The Impact & Commercialization of Research By Mohd. Azwar Mahmud, CEO, MALAYSIA VENTURE CAPITAL MANAGEMENT BHD

1. The Impact & Commercialization of Research ByMohd. Azwar Mahmud, CEO, MALAYSIA VENTURE CAPITAL MANAGEMENT BHD International Islamic University Malaysia September 9 & 10, 2003

2. A G E N D A • Key Concept, Relationship and Relevance • Benchmarking Indigenous Research: • Commercialization: VC’s Perspective • Conclusions

3. Key Concept, Relationship, Relevance • Research • Creativity • Discovery • Invention • Technology • Innovation • Technopreneurship • Commercialization

4. Taxonomy Research • Creative work • undertaken on a systematic basis • to increase the stock of knowledge • to use this stock of new found knowledge • for the betterment of man and society Source: Frascati Manual, 2002, OECD

5. We discover what before existed, though to us unknown. (discovery) • We invent what did not before exist. (invention) • Operationalising discovery & invention to practical use (technology) Creativity – accidental, art, diff to plan & predict

6. Evolutionizing technology to create competitive advantage Commercialization- process • Taking innovation to market profitably Technopreneur Innovation • Enterprising soul that make innovation & commercialization possible

7. Resources for Competitive Advantage • Key engine for perpetual “regeneration & reinvention” of the US economy into the most dynamic & competitive globally Relevance - Creativity, Innovation & Commercialization

8. Benchmarking Indigenous Research

9. 5232 R&D projects implemented during 6 MP and 7 MP revealed 14% (732) of these are “potential candidates” for commercialization while 5.1% (267) was commercialized. Source: MOSTE

10. Examples of Local Research Success Putra J-58: The Grain Maize Hybrid Variety [14] Putra J-58 is the first grain maize hybrid variety ever developed and released in Malaysia for use as animal feed. A rapid test kit, produced at UPM, is sold in many countries affected by the disease. This novel single tube method is the first in the world and is patent pending. White spot syndrome (WSS) Detection Kit for shrimp [20] Strength Measuring Device for Hard Soil, Weak Rock and Concrete [15] Measures the indirect tensile strength of weak rock, hard soil and concrete. It is protected by a patent and won the Bronze Medal for International Invention, Invention, Industrial Design and Technology Exhibition (I.Tex’99). UPM’s PCR technique is 100-fold more sensitive, simple to perform; more samples can tested, and takes less than 10 hours compared with previous methods. Diagnostic Kit for Newcastle Disease Virus [19] Source: UPM

11. Venture Capital backed Companies Spinning out of Local Research Malaysian Bio-Diagnostic Research Sdn Bhd (MBDR) Commercialization of rapid diagnostic detection for typhoid fever from USM School of Medical Sciences. (Backed by MTDC) Commercialization of Aujeszky’s Disease Killed Vaccines formulated by Veterinary Research Institute (VRI) (Backed by MTDC). Malaysian Vaccine and Pharmaceuticals Sdn Bhd (MVP) Malaysian Agri-HiTech Sdn Bhd (MAH) Commercialization of Arbuscular mycorrhiza fungi to strengthen tree roots and provide defense against pathogen. The invention originated from UPM’s laboratory. (Backed by MTDC) Malaysian Electroplating Technology Sdn Bhd Source: MTDC

12. Venture Capital backed Companies Spinning out of Local Research Phytes Biotek Sdn Bhd Commercialization of a standardized extract of Tongkat Ali from UM & FRIM. (Backed by MAVCAP) The technology for speech recognition and natural language originated from Hong Kong University of Science and Technology. Intellectual property lies within the company. (Backed by MAVCAP). Nusuara Technologies Sdn Bhd Commercialization of aromatherapy using locally extracted essential oil. (Backed by MAVCAP) Fito Elegance Sdn Bhd Source: MAVCAP

13. 10. Feasibility Studies 8. Innovation Infrastructure 6. Reward & Incentives 4. Manpower 2. Commercial Awareness WHY COMMERCIALIZATION OF PUBLIC RESEARCH IS MODEST IN MALAYSIA? 1. Funding Mechanism 3. Research Management 5. Research Focus 7. Industry Linkage 9. Diffusion of New S&T

14. Low Rates of Commercialization: Root Causes • Funding mechanism not conducive to commercialization • Researchers are not commercially aware of the potential of their research findings • Impending lack of effective Research Management Practices in universities and PRIs • Manpower issues constraint ease of translating research results into commercial outputs • Research focus is largely publications-oriented with little applications-oriented research Source: MOSTE

15. Low Rates of Commercialization: Root Causes • Lack of clear incentives and rewards to stimulate commercialization • Paucity of networking mechanism linking key parties to commercialize research findings • Pockets of excellence exist in the Innovation Infrastructure, but overall, it suffers from systemic weakness • Shortage of diffusion mechanisms to accelerate adoption of technologies across different sectors • Pre-technical feasibility studies on marketable outputs or tangible benefits are seldom conducted by researcher, since it is not an institutional requirement Source: MOSTE

16. Four main hypotheses affecting low rates of commercialization • Manpower issues • Industry linkage • Innovation infrastructure • Diffusion of Science and Technology knowledge

17. Manpower issues • Lack of people with business building competence ; • To attract world class talents to raise standards of research in the country; • To attract and retain overseas Malaysian S&T personnel; • Lack of S&T personnel with the required skills in the country. 64% respondents agreed agreed statement suggesting the Manpower issue is not just one of “capacity” but more so in term of “capability” • World Bank report which ranked 128 developing countries based upon • their scientific proficiency, Malaysia was categorized as “Scientifically • Lagging” (World Bank 2002). Malaysia generates less than 5 S&T articles • per 1 Billion GDP (MOSTE, 2002:84)

18. Industry linkage • “Marketing of my research findings to industry is not a requirement in my job” • Facing difficulty in finding partners for research collaboration; • Pro-sharing of information with industry. • Innovation infrastructure • 91% respondents agreed that Malaysia requires a critical massof research centers of excellence for various disciplines • Malaysia’s share of worldwide scientific publications stand at mere 0.01% (Indicators Report, MOSTE 1999)

19. Diffusion of S&T knowledge • Do not know what technology transfer mechanisms are available • Do not have access to Technology Transfer organization • Lack of good Technology Broker in the market

20. Commercialization – VC’s Perspective

21. RELATIONSHIPS BETWEEN CREATIVITY, TECHNOLOGICAL INNOVATION & COMMERCIALIZATION COMMERCIAL WORLD TECHNICAL WORLD TECHNO-PRENEURSHIP 15 – 20 % of Commercial proceed to be ploughed back into R&D BUSINESS CAPABILITIES TECHNOLOGICAL INNOVATIONS INVENTIONS/DISCOVERIES/ TECHNOLOGIES Results Market Develop’m Activities Activities Research Activities Develop’ m Activities Product/ Process Develop’m Activities Tinkering/ Experimenting Source: Technology & Strategy: A General Management Perspective

22. APEC The First APEC Incubation Forum Commercialization • • Research universities are an “engine” for economic growth and a source of new knowledge • Fertile ground for new ideas • Educate workers comfortable with new technology • Focused on research involving revolutionary concepts • Funded with a mandate to benefit society • • So if research universities are such a great engine, why isn’t our Corvette smoking down the track? • Engines must be properly designed and tuned • My car needs more than just an engine!

23. Corporate Spin-offs Versus University Start-Ups in the EU APEC The First APEC Incubation Forum • • Benefits of Corporate Spin-offs • Greater business experience • Better access to development capital • Better access to markets • Better job prospects for employees % % • • Hurdles of University Start-ups • Grow slowly • Commercialization hampered by bureaucracy • Less entrepreneurial approach Source: EU Study, 2000

24. Lesson # 1 - Chances of Success for a High-Tech Start-up On average, good plans, people, and businesses succeed only one in ten times. INDIVIDUAL EVENT PROBABILITY Company has sufficient capital 80% Management is capable and focused 80% Product development goes as planned 80% Production and component sourcing goes as planned 80% Competitors behave as expected 80% Customers want product 80% Pricing is forecast correctly 80% Patents are issued and are enforceable 80% COMBINED PROBABILITY OF SUCCESS 17% Source: Harvard Business Review

25. APEC The First APEC Incubation Forum Business incubator Profit Cornered Markets Government Education of Students Economic Development Improvement of Life Commercialization Ideas Jobs Distribution Publication Reputation University There are Lots of Players with Different Goals!!

26. Source: A.D Little, 1992

27. APEC The First APEC Incubation Forum Rapidly Changing Global Scenario • Shortening life cycle of products and services: “if you understand the technology, it is obsolete” • Rapidly changing business environment: “it’s not the big that eats the small; it’s the fast that eats the slow” • Globalizationof world economies, technologies and innovations • Shiftof emphasis from a decaying industrial economy composed of large firmsto a knowledge-based entrepreneurial economydriven by innovative technology Source: 1000ventures.com

28. Gap Between Research & Commercial Application Target Resources Where They Have The Greatest Impact On New Business Creation Existing Research Resources Existing Commercialization Resources Resources “Valley of Death” “Entrepreneurial Zone” “Gap Funding” Idea Patent Practice Product Commercial Business Product Development Timeline Source: School of Venture, Hoseo University, Korea [itbi_kim]

29. APEC The First APEC Incubation Forum Barriers to CommercializationIndustry • • Poor understanding of the nature of academe • Poor understanding of its financial imperatives • • Funding for research • Funding for commercialization activities • • Desire to overlook the importance of student education • • View of university as a “vendor” not a “partner” •“Purchase” agreements for research • University seen as a source of “contract research” • • Lack of “industrial” role in education • • Difficulty in funding early, risky stages of the research/product process

30. APEC The First APEC Incubation Forum Barriers to CommercializationUniversities • • Poor understanding of the industrial environment • Lack of understanding of the need for speed • Unrealistic evaluation of the work of commercialization • • Need to protect education and discovery missions • • Susceptibility to litigation • Lack of revenue to offset liability • Deep pockets of endowments • • Lack of flexibility in the system • Government regulations • Protection of multiple, independent participants

31. Venture makes sense for very few companies • MOST successful companies are NOT funded by venture • Venture Capital ONLY makes sense for very few companies • Pre-Seed funding(cradle)- RM 50K • Seed funding- up to RM 2 million • Post-Seed funding- up to RM 40 million • Venture capitalists are not risk-takers, they are risk managers

32. HIGH REWARD A study, sponsored by the National Venture Capital Association found the following; • Companies backed by venture capital generate 2X the sales, pay 3X the federal taxes; • And invest far more heavily in research and development as their traditionally financed counterparts, VC backed companies generate $634 in sales for every $1,000 in assets, compared with traditional companies, $391 in sales. Venture-backed firms spend more money on R&D costs: $ 44 per $1,000 in assets compared with $15 for others. * Ciena Corp USA – IPO on NASDAQ reach valuation of USD 2.1 bil Source: Dresdner RCM Global Investors LLC, Ca

33. Lesson # 1 - Chances of Success for a High-Tech Start-up Idea to IPO 6 in 1,000,000 Plans to IPO 6 in 1,000 Funded to IPO 1 in 10 Source: Saratoga Venture Finance

34. Lesson # 2 - Scientist Versus Rainmaker (Who makes the better Entrepreneur?) Case 1: Biotech early stage in neutraceutical) - water soluble extraction technology - Strong technology and academic grounding - Commercialization fresh from the lab - Over-promise & underperformed - Difficulty adjusting to real-world practices Case 2: MEMS company design fabrication & packaging of sensors - Veteran Engineers in semiconductors business - Have strong contact with the industry and understand the practicalities - Under-stated & Over performed Case 3: EAI Software - Freshie (bright young graduates) - Naïve, gun-ho, stubborn and idealistic - Over--promise & underperformed

35. Some Common Mistakes Entrepreneurs make:- • Mistakes #1: Hiring the Wrong Person to Fill a Key Position • Mistakes #2: Thinking Small to Reduce Risk • Mistakes #3: Telling VCs What You Think They Want to Hear • Mistakes #4: Believing Your Competition Is Incompetent • Mistakes #5: Focusing Solely on the Money Source: Dresdner RCM Global Investors LLC, Ca Source: Dresdner RCM Global Investors LLC

36. Conclusions

37. Commercialization is “risky” mainly because so few of the so-called entrepreneurs know what they are doing. They lack the methodology. The violate elementary and well-known rules.