Proof-Of-Concept

Proof-of-Concept

Proof-of-Concept

A proof of concept is a realization of a certain idea to demonstrate its feasibility. It verifies that the idea is actually capable of being useful and demonstrates the attractiveness of taking an innovative idea into commercial development.

With a combination of different elements like the construction of a working prototype and an economical feasibility study the proof of concept is meant to work as a marketing tool to attract investors funding and to realize the commercial development of the innovative idea.

Background

One of the most common indicators for measuring technology innovations are patents. However a lot of this valuable knowledge created in research labs and academic institutions will never reach the market outside the laboratories. Europe is far behind the US and Japan in terms of usage of patents and the continent is seen as a leader of unexploited knowledge with statistically less than 10% of the present patents filed..

After a throughout research, identification of commercial opportunities and creation of the final idea for a product, the invention does still not make it to the market, why? One of the most common barriers to a successful commercialisationis the lack of funding. The academic world as well as the industry does often suffer from communication problems in terms of bridging a technology/science focus from the researcher to a more commercial focus of the investor. As a consequence, without commercial funding of investors, such as banks, business angels or venture capitalists the idea cannot be further developed and will not reach its final market.

At the idea-stage of an invention investors bear fears and hesitation for undertaking the project due to unanswered questions as;

What will I gain from the invention?

How does the market look like?

Who would by/use the product?

Are there any competitors?

Will the idea work out?

... just do name a few of the uncertainties the investors face. It is difficult to convince funders to invest in ideas for which they are not certain about the actual content and even less about the possible outcomes.

In order to overcome this problem and make the idea more attractive to investors the invention has to be repositioned and move forward to a point where the risk factor for failure is low enough to attract the investors. A proof of concept might be useful in this case as it provides further frameworks for the commercialisation process and can be seen as a marketing tool for funding acquisition.

Undertaking the proof of concept

A proof of concept usually consists of five different aspects; explanations of the technical, market and IPR issues help the researcher to translate his science project into harder tangible facts. An analysis of the costs, benefits and risks will further reduce the investor’s uncertainty about the project as well as it will help to present the idea in a more understandable way for potential investors.

2.1 Technical issues

A technically feasibility study will try the invention’s capacity to fulfil its performable purpose by a physical test. While the physical proof usually involves the production of either a working prototype or of a sample the performance proof examines the actual properties and effectiveness of the invention. The proof of performance is basically the technical validation through lab and field-trails.

However a physical proof is not enough as the pure existence of a working technology does not make it a useful product. The prototype has to It has to achieve a certain degree of performance measured against a set of specific parameters like:

units of output

environmental conditions

timeframe

cost

etc.

It is very important to keep the customer’s/the end-user’s needs in mind while proofing the technical issues as well as it is vital that the results are reproducible and significantly stable.

2.2 Market issues

The aim of the market proof is the ability to show the investor that there is a serious market opportunity for the product. The market opportunity is an existing need or demand from the potential customers, either seen as a up-going trend, or a need that can be exploited due to the fact that it has not yet been fulfilledat all or not effective enough by the competitors. Accordingly the evaluation of the market opportunity depends on an analysis of the customer/ end-user, as well as the competitors and other factors influencing the concrete market.

The market analysis can generally be accomplished through straight-forward desk research backed-up by market research reports and trade journals. Some information may be available free of charge, such as government issued data, others resources may claim a fee. Academic institutions usually have access to a variety of paid-for resources, including market research reports. Valuable data can also be gained from field research such as interviews and surveys and even from informal talks with potential customers to gain a first-hand insight into their needs.

The market analysis should end in a broad knowledge about the customers and competitors and should at least address the following aspects:

Customers

The target market has to be identified. That are the people or companies that a most likely to buy the product. This target group has to be profiled as in who they are, their age, sex and in what they do. Additionally their geographically location should be determined as well as the size and the value of the market. It has to be communicated to the investors that the profile of the target group is known in detail. Furthermore it has to be shown that the innovative idea is the solution of their unsolved problems. By doing so their problem has to be specified as well as the related constraints. It has to be pointed out what their motivation is for adopting the product and to actually spend money for it.

Competitors

No matter how innovative and ground-breaking the product is, there will be always competitors. Telling the investors there is no competition and there is nobody doing comparable will be taken non-reliable. The aim here is to demonstrate the potential investors that the competitors are known but it is possible to handle them. Therefore it has to be shown what kind of competition there is, who they are, who the market leader is and who are seen to be the main competitors.

Direct competitors are those who offer a similar solution and are addressing the same problem. Indirect competitors are those who solve the same problem but in a completely different way or those who do something similar but are addressing a different problem. There may be also suppliers who are not jet competitors but have the potential to invade in the relevant market.

2.3 IPR issues

Potential investors are always interested in the IPR-strategy where they are interested in knowledge about the general formation of the constituent parts of the intellectual property as well as other parties whit the same knowledge. This matter of identification of knowledge-spread is extra important when the respective is not protected by IPRs. This following the fact that the investor wants to reassure monopoly over the knowledge as insights from third parties would make the commercialisation less valuable to the investor. In case of non-existent IPRs or not jet accomplished IPRs, the investors will probably require plans for future protection of the knowledge.

2.4 Costs and Benefits

A cost-benefit-analysis is a mean for demonstration of the value of an investment in the commercial development of an innovative idea. The estimated costs and revenues need to be investigated over a time frame covering the whole commercial development process.

The costs of this process may include the development of a pre-production prototype (a final version of the product), large scale field trail, further in-depth market research, a marketing strategy, supply chain management etc.

The expected return on investment is to a high extent dependent on the choice of the market and its opportunities. The value of the technology/innovation has to be estimated realistically regarding questions as; how many products will it be possible to sell to whom and which capacity is there for distribution of those? Also, the way into the market in terms of overcoming entry barriers as competition and legal rights will affect the pay-back time for the investment.Examples of factors that can have an impact are a need for licensing of the technology and time spent on setting up a start-up company which ends up in a longer payback time than the straight-forward sale of a technology. However, each way to tackle a market comes with its own pros and cons...

As with the previous issues, the end market is the key factor to keep in mind and therefore not only the financial advantages for the investors are of interest but also the cost and rewards to the end users/ customers. Their needs and preferences combined with actual costs/benefits will impact their willingness and ability to buy the product.

For the customer the costs related to the product might not be limited to the purchase price. Depending on the nature of the product, it may also require the purchase of new extra equipment, hiring of new staff with specific skills to handle the operational work or developing training of skills and knowledge if the customer is within the industry. Also, the benefits for the customer may in addition to economical also be social, environmental friendly etc.

2.5 Risk

After a process of investigation of the proof of a concept where the technical aspects have been proved, the market has been identified, the IPR-strategy is developed and the cost and benefits have been analyzed, the last step is a risk analysis. All the prior parts should strive for rising the attractiveness of the project by reducing the perceived risk down to a point which is acceptable to potential investors.

Funding the proof of concept

Regarding the elements of work required for reaching a point of proof of the concept, it is likely that general academic/ R&D funding is not enough to cover the effort undertaken in all intermediate steps. In order to finance the proof of concept there is therefore a recommendation for applying for public funding programmes.