Risk and Innovation The Role and Importance of Small, High-Tech Companies in the U.S. Economy (1995) / Chapter Skim
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3. THE ROLES OF TECHNOLOGICAL START-UPS AND SMALL INNOVATIVE COMPANIES IN THE U.S. ECONOMY
3. THE ROLES OF TECHNOLOGICAL START-UPS AND SMALL INNOVATIVE COMPANIES IN THE U.S. ECONOMY
Pages 15-39
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From page 15... ...
To the normal business risks, technical innovators add the risks of technical failure or failure to match a technological advance with a market demand. in certain types of commercial technological advance, exploration by small firms is a critical part of the learning process of the industry.
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From page 16... ...
Table ~ names a few of the typical factors increasing and decreasing risk borne by companies, of all sizes, engaged in technology-dependent ventures. Some of these risk factors are best negotiated by larger companies-they may be better equipped to minimize the risk or survive an adverse outcome but some are successfully tolerated or managed only by
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From page 17... ...
Guaranteed access to foreign or government technology or other external sources Strong patent or copyright protection small companies. Small companies may systematically face a different risk/rewarcl line than larger companies; some risks may be differentially critical to small companies.
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From page 18... ...
In general, to reduce real and persistent technical and market uncertainties, the bulk of small technically oriented companies and start-ups tend to focus on incremental marketdriven innovations, and not breakthrough technologies; small company innovation often reflects the shape of perceived market opportunity. Based on the industries studied for this project, it is clear that small companies are often compelled to focus on incremental, market-driven innovation by the immediate, anct at times overwhelming, risk of running out of money.
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From page 19... ...
The industries studied for this project illustrate the types of technological and policy risk borne by a representative group of small companies. Most important, they illustrate how small companies pioneer and develop new markets and provide product diversity and innovation in small markets.2 Advanced Displays and Visual Systems Although cathode ray tube (CRT)
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From page 20... ...
The reason these small companies exist in advanced displays is that, with few exceptions, the market pull for the next generation of display technologies is undeveloped in many potential applications. For example, plasma and electro-luminescence technologies compete with LCDs, as well as with several other emerging technologies (e.g., field emission displays, microtip displays, vacuumfluorescent displays)
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From page 21... ...
display companies, typically by awards directly to small companies in the form of grants or development contracts from the Department of Defense. More recently, mergers and partnerships between these small entrepreneurial companies and larger companies have also become increasingly frequent, for several reasons.
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From page 22... ...
unrealized, creating enormous uncertainty about the next generation of display technologies. This technological uncertainty and therefore riskas well as direct government support of advanced displays technologies has created a cadre of small, relatively research-intensive companies in search of a valuable proprietary technological position.
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From page 23... ...
First, universities and academic medical centers tend to be the locus for innovation in medical devices, as well as for the development of new devices. Frequently, medical device innovation is driven by what can best be characterized as "hobby shop" innovation by highly trained specialists in universities or academic medical centers.
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From page 24... ...
Currently, radical changes in this regulatory and policy environment for medical devices are raising questions about the viability of the innovative enterprise which has driven linked technical and therapeutic advances in smaller segments of the medical device industry. First, more stringent FDA regulation of mectical devices requiring increased numbers of trials and evaluation increases the expected time to market of new devices and increases the cost of demonstrating new devices, increasing the business risk.
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From page 25... ...
in an academic or clinical setting usually a university or academic medical center these userinvestors transfer technologies developed in other areas and for other uses into medicine and in that way create new medical devices. Software While the roots of the software industry are firmly planted in the early history of commercial mainframe computers, the current software industry largely unbundled from hardware and dominated by applications running on personal computers, workstations, and networks did not exist as recently as 15 years ago.
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From page 26... ...
Insteacl, larger companies usually commercialize new technologies and enter new markets by acquiring a smaller company or start-up that has demonstrated success. This mechanism creates both substantial industry growth and opportunities for entrepreneurs to reap returns on their investments.
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From page 27... ...
This nascent industry consisted of small in-house water utility labs, as well as commercial "mom and pop" laboratories that tested for a variety of simple parameters such as water hardness, some metals, and coliform bacteria. Industry growth accelerated with the introduction of the first two major pieces of environmental legislation requiring extensive analytical testingthe Federal Water Pollution Control Act amendments of 1972 (now referred to as the Clean Water Act, or CWA)
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From page 28... ...
and economies of scope and scale, which could enable larger companies to compete at lower cost, are not eviclent. While there are many small testing laboratories because of low barriers to entry, the proven lack of economies of scale and scope limit their growth prospects.
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From page 29... ...
In many cases regulations preclude proprietary "product" technologies; regulation of testing processes reduces technological uncertainty in the market for services and limits the potential benefits of small company innovation. As a consequence, current technical innovation in environmental testing labs focuses on incremental approaches to cost savings and throughput increases rather than new product development, which is largely irrelevant.
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From page 30... ...
Telco Systems, Tnc., Newbridge Networks Corporation, Cisco, 3Com Corporation, Level ~ Communications, and SynOptics are examples of such successful companies, but there are many others. Note that these companies thrived despite the presence of established computer companies in the network equipment market, such as IBM and Digital Equipment Company, by providing new proclucts tailored for emerging market segments.
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From page 31... ...
in this industry small companies fill important niche markets and explore market acceptability for products considered too risky for larger companies: · New companies are expected to play a key role in the viability of portable computing. The number of people using cellular and satellite systems to transmit data is anticipated to increase from less than million users in 1993 to more than 20 million users in the next decade.
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From page 32... ...
In summary, a high degree of commercial and technological uncertainty is forcing the larger players in networking to engage in a frenzied competitive search for solutions that simultaneously create de facto technical standards and establish the proprietary network technologies that will dominate the nation's information infrastructure. in this competitive environment, larger competitors depend on small companies to realize new opportunities that will drive demand for (a)
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From page 33... ...
Innovation in the outdoor sporting goods industry is typical of consumer product industries where the line between changing fashion and advancing product technology is usually blurred. Tnnovation in outdoor footwear is an excellent example.
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From page 34... ...
in short, innovation in many outdoor sporting goods is most important, and most prevalent, when it reinforces or responds to lifestyle and fashion changes. Companies in the industry remain technically innovative largely without much organized research, materials testing, product clevelopment, and product testing-by relying heavily on a small cadre of designers and innovators.
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From page 35... ...
In sharp contrast to software start-ups, for example, many small companies in the industry even the most innovation-oriented companies do not expect to grow rapidly or to go public or be purchased by a larger company as a method of getting founders "liquid." Technical entrepreneurs in the industry are drawn primarily from the ranks of enthusiasts who want to be a part of the industry rather than from general entrepreneurs who see the industry as ripe for innovation-based businesses. Finally, among the industries studied for this project, with the possible exception of prepackaged software, this industry is most dependent on established distribution and retail networks.
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From page 36... ...
The cost of manufacturing facilities and the demands of process research and refinement suggest that these products will have to be produced by larger companies or partnerships. While there are considerable differences between outdoor sporting goods anct implantable and surgical medical devices, some similarities stand out.
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From page 37... ...
rather than retailed clirectly to consumers and, of course, they are increasingly regulated by the FDA, a change that industry observers believe may alter forever the way medical device innovation is done and, perhaps, eliminate small company participation. The outdoor sporting goods industry and the implantable and surgical medical device industry illustrate the range of small markets that are served by small innovation-oriented companies that often pull fundamental technical advance from outside the industry into new applications.
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From page 38... ...
Generalizing on the industries addressed in this study, the specific contributions of small technically oriented companies in an industry depend on the following factors: · The size of markets, current and prospective, that make up the industry. · The degree of technical uncertainty in current or prospective markets.
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From page 39... ...
From the perspective of a large company, this allows them to focus and to share with other companies some of the technological risk of improving their current business. Based on the industries addressed in this study, the committee concludes that small technically oriented companies often assume types of risk (and an amount of risk)
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