Author Archives: Hervé Lebret

The Dream of Silicon Valley

This is my translation (well Google translation) of a very good article I read in newspapers La Tribune de Genève (pdf here) and 24 heures (pdf here). I am not sure I have the rights to do such a transaltion. I will do it the Google was and hopefully the news papers will not complain…

If you do not want to read it all, here are just two short quotes: “Some explain the excitement that prevails here because of a feeling of urgency, says Christian Simm. We must go quickly, people know they cannot work 80 hours a week for twenty years.” and
“You want to know the secret of Silicon Valley? asks Fadi Bishara, head of the incubator Blackbox. Failure is not an issue. It is completely accepted. It is even considered an apprenticeship.”

The Dream of Silicon Valley
Can the Lake Geneva area reproduce the ecosystem of the U.S. technology hub ?
by Renaud Bournoud

Often imitated, never equaled. The famous ecosystem of Silicon Valley, near San Francisco, is one of the most dynamic regions of the world. The success stories of Google, Apple and Facebook continue to fascinate, even on the Lake Geneva. But on paper, this Eldorado for innovation has much in common with our region. In a similar geographic area, a large bean sixty kilometers long, the two countries are ranked in the world’s most successful regions. If Silicon Valley is based on the prestigious universities of Stanford and Berkeley, the Lake Geneva can count on the EPFL, the Universities of Geneva and Lausanne or the IMD, the High School of Management. In both cases, the density of highly qualified people is high. Even daily commuters from Silicon Valley experience the discomfort that we know well . They also wait for hours in traffic jams. U.S. Highway 101, which irrigates the valley is as congested as the A1, between Lausanne and Geneva. Housing is also a concern that we share with them. The real estate prices are well above the U.S. average and have nothing to envy to those on Lake Geneva. So what are the ingredients that make Silicon Valley so special?

Demographic factors

A century ago, the orange groves reigned as kings over this corner of California. Now the land has nearly four million people. More broadly, the population of the San Francisco Bay is the size of that of Switzerland. The presence of reputable universities brings a lot of talent, as well as the attraction of the region. Silicon Valley Community Foundation considers that 60% of the engineers were born abroad, many of whom are from Asia. But the valley also attracts many Americans. “Here we are at the extreme west of the United States. We cannot go further, says Christian Simm, founder of Swissnex (note: the Swiss Agency for Promotion of Science and Innovation) in San Francisco. People who consider Boston too quiet come here to create. Because everything seems possible.” This density of great talent pool is ideal for company recruitment. A startup like Square, active in payment systems, could recruit 600 programmers in less than four years. This would not necessarily be feasible in the Lake Geneva region. These people have often come alone and can concentrate fully on their work. “Some explain the excitement that prevails here because of a feeling of urgency, says Christian Simm. We must go quickly, people know they cannot work 80 hours a week for twenty years.”

Cultural factors

A they arrived alone in Silicon Valley, people are quite willing to meet others, creating a culture of networking. Many networking events are regularly organized, like the Start Up Weekends. They also exist here, but in smaller proportions, simply because the population and the number of start-ups are lower. “It makes it easy to find a partner to build a startup,” says Ahmed Siddiqui, one of the organizers of Start Up Weekends Bay Area. “Here the world lives around the field of technology , explains Alexandre Gonthier, the boss of PayWithMyBank in Redwood City. I met my partner at the playground where I watched my children.” Not only can we can find a future partner in the sandbox, it is also easy to cross the pundits of Silicon Valley at random from a barbecue party. They are available and are ready to play mentors for younger people. “It is not as easy to meet bosses in Europe … Unless they learn that you are installed in Silicon Valley. There, the doors open,” notes Alexandre Gonthier. Contacts are natural, and the mentality towards failure also has a role. “You want to know the secret of Silicon Valley? asks Fadi Bishara, head of the incubator Blackbox. Failure is not an issue. It is completely accepted. It is even considered an apprenticeship.” And if the project does not fail, it will soon be on the market. “The minimum viable product” is the leitmotif of the Silicon Valley. “We need to create something simple that you can use right away,” says Solomon Dykes, the founder of the start-up Dotdoud in San Francisco. “I would add that the idea is not very important, Fadi Bishara continues. Googje invented nothing, there were already search engines. What matters is the “packaging”, how the project is sold.” It’s the reason why storytelling is used a lot to sell. These stories also serve to develop an entrepreneurial spirit. Many myths have grown from Silicon Valley. There is the famous story about the birth of startups in garages. Like, for exampl , Google, which had rented a garage, whereas it had already raised $ 1 million.

Financial factors

Good idea or not, nothing is possible without money. The region of Silicon Valley attracts 46% of venture capital in the United States, according to the Bay Area Council Economic Institute. This happens especially much earlier in the development of projects than here.” If, after a year , the start -up has not found funding , we believe that we need to move on,” adds Jeff Burton , director of Skydesk , an incubator located on the Berkeley campus . “For us, the institutional money comes much later, said Joao Antonio Brinca, representative of BCV board at the Foundation for Technological Innovation in Lausanne. Financing through venture capital funds typically occurs between the fifth and seventh year of the project life. “The sums involved are not the same. A young company of Lake Geneva can hopee to raise between 300,000 and 600,000 francs for its first round of funding. In Silicon Valley it is at least twice. So there is a gap between the first efforts of startups to exit the academic world and the interests of investors . This longer period may explain the difficulty of transforming research into marketable products. Another advantage of Silicon Valley is its close proximity maintained between universities and private firms. In this regard, the Lake Geneva is still lagging behind. But it would be wrong to say that nothing is done about it. EPFL has worked in recent years to attract firms in the area of innovation, so that they mingle with the start-ups. But again, the structures of the same type that abound in Silicon Valley are favored by the scale. The density of start-ups produces a unique emulation world. Also keep in mind the economy of scale to explain this difference. A U.S. start -up happens in a domestic market of 320 million potential customers. In Switzerland, an emerging company has to deal with a much smaller market, divided into three languages and twenty- six cantons.

This article was produced as part of a tour organized by BCV for ten young Vaudois.

Twitter discloses numbers through SEC filing

Leave a reply

Twitter finally published its S-1 document. In 2011, I had tried to make a tentative assessment in my post, If Twitter was going public, some far-fetched assumptions.

You can compare the cap. table below to the one in the post (click on the picture to enlarge image). Of course there were missing data and there are still some today. The investors shares are not described in detail. I do not have the shares of one of the founders, Biz Stone, but only those of Jack Dorsey and Evan Williams. I plan to update info when I have more. (A small detail: series A was probably $100k and not $76k for example.) Enjoy and react!

click on picture to enlarge

Criteo files to go public

Leave a reply

The latest French success story, Criteo, just filed to go public on Nasdaq. You can find all the details in the SEC F-1 document. I had tried to build Criteo’s cap. table, one of my favorite exercises, in What’s Criteo worth?

I was not too far from the truth. The numbers are different because there was a 2-for-5 stock split and probably other little things, I consider minor. You will see my cap. table again at the end (figure 3), but first here are Criteo’s impressive numbers (profit & loss – figure 1) as well as the current shareholder structure (figure2):

Figure 1 – Criteo’s P&L – click on picture to enlarge

Figure 2 – Criteo’s main shareholders – click on picture to enlarge

Figure 3- Criteo’s “old” cap. table – click on picture to enlarge

The Startup Kids – a film that any wannabe founder should watch!

Leave a reply

Movies may become a better way to communicate about start-ups & entrepreneurship than books or blogs. It’s something Neil Rimer had told me when I published my book. It is true there has been a number of new features in fiction (The Social Network, Jobs) and non-fiction (SomethingVentured) recently without a need to mention old stuff such as Triumph of the Nerds Silicon Valley Pirates and special events on television such as PBS.

Startup Kids belong to this new trend and it is an interesting (and fun) document. You may watch the trailer here and I will quote a few entrepreneurs thereafter. The document had been mentioned to me by colleagues (merci Corine ) who showed it to me, including the very good blog article of Sébastien Flury: The Startup Kids – a film that any wannabe founder should watch! (whom title I used, nice Sébastien 🙂 )

What’s entrepreneurship?

Drew Houston, Dropbox: “It’s like jumping out of a cliff and having to build your own parachute”

Kristian Segerstrale, Playfish: “An entrepreneur is a person who dares to have a dream that not many people have and even more important dares to chase it, put their money where their mouth is and their time and their career and dares to take the risk to going out there to realize that vision.”

Alexandre Ljung, SoundCloud (from Sweden and based in Berlin and San Francisco): “I did not have the typical entrepreneur background, […] but in hindsight I was very focused on projects so I was very entrepreneurial but not in a business sense.”

In European Founders at Work, his co-founder Eric Wahlforss states “I think we could have easily done this in one year faster if we would have been a little bit more bold and thinking a little bit more in terms of scale early on. We started out very small, had almost no money at all, and a very small team. I think we could have been bolder. […] and running with a bigger vision from the start.” And then “Do it.” It’s the best decision I’ve ever done in my whole life. […] And I was studying engineering as well, and I had one hundred classmates. And I know that almost zero of them actually went on to start a company, which is kind of crazy because I know a lot of them have good ideas. But none of them quite felt that they were able to pull it off.

Luck is an important topic in the movie

Segerstrale again: “Successful start-ups need a lot of things, they need a great idea, they need a great team, they need to be there at the right time, they need the right level of funding, and they need a lot of luck.”

Tim Draper, founder and investor, DFJ: “There is a lot of luck in the success of all the companies which have succeeded. You need a lot of luck, there were 25 search engines funded before Google was funded. There was Friendster and LinkedIn and MySpace and about 50 others before facebook became the big winner in that area.” [And it was the same with computer companies in the 80s!]

Finally do not miss Zach Klein (founder of Vimeo) in his beautiful wood cabin which reminds me of Thoreau’s Walden.

Stanford will invest in companies founded by students

Leave a reply

“The prestigious American university Stanford will now invest in start-ups.” Thus begins an article in the newspaper Le Monde. The author, Jerome Marin, is rather negative about this decision, as the following quote shows: “The confusion is fueled even at the top of the university: the president has close ties with several giants of Silicon Valley, including Google as it is a member of the Board.” Without trying to argue, I think the reporter is misled.

But before I give you my point of view , I’d like to mention that I looked for other articles related to the topic, I found at least two :
– That of TechCrunch, close in spirit to Le Monde’s one, Stanford University Is Going To Invest In Student Startups Like A VC Firm. The article is also critical but I think better informed… and it also deals with the tension between the academic and business worlds. “That tension between academia and industry was highlighted this past spring when a number of students dropped out of school to start Clinkle”.
with references to another New Yorker article.
– The press release by Stanford University, StartX, Stanford University and Stanford Hospital & Clinics announce $3.6M grant and venture fund. If you read the statement carefully, it is about a gift from Stanford to StartX and a joint Stanford-StartX fund. StartX is an accelerator created by Stanford students and I understand that the University therefore supports this initiative. There is no mention, however, of a fund managed by Stanford as a VC fund.

The reason I think the reporter is mistaken is when he says that “Stanford will invest in companies created by its students”. As if it was new. Even if I agree that the stakes taken in start-ups in exchange for licensing of intellectual property is not an investment per se, Stanford still has acquired stakes in more than 170 of its spin-offs in the past . In addition the Stanford endowment has invested on an individual basis in many start-ups in the past (not to mention in many VC funds). For example, I found in a database I am building on Stanford-related companies, that Stanford invested in Aion (1984), Convergent (1980), Gemfire (1995), Metreo (2000), Tensilica (1998). Website LinkSv mentions Stanford invested in 143 companies. [I am aware there might be some confusion between investor and shareholder, so the topic remains somehow confusing].

Finally, in the 2000s, the Office of Technology Transfer at Stanford managed two funds, the Birdseed Fund (for amounts of $5k to $25k) and the Gap Fund ($25k to $250k) as shown the 2002 OTL annual report.

It is not at all new that Stanford invests in its start-ups. There has also always been tension, let’s do not deny it either. A little-known example of Cisco-Stanford early relationship. So nothing new under the sun. But you will not be surprised if I add that the overall result seems (is) extremely positive for all stakeholders, the university (including in its academic dimension), individuals, start-ups and the economy in general.

What makes an entrepreneur great? (according to Max Levchin)

Leave a reply

Ashort quote from Max Levchin taken from the latest issue MIT Technology Review. Q: What makes an entrepreneur great?

A: I don’t think entrepreneurship can be taught. I don’t think it’s like: “Do these five things and you’ll be an entrepreneur.” And by extension, I don’t think it’s: “Do these five things better and you’ll be a better entrepreneur.” Everyone I know has their own style. The unifying characteristics are all the same: drive, inability to play well with others, decisiveness, general indifference to reason on occasion. Entrepreneurship is this weird process of constantly flying blind, by the seat of your pants, and also of constantly projecting this extreme confidence that everything is going to be just fine. And the only way you can do it is you have to believe that it really will be. So it’s the continuous ability to suspend your own disbelief, basically. —Max Levchin, a founder of several companies, including PayPal, who was an Innovator Under 35 in 2002.

In addition I just read an interview of Bernard Dallé, General Partner with Index Ventures in Entreprise Romande, in the same special issue dedicated to failure where I wrote a short note entitled “Does the Swiss culture tolerate failure?”. Bernard is asked about common features of entrepreneurs. He just says: “Often they are not attracted by money. They are not afraid of failure. Their goal is to have an impact on society.”

The Capital Sins of Silicon Valley

1 Reply

People who are close to me are sometimes (often?) tired of my enthusiasm for Silicon Valley. It is well known that the creative energy in innovation is quite unique and the resulting value creation pretty huge. This energy is contagious and as Steve Jobs said: “[There are] two or three reasons. You have to go back a little in history. I mean this is where the beatnik happened in San Francisco. It is a pretty interesting thing. This is where the hippy movement happened. This is the only place in America where Rock‘n’roll really happened. Right? Most of the bands in this country, Bob Dylan in the 60’s, I mean they all came out of here. I think of Joan Baez to Jefferson Airplane to the Grateful Dead. Everything came out of here, Janis Joplin, Jimmy Hendrix, everybody. Why is that? You’ve also had Stanford and Berkeley, two awesome universities drawing smart people from all over the world and depositing them in this clean, sunny, nice place where there’s a whole bunch of other smart people and pretty good food. And at times a lot of drugs and all of that. So they stayed. There’s a lot of human capital pouring in. Really smart people. People seem pretty bright here relative to the rest of the country. People seem pretty openminded here relative to the rest of the country. I think it’s just a very unique place and it’s got a track record to prove it and that tends to attract more people. I give a lot of credit to the universities, probably the most credit of anything to Stanford and Berkeley.” A paradise? That’s a nice question! I will try to address the maybe lesser-known dark sides of the region.

All those office perks come with strings attached. Reuters/Erin Siegal
from Those cool Silicon Valley offices? More like secretly evil empires

Single-minded devotion to self-interest

The topic is not new. In 1984, the authors of Silicon Valley Fever devoted two chapters to the difficulties of the region, one is entitled “Lifestyles” and the other “Troubles in paradise”. On page 184, they say: “In the 1980s, cracks began to appear” and concluded (page 202) that “perhaps the greatest threat of all is the single-minded devotion to self-interest at the expense of the common good. ”

I think this is the most serious problem in Silicon Valley. In a recent article in the Nouvel Observateur, The hidden face of the oligarchs of the net, Natacha Tatu is critical of the wealthy entrepreneurs who “sometimes become rich against the American interests.” In fact, the large technology companies (Intel, Oracle, Google, Apple, etc.) have made real war chests outside the U.S. and prefer not to repatriate them to avoid paying the taxes they consider excessive. “The effective tax rate of the high-tech giants was only 16% in 2011. At this game, the champion is Amazon, which taxes amounted to only 3.5% of its earnings in 2011, followed by Xerox (7.3%) and Apple (9.8%)”, according to BFM TV in How Google, Apple & Co use tax havens. Furthermore, “in 2004, George W. Bush, magnanimous, had given such a “tax holliday” – the repatriated profits were taxed at only 5% instead of 35% -, that HP took the opportunity to repatriate $16 billion, IBM 12 billion, Intel 7.6 billion, Oracle 3.3 billion, and Microsoft 1 billion.” This tax selfishness may partly explain the poor infrastructure (public transportation, low quality highways, schools, health services); this is a typical American vice that is not unique to Silicon Valley. The fact remains that the gap between the wealth of the region and poverty in the public system is more extreme.

A very expensive area with large inequalities

I quote now Chris Schrader in What’s The Dark Side Of Silicon Valley? “The amount of wealth in the area has driven up home prices near the places where the jobs are to astronomical levels.” If we add the cost of health and education, living in Silicon Valley is a nightmare if you do not have comfortable income. I do not even talk about the “working poors” whose situation is more difficult admitting that their situation is legal. Not to mention either that much of the production is outsourced to emerging countries where working conditions are even more difficult. Needless to return to the example of Foxconn in China that provides the bulk of Apple products.

Workaholics

This is known. In Silicon Valley, people work a lot. Not just for the money, no doubt, but the material considerations seem to be the only common concern to everybody. This is probably the consequence of this devotion to self-interest as much as of the cost of living. In order to pay for home, health care and education, you have to work a lot. But it goes further, and this is probably linked to the Protestant ethics and culture as well as to the pursuit of wealth that startups give hope to. Social life is sacrificed and I remember that many students at Stanford thought only of their education, which is a little sad…

This geek culture does not help in making Silicon Valley a balanced society. Discrimination and inequality remain strong. Noyce, the founder of Intel, was afraid of the unions and thought their arrival in a company were killing business. Undeclared work exists and working conditions are not nearly as idyllic as is sometimes described. More simply, the behaviors are often arrogant, hypocritical and superficial.

A deteriorated quality of life

The authors of Silicon Valley Fever mention some negative consequences of the points above: the lack of free time has obviously negative impact on family life, which is sacrificed at the altar of hard work. Little vacation, little curiosity too. In addition to degraded life conditions related to stress and a high divorce rate, these financial constraints induce a struggling transportation system since people generally work far away from home. Traffic jams are so unreasonable that Chris Schrader said, “I have to establish my schedule based on commute traffic which typically has me out of the house well before 7 am and many times back home by about 8pm. Leaving work at 5pm simply doesn’t make sense, because I would get home at the exact same time if I left at 7pm.” I’m not even talking about public transportation which is almost non-existent compared to European cities or even the metropolitan areas on the East Coast of the United States.

Security is not such an important topic in the Bay Area, but there are significant pockets of insecurity in East Palo Alto and Oakland. I’ll let you see the picture I took a few years ago. Again this is a more general American issue.

A poor socio-cultural life

Contrary to the statements by Steve Jobs I quoted earlier, Silicon Valley does not shine by its cultural life. Few major artists (compared to the wealth of the region). Athens, Rome, Florence in the distant past or Paris, London, Vienna and New York today did much better at their peak. No major museum in the region. No major figure in the political or social life despite two major universities. If you go to New York, Washington, Chicago or Los Angeles, I’m pretty sure that you’ll find a richer cultural life.

A herd mentality

I am far from having a complete list of negative elements in the region, but I will finish with a point that certainly creates a lot of frustration for innovators and creators. The fashions and trends are so strong that it is difficult to express oneself or worse succeed if one swims against the current. This “herd mentality” implies that one rarely listens to those who come up with ideas seemingly farfetched. Even the Google founders had struggled several months to convince anyone. More recently Elon Musk dit not use for Tesla Motors the usual Silicon Valley investors to finance his dream of electric vehicles; however, he has become the latest darling of the region. In the late 90s, it was the dotcom bubble, today, you need to be in social media. Innovation is much broader, but the money is flowing though in dozens of similar and often less innovative projects… Employees in start-ups follow the same trends and have no attachment or loyalty to their employers. This has probably some good sides (employees can negotiate for example, companies need to do their best to retain talent), but the superficiality of social relations in general can be problematic.

I do not in any way deny my enthusiasm for Silicon Valley which remains in my mind one of the most dynamic and creative regions in the world. I found inspiration and enthusiasm at critical moments of my life and the beauty of the surrounding nature, the enthusiasm (even if artificial) of the population and the sweetness of life (if you can afford it) make the region much enjoyable and exciting. It does not mean it is a paradise and there is clearly room for improvement.

What’s a start-up? (part 3)

1 Reply

My colleague Jean-Philippe Solvay recently asked me to a react to a Facebook post asking what is exactly a start-up. And as you may read there, it is not so easy to answer. One of the best references given in the post is swombat.com rather exhaustive analysis.

In the past, I wrote two posts: “part 1” was in 2011, where I had given my definition: “A start-up is a company which is born out of an idea and has the potential to become a large company” as well as the very good definition by Steve Blank: “startups are temporary organizations designed to search for a scalable and repeatable business model.” (There is something I am not comfortable with Steve Blank’s: I would delete “model”, as a start-up may know what it wants to do, but has not validated it yet. And start-ups copying existing business models would not be ones…)

Then in “part 2” in early 2013, I added the following: “A start-up is a corporation which explores, which is looking for a business model, a market, customers and is trying to innovate. It usually looks for a big market (“scalable”) and therefore service businesses do not qualify (except on the web) as they do not often scale. It is also a matter of strong and rapid growth in emerging markets because the competition is tough and there will be few winners. It often go fast. That is why it is more about a mindset: you are curious, in an uncertain world, trying to bring new things to the world. Because you are looking for a business, you do not have enough paying customers, and you will most likely need external capital (business angels, venture capital) except if your future customers accept to pay a lot in advance. This is why there is a strong correlation between being a start-up and having investors.”

I agree with most features given in the facebook or swombat contributions: “start-ups are new firms focusing on innovation and growth in situations of high uncertainty (or risk)”. They do not have to be about technology and if so, they are called high-tech start-ups. Maybe innovation is not so important, as many just copy others, but growth (through scalability) is critical. Consulting or service firms usually do not qualify because the growth is linear, not exponential (with the number of jobs).

Let me add another point: if the start-up term, was created, there has to be a good reason! When was it created? Wikipedia claims it became popular with the dot.com bubble of the late nineties. However, I found the term in Saxenian’s Regional Advantage (1994) and even in Silicon Valley Fever (1984). There is no doubt the term emerged with the technology clusters Route 128 and Silicon valley, the reason why it is associated with high-tech as well as venture capital. But not all start-ups belong to these geographic clusters. Microsoft and Amazon are based in Seattle, which is (at least was) not really a cluster. When they do not belong to a geographic cluster, they belong to a technology cluster, mostly IT (electronics, software, internet) or biotech/medtech. Tesla Motors is considered a start-up because it belongs to the Silicon Valley ecosystem though it is in an industry where very few start-ups exist. I do not think EasyJet was ever called a start-up because it belongs to no (technology or geographic) clsuter. So I would finally define a start-up as “a new firm focusing on growth in situations of high uncertainty, and belonging to a technology or geographic cluster”.

PS: while looking into the topic again, I found a debate on how to spell the word… In 2007, I had decided for “start-up”, but “start up” and “startup” also existed. It seems “startup” is now more and more popular. I stick to “start-up” for the time being, just to be consistent with what I always did.

Does the Swiss culture tolerate failure?

Leave a reply

Here is my fourth contribution to Entreprise Romande. I realize now it is often about failure and innovation. This new article maintains the tradition. And because it was a special issue about failure, let me provide a translation of the editorial.

Entreprise romande – July 5, 2013 – Véronique Kämpfen, rédactrice en chef:

Tolerance for failure favors growth

We are not all equal vis-à-vis failure. The fact is confirmed by a detailed study published by Barclays in late 2012. First, Europeans have more difficulty seeing failure as positive (69%) than Americans (71%), Asians (80%) and Middle Easterners (91%). Second, entrepreneurs have a less negative attitude towards failure than the rest of the population. They often think that failures have shaped their character, that this event has taught them a lot and they were able to bounce back quickly. Entrepreneurs are also far more optimistic than the rest of their fellow citizens. This phenomenon is described in the medical literature: it seems that a high number of successful entrepreneurs are characterized by a genetic form of psychiatric bias, which predisposes them to be creative, enthusiastic and somewhat less apprehensive vis-à-vis risk taking. John Gartner, the psychiatrist at the origin of this study, highlights the specific features of these characters: “Having that kind of confidence can lead to blindness when facing risk, because these individuals do not believe they can fail. (…) However, if they fail, they will not stay down for long and will soon be energized by a completely new idea”.

More generally, the Barclays study shows that tolerance for failure is essential to growth. The process of “creative destruction”, that is obsolete ideas, technology and business models give way to new impulses, is essential to economic progress and job creation. For this process to be effective, we need entrepreneurs who want to take risks, and an environment that supports their efforts. Until now, Switzerland seems to have done OK, as evidenced by its economic health and its high ranking in terms of innovation and competitiveness. As the Swiss are not the champions of tolerance for failure, they must be supported by appropriate framework conditions and encouraged so that those who have the entrepreneurial spirit may try … without taking too much risk! These topics are covered in great detail in the Magazine Entreprise romande. The taboo of failure and bankruptcy is analyzed in all its forms and put into perspective with practical advice and testimonials from entrepreneurs. Happy reading … enjoy the summer!

and here is my contribution:

Does the Swiss culture tolerate failure?

“The Swiss Society gives us so many slaps in the face through education that we are afraid of being creative, because we show then our weaknesses. By expressing our dreams, we do an intellectual striptease; it is feared that others see them as bad, not good, not nice and not fair.” So speaks Elmar Mock, inventor of the Swatch and founder Creaholic. The Swiss school system is indeed not known for its creativity. The famous (in French speaking Switzerland) « faut se gaffer » (“don’t be goofy”) might make you smile. Our teachers too seem to give more importance to the rigor than to the creativity of our little darlings. The room for error is unconsciously repressed. If one accepts the idea that innovation is above all creating in situations of uncertainty, the statement is worrying. Yet Switzerland is world champion of innovation in almost all global reports. Is there a contradiction?

Innovation is a subtle thing. Innovation is not limited to invention and innovation is not about technology only; it is the result of a process, following which are created products, services or new processes that will have to demonstrate that they answer a (commercial or non-commercial) need. The process leading to innovation is long, unpredictable and hard to control, innovation cannot therefore be planned and we have to accept failure.

Clayton Christensen, a professor at the Harvard Business School, built a theory explaining the process of disruptive innovation, the one innovation which allows the emergence of new revolutionary products such as the Internet, the mobile phone, but also the low-cost airlines, the one innovation which also allows new players to emerge and replace their older competitors. According to Christensen, disruptive innovation cannot occur within established institutions. The best companies are listening to their customers and those only want to improve existing products and will rarely desire new products. The U.S. has seen more than 80 major new companies emerge since 1970, and France, only 4. And Switzerland?

Switzerland is world champion of innovation firstly because the framework conditions are excellent. Everything is done for businesses to succeed, minimizing barriers and constraints. Then, because there is a culture of work well done. Apprenticeship, in the early years of training, helps in maintaining this tradition and Swiss companies are known to be listening to their customers in order to improve existing products in the right direction. But what kind of innovation are we talking about? Probably not about the one which enables technology breakthroughs. No, rather of a different type of innovation, incremental innovation, made of “gradual, continuous improvement of techniques or existing products; usually incremental innovation does not fundamentally change the dynamics of an industry, or does not require a change in behavior,” according to wikipedia. Switzerland is champion of incremental innovation through a dense network of highly performing SMEs. Failure is relatively absent, when the attention to every detail is permanent. But is it enough?

Not only the Swiss school system is not known for its creativity, but furthermore our academic spin-offs create few jobs. If we accept the corollary that innovation is a source of growth and new jobs, we might not be as innovative as it might be desired. We are obviously efficient for incremental innovation, but certainly not as good when it comes to disruptions. Except for one example that comes easily to my mind, the Swatch. But Nicholas Hayek was not the product of the Swiss culture! I could add Nespresso, but Eric Favre, inventor of the product, had suffered a strong initial reluctance from Nestlé to the point of saying: “The Swiss economy lacks real entrepreneurs!” The difficulty of integrating risk and radical innovation can make anyone short-sighted when experiencing ongoing changes and cause much bigger failures, as evidenced by the grounding of Swissair, which was seen as a national trauma. The United States has lost TWA and PanAm, but Americans have invented the concept of low cost airlines with Southwest or JetBlue, which have happily replaced the old players. In Europe, EasyJet and similar companies only followed the American model.

The Swiss start-ups never die. They have a survival rate of 90% after 5 years. Whereas across the Atlantic and even in Switzerland for traditional businesses, this rate is less than 50%… This may mean, quoting Xavier Comtesse, that “startups are protected by the academic system or federal funding.” Because failing is an unacceptable stigma? Or because taking risks, an inevitable cause of a greater failure rate, would be too dangerous? Without being so pessimistic, I would add that our start-ups are often excellent engineering offices, with great know-how. With a service business model eventually outweighing new products, the company survives without significant creation of jobs and without growth. I often asked entrepreneurs who failed to share their experience. A real failure! Our experts and mentors do not grow our young entrepreneurs in this direction, and I have heard it so often that I almost got used to it. Our business angels have a great distrust of more aggressive venture capitalists and they fear their more binary approach of “make it or break it. ”

Daniel Borel, the iconic entrepreneur: “In our industry, if we do not innovate constantly, if we do not have the courage to take risks, we disappear. This is why I prefer to get into seven projects even if it means failing three, as not to fail in anything, by chance, having focused on a single project.” […] “We only learn from our failures, rarely from succcess. Success can be your worst enemy: it makes you think you are strong, very strong; you could even walk on water. And it is at this point that you drown. ”

The Swiss culture has certainly a very small tolerance for failure. It promotes a type of innovation (incremental) which may explain its strengths. Its network of strong SMES is probably the result of this conservative and demanding culture. There is reason to be proud of it. But I like the quote from the former star of Hockey, Wayne Gretzky: “I skate to where the puck will be, not where it was.” The question is whether Switzerland will be tomorrow at the right place to get the puck …

When Science Looks Like Religion: The theory That Would Not Die.

Leave a reply

It is the third book I read about statistics in a short while and it is probably the strangest. After my dear Taleb and his Black Swan, after the more classical Naked Statistics, here is the history of the Bayesian statistics.

If you do not know about Bayes, let me just add that I like the beautiful and symmetric formula: [According to wikipedia]
For proposition A and evidence B,
P(A|B) P(B) = P(B|A) P(A)
P(A), the prior, is the initial degree of belief in A.
P(A|B), the posterior, is the degree of belief having accounted for B.
the quotient P(B|A)/P(B) represents the support B provides for A.
Another way of explaining it mathematically is Bayes’ theorem gives the relationship between the probabilities of A and B, P(A) and P(B), and the conditional probabilities of A given B and B given A, P(A|B) and P(B|A).

I was never really comfortable with its applications. I was probably wrong again, given all what I learnt after reading Sharon Bertsch McGrayne’s rich book. But I also understood why I was never comfortable: for three centuries, there’s been a quasi-religious war between Bayesians and Frequentists on how to use probabilities. Are these linked to big, frequent numbers only or can they be applied for rare events? What is the probability of a rare event which may never occur or maybe just once?

[Let me give you a personal example: I am interested in serial entrepreneurship, and did and still do tons of statistics on Stanford-related companies. I have more than 5’000 entrepreneurs, and more than 1’000 are serial. I have results showing that serial entrepeneurs are not on average better than one-time, using frequency and classical methods. But now I should think about using:
P(Success|Serial) = P(Serial|Sucess) P(Success) / P(Serial)
I am not sure what will come out, but I should try!].

If you want a good summary of the book, read the review by Andrew I. Daleby (pdf). McGrayne illustrates the “recent” history of statistics and probabilities through famous (Laplace) and less famous (Bayes) scientists, through famous (the Enigma machine and Alan Turing) and less famous (lost nuclear bombs) stories and it is a fascinating book. I am not convinced it is great at explaining the science, but the story telling is great. Indeed, it may not be about science at all. But about belief as is mentioned in the book: Swinburne inserted personal opinions into both the prior hunch and the supposedly objective data of Bayes’ theorem to conclude that God was more than 50% likely to exist; later Swinburne would figure the probability of Jesus’ resurrection at “something like 97 percent” [Page 177]. It obviously reminded me of Einstein’s famous quote: “God does not play dice with the universe.” This is not directly related but for the second time in my life, I was reading about links between science, probability and religion.

Start-Up

What we may still learn from Silicon Valley

Author Archives: Hervé Lebret

The Dream of Silicon Valley

Twitter discloses numbers through SEC filing

Criteo files to go public

The Startup Kids – a film that any wannabe founder should watch!

Stanford will invest in companies founded by students

What makes an entrepreneur great? (according to Max Levchin)

The Capital Sins of Silicon Valley

What’s a start-up? (part 3)

Does the Swiss culture tolerate failure?

When Science Looks Like Religion: The theory That Would Not Die.