes, value networks, and revenue models, as proposed by Maine and Garnsey (2006). Although experimentation along these dimensions was generally important for success, experimentation was clearly more important to the success of process-based ventures. The ability to manage this experimentation and evolve strategy to better suit the changing environment, discussed by Chesbrough (2010) as ‘‘change leadership,’’ was also shown to be critical to successful evolution and to harnessing the above value creation mechanisms. All of the ventures experimented with technical attributes, altering them to meet the performance attributes required by their customers in varying applications. However, assessing customer utility in different applications and altering technical attributes accordingly was far more of an issue for nanomaterial ventures, which provide customized solutions whereas fuel cell ventures provide standardized products wherever possible. All of the successful nanomaterials ventures customized their process for each application, whereas all of the successful fuel cell ventures standardized their products. For example, As we complete our initial commercial fuel cell product we are trying to focus our efforts on preparing a single standard item. This way we focus our learning and later we can distribute this learning across multiple products. (FC3) We note that there does have to be experimentation with technical attributes before establishing a standard, and standardization results in more focussed experimentation rather than closing off further experiments altogether, as explained by the CEO of FC1: The value of standardization is in how it enables innovation. There is strength in continuous improvement. Some people think that standardizing locks things down and would make the company resistant to change, but once a standard is established, it is more about change than a static state. (FC1) However, given the higher complexity of customized solutions in diverse markets, experimentation with technical attributes was more important for process-based innovation. Experimenting with value networks was also more important for process-based ventures than for product-based ventures, because of the greater breadth of markets (and thus value networks) targeted by process-based ventures, and because of their greater reliance on their alliance partners. To effectively experiment with value networks, a venture needs to engage in technology–market matching, alliance building, and change leadership. An example was given of value-network experimentation in a process-based venture that had effective change leadership: [Later] there was another change [from medical devices] y. because [the senior leadership] saw telecom as a still growing industry as opposed to others which were slowing down. They identified a need for improvement in particular components. [The CEO] changed 90% of R&D to the new field in just a few weeks and began demonstrations. (NM1) The product-based ventures studied here were most often working with the value networks of military energy generation and residential energy generation. Even when they ventured further into other value networks, they did so in a standardized fashion, wherever possible. They needed technology–market matching and alliance building capabilities, but required less of

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their alliance partners. The process-based ventures, on the other hand, needed to make bigger leaps in recognizing new relevant value networks, had to forge strong partnerships such that their allies would be willing to co-experiment and co-develop processes and components, and needed to make far greater shifts in R&D when changing value networks. Experimenting with revenue models, developing hybrid models and evolving those models, was important for both product and process-based innovation, in some cases allowing the venture to survive. The market for technology was a source of revenue for 2/3 of the process-based ventures and half of the product-based ventures. Along with manufacturing, licensing was more prominent for the process-based ventures whereas a service revenue model (such as contract research) was more prominent for the product-based ventures. NM1’s eventual hybrid revenue model with a licensing parent venture and segment specific manufacturing subsidiaries/spinoffs facilitated their high value creation. But this required extensive experimentation with their revenue model and their value chain positioning: When [the CEO] joined the company, they were developing unusual materials and sampling customers that they felt were important to work with them to try them in products. This was a low profit model because the quality could be high but the material was a very small part of the end value. For example, using nanomaterials in batteries greatly improves power and performance but is a very small part of the full cost of the product so they needed to focus higher up the value chain. For example, they began making batteries for defibrillators so they could prove this improved quality and performance.y. The initial model did not raise as much money. (NM1) Similarly, the highest fuel cell value creator (FC1) explained their experimentation with both revenue models and applications by saying ‘‘The lesson here is to reinvent at the right time and in the right way and to abandon some of your children at the right time while harvesting some of the learning’’. In contrast, one of the low value creator process innovation ventures (NM5) did not experiment with revenue models, and the other (NM6) experimented extensively, including attempting a manufacturing joint venture, but admitted that their business model and R&D culture never really changed, and that they were constrained by ‘‘lack of money, trying to commercialize with R&D people, and lack of credibility in the market due to small size’’. This further underscores the importance of change leadership to the successful evolution of commercialization strategy. Both of fuel cell ventures that created little value were also unsuccessful in experimenting with their revenue models, in both cases moving away from the market for technology to focus solely on the product market, but never having sufficient access to finance, and not creating much value. Change leadership, is equally important for both product and process-based innovation when they attempt to evolve their commercialization strategy. In both sets of firms, the successful ones demonstrated change leadership. In every successful firm with a process innovation, either the founder eventually withdrew and was replaced by an experienced entrepreneur or the founder brought in senior business development leadership and allowed them autonomy. Strong leadership was exhibited by NM1’s CEO, who changed markets, industries, and organizational form rapidly under pressure, successfully responding to both opportunity and necessity, and convincing employees with his vision. For the unsuccessful process-based firms, both founders stayed with the venture the entire time as CEO and did not bring in other business development leadership. The founder of NM6 mentioned the ‘‘R&D culture’’ as being a key factor holding back

the venture, but effective change leadership would have meant finding a way to change that culture. For most of the product innovation firms, again the successful ventures had changes in leadership, and successfully repositioned their companies in response to external forces. FC4’s senior management team displayed this type of leadership by embracing a standardization strategy and gaining acceptance for this throughout the company. In contrast, the unsuccessful fuel cell ventures both maintained the same founder as CEO, and, though they attempted to evolve their commercialization strategies, did not show signs of effective change management during the period of observation. Thus, the ventures successfully commercializing process innovation differed markedly in the degree and importance of experimentation. As shown in Table 5, the relevant value creation mechanisms and evolution mechanisms were the same for process and product innovation ventures; but, for process innovations, several of the challenges are more complex, requiring greater levels of proficiency in technology–market matching, in alliance building capabilities, and in experimenting with technical attributes and value networks. Greater levels of proficiency in these value creation mechanisms and in evolution mechanisms are required of ventures commercializing process innovation, because they faced more market possibilities and associated value networks, had to impose more onerous requirements on alliance partners, and experienced greater dependency on their alliance partners. 5.4. Extracting value from technology innovation This paper has examined ways of securing value from technological innovation, presenting evidence that supports two theories of innovation and challenges two others. First, we find support for Teece’s (1986) argument that complementary assets are an essential consideration when planning a strategy to profit from innovation. Tables 3 and 4 show that access to complementary assets was high for seven out of eight successful technology ventures, whereas it was low for three of four unsuccessful ventures. Second, we find support for the argument that, when there is a market for emerging technologies and proof of concept exists, and when a technology venture has strong intellectual property rights, it may do well to use a licensing or service model (Gans and Stern, 1993); this enables the venture to avoid the financial strain and risk involved in building, acquiring or accessing the complementary assets needed to pursue a manufacturing strategy. Three of the four successful nanomaterials ventures included licensing models and two of the four successful fuel cell ventures included service models which helped them gain initial revenue and market knowledge. As nanomaterials ventures frequently have strong intellectual property applicable to multiple markets, do not have downstream assets, and are constrained in their financial resources, the findings suggest that they should incorporate markets for technology into their commercialization strategy. Third, as Christensen et al. (2004) propose, forward integration to the decoupling point is a useful strategy to reduce market uncertainty for technology ventures and appears to be utilized by the majority of fuel cell ventures in our sample. However, forward integration is expensive and may not be possible over multiple markets unless it is possible to mitigate these expenses by creating standardized modular products. The nanomaterials ventures in this sample – all of which customize their products – could not have integrated downstream in each of their target markets. Thus a nanomaterials venture which follows the Christensen et al. (2004) advice on forward integration may forfeit value creation by constraining the breadth of its market

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focus. This is a possible explanation for the relative lack of success experienced by NM5. Lastly, Neckar and Shane (2003) argue that ventures with generic technologies face lower market uncertainty as the venture has several chances to commercialize their technology successfully. Shane (2004) suggests that this assists in raising financing because of lowered market uncertainty. In contrast, Davidow (1986) proposed reducing market uncertainty by targeting a narrow market segment. Fuel cell firms, based on product innovation, appear to largely follow Davidow’s logic. Nanomaterials ventures, based on process innovation, were better able to raise finance and create value by embracing the radical, generic nature of their technology and thus targeting several market segments; this lends some support to Shane’s (2004) arguments.

6. Conclusion This paper makes three main contributions, one empirical and two theoretical, respectively. The first contribution is to compare and contrast value creation metrics for ventures with process-based innovation and those of ventures with product-based innovation and to identify successful and less successful strategies for overcoming their specific challenges. This also contributes to the small amount of empirical evidence in this area, particularly detailed and contextual evidence. Our second contribution is to elucidate the underlying value creation and evolution mechanisms and their relative importance to process and product innovations. The third contribution is to expand our understanding of strategies used to extract value from technological innovation. Based on these findings, we offer normative recommendations for nanotechnology ventures. Different value creation strategies are suggested for ventures commercializing process-based innovation and ventures commercializing product-based innovation. Successful process ventures exploited the radical and generic nature of their technology, were positioned upstream or midstream in their chosen target markets, and participated in both the market for technology and the product market. Successful product ventures had a narrower market focus, were positioned downstream or midstream in their target markets, chose target markets with lower innovation ecosystem uncertainty and in which no customer process innovations were required, and commonly standardized their products across markets. In addition to these value creation metrics, the importance of value creation mechanisms and evolution mechanisms differs between process-based and product-based ventures. Process-based ventures require capabilities in market matching, alliance building, change leadership and experimentation greater than those required of product ventures. Process innovation appears to require more experimentation with technical attributes for each market, versus a conscious strategy of standardization for product innovation. Process innovation also requires more experimentation with value networks because of the broader range of markets targeted. We provide support for two theories about the extraction of value from technological innovation and reveal two instances in which theories do not apply to process innovation. Our findings support the importance of complementary assets in creating value from technological innovation, and the role of markets for technology in helping a venture create value. Notably, we find that successful strategies for forward integration and breadth of target markets differ for ventures commercializing process-based innovation than what has been proposed in the technology commercialization literature. This paper points to promising commercialization strategies for nanotechnology ventures. Our research implies that nanotechnology ventures benefit from exploiting the breadth of their generic technology in multiple markets and from an upstream or

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midstream position in targeted industry value chains. Hybrid business models including both licensing and manufacturing are recommended to maximize the value creation potential in this sector. Strategic alliances are a prerequisite for value creation for nanotechnology ventures, and creating and deepening such alliances must be a key priority. Lastly, nanotech ventures need to emphasize technology–market matching, alliance building, and experimentation to a greater extent than do product-based ventures.

Acknowledgements The authors gratefully acknowledge the financial support of the Social Sciences and Humanities Research Council of Canada through an Initiatives in the New Economy grant and the UK Engineering and Physical Sciences Research Council through the Institute for Manufacturing’s Emerging Industries Programme.

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