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Are business, engineering, and law students learning anything about managing IP? This was the central question asked at a conference last week on Intellectual Property Management Education and Research hosted by WIPO. The answer to this questions appears to be “no”, and the consensus among participants is that this needs to change. Mr. Yo Takagi, in opening the conference said this, “Intellectual property management is the need of the hour and has a major role to play in transforming the vast development and competitive potential and value created by innovation and brand into concrete and tangible benefits for countries and companies.”

As a recent graduate of a major MBA Program, I can confirm that, not only is IP management not on the menu, it isn’t even understood among the faculty exactly what it is or why it is important to business. Naturally, there is an elective course on business law that contains a short segment (1 day I think) on patents and other IP. One of the innovation courses covered it in half a lecture. I know some schools even bring in a law professor to teach an entire course on IP. But obviously none of these has anything to do with teaching students about the importance of managing IP as a core business process.

I find it difficult to understand how IP management hasn’t become an integral part of every business strategy course, much less all of those courses on innovation and entrepreneurship that are now so popular at business schools and executive education programs. They should all be dealing with IP management as a central issue. In support of this modest proposal, I offer three very simple arguments:

1. IP is now the most valuable business asset class in the world

How is it possible that the world’s most valuable business assets receive virtually no attention in an entire MBA education?

It is astonishing that we are not talking to students about how to manage these assets, especially in light of the many, shall we say, more esoteric management subjects that receive in-depth treatment. I remember one experience in particular that illustrates this…  We were studying a specific drug market in a business economics course and the professor was engaging in his best statistical gymnastics to explain why successive waves of drugs had succeeded each other in dominating the market over a period of 40 years. Afterwards, I approached the professor and explained that specific patents and their invalidations and expirations was actually the true explanation. He was quite surprised at this as he was to learn that patents expire and that this can have a significant market impact.

2. IP is a strategic pillar of most of the companies that business students study

How can we study companies that rely on IP, and whose valuations are based mostly on IP, without ever mentioning IP?

Business students are required to delve into virtually every dark corner of dozens of different companies including their history, balance sheets, management, strategy, and finances. The goal is understanding what makes these companies succeed, fail, or otherwise. The irony is that, even though many or most of these companies have leveraged IP as a key part of their strategy or rely on it for their success, this fact never arises in business cases. It is easy to simply say that managing IP must be contained in Porter’s “five forces” - probably under “barriers to entry”. But, this is hardly the same thing as learning how to manage IP.

3. Managing IP is what’s next

Innovation, technology, and entrepreneurship have been the hot topics at business schools around the world for the past 10 years - minus the management of IP.

It would seem unlikely that the management of IP would not be among the most important subjects to address in an innovation and entrepreneurship curriculum. But, I took every possible course on these at what is arguably the best school in the world for these topics, and I can assure you that it is conspicuous in its absence. In theory at least, the top business schools are at the leading edge of management. These are the platforms on which you can gain a view of the road ahead - to see where business is going next. Unfortunately this is not the case for IP management. No only are they not making it a core part of their curriculum to prepare students to integrate IP management into their strategic and operational thinking, they were not  looking ahead five or ten years ago to the explosion of business investment and interest in IP that we are now experiencing.

Ultimately, the most important obstacle to integrating IP management into business curriculums is finding people who know something about it and can teach it. The worst thing that can happen would be for business schools to start putting IP management in the curriculum now - without any real expertise in the subject. This is of course normally what b-schools do. When entrepreneurship was hot - they added it (but not the people who knew anything about it). The result was that many existing professors suddenly became experts in the subject. The truth is that courses nominally about entrepreneurship are really about raising venture capital and worshiping sexy technology.

What the world’s universities need isn’t classes about managing IP. What is needed most are business professors in every subject who are aware of the importance and role of IP in business. Only then will students be exposed to the reality of IP as a key aspect of management and begin to see how it is integral to strategy, competition, financing, partnerships, employment, innovation and, well… business.

There were not one but two very interesting reports in the past 48 hours coming out of Scotland. The first was a particularly harsh critique of Scottish efforts to commercialize IP from its Universities. Robert Hannah, a partner in account firm Grant Thornton’s technology industry group, laid blame for poor performance on a lack of management expertise, particularly in raising investment. He called for improvements in management education, but didn’t stop there. He went so far as to suggest that Scotland should spend “serious money” to “buy in” management experts from the US “who have done it before.” Hannah’s comments came in response to a report from Targeting Innovation which advocated for more concentrated funding in fewer university spin-outs to improve their chances for success.

The second piece of innovation news was an announcement by Perth-based venture investors Braveheart of a 15-year commercialization agreement with Aberdeen University. The deal gives Braveheart first refusal rights to IP in certain areas, and appears to offer at least £5m over 5 years, with a dedicated fund thereafter that will include other investors. Braveheart also has similar deals with the University of Strathclyde and the University of Edinburgh. The stated objective is the fill the proverbial “funding gap” and accelerate Scotland’s success in IP commercialization. This kind of long-term partnership between investors and universities seems to be getting more popular.

I enjoyed Carl Weissman’s recent article on Xconomy (one of my favorite sites!) in which he talks about (among other things) how venture capital has lost it’s taste for investing in “risky” innovation. There is a lot of truth in what he says, “VCs are demanding that these technologies be ‘de-risked’ before they warrant venture investment, and of course they think this should be accomplished using other people’s money.” But, if it’s true - and I very much think it is - then it begs the question as to why. What has changed? Have VC’s collectively lost their nerve?

VCs are Too Big
One problem is that many of today’s funds have simply become too large to invest in innovation. Bets on disruptive ideas or radical new technologies that are unproven tend to be smaller. Remember that being “unproven” is the attribute that both risk and innovation share - by definition. But if you have a billion-dollar fund, it’s impractical to make investments averaging less than $10m each. The sheer number of investments in the portfolio would be overwhelming to try to manage.

Performance
However, there is a more important problem, and that has to do with returns. The fact is that many VC funds of recent vintage did not perform as hoped. Too many investments that were “disruptive”, “radical”, and “game-changing”, simply turned out to be “game-ending” instead. VC’s have largely responded by moving their investments down-stream to the growth phase. Many have commented, and I think it is true, that VC’s have become just another player in the Private Equity world. That means that they invest in growth not innovation.

“De-Risking” Innovation
But the amorphic nature of the word “innovation” never ceases to amaze me, and these PEs in VC clothing continue to wield it liberally in defense of their post-innovation investments. As Weissman insightfully notes, VCs continue to talk big about investing in “innovations” as long as they have been “de-risked”. This simply means that they want to take the “unproven” out of both innovation and risk. Of course, when you do that all that remains is growth. That’s not innovation and it obviously isn’t risk.

The Funding Gap is Real
The interesting thing is that all of this seems to prove that there is a funding gap after all, which Weissman is arguing doesn’t really exist. He says it is merely an “expectations gap”. Although that may be true, that gap exists in a very important place: the minds of the investors. If there is a gap in their expectations, then I would expect that to manifest itself in their investments - which is exactly what a “funding gap” is.

I think what has happened is that the established VCs have sort-of “grown up” with their investments. I look at it as like an elementary school that changes to being a high school and then a university as their students progress, rather than admitting a new crop of kindergarten-ers. Over time, VCs seem to have lost interest in the fresh new faces. Certainly they invest in new companies, but many of them aren’t as “new” as they may appear. They invest in people they know, people that they have invested in before, or people who have a “proven track record of success”. Those are all acceptable things to invest in, but investing in your friends it isn’t the same thing as investing in innovation.

What Is Next?
I think that this has created a situation that is rife for disruption. Investors willing to make smaller investments at earlier stages are likely discover that the higher returns associated with things that are “unproven” are still out there for the taking. In fact, Weissman may be proof of that. To bolster his argument that there is no funding gap, Weissman provides his own company as evidence that VCs still make early stage bets on innovation, while criticizing other VCs for not doing so. So which is it Carl? Have VC’s mostly moved away from risk and innovation, or are they mostly like you? You can’t have it both ways. My own experience is mixed. I have certainly interacted with a lot of VCs that aren’t bashful about their departure from the rough and tumble world of early-stage venturing. But, I have also met several new VCs over the past year that are talking about filling this gap as a core part of their investment strategy. I think that the funding gap is real (as is Weissman’s “expectations gap”), but that innovation is not dead - it’s just hungry.

I wanted to follow-up on the theme of my last posting by asking: when is less invention more or less innovation? One of the things that I referred to was the company 37 Signals. As you probably know, there has been a terrific debate about 37 Signals and their widely-publicized call to arms against feature complexity (eg. “Bloatware”) in software. Basically, they are the “less is more” poster child for the world of software. Probably the best example that I have found of this debate flowed out of a blog posting way back in 2006 by my friend Dharmesh Shah on his phenomenal blog: OnStartups.com.

The Debate: Basically the debate can be boiled down to this:

The 37 Signals school of thought is that the mere act of reducing features can add value to software for many if not most users, and is its own form of innovation.

The counter-argument articulated by Dharmesh is that most of the interesting problems that software can help solve aren’t simple enough to be solved by simple software. His argument is that software should be no more complex then is necessary to meet the need.

What vs. Who

I actually think that both “sides” in this debate are saying something true, and that the tension between them is actually artificial in that it is mostly based on another factor. As Dharmesh himself points out in his post, “Many can (and have) argued that nobody uses more than 20% of the features in Word. That’s likely true. The issue is that it is a different set of features for each user, and within that set, one or more features are very important.” So I think that the question is not how many features to offer, the correct question is how many people to offer the features to.

The example of Word (and a lot of other software from the past 20 years), is of a product that needed to fulfill the needs of most everyone and therefore had to include a lot of functionality to meet everyone’s needs. But this requirement is really driven by the business model which led to loading every conceivable capability into a single, gigantic product. When you look at any particular person or group, it is much easier to identify what my friend Clayton Christensen calls “jobs to be done“, and the features and capabilities that are needed naturally fall out of that. More importantly, using the “jobs to be done” concept clarifies which dimension of performance defines the correct innovation trajectory.

It’s the Business Model

I would argue that for 37 Signals and others in the new generation of Web 2.0 and Software as a Service (SaaS), what has changed isn’t really the philosophy - it’s the business model. These companies build and deploy software in a completely different way (as internet services) and into much more sophisticated and heterogeneous markets. The result is a different software business model with very different economics. It enables, and I would say even encourages, software companies to form solutions around much more homogeneous markets defined by common “jobs to be done” and a shared vision of the dimension of performance.

What this leads me to is the concept of “requisite complexity” which I first encountered many years ago while I was studying innovation at Cambridge University. The idea is that solutions will not be less complex than the problems they solve. I would hypothesize that neither side of the debate would disagree with this idea (I hope - anyone out there want to speak to this?).But, the only way to reconcile the very real conflict between these ideas is to understand that they represent different business models (eg. the traditional mass-market software application vs. jobs/market-specific software).

Many in the Web 2.0 world are very enthusiastic about Christensen’s “Disruptive Innovation” thesis because it appears to offer a roadmap for success. I think that they are right, and I am satisfied that the success of Salesforce.com is an example of classic disruption. But I also think that this new generation of software entrepreneurs would be wise to take another page out of Clayton’s book (literally!), and make sure that they understand and align their solutions with the “jobs” that their customers “hire” them to do.

So this may be a starting formula for software success right now:

identify the “jobs to be done”
(and understand what that “market” looks like”)

+

build solutions of “requisite complexity”
(not “less” or “more” - but “just right”!)

+

wrap them in the right business model
(and delivery mode etc.)

To me, Web 2.0 is really about a new business model for software, and not really about technology (though technology has been a key enabler). This helps explain the profusion of smaller, more specialized, software companies and the blurring of the lines between software “products” and “services”. My own company offers IP management software and represents this trend. As a specialized vendor, our solutions have come to be defined by a unique “jobs to be done” profile. Ultimately, our evolution toward the SaaS business model has been driven by the economics of serving these kinds of specialized markets. This model allows us to deploy many different versions or “flavors” of the product to address the need for requisite complexity for each “jobs to be done” profile - and make money. Said more simply: our objective is to profitably offer everyone with IP just the software they need to effectively manage their IP. Simple to say - difficult to do!

This spring I had the pleasure of lecturing at MIT in two different courses on innovation - both taught by the always fascinating Eric Von Hippel. The first was to a group of MBA students and Sloan Fellows at the MIT Sloan School of Management as part of a course entitled, “Innovation in the Internet Age: Emerging Trends“. The purpose of my lecture was to provide a real-world example of a company struggling to rapidly evolve an innovative web platform using as a case study, Knowligent’s IP Portfolio software for managing innovation and intellectual property.

In my session, I briefly recounted Knowligent’s experiences innovating a complex enterprise system and the way that customers essentially negotiate to introduce their ideas into the design of the product. Eric’s objective for bringing me in to lecture was to provide proof for his overarching thesis - which is essentially that a lot of innovation comes from end-users, and companies that embrace this reality are better off for it. Of course this is absolutely true, and Eric has become a sort of collector of cases and evidence in support of this “Open Innovation” idea. The students were very intellectually engaged and a lively discussion ensued over the basic issue of whether customer-driven ideas can be trusted to lead a company’s innovation in the right direction. It was typical of MIT - very probing, questioning, and spirited - and it was a lot of fun! A few things came out of the discussion and my subsequent pondering after that I feel are particularly interesting and useful…

1. Enterprise software is actually a pretty good example of an industry where innovation has been heavily user-driven. Many if not most business software companies originated out of home-grown IT projects within companies for from corporate “wish lists”. Even after a project has spun-out, the vendor tends to be dependent on a small group of corporate customers for at least the first few years of their development, and these customers can exercise enormous power over the development trajectory of the product.

2. However, although a majority of ideas for new features and capabilities originate with end-users, only a small subset tend to have broad appeal. That is, customers can quite easily produce a large volume of ideas for new functions mostly because they have so many jobs to do. But these features make for complex, and usually expensive, software. If the vendor isn’t vigilant in controlling the code base, this significantly restricts the appeal of the software and I think that this can be a very dangerous trap for a software company to fall into.

3. More importantly, it is arguable that these user-driven features aren’t really “innovation” at all. Just because a customer demands certain features doesn’t mean that they are innovating for you. Much of the time this is really just “invention” (as distinct from “innovation”), and often it isn’t even that. The danger is that companies may come to think that they are innovating because they are adding a lot of new “features” to their products.

4. Enterprise/business software seems at the moment also to be a good example of another interesting theory of innovation - namely Clayton Christensen’s idea of “Disruptive Innovation”. Disruption usually happens when new products are introduced that actually offer less of the kind of functionality traditionally demanded by the existing (and influential) customers. So, running counter to the urge to create customer-driven “bloat-ware” is an urge to create software that is actually less functional but which may be easier and cheaper to deliver and use and is frequently innovative in other dimensions. For examples, I point to Google Docs, 37 Signals, and Mint.com as just a few of my personal favorites demonstrating this kind of disruptive innovation in the world of software. In other words, the current tide of “innovation” in software seems to be moving in the opposite direction than the one that big and influential enterprise customers may want to go. As the theory predicts, over time these offerings will likely become ever more functional and ultimately displace their predecessors. It’s this changing of the dimension of innovation that makes disruptive innovation so powerful.

The question that comes out of all this is whether your biggest and most influential customers are likely to lead you in a direction that makes you more or less innovative. My own feeling and experience (from the world of management software) is that involving customers and end-users in driving your product design usually makes you more inventive but can make your products less innovative overall. It is probably true that this will be different in other sectors. However, at the very least this supports the idea that there is a need to carefully evaluate the direction your customer input is driving you and to distinguish between “inventiveness” and “innovation”.