Companies find it increasingly challenging to justify long-term, risky R&D investments. Innovation and strategy expert Gary Pisano believes it’s time to consider a different financing model, and he draws inspiration from an unlikely source: movies.
The challenge is especially acute in such research-intensive fields as biotechnology, nanotechnology and advanced materials. In biotechnology, for example, the journey from basic scientific discovery to fully approved drug can span up to 20 years and require massive capital in excess of $2 billion. The potential for failure is equally extreme.
Corporate R&D, and even early-stage venture capital investors who typically have a higher tolerance for uncertainty, simply aren’t designed to deal with the costs, risks and slow (if ever) payout of science-based industries, explains Pisano, who has spent nearly 30 years extensively researching the strategies, structure, performance and evolution of these sectors.
In the winter 2016 issue of Sloan Management Review, he and co-author Andrew Lo, MIT Sloan School of Management professor and director of the MIT Laboratory for Financial Engineering, propose an alternative structure: the project-focused organization (PFO) – a proven model in the movie industry.
As they describe in “Lessons from Hollywood: A New Approach to Funding R&D,” “The highly integrated Hollywood studios of yore have given way to individual movie projects as the central organizing unit. Movie projects are organized as independent entities. The key resources for each film – financing and human talent – come from different sources and are committed specifically to that project. The project acts as a contractual clearinghouse for its various obligations, which include returns to the initial investors and payments to the creative talent with residual claims. Once the movie has been distributed, the film entity essentially vanishes except as a legal mechanism to transfer payments during the film’s lifetime – which, in today’s information age, is essentially forever.”
Organizing innovation through PFOs has a number of benefits, Pisano says. Investors have the opportunity to diversify across multiple projects. For companies, PFOs can help minimize overhead. Of course, adapting the model to biotech isn’t without obstacles and it’s not one-size-fits-all, he acknowledges.
“But if the history of innovation over the past century has taught us anything, it is that institutional and structural innovations are critical enablers of technological innovation. If necessity is the mother of invention, we expect to see the biopharma industry develop several new business models in the near future,” Pisano predicts.