Open Innovation and Startups

Introduction

The term “open innovation” (OI) is primarily associated with Professor Henry Chesbrough- a very well known academic researcher. In this post, I’ll dig into what this concept is all about (#openinnovation) and also show some examples of open innovation in action. We also need to be careful as what works for larger firms may not be possible for your startup. Essentially Dr. Chesbrough is arguing in his many papers and books that we need to move away from vertically integrated organization of the firm toward an ecosystem where companies are more open to leverage innovations from outside their ecosystem and license or move their unused innovations to other companies. I found open innovation to be complementary to many of the concepts we talk about in this blog.

The Main Idea

All the smart people don’t work for you[1]

I touched on some of the concepts such as “not invented here” (NIH). This leads to a very insular innovation environment inside the firm. HP for many years had the philosophy that designers should solve problems for the designer at the bench next to them or words to that effect. The reasoning was that if your fellow designers could not find a product to solve a problem, then perhaps this is a market for a new product. This may have worked well in the 70’s and 80’s when nearly every industry in the US was growing, but global competition changed this free and easy environment that assumed that everyone grows at 10%+ per year.

Open Innovation for Startups

Open innovation has attracted a very large following of researchers and practitioners. You will find a wide range of marketing literature on the web clamoring for your attention. But stop, slow down, and do some reading first. Open innovation is a lot more than just finding a large company to take interest in your startup. For open innovation to work for you, you need to understand some of the decision making that may go on in larger firms. Lets start with the formal definition of this theory from Chesbrough: “purposeful inflows and outflows of knowledge to accelerate innovation internally while also expanding the markets for the external use of innovation”.

“Purposeful” inflow and outflows implies a process, not some random activity, for actively seeking external customers for innovations from your firm but also seeking cool ideas from other firms. “Accelerating innovation” is a bit problematic. Internally, I want my firm to be first and often with innovative solutions in my market space (agriculture). I want to find a way to have a continuous flow of profitable new products. I also want to prevent poorly developed ideas from consuming too much time and resources.

Large firms think the same way except their requirements are not just the rate of new products but more important is investing in new business ideas that can generate substantial sales and profits. A company making $100M in revenue each year needs to generate $10M+ in incremental revenue just to report a “10% increase in revenue”. A startup may be looking to simply make a profit on the initial or service. The point is that open innovation has very different implications for the larger firm vs the startup. And you, dear reader, need to be very careful about applying management and innovation concepts without understanding them in more detail.

The “external use of innovation” is claiming that by leveraging (this means getting a license or agreement) other people’s innovations, you can accelerate growth of your new product introductions. Likewise, this also means that should you invent something or create something internally that may not have an existing line of business to take that innovation to market, you should try to launch this innovation into the market place in a way that benefits your firm. This is exactly what IBM did with Keithley Instruments, which I discussed in an earlier post. IBM created a new instrument to solve their own problems but realized they were not really in the semiconductor processing equipment businesses, so they sought out Keithley to bring this tech to market.

But in a startup with only a few people, IBM is not going to come to you to license and manufacture such a complex piece of processing equipment. But it does not mean that startups can’t benefit from outbound open innovation efforts by larger firms. My firm, Tailwater Systems, is focused on helping growers become completely sustainable in their use of our scarce freshwater resources. We used the open innovation concept to seek out a supplier of a new technology we identified but asked the firm we identified to consider applying that tech to our market. Our corporate partner in this venture is using us to learn about this new market place and examine related markets where the product might also have some positive impact.

Seeking Out New Innovations for Your Startup

You don’t need to partner with a firm the size of IBM in order to access some know how. Your partner could be another startup or small profitable firms like Keithley[2]. The innovation does not have to be a license to a patent. It could be specific know how about manufacturing or a new material. So how do you do this?

This is the more challenging part of open innovation for startups. Lets say that you need a specific thing or “innovation” to complete the vision for your new product. But, all the existing tech and products you’ve looked at are too old, power hungry, or difficult to work with (e.g. use hazmats in the process). You looked everywhere and found nothing. Call it a day and have a bourbon? Nope.

Finding that other innovation will take some different thinking. Prior to starting Tailwater Systems in 2017, I talked to large number of growers and influential agriculture players in the central coast area of California. I asked them about the State’s nitrate problems and what they were looking for, what they had tried, what worked, and what did not work. What I got, essentially, were the preliminary definitions of perhaps 3 or 4 products. One set of potential customers were focused on drinking water, the other was focused on avoiding regulatory enforcement of nitrate water quality laws affecting their grow operations, and a third group wanted to find ways to re-use their nitrate laden runoff back in the front end of the growing process. All the same product? No, unfortunately. Each of these products had some very unique requirements.

We went after the market that had the least involvement of the regulators in California- stopping nitrate from leaving the growing area. This area would not need a water treatment permit but the solution had to reduce nitrate to below the regulatory limit of 10mg/L. Or did it? (more on this later). At the time (2017), I worked with a team of students and other faculty to build and test several so-called “woodchip bioreactors” at a university where I was teaching. Woodchips were the answer, or so I was told. However, when we got down to performance and specifically the size of a woodchip bioreactor, the growers told me in no uncertain terms that they had already heard about woodchip bioreactors but they would never use them because of the size (huge land area required). As a chemical engineer by training, I was very perplexed by a lot of this. Why on earth use woodchips? Because they were cheap I was told. What about the size? No answer from the wood chip advocates. Many other questions, that any chem engineer would ask, went unanswered or ignored.

Here is a key point that I already knew- don’t expect a room full of horticulturalists or soil scientists to suddenly go outside their training and professional expertise and experience to find an innovation for this kind of a problem. But this is precisely the problem that Professor Chesbrough was addressing. As a chemical engineer, I approached this as an enzymatic reaction, facilitated by nitrate reducing bacteria, that converted the nitrate into nitrogen gas. It took very little time to figure out that many people were already removing huge quantities of nitrate from water continuously- and none of them were row crop, berry, or tree fruit/nut farmers.

We immediately found a potential solution. The Europeans had developed a technology called moving bed bioreactor (MBBR) in the early 90’s. I began reading about utility scale systems (all in Europe) that were removing the trace nitrogen left over by the wastewater treatment process. I also found that fish farming operations had a critical need for removing ammonia/nitrate from the water at extremely high rates with very serious consequences if the system did not work. I found the exact same thing in large commercial aquariums. The aquariums used sand as the bio film carrier, rather than the ubiquitous plastic biofilm carriers that are used in wastewater treatment. But sand, with a density of 2X that of water, would make a large scale bioreactor exceptionally heavy and impossible to move or relocate. Sand was definitely out but biofilm carriers were in. Since my university had no interest in this area, I launched my own company. We purchased a small amount of these plastic carriers via Alibaba , built a simple plug flow reactor using parts we got from Grainger Industrial Supply™ and HomeDepot™. It worked the first time and it worked really well. We were removing about 50X more nitrate per unit of biofilm carrier than any woodchip bioreactor we had built. All this was done using cash on hand, and with the permission of my wife (family’s CFO). Product launch was successful and we are now growing this business, protected by our first patent.

Outbound Open Innovation

We also explored some “outbound” open innovation in our market space. We were told early on by the State of California that we should connect our nitrate removal system to existing water treatment systems to solve some of the rural problems with contaminated wells. The “problem” was that reverse osmosis (RO), an ancient technology, was approved by the State to treat raw water and produce drinking water. However, the state also banned the dumping of the reject water from RO on the ground. RO systems generally produce about 1 gallon of concentrate waste water for every gallon of delivered drinking water.

We contacted several RO suppliers in California to see if they were interested in working with us. The value proposition was easy- with our help, they could sell more systems. Our “add-on” would denitrify the reject water so it could be reused or just applied to roads to keep the dust down. Not a single RO manufacturer responded in any meaningful way. We also went to several consulting engineering consulting firms- their answer was essentially zero. At this writing, we continue to get questions about this hybrid treatment system but no takers yet. Since we've already built nanofiltration and microfiltration systems for another product, maybe we'll enter the market by ourselves. We'll see.

So far, this small effort has failed to attract attention. The most likely reason is that we’ve not found the right firm to work with. Just like the auto industry with its extreme aversion to startups, my guess is that most of these established membrane filtration companies simply have no innovation plan in place and do not share Dr. Chesbrough’s optimism about open innovation. My admonition to these firms is very clear- innovate or die.

Summary

At the most basic level, open innovation first requires a change in the firm’s attitude about innovation and it requires senior management leadership. Second, what works in OI for large or small established firms may not work for your startup. Most of all, try to get a sense of the innovation strategic intent within a prospective partner before you approach them about a collaboration.

[1] This quote is attributed to Bill Joy, one of the founders of Sun Microsystems and is referred to as “Joy’s Law” in some publications. [2] Small firm from an SEC standpoint can mean a firm with less than $250M in market cap. “Small firm” as a phrase in the lay literature literally has no meaning unless you are very specific.