Column: A Novel Economic Development Model

A Novel Economic Development Model
Column by Liviu Popa-Simil and Dave Jones

We’ve heard about economic development in Los Alamos many times and, in our opinion, the way it’s presently conceived and practiced, it’s simply counterproductive because it is not compatible with present reality or future predictions for our community, and we badly need another business development program, supported by the community.

The present economic reality for Los Alamos is:

  • The population is continuously decreasing by >3 percent since 2000, and by 2020 the median age will be above 50, making Los Alamos County the first or second oldest municipal entity in the state.
  • Presently Los Alamos and White Rock are dormitories for Los Alamos National Laboratory, with a cumulative population of fewer than 20,000 people. 
  • The only income source is from LANL that has a budget of about $2 billion/year, which is continuously being reduced by about 5-10 percent/year. From the LANL budget, our community may retain about 10 percent from retail activities, with Smith’s taking about 50 percent, the restaurants less than 5 percent, and the rest distributed between the hotels and other retail establishments. 
  • Tourism is weak in Los Alamos and is unlikely to see much improvement because we are remote and there are a limited number of attractions likely to draw more visitors in the future.

Therefore, the future for our community doesn’t look bright because, in reality, income will fade and tourism, retail and real estate won’t grow. 

The idea that we need new business space for business-as-usual is wrong because demand will fade due to LANL budget reductions in real terms and population reduction in number and needs. The exception might be made by some real estate bargains where the County builds expensive buildings and sells them cheap to a few privileged businesses, which is unlikely to generate long term improvement.

With stock market spectacular growth, that may signal another economic bubble burst, the U.S. and world economy is in decline, see for example the lack of correlation with the price of gold and the daily food cost, which says that a world food crises is already here, and is growing. At Smith’s the food packages are smaller and more expensive, perhaps double the price since 2000. The main reason behind this crisis is that most of the present day “accredited” economists fail to see the lack of meaningful inventions as compared to the end of the 19th century, which drove the economic development boom of the 20th century. The lack of meaningful inventions today is mainly due to the present IP laws (U.S. Intellectual Property), and the way inventions and inventors are treated, which deters all but big corporations from inventing.

We are not alone on this path to a declining economy, but some in our community are starting to think about real economic development, by considering the present realities – the main resource that this community has, and which may be used to further economic development and maintain our standard of living into the future is BRAIN Power, of which Los Alamos still has in abundance, compared with other places, but this resource will not remain available forever if not properly harnessed.

A sound economic development model has to rely on facts and real local conditions, with an accurate prediction into the future, and that is what seems to be missing in LA County – a reliable strength, weakness, opportunity, and threat (SWOT) analysis.

The only abundant resource – BRAIN Power isn’t easy to harvest, like ore from the ground, and in order to be successful, this process requires special skills and capabilities developed by the community – it simply doesn’t just appear by itself and begin to spread prosperity. Many things need to be done in order to obtain a stable flow of brainpower and it’s byproducts. The process is generically called taking ideas to the market place through invention stimulation, a process many talk about but very few understand. There are many middlemen, touting their powers to guide inventors in how to write business plans and how to find investors, but they are missing the essential points, so their guidance looks similar to how to hunt elephants in Alaska. No elephants are there, but that’s considered a nonessential detail, and the guidance is considered more valuable.

When we made the statement about BRAIN Power abundance in Los Alamos, we based it on the idea that we have about 10,000 latent brains (PhDs, MS, and other college graduates), from which about 1,000 may be considered active, and even fewer prolific, in the present atmosphere of impediments to inventing.

Considering that each brain may generate about five ideas, we have the potential of 50,000 inventions – while the actual invention rate for New Mexico is about one invention per day, less than 400 per year (see USPTO statistics). Considering that only about 1 percent of them will produce a business that sells $10 million/year in products, that will produce sales of over $5 billion/year, from which the community might retain a higher share than present retail based on the only $2 billion/year of LANL’s budget.

The question that Los Alamos must face is how do we move to this new approach, based on inventions, instead of relying only on retaining some of LANL’s budget.

The Los Alamos community has to understand clearly that, from the inventor’s point of view, it isn’t difficult to have an idea that is original, innovative, unique and solves a problem. The initial difficulty is that the inventor has to be challenged to produce the idea, – because challenge, or need, is the mother of invention – and further, to pursue it and make it marketable. 

This is where the role of the Los Alamos Academy of Sciences (LAAS) and other organizations in the community come into play – to create an atmosphere that will challenge the brains in our community and expose them to the needs and “pains” of society. The actual Los Alamos community support for this is inadequate, due to a lack of understanding of the issue and its integration into the global picture.

Immediately after an innovative idea is formulated, a big obstacle appears that scares most of the inventors, that has to be passed in order to have an invention flourish – the IP impediments (that at times seem like harassment) built into the present patent process.

The inventor has to be assured that the community protects his IP and clear rules have to be introduced in order for others in the community to join in on the invention in order to improve the original idea and share in the potential profits without ripping off the first inventor.

This is a very big and delicate problem all the organizations dealing with IP have to face – how to make inventors be realistic about their idea, to be willing to share the potential profits and collaborate with others, and how to make others respect the ideas and have an honest approach to inventions.

This is compounded by the fact that most of the investors exaggerate the role of money in the project, minimizing the inventor royalties, and causing a lack of enthusiasm on the part of the inventor, in the development and promotion of their idea to bring it to market, which is at the root of many businesses failures.

There are some local efforts to overcome this issue including the fact that LAAS has developed policies and rules that the members have to adhere to, during the sharing and discussing of new ideas, thereby improving them while protecting the inventor. What is missing is the real legal support for the inventors to promote their inventions in front of USPTO examiners, that are doing a perfect job protecting the US against inventors, and making the inventors life very unpleasant and causing many of them to abandon their ideas before completion.

The figure below presents, in an allegoric mode, the stages an idea must pass through in order to become a successful marketable product.

From the original idea at the bottom of the picture, based on knowledge, represented by the books, a light bulb, that represents that enlighting moment an inventor may have when he responds to a real life challenge, and gets an idea, that can be envisioned to – say on a supercomputer – drive to the right solution to the problem and is the first step on the 10 step ladder, TRL=1 (Technology Readiness Level). Immediately he needs help, because on step 2 the inventor steps on a mine, that explodes under his feet – the invention, with all IP associated issues, normally referred to as TRL= 2, finds very little support and most of potential inventors are discouraged from proceeding. This first, and very important step requires community support to reach the patent application that is the basis for the new IP.  This step costs about $1,000 when it is done by the inventor alone, and >$10,000 when an IP attorney is used, money that the inventor may not have, or be willing to invest at this stage.

At this level, in spite of the fact that many pretend otherwise, the inventor doesn’t have a clear knowledge of how good or valuable the invention might be in the market, and he is left to his imagination. The business community middlemen have invented various tools, that claim that help the inventor, such as teaching the inventor to write better business plans, or subjecting the invention to “murder boards”, but many inventors stay away because they are aware that this is a way big companies, that pretended support, tap into new ideas for little or nothing. The same is true for the so-called X-prizes, that attract a lot of newbies, but many competent inventors refrain from taking part because they know that the invention will be stolen.

Courtesy/LAAS

For sure something else has to be put in place by the community, with community support, and that is represented on the left side of the above image.

Clear rules of potential profit sharing, clear support, and a strong helpful hand makes the inventor climb the ladder and graduate every step. That is what gentlemen No. 2 is doing in the image.

After the patent has been filed, the inventors have to work fast to bring that IP to life, which takes it from TRL 3 to TRL 6 when a prototype is created.

This is where more complex organizations have to come into play, such as the Hive, to provide the necessary support for the inventors in making their prototypes and testing them to gain a clear idea of how to start a business based on the invention. A sustained community investment is needed to provide this service. This is a threshold investment – because only after reaching a certain level, the desired synergistic reaction starts. That level of support is not yet clear, but common experience shows that it might be over $500,000/year, because the amount of available money is inversely proportional to the time it will take to bring the invention to market and the more money that is available, the more inventions can be brought to market in a given period of time. For details see the chart below, and its explanations.

With the large number of potential inventions in Los Alamos, as opposed to other locations, we will need a larger pool of support money in order to move the increased number of inventions to market. Synergy between inventors and inventions will help mitigate the increase in investment required. This accelerated invention movement will also increase the speed and size of potential return on the investment.

The chart shows in the center right, that the more the TRL increases, the lower the inventor role and position in the project becomes, showing the inventor at a smaller and smaller desk. This decreasing involvement is often misunderstood or unacceptable for inventors, which is often a reason for the project to failure. Clear and fair rules are missing and the continuing role of the inventor is based on dynamic negotiation, which most of the time takes place on an unequal footing between the inventor and the investor and may trigger many future issues. In many cases private companies and business owners force the inventors to sell them all their rights to the invention for a symbolic amount of $1 as part of an employment agreement, which many times includes a non-disclosure agreement (NDA), or as a condition for maintaining employment. Such a situation makes many employees avoid inventing.

After the prototype is ready and tested, the LAAS members are available to discuss how to use and commercially develop the product, resulting in prototype improvements and a SWOT analysis. At this point, the inventor may have a better evaluation of the project’s value in market, and a serious discussion of cost and profit, and potential market share can be made, although knowing how the markets will evolve, and react to the project, is unknown even after reaching TRL 9.

At TRL 6, a business plan needs to be started, based on sound fundamentals, and organizations like Los Alamos Commerce and Development Corporations (LACDC) can get involved in creating the new company and helping it to find funding with the help of local banks and investors.

In the upper-right corner of the picture under the generic name – “old scheme” is shown the concept of an “angel investor”, or venture capitalist, spreading money over ideas.  Despite the angelic appearance, a system of advisors roll the dice in order to allow the big money to be trapped in the “angel’s net”. The image is crossed because, in the absence of effective helping hands, there are few “fish” up there for the “angel’s net”, and most of them end up fishing various rabbits from the government’s magic hat. This represents various spin-offs offered by the government that, after a grandiose well praised start-up, have a silenced end under chapter 11, for well known reasons, that I will not discuses here.

In the case of our local inventors, the products of these companies need to leave Los Alamos and reach national and international markets, and entrepreneurial networking is important to facilitate this because, in the Los Alamos market we have too many sellers and too few buyers.  After the companies become fully developed, hopefully their headquarters will be maintained in Los Alamos, thereby returning a share of the profits to the community that helped to bring the idea to market. Here another limitation, that we have to be aware of, appears: Los Alamos has limited space and workforce for manufacturing – simply because Los Alamos is a mountain community that may not support more than other 10,000 residents and it doesn’t have the cheap heavy transportation capabilities required for large scale manufacturing. Therefore for maintaining and improving the standard of living in Los Alamos, we have to orient our efforts in highly qualified white collar people, with younger ages that improve the our demographics, and complement the efforts of LANL, creating a pool of multidisciplinary qualified people good for both government research and private research spin-off industries.

We’re not the only community thinking this way, see the website http://geekdom.com/san-antonio, but we still have better resources than they have. 

The model that San Antonio is initiating has produced little data so far, but another model, that Los Alamos is presently following, is one based on a single industry, as is the case with Detroit, has proven to be the wrong approach, Detroit having filled for bankruptcy.  Detroit’s maturation was reached between 1950 and 1970. With Los Alamos the maturation period was 1960 to about 1990.  If we assume a similar decay path as Detroit, Los Alamos might have a 20-year window of opportunity to diversify.  In the case of Detroit, they had multiple companies competing in a single field.  In the case of Los Alamos, we have only one “company”, so the resulting path might be more unpredictable.  In order to capitalize on this new approach, our community will have to have a large change in our economic development thinking and approach.

There have been many expenditures in Los Alamos, as in Detroit, that have provided minimal or questionable benefit to the future of our community. By diverting some of this money to economic development in Los Alamos, based on harnessing the BRAIN Power that is so abundant here, to help several startups, that in a few years might return it ten fold, thereby allowing the real development based on real demand, and facilitating more educational activities we would enhance the future of our community.  By applying a portion of the County expenditure to enhancing our capability to have a self sustaining future, and I hope they will pay some attention to these new ideas, we will position Los Alamos for growth and be able to adapt to the requirements of the climate and economy of the 21st century.

In order to have that happen we need to start the synergistic process of creativity by accelerating the process of moving ideas to market, which is not something that will spontaneously happen over night, as San Antonio has identified exceptionally well. We will have to have all the necessary resources in place and functional in order for it to happen.

The chart below shows the synergistic process launch probability as a function of the potential BRAIN Power density – that simply means the relative percentage of highly educated individuals in the local population of a town or county.

Chart. Courtesy/LAAS

The chart represents the level of investment needed, in various communities, with different concentration of highly educated individuals, able to invent.

We have to be aware of the fact that, when a community is relatively rich, it is more prone to leisure than to inventing, because they feel comfortable. In the case of Los Alamos, one of the richest communities in New Mexico, the innovation and relaxation trends are intermixed, similar to the yin-yang vortex. On one side our community loves easy, smooth spending on risk free objectives, and on the other side the many people in the community are simply suggesting that the opposite direction might be the most successful one, because they see the risks of not developing alternate income sources.

The chart shows that for invention-to-market stimulation centers, as the HIVE was designed to be, there is a threshold limit, that is lower for the more educated communities, since the “critical mass” needed for a process to nucleate and start, is lower, because the community is already into a sub-critical mode. The chart shows the number of inventions that may be brought to market with a given investment. It is considered an equilateral hyperbolic law where “time is money”, and the synergistic result is the product of time and money, with appropriate weighting constants, after the reaction startup barrier (threshold) is overcome. 

The abscises shows the time needed for bringing an invention to market as a function of the available funding, so for a $10 million investment on the blue curve (for 30 percent BRAIN density), one idea, that produces a $10 million ROI (Return of investment) per year, may take about 6-7 months, while for only $7 million investment, it may take one year, thereby saving the community $3 million in the first year, but causing a loss of $2 million after the second year (time is money.)

Fine-tuning is possible here, because for the same type of application, an investment of $20 million will shorten the time to market by 3 months, but a loss of $7 million might result. In these examples, the ROI is shown as a linear curve (i.e. $10 million/yr.) Reality may dictate a different ROI curve that might start slower and then accelerate.  The amount of investment versus the ROI requires fine-tuning based on in-depth knowledge for each case. 

Since this approach is relatively new, there isn’t much existing data to base the model on. Threshold funding, to reach the “critical mass” and start the synergistic process, is needed because the incubation center has to be a universal prototyping center, able to process everything in small amounts utilizing fields from stone and gravel, to wood, to electronics, to material science, etc. and holding this in ready reserve and manned by world class specialists is costly and might never be paid back if it is not associated with idea generation and harvesting infrastructure, that all have to be funded and maintained operational as a functional organism. Intermittent funding does not work because, even if it produces results, they are mainly the product of chance and can’t be relied on.

The other curves are similar but are applied to other communities with various other demographic compositions. If the synergistic process is started and the appropriate investment is made, there might be a burst of inventions injected into the system that will require an additional investment to capitalize on all worthy ideas in that period of time. This may require outside sources of funding or a reserve fund because delaying ideas can result in lost opportunity. The process is multidimensional; more parameters than the three presented here have to be considered to maximize the result. Patents are time sensitive products because, if made too early, the 20 year protection period will elapse without reaching maturity in market, while if the application is delayed, other inventors may apply for it and get the patent based on time priority.

It’s important that our community support these new economic development ideas, because that will create an added trust layer between the inventors and the other participants. The community will not cheat the inventors, but, on the contrary, will protect their interests and ideas, because it is directly interested in having rich habitants, that contribute more to the general welfare. 

A disgruntled inventor may leave the community and if that happens repeatedly, might result in a decay of our community to average, where its habitants are retired in their houses and view as aggression or a waste of money anything the community is doing, and through their actions, driving to a lower standard of living

We believe that we get what we deserve. 

The people of Los Alamos will find for themselves that “The Sleep of Reason Produces Monsters,” (In Spanish: “El sueno de la razon produce monstrous”) that we are told in the etching made by the Spanish painter and printmaker Francisco Goya. Created between 1797 and 1799, it is plate 43 of the 80 etchings making up the suite of satires Los Caprichos — and will take part more actively in the community debates of the new projects, coming with their original ideas and proposals.

We are convinced that Los Alamos is not such a “sleepy” community, it will value the inventiveness of its habitants and will support their path toward maximum prosperity and will join the winners, becoming even richer and self-sustaining, and a model the entire world can follow.

Direct comments and questions to the authors at info@laaos.org.

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