Seeking Opportunities? Follow the Money!

If you want to know what’s important to someone, just look at what they spend money on.

The same can be said of businesses and funding organizations. They only spend money or issue funding when they’re confident the idea, product, service or initiative they’re supporting is a sure bet.

But funders aren’t always upfront about what industries or projects they’re looking to support. Even RFPs don’t tell the whole story. So what’s a money-seeking university, company or individual to do?

The best predictor of future behavior is past behavior. The best predictor of funding preferences is (recent) funding activity, but that information is scattered all over the place and would take lots of time to secure and analyze. So we at CIMS decided to apply big data analytics—the same process we’ve been using to help companies make critical business decisions in a fraction of the time than it typically takes—to the process of researching funding opportunities.

I worked with Jim Gruskin, managing partner of Cobb Bay Partners and an adjunct professor at the Poole College of Management, along with MBA candidates Jeremy Guill and Allen Thomas, to use text analytics to discover funding opportunities. The result of our work is a new tool we’re calling the Opportunity Finder that we hope to make available to our members and other interested companies.

First, some background.

The primary players at the idea-generation and concept development stages of both basic and applied research are the universities and colleges whose major sources of funding are from the federal government and industry-based research and development labs. Industry, often in the form of manufacturers or major technology users, will invest through all stages, as their individual interests and economic ability allow. However, industry generally focuses on the applied research and market development /market entry stages.

Early private equity in the form of seed capital or individual (angel) investors is a source of financing for fledgling companies prior to the market-ready stage. Angel investors, who are often serial entrepreneurs themselves, will invest in individuals or start-up companies at the pre-seed capital stage, but generally have an increasingly smaller role to play as the product reaches the market development stages.

Formal financing through risk capital typically picks up after the seed capital stage, where products have been prototyped and demonstrated, but are not necessarily manufactured in volume. And certainly, these companies are not generating revenue. Venture capitalists fund individual companies through these stages, and frequently realize their returns (“exit”) once industry, banks and IPO markets invest.

In developing the tool, we considered the following dimensions involved in supporting an idea to market:

Innovation cycle stages. For a concept to be developed to a point where it attains market entry, a number of stages need to be followed, from fundamental research to market entry.

Risk types and weightings. In general, development linked to technology performance uncertainty is most significant in the early research stage, and since the eventual markets are unknown, the markets’ risk is negligible. As the technology moves through its development stages–and the market application becomes clearer–all three categories share an equal weighting. As these demonstrations and scale-ups prove out product capability and the technology moves toward market entry, the other downstream risks dominate, including market and financial uncertainties (market definition, size, receptivity, uptake rates, etc). Overall, as one nears market entry, all types of risk are generally lower.

Players. Multiple players appear in the innovation cycle; their degrees of influence and activity vary along this chain. The nature of participation is linked to the risks involved. These can be grouped into three categories: Technology risk, financial risk, and market risk.

Armed with this information, we decided on the following process for the most effective text-focused, big data-driven research into funding opportunities:

1.Determine funding sources and proportions of funding. Again, this is a general purpose tool. The first job of any organization is to understand all of the major funding sources and their level of investments. After all, they are ones who continually scan their macroenvironment and step up to the risks with their capital and talents.

2.Select information types and sources. The second job is to select what you consider to be trusted sites that contain this information. These become the target for big data analytics web crawlers.

3.Calculate funding intensities and gaps. By making the innovation cycle the function of the funding sources, you can determine “what’s trending and impending.” Specifically, by tabulating the investments being made at each stage of the cycle, you can map the funding intensity behind any concept. Funding gaps are equally important to understand. As the technology develops from prototype stage to full demonstration, which is usually where the technology is spun out from academic institutions to private research laboratories, individual entrepreneurs and subject-matter experts, funding intensity usually drops abruptly.

At the same time, financial and market risks begin to rise as concern shifts from technology viability to market relevance. Given the risk aversion of both mature companies and recently the financial sector, a structural break can occur in the innovation cycle. This is sometimes termed the “pre-IPO gap” or “pre-commercial gap”. And its arrival couldn’t come at a worse time for large segments of the population needing these products and solutions.

Although the Opportunity Finder is still in the beta stage, we’re hopeful that we’ve hit upon an easier, smarter way to help organizations find funding partners and sources to make sure their exciting new products live to see the light of day.

By Paul Mugge, CIMS Executive Director, Innovation Professor, Poole College of Management, NC State University

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