We put the franchisee+ (the research unit that developed the prototype+) in charge of commercialization+. When the firm purchases the prototype from the franchisee, this responsibility is stipulated in the purchase agreement. The franchisee receives initial funds as payment for its prototype and to cover commercialization costs. It uses commercialization funds to pay vendors of commercialization services (or firm internal resources). The franchisee is responsible for pulling together and managing the commercialization team. We do this because the franchisee is the most emotionally invested into the prototype, and has the most to gain financially (relatively speaking) from its success in commercialization.

The franchisee has every financial incentive to ensure the success of commercialization. The purchase agreement back-loads the firm’s largest milestone payments for the prototype to the end of commercialization. The franchisee does not get its full payment for the prototype unless commercialization is successful. In turn it is expected the franchisee will back-load its largest payments to commercialization service providers. This is the basis for pay-for-performance+, the financial incentive for all commercialization participants.

Why would the franchisee agree to this deal? What if another firm offers me all my money for my prototype up front? Company-financed franchisees have no choice. It’s in their franchise agreement. The firm has a Right of First Refusal to purchase all franchisee prototypes. And this right confers upon the firm the right to equalize payments from all competitors. So that other firm’s offer of $500 million up-front is equated to my offer of $100 million up-front and $900 million upon successful commercialization. It’s in the contract.

Independent franchisees, or research units not associated with the firm, might want to retain control over commercialization. In these cases, the firm still offers to pay all commercialization costs, for reasons discussed below. Independent research units may want the experience of commercializing their own products with the intent of one day becoming full-service operations. They get the chance to learn commercialization on someone else's nickel. And, they may find the firm’s back-loaded offer more attractive.

Why would the firm want this arrangement? Because the firm fully believes that commercialization experience makes for better prototype development by franchisees. And, they fully believe that this is the best way to make explicit all the vast stores of implicit knowledge+ held by the prototype build team, without which commercialization would be severely crippled. The firm has to pick someone to lead the commercialization effort. The franchisee has the highest financial and emotional stake in the prototype of all the parties to this transaction, including the firm. The franchisee will be quick to raise red flags when any particular team member is not pulling their weight. The firm therefore gives them full control over the selection and removal of all commercialization team members.

The firm will not want a company-financed franchisee to perform commercialization work on a prototype sold to another firm, and has some say in the matter. If the prototype is sold elsewhere, then the firm will insist the company-financed franchisee minimize its participation in outside commercialization activities, and concentrate instead on finding that next blockbuster+ prototype (of course independent research units can do as they please). Although success with the outside sale will redound significantly to the benefit of the firm, as majority owner in the company-financed franchisee, the reason the firm continues to invest in the franchisee is to find blockbuster products. World Class R&D certification demonstrably increases the success of any activity performed by the franchisee. Certification typically will not be held by most team members when commercialization work is performed with outside firms. Spend your time instead being looking for that next blockbuster prototype.

Why not just wait and purchase the prototype from the franchisee after it has been commercialized? Well in effect we are. The large bolus of money for the purchase only arrives after successful commercialization. In the meantime, we use interim milestone payments to the franchisee as a financial incentive, as a reward for graduation+ of the prototype, and as confirmation of the firm’s ultimate ownership. One of the most influential players in commercialization is Commercial Operations+, which typically resides within the firm. We purchase the prototype up front so players in Commercial Operations can better feel they are working on their own future.

But these small research firms specialize in the development of prototypes! They don’t have the commercial experience needed to run commercialization+. We need them to focus on what they do best. Illustrative Pharmaceutical Industry Quote

Franchisees of the firm will have commercialization expertise. We’ve built it into their mandate. They have been involved in many sub blockbuster+ commercialization efforts with the intent of getting them ready for blockbuster commercialization. And they are not in this alone. They have the full support and backing of Franchise Operations+, which has a significant economic and political interest in the success of commercialization for any of its members. Franchisees no longer specialize in the development of prototypes to the exclusion of everything else. They build skills required for full commercialization of their prototypes (albeit in a limited capacity).

Table 1. Who's the Customer? The Funding Agent sits at the top of this structure. They're the ones who put skin in the game up-front, a long time ago, and now seek their financial returns. Returns come from the success of the Franchisee's baby. But the Franchisee needs to shape their baby so it can be marketed, and so we see the Franchisee looks toward Commercial Operations as a customer. Commercial will take the baby to market. Industrial Design, the group that takes the raw physical child and shapes it to meet customer dreams, reports to the parents (the Franchisee), Commercial, and often to manufacturing (which has to mass produce this child).
Fully two-thirds (illustrative) of commercialization work for innovative R&D depends on the technical capabilities of the product or service. The need is for expertise in the features, functions, technical risks, and maintainability of the physical product or service. These skills are found much more with the franchisee than anywhere else. The technical experts within the firm (or within an external service provider) for this technical work have similar training and backgrounds. These are engineers with creative and critical thinking+ skills. We pair up our franchisee technical experts with the firm's experts in Industrial Design+ or similar technical areas.

The remaining third (but perhaps the most important third) of commercialization work requires skills in market-sizing and market preparation, as contributed by Commercial Operations. These are the customers and partners of the Industrial Designers. The Industrial Designers have their feet in both camps. They translate the limits, capabilities and risks of the physical product or service in a way that allows Commercial Operations to plot out a subjective consumer experience leading to blockbuster sales. It’s an iterative process. Having the Franchisee in charge of commercialization should in no way distract from this partnership of Commercial Operations with the Industrial Designers. Industrial Designers are kindred spirits and are tied emotionally and professionally back to the technical experts in the Franchisee. Table 1 illustrates the interrelationships.

Joined: 01/20/2010
Franchisee Funding of Commercialization - Great Insight

Having the franchisee+ really spend its own money for commercialization+ is a great idea, worthy of further investigation. It very much reinforces the sense of responsibility of the franchisee for the success of commercialization. We have to address, though, the limitation that we don't want employees of the franchisee to own less than approx. 30% of their firm, or they may be tempted to walk away from the mortgage. We can do this by having the firm recognize the power of allowing the franchisee to issue new shares to fund commercialization.

Majority shareholders (e.g., the firm) can have the franchisee issue new shares if it’s in the best interest of the majority shareholders. This slightly dilutes the value of all the current shares, but this is often done when it opens up significant new earnings opportunities for the franchisee that comes from investing the funds from the new shares. After prototype+ graduation+ all shares increase significantly in price, and you can confidently issue new shares to help fund commercialization without unduly diluting the sense of ownership of current shareholders. The franchisee issues new shares to fund commercialization, and it takes relatively few new shares (since they are now very highly valued), to do this.

There is another issue. In the current schema, the firm 'releases' commercialization money on a 6-month or annual basis, and the commercialization team understands they have a set timeframe within which to repair any damage done to product valuation+. You don't want to walk into negotiations for that next tranche of funding having a poorly performing effort (i.e., product valuation is sub blockbuster+). Tranches of commercialization funding were designed as a mechanism to allow the firm to feel they had some control over the progress of commercialization. Using the mortgage idea, we replace tranche funding with a funding mechanism designed for discovery of blockbuster prototypes; it will be less directly 'associated' with the success of commercialization. Blockbuster prototype funding is dependent on many factors (i.e., the 5-P's).

The proposal to use franchisee funding of commericalization with their own mortgage money or line of credit is very attractive, but will require much more consideration and study.

Joined: 06/05/2010
Franchisee Funding of Commercialization

You state "The franchisee+ receives initial funds as payment for its prototype+ and to cover commercialization+ costs." ... wouldn't there be an even greater financial incentive for the francishee if they had to use their own money for commercialization? Simply build commercialization funding into the franchisee 'line of credit' -- every time they spend a dollar on commercialization they are in effect going deeper into debt (i.e., they own even less of their own firm). This will encourage them to 'spend wisely' but not to penny-pinch. They still realize their biggest milestone payment only comes at the successful conclusion of commercialization.