‘The way to get good ideas is to get lots of ideas and throw the bad ones away’ Linus Pauling
An excellent piece of work in this issue (‘A Review of the Physical Properties of Base Metal Mattes’) which being highly specialized, will be glossed over by most of our readers. This led me in a convoluted way to the topic of this Journal Comment. There have been a number of references recently to the difficulty of attracting venture capital (VC). In a discussion paper from the South African Venture Capital Association in May, the situation in South Africa has been comprehensively and well analysed. The primary authors were J.P. Fourie (Executive Officer SAVCA), Greg Voigt (Blue Catalyst) and Ela Romanowska (Seed Fund Manager, Innovation Fund), and is well worth reading. The noteworthy motivation for the paper is: R&D spend and patent rates indicators, as compared to other developing countries such as Korea and China, show that for South Africa’s economy to remain competitive, R&D spend and the translation of R&D activity into economically traded goods and services, through inter alia the creation of high tech, high growth potential, high risk ventures, needs to be accelerated dramatically.
Concurrent to such ramp up, a thriving VC industry is a necessary facilitator in the translation process. There is so much in the paper that I enthusiastically support, that my amplification of many of their analyses and recommendations, particularly for the need for trained risk managers, would far exceed the space for these comments. I must confine myself to some observations that are needed to promote pragmatic and achievable ambitions. Venture Capital (VC) is defined as a sub set of the private equity asset class which deals with predominately equity funding of high tech, high growth potential businesses, whose growth is typically achieved through radical global scaling. In layman’s terms, VC has a spectrum of meanings. At the lower end of the spectrum, there is the capital given to an individual or small research group attempting to do research to develop an innovative idea into a business providing a source of income.
At the other end is the long-range, large-scale, high risk ventures tackled nationally or by global organizations. An essential feature of venture capital which clearly distinguishes it from other capital requirements is that there is a high risk factor that cannot be precisely quantified. In all capital projects there is a risk. In building a dam for hydropower or a metallurgical plant, the risk can be confined to reasonable limits contained within a contingency factor and where VC is not conventionally applicable. VC relates to projects where the risk factor is orders of magnitude greater. VC investment is a gamble at fairly high stakes, and the professional will invariably hedge his bets by means of a portfolio of VC projects with the anticipation that the successful projects will provide a return that will more than compensate for the failures.
In evaluating VC investment, the name of the game is portfolio risk analysis and management of R&D in which there are uncertainties in a successful outcome. In the field of geological prospecting, the mining industries are well accustomed to such risk portfolio activities demanding VC. There are many unsuccessful exploration efforts, but the classic example where one success could pay for the failures was the expenditure on geophysical methods, which opened up the West Rand and OFS goldfields. But for VC investments for Research and Development (R&D) in SA, our expertise is below that in other countries as shown in the discussion paper. This is for good reason, arising from a culture inherited from the second half of the last century.
There was a euphoric period in mid-century when government and industry, after the success of nuclear developments, radar and other scientific research, convinced investors, taxpayers and shareholders that this was the way forward for the country. The CSIR, the Atomic Energy Board, the National Institute for Metallurgy and COMRO were established, and all the major mining groups set up their own research laboratories. But towards the end of the century the major industries decided that DIY research could not deliver the goods and could not compete with the ‘buy technology’ tactics. Soon the research organizations were either scaled-down, moved to other countries, or even disbanded.
Even the statutory bodies had to subsidize their existence by way of contract work The formula that was almost universally applied for new major projects was to obtain technology from overseas, often by using a blackmailing tactic of imposing a tariff protection on the products so the supplier of the technology would prefer to be a partner rather than a competitor. This was the period in which Armscor and Sasol flourished. Hordes of highly skilled technical people in the form of overseas contractors and technology suppliers were brought into the country at high cost. This enabled the country to continue some innovative work in spite of sanctions. The university research was dominated by FRD grants where the ‘publish or perish’ academic syndrome prevailed. In 1995 I conducted a survey on the research manpower in SA and found it to be abysmally low. It was a small fraction of a major global company with a turnover equal to our GDP.
Now the pendulum has swung back, with the emphasis on global competition, free markets and home based R&D. The clarion call is for ‘innovation’ ‘entrepreneurs’, more scientists and engineers, and increased allocation to R&D in the budget. Primarily, this was to be focused on globally competitive products for export to create manufacturing jobs for the millions of underprivileged members of the population. That this is the quickest and best way to solve the latter problem is arguable. My fear is that unless we recognize from history, the cardinal features of proper Research Management and particularly risk Management, we might be disappointed in the drive for industrial innovation. I do not believe success will come from a host of small entrepreneurial research activities.
The previous research laboratories were abandoned not because they had poor researchers but because they were sub critical in size and were required to be dedicated to one or two sure winners selected, by hunches and guesswork. They had no hope of any portfolio approach. There was little appreciation of the manpower, time and cost to bring an innovative concept to commercial success status. Innovative research of the type needed to provide jobs requires a host of basic scientific data provided by a support team of many research scientists and technicians—the sort of data represented by the paper alluded to earlier. There is no quick fix. There are many years between concept and commercialization.
We are pitifully short of good research scientists in SA. Even if we succeed in producing an army of entrepreneurial ‘Edisons’, they will have to be coordinated into national level research teams large enough to be effective and in a number to take into account the portfolio probability effect. There is only one way that this will be achieved on a scale that is meaningful for job creation and that is on a coordinated national basis with the government as the main VC provider. This is an obvious conclusion. Not only is it the government the main beneficiary (via the IRR) but also the one with a research capability under its control on a scale that can compete with the global competitors. Fortunately, thanks to the Innovation Fund of the Department of Science and Technology, who now have a history of close to 1 000 innovation projects, we have had a number of almost certain successes with high job creation potential as part of the portfolio.
This is a statistically sized sample for probability analysis. What a wonderful opportunity for the SAIMM in collaboration with the DST to arrange a conference on ‘innovation, risk project planning and portfolio management. Apart from the smaller-scale innovation projects, there is a wealth of major strategic R&D projects of cardinal economic importance, which also fall into the Venture Capital domain. Here again the mining and metallurgical industries can make an important contribution. R.E. Robinson August 2008
- Written by R.E. Robinson