Technology commercialization strategy for startup innovators
Research by Simon Wakeman, Associate Professor, ESMT
What are your options as a startup innovator wanting to bring your product to market?
A challenge for all innovators is how to capture the most value from their innovation. Startup firms, in particular, lack the commercialization capabilities to bring the innovation to market, and so face a choice between partnering with an established firm, or building their own commercialization capabilities. However, both strategies have their disadvantages: if the innovator decides to partner, then it has to share the profits with the established firm, while if it goes it alone it has a lower likelihood of success and is also likely to end up with a smaller pie.
Simon Wakeman, an associate professor at ESMT, has examined how biotechnology firms in particular deal with this issue. They typically start with a strong research base, yet do not have the expertise necessary to bring the innovation to market. Furthermore, the length and uncertainty of drug development means a startup firm is rarely able to finance commercialization either completely from its own resources, or even with the help of venture capital finance. This combination of factors makes cooperation with industry incumbents attractive. Nevertheless, biotechnology firms report that often they do not capture a proportionate share of the value from an innovation purely through licensing.
In studying how biotechnology firms deal with this issue, Wakeman discovered that these firms use an innovative strategy – known in the industry as “co-development” – in which they partner with an established firm to commercialize the innovation, but retain the rights to participate in the commercialization. The main advantage of this strategy is that it enables the innovator to acquire the knowledge that it needs to build its own commercialization capabilities, without sacrificing the benefits that an established firm can bring to the partnership. The disadvantages are that both parties are distracted by the innovator trying to learn, so the established firm is likely to be less effective in commercializing the current innovation than under a straight licensing arrangement. At the same time, the conflicting objectives of the parties create costs in managing the relationship that would not be incurred if the innovator were to commercialize alone.
In a recent working paper titled “Technology commercialization strategy in a dynamic context: developing specialized complementary assets in entrepreneurial firms” Wakeman, along with his coauthor David H. Hsu, The Wharton School, have proposed a valuable framework to help innovators choose which of the alternatives best meets their business and financial needs. Their empirical analysis suggests that biotechnology innovators incur a significant, short-run penalty in the likelihood that the current product will be commercialized when they choose co-development or self-commercialization. However, the products of innovators with either co-development or self-commercialization experience are more likely to be commercialized in the future (relative to firms that merely have straight licensing experience). More specifically, an innovator that enters into a co-development arrangement does better in the commercialization process if it has prior experience of either type, although not necessarily if it commercializes alone.