Selecting Technology and Creating $30 -300 Billion in Value for the

US Economy.


By Gary Howorth, Founder Energy-Redefined


Introduction

In a recent article written in the Sunday New York Times 1 , attention was drawn to the
performance of the Houston Rockets basketball team and one man in particular Shane Battier.
Im no fan of the team, but Shane Battier has one of the worst records in basketball when viewed
from the usual statistics point of view. But why is he so important?

The article in essence makes three important points. That simple ranking methods or indices like
balanced scorecards dont really work in predicting the real value of Shane Battier. In addition
they give no real measure of ultimate team performance2. And lastly he brings real value to the
team in some other way. We all inherently believe that the team has more value than the sum of
the parts and some seemingly invaluable components are key to network or team success. This is
the crux of this paper. But how do we value and identify these important components,
technologies and or team players? This paper will essentially show:

We have a methodology that addresses these issues,
Places a value on the team, portfolio or network of players and can highlight areas of
value extraction
Can apply this to better focusing either company, VC or government spending on
technology programs
Have built prototypes that have shown how to extract this value and have identified
research avenues that would have otherwise been missed
It is flexible and can be used across a number of industries, but we will concentrate on
technology investments in the energy industry, as this is our area of expertise.
That network structure and policies drastically affect the outcomes. Understanding
these is important to optimize results
That the interaction of the players, structure and policies are highly non linear and mean
that the myriad of sophisticated but linear models in the market today may be providing
misleading conclusions.


1
http://www.nytimes.com/2009/02/15/magazine/15Battier-t.html

2
Another good example of this would be the multi million dollar soccer player who once transferred underperforms
So why is this so important Now?

Recent changes in government positions and a focus on new technologies and will divert funds to
pressing energy and climate change issues and firms addressing them. Beyond creating jobs,
government investment in these technology fields, holds the promise of laying a lasting foundation for
more business innovation and efficiency, while helping to create new industries. The appeal of these
kinds of investments is that you not only get the simulative effect but also build a platform for
productivity gains and long-term growth. If applied in the right way this approach could create some
20-300 billion$ of value to the US economy, including under the right conditions some ~1-10 million
jobs
3.
But current approaches based on current expert ranking methods used in organizations like
SBIR etc could miss much of this value

In the same way as our basketball example, technology sponsors whether it be government or private
investors have been struggling with a similar but a related issue in Research and
Development/technology
4
. That of how to best spend taxpayers or other funds more effectively.
Many government audits and reports have been written about the inadequacy of the existing systems
to select winners. These solutions typically are focused on complicated indices with expert input.


We believe like our basketball example they take no account of the team or network effects or other
spin offs to the investors whether they be government or private investors. In addition the R & D
experts:

Typically overvalue their technology (but not in an malicious way)
Focus on and around their own areas of expertise and do not necessarily look outside their
scope
Tend to band together with other like experts or social norms
5




The resulting incremental approach is good in formative or new industries such as biotechnology as
benefits from this focused approach can be large. The traditional experience curve tells us this.
Large gains with exponentially declining returns through time. The big and innovative breakthroughs
of course will come from outside the Industry, but only if they are allowed to flourish.

So what does this mean? Participants who look inward, will reap incremental gains. Those that look
outward and are more open, may gain much more. But incumbents within industry have a poor track
record of allowing these external ideas to their industry to take hold. It presents risk to them in many
ways.
6
But good ideas, which are not adopted, ultimately have no value.
So an analysis of these potential blockers or gatekeepers and methods or policies to change the
technology and Industry landscape are incredibly important and provide one key to unlocking value.


After reading this paper you may be thinking this is sort of like social networking. Well you would be
right. So surely we need to have as many contacts as possible to gain as many new friends ideas as

3
http://www.nytimes.com/2009/01/26/technology/26techjobs.html 900,000 jobs per $30 billion.
4
I will use R & D and Technology interchangeably here in this article.
5
We dont believe that this is contentious as this is well documented in many research papers
6
Risks can be viewed in many dimensions including ultimately an impact on the incumbents job.
possible. Im sure you have friends who have social network sites like linked in, Facebook with 30
-50 contacts and others that have over a 2000. Unfortunately there is a cost to maintaining links
either in time, money or energy, which many of us tend to forget. Some of the links are valuable and
others are not. The evidence from a number of recent studies in a number of different
7
industries
clearly shows that there is an optimum level and type of contacts required. It depends on the network
structure and its underlying dynamics which by the way, changes through time.


It is however possible to capture many of these network and spin off values, and to manage and
extract value from them.


But we also believe that this approach can provided a myriad of other benefits including but not
limited to:
Better and more focused University programs/Education particularly in science
Takes account of Government priorities/requirements including climate change initiatives and
job creation
Helps in the deployment and diffusion of new technologies and the identification of blockers
Creates value to society as a whole (including private investors)
Identifies additional value in addition to the more conventional approaches. This helps lowers
risk to potential investors, allowing private or VC investors to enter earlier in the development
cycle. We believe that this will ultimately help in the faster diffusion and adoption of
technologies.



Why the need for a better system
Although we have discussed this at some length above, we would add that many of the current
methodologies either use a modified experience curve approach or has focused on patent analysis.
This is valuable work but doesnt reflect the network or team nature of this problem. Neither does it
recognize in any sophisticated way the impact that policy, gatekeepers and other industries
technologies interact and react to various stimuli and responses. They are not particularly dynamic.

How can we do this?

Over a number of years whilst building various components, we have realized that by putting
together various databases and approaches that we can get a better handle on how technologies
might evolve, interact and provide value. We have used this approach recently to provide a roadmap
for technology development within an emerging country and a similar approach to help a company
extract value using a network or spin off approach. Value, far in excess of the conventional individual
asset approach.


Most technologists use a tinkering approach to improve their process. At its simplest, technology is
both impacted on and by its environment. Technology can change the environment in the longer run
and be changed by it. We believe that to be successful, technological progress, needs to be more or
less correlated with its environment or landscape. This landscape is shaped by government, industry

7
You can also liken this to an option. Options have costs , so having many options costs more.
and other stakeholders in varying proportions. So the intersection of technologies with requirements
or needs provides opportunities for these technologies. But what are they?


Intersection of Needs and Technology
Government/Policies
and Regulations
Patents/Inventions
Innovation
Diffusion
Other Stakeholders
Needs
Value to
Society
Unintended
Consequences



By modeling these intersections in a network and the dynamic process in play we have represented
in a more realistic way the true value to society of technology focus. We have brought together a
number of approaches that we have been developing over a number of years to capture:

Technology evolution at the component level
Modeled the interactions between technologies
Factored in political and power base issues ie who will support and who will block
Valued them
Built multi level networks of interaction


This has been built on a onion based model starting with underlying data and databases and
finishing with a multilevel interactive process.

Databases
We have started to build a comprehensive database of technologies from both within and without the
Industry
8
ie technologies that could impact even in a small way the industries under analysis. This
includes data on costs, production output, efficiencies and potential benefits in terms of cashflows
and jobs etc.

8
In this case the energy industry


Methodology
Energy Costs and
views on markets
Energy Costs and
views on markets
Technologies costs,
impacts
Technologies costs,
impacts
Experience curves
Experience curves
Valuation tools
Valuation tools
Technology
Assessments
Technology
Assessments
Policy impacts
Policy impacts
Technology
impli cations
Technol ogy
implications
Tools and models
Tools and models
Non linear
Adapti ve Networks &
evoluti on
Non linear
Adaptive Networks &
evolution
Optimization
Evolved Experience
curves
Evolved Experience
curves
Characterization of
technology
Characterizati on of
technology
Rul es
Rules







Models
We have started to build a suite of valuation models (including carbon and other effects) to help us
evaluate technologies on a stand-alone basis. This is difficult to perform without a good
understanding of how the industry operates and potential impacts on the industry. In addition we
have had to develop a better approach to comprehending how technologies evolve and in what
direction.
9
This is important in the context of understanding the potential linkages to other
technologies. Our approach treats the technology investor essentially as an agent. An agent that can
chose the direction in which it wants to grow, based on some logical behavior and selection process.
Incentives from governments can change this behavior.


But these agents are interconnected with one another and evolve with one another.



Network Value and identifying Key Areas of Focus

By integrating these components we have the basis for modeling technologies and valuing them on
a stand alone basis, but how do we put all this together to extract value in a network?



9
Our methodology takes account of some 40-50 potential improvements in the current state of the technology .
Lets consider a network of technologies represented in the figure below. The linkages represent
potential benefits that could flow to other technologies if they are successful. The links are
directional. Success in one or more of the technologies could cascade or permeate through the
network. Our models allow us to simulate this. If we put values on these links to society or to
investors we have a way to value the network. If we remove a link or a node (technology) then we
can revalue the network. The difference between the value of the network with and without the node
represents the value of the node or link. Note in the case of the basketball player this is the better
way to value his contribution. Simple but of course the devil is in the detail.


Technological Interactions
Technologies
Interactions
Stimulus and
funding applied
here
Under certain conditions stimulus
permeates and cascades to here




But this only tells one part of the story. There are other interactions that need to be considered. They
include, amongst other things:

Market impacts
Carbon and green energy
Government and social needs and issues
Company positions and behaviors



Networks Interact and Change due to other
Interactions
Technologies
Governments
Institutions/Coalitions
Corporate
Markets/Needs
Environment eg. Oil prices





To cut a long story short this is what we have done. We have built a multi level non linear simulation
model that starts to address these issues.



Summary

So this methodology essentially captures a number of facets that we believe is important to
understand in creating real value in the technology business.


It uses a combination of a variety of approaches and could provide multiple benefits including:
Education
J obs
Better technology focus to meet agreed goals
Help reduce climate emissions
Portfolio management
Identifies
o network value of individual technologies
o blockers
o technology opportunities - eg strategic alliances

Why us

Expertise. We have been working on these components for 5+years and have a through
understanding of our industry
Commercially realistic
Developed a methodology that can create value.



If you would like to know more contact Gary Howorth at [email protected]



April 2009 Energy-Redefined 2009