Inventors and the Market: A Profit-seeking Behavior
While some entrepreneurs seem to try to commercialize their creations in spite of economic sense, a study of more than 1,000 Canadian inventors showed that they in fact did work mainly with the goal of profit in mind. But because some irrationality still taints the decision-making of inventors, Thomas Åstebro suggests pairing them up with business partners for higher commercial success.
One day in 1996, when Thomas Åstebro was assistant professor at Canada’s University of Waterloo, the Canadian Innovation Centre came knocking at the department’s door asking if anyone was inter- ested in doing research on the 14,000 inventors who had used their Inventor’s Assistance Program. The opportunity was too good to pass. So the professor, who had himself made a few less-than- successful forays into entrepreneurship, mined the data being offered up to examine economic mod- els of decision-making among inventor-entrepreneurs. After all, many important inventions, from the telephone to the camera, stem from individual creators, so there is good reason to care about their motivations and successes, he wrote.
Were inventors all wild-haired mad scientists, so overwhelmed by the sheer joy of creating that they refused to imagine that their gadgets might never become household products? Or were they as rational as any other economic agent, calculating how to hit supermarket shelves and repay their investment? To determine that, Thomas Åstebro and his colleague matched the Canadian Innovation Centre’s evaluations (potential market size, costs, competition, risk) with the inventors’ sub- sequent successes – or lack thereof.
A MAINLY RATIONAL, PROFIT-SEEKING BEHAVIOR
The first results were rather surprising: contrary to what the researchers expected, given the invent tors’ deviation from the norm in terms of unbridled optimism, inventors’ decisions to enter the market mainly did respond to profit opportunities. Com- paring the 911 inventions that were not commercialized with the 101 that did enter the market, entrants on average had been rated to have lower investment and manufacturing costs, greater potential sales and less competition than non- entrants, with potential sales having the largest estimated effect. Inventors exhibited just as rational a behavior regarding stated reasons not to commercialize their idea, citing mainly pecuniary reasons: lack of capital (32%), competition from a similar product (22%) or simply a negative assessment from the Canadian Innovation Centre’s evaluators (42%). These decisions to enter the market or not were just as consistent with another logical reasoning, that of risk aversion. For instance, increased development uncertainty deters entry. Yet the profit motive clearly dominated the decision-making process, with low sales volumes (for 31% of respondents) or opportunity costs (14%) cited as reasons for abandoning the commercialization of the product.
Inventor’s decisions to enter the market mainly did respond to profit opportunities
THE RUTHLESS MARKET PREVAILS
Yet the fact that realistic hope for gains was the major factor in the decision-making process of inventors definitely could not be taken for granted. As Thomas Åstebro points out: “While some inventors are very rational and money-oriented, many do not give off that image as I noticed when” interviewing dozens of them; they tend to be significantly much more optimistic and overconfident than the rest of the population.” But these biases perhaps did not amount to anything when crunch time came. In other terms, some sort of correction seemed to play on behaviors in the market- place, as the professor puts it: “At the end of the day, the good ideas will persevere and the bad ideas will fail” - whether they come from a crazy or a rational mind. And a tough rule that is, for the plans that actually reach the stage of development and commercialization are a minority, and the truly successful ones, an even tinier minority within the minority. The only runaway success that the Canadian Innovation Centre (positively) evaluated was the first abdominal exerciser, invented by a Water- loo chiropractor in the 1970’s, and which went on to make $500 million in sales. But out of the 1,012 inventions in this survey, fewer than 10% made it to the market.
SOME IRRATIONALITY REMAINS
Even though this research demonstrated that rational gain-seeking motives predominated, some behaviors remained irrational, with some inventors still not prepared to throw in the towel after being told their idea had not a hope of realistically ever making money. The cruel truth, as stated by Thomas Åstebro, is that some forms of indomitable optimist are “value-destroying”, “because these people keep throwing money after bad ideas. If told by experts that their idea is worthless, they should listen.”
Based on an interview with Thomas Åstebro and the article “Entrepreneurs Seeking Gains: Profit Motives and Risk Aversion in Inventors’ Commercialization Decisions” (Journal of Economics & Management Strategy , Winter 2010), co-authored with Kenneth L. Simons.
APPLICATIONS FOR POLICY
The difficulty is that research barely grazes at the margins of explaining which inventions become successful. “It’s mostly luck, which you can’t identify by statistics, and quality ideas, but how can policy tell people they must find good ideas?” asks Thomas Åstebro. But in subsequent research, he noticed one variable that can be effectively tweaked to increase commercialization success: helping inventors find business partner with complementary skills. In other words, it’s about matching those who hatch ideas with those who can turn these ideas into good businesses. What governments can do is to simplify the process of matching inventors with partners, for example by funding meeting spaces and networks of business angels. He points to the local chamber of commerce (CCIP, chambre de commerce et d’industrie de Paris) as a good example.
The data comes from the assessments by an independent agency, the Canadian Innovation Center, of the commercial prospects for inventions submitted by independent inven- tors. Åstebro followed-up on the reports produced for 1,012 inventors between 1989 and 2001, with telephone surveys to measure economic outcomes and discovered that among these 1,012 inventions, 121 products made it to the market.