In several recent columns, we examined the need for educated people to aid our national prosperity. We also studied the outlooks for U.S. industry in an intensely competitive world where improvements to standard of living greatly depend on innovation. This month we will explore the statistical history of American innovation and the surprising record of conversion of ideas to commercial reality. This was all studied by Greg Stevens and James Burley for the Industrial Research Institute in a report titled “3,000 Raw Ideas = 1 Commercial Success!”

Across most industries, it seems that 3,000 raw ideas are needed to produce one new product that is commercially suc-cessful. In some sectors (e.g., pharmaceutical), 6,000 to 8,000 starter ideas are needed but far fewer are required for prod-uct-line extensions. But the rule of thumb goes like this.
  • Stage 1: 3,000 ideas for something new are generated.
  • Stage 2: 300 ideas receive minimal action (experiment, patent disclosure, discussion with management).
  • Stage 3: 125 ideas advance to small investigative projects.
  • Stage 4: Nine projects survive and evolve into significant projects.
  • Stage 5: Four projects advance to major development efforts.
  • Stage 6: 1.7 projects are commercially launched.
  • Stage 7: One project (59% survival from prior stage) is commercially successful.
A key requirement here is defining what constitutes “commercial success.” One measure can be that “the money returned is greater that all the money invested.” But it is important to understand success in terms of how effectively that funding was spent and the leverage that new product or process development provides to an enterprise. So the means to assess “success” is derived from a composite evaluation of patent activity, project actions at large companies, venture capital activity and independent inventor activity. As a guideline, only one of 10 ideas are ever submitted for patent consideration. Just 50% of these are deemed appropriate for patent application documents, and 75% of these receive patents. So only 37.5% of patent submissions receive “granted” status, and 75% of these awards were altered substantially during the patent examination process.

Historical evidence offered by industrial managers indicates that only 5-10% of granted patents have potential for commer-cial utility, only 1-2% will ever recoup any return exceeding costs to maintain the patent and less than 1% will offer “crown jewel” benefits. In separate analysis of 28,000 awarded patents, less than 5% of those granted to government researchers have “marginal commercial value,” which is less than those working outside of government – an unexplained feature of mental processes that differentiate people working in the public and private sector. Allowing for the fact that only about 10% of busi-nesses that acquire patents survive five or more years and only 15% in the high-tech sector have any measure of financial success, it is a wonder that technology improvement exists at all. A 30-year review of such statistics ending 10 years ago re-veals a consistent picture of this high mortality and low rate of commercial success, which is always exacerbated by manage-ment of the enterprise (the perpetual people problem) because good development execution and financial ability and stability are rare in small businesses.

This raises the interesting differences between the inventor in a “contained” environment versus those who pursue financial assistance via venture capital (VC) investment to hasten commercialization. Analysis shows that fully 50% of VC-backed busi-nesses fail completely, 20-35% provide a return of 8-10% (practically speaking, break even) and only 10-15% assisted by VCs provide better than the cost of capital. In this regard, only 0.3-0.45% of originally submitted ideas become true business suc-cesses. The VC community generally agrees that only 0.03% of original raw ideas return spectacular results.

This offers a sobering perspective of how capitalist-based innovation selection processes work and why it is important to stimulate creativity, the most critical component of industrial enterprise. Only talented people can make this happen, and it is why they are worth their weight in gold. IH