Author Archives: Hervé Lebret

How the Web was Born

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How the Web was Born is a book I bought recently while visiting CERN in Geneva. It was written by James Gillies and Robert Cailliau and published in 2000. If you like history, you will appreciate this detailed account of more than forty years of technology developments. I am not yet finished, but there were a couple of things I wanted to mention here.

howthewebwasborn

– Public funding, mostly through (D)ARPA has been critical for the emergence of the Internet.
– Xerox PARC with its freedom to explore in the 70s has also been instrumental even if it did not directly benefit from its innovations. I did not know key people were coming from ARPA (again).
– When in 1987, CERN needed equipment that could guarantee and secure data transfer, it used he a small 3-year old company… Cisco.
– They were similar experiments to ARPANET in the UK and France, but with different dynamics… [In France] “this apparent success is tempered by the fact that CII had been selling its products at a loss, despite billions of francs of state investment, and the resulting company, again called Bull, is but a small player on the world stage. American success stories like DEC and Apple were launched for the equivalent of less than a single day’s funding of the French Plan Calcul and that from private funds. The lesson to be learnt is that state investment alone isn’t the answer. France’s Délégation à l’Informatique included not a single computer scientist, and was motivated by national pride rather than economic viability, noted a 1997 French government report. Partly because of this, ‘the failure of CII was written in its genes’, one former director of Bull was moved to say. The American approach, on the other hand, most strongly expressed through ARPA, had been to support good ideas coming from the ground up rather than trying to impose something from the top down.” [Page 58]

Indeed the TCP/IP protocol won because it worked but not because it was planned… The Internet is an amazing innovation which does not belong to anyone but is the result of collective endeavors. Again, the role of the state is shown as a friendly enabler more than a direct actor. Interesting lessons (or at least useful reminders)…

Celebrating a (too rare) Swiss IPO: Molecular Partners

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I could have said: Celebrating a (too rare) European IPO. Molecular Partners is a spin-off from the University of Zurich, founded by Professeur Andreas Plückthun, Christian Zahnd, Michael Stumpp, Patrik Forrer, Kaspar Binz and Martin Kawe in 2004. It was funded by private investors: a first round of CHF18.5M in 2007 and a second round of CHF38M in 2009. Molecular has also signed a number of agreements with pharmaceutical companies, which explains the high income for a biotech start-up. The University of Zurich is also a shareholder thanks to a license agreement signed in 2004, through which it also receives royalties.

Molecular-CapTable
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I think it is interesting to illustrate the evolution of its ownership trhough the financing rounds, including the IPO that has brought about a hundred million to Molecular.

Molecular-Dilution
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I also like to mention the age of the founders. The IPO document provides data and I “guesses” the others from the academic career (based on a age of 18 at university entrance…) It gives an average of 33 with a range of 20 years between the extremes. I know that money is a taboo; Europeans do not like to disclose their wealth, which remains highly theoretical, because one does not sell shares in a biotech as easyly as a Facebook employee… But it seems to me important to celebrate the success of founders and their investors … Congratulations to all!

Molecular-Founders-Age

Something rotten in the Google republic?

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I should have added a point of disagreement or discomfort in the analysis made by the authors of How Google Works. On page 125, there is a short section called Disproportionate rewards:

“Once you get your smart creatives on board, you need to pay them. Exceptional people deserve exceptional pay. Here again you can look to the sports for guidance: Outstanding athletes get paid outstanding amounts. […] Yes they are worth it (when they perform up to expectations) because they possess rare skills that are tremendously leverageable. When they do well, they have disproporationate impact. […]

You can attract smart creatives with factors beyond money: the great things they can do, the people they’ll work with, the responsability and the opportunities they’ll be given, the inspiring company culture and values, and yes, maybe even free food and happy dogs sitting desk-side. […] But when those smart creatives become employees and start performing, pay them appropriately. The bigger the impact, the bigger the comp. Pay outrageously good people outrageously well, regardless of their title or tenure. What counts is their impact.”

HowGoogleWorks-cover

I am in fact coming back to Capitalism in Silicon Valley following my contribution on France Culture. My French culture naturally favors the collective rather than the individual, while America has a reverse culture. However, the excellent exchange between Xavier Niel and Edgar Morin (l’école de la vie) shows that the borders or at least the analysis are moving. “What can a young French do if he wants to get rich, which is not to be despised? Not much. So he/she leaves. If a young suburban, if excluded from the school system, he/she only has small jobs or illegal dealing. And it is tragic. […] The problem is that the state has no money. No money, no reform. There is no more vision and courage to face corporatism.” And there’s the problem of Republican elite which is out of breath. “The social elevator is not working anymroe. We have the worst grade among the OECD countries in this area. The elites are very little renewed. What hope can have a growing number of young people who will find it difficult to benefit from a system monopolized by a few self-proclaimed castes and other great public servants of the state, which management has also been poor?”

In California, Google also stirs controversy. The exclusivity and exception create exclusion. How to correct it? Picketty and others respond with tax. But Google and others do not pay (enough) taxes … And Eric Schmidt does not addresses the issue of the collective and Google uses the law to optimize taxation. The “exceptional” and “outrageously” can become outrageous…

My discomfort is amplified by the notion of merit. In the field of science, one “grows up on the shoulder of other giants” and many have been forgotten. Albert Einstein. Didn’t he owe anything to Mileva? These exceptional individuals. Don’t they owe nothing to the surrounding environment, which may have helped? I’m much more sensitive to the other argument the authors use: “fight for the Divas” (page 48). I believe that in science, we have not listened enough to the exceptional behaviors such as Perelman and Grothendieck, two mathematicians who have withdrawn from the world.

I do not have answers and just intuitions. Between the elite, the exceptions, the rare individuals, and the collective, society, people, there must be a better balance. Between the negative taxes that the multinational corporations pay and the higher-than-the-annual-income taxes of some wealthy entrepreneurs, there must be a wise mid-point, which should help solve some issues of Silicon Valley on one side and Europe on the other side…

My coming out – in the world of start-ups

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No it is not a true coming out à la Tim Cook, but a much less spectacular message… I woke up early this morning very disturbed. As you can see below, the ecosystem to support entrepreneurs at EPFL (finance, coaching, exposure and office space) is rich and complex. Yet our results are average not to say mediocre… all this is in fact useless without the ambition and risk-taking of enthusiastic and passionate individuals.

I’m not talking about people, but the system. A few days ago, I said to colleagues I was a matchmaker. I encourage meetings and I put the oil in the wheels. Then I smiled, thinking – I’m usually not too vulgar – that I offered vaseline for introducing investors. Fifteen years ago, an entrepreneur who had enjoyed a chat told me that I made him think of a prostitute but hidden behind me, there were nasty pimps…

Two days ago, I was lucky to listen at EPFL to a Nobel Prize in economics who explained that the Western world is in decline, that the crisis can be explained in part by a weak innovation. Corporatism and financiarization are some reasons of this. Then there was a shocking message from another speaker. Switzerland would be fine because it is hard-working while its neighbor would go wrong because its workers start their weekend on Wednesday at noon. Who can believe that unemployment and bankruptcy in Detroit would come from the laziness of the automobile workers and the success of Silicon Valley because of workaholic nerds. Things are much more complex! Just see in particular the recent analysis of Thomas Picketty or the related MIT Technology Review Technology and Inequality.

Four days ago, I listened to the US ambassador to Switzerland and Liechtenstein. Suzi Levine knows the world of start-ups. She is therefore interested in the situation in Switzerland. I noticed two of her messages:
– First “you have a lot of money but little capital”, I leave you to think about the message that was given to her at EPFL I think, “you have a lot of money but little capital”.
– Second, the weakness of the female presence in this entrepreneurial world. She therefore particularly appreciated that the Prix Musy be created this year. But our efforts will be useless, if we do not encourage and allow the emergence of passionate and adventurous entrepreneurs that create wealth and value… it’s not just about women, but diversity in general which should not be hindered by corporatism and financiarization.

EPFL-VoD-funding

More on the EPFL support to entrepreneurs

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Patrick Modiano, Nobel Prize in Literature

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I remember a conference by Carlos Fuentes at Stanford University in 1989 or 1990. The Mexican writer said there that literature had become mixed. I did not find any trace of this conference, but some traces of a similar conference.
carlosfuentes
“Our future depends on the freedom of the polycultural to express itself in a world of shifting, decaying and emerging power centers.” He talked about the voices in literature today – Third World writers such as Salman Rushdie and V. S. Naipul – whose works reflect a diverse world that is no longer bipolar in terms of power and culture.

I took my courage in both hands and lined up to talk to him for a short moment. I asked him when my turn came what he thought of French literature. He told me that in this trend of global mixing, it was less visible except some authors such as Michel Tournier and J.M.G. Le Clézio. He did not mention Patrick Modiano but he should have! Nothing is more mixed as the writing of Modiano from La place de l’étoile until aptly titled Un pedigree. And nothing beats the most surprising opinion on this great author than François Mitterrand and Frédéric Mitterrand.

Frédéric Mitterand: “He received the Nobel Prize because, in my opinion, he permanently searches the Western guilt about the behavior of each other in times of totalitarianism, cruelty, and maltreatment from the state. […] he does not know why good people have become collaborators and bastards, resistant and what is perhaps the key to the deep melancholy and poetry that emerges from his books is that he does not know exactly.” (Minute 0:56 of the video below)

As for François Mitterrand, the archive dates back to 1978 when Bernard Pivot asked the man who was not yet President of the French Republic to invite four authors. He invited among others Patrick Modiano and Michel Tournier also! From minute 56:10, we could hear an amazing exchange … “There is a great clearness of style, which can deceive. Rue des boutiques obscures, it is an interesting story of someone who, in search of himself – he has amnesia, he does not know who he is – falls on Russian picturesque, families… But this is just a simple story. And then we get to the end […] and suddenly you realize that it’s not a simple story, it’s not a clear story. […] We realize that we are projected into another story; this man who is looking for himself does not just have amnesia – or so we all amnesic: who are we? […] This is a great classic French style and then we realize that there is some Russian under this. These are people who talk like Dostoevsky would do, but in the style of Stendhal or of a detective novel. »

When you know the relationship also ambiguous and far from simple between François Mitterrand and the Second World War, the exchange is amazing. I do not know if Modiano was surprised by the invitation. He was to receive the Prix Goncourt a few months later and the Nobel Prize some 25 years later…

NB: Fuentes and Tournier did not recieve the Nobel prize, but Le Clézio and Modiano did. If I had to bet, the next French writer on the list might be Michel Houellebecq.

NB2: when available, I will add here Modiano’s speech in Stockholm for his Nobel Prize.

Venture capital

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I was asked this week about how big venture capital is in Switzerland. And also in Silicon Valley. So I checked the data and found what comes below. But try to ask yourself how much money is invested in countries such as Germany, France, the UK, and regions such as Silicon Valley or the Boston area. Any clue? Before providing some answers, I should clarify one point: there are at least two definitions. How much money is raised by funds located in a given area. And how much money is invested in companies established in that area. I focus on the second one as funds can artificially be established in strange places such as Jersey for example. Then you have to remember that money can be invested in a Swiss start-up by Silicon Valley investors. It therefore shows the dynamism of entrepreneurs, not of local investors.

venture_capital_superhero

A second point I want to mention again is that high-tech start-ups and venture capital are about exceptions. If you are not convinced, read Peter Thiel or what follows. Marc Andreessen pronounced this at class 9 of How to Start a Startup: “The venture capital business is one hundred percent a game of outliers, it is extreme outliers. So the conventional statistics are in the order of four thousand venture fundable companies a year that want to raise venture capital. About two hundred of those will get funded by what is considered a top tier VC. About fifteen of those will, someday, get to a hundred million dollars in revenue. And those fifteen, for that year, will generate something on the order of 97% of the returns for the entire category of venture capital in that year. So venture capital is such an extreme feast or famine business. You are either in one of the fifteen or you’re not. Or you are in one of the two hundred, or you are not. And so the big thing that we’re looking for, no matter which sort of particular criteria we talked about, they all have the characteristics that you are looking for the extreme outlier.”

Now the numbers through tables:

VC-US-Figure

VC-US-Table

VC-Eur-Figure

VC-Eur-Table

Many striking facts. Not new ones, I knew about them. but still…
– Silicon Valley leads. By far.
– There had been a bubble in 2000! But the amounts of VC funding post 2000 have remained extremely high compared to the 90s. Would there be too much money?
– The USA easily recovered from the 2008 crisis. Not Europe…

NB: I had done the exercise in 2011 in Venture Capital according to WEF. Let me just add again this table. Notice the numbers are not fully consistent with what I showed above. Just an illustration of the difficulty of definitions (stages, origins…) but the order of magnitude is what matters.

The Importance and Difficulty of Culture in Start-ups: Google again…

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I confirm I do not like the “how to” books or the ones helping you with recipes, methods. There are exceptions but I always struggle with them. (Same with audio or videos by the way). And same thing about culture. What is it? How do you build it? Here is an element of why it’s tough for me and others: “There are three things they never tell you about culture. First thing is they never tell you anything about culture. No one talks about culture and no one ever tells the need to have strong culture. So there’s tons of articles about building a great product, there’s tons of articles on growth and adaption, and a few things about culture. It’s a mystical thing that’s soft and fuzzy. That’s the first problem. The second problem is it is hard to measure. Things that are hard to measure often get discounted. These are two very hard things. The third thing, the biggest problem, it doesn’t pay off in the short term. If you wanted to start up a company and sell it in one year, the one thing I would tell you to do is fuck up the culture. Just hire people quickly. Culture makes you hire really slowly, makes you deliberate about your decisions that in the near term can slow progress.” This is taken from How to startup a start-up. It’s from Brian Chesky, Founder, Airbnb in class 10.

This being said, there’s a great book about company culture. It’s How Google Works, which I mentioned already in a recent post, Entrepreneurship from First Principles. So let me extract a couple of notes from my reading.

HowGoogleWorks-cover

No real businesss plan
“One of the biggest reasons for our success, though, is that the plan we delivered to the board that day in 2003 wasn’t much of a plan at all. There were no financial projections or discussions of revenue streams. There was no market research on what users, advertisers, or partners wanted or how they fit into nicely defined market segments. There was no concept of market research or discussion of which advertisers we would target first. There was no channel strategy or discussion of how we would sell our ad products. There was no concept of an org chart, with sales doing this, product doing that and engineering doing some other that. There was no product roadmap detailing what we would build and when. There was no budget. There were no targets or milestones that the board and company leaders could use to monitor our progress. […] We left that out for the simple reason we didn’t know how we were going to do it. When it came to management tactics, the only thing we could say for sure back then was that much of what [we] had learned in the twentieth century was wrong, and that it was time to start over.” [Page 10]

Smart creative
“The main reason for the lack of business plan is Google population made of Smart Creative. When we contrast the traditional knowledge worker with the engineers and other talented people who have surrounded us at Google over the past decade-plus, we see that our Google peers represent a quite different type of employee. They are no confined to specific tasks. They are not limited in their access to the company’s information and computing power. They are not averse to risk taking, nor are they punished or held back in any way when those risky initiatives fail. They are not hemmed in by role definitions or organizational structures; in fact, they are encouraged to exercise they own ideas. They don’t keep quite when they disagree with something. They get bored easily and shift jobs a lot. They are multidimensional, usually combining technical depth with business savvy and creative flair. In other words, they are not knowledge workers, at least not in the traditional sense. They are a new kind of animal, a type we call a “smart creative,” and they are the key to achieving success in the Internet Century.” [Page 17]

Key attributes of smart creative: expert in doing, comfortable with data, sees a direct line from technical expertise to product excellence to business success, hard-working, understands the user or consumer’s perspective, always questioning, not afraid to fail, self-directed, open, thorough. Communicative, eager and able.

Mentor
“When they learnt all this, they decided to write this book as if they were mentors. Lew Platt, HP’s CEO explained why he was investing so much time to help out a young executive at another company: “This is the way Silicon valley works. We’re here to help you.” Steve Jobs explained that Noyce helped him discover the tricks. Schmidt agrees that “it’s what you learn after you know it all that counts” and he believes “we had a front-row seat and used it to relearn everything we thought we knew about management, i.e. how to grow a business, attract and motivate smart creative, which start with a culture, then strategy. Business plans aren’t as important as the pillars upon which they are built” [Pages 21-23]. Culture stems from founders, but it is best reflected in the trusted team the founders form to launch their venture. [Page 30]

Slogans (believe in them)
– Keep them crowded
– Work, eat and live together
– Messiness is a virtue
– Don’t listen to the HiPPOs (*)
(later there is “your title makes you a manager, your people make you a leader”)
– The rules of seven (hierarchy is not good but flatness neither)
– Do all reorgs in a day
– The Bezos two-pizza rule
– Exile knaves but fight for divas
– Overworked in a good way
– Establish a culture of Yes
– fun, not Fun
– You must wear something
– Ah’cha’rye
– Don’t be evil
(*): Highest Paid Person’s Opinion

Strategy
Bet on technical insights, not market research
Don’t look for faster horses
Optimize for growth
Specialize
Default to open, not closed
Default to open, except when…
Don’t follow competition

The CEO needs to be the CIO (Chief Innovation Officer).

One of the best chapters is the one entitled Innovation. “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.” [Page 206]

[NB. These are the 3 criteria for real patentability: novel, non-obvious and applicable]

“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.” [Page 206]

And innovation is critical: “A few years ago, a major consulting firm published a report advising all companies to appoint a Chief Innovation Officer. Why? Allegedly to establish a “uniformity of command” over all the innovation programs. We’re not sure what that means, but we’re pretty sure that “uniformity of command“ and “innovation” don’t belong in the same sentence (unless it’s the one you’re reading now). […] Innovation stubbornly resists traditional, MBA-style management tactics. Unlike most other things in business, it cannot be owned, mandated, or scheduled. Innovative people do not need to be told to do it, they need to be allowed to do it“. [Page 209]

InnovationAtGoogle

If you really do not want to read this very good book, here is an alternative:

PS: a small detail. The last section is about acknowledgements. It is usually boring, here it’s not. Just because it is more than 7 pages with more than 100 names mentioned…

What has Silicon Valley to do with Capitalism?

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(this is a quick and dirty translation of a French post as it is linked to a French radio broadcast – sorry for the bad english if any)

I was a guest yesterday of French radio Culturesmonde France Culture in a series about capitalsim entitled Des capitalismes (1/4) – Silicon valley: l’émancipation par l’argent. I had to give my views abotu SV and capitalism. Is it unique or extreme? Does the area care, does it have an ideology or is it indifferent to capitalism?

FranceCultureMondes-SiliconValley

The topic is rich and complex because with 7 million people, opinions in SV are also diverse and were built over 50 years. Each decade brough a new generation of entrepreneurs and investors. You can listen to the broadcast (in French) who also involved Yann Moulier-Boutang, who talked about « cognitive capitalism » and Sébastien Caré, a spécialist of libertarian thinking.

A big thank you to Clémence Allezard who prepared the series, pushing me to think about the region in a manner I was not used to. 🙂 So I thought about it as follows. Is SV an extreme form or a unique form of capitalism? or as I have a tendency to think a region quite indifferent to capitalism? On the one hand you have large powerful firms who do not really pay taxes, you have a fast Schumpterian creative destruction, the government is not active as it is in Europe (health, schools, transportation) so that firms (at the anecdote level or not?) do the work (Google buses, Apple And FB recent initiative about freezing women eggs, Peter Thile encouraging school dropouts) and even induce the SF authorities in changing housing laws. One the other hand, it is not just extreme, it is unique, SV created venture capital, systematized stock options, and has active co-opetition. Richard Newton was saying SV is the firm and all the companies are its divisions. People move from one to the other easily with market dynamics.

Finally, it is the “revenge of the nerds”. They are problem solvers, and do not care about society (hence the libertarians) and even about capitalism (making money is a by-product and if an objective, far from being the only one). I read a great New Yorker article where George Packer explains that these nerds hate the friction created by negotiation and compromises politics and society necessarily induce. So they avoid it as long as they can. And do more when they feel limited by the government but are quite neutral about it. They are selfish. But i doubt “changing the world to make it a better place” is totally convincing at the same time. It is more selfish than generous. These people are mild versions of Asperger and are obsessed by solving their problems. If it solves others’, good, not critical. (Of course SV is 7 million people and is a diverse region, I am focusing on what is visible). I was saying to the journalist when we prepared the talk, that I see more indifference than real strategy, I see some lobbying in SF or Washington, but rather limited compared to general lobbying in the USA.

Another way to summarize is: is there a particular ideology of capitalism in Silicon Valley? I would say that rather than a strategy, there has been a practice that was put in place over decades, by iteration, by trial and error. Ultimately, Silicon Valley is the meeting of ideas (entrepreneurs, and academics sometimes) and money (investors). But unlike the rest of the world where investors are bankers who lend money, in SV they are often former entrepreneurs who “give” money (in the sense that they take the risk of not finding it back), in fact they take shares in the company (often around 50%). They literally invented venture capital, which has found its final form in the 80’s. In addition, the “stock options” decried in Europe are recognized in the SV as a motivation. Secretaries at Apple or Microsoft did sometimes become millionaires, something unthinkable at home in Europe. I have also said, there is an optimism that encourages risk-taking. Moreover, there is no real risk because the skill allows you to find a new job quickly. The risk lies in the possible error in the choice of the project and nobody is ever ruined normally, except one’s health. And as the model works, it is enriched in new areas beyond which the electronics is the root, through the electric car (Tesla Motors), aeronautics (SpaceX) and even the food 2.0 movement (for synthetic food). And the last frontier, aging, death, trans-humanism … which seems to me personally crazy, but …

As a post-scriptum, some comments I got… very interesting! i think SV is more diverse these days. there are the really old school types, like intel, cisco, even apple. then there are places like google and Facebook, that actually do something valuable. and then there are the startups with a hand full of 20 year olds that do not much, but have valuations measured in billions. i think the question should be answered differently for the different groups. and it’s important to not lump cisco in with, say, whatsapp or snapchat.

i’d say for many of them, it’s indifferent to mildly positive feeling abotu politics, as you say. for some (many of the VCs) it’s definitely capitalism on steroids. (or at least, they like to think of themselves that way; they blabber all the time about “wealth creation”, making sure that much of that new wealth goes to them.) more than capitalism, i think what’s concentrated in SV is talent, especially, technical talent. creative destruction resonates *very strongly* with people here; the whole idea of SV is that a handful of kids can change an entire industry, or even create a new one. they usually fail, and sometimes they succeed. imagine how steve jobs or the google guys would have done in europe. the google guys would have gone to the librarians and asked, how can we help you find information? steve jobs would have run long, extensive marketing tests to determine what people want. or maybe he’d go to siemens to try to convince some high level manager that a smart phone was a good idea. of course what happened is way cooler. steve jobs had better taste than everyone else, so he made stuff he liked, period. and the google guys just forged a new path, without seeking the endorsement or buy in of the librarians. in europe, a startup would try to get some giant company to use their product/technology, a long, boring, and tedious process.

typically, a handful of EPFL students would not imagine/believe that they can change the world. stanford students (who are not more talented) do. so, i think it’s mostly a cultural difference, and not something that has to do with capitalism.

Should entrepreneurs have start-up skills? Two counterintuitive answers

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I teach entrepreneurship and I often wonder. What should be taught? I am not sure. In the class How to Start a Startup, both Paul Graham and Peter Thiel did provide feedback on some examples. First Paul Graham. Just click here or go to time 5:26 below or read after the video frame.

“The second counterintuitive point, this might come as a little bit of a disappointment, but what you need to succeed in a startup is not expertise in startups. That makes this class different from most other classes you take. You take a French class, at the end of it you’ve learned how to speech French. You do the work, you may not sound exactly like a French person, but pretty close, right? This class can teach you about startups, but that is not what you need to know. What you need to know to succeed in a startup is not expertise in startups, what you need is expertise in your own users.

Mark Zuckerberg did not succeed at Facebook because he was an expert in startups, he succeeded despite being a complete noob at startups; I mean Facebook was first incorporated as a Florida LLC. Even you guys know better than that. He succeeded despite being a complete noob at startups because he understood his users very well. Most of you don’t know the mechanics of raising an angel round, right? If you feel bad about that, don’t, because I can tell you Mark Zuckerberg probably doesn’t know the mechanics of raising an angel round either; if he was even paying attention when Ron Conway wrote him the big check, he probably has forgotten about it by now.

In fact, I worry it’s not merely unnecessary for people to learn in detail about the mechanics of starting a startup, but possibly somewhat dangerous because another characteristic mistake of young founders starting startups is to go through the motions of starting a startup. They come up with some plausible sounding idea, they raise funding to get a nice valuation, then the next step is they rent a nice office in SoMa and hire a bunch of their friends, until they gradually realize how completely fucked they are because while imitating all the outward forms of starting a startup, they have neglected the one thing that is actually essential, which is to make something people want.”

Second Peter Thiel about the Lean Startup movement. Again just click here or go to time 44:55 below or read after it.

“What do I think about lean startups and iterative thinking where you get feedback from people versus complexity that may not work. I’m personally quite skeptical of all the lean startup methodology. I think the really great companies did something that was somewhat more of a quantum improvement that really differentiated them from everybody else. They typically did not do massive customer surveys, the people who ran these companies sometimes, not always, suffered from mild forms of Aspergers, so they were not actually that influenced, not that easily deterred, by what other people told them to do. I do think we’re way too focused on iteration as a modality and not enough on trying to have a virtual ESP link with the public and figuring it out ourselves.”

(NB: I assume ESP is Extra-Sensory Perception)

So what’s good: monopoly or competition?

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Two minor events drive me to write a minor post about monopoly or competition. What’s best? On the one hand, I just read an article about the poor status of the patent landscape and how to improve it. On the other hand, I listened yesterday Peter Thiel – yes, the same Peter Thiel I have so often mentioned already here – in a class he gave at How to Start a Startup? So what’s the link?

Well a patent is a monopoly given by the authorities as an incentive to innovate (just check http://en.wikipedia.org/wiki/Patent). But some authors, in particular Boldrin and Levine, claim this is an “unnecessary evil”. I just read again my notes about their Against Intellectual Monopoly and their arguments are strong. In fact, capitalism in general considers competition is good and monopoly is bad.

But Peter Thiel has different views. Just check two slides from his talk below. Peter Thiel, a famous libertarian, claims that start-ups should look for monopolistic positions! What a strange paradox… I honestly do not know who is right! probably, as Boldrin and Levine wrote, “in media stat virtus, et sanitas”.

Thiel-perfectcompetition

Thiel-monopoly

As I did not find his views about patents in his class, I tried to find something in his recent book, Zero to One. Here is what he says (pages 32-34): “So, a monopoly is good for everyone in the inside, but what about everyone in the outside? Do outsized profits come at the expense of the rest of society? Actually, yes […] and monopolies deserve their bad reputation – but only in a world where nothing changes. […] But the world we live in is dynamic: it’s possible to invent new and better things. Creative monopolies give customers more choices by adding entirely new categories of abundance to the world. Even the government knows this: that’s why one of its departments works hard to create monopolies – by grating patents to new inventions = even though another part hunts them down (by prosecuting antitrust cases). It’s possible to question whether anyone should really be awarded a legally enforceable monopoly simply for having been the first to think of something like a mobile software design, but… […] Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. […] So why are economists obsessed with competition as an ideal state? It’s a relic of history.”

Maybe all this is BS, and unfortunately, I never read Jean Tirole. “He was awarded the Nobel Memorial Prize in Economic Sciences in 2014 for his analysis of market power and regulation of natural monopolies and oligopoly.” He would have much to say about this… maybe you can react and in the mean time, you can listen to Thiel’s full talk (see at the end).

In this talk, Peter Thiel has another interesting description about capturing value creation. “If you have a valuable company two things are true. Number one, that it creates “X” dollars of value for the world. Number two, that you capture “Y” percent of “X.” And the critical thing that I think people always miss in this sort of analysis is that “X” and “Y” are completely independent variables, and so “X” can be very big and “Y” can be very small. “X” can be an intermediate size and if “Y” is reasonably big, you can still have a very big business.” [HL comment: The “you” here may be the inventor or the entrepreneur, or the university at the origin of the idea…]

And then: “The thing that I think people always miss when they think about these things, is that because “X” and “Y” are independent variables, some of these things can be extremely valuable innovations, but the people who invent them, who come up with them, do not get rewarded for this. Certainly if you go back to you need to create X dollars in value and you capture Y percent of X, I would suggest that the history of science has generally been one where Y is zero percent across the board, the scientists never make any money. They’re always deluded into thinking that they live in a just universe that will reward them for their work and for their inventions. This is probably the fundamental delusion that scientists tend to suffer from in our society. Even in technology there are sort of many different areas of technology where there were great innovations that created tremendous value for society, but people did not actually capture much of the value. So I think there is a whole history of science and technology that can be told from the perspective of how much value was actually captured. Certainly there are entire sectors where people didn’t capture anything. You’re the smartest physicist of the twentieth century, you come up with special relativity, you come up with general relativity, you don’t get to be a billionaire, you don’t even get to be a millionaire. It just somehow doesn’t work that way. The railroads were incredibly valuable, they mostly just went bankrupt because there was too much competition. Wright brothers, you fly the first plane, you don’t make any money. So I think there is a structure to these industries that’s very important. I think the thing that’s actually rare are the success cases. So if you really think about the history in this and this two hundred fifty years sweep, why is almost always zero percent, it’s always zero in science, it’s almost always in technology. It’s very rare where people made money. You know in the late eighteenth, early nineteenth century, the first industrial revolution was the textile mills, you got the steam engine, you sort of automated things. You had these relentless improvements that people improved efficiency of textile factories, of manufacturing generally, at a clip of five to seven percent every year, year after year, decade after decade. You had sixty, seventy years of tremendous improvement from 1780 to 1850. Even in 1850, most of the wealth in Britain was still held by the landed aristocracy and the workers didn’t make that much. The capitalists didn’t make that much either, it was all competed away. There were hundreds of people running textile factories, it was an industry where the structure of the competition prevented people from making any money.”

Please react 🙂