“Innovation Orchards”: Helping Tech Start-Ups Scale

Federal support for R&D has fallen precipitously in recent years as a share of gross domestic product (GDP), and because of this, the United States risks slipping significantly as a global innovation competitor. More federal investment is needed to avoid falling behind. But it will be difficult to find political support for more funding, since Democrats are reluctant to reduce entitlement spending, and Republicans want to cut budgets, including science budgets. So America will likely be forced to make the best out of a bad situation. One way to do that is to focus more effectively on spurring innovation commercialization—and one emerging idea is the creation of “innovation orchards.”

MIT President Rafael Reif coined the term “innovation orchard” in 2015, proposing a new mechanism to address a growing gap in the U.S. innovation system. An “orchard” would bring together university, industry, and potentially government partners to create a space that provides start-ups with the know-how, access to technology, equipment, and bridge funding to scale up their new technologies. With existing gaps in innovation financing, the aim is to leverage strengths in a region’s innovation system to help start-ups develop advanced prototypes, then demonstrate, test, and bring them to the manufacturing stage. In effect, the orchard would substitute space for capital.

Even with its decline, federal support for research at universities does continue to help create many new innovative technologies. New business start-ups have played a crucial role in translating innovative technologies into market-ready products, often with strong support from venture capital. The venture-capital system rose to prominence during the information-technology revolution, supporting computing and semiconductors, and has played a pivotal role in the U.S. innovation system for decades. Innovative start-ups, financed with venture funding, became a backbone of the U.S. economy during the second half of the 20th century. Some of the most successful firms to come out of this model, backed by early venture funding, include Apple, Microsoft, Genentech, and Google. However, starting in the second half of the 1990s, venture capital became more and more sector specific, coalescing around software and biotechnology, and in 2015 those two sectors received 53 percent of U.S. venture financing.

Venture capital has developed two different but successful models that have fostered the software and biotechnology sectors. Software start-ups have low initial costs, require minimal capital equipment, typically require a short period of time for development, and face low barriers to scaling online. This means software start-ups have the potential for very high profits on a smaller investment, though they are still high risk. Biotechnology differs from software in that the time to market tends to exceed a decade, and needed investments are substantially larger than those in software. However, the Food and Drug Administration approval process provides risk benchmarks for investment as a drug advances through the three phases of clinical trials. If a drug receives approval, its patent grants a short-term monopoly that is, in essence, assured by the FDA certification, enabling the high development costs to be recouped.

“Hard” technologies—in areas such as clean energy, materials, robotics, equipment, and others—that require long-term development, significant capital costs, and high risk, fall somewhere in between software and biotech and lack a well-defined venture-capital model. Start-up costs are much higher than for software, with a longer time to market, and they lack the FDA product certification and patent monopoly protections available to biotech. From 2006 to 2011, venture capital began investing heavily in the hard technology for new energy. A variety of factors made the sector appear promising for investment: high oil prices, growing environmental awareness, and an economy that had seen sustained growth in the years after the dot-com bubble. The onset of the recession proved damaging for cleantech; within a year, the price of oil had fallen by more than half, and Chinese government-subsidized low-cost solar panels flooded the market. Venture firms suffered major losses as a result and have largely withdrawn from the sector since. Other “hard” technologies face comparable challenges.

An ongoing effort to address these shortcomings has led to the creation of a number of new programs. Technology incubators and accelerators have been founded in a number of regions. Most cater to software start-ups, but a growing number are now focusing on start-ups developing hard technologies. However, most only have the resources to help with the early-development stages: low-cost office space, developing business plans, and first prototypes.

To fill this gap and focus on later-stage support, some new programs have emerged. Cyclotron Road, which is supported by the Department of Energy and its Lawrence Berkeley Lab, is one example. It offers newly-formed energy-technology groups advanced equipment, technology, and know-how to take on the technology-development stages of advanced prototyping, demonstration, testing, and production design. TechBridge, a program of the Boston branch of the Fraunhofer Institute organization—a nonprofit applied-research and development laboratory—links established start-ups with established firm partners for collaboration on late-stage development, with extensive lab support for new technology and product validation. It helps to certify new technologies through industry-driven validation and demonstration projects that Fraunhofer performs, rather than through the innovators themselves, as in the case of Cyclotron Road.

MIT’s The Engine is another entrant that performs a similar “innovation orchard” role. The Engine builds on MIT’s interest in bringing together technology start-ups, large companies, biopharma companies, federal labs, local incubators, and small- and medium-sized manufacturers in the region. It aims to fill a critical emerging gap in the innovation system, offering space, technology, and know-how as a substitute for initial financing, then de-risking and accelerating new technologies, so they can come into range of existing financing. The Engine will be regionally based but offer a new model for other universities and other regions interested in bridging this innovation gap. An experiment between the Massachusetts Manufacturing Extension Partnership and an area incubator, Greentown Labs, adds another element: creating collaborations between small area manufacturers and start-ups for production prototypes and pilot production.

Cyclotron Road, TechBridge, The Engine, and MassMEP-Greentown, then, all aim at helping start-ups commercialize their technology through new approaches to technology support. These and other innovation-orchard approaches aim to fill a growing gap in the U.S. innovation system, the start-up scale-up gap. As such, federal and state government programs should recognize the potential benefits of such efforts and more actively support their replication across the nation.