Taking Technical Risks—How Innovators, Executives, And Investors Manage High-Tech Risks

Journal of Risk and Insurance, March, 2004 by Maurizio Pompella

by Lewis M. Branscomb and Philip E. Auerswald, 2001, Cambridge, MA: The MIT Press

The difficult life of technical innovators and the gaps which have to be covered in order to cross the "death valley" (where the majority of innovative projects fail) give a satisfactory idea of how tough is the way from scientific breakthroughs to market prototypes, or throughout the book--in other words--how difficult it is to control purely technical risks and market risks at the same time. The financial gap between funding of research and resources to be invested to put the projects in practice, the research gap between the initial idea and a market-suitable product, and also the trust gap--or the information asymmetry--between technologists and managers, may seriously affect the underwriting of high-tech risks. Technical breakthroughs no longer coincide with products themselves, as it was once; there is now a difference between an innovating concept and a product ready to be launched. This is the central subject of the book, and also a very typical insurance topic, as everybody can see and realize, although this is not emphasized throughout the work as it could have been. In fact, the risks necessarily related to all innovative projects are normally shared, and risky activities may be undertaken--under insurance mechanisms--which would not have been possible otherwise.

At the very heart, the problem originates from the fact that different, sometimes conflicting interests stand on the valley sides. On the one hand "inventors" and technologists are responsible for research and follow the reasons of science, often paying attention to feasibility more than to the impact of proposed innovations. On the other hand investors, and particularly managers, are responsible for decision-making processes and risk firm reputation and money, so that they follow the reasons of market.

The volume takes the form of a monograph that is divided in chapters, as usual; among the chapters a series of papers ("contributed essays") can be found, however. These were mostly chosen from the commissioned contributions of a report on "Managing Technical Risks," which was sponsored by the Advanced Technology Program of the NIST (National Institute for Standards and Technology) in the late nineties. Together with the academics, a series of practitioners were involved in the project, and two preliminary workshops were organized to approach the matter. Thus, most of the "added value" comes from the choice to combine continuous, often implicit, reference to theory--from Schumpeter on--with the point of view and the experience of professionals, whose opinions are quoted throughout the book.

The Introduction is devoted to elucidate the aims and structure of the book. On the other hand, the first chapter (Between Invention and Innovation)--having introduced the discussion and presented two case studies--offers a useful definition of success and failure in terms of objectives. Institutional, personal, and project objectives are discussed to evaluate technical uncertainties and failure risks. The corresponding contributed essay (Technical Risks, Product Specification, and Market Risk, by George C. Hartman and Mark B. Myers) gives the subject a concrete form, by explaining how research, technology development, and product development activities are structured at the Xerox corporation, according to a model adopted to identify/quantify technology risks and market risks.

Risk and uncertainty are analyzed in the following chapter (Defining Risks and Rewards). However, this is not a purely analytical approach, for a "soft way" is chosen to treat the related statistical concepts: the quantification of technical risk is as much an art as it is a science. Some of the methodologies to assess the technical risks are mentioned here: (1) the two-part appraisal, evaluating the global risk as the product between the probability of technical and the probability of commercial successes; and (2) the mapping of the research, development, and commercialization process, in order to simulate a series of scenarios through which a model is to be obtained. Then the problem of the interdependence of technical and market uncertainties and the low predictability of changing "specifications" of products, as the development process goes on, are treated.

The second essay (The Dual-Edged Role of the Business Model in Leveraging Corporate Technology Investments, by Henry Chesbrough and Richard S. Rosenbloom) emphasizes--by the illustration of three cases--the relevance of the business model applied to bringing about the success of decided investments. In particular, it explains how an established business model may cause a twofold problem, either by masking the potential of a new technology or by exaggerating the reward expectations.

The institutional differences between firms in terms of corporate size and structure, as far as technical risk-taking is concerned, are the subject of the third chapter. Here the ways the innovations can be created--i.e., internal development, external acquisition, or collaboration--are discussed. Large, mid-size, and start-up companies are compared, in order to explore how they approach the matter and what are the advantages each of them may enjoy, by adopting a different mix of the three innovation strategies. Then the "external ways" to bridge the gap between research and market are considered in detail, and the role of universities (with the phenomenon of creation of new firms from university research), as well as the one of partnerships and consortia are explained.