Author Archives: Hervé Lebret

The business of biotech – Part 3: Genentech

Leave a reply

I should have begun with Genentech this series of posts about Biotech (see part 1: Amgen or part 2 about more general stats). Genentech was not the first biotech start-up, it was Cetus, but Genentech was really the one which launched and defined this industry. All this really began with the Cohen Boyer collaboration. Genentech would have loved to get an exclusive license on their patent about recombinant DNA, but the universities could not agree for business as well as political reasons. Genentech was an unknown little start-up and genetic engineering a very sensitive topic at the time. Swanson had tried even to offer shares to Stanford and UCSF (the equivalent of 5% of the existing shares at the time).

Please note I already wrote about Genentech here in Bob Swanson & Herbert Boyer: Genentech. But this new post follows my reading of Genentech – The Beginnings of Biotech by Sally Smith Hughes.

Genentech-the_beginnings_of_biotech

Chronology
– November 1972 – Meeting of Cohen and Boyer at aconference in Hawaii
– March 1973: First joint lab. experiments
– November 1973: Scientific publication
– November 4, 1974: Patent filing
– May 1975: Cohen becomes an advisor for Cetus
– January 1976: Meeting between Swanson and Boyer
– April 7, 1976: Genentech foundation
– August 1878: first insulin produced
– Q2 1979: 4 research projects with Hoffmann – La Roche (interferon), Monsanto (animal growth hormone), Institut Mérieux (hepatitis B vaccine) and an internal one (thymosin).
– July 1979: first human growth hormone
– October 1982: FDA approval of Genentech insulin produced
– October 1985: FDA approval of human growth hormone

I have to admit I had never heard of the Bancroft Library’s website (http://bancroft.berkeley.edu/ROHO/projects/biosci) for the Program in Bioscience and Biotechnology Studies, “which centerpiece is a continually expanding oral history collection on bioscience and biotechnology [with ] in-depth, fully searchable interviews with basic biological scientists from numerous disciplines; with scientists, executives, attorneys, and others from the biotechnology industry.”

The invention of new research and business practices over a very short period

Swanson was captivated: “This idea [of genetic engineering] is absolutely fantastic; it is revolutionary; it will change the world; it’s the most important thing I have ever heard.” [… But Swanson was nearly alone.] “Cetus was not alone in its hesitation regarding the industrial application of recombinant DNA technology. Pharmaceutical and chemical corporations, conservative institutions at heart, also had reservations.” [Page 32] “Whatever practical applications I could see for recombinant DNA… were five to ten years away, and, therefore, there was no rush to get started, from a scientific point of view.” [Page 32] “I always maintain” Boyer reminisced, “that the best attribute we had was our naïveté… I think if we had known about all the problems we were going to encounter, we would have thought twice about starting… Naïveté was the extra added ingredient in biotechnology.” [Page 36]

The book shows the importance of scientific collaborations. Not just Boyer at UCSF but for example with a hospital in Los Angeles. A license was signed with City of Hope Hospital with a 2% royalty on sales on products based on the licensed technology. “[…] negotiated an agreement between Genentech and City of Hope that gave Genentech exclusive ownership of any and all patents based on the work and paid the medical center a 2 percent royalty on sales of products arising from the research.” [Page 57]

Even if in 2000, City of Hope had received $285M in royalties, it was not happy with the outcome. After many trials, the California Supreme Court in 2008 awarded another $300M to City of Hope. So the book shows that these collaborations gave also much legal litigation. [Page 58]

In a few years, Genentech could synthesize somatostatin, insulin, human growth hormone and interferon. It is fascinating to read how intense, uncertain, stressful these years were for Swanson, Perkins, Boyer and the small group of Genentech employees and academic partners (Goeddel, Kleid, Heyneker, Seeburg, Riggs, Itakura, Crea), in part because of the emerging competition from other start-ups (Biogen, Chiron) and academic labs (Harvard, UCSF).

“On August 25, 1978 – four days after Goeddel’s insulin chain-joining feat – the two parties signed a multimillion-dollar, twenty-year research and development agreement. For an upfront licensing fee of $500,000, Lilly got what it wanted: exclusive worldwide rights to manufacture and market human insulin using Genentech’s technology. Genentech was to receive 6 percent royalties and City of Hope 2 percent royalties on product sales.” [Page 94] They managed to negotiate a contractual condition limiting Lilly’s use of Genentech’s engineered bacteria to the manufacture of recombinant insulin alone. The technology would remain Genentech’s property, or so they expected. As it turned out, the contract, and that clause in particular, became a basis for a prolonged litigation. In 1990, the courts awarded Genentech over $150 million in a decision determining that Lilly had violated the 1978 contract by using a component of Genentech’s insulin technology in making its own human growth hormone product. [Page 95] Perkins believed that the 8 percent royalty rate was unusually high, at a time when royalties on pharmaceutical products were along the lines of 3 or 4 percent. “It was kind of exorbitant royalty, but we agreed anyway – Lilly was anxious to be first (with human insulin)” […]The big company – small company template that Genentech and Lilly promulgated in molecular biology would become a prominent organizational form in a coming biotechnology industry. [Page 97]

The invention of a new culture

Young as Swanson was, he kept everyone focused on product-oriented research. He continued to have scant tolerance for spending time, effort, and money on research not tied directly to producing marketable products. “We were interested in making something usable that you could turn into a drug, inject in humans, take to clinical trials.” A few year before his premature death, Swanson remarked, “I think one of the things I did best in those days was to keep us very focused on making a product.“ His goal-directed management style differed markedly from that of Genentech’s close competitors. [Page 129]

But at the same time Boyer would guarantee a high quality research level by encouraging employees to write the best possible scientific articles. This guaranteed the reputation of Genentech in the academic world.

A culture was taking shape at Genentech that had no exact counterpart in industry or academia. The high-tech firms in Silicon Valley and along Route 128 in Massachusetts shared its emphasis on innovation, fast-moving research, and intellectual property creation and protection. But the electronics and computer industries, and every other industrial sector for that matter, lacked the close, significant, and sustained ties with university research that Genentech drew upon from the start and that continue to define the biotechnology industry of today. Virtually every element in the company’s research endeavor – from its scientists to its intellectual and technological foundations – had originated in decade upon decade of accumulated basic-science knowledge generated in academic labs. […] At Boyer’s insistence, the scientists were encouraged to publish and engage in the wide community of science. [Page 131]

But academic values had to accommodate corporate realities: at Swanson’s insistence, research was to lead to strong patents, marketable products, and profit. Genentech’s culture was in short a hybrid of academic values brought in line with commercial objectives and practices. [Page 132]

Swanson was the supportive but insistent slave driver, urging on employees beyond their perceived limits: “Bob wanted everything. He would say, If you don’t have more things on your plate than you can accomplish, then you’re not trying hard enough. He wanted you to have a large enough list that you couldn’t possibly get everything done, and yet he wanted you to try.” […] Fledging start-ups pitted against pharmaceutical giants could compete mainly by being more innovative, aggressive, and fleet of foot. Early Genentech had those attributes in spades. Swanson expected – demanded – a lot of everyone. His attitude was as Roberto Crea recalled: “Go get it; be there first; we have to beat everybody else… We were small, undercapitalized, and relatively unknown to the world. We had to perform better than anybody else to gain legitimacy in the new industry. Once we did, we wanted to maintain leadership.” […] As Perkins said “Bob would never be accused of lacking a sense of urgency. “ […] Even Ullrich, despite European discomfort with raucous American behavior, admitted to being seduced by Genentech’s unswervingly committed, can-do culture. [Page 133]

New exit strategies

Initially Kleiner thought Genentech would be acquired by a major pharma company. It was just a question of when. He approached Johnson and Johnson and “floated the idea of a purchase price of $80 million. The offer fell flat. Fred Middleton [Genentech’s VP of finance], present at the negotiations, speculated that J&J didn’t have “a clue about what to do with this [recombinant DNA] technology – certainly didn’t know what it was worth. They couldn’t fit it in a Band-Aid mold”. J&J executives were unsure how to value Genentech, there being no standard for comparison or history of earnings.” [Page 140]

Perkins and Swanson made one more attempt to sell Genentech. Late in 1979, Perkins, Swanson, Kiley and Middleton boarded a plane for Indianapolis to meet with Eli Lilly’s CEO and others in top management. Perkins suggested a selling price of $100 million. Middleton’s view is that Lilly was hamstrung by a conservative “not invented here” mentality, an opinion supported by the drug firm’s reputation for relying primarily on internal research and only reluctantly on outside contracts. The company’s technology was too novel, too experimental, too unconventional for a conservative pharmaceutical industry to adopt whole-heartedly. [Page 141]

When Genentech successfully developed interferon, a new opportunity happened. Interferon had been discovered in 1957 and thought to prevent virus infection. In November 1978, Swanson signed a confidential letter of intent with Hoffmann – La Roche and a formal agreement in January 1980. They were also lucky: “Heyneker and a colleague attended a scientific meeting in which the speaker – to everyone’s astonishment given the field’s intense competitiveness – projected a slide of a partial sequence of fibroblast interferon. They telephoned the information to Goeddel, who instantly relay the sequence order to Crea. […] Crea started to construct the required probes. […] Goeddel constructed a “library” of thousands upon thousands of bacterial cells, seeking ones with interferon gene. Using the partial sequence Pestka retrieved, Goeddel cloned full-length DNA sequences for both fibroblast and leukocyte interferon. […] In June 1980, after filing patent protection, Genentech announced the production in collaboration with Roche.” [Page 145] Genentech could consider going public and after another fight between Perkins and Swanson, Genentech decided to do so. Perkins had seen that the year 1980 was perfect for financing biotech companies through a public offering but Swanson saw the challenges this would mean for a young company with nearly no revenue or product.

New role models

The 1980-81 period would see the creation of a fleet of entrepreneurial biology-based companies – Amgen, Chiron, Calgene, Molecular Genetics, Integrated Genetics, and firms of a lesser note – all inspired by Genentech’s example of a new organizational model for biological and pharmaceutical research. Before the IPO window closed in 1983, eleven biotech companies in addition to Genentech and Cetus, had gone public*. […] But not only institutions were transformed. Genentech’s IPO transformed Herb Boyer, the small-town guy of blue-collar origins, into molecular biology’s first industrial multimillionaire. For admiring scientists laboring at meager academic salaries in relative obscurity, he became a conspicuous inspiration for their own research might be reoriented and their reputation enhanced. If unassuming Herb – just a guy from Pittsburgh, as a colleague observed – could found a successful company with all the rewards and renown that entailed, why couldn’t they? [Page 161]

*: According to one source, the companies staging IPO were Genetic Systems, Ribi Immunochem, Genome Therapeutics, Centocor, Bio-Technology General, California Biotechnology, Immunex, Amgen, Biogen, Chiron, and Immunomedics. (Robbins-Roth, From Alchemy To Ipo: The Business Of Biotechnology)

Following these three posts, I might write a fourth one about academic licenses in the biotechnology if and when I find some time…

When Entrepreneurship Meets Street Art

Leave a reply

From time to time, I post articles not related to start-ups and entrepreneurship, but to other topics such as Street Art for example. Now comes the opportunity to join both thanks to Banksy. Indeed I can even relate both to migrants (who are a critical component of entrepreneurship). Banksy recently created the following Street Art work:

jobs_02-932x525

648x415_uvre-banksy-pres-jungle-calais

Banksy explained: “We’re often led to believe migration is a drain on the country’s resources, but Steve Jobs was the son of a Syrian migrant. Apple is the world’s most profitable company, it pays over $7 billion a year in taxes—and it only exists because they allowed in a young man from Homs.” Do I need to add about the importance of migrants in high-tech entrepreneurship? If yes, just read again AnnaLee Saxenian, Migration, Silicon Valley, and Entrepreneurship.

The business of biotech – Part 2

Leave a reply

After a short analysis of Amgen through the book by Gordon Binder – Science Lessons – here’s a more statistical description of the world of biotech. I am considering a third part about Genentech as a conclusion of this group. For several years, I have been manually building the capitalization tables of start-ups in general thanks to their IPO documents. They probably contain errors as the exercise requires attention and accuracy, but I imagine that these errors are averaged. I have today more than 350 cases, which are published on Slideshare.

At the end of this document, I have added some synthetic data from which I extract the following. Remember that my sampling is done as I find new companies, so it is not totally random or statistically neutral …

Biotechnology represents a significant part of my data, I will return to this later. VC fundraising is not more important than in other areas, which may seem surprising but it is because a biotech start-up goes public in term of maturity well before the start-ups of other fields. Besides their sales level ($11M on average) is much lower than the others ($114M for the average of all). Also they count 71 employees against 521 for the full set. The Amgen example illustrated that an IPO in fact more a complementary VC round than a market validation. However the first round is much bigger, probably because of the resources required for the initial proof of concept. The (profits and) losses are similar to other areas (excluding software and internet).

BiotechDataFeatures

Now a small digression about the founders and the sharing of equity. They are much older (45 years) than average (38 years) and only come close the founders of medtech start-up. Probably because of the specific domain (length of academic curriculum and difficulties in inventing without a long experience). Another consequence of the dynamics of the field (including the uncertainties), the founders retain less equity at the IPO and investors get a larger share.

BiotechDataFeatures2

I now return to the biotech industry through its geography first and its timeline later. One known fact – the importance of the Boston area and the East Coast of the USA in general – and perhaps a surprise – the just as great importance of Silicon Valley and California more generally. It is often believed that the Boston area is the site of biotechnology, which is true with respect to other areas, but the West Coast is just as creative and entrepreneurial.

Cap_Tables_Fields_vs_Georaphy

Finally it would be wrong to believe that the Internet has removed biotech. The periods here represent the years of creation of the startups. Biotech is the main field (over one third) since the 2000’s whereas they accounted for less than a quarter before. Again remember that my sample is not statistically validated …

Cap_Tables_Fields_vs_Period

Cap_Tables_Fields_vs_Period_percent

Elon Musk and the Secret Sauce of Entrepreneurship (according to Tim Urban)

Leave a reply

A student of mine (thanks 🙂 ) just sent me a link to amazingly great blog articles about Elon Musk. I had never of heard of the author, Tim Urban, and his blog Wait But Why but I will certainly follow his work from now on.

Tim Urban has written four articles about “the world’s most remarkable living entrepreneur.”
Part 1: Elon Musk: The World’s Raddest Man.
Part 2: How Tesla Will Change the World.
Part 3: How (and Why) SpaceX Will Colonize Mars.
Part 4: The Chef and the Cook: Musk’s Secret Sauce.
These 4 posts represent hundreds of pages if you print them. No kidding. I’ve read part 4 and it was a real (positive) shock. Tim Urban explains Musk’s entrepreneurial strengths. I just give some extracts but if must read it all (if you find the time).

“I think generally people’s thinking process is too bound by convention or analogy to prior experiences. It’s rare that people try to think of something on a first principles basis. They’ll say, “We’ll do that because it’s always been done that way.” Or they’ll not do it because “Well, nobody’s ever done that, so it must not be good.” But that’s just a ridiculous way to think. You have to build up the reasoning from the ground up —“from the first principles” is the phrase that’s used in physics. You look at the fundamentals and construct your reasoning from that, and then you see if you have a conclusion that works or doesn’t work, and it may or may not be different from what people have done in the past.” […] Musk is an impressive chef for sure, but what makes him such an extreme standout isn’t that he’s impressive — it’s that most of us aren’t chefs at all. […] “When I was a little kid, I was really scared of the dark. But then I came to understand, dark just means the absence of photons in the visible wavelength—400 to 700 nanometers. Then I thought, well it’s really silly to be afraid of a lack of photons. Then I wasn’t afraid of the dark anymore after that.” That’s just a kid chef assessing the actual facts of a situation and deciding that his fear was misplaced. As an adult, Musk said this: “Sometimes people fear starting a company too much. Really, what’s the worst that could go wrong? You’re not gonna starve to death, you’re not gonna die of exposure—what’s the worst that could go wrong?” Same quote, right? […] That’s Elon Musk’s secret sauce. Which is why the real story here isn’t Musk. It’s us. […] People believe thinking outside the box takes intelligence and creativity, but it’s mostly about independence. When you simply ignore the box and build your reasoning from scratch, whether you’re brilliant or not, you end up with a unique conclusion—one that may or may not fall within the box.

sjobs

Then Tim Urban quotes Steve Jobs from his famous speech at Stanford in 2005 (I think): “When you grow up, you tend to get told the world is the way it is and your life is just to live your life inside the world. Try not to bash into the walls too much. Try to have a nice family life, have fun, save a little money. That’s a very limited life. Life can be much broader once you discover one simple fact. And that is: Everything around you that you call life was made up by people that were no smarter than you. And you can change it, you can influence it, you can build your own things that other people can use. Once you learn that, you’ll never be the same again.”

Reich_Listen_little_man

And all this reminds me about an essay I mentioned in the conclusion of my book, an essay by Wilhelm Reich, the great psychoanalyst, who he wrote in 1945: “Listen, Little Man”. A small essay by the number of pages, a big one in the impact it creates. “I want to tell you something, Little Man; you lost the meaning of what is best inside yourself. You strangled it. You kill it wherever you find it inside others, inside your children, inside your wife, inside your husband, inside your father and inside your mother. You are little and you want to remain little.” The Little Man, it’s you, it’s me. The Little Man is afraid, he only dreams of normality; it is inside all of us. We hide under the umbrella of authority and do not see our freedom anymore. Nothing comes without effort, without risk, without failure sometimes. “You look for happiness, but you prefer security, even at the cost of your spinal cord, even at the cost of your life”.

Tim Urban is absolutely right and you need to read his piece about dogma and tribes. He made me think again of my readings of the great French philosopher Cynthia Fleury and how we need to balance the individuals and the groups and why democracy is a fragile jewel of societies…

PS: I totally forgot to mention a video that a colleague of mine (thanks to her now 🙂 ) mentioned a few days ago. BY one of these nice coincidences of life, it is precisely one of the arguments of Tim Urban about why some people are “cooks” (followers or incremental innovators) and others “chefs” (disruptive innovators). Enjoy!

The business of biotechnology – Part 1 : Amgen

Leave a reply

I do not know much about biotechnology (my background is IT). Though a start-up is a start-up, I always had the feeling that biotech was a different world. You often read that it easily takes ten years to develop a drug, so that biotech start-ups do not have any sales from products for even longer (with revenue coming only from R&D deals with big pharma). You also hear about going public through an IPO far before your product is on the market, something unusual in the IT world (except during the Internet bubble). Finally the financing needs from VCs seem to be much larger than in IT.

I have already written articles about this topic and you can find them under the tag biotech but I plan to write soon three new posts on the topic, related to recent readings and analysis:
– this post deals with my reading of Science Lessons – What the Business of Biotech Taught Me About Management by Gordon Binder, former CEO of Amgen & Philip Bashe.
Amgen-ScienceLessons

– I will then give an update of cap. tables with 350+ companies. I will focus then on biotech firms.
– Finally, I should read soon another book, Genentech – the Beginnings of Biotech by Sally Smith Hughes. Hopefully it will be as good as Science Lessons. (And here is my synthesis, Part 3: Genentech.)

The Business of Biotech

Amgen is probably the biggest biotech firm today (with a market cap. around $100B in 2015). “The company debuted on Nasdaq stock exchange on June 17, 1983. Considering that Amgen didn’t have any products at the time, going public seemed premature to some observers. And it was; an IPO wasn’t in the original timetable at all. But our other sources of capital had shriveled up like foliage during Southern California’s dry season, leaving an initial public offering our only option.” [Page 6]

Amgen’s secret weapon

From the beginning, Amgen was a magnet for gifted, innovative men and women. How does an organization attract outstanding employees? […] Certainly we offered attractive salaries and benefits, and the stock options made available to every Amgen employee no doubt induced some folks to stay who otherwise might have sought opportunities elsewhere. As numerous studies have established, however, pay and perks aren’t what foster long-term employee loyalty. It’s something more profound, something that speaks to the very soul of a company. […] Because a company’s culture emerges from its values, we interviewed hundreds of staff members in all areas of Amgen to learn which values they believed constituted the core of that culture. Today it seems that every company under the sun (or under a cloud) has a values statement. Some are written by the CEO, and others are concocted by the public relations or human resource department. Sometimes they’re written by consultants who don’t even work there. More often than not, the statement doesn’t truly reflect the organizations values; it’s either a wish list of what the company aspires to be or a PR tool for impressing customers, suppliers, and investors. [Page 9]

As Amgen grew exponentially, we constantly wrestled with the same quandary that confronts most flourishing companies at some point: how to remain nimble when you’re no longer a small start-up. You do it by decentralizing power, of course, but also by establishing an entrepreneurial culture that embraces change and encourages innovation. For that to happen, management must empower its people and then support them 100 percent, because staffers do not offer ideas freely if they secretly believe they will be hung out to dry should their promising project flop. In an industry such as biotechnology, failures abound. Had Amgen not lived its principle “Employees must have the freedom to make mistakes,” we would not have survived. [Page 14]

Amgen’s financings

Amgen was incorporated on April 8, 1980. Then Bowes the cofounder and 1st investor “coaxed six venture-capitalist into putting up roughly $81,000 apiece in seed money.” [Page 18] George Rathmann became the CEO and only employee in the company. When the company needed a serious series A funding, Rathmann was convinced it needed much more than the typical $1M first round and looked for $15M. No VC would have agreed, so he convinced first corporations. Abbott invested $5M (which would be worth $700M in 1990). Tosco added $3.5M. And New Court (managed by Rothschild) would then invest $3M. The Series closed with $19.4M on January 23, 1981. Then the IPO brought $42M in 1983, but this was only another beginning as more public financings would follow: $35M in 1986 for the “secondary” and $120M for a third financing the next year.

Here is the cap. table of Amgen at IPO:
Amgen-CapTable

Though biotech start-ups have longer horizons that IT firms, the intensity of activities is very similar. Binder shows examples such as Amgen’s IPO (chapter 2), the discovery of EPO (chapter 4) and its FDA approval (chapter 5). There is however a major difference. Biotech is about science and research. “It’s fair to say that at many companies, if not most, sales and marketing dominate corporate strategizing; the scientific or creative end may be behind the wheel, but ultimately the sales-and-marketing people commandeer the road map, barking out directions from the passenger seat. Not so in the field of biotechnology and certainly not at Amgen where even the company’s location was chosen to attract first rate scientists. Our headquarters sat more or less equidistant to the three principal research centers in southern California: the University of California at Los Angeles (UCLA), the University of California at Santa Barbara (UCSB), and the California Institute of Technology (CalTech), in Pasadena”. [Pages 57-58]

Amgen’s partners

“Success is the ability to survive your mistakes.” George Rathman

Chapter 6 (Partnerships Made in Heaven – and That Other Place) is a must read. Binder explains how critical good and bad partners may be and again this is linked to values and ethics. Binder claims that managers are much more careful when they hire someone than when they sign a partnership.

“Our search for a corporate partner started at home. Much to our shock, not a single U.S. pharmaceutical firm showed interest. […] Abbott Laboratories, one of Amgen’s original investors, had the opportunity to be involved in the Epogen project. CEO and Chairman Bob Schoellhorn turned it down. He’d been influenced by Abbott’s chief chemist, who apparently didn’t think much of drugs based on large proteins. As we would discover, that bias was not unique to Abbott; in fact it dominated traditional pharma. One company’s representative informed us that his bosses were passing on Epogen because the opportunity was too small; their market research department predicted sales would never eclipse $50 million per year (For the record, the drug generates $10 billion in annual revenue. Some market research!).” [Page 126]

Their first partner would be Kirin, the Japanese beer company with which trust, transparency and little paper work helped in building a great partnership. This was not the case with Johnson & Johnson. “To this day, contempt for Amgen’s former partner runs so deep that many employees proudly proclaim their homes to be 100 percent “J&J free.” Considering that Johnson & Johnson and its many businesses sell more than one thousand products, from Band-Aids to Tylenol, that’s no small feat.” [Page 133]

Amgen also has academic partners: “Memorial Sloan-Kettering possessed a mixture of about two hundred proteins. But it didn’t have the technology to separate them. Amgen did. […Amgen] discovered the human gene that produces G-CSF, located on chromosome 17. Once isolated, the gene was cloned using the same process as for human EPO. Memorial Sloan-Kettering had filed a weak patent, not knowing what it actually had. Therefore, said my general counsel, Amgen was legally free to process on its own, without paying a royalty to MSKCC. That didn’t seem ethical to me; without Sloan-Kettering, we wouldn’t have stumbled across filgrastim (Neupogen’s generic name). We negotiated a license with a modest royalty.” [Pages 143-44]

Finally for now, here is Amgen growth curve – revenues & profits. When a biotech start-up is successful, the numbers are impressive…

Amgen-Sales-Profits

Ten Ideas to Innovate in Uncertain Times

1 Reply

Following my post yesterday about Invention, Entrepreneurship and Innovation, here is a short presentation I made yesterday about the culture of innovation. I had already mentioned it in a previous post (without the slides) entitled Can the next google come from Europe? An answer by Fathi Derder. Derder, a Swiss politician, has written a book explaining what Switzerland needs to change in the general framework conditions. It is an important book. When I talk to students and young entrepreneurs, I focus more on the importance of culture. Which is what you can read in the slide below. Enjoy!

Invention, Entrepreneurship and Innovation

2 Replies

“Anything that won’t sell, I don’t want to invent.” – Thomas Edison

This article arouse from a discussion with colleagues about what innovation really is. I have to admit the conversation helped me in clarifying and correcting a few misconceptions I had. So let me try to explain how the three concepts of Invention, Entrepreneurship and Innovation differ and how they are related. At least these are my views.

Invention - Entrepreneurship - Innovation

So let me begin with definitions:

Invention: something new, that did not exist previously and that is recognized as the product of some unique intuition or genius. A product of the imagination. Something that has never been made before. “Something new under the sun”. A discovery pre-exists the discoverer, by opposition to the inventor and her/his invention.

Innovation: the successful implementation and adoption by society of something new. So an innovation is the succesful commercialization or use (if non-profit) of an invention.

Entrepreneurship: it is the process of designing a new business (wikipedia). The entrepreneur perceives a (new) business opportunity and gathers the resources to implement it, ideally successfully. When the entrepreneur succeeds in implementing something new, (s)he is an innovator. But (s)he does not need to be an innovator, (s)he can also be an imitator.

So this makes a clear difference between an invention and an innovation. There is always an invention before an innovation, but an innovator does not have to be an inventor. It also shows that an entrepreneur does not have to invent, neither to innovate.

My biggest mistake was to say “big companies do not innovate anymore”. I was wrong, Though most established companies imitate, many do innovate. They rarely invent and not many are entrepreneurial. But in order to innovate, it is better to be established. Let me clarify.

Let me come back to my favorite topic: “A start-up is an organization formed to search for a repeatable and scalable business model.” This is the best definition I have found so far and it comes from Steve Blank. This beautifully explains that all companies are not start-ups (for example when they have a clear business model from day one and/or if they do not try to scale). It also explains when a company is not a start-up anymore. Then it can innovate.

Another misconception is to confuse Research and Development (R&D) with innovation. Research deals with inventing or discovering. Development follows. Innovation comes afterwards. Patenting belong more to the invention side than to the innovation side of the equation. All this explains also why I have so many doubts about innovation metrics. They measure inputs (such as inventions or R&D) more than what innovation really is, an output.

Invention - Innovation

So how are these three concepts related? Read again, Edison’s quote above. In the past, large innovative firms such as IBM or Bell Labs were inventing. They had big R&D labs. Xerox was famous for its inventive capability and low innovation output. So Apple “stole” many of its inventions and innovated instead. Today, many established companies go to universities to find inventions they license. Or they collaborate with partners (i.e. “open innovation”). However, the risk and uncertainty linked to inventing as well as finding a market for new things makes innovation difficult without entrepreneurship…

Entrepreneurship - Innovation

Entrepreneurship is a great way to enable innovation. Entrepreneurs see an opportunity and accept the uncertainty and risk taking. When it is done in-house. It is called intrapreneurship. Nespresso is one example (even if Nestle did not initially encourage its intrapreneur – who by the way was also the inventor). (Indeed because of the definition given above) corporations stop being start-ups when they innovate! Indeed they are often acquired (M&A) by big, established companies who know better how to commercialize – innovate.

Invention - Entrepreneurship

I had to add the intersection between invention and entrepreneurship. But does this make sense? I am not sure. There is however one industry which has combined both without a real need for innovation: the biotechnology industry is mostly an entrepreneurial activity which develops invention thanks to clinical trials. Biotechnology firms seldom innovate (Genentech and Amgen were exceptions – with a few other firms which managed to commercialize their molecules) because they are often acquired by large pharmaceutical firms or at best license their products to the bigger players. In fact many start-ups are in the same situation. But the truth is companies very seldom invent. Inventions occur before firms are established, at least in the high-tech field.

The following extract from Science Lessons: What the Business of Biotech Taught Me About Management, by Gorden Binder, former CEO of Amgen is interesting:
Biotech Model

Inventors, Entrepreneurs and Innovators

Inventor - Entrepreneur - Innovator

For the same reasons as explained above, individuals have seldom the three attributes. At Apple, Wozniak was an inventor. Jobs was an entrepreneur and an innovator. But Bill Gates or Larry Page and Sergey Brin, the Google founders, were rare cases of inventors, entrepreneurs and innovators combined. However Brin and Page invented at Stanford and then created Google to implement succesfully their invention.

So let me finish with a great definition of innovation given in How Google Works [page 206]: “To us, innovation entails both the production and implementation of novel and useful ideas. Since “novel” is often just a fancy synonym for “new”, we should also clarify that for something to be innovative, it needs to offer new functionality, but it also has to be surprising. If your customers are asking for it, you aren’t being innovative when you give them what they want; you are just being responsive. That’s a good thing, but it’s not innovative. Finally “useful” is a rather underwhelming adjective to describe that innovation hottie, so let’s add an adverb and make it radically useful, Voilà: For something to be innovative, it needs to be new, surprising, and radically useful.” […] “But Google also releases over five hundred improvements to its search every year. Is that innovative? Or incremental? They are new and surprising, for sure, but while each one of them, by itself is useful, it may be a stretch to call it radically useful. Put them all together, though, and they are. […] This more inclusive definition – innovation isn’t just about the really new, really big things – matters because it affords everyone the opportunity to innovate, rather than keeping it to the exclusive realm of these few people in that off-campus building [Google[x]] whose job is to innovate.”

Innovation is complex. Do I need to remind you of the challenges that Clayton Christensen – The Innovator’s Dilemma – Geoffrey Moore – Crossing the Chasm – or Steve Blank – The Four Steps to the Epiphany – have brilliantly described to explain why innovation remains somewhat magical…

Innovation Challenges

PS: can you be an entrepreneur without inventing and innovating? Sure! Not just small companies and craftmen who use their know-how for a decent living. You just need to imitate. Telecom operators such as Vodafone or Bouygues Telecom compete without a need to invent or innovate. They copy other telecom operators. (OK sometimes, they innovate, too). In the start-up world, the Samwer brothers have been famous for copy/paste American success stories and adapt them to the European market. You can find many references about this online and the clones they created include Alando (eBay), Zalando (Zappos, EasyTaxi (Uber), Pinspire (Pinterest), StudiVZ (Facebook), CityDeal (acquired by Groupon), Plinga (Zynga), and Wimdu (Airbnb). See also When Samwer was not Samwer yet but was writing a book – way before Rocket Internet and its clones.

Art as an Answer to the Tragedy of Life

Leave a reply

This blog is about Start-ups. But from time to time, I take the freedom of touching other topics. Often about Art. It will be again the case here. And also when tragic events occur. Last Friday, Paris was stricken again. And I do not have any answer but to say I believe in Peace and Love, not in war and hate. My brother sent me two beautiful pictures he took in Paris recently. They mean a lot.

WP_20151115_15_29_30_Pro

WP_20151114_16_30_20_Pro

My friend Dominique sent me a quote from René Girard in “Achever Clausewitz”, 2007, Champs Gallimard, pages 57/58« Ces échecs de résolution [de conflit] sont fréquents quand deux groupes « montent aux extrêmes » : nous l’avons vu dans le drame yougoslave, nous l’avons vu au Rwanda. Nous avons beaucoup à craindre aujourd’hui de l’affrontement des chiites et des sunnites en Irak et au Liban. La pendaison de Saddam Hussein ne pouvait que l’accélérer. Bush est, de ce point de vue, la caricature même de ce qui manque à l’homme politique, incapable de penser de façon apocalyptique. Il n’a réussi qu’une chose : rompre une coexistence maintenue tant bien que mal entre ces frères ennemis de toujours. Le pire est maintenant probable au Proche Orient, où les chiites et les sunnites montent aux extrêmes. Cette escalade peut tout aussi bien avoir lieu entre les pays arabes et le monde occidental. Elle a déjà commencé : ce va et vient des attentats et des « interventions » américaines ne peut que s’accélérer, chacun répondant à l’autre. Et la violence continuera sa route. L’affrontement sino-américain suivra…. » which translates as follows:

Girard-Clausewitz

So my reaction goes elsewhere. I recieved emails on Friday night and Saturday from the Space Invader community checking that everyone was all right. People who love street art go out to find the works and take pictures. Indeed Invader was in the same mood last January. He is now invading New York City, with a fifth wave. By following him with a work in progress, I see art as an answer to the tragedy of life.

SI est charlie

Here is my own work in progress:

as well as my map (if I gave you access – Invader asks people not to give inidcations to people who destroy his work).

Marcel Salathé’s Creating a European Culture of Innovation

Leave a reply

Regularly but not often enough I read about people calling Europe to wake up and react. Recently it was Nicolas Colin’s What makes an entrepreneurial ecosystem. But now I also remember Risto Siilasmaa’s Entrepreneurship should be cherished” and I had my own Europe, Wake Up!. The latest of these is Marcel Salathé’s Creating a European Culture of Innovation. Another must read. Thanks Marcel! So let me just quote him.

Salathe-Blog

At stake is the future of Europe. And we, the innovators, entrepreneurs, scientists, activists, and artists, need to step up and take ownership of this future. Because if we don’t, Europe will continue its downward trajectory that it’s currently on, and become what it many places it already has transformed into – a museum of history.
[…]
The information and communication technology sector is now the dominant economic driver of growth. Think Apple, Google, Facebook, Amazon, Uber. Noticed something? Not a single European company. Only 1 out of 4 dollars in this sector are made by European companies, and all the indicators for the future are pointing down. Some numbers are even more dire: when you list the top 20 global leaders of internet companies that are public, you know how many are European? Zero. And among all publicly listed companies in the digital economy, 83% are American, and a mere 2% are European. 2%!
[…]
So where’s the problem? Some say it’s VC funding, which is only partially true. Yes, the culture of VC funding is probably less mature in Europe than it is in the US, especially for stage A, B and C funding. But money will find its way into good ideas and market opportunities one way or another. Others say it’s simply the European market, and European regulation. I think that is an illusion. Look at AirBnB, the US startup that now has a valuation of over 25 Billion dollars. It was started as a three person startup in California’s Y Combinator, but it now gets over half(!) of its revenues from within Europe. And by the way, San Francisco is probably one of the worst regulatory environments you can find yourself in. AirBnB is currently facing huge battles in San Francisco, and a Californian judge recently ruled Uber drivers employees, causing a minor earthquake in the booming sharing economy. Indeed, California is probably one of the most regulated of the American States, and yet it does exceedingly well.
I think that the problem is actually quite simple. But it’s harder to fix. It’s simply us. We, the people. We, the entrepreneurs. We, the consumers. I have lived in the San Francisco Bay area for more than three years. What’s remarkable about the area is not its laws, or its regulations, or its market, or its infrastructure. What’s truly remarkable is that almost everyone is building a company in one way or another. Almost everyone wants to be an entrepreneur, or supports them. Almost everyone is busy building the future. Indeed, you can almost physically feel that the environment demands it from you. When someone asks you about what it is you are doing professionally, and you don’t respond by saying that you’re building a company, they look at you funny, as if to say, “then what the hell are you doing here”?
[…]
It’s not a trivial point I think. The other day, I was in Turin in Italy, and I desperately needed a coffee. I walked into the next random coffeeshop, where I was served a heavenly cappuccino, with a chocolate croissant that still makes my mouth wet when I just think about it. Was I just lucky? No – all the coffee shops there are that good. Because the environment demands it. Sure, you can open a low-quality coffee shop in Turin if you want to, but you’ll probably have to file for bankruptcy before you have the time to say buongiorno. The environment will simply not accept bad quality. In another domain, I had the same personal experience when I was a postdoc at Stanford. Looking back, all of my best and most cited papers I wrote there. I don’t think it’s coincidence. Every morning, as I was walking across campus to my office, I could sense the environment demanding that I do the most innovative work – if I didn’t, then what the hell was I doing there?
So this is my message to you. I’m asking you to create those environments, both by doing the best and most innovative you can, but also by demanding the same from everyone else around you. These two things go together; they create a virtuous circle.
[…]
Don’t ask for permission, ask for forgiveness if necessary. If you are waiting for permission, you will wait for the rest of your life. Most rules exist for a simple reason: to protect incumbents. Don’t ask for permission, just go and do it.
[…]
Orson Welles was best at describing why asking for permission is deadly…

[…]
So please, let us all live in the future and build what’s missing – here in Europe. I am worried sick that the easiest way for me to live in the future is to buy a ticket to San Francisco. Just like the easiest way for Americans to relive the past is to buy a ticket to Europe, rich in history. I’m asking you to become even more ambitious, more daring, and more demanding, both of yourself, but most importantly also of your environment.

Salathe talks also about role models. His was the founder of Day Interactive, a Swiss start-up which went public in 2000 before being acquired by Adobe for $250M in 2010. So coming next… its cap. table..

DayInteractiveIPO

Isaacson’s The Innovators (final thoughts) – is the future about thinking machines?

Leave a reply

It is always very sad to end reading a great book, but Isaascon’s beautifully finishes his with Ada Lovelace considerations (during the 19th century!) about the role of computers. “Ada might also be justified in boasting that she was correct, at least thus far, in her more controversial contention that no computer, no matter how powerful would ever truly be a “thinking” machine. A century after she died, Alan Turing dubbed the “Lady Lovelace’s Objection” and tried to dismiss it by providing an operational definition of a thinking machine. […] But it’s now been more than sixty years, and the machines that attempt to fool people on the test are at best engaging in lame conversation tricks rather than actual thinking. Certainly none has cleared Ada’s higher bar of being able to “originate” any thoughts of its own. […] Artificial intelligence enthusiasts have long been promising, or threatening, that machines like HAL would soon merge and prove Ada wrong. Such was the promise of the 1956 conference at Dartmouth organized by John McCarthy and Marvin Minsky, where the field of artificial intelligence was launched. The conference concluded that a breakthrough was about twenty years away. It wasn’t.” [Page 468]

800px-Ada_Lovelace_portrait
Ada, Countess of Lovelace, 1840

John von Neumann realized that the architecture of the human brain is fundamentally different. Digital computers deal in precise units, whereas the brain, to the extent we understand it, is also partly an analog system which deals with a continuum of possibilities, […] not just binary yes-no data but also answers such as “maybe” and “probably” and infinite other nuances, including occasional bafflement. Von Neumann suggested that the future of intelligent computing might require abandoning the purely digital approach and creating “mixed procedures”. [Page 469]

“Artifical Intelligence”

Discussion about artificial intelligence flared up a bit, at least in the popular press, after IBM’s Deep Blue, a chess-playing machine beat the world champion Garry Kasparov in 1997 and then Watson, its natural-language question-answering computer won at Jeopardy! But […] these were not breakthroughs of human-like artificial intelligence, as IBM’s CEO was first to admit. Deep Blue won by brute force. […To] one question about the “anatomical oddity” of the former Olympic gymnast George Eyer, Watson answered “What is a leg?” The correct answer was that Eyer was missing a leg. The problem was understanding “oddity”, explained David Ferruci, who ran the Watson project at IBM. “The computer wouldn’t know that a missing leg is odder than anything else.” […]
“Watson did not understand the questions, nor its answers, nor that some of its answers were right and some wrong, nor that it was playing a game, nor that it won – because it doesn’t understand anything, according to John Searle [a Berkeley philosophy professor]. “Computers today are brilliant idiots” John E. Kelly III, IBM’s director of research. “These recent achievements have, ironically, underscored the limitations of computer science and artificial intelligence.” Professor Tomaso Poggio, director of the Center of Brain, Minds, and Machines at MIT. “We do not yet understand how the brain gives rise to intelligence, nor do we know how to build machines that are as broadly intelligent as we are.” Ask Google “Can a crocodile play basketball?” and it will have no clue, even though a toddler could tell you, after a bit of giggling. [Pages 470-71] I tried the question on Google and guess what. It gave me the extract by Isaacson…

The human brain not only combines analog and digital processes, it also is a distributed system, like the Internet, rather than a centralized one. […] It took scientists forty years to map the neurological activity of the one-millimeter long roundworm, which has 302 neurons and 8,000 synapses. The human brain has 86 billion neurons and up to 150 trillion synapses. […] IBM and Qualcomm each disclosed plans to build “neuromorphic”, or brain-like, computer processors, and a European research consortium called the Human Brain project announced that it had built a neuromorphic microchip that incorporated “fifty million plastic synapses and 200,000 biologically realistic neuron models on a single 8-inch silicon wafer. […] These latest advances may even lead to the “Singularity” a term that von Neumann coined and the futurist Ray Kurzweil and the science fiction writer Vernor Vinge popularized, which is sometimes used to describe the moment when computers are not only smarter than humans but also can design themselves to be even supersmarter, and will thus no longer need us mortals. Isaacon is wiser than I am (as I feel that these ideas are stupid) when he adds: “We can leave the debate to the futurists. Indeed depending on your definition of consciousness, it may never happen. We can leave “that” debate to the philosophers and theologians. “Human ingenuity” wrote Leonardo da Vinci “will never devise any inventions more beautiful, nor more simple, nor more to the purpose than Nature does”. [Pages 472-74]

Computers as a Complement to Humans

Isaacson adds: “There is however another possibility, one that Ada Lovelace would like. Machines would not replace humans but would instead become their partners. What humans would bring is originality and creativity” [page 475]. After explaining that in a 2005 chess tournament, “the final winner was not a grandmaster nor a state-of-the-art computer, not even a combination of both, but two Americans amateurs who used three computers at the same time and knew how to manage the process of collaborating with their machines” (page 476) and that “in order to be useful, the IBM team realized [Watson] needed to interact [with humans] in a manner that made collaboration pleasant” (page 477) Isaacson further speculates:

Let us assume, for example, that a machine someday exhibits all of the mental capabilitie of a human: giving the outward appearance of recognizing patterns, perceiving emotions, appreciating beauty, creating art, having desires, forming moral values, and pursuing goals. Such a machine might be able to pass a Turing test. It might even pass we could call the Ada test, which is that it could appear to “originate” its own thoughts that go beyond what we humans program it to do. There would, however, be still another hurdle before we could say that artificial intelligence has triumphed over augmented intelligence. We call it the Licklider Test. It would go beyong asking whether a machine could replicate all the components of human intelligence to ask whether the machine accomplishes these tasks better when whirring away completely on its own or when working in conjunction with humans. In other words, is it possible that humans and machines working in partnership will be indefinitely more powerful than an artificial intelligence machine working alone? If so, then “man-computer symbiosis,” as Licklider called it, will remain triumphant. Artificial Intelligence need not be the holy grail of computing. The goal instead could be to find ways to olptimize the collaboration between human and machine capabilities – to forge a èartnership in which we let the machines do what they do best, and they let us do what we do best. [Pages 478-79]

Ada’s Poetical Science

At his last such apperance, for the iPad2 in 2011, Steve Jobs declared: “It’s in Apple’s DNA that technology alone is not enough – that it’s technology married with liberal arts, married with the humanities, that yields us the result that makes our heat sing”. The converse to this paean to the humanities, however, is also true. People who love the arts and humanities should endeavor to appreciate the beauties of math and physics, just as Ada did. Otherwise they will be left at the intersection of arts and science, where most digital-age creativity will occur. They will surrender control of that territory to the engineers. Many people who celebrate the arts and the humanities, who applaud vigorously the tributes to their importance in our schools, will proclaim without shame (and sometimes even joke) that they don’t understand math or physics. They extoll the virtues of learning Latin, but they are clueless about how to write an algorithm or tell BASIC from C++, Python from Pascal. They consider people who don’t know Hamlet from Macbeth to be Philistines, yet they might merrily admit that they don’t know the difference between a gene and a chromosome, or a transistor and a capacitor, or an integral and a differential equation. These concepts may seem difficult. Yes, but so, too, is Hamlet. And like Hamlet, each of these concepts is beautiful. Like an elegant mathematical equation, they are expressions of the glories of the universe. [Pages 486-87]

leonardo-da-vinci-vitruvian-man
Issacson’s book last page presents Vinci’s Vitruvian Man, 1492