_____________________________________________________________________

Innovation Network-Based Private Equity Investment

The Information Technology & Innovation Foundation (ITIF) is a non-partisan think tank

whose mission is to “formulate and promote public policies to advance technological

innovation and productivity to spur growth, opportunity, and progress1”. ITIF’s 2012

report “Innovation in Cities and Innovation by Cities”, by Robert D. Atkinson, notes that

for economic development, “industrial manufacturing relocations is a zero-sum game,

the gain of one region is the loss of another, while the jobs created through innovation is

a non-zero-sum game, both the region and the nation benefit.” Further, “Innovation

economics shifts the focus of economic policy toward creating an institutional

environment that supports technological change, entrepreneurial drive, and higher

skills…regions and states need to recognize that the economic development ‘playbook’

they rely on needs to be updated [to] reflect the new realities of the global innovation

race.” This applies equally well to equity investors that are a primary engine for growth.

The Brookings Institute2 2013 report “Patenting Prosperity: Invention and Economic

Performance in the United States and its Metropolitan Areas”, by Jonathan Rothwell et

al, supports ITIF’s conclusions and establishes a relationship between patentable

inventions and economic performance. The study finds:

- While many innovation dynamics are national and boundary crossing and so

require federal nurturing, the fact remains that the innovation process turns out to

be intensely localized… the innovation economy has an inherent tendency

toward geographical clustering.

- Supporting this they found that 63% of patentable inventions were created by

people living in just 20 metro areas that are home to 34 percent of the U.S.

population, and the top 100 metro areas are responsible for 92% of all patentable

inventions.

- Inventions, embodied in patents, are a major driver of long-term regional

economic performance, especially if the patents are of higher quality.

1 ITIF was named the #1 science and technology think tank in 2014. See “2014 Global Go To Think Tank Index Report” by the University of Pennsylvania Scholarly Commons 2 Brookings Institute was named top think tank in the world in 2014. See “2014 Global Go To Think Tank Index Report” by the University of Pennsylvania Scholarly Commons

224 San Fernando Drive

Lavallette, NJ 08735

(914) 474-9499 or

Info@InnovationBP.com

Innovation Business Partners, Inc.

"Connecting Minds to Markets TM"

- Patenting is associated with higher metropolitan area productivity... patent growth

is strongly correlated with better employment opportunities… [and] significantly

lower average unemployment rates.

- Average value of IPOs is 5 times higher in metropolitan areas with above

average patents per capita.

- Patents per capita are highest in regions with university graduate programs in

science.

- Research universities, a scientifically-educated workforce, and collaboration play

an important role in driving metropolitan innovation.

- In regions with existing research universities a critical catalyst for innovation is to

speed knowledge transfer out of universities and into the regional private

economy through targeted programs that seek to actively reveal new intellectual

property; streamline its marketing and licensing; and systematically incentivize

universities to maximize outward knowledge flow.

The Brookings study was statistically rigorous and controlled for many variables, and

yet, it may seem hard to believe that patenting could correlate with so many economic

factors until you understand what constitutes a patentable invention. Under federal

statute, any person who "invents or discovers any new and useful process, machine,

manufacture, or composition of matter, or any new and useful improvement thereof,

may obtain a patent.3" As opposed to artistic or literary inventions, which may be

culturally valuable, patentable inventions are the foundation of scalable products and

services that represent investment opportunities that create returns, jobs and wealth.

The question we are asking is how do we go beyond using patents to characterize a

capacity for innovation and use them to guide investments that create a high return for

investors while creating jobs and wealth for the region? How could patents be used to

speed knowledge transfer from universities and government research facilities into the

regional economy, and facilitate collaboration between academia and the private sector

to produce investment opportunities and economic growth? With these questions in mind,

and as a “proof of concept”, we analyzed the Innovation Networks and Innovation

Genotypes™ of New Jersey Institute of Technology (NJIT), the state of New Jersey, and

the Newark metropolitan area.

The concept of an Innovation Genotype™ is based upon a biological metaphor. Just as

genes in a genotype express proteins that become organs, which in turn determine an

animal's characteristics, so too, the inventors express inventions that become

innovations, which in turn determine the economic and competitive advantage of an

organization. By analyzing the genotypes of academic, commercial, and government

organizations we are able to identify the organizations that have the intellectual capital

and human resource that are the prerequisites for private equity investments.

3 U.S. Patent and Trademark Office general information concerning patents.

Figure 1 the left side of the graph indicates the US Patent & Trademark classes in which

NJIT researches have invented during the five year period from 2000 through 2014.

The bars on the right indicate the number of patents in the given class. You can quickly

see that NJIT has strength in many technical domains with some large concentrations in

image analysis, pulse or digital communications, and multiplex communications.

Figure 1: NJIT Innovation Genotype™ (2000-2014)

Figure 2: New Jersey State Innovation Genotype (2014)

The state has significantly more patents and over a broader spectrum of technical

domains, as should be expected given the number of companies in New Jersey.

Because of this we have plotted a single year, the five year period would have

generated an unreadable graph.

The purpose of Figure 2 is to demonstrate there is ample opportunity to find

intersections between the universities and private companies of New Jersey. Similar

genotypes can be generated for Federal institutions such as NASA and DOE that

liberally license their patents and even provide matching funds for their

commercialization.

To explore these overlaps further we examined class 370, multiplex communications,

was a strong suit for NJIT. We found 40 New Jersey companies that produced 873

multiplex communication inventions from 1,044 inventors. These firms ranged from

giants like Verizon and Avaya, to midsize firms like Vonage and small firms like w2bi,

Inc. that offers software solutions for the wireless industry.

But we need to go beyond identifying the organizations, we need to identify the

individuals in those organizations that can initiate the creation of new products and

services. For that we use Innovation Network Mapping (INM).

INM uses patentable inventions to reveal the networks of inventors in commercial,

academic and government organizations that are generating the inventions that are the

basis of new products and services. INM identifies the individual inventors that form the

“Innovation Backbone™”, that small collection of individuals that drive innovation in their

organizations. These are the people (highlighted in red) that can appreciate new ideas

and use them to initiate the creation of new products and services.

Figure 7: Innovation Backbone™ Top 3 Companies

Identification of regionally

important technology domains,

the organizations inventing in

those domains, and the specific

inventors in those organizations

that are the drivers of innovation

provides valuable investment

intelligence.

Figure 4: Clusters of Collective Intelligence

First, with this knowledge it is possible

for investors working alone or in

conjunction with a university to create

a “Hub” to convene the key regional

innovators to explore the limits of the

given domain and identify

opportunities. This creates a

collective intelligence that can inform

investment strategies.

.

Figure 5 Innovation at the Intersections

Second, by convening multiple

networks of innovators in multiple

domains it opens the possibility to

identify the innovations at the

intersections of domains that often

provide the more radical or disruptive

innovations

Figure 6: Co-Development Model

Third, given the range of companies from large OEMs to small suppliers there is the co-

development investment opportunity modeled after the Nike model as diagramed in

Figure 6.

Figure 7 Technology Enhanced Manufacturing

Finally, there is the technology

enhanced manufacturing model

(TEM). Many regions have medium

size manufacturers that are successful

but cannot afford the research and

development to go beyond the

products that made them successful.

Likewise the region will have small

innovative companies that are

struggling to create the capabilities of

these manufacturers to produce,

market and support a product. TEM takes the best from both and creates a partnership

to produce a synergistic new product that benefits both and the investment community.

In summary we have demonstrated how an innovation network approach to private

equity investment could create new opportunities beyond the traditional models,

generating returns on investment, and regional job and wealth creation.