‘Technological innovation’ has recently become an ossified catch-all term not only in venture capital circles, but in management consultancy as well. Under the deceiving influence of this catchy buzz-word, we tend to underestimate the complications which technological trailblazing entails. Such issues gain increasing relevance in a consulting career, if one decides to take projects with start-ups.
Innovation start-ups are a practical starting point for familiarising yourself with the industry, since they rarely have the budgets for hiring major strategy firms, and therefore often welcome volunteer consultants. In addition, such small-scale clients allow greater insight and deeper involvement with the entirety of the project than high-profile ones, which usually require interns and associates to only focus on a specific aspect of the programme. Although start-ups are welcoming employers for newcomers of management consultancy, they face very specific problems, which you need to be prepared for.
The following article will demonstrate the pitfalls of turning an innovation into a market reality with a case study from the plastics industry.
Turning Innovation into a Market Reality
Curiously, those who benefit the most from ground-breaking innovations are generally not those who made the crucial discovery in the first place. The first social media network was not Facebook, but a short-lived Hungarian start-up called iWiW, and the Ford Model T was by far not the first automobile either. The reason why the public often falsely remembers the aforementioned companies as the vanguards of innovation is that they were the ones who managed to use the new technologies in an economically viable way. More often than not, the key to the success of an innovation lies primarily in business management, and that is where consultants come into the picture.
Start-up in the Plastics Industry
My experience working with a start-up that has found a way to test the enzymatic degradability of different plastics with a hundred times increased efficiency was instructive in spotting the mistakes failed trailblazers often make.
The degradation of plastic waste is necessary for the establishment of a circular economy, and current solutions to the issue are deeply inadequate. Only a meagre 8.7% of plastics are recycled in the US, with the rest ending up in landfill or an incinerator. Unfortunately, even this minor fraction is not recycled based on market principles, since firms usually only use recycled plastics to meet environmental standards imposed by government, not to reduce costs or improve quality. Thus, the market potential behind the enzymatic recycling of plastics is huge, yet projects in the field still have to go through a myriad of difficulties.
1. Copycats and Patenting Strategy
The first issue presents itself at the moment of invention, the threat posed by copycats. Patenting the innovation is an obvious first step for any emerging start-up, yet things are more complicated than they would at first seem. As soon as a technology is patented, it becomes public knowledge, and such exposure can actually cause more harm than good. The reason for this is that despite the best efforts of solicitors, legal patents can often be circumnavigated with the help of specific legal loopholes and self-serving legal interpretations.
One way around this issue is a patenting strategy called ‘swarming’, which involves submitting an excessively large number of highly specific patents to keep hostile copy-cats at bay. There are two weaknesses to such a strategy. Firstly, legal and registration costs are extremely high. Industrial patents in the US usually cost around $3,000 each, which would often force the founders to involve investors into the project at an early stage. Secondly, the swarming strategy is not as comprehensive as you might like to think. In order to truly protect a business, you not only need to secure its technology, but as many elements of the business model as possible. In order to spare costs and expand the scope of its patents, many start-ups opt for making the majority of their patent applications not at the time of their initial founding, but in the period of scaling-up and monetisation, where they can also safeguard some of their management practices.
When it comes to the plastics industry, the chemical recycling company Carbios is an instructive example of this delayed patenting strategy. The firm inflated the number of its patents only in 2020, when it patented its management practices relating to the chemical recycling process, nine years after calling the company into existence, and three years after its original patents were licenced out for €8 million.
2. Rivals and Strategic Partners
Another crucial aspect of launching a start-up is realising who your friends and foes are. Disrupting innovations can often lead to an avalanche of complementary technologies, since new production methods enable new products and require new supply chains. A pertinent historical example of this phenomenon is the ‘yarn hunger’, which arose after the invention of the spinning machine at the dawn of the first industrial revolution. Concomitant and complementary inventions can greatly enhance the economic viability of a product, but can also turn into competitors.
My personal consulting experience is related to exactly such a complementary innovation. Having realised the potential behind the enzymatic degradation of plastics, which was a pre-existent finding, our clients created a technology which revolutionised the testing of such enzymes, making the technology a potential market reality. The question was whether they should create their own recycling plant, or partner with other chemical recycling companies. In industries with high barriers to entry, like the plastics recycling business, firms usually opt for cooperation instead of competition, which is not a coincidence. Referring back to Carbios, the company was established in 2011, but its first demonstration production unit is not expected to turn a profit until 2025. Under such difficult circumstances in terms of funding and a long payback period, launching a competing enterprise from scratch poses many risks, which most investors are not willing to incur.
Yet, in a different case, when working on a health mobile application, we could not expect such a cooperative sentiment from fellow actors in the market. The development of mobile applications requires relatively small investment and faces only few legal burdens, therefore competition in the segment has become a ferocious race for public recognition. Despite this, the scene is not only filled with hostile competitors. What helped our clients establish their market position was a strategic partnership with a technology giant which was not directly interested in the field. This partnership channelled users to the app who would hardly have heard of it otherwise.
In short, you need to astutely assess the industry and the players in order to perceive when it is in your interests to collaborate and when you should compete.
Final Thoughts
In conclusion, specialising in working with innovation start-ups offers considerable potential as a consultant, but such an endeavour also comes with specific challenges. In order to turn technological innovation into a success story instead of a wasted opportunity, you need a heightened awareness of crucial issues like patenting strategy and business partnerships.
Bence Borbély is a Hungarian first-year History and Politics student at the University of Cambridge whose professional fields of interest are management consultancy, public policy-making, politics and international relations.
Image: Pexels
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