NEDO Director General of Policy Planning and Coordination Department, METI
Innovation Strategy and NEDO
No.3: High-Tech Ventures and Innovation
No.1: Spin-OFF Ventures
High Hopes for High-Tech Ventures
(As this column will be more of an introduction and likely to be a bit tedious for the regular DND readers, please skip through.)
Venture enterprises and innovation go hand in hand and are in a symbiotic relationship. In due course, 'innovation' fostered by an enterprise will fully blossom only when the innovative product or service has taken a hold over the market. However, to achieve that goal, corporations have their own strategies for determining which new products and services to invest in: the decision is based on the anticipated market shares and profits. Strategically, it is necessary to scrupulously allocate human resources, equipment, capital, and other resources on the product or service that looks promising enough to secure more than the stipulated amount of market share and profit. That standard varies with corporate scale and the quality of the product/service as well, but for corporations listed in the first section of the stock exchange, investment is contingent on whether the projected annual proceeds of a product or service are over a few billion to ten billion yen.
Ten billion yen is quite a huge figure. To give you an idea, a good example is the pull-out from the market this January ('06) of Sony's AIBO, which is said to have sold 150,000 worldwide. Presently, the robot industry is said to be a 500 billion yen market, but the majority are for industrial use; while those for personal use, expected to grow in the future, are still in the formative years---AIBO was said to have had a few billion yen market. Sony's pull out, most likely very disappointing for the AIBO fans, must have been a down-to-earth business decision. Even in areas that appear to have promising future prospects, for large corporations there exists a strategic benchmark that makes them back out from investing.
Sony had once been a venture business that meagerly produced tape recorders and transistor radios. It is unthinkable that Sony expected ten billion yen markets for them at that time. With the spirit typical of startup ventures, they must have gambled on their technology. But such 'reckless' business strategy is not tolerated in the present Sony. This is where ventures, high-tech (research & development---R&D---type) ventures, in particular, come in: they are expected to fill in the important role of closing this gap and to nurture 'innovation' into a full-blown business.
There are two major types of high-tech ventures, that is, ventures that can implement innovation with their newly developed technology. One type is the "spin-off venture," starting up as spin-offs from large corporations by engineers denied the enterprising of their technology due to corporate business decisions. The other, is the "university-based venture" that converts research results of universities into new businesses. Both, I think, sprouted in Silicon Valley.
With spin-off ventures, I have a rather fond memory of an encounter in Los Angeles (L.A.) a few years ago. Makoto Yokota, the deputy director of JETRO, L.A., at that time (the present Director of the Recycling Promotion Divison of METI) told me that he wanted to introduce me to a venture entrepreneur he was deeply impressed with. That's when I visited Quallion, LLC, a medical battery company within a medical care conglomerate in the suburbs of L.A. The CEO of Quallion who received me was Mr. Tsukamoto, a Japanese with an engineering background.
Mr. Tsukamoto told me that, a few years back, the president of the medical care conglomerate came to Japan to visit the battery company he was working at as an engineer and asked him whether he could develop a microscopic battery for implantation in the body. As the Japanese technology for storage cells was leading the world, the president came all the way to Japan hard pressed for high-tech microscopic medical implant batteries. Mr. Tsukamoto took pains to come up with a prototype, and the president pleased with the result, tried to sign a contract with the battery company. However, the company refused to sign the contract. It not only is difficult to obtain production approval for medical batteries under the Japanese Pharmaceutical Business Law, but even if approval were to be granted, an exorbitant amount of liability damages might be claimed in case of accidents. Moreover, as the battery meant for an implanted communication device serving as a substitute for neurons has only a limited market, it is only natural that the company rejected the offer as a realistic business strategy. But for Mr. Tsukamoto, priding himself on having the only technology in the world for the medical battery, it was a preposterous decision. He ended up leaving the Japanese battery company and started making batteries as the CEO of a medical battery company in L.A.
A picture perfect spin-off venture story, don't you think? When I visited him, he had reconciled with his former Japanese battery company, obtained FDA approval for his medical battery, and his business appeared to be doing well. (When I checked on him this time, I learned that he was also teaching part-time, based on his success experience, for the High-Tech Business Strategy Course chaired by Professor Eiichi Yamaguchi of Doshisha University Business School. Incidentally, Prof. Yamaguchi is a present member of NEDO's Technology Research Committee at my request. 'It's a small-world' network, isn't it?) *i
According to Prof. Yamaguchi's book, "Innovation: Destruction and Resonance,*ii" in the late 90's, many high-tech businesses dramatically scaled-down their research divisions. NTT laid off over 30% of the researchers from its Basic Research Institute and other research institutes of the NTT Group; and Hitachi and NEC laid off the whole Silicon Semi-Conductor Division of their Central Research Institute or Basic Research Institute, respectively. The researchers were transferred to factory duty or to a subsidiary company. But, apparently, some researchers 'spun off' to start ventures on their own and is said to have had a high success rate. Similarly, after the IMF shock of South Korea, the Korean engineers laid off from large corporations started up a venture boom that triggered the revitalization of the South Korean economy. It is ironic that innovation inevitably results from such personal and social upheavals, but that may be how history is made.
…Which brings us back to Sony's robotics engineers. I wondered about their fate after the AIBO pull-out, and sure enough 'living up to my expectations,' some of those who left have started up spin-off ventures of their own. It appears that large corporations are apt to cut off their former engineers and adopt an antagonistic stance towards them. This appears to be also the case for Sony engineers who did not necessarily leave their jobs that amicably. The engineers leave not because they dislike their jobs, but rather, they spin off to pursue their dreams. If corporations were to provide them with venture capitals and foster them into future businesses, they would eventually be able to reap profits and integrate them into their resources while keeping their business risks to a minimum. If a cultural climate could be cultivated so that former corporations would start supporting spin-off ventures without reserve, Japan's future for ventures might not altogether be that bad.
Supporting R&D type spin-off ventures is one of NEDO's major policies. Under the "Technology Development Assistance Project for R&D Ventures,*iii" we select 10-20 ventures annually, providing them with an annual maximum of two hundred million yen, up to a 2/3 assistance rate, for two years.
*i) Please refer to: http://syllabus.doshisha.ac.jp/syllabus/html/2006/6510082.html and http://www.nedo.go.jp/kankobutsu/report/918/918-11.pdf. According to Prof. Yamaguchi, he asked Mr. Tsukamoto to be one of his instructors when Mr. Tsukamoto developed an Engineer Entrepreneur-ship Training Program with UCLA as a part of the Management of Technology (MOT) Program of METI. I was doubly surprised when I learned of this circumstance.
*ii) Eiichi Yamaguchi, "Innovation: Destruction and Resonance " NTT Publishing, Co., March 2006.
*iii) Implemented as part of the "Development Assistance Program for Practical Application of Industrial Technology." For details, please visit the following site: