Q&A with Peter Boer, president and CEO of Tiger Scientific Inc and a professor of management and engineering at Yale University
What would you recommend someone new to R&D Today reads?
R&D executives need to understand corporate finance if they are to communicate effectively with commercial and financial colleagues. The Brealey and Meyers textbook is a great primer. There are some highly relevant case studies in my book Technology Valuation Solutions (Wiley, 2004).
Could you recommend a tool/technique and explain when you would use it and why it is useful?
The decision tree, with stage gates, is extremely useful in identifying and reducing project risk. The Traps article goes into some details on this. Real options can get you to almost the same place, but it is more complicated and less intuitive. I would use it as a backup if the decision is a close one.
Looking back on your career can you think of a learning point you gained or something which you would tell your younger self about R&D?
Don’t fall for a plausible narrative. Outline the tasks and identify the costs and risks. Understand the track record of your commercial partners and place your bets with partners that are consistent winners. Probability of success is a key to managing R&D and this guidance will make it work for you.
Review of Peter Boer’s Traps, Pitfalls and Snares in the Valuation of Technology
Economists have calculated that 50 per cent of the economic growth of developed countries arises from technology (the balance being labour and capital). The valuation of technology is important – investment decisions make the need for valuation of technology compulsory – but the consequences of mis-valuing it can be unfortunate.
The valuation of technology differs from the valuation of ordinary physical and financial assets in three ways:
- Innovative technology is intangible and often financially invisible – much of it is embodied in the skills, experiences and records of scientists and engineers.
- A technology asset only realises its value when it is linked to other technology assets and/or physical assets – valuing technology is all about valuing linkages.
- The degree of unique risk in the R&D marketplace, where new and innovative ideas are conceived, patented and developed, is extraordinarily high compared to the normal of risk encountered in financial markets.
This article reviews why technology is inescapable and what financial methods are applied to it and then addresses eight hidden traps which can lead to the wrong answer:
- Confusing hurdle rate with discount rate
- Using the status quo as the baseline
- Miscalculating Horizon Value
- Focusing too narrowly on cashflow
- Confusing Investment with Operating Expense
- Overweighting the Analytic (versus the Synthetic) Approach
- Neglecting the Spectrum of Possibilities
- Neglecting the Options Approach to Valuation
This article introduces the prevailing free cash flow method for valuation and the significant pitfalls which can occur in misuse of hurdle rates or miscalculating horizon value. The author states that it is equally important to recognise that much of the value of R&D is embedded in options, whether these are simple options to terminate the project or broad options to pursue a range of technology-based opportunities. Properly applied, writes the author, discounted cash flow (DCF) analysis can be an ally rather than the nemesis of innovation.
The article concludes that managing technology is about managing risk – and that risk should correlate positively with reward. Risk can be reduced through diversification as well as through a quest for certainty – but managing risk is also about creating opportunity.
Taken from Traps, Pitfalls and Snares in the Valuation of Technology by F. Peter Boer published in Research Technology Management September/October 1998.
Peter Boer is president and CEO of Tiger Scientific Inc and a professor of management and engineering at Yale University. He is a former executive vice-president and CTO of WR Grace & Co. He has also held business management and technical positions at The Dow Chemical Company and the American Can Company. Boer holds an AB in physics from Princeton University and a PhD in chemical physics from Harvard University and is a member of the National Academy of Engineering. His book The Valuation of Technology was published John Wiley & Sons in 1999. For three years he taught Valuation of Technology at the Yale School of Management. In addition to his consulting and advisory work, he has served on some nine corporate boards, and is the author of nine books and about one hundred technical papers.