" It is important that we address the management of innovation, and I hope that this book will make an initial contribution to this critical area."
? ? Carl Icahn
Financier, innovator, and philanthropist

" This book starts this discussion of how we can better help innovation become realized and discusses the profound impact this could have on our economy and our society."
? ? Sir David Cooksey
Chairman of the Committee of Non-Executive Directors of the Bank of England

" The more we can make a fertile ground for new ideas and innovations the better. The ideas in this book go a long way in showing you how to do this!"
? ? Lee Iacocca
Former Chairman of Chrysler

" Being engaged for almost a decade in making managers and investors aware of the challenges and potential of intangible investments and the consequent innovation, I welcome a book that brings this message to a broader audience."
? ? Baruch Lev
Founder and Director, The Intangibles Research Project, New York University

" Too many artists (and businessmen) fail to value their intellectual rights and all lack an efficient means of benefiting from them."
? ? Ron Altbach
Concert pianist, investment banker, and former member of the Beach Boys

" A challenge is that to commercialize innovation you have to move quickly and be in a continual process of self-obsolescence. You have to keep reinventing your own products."
? ? Craig Fields
Former Chairman, Defense Science Board and Director, Defense Advanced Research Council (during invention of Internet)

" Each production is an idea that grows and gathers other ideas until the final event. The management of this creative process is the challenge."
? ? Don Mischer
Event creator and winner of thirteen Emmys

" If we can commercialize just a portion of the defense and intelligence research as suggested, then it is a huge benefit for the taxpayer and society."
? ? Honorable Ty W. McCoy
Former Acting Secretary of the Air Force and Chairman, Space Transportation Association

---

Have you ever had a great idea? Did you do anything with it? Don’t worry–you are not alone. Most of us have had great ideas but few of us ever do anything about them. Ideation will tell you what to do, how to find out if anyone has thought of it before, how to protect, develop, fund, and market it–regardless of whether it’s business, creative, or scientific in nature, and regardless of whether you are working in a large corporation or at home.

Ideation

The Birth and Death of Ideas

---

By Douglas Graham Thomas T. Bachman

John Wiley & Sons

ISBN: 0-471-47944-6

---

Chapter One

Why Ideas Matter

Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world. Albert Einstein (1879-1955), mathematician

Why are ideas of such overriding importance that we live and die by them? Nations have been founded on ideas; civilizations have been destroyed by ideas. In this book, we discuss their impact in all fields of life and gain insights into their management from economics, finance, law, and psychology.

Ideas are important because they are the source of every aspect of human endeavor. Our potential is limited only by the quality of our ideas. What we become as individuals, companies, and nations depends primarily on our ideas and our ability to realize them. Every project starts in someone's mind. From there it begins the complex path that we discuss in depth in this book. Most ideas will not survive the journey. They wither on the vine for many reasons including lack of funds, resources, confidence, and markets, but generally they die because the person who thought of the idea does not know what to do with it. We offer some solutions to that particular problem regardless of whether the innovation is in business, science, or the arts. Some of these simple ideas will change the world.

The value of the intellectual capital derived from ideas in our companies is close to 70 percent of their value according to a recent PriceWaterhouseCoopers study. This means the value of intellectual capital in corporate America is close to $12 trillion and globally this value is $21.9 trillion. However, because of our inability to manage abstract entities such as ideas and innovation, the vast majority (over 90 percent by most estimates) of these assets go unused. This is a staggering $19.8 trillion that is being wasted and, if through the simple procedures discussed in this book we are able to start using even 5 percent of these, then we are contributing almost $1 trillion to the global economy. This would make even Ted Turner's gift of $1 billion to the United Nations seem modest.

Terminology

The terminology used can be confusing-probably a reflection of how little this topic has been discussed. We are talking mainly about ideas-often referred to as innovations. To be accurate, innovation implies ideas that improve something that already exists but it is commonly used to refer to all new ideas. Within the corporate setting, innovation is often referred to as intellectual capital or when viewed from a financial perspective as intangible assets. The innovation within the intellectual capital that is formally protected is referred to as intellectual property. However, all of these terms tend to be used interchangeably but with certain functions having preferences (see Table 1.1). To clarify the overlap in usage of these terms, it is useful to refer to the Venn diagram in Figure 1.1.

The confused nomenclature is very much part of the problem. Innovation impacts many different parts of a company and each manages it as best they can and in isolation from the other business functions that also interact with the innovation.

Little is written about something as important as ideas because, by their very nature, ideas are intangible and thus largely unknown. We are surrounded by the unknown. The more we learn and understand, the more we realize there is an ever-greater field of the unknown lying beyond.

All our knowledge brings us nearer to our ignorance. T. S. Eliot (1888-1965), poet

We are surrounded by the unknown. Ninety-five percent of the universe is radio silent consisting of "dark matter" and "dark energy," also 90 percent of our brain is electrically silent-we have little knowledge of what, if anything occurs there. Similarly, according to one study, 78 percent of a typical company consists of unknown, unmanaged intangible assets (Figure 1.2).

This is a tremendous waste. If we value this proportion for just the world's public companies, it comes to approximately $21.9 trillion. This $21.9 trillion of value tied up in nonfungible, illiquid, unmanaged assets is a primary drag on the global economy and represents an opportunity of unprecedented size for those who can tap into this value. Almost all of this number exists off the balance sheets providing interesting opportunities for new financial vehicles (see Chapter 15, The Global Innovation Imperative).

John Kendrick, a well-known economist who has studied the main drivers of economic growth, reports that there has been a general increase in intangible assets contributing to U.S. economic growth since the early 1900s. The dramatic change in the proportion of value represented by intangible assets over the past 10 years is illustrated in Figure 1.3.

These intangible assets are the assets that a company has that are neither financial nor physical. They are the business plans, marketing plans, advertising slogans, technology, formula, URLs, trademarks-all largely the result of innovation. However, most of management's time appears to be focused on managing tangible assets.

This does not apply only to Fortune 500 companies; it is even more important for an early stage company founded as a vehicle to realize one particular idea.

One very important aspect of intangible assets that makes them so much more valuable than tangible assets is that they are nondepleting. That is, no matter how much you consume them they are still available for use. Tangible assets can be deployed in one place at one time. For instance, a hotel room-a tangible asset-can be rented to only one guest at a time. The software-an intangible asset-that books those rooms on the Internet, however, can be used any number of times. It can be used for each hotel in a chain, licensed to competitive hotels, or adapted for use in other industries. That is why intangible assets are so much more valuable while being so much more difficult to value.

One final perspective on how important ideas are is an economic one. How much do we spend to try to generate ideas? We really do not know. What we do know is how much we spend on research and development (R&D) to develop ideas within the formal environment of scientific research. For 2002, that figure is $245 billion in the United States alone. This does not include the huge but uncounted cost that goes into innovation in creative fields such as entertainment, art, and advertising. The total output of these "copyright" industries in 1999 for the United States is $457 billion-almost 5 percent of the gross domestic product (GDP). Neither does it include the countless efforts to generate business ideas within the corporation but outside of the lab. The global figure is a significant portion of the $21.9 trillion existing as intangibles, which makes it one of the primary, if not the primary, drivers of economic activity.

Investment in intangibles is difficult to measure because much of it is not accounted for separately. However, Leonard I. Nakamura studied the level of intangible investment by analyzing R&D expenditures in addition to investments in advertising and software. He concluded that the level of intangible investment includes not only the substantial investment in R&D but also in advertising and software.

Nakamura attempted to measure the level of investment in intangibles through an analysis of investments, labor inputs, and operating margins. Nakamura estimated the level of intangible investment at least $0.5 trillion a year and estimates it is probably $1 trillion a year. As a result, he feels the U.S. economy is in better shape than we have thought being it is underpinned by significant investment that has not been visible due to the inadequacies of current accounting procedures.

Baruch Lev has been a pioneer in leading us to understand the importance of intangibles for the economy and more specifically to the analysis of corporations and the prediction of their future performance. He, along with others, point to the anomaly of the way tangibles and intangibles are treated for accounting purposes-the former being reported as assets on the balance sheet and the latter usually written off in the income statement as an expense. He and his collaborators point to the inadequacy of the information that investors currently use in analyzing companies and suggests his own metrics for analyzing company intangibles. These include metrics related to patents:

Number of patents granted to firm in given year

Intensity of citations to a firm's patent portfolio by subsequent patents

Number of citations in a firm's patents to scientific papers

Technology cycle time

In addition, there are metrics related to:

Investment in basic R&D

Investment in applied R&D

Their research found a statistically significant correlation between these metrics and the return on equity, annual stock return and especially the market to book ratio.

A paper portfolio using his methodology has consistently outperformed the market indices in good and bad economies. Baruch Lev intends to put his theory into practice with a fund based on these methodologies.

Realizing the Potential of Ideas

This book provides practical advice on how we should manage ideas and innovation both in our personal lives and in our companies and society.

We show how we can make the most of our ideas and greatly improve their chances of becoming realized even with the current infrastructure that exists for their support. We also argue that this infrastructure is hopelessly antiquated and that a radically new infrastructure is needed that, once developed, will provide an enormous stimulus to the world economy.

This new infrastructure is based on developing global markets for ideas that are parallel to the equity markets. Instead of being based on shares of corporations, they are based on shares of intellectual property and intangible assets. This provides an investment marketplace that matches capital and market access to ideas at a much earlier stage than usual. Normally it would take years for an idea to be developed, protected, have a corporation built around it, and then eventually made available for public investment. The intellectual property market would greatly reduce this delay in funding new ideas and also allow corporations to raise badly needed capital or cash f low from their intellectual property.

As you will see, it is all common sense and relates to your everyday experience, but the impact is global.

(Continues...)

---

Excerpted from Ideation by Douglas Graham Thomas T. Bachman Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

---

DOUGLAS GRAHAM is CEO and Chairman of Innovation Trust Company, which administers $8 billion of financial assets and is the first bank to manage intellectual assets as well as financial assets. A former managing director at KPMG consulting, he is an acknowledged expert on intellectual capital and idea valuation and has advised many governments.

THOMAS T. BACHMANN is a leading innovator who operates a multibillion dollar investment company specializing in active and passive investments. He pioneered the practice of trading intellectual property portfolios as equities.