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In 2012, when the Creative Destruction Lab (CDL) at the University of Toronto’s Rotman School of Management was launched, the audacious target of this seed-stage program for massively scalable, science-based companies was $50 million in equity creation in five years. In 2017, CDL companies surpassed $790 million in equity creation. Such is the power of a market for judgment.
A market for judgment is a nexus between science and technology. By science, I mean the kind of knowledge that is produced in academic institutions and research labs. By technology, I mean the commercial application of that knowledge. A market for judgment is a place, like CDL, where the producers of knowledge meet and mingle with businesspeople and investors.
Markets for judgment are necessary and valuable because science and technology are mismatched in several ways. They are mismatched in geographic terms: Science is concentrated in universities, which are located all over the world; technology aggregates in a few places, such as California’s Silicon Valley and Cambridge, Massachusetts, in the U.S.1 The landscape of science is the gently undulating Great Plains whereas the landscape of technology spikes like Mount Olympus.
The distribution of scientific and technological talent is also mismatched. I think that may be because of the antithetical nature of the two jobs. Scientists are supposed to go down fruitless paths; it’s part of their process. Technologists are supposed to go down fruitful paths; in their process, fruitless paths are decidedly unwelcome and potentially destructive.
In short, although science and technology are supposed to go hand in hand, they usually can’t get that close. CDL was designed to determine if we could bring science and technology closer together by building a market for judgment.
The Case for Markets for Judgment
Typically, entrepreneurs who are seeking to commercialize their hard-won scientific knowledge have little or no business experience. To get started, they need advice. What customers or market verticals should they target? Should they license their knowledge and, if so, to whom? Or should they go it alone? What sort of people should they hire? When and where should they seek funding? There are a host of such questions, and finding even one person capable of answering them, let alone a group whose diverse views would allow scientists to figure out the right answers for their ventures, is unlikely.2
As a result, many entrepreneurial scientists head to technology centers, such as Silicon Valley, to get the answers they need.3 But even there, it can be very tough to gain access to a network of advisors (and investors).
But what if we could give science-based entrepreneurs access to markets for judgment, perhaps at their own universities or other nearby universities? Such markets would bring them together with successful entrepreneurs who had already brought companies to scale.
This scenario might start with a one-day meet-and-greet. But to create a robust market for judgment, there would need to be continued interaction. The would-be entrepreneurs would need to get to know their already successful counterparts and vice versa. This won’t happen with a three-month boot camp à la Y Combinator. The leaders of new ventures, mentors, and investors tell us that they need regular interaction over a year and perhaps beyond to get a feel for a business and its true potential. That means getting them all together in the right place at the right time, matching them up appropriately, and providing the foundation for a long-term relationship. If a market for judgment were a marriage market, it would need to be more like a religious institution than speed dating.
Research suggests that the returns on creating such a venue for long-term relationships can be high. Studies have shown that family relationships — one common way that entrepreneurs access judgment in the absence of a market — drive invention and entrepreneurship.4 We also know that colocating science and technology talent in a region, such as Silicon Valley, spurs entrepreneurship.5 This supports the idea that market creation can unlock the commercial potential of scientific research that otherwise might lie dormant.
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The Principal Players
Let’s visit a CDL meeting in Toronto to see what a market for judgment looks like. The setting is a typical business school lecture room with U-shaped, tiered rows of seats tucked under a narrow countertop.
The technologists — entrepreneurs who have started and successfully exited their own companies — sit in the first tier. Tony Lacavera, who recently sold his Canadian mobile phone network, Wind Mobile (now called Freedom Mobile Inc.), for $1.6 billion, sits next to Michael Hyatt, who sold his Canadian startup, BlueCat Networks Inc., for nearly $400 million. On the other side of the tier is William Tunstall-Pedoe. You may not recognize his name, but you might already be talking to his startup’s invention, Alexa, which was acquired by Amazon.com Inc. Next to him is Anousheh Ansari, the entrepreneur of Ansari XPRIZE fame, who has been into space herself. And next to her is Barney Pell, whose company Moon Express Inc. hopes to mine Earth’s “eighth continent.” They have come to the Rotman School of Management to help entrepreneurial scientists launch their own startups.
The new entrepreneurs stand where a lecturer might. They are usually postdocs or professors, with the occasional student sprinkled in. Their ideas come from their own research domains and usually their own multiyear research efforts. They don’t talk at this meeting; that has happened earlier with the mentors they interact with between these gatherings. Now, they are here to listen to those experienced in business — to receive their judgment.
This is not an incubator. The group convenes here for one or two days every two months. Then, they adjourn. Some go back to their homes in Toronto, some to homes much farther away. One of the new entrepreneurs, Charles Ollion, whose startup is named Heuritech SAS, has come all the way from Paris. The answer to the obvious question — why? — is simply: Where else can you meet so many experienced people who might be willing to guide you on your entrepreneurial journey over the next 10 months?
This CDL event is freewheeling, but not a free-for-all. Each entrepreneur needs to leave the meeting with three objectives to be achieved over the next two months, as well as the commitment from at least one of the mentors for ongoing support. Otherwise, they can’t come back to CDL.
The process is designed to force a consensus. Mentors must agree to a venture’s objectives. Unlike situations where an entrepreneur may listen to one advisor, the result here is a pooling of diverse experiences to give new entrepreneurs the focus they desperately need to transform them into scientists who can bring technologies to market.6
The Not-So-Cheap Seats
Entrepreneurs — new and old — are not the only people in the room. In the row behind the mentors sit the investors, who fly in from around the world. They know a market when they see one. Often, millions of dollars of funding are committed in minutes in CDL meetings. Raising money wasn’t the initial objective of this market for judgment, but when investors get to spend time with entrepreneurial scientists over a long period, they see more than a business plan: They see a trajectory. They see the decisions and missed objectives and pivots that make a new business. At each meeting, the investments they are considering are de-risked, just a little.
In the tier behind the investors are the competitors. They represent established companies. Concerned about potential disruptions, they are seeking a window into what might be coming at them in the months and years ahead. They watch and talk with the new entrepreneurs. Sometimes they become customers, and sometimes, they provide an exit.
In the last tier are experienced scientists. The science being commercialized in this lab is complex. So, the CDL draws on people like Steve Mann, the University of Toronto professor who invented HDR imaging, among many other things, and Russ Salakhutdinov, a Carnegie Mellon University computer science professor who also happens to be Apple Inc.’s AI research director. Each is making sure that the science can be made understandable. Not to be outdone, there is a team of economics professors, including myself, doing much the same thing.
And finally, not seated, but standing in the back of the crowded room are students in Rotman’s MBA program. Their presence might seem an afterthought, but this is a learning opportunity as well as a market. Moreover, some of them are already playing active roles in startups being discussed on the floor below. In recent years, 10% of them have declined job offers from companies like McKinsey & Co. and Amazon to join CDL startups.
Since 2012, 400 new ventures have come to life in CDL. Validere Technologies Inc., which brought technology for assessing the quality of liquids to market, came into CDL thinking about the cosmetics industry and left serving oil and hazardous waste companies. Toronto-based Nymi Inc., with its heartbeat authentication patents, quit trying to license the science and began manufacturing wearables. Bridgit Inc., based in Kitchener, Ontario, and its female founders are revolutionizing large-scale project management with their construction “punch list” software suite. The list goes on and on.
CDL has grown, too. There are now Creative Destruction Labs at the University of British Columbia, University of Calgary, Dalhousie University (Halifax), HEC Montreal, and, beginning this year, New York University. As they evolve, specializations emerge: AI in Toronto and Montreal; biotech and health in New York and Vancouver; energy and oil in Calgary; and environment and ocean sciences in Halifax.
The above schools have chosen to take the CDL moniker and work with us in a coordinated fashion, but the CDL model is here for the taking. It is often pointed out that business schools can serve as an important nexus between science and technology, but that has been more a promise than a reality. The Creative Destruction Lab shows that the promise can be delivered upon. It only takes a market and an aggressive attempt to get the right talent in the right room, at the right time.
If business schools make the effort, I believe that they will discover what Kevin Rivette and David Kline characterized as “Rembrandts in the attic” all over the place.7
1.A. Agrawal, A. Galasso, and A. Oettl, “Roads and Innovation” Review of Economics and Statistics 99, no. 3 (July 2017), 417-434; J. Guzman and S. Stern, “Where is Silicon Valley?” Science 347, no. 6222 (Feb. 6, 2015), 606-609.
2.For more questions, see J. Gans, S. Stern, and J. Wu, “Foundations of Entrepreneurial Strategy,” (abstract), Sept. 28, 2016, https://ssrn.com/abstract=2844843.
3.J. Guzman, “Go West Young Firm: The Value of Entrepreneurial Migration for Start-ups and Their Founders,” (MIT & NBER, September 2017), http://mitsloan.mit.edu/uploadedFilesV9/Global/Events/TIES/GO%20WEST%20YOUNG%20FIRM.pdf.
4.H. Hvide and P. Oyer, “Dinner Table Human Capital and Entrepreneurship,” Stanford Institute for Economic Policy Research (SIEPR) Working Paper No. 17-046 (Dec. 14, 2017), https://siepr.stanford.edu/sites/default/files/publications/17-046.pdf.
5.A. Agrawal and I. Cockburn, “The Anchor Tenant Hypothesis: Exploring the Role of Large, Local, R&D Intensive Firms in Regional Innovation Systems,” International Journal of Industrial Organization 21, no. 9 (November 2003), 1227-1253.
6.CDL research backs up this finding; see K. Bryan, A. Tilcsik, and B. Zhu, “Which Entrepreneurs Are Coachable, and Why?” American Economic Review Papers and Proceedings 107, no. 5 (May 2017), 312-316.
7.K. Rivette and D. Kline, “Rembrandts in the Attic: Unlocking the Hidden Value of Patents” (Boston: Harvard Business Review Press, 1999).