Open Innovation: A channel to success in RFID

The process of corporate innovation is inherently an iterative process of trial and error.  Further complicating this process is the fact that corporations in the current economic climate are resource constrained, in terms of monetary budgets and manpower.  The downturn in the economy has also forced corporations to reexamine their strategies.  All of these factors have resulted in the cancellation of various innovations and R&D initiatives at the expense of millions of dollars and many thousands of man-hours.  But instead of incurring these losses, is there an alternative way to potentially realize a return on these innovation investments, and by doing so injecting a spirit of entrepreneurship into the corporate environment? 

The answer to the question above lies in an organization’s ability to embrace Open Innovation, a term promoted by Henry Chesbrough in his book Open Innovation: The new imperative for creating and profiting from technology.  Open Innovation is a corporate paradigm that embraces both internal and external ideas, and internal and external paths to market for various corporate innovations and technologies.  The example of the spinout of the Class-3 RFID business from Maxim Integrated Products into Intelleflex Corporation, an existing venture-backed startup, serves to highlight the challenges and issues facing managers and engineers in trying to decide the optimal path to commercialization for their innovations. The new Class-3 RFID technology dramatically increases read distance (10x over incumbent Class-1 RFID), increases read reliability in harsh RF environments, and enables the integration of various sensors for environmental monitoring applications. 

Maxim had spent millions of dollars and countless man-hours towards developing the new RFID technology, which resulted in numerous system and RF-level innovations that translated into strong intellectual property (IP) in this domain.  However, these innovations had not yet reached full commercialization.  Achieving commercialization would have required additional investment in headcount and tens of millions of dollars on part of Maxim at a time when the company was in the midst of redefining itself and its strategy.  As a result, the company was faced with a classic innovator’s dilemma: Maxim viewed Class-3 RFID as a disruptive technology that presented a long-term strategic interest to the corporate parent, but given Maxim’s immediate strategic focus, it could not justify providing additional resources to the project.  Maxim was faced with the decision of shutting down and potentially “wasting” key innovations that could be valuable in the future, or defining an alternative external path to market via a spinout. 

Maxim approached New Venture Partners (NVPLLC) to explore the possibility of spinning out its RFID business.  During the course of due-diligence on this spinout opportunity, NVPLLC identified complementary team and technology in Intelleflex that could benefit from the addition of the Maxim innovations to further strengthen Intelleflex’s position in the market.  For example, Maxim’s system and RF-level innovations complemented Intelleflex’s component-level innovations; Maxim’s IP had the potential to improve Intelleflex’s product performance.  Conversely, Intelleflex’s strong management and engineering team complemented the specialist technical team from Maxim.  Additionally, both Maxim and Intelleflex were viewed as key innovators and leaders in the field of Class-3 RFID, and both were key drivers of the associated technology standardization activity.  Ultimately, NVPLLC deemed that a combined entity, consisting of the Maxim RFID business and Intelleflex, presented the optimum path to leadership in the Class-3 RFID market (versus funding a competitor in this space that would further segment a growing market). 

NVPLLC facilitated the Maxim RFID business spinout and immediate, subsequent spin-in of the business into Intelleflex.   Coincident with this transaction was the completion of a new equity-financing round in Intelleflex.  This complex transaction involved identifying the relevant Maxim RFID innovations and IP and defining the appropriate IP rights that fit the requirements of the corporate parent as well as the new spinout.  Innovations and IP in corporations are usually consumed by multiple business units and are subject to the approvals of multiple stakeholders, including the GMs of the various business units and corporate legal teams.  Further complicating the corporate IP landscape is the fact that IP is consumed in different ways by the different business units, which in turn attribute different value to the IP.  Navigating the complicated IP landscape can be a challenge and usually serves as the proverbial “long pole in the tent” in transacting spinouts.  Similarly, the key innovators and individuals developing the technologies can have multiple responsibilities to various projects, potentially across different business units.  Corporations may not want to spinout the key innovators and technologists for fear of a “brain drain” associated with these various projects. 

Another challenge is that key innovators may not want to participate in a spinout due to the perceived instability of a spinout.  Innovators may not want to join a startup because they may not appreciate the value of a spinout compensation structure (which is usually weighted towards equity vs. cash).  Having an experienced partner, such as NVPLLC, that can define innovative solutions that address these challenges can mean the difference between a successful spinout and shutting down the business.  NVPLLC, with assistance from Maxim and Intelleflex, was able to successfully identify and navigate a path through these IP, personnel, and other challenges, thus resulting in the spinout of the Maxim RFID business into Intelleflex.