Author Archives: Hervé Lebret

Against Intellectual Monopoly

Last October I published a post about the article The Case Against Patents by Michele Boldrin and David K. Levine. I had mentioned at the end that there was also a book, entitled Against Intellectual Monopoly. I am not finished with it yet but it is so strange, powerful and complex that I will talk about it in two parts. More in a few days…

It’s a very strange book (and the authors have been known for their arguments for a few years now) because it gives arguments against intellectual property (“IP”). They are not always easy to follow. This is a book about economics which sometimes, often (but not always) confirms the intuition that there is something wrong about IP. Yes inventors, innovators, creators need to be able to protect their creation against thieves. Does it mean they should be given a monopoly (patents) or a right to prevent copy of their work (copyright)? This is what the authors try to address. You can now read my comments but I strongly advise you to read the book and its complex and fascinating arguments, even if in the end, you disagree with them! As a provocative statement, they finish their 1st chapter with: “This leads us to our final conclusion: intellectual property is an unnecessary evil”. [Page 12]

One of their strongest arguments is the following: “It is often argued that, especially in the biotechnology and software industries, patents are a good thing for small firms. Without patents, it is argued, small firms would lack any bargaining power and could not even try to challenge the larger incumbents. This argument is fallacious for at least two reasons. First, it does not even consider the most obvious counterfactual: How many new firms would enter and innovate if patents did not exist, that is, if the dominant firms did not prevent entry by holding patents on pretty much everything that is reasonably doable? For one small firm finding an empty niche in the patent forest, how many have been kept out by the fact that everything they wanted to use or produce was already patented but not licensed? Second, people arguing that patents are good for small firms do not realize that, because of the patent system, most small firms in these sectors are forced to set themselves up as one-idea companies, aiming only at being purchased by the big incumbent. In other words, the presence of a patent thicket creates an incentive not to compete with the monopolist, but to simply find something valuable to feed it, via a new patent, at the highest possible price, and then get out of the way.” [Page 82]

The following is nearly as strong: “The incentive to share information is especially strong in the early stages of an industry, when innovation is fast and furious. In these early stages, capacity constraints are binding, so cost reductions of competitors do not lower industry price, as the latter is completely determined by the willingness of consumers to pay for a novel and scarce good. The innovator correctly figures that by sharing his innovation he loses nothing, but may benefit from one of his competitors leapfrogging his technology and lowering his own cost. The economic gains from lowering own cost or improving own product, when capacity constraints are binding, are so large that they easily dwarf the gains from monopoly pricing. It is only when an industry is mature, cost-reducing or quality improving innovations are harder to come around, and productive capacity is no longer a constraint on demand that monopoly profits become relevant. In a nutshell, this is why firms in young, creative, and dynamic industries seldom rely on patents and copyrights, while those belonging to stagnant, inefficient, and obsolete industries desperately lobby for all kinds of intellectual property protections.” [Page 153]

You can stop here! Or read additional extracts below. Or as I advised go to the book…

“The crucial fact, though, is that the following causal sequence never took place, either in the US or anywhere in the world. The legislative branch passed a bill saying “patent protection is extended to inventions carried out in the area X”, where X was a yet un-developed area of economic activity. A few months, years, or even decades after the bill was passed, inventions surged in area X, which quickly turned into a new, innovative and booming industry. In fact, patentability always came after the industry had already emerged and matured on its own terms. A somewhat stronger test, which we owe to a doubtful reader of our work, is the following: can anyone mention even one single case of a new industry emerging due to the protection of existing patent laws? We cannot, and the doubtful reader could not either. Strange coincidence, is it not?” [Page 51]

In Italy, pharmaceutical products and processes were not covered by patents until 1978; the same was true in Switzerland for processes until 1954, and for products until 1977. [Page 52]

The firms were asked whether particular methods were effective in appropriating the gains from an innovation.The table below shows the percentage of firms indicating that the particular technique was effective. The numbers in parentheses are the corresponding figures for the pharmaceutical and medical equipment industries respectively: these are the two industries in which the highest percentage of respondents indicated that patents are effective. [Page 68]

“While patent pools eliminate the ill effects of patents within the pool – they leave the outsiders, well, outside.” [Page 70]

“Later in the book we talk about the Schumpeterian model of “dynamic efficiency” via “creative destruction.” The latter dreams of a continuous flow of innovation due to new entrants overtaking incumbents and becoming monopolists until new innovators quickly take their place. In this theory, new entrants work like mad to innovate, drawn by the enormous monopoly profits they will make. Our simple observation is that, by the same token, monopolists will also work like mad to retain their enormous monopoly profits. There is one small difference between incumbents and outsiders: the formers are bigger, richer, stronger and way better “connected.” David may have won once in the far past, but Goliath tends to win a lot more frequently these days. Hence, IP-inefficiency.” [Page 76]

“We understand that the careful reader will react to this argument by thinking “Well, the AIDS drugs may be cheap to produce now that they have been invented, but their invention did cost a substantial amount of money that drug companies should recover. If they do not sell at a high enough price, they will make losses, and stop doing research to fight AIDS.” This argument is correct, theoretically, but not so tight as a matter of fact. To avoid deviating from the main line of argument in this chapter we simply acknowledge the theoretical relevance of this counter-argument, and postpone a careful discussion until our penultimate chapter, which is about pharmaceutical research. For the time being, two caveats should suffice. The key word in the former statement is “enough”: how much profits amount to “enough profits?” The second caveat is a bit longer as it is concerned with price discrimination, and we examine it next.” [Page 77] There is a full chapter about Pharam, I will probably cover in part 2 of this article.

Jerry Baker, Senior Vice President of Oracle Corporation: “Our engineers and patent counsel have advised me that it may be virtually impossible to develop a complicated software product today without infringing numerous broad existing patents. … As a defensive strategy, Oracle has expended substantial money and effort to protect itself by selectively applying for patents which will present the best opportunities for cross-licensing between Oracle and other companies who may allege patent infringement. If such a claimant is also a software developer and marketer, we would hope to be able to use our pending patent applications to cross-license and leave our business unchanged.” [Page 80]

Roger Smith of IBM: “The IBM patent portfolio gains us the freedom to do what we need to do through cross-licensing—it gives us access to the inventions of others that are key to rapid innovation. Access is far more valuable to IBM than the fees it receives from its 9,000 active patents. There’s no direct calculation of this value, but it’s many times larger than the fee income, perhaps an order of magnitude larger.”[Page 84]

“Notice, in particular, that patenting is found to be a substitute for R&D, leading to a reduction of innovation. In the authors [Bessen and Hunt]’ calculation, innovative activity in the software industry would have been about 15% higher in the absence of patent protection for new software.” [Page 92]

An example of extreme aberration in U.S. Patent 6,025,810: “The present invention takes a transmission of energy, and instead of sending it through normal time and space, it pokes a small hole into another dimension, thus, sending the energy through a place which allows transmission of energy to exceed the speed of light.” [Page 101]

Arguments in favor of IP are known and quoted again by Levine and Boldrin… “In order to motivate research, successful innovators have to be compensated in some manner. The basic problem is that the creation of a new idea or design … is costly… It would be efficient ex post to make the existing discoveries freely available to all producers, but this practice fails to provide the ex ante incentives for further inventions. A tradeoff arises… between restrictions on the use of existing ideas and the rewards to inventive activity.”[Page 176]

Steve Jobs by Walter Issacson

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I finally read the Steve Jobs biography by Walter Isaacson. I hesitated a long time (the original edition was published in 2011) because I feared disappointement. I had read the excellent The Apple Revolution as well as Return to the Little Kingdom. I finally read it in French and it is excellent. Read it if you have an interest in the topic. I’m not going to do any analysis, but as I usually do just mention some striking or subjective extracts. The citations refer to the French paperback release dated October 2012.

Silicon Valley

Various cultural earthquakes upset San Francisco and SiIicon Valley in the late 1960s. There was the technological revolution, initiated by the increase of military contracts, which had attracted electronics companies, chip manufacturers, designers of video games and computer manufacturers. There was a sub-culture, the pirates – inventors of genius, cyberpunks, dilettantes as well as pure geeks, they also had in their ranks electronicians refusing to fit the mold of HP and their impetuous children who wanted to break down all barriers. There were (quasi-academic) research groups, who led in vivo experiments on the effects of LSD, such as Doug Engelbart’s Augmentation Research Center, who would later work at the development of the mouse and graphical user interfaces, or Ken Kesey, who praised the psychedelic drug in shows, combining music and light, run by a group of musicians who became the legendary Grateful Dead. There was also the hippie movement, from the Beat Generation of Kerouac, a native of San Francisco Bay, and political activists, born out of the Movement for Freedom of Expression of Berkeley. And encompassing all that, there were various spiritual movements seeking inner enlightenment – Zen, Hinduism, meditation, yoga, primal scream, sensory deprivation and Esalen massage.
Steve Jobs was the embodiment of the fusion of Flower Power and microchips, the pursuit of personal revelation and high tech: he was meditating in the morning, followed in the afternoon courses in physics at Stanford, working the Atari at night and dreaming of starting his own business. [Page 114]

A passion for entrepreneurship

Bushnell is of this opinion: “To be a successful entrepreneur, you must have something special and I saw this thing with Steve. He was not only interested in electronics, also by business. I showed him that one had to behave as if one would succeed in what one wanted to achieve and then everything would naturally follow. That’s what I always say: if you pretend to know what you do, people will follow. “[Page 111]

His closest friends think that having learned so young, he had been abandoned at birth had left indelible scars. “The need for total control of what he did comes from this injury” [Page 34] … “The most amazing thing about Steve is that he cannot help being cruel to some people – a kind of Pavlovian response. The key to the mystery is the fact that he was abandoned at birth.” [Page 35]

So he went back to Nolan Bushnell, “Steve asked me to put fifty thousand dollars on the table and in exchange he’d give me a third of Apple’s shares. I thought I was smart and I said no. When I look back, I still laugh. Not to cry!” [Page 142]

The reality distortion field

– “This is madness. It is impossible. ”
He was answered that Jobs would not listen.
– The best definition of this oddity, you find it in Star Trek. Steve creates a reality distortion field. In his presence, reality is malleable. It can make anyone believe almost anything. The effect of course disappears, when he is not there, but it prevents you seriously to have realistic expectations for anything.
RDF was a confusing mix of charisma and mental strength, it is the willingness to bend the facts so they fit the mold. [Page 207]
When Jobs decreed that the sodas in the fridge would be replaced by organic orange and carrot juice, someone on the team had printed T-shirts with: “Beware of Reality Distortion Field!” And on the back: “It comes from the juice!”

There is a small bug page 225: To draw circles, Atkinson found a trick based on the fact that the sums of odd numbers gave a succession of perfect squares (for example, 1 + 3 = 4, 1 + 3 + 5 = 8, etc.) [The statement is correct because the last sum is 9 and not 8!]

Being a pirate

“Better to be a pirate than join the navy” [Page 248] And the Jolly Roger decorated with the Apple logo floated for a few weeks on the roof of Bandley 3.

The chapters on Jobs’ private life and Pixar are quite interesting. About the IPO of Pixar: “Earlier that year, Jobs had tried to find a buyer for Pixar, for fifty million dollars, just to recover his funds. At the end of this historic day, the actions he had kept – about 80% of the company – were worth more than 20 times that amount: one billion two hundred million dollars! It was nearly five times more than he had gained with the Apple IPO in 1980. But Jobs did not care to make a fortune, as he told John Markoff of the New York Times: “I do not intend to buy a yacht. I never did it for the money.” [Page 471]. He is in this respect very different from Larry Ellison, founder and CEO of Oracle with whom he became a friend who helped him to return to Apple.

Return to Apple

In this regard, there is an funny anecdote page 482: “Two years ago, Guy Kawasaki, Macworld magazine columnist (and former Apple evangelist) published in the magazine a parody telling Apple was buying NeXT and elected Jobs as CEO. The article featuring Mike Markkula talking to Jobs: “You want to spend the rest of your life selling Unix with a nice coating, or change the world?” And Jobs replied:” Now I am a father and I do not want to play adventurers.” The article made the assumption: “Following his troubles with NeXT, it is possible that Jobs, in his return to the parent company, will bring the Apple management a dose of humility. Bill Gates was also quoted; he said that if Jobs returned to the business, Microsoft would again have innovations to copy! Everything was invented and purely humorous. But the reality has this annoying habit of catching up all satires. “([Page 482 and see below]

And on his return: “His credo was perfection. He was not very good at compromise, or to arrange with reality. He did not like complexity. This was the case for the design of his products and the furniture of his houses, it was the same for his personal commitments. If he was sure of himself, then nothing could stop him, but if he had doubts, he sometimes preferred to throw in the towel rather than ending up in a situation that did not satisfy him completely. [Page 509]

Death

[With Markkula] They spent the rest of the time talking about the future of Apple. Jobs wanted to build a company that survives him and asked for his advice. Markkula replied that companies that remain are those who knew how to renew. That had been constant with Hewlett-Packard, beginning by constructing measuring instruments and then calculators and then again computers.” Apple was ousted by Microsoft from the market for personal computers, Markkula explained. You must change the course of Apple to another product. You have to be like a butterfly and accomplish your metamorphosis.” Jobs was hardly talkative, but he retained the lesson. [Page 515]

The music was obviously an essential art in the life of Jobs. We know his passion for Bob Dylan, Joan Baez, and the Beatles. But here’s a most interesting part: Bach, he said, was his favorite classical composer. He particularly liked the contrast between the two versions of the Goldberg Variations recorded by Glenn Gould – the first in 1995 by the little-known pianist of twenty-two years that he was, and the second in 1981, a year before his death. “They are like night and day, Steve told me one day after having listened to one after the other. The first is exuberant, young, brilliant, played so fast that it is a revelation. The second is more efficient, more austere. It reveals a deep soul, a painful experience. “Jobs was sick for the third time when he listened to the two versions. I asked him which was his favorite version. “Gould preferred the latest version. In the past, I preferred the first, the exuberant. But now, I understand better what he meant.”

Isaacson ends his book with a brilliant remark by Jobs on the topic of life and death. “But on the other hand, maybe it’s like an on/off switch. Click and nothing more!” He paused again and smiled. “This is surely why I never liked the on/off switches on the Apple products.”

The legacy

I could have put these final remarks earlier in the section A passion for entrepreneurship. “My passion has been to build a sustainable business, where people were motivated to manufacture great products. Everything else was secondary. Of course, it was great to make a profit, because it allowed us to create good products. But the motivation is the product, not profit. […] The difference is subtle, but in the end it is crucial because it defines all the people we hire, those we promote, the topics we discussed at meetings. […] People do not know what they want until they have it in front of them. That’s why I do not care about market research. […] The intersection between the arts and sciences. I love this juncture, IL has a magical aura. […] Our innovation holds a large part of humanity. I think great artists and great engineers are similar .. Both have the desire to express themselves. […] I have my own theory to explain the decline of companies like IBM and Microsoft. The company did a great job, innovates and comes almost to a monopoly in some areas. It was then that the quality of the product becomes less important. The company praises great sales people […] that eventually take control of the company. […] I hate people who say they are entrepreneurs when their sole objective is to build a start-up that they will sell or go IPO. They do not have the desire to build a real company. […] People should never stop innovating. […] I think most creative people want to thank their predecessors who left their legacy.” [Pages 889-892]

An incredible life. Jobs will remain one of the biggest celebrities of the twentieth century. I wondered when I finished reading this book what I remember of Apple and Jobs and here is the result.

Venture Capital in Europe and in the USA

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A very short note on an excellent presentation by Jean-David Chamboredon, partner with ISAI fund, entitled Funding Innovation in Europe. I particularly liked two slides that show the success rate of investment in a start-up, and the other one addressing a subject that is dear to me, the comparison of VC in Europe and the USA. Thank you to my colleague Marie-Laure for mentioning this study have me

Stanford Impact via Entrepreneurship

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My friend Jean-Jacques reminded me about this new study about entrepreneurship at Stanford University. Charles Eesley (who is also the co-author of the study on MIT impact) and William Miller have published it last October after surveying thousands of Stanford alumni. I was a little disappointed by the findings, but it might because I am biased (I work on the topic too, check my previous post on Stanford entrepreneurs) and also because I preferred the MIT study. But there is so much to say and analyze about Stanford! There are still very interesting data (see figures below), and it begins with the executive summary:

“The report […] estimates that 39,900 active companies can trace their roots to Stanford. If these companies collectively formed an independent nation, its estimated economy would be the world’s 10th largest. Extrapolating from survey results, those companies have created an estimated 5.4 million jobs and generate annual world revenues of $2.7 trillion.” [Page 6]

I also liked very much the small paragraph on risk-raking [Page 27]: When we asked Bechtolsheim whether taking on risks was part of the reason for his successes, he instead offered: “Risk is the wrong word. To me, Sun was a zero-risk startup because I knew there was a large market opportunity for this product. It was just about getting it out the door and selling it. Quite frankly, good startups don’t take on a lot of risk. They focus on making the right technology choices and product investments to go after significant market opportunitites. If you build the right product at the right time for the right market, success is much more predictable. That’s true even today.”

Now the figures I noticed, but there are many more: the initial capital raised by start-ups is high. It is consistent with my data on 190 public companies. The average value is $7.2M overall in my study and the median $3.0M (all fields included; the figures become $6.4M and $2.7M without biotech).

It is no news that many founders are immigrants. Here is a new illustration

Finally there is an interesting trend about how many years after graduation, alumni become entrepreneurs.

The Beylat Tambourin report and innovation ecosystems.

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A major element of the Beylat-Tambourin report (about which I have already published an article) addresses the concept of innovative ecosystems. Before mentioning some passages, here are two interesting references on this concept:

– Josh Lerner in his book Boulevard of Broken Dreams shows how entrepreneurs and investors have benefited from each other in situations of tension and collaborations in the 60-70s. He also shows the importance of public support at least in the early years (funding for the Cold War and support to venture capital – SBIR, Erisa) so that it can be said that “the public sector played a key role in the evolution of Silicon Valley”. Then he tries to show some errors: incompetence in the allocation of public resources, inefficient use of subsidies, by “organizations whose mandate is to help entrepreneurs” (“Seven incubators provided under 50% of funds for companies”- an example in Australia) and the SBIR program has reached its limits. Also, his recommendations are:
– enhancing the entrepreneurial culture [through the right laws, the access to technologies, tax incentives and training],
– increasing the start-ups attractiveness [through allowing partnerships, creating local markets, accessing human capital abroad],
– avoiding common mistakes: timing [be patient], sizing [not too small, not too large], flexibility [learn by doing], create the right incentives [and here it is a complex situation as perverse effects from good ideas often occur] and evaluate [which does not happen often enough]. Already in his introduction he writes that you need rules, experience, time, incentives and assessment. But with all his experience and knowledge about high-tech entrepreneurship, Lerner is very humble with the lessons: the topic is really complicated, all these advice have to be implemented together and it is really their careful interconnections which will make an ecosystem lively or not. There must obviously be a lot of talent.

– Brad Feld gives the ingredients of start-up ecosystems:

1. A Strong Pool of Tech Founders
2. Local Capital
3. Killer Events
4. Access to Great Universities
5. Motivated “Champions”
6. Local Press / Websites / Organizational Tools
7. Alumni Outreach
8. Wins
9. Recycled Capital
10. Second-Time Entrepreneurs
11. Ability To Attract a Pool of Engineers
12. Tent-pole Local Tech Companies

Back to Beylat Tambourin report : “Everywhere in the world, innovation is stimulated within networks of actors uniting training, research, young & fast growing companies (start-ups), service companies, large groups engaged in a policy of “open innovation”, professional coaching and innovation funding, and sometimes the hospital.”

The most emblematic examples are of course Silicon Valley, the Boston area or Israel. […] In Europe, most states began a decade ago to implement a policy of clusters: poles of competence in France (in addition to existing clusters), with a focus on collaborative R&D; more recently a focus on a small number of world-class Spitzencluster in Germany, etc.. The effectiveness of these networks is based on the fluidity and speed of “assets” of innovation skills (persons), technology, infrastructure, services and financing. Innovation is primarily a matter of stimulation and confrontation of different points of view. The role of clusters and innovative ecosystems, in this aspect of their business and not as factories of R&D projects, is critical.

The success of clusters at international level is now relatively well analyzed and relies heavily on a few factors:
– World-class universities
– An industry of venture capital aggregating institutional and private investors,
– A range of sophisticated services (HR, legal, marketing) to support the growth of young innovative enterprises,
– Professionals of high techonology
– A critical but intangible ingredient: an entrepreneurial culture.

Transfer processes and innovation are “naturally” complex for several reasons:
– The transfer takes place at the interface of two worlds with different logics, which requires to achieve and maintain a significant level of trade, trust, understanding of the issues and objectives of each other…
– Innovation can not be deployed within an “established” entity: this statement is largely based on the concept of open innovation (open innovation).
– The complexity of the transfer process and innovation also increases with the depth of research and the nature of disruptive innovation.
– The processes involved are not “deterministic”: set goals and define interim milestones is of course necessary to construct a “nominal” trajectory, but we must accept that the “real” path will be different, and it is better to be able to adapt than trying to predict the future.

-> The policy must finely understand the ecosystem dynamics: centralized methods are not effective, we must have a Darwinian system and continually assess.

The challenges of ecosystems

– The impossibility of identifying a “construction plan” of an ecosystem, from scratch or from some already present features: an ecosystem is built over time and then one notices it. The time required for its construction (often several decades!) just proves that any search for the “first cause” behind the ecosystem is futile. This is a hard point for governments who want to create an innovation ecosystem for a particular “field” on this or that “territory”. Local governments, national and European are generally funders but they must have the patience of investors.

– The complexity of measuring the effectiveness of an ecosystem: assessment is central, but difficult to implement. The evaluation of each of the players in the ecosystem is of course possible, if indeed they have clearly defined tasks and ways to fill them. However, all of these individual assessments is not an assessment of the ecosystem, according to Pascal’s principle that it is “impossible to know the parts without knowing the whole, nor to know the whole without knowing the parts”.

– An effective ecosystem is based on the acceptance of their role by each of the actors: all are necessary for the operation, but none can claim to be the sole cause of success. However, the temptation to declare oneself essential is much stronger as most actors depend on government subsidies and can consider themselves in competition for access to these resources. Each player must avoid both “sufficient and insufficient” and remember that one’s effectiveness depends largely on that of the ecosystem (or ecosystems) to which one belongs.

– “Simplify” or “optimize” an ecosystem, let alone a complex of ecosystems, is irrelevant: we must accept “Darwinism”, think articulations, and continuously assess the dynamics to maintain and improve the efficiency of public investment. Proposals for simplification and optimization from some players and / or public authorities (local, national, European) actually consist of creating a new “object” that is supposed to respond to the noted deficiencies : it is the illusion of the “exceptional measure” that will change the situation of innovation, the creation of a device or structure, which explains to a large extent the accumulation of devices and structures in France. The challenge, however, is to define the positioning of any new “object” within the existing structure (for an ecosystem is built over time) and explain how it will improve the efficiency of the overall system.

Innovation: High Stakes for France

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I had the pleasure to be part of the group who contributed to the Beylat-Tambourin report, Innovation: High Stakes for France, which subtitle is also important: Dynamizing the Growth of Innovative Companies. It was a long process, we started working in September and the final document was presented to the Ministers on 5 April. You can download the report in pdf format or here, should the previous one not work..

The report is in French but as I saw the Wall Street journal mentioning it, I thought I would do a post in English too. However, if you read French, go to the sister blog post: L’innovation en France: le rapport Beylat Tambourin. My French is much better!

What should be noted before discussing the content is that 25 members of the mission come from different worlds (see end of article), which could have made it difficult to find agreement. This was not the case. There were debates, but this report summarizes the proposals without forgetting important points, or dilute the point, I think. I read (only) one satirical article in the media, but I’m not sure that the author had read the report (see end of the article as well)…

Click on the image to download the report in pdf format

I translate (again my apologies for my far from perfect English) here a quote from the introduction: “With the acceleration and the complexity of the issues, public policies sometimes seem poor, often messy. […] They have often been compared to a system of research transfer, itself too weak, and indeed not focusing enough on the creation of high-growth companies with an ability to create jobs. […] But there is no single model of innovation. […] However, invariants exist: research excellence; low barriers between public and private sectors; an entrepreneurial culture; cultural diversity, the ability to attract talent at an international level; a migration policy; and a successful combination of start-ups, large corporations, public research, higher education and investors.” [Pages 1-2]

The difficult definition of innovation
Here’s a great paragraph that I want to quote again: “There is no definition – uncontested and incontestable-of innovation but it is possible to bring out some characteristics of innovation:
– Innovation is a long, unpredictable and hard to control process.
– Innovation is not limited to the invention and innovation is not only technological.
– At the end of this process, are created products, services or new processes that demonstrate that they meet the needs (market or non-market) and create value for all stakeholders.
Another point worth noting: an innovation cannot be decreed, cannot be planned, but it is seen through the commercial (or societal) success it meets. This explains why it often comes at the margins of existing businesses and through interactions with many different actors: “The Internet is the product of a unique combination of military strategy, scientific cooperation and protest innovation” in the famous sentence by Manuel Castells.” [Page 5] ” Accordingly, a vision where the expenditure on R&D is the main concern should be changed in favor of a systemic vision for results, in terms of growth and competitiveness.” [Page 6] In other words, innovation is not the invention and certainly not R&D.

Here are the 19 recommendations, divided into four groups:
I. Developing a culture of innovation and entrepreneurship.
II. Increase the economic impact of public research by the transfer.
III. Support the growth of innovative companies.
IV. Develop instruments of public policy for innovation.

For the first group (Culture):
1. Revise teaching methods in primary and secondary schools to develop innovative initiatives.
2. Implement a large-scale program for entrepreneurship learning in higher education.
3. Promote the dissemination from large groups through spin-offs.
4. Develop a policy for attractiveness of talent around innovation.
For the second group (transfer):
5. Implement the operational monitoring of 15 measures for rebuilding the transfer of public research (see http://www.enseignementsup-recherche.gouv.fr/cid66110/une-nouvelle-politique-de-transfert-pour-la-recherche.html – in French)
6. Promote the mobility of researchers between the public and private sectors.
7. Develop a coherent program for the transfer through the creation of businesses.
8. Focus SATT on maturation [SATT are the new French structures for academic technology transfer].
9. Establish a consistent policy of public-private research partnerships, bringing together different policies (scattered today).
For the third group (growth):
10. Address the lack of equity financing for innovative companies (venture capital and later-stage growth equity) by mobilizing a small part of the French savings and improving the possible exit strategies for investors in these segments.
11. Launch “early stage” sector initiatives.
12. Implement the policy instruments of protection (IP, standardization) serving innovative companies.
13. Harmonize the different labels of innovative companies for better readability and link them to the growth of companies, consistently aligning all support tools available.
14. Encourage large groups and large public institutions to be involved in the emergence and growth of innovative enterprises, integrating new dimensions in their obligation for environmental and social responsibility.
Finally for the last group (public policy):
15. Recognize the role of metropolitan innovation ecosystems as the support for regional strategies as well as for the national innovation strategy.
16. Organize the transfer system to make it more readable and more efficient.
17. Provide the means to develop, pilot and evaluate a comprehensive and coherent strategy of French innovation.
18. Appoint a single operator for the operational consolidation of public finance policies of innovation: the BPI (the Investment Public Bank in its innovation component).
19. Making innovation a real political issue, organizing a broad public debate.

[Again sorry for the imperfect translation. I hope you got the points…]

As explained in the Wall Street Journal in Nineteen Ways to Make France More Innovative, “In the short-term, the government should move away from considering R&D spend as a metric of innovation recommended the authors, and look at jobs created. France outspent Germany on R&D in many areas, said Mr. Beylat and Mr. Tambourin, but the effect wasn’t felt in the economy.”

Another comment concerns the sub-title of the report: Dynamizing the Growth of Innovative Companies. This is a very important subtitle, but do not get me wrong, it is not about start-ups only here, but the message is that innovative companies should be a source of growth, whether large groups, SMEs or start-ups. It may not be a cultural revolution, or is it?

To push the envelope a little further, here is a short excerpt: “France is between the American dream of Silicon Valley, where disruptive innovations are supported by start-ups, the German dream of a well-established industrial Mittelstand, efficient in incremental innovation, and a French tradition of industrial planning in sovereign sectors. This oscillation blurs the representation that France has made of innovation because it mixes breakthrough innovation, incremental innovation and “strategic industrial policy.” We must cut short a myth: if innovation often requires an excellent R&D, it is not limited to R&D. It is not its natural extension. Innovation is above all the process that leads to the marketing of products or services, meeting a need, made by individuals engaged in an entrepreneurial approach. Innovation is thus at the crossroads of several areas, first and foremost research, entrepreneurship, industry and education. There is therefore no conceptual optimization or normative expected pattern.” [Page 6]

And on the cultural aspects: “Innovation is primarily a matter of individuals, state of mind and ambition for the company and for themselves. The dissemination of the culture of innovation and entrepreneurship is vital. These cultures are closely linked: vision, risk-taking, acceptance and learning from failure, capacity for initiative, project culture and commitment to completion are the main components. Finally, the ability to create companies with high growth potential (spin-offs and start-ups), some of which will become world leaders, sometimes in a few years, characterizes an effective innovation system.” [Page 7]

And finally I add a quote from President Obama, which perfectly symbolizes the problem: “We insist on personal responsibility and we celebrate individual initiative. We’re not entitled to success. We have to earn it. We honor the strivers, the dreamers, the risk-takers, the entrepreneurs who have always-been the driving forces behind our free enterprise system – the greatest engine of growth and prosperity the world has ever known.”

The report was presented to ministers on April 5, and to the French Prime Minister on April 8, for the appointment of Anne Lauvergeon as President of Innovation 2030. Genevieve Fioraso [the French minister for research and higher education] noted, however, in her introduction to the submission of this report, that President Obama was able to speak for about an hour on this one chapter of innovation. Where else would this be possible?

Finally, and this is a personal note, this report should be used more as a base for innovation than as a toolbox or a set of recipes. This is the big picture that matters and not the extraction of recommendations that would suit one or the other. “The issues of competitiveness show that innovation must be at the heart of public policy, as illustrated by our recommendations. While this is a technical issue that is inherently complex (because of all the dimensions that make up), where the “right” decisions are sometimes against-intuitive (eg, linear view of innovation seductive but wrong), it seems essential that innovation becomes a real political issue to ensure its adoption by policy makers and citizens.” [Page 121]

Finally I would like to add more quotes on innovative ecosystems. As it begins to be long, I’ll do it in a future article …

Facts and Figures

They show the challenges of innovation, particularly in France. I’ll let you judge for yourself.

R&D Intensity (compares France and Germany in their R&D efforts relatively to firm size)

An interesting typology of research using fundamental and applied research as well as experimental development

… and its evolution in France

A real issue: company growth – number of companies reaching €100M in R&D relatively to company year of foundation

The complexity of the financing situation – as a % of GDP

The complexity of the financing situation – seed, early, late & LBO

As mentioned above this is the origin of 27 members (two presidents, 25 experts).

A few references from the Press:

– Nineteen Ways to Make France More Innovative (Wall Street Journal)
– Une mission sur l’innovation après le rapport Gallois (les Echos)
– Cinq pistes pour favoriser l’innovation en France (L’Expansion)
– Le gouvernement va-t-il enfin mener une politique volontariste d’innovation ? (ZDnet)
– Un rapport sur l’innovation qui sent la naphtaline (The satirical article by L’Informaticien)

What’s Criteo worth?

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Criteo is the latest European story. Not yet, some may say, but its numbers are impressive. How do I know? Well in France the Register of Commerce provides a lot of data if you are prepared to pay a small fee (about €10 per document you download). It is possible to know about the rounds of financing, about the revenues, about the founders. It was not as easy as I imagined and maybe I should have bought more documents. (The revenues are not what I had read, stockholders’ shares is probably not accurate as things may be missing. But it looks good enough to me.)

I also know people involved do not always like such publications. Wealth, money is still a taboo, in France particularly. What is important is the message of value creation that entrepreneurs and their investors contribute to create for others. As I copied from the Slicing Pie recently: “Entrepreneurs give security to other people; they are the generators of social welfare. The country needs entrepreneurs, the world needs entrepreneurs. Without them not much would happen. In spite of the exciting life and important role of entrepreneurs, most people never become entrepreneurs. To most people, life is too risky. Most people can’t handle the ambiguity. Most people are afraid of failure. Every entrepreneur fails more often than they succeed.”

So I publish here again, one of my favorite tools, the capitalization table of Criteo with its rounds of financing (€47M raised), its revenues (at least €74M in 2011), its investors and its founders. But the wealth is virtual, it corresponds to a €15 price per share, more than 3 times the price paid by the series D investors…

I do not think Criteo’s journey was easy and simple. When I first heard of the company, it was developing recommendation systems, not ‘personalized retargeting’. It had Plan B related Pivot. So here it is and my apologies for inaccuracies / frustrations.

Here are some more references.
– Criteo Nabs $40 Million in Funding at $800 Million Valuation
– Criteo Hires Bank for Imminent IPO

This last article mentions the IPO of Marin, which I had followed too. The comparison is interesting…

Business Model Generation – never too late!

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Last week, I attended a workshop organized by Raphael Cohen. He explained his IpOp process. You can read again the post I wrote a few months ago: Proven Tools for Converting Your Projects into Success (without a Business Plan). It’s really a good tool if you need to develop your own project. Cohen mentioned the famous Business Model Generation by Alexander Osterwalder and Yves Pigneur; and he showed us again its 9 building blocks. It has become such a standard… I never mentioned it here. Better late than never!

You can download the pdf canvas here.

The Swiss innovation model: is it the best?

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Very interesting presentation by the newspaper Le Temps and Xavier Comtesse about innovation in Switzerland (compared to the USA). (Thanks to Pascal for giving me the link :-)). The article is entitled The Swiss innovation model is it the best? (Same document on Prezi)

Before you view or read the content of the contribution by Comtesse, here is my reaction: it is indeed an excellent analysis, but the conclusion can be misleading! One could get the impression that the U.S. does not have large innovative companies like Switzerland has with Novartis, Roche or Nestlé. But I fear that it is a misleading view. The U.S. does not have that start-ups only and our are not growing. Not to forget, the topic of job creation, see Job creation: who’s right? Grove or Kauffman

Now here is a summary translated from Prezi: For several years, Switzerland has been at the top of the world rankings for innovation, this was not always the case especially during the 90s. So … Are we better than Silicon Valley?

Silicon Valley has developed a model in 8 strengths
– Excellent local university system
– Transfer of knowledge to the economy – technoloy parks, coaching, awards, etc..
– Powerful venture capital
– Start-ups that grow quickly and innovate in disruptive fields
– An effective IPO or M&A market (Exit Strategy)
– Large expenditures in R&D
– A high rate of patents per capita
– A strong entrepreneurial spirit per inhabitant

The 7 strong points of the Swiss model: Switzerland has a very different system of innovation from Silicon Valley but ultimately just as effective, especially for large companies.
– No federal masterplan for Innovation
– A concentration in life sciences
– A innovation driven by large companies
– Incremental innovation more than disruptive
– A quality education at all levels
– Framework conditions very favorable to the economy
– A high performance system of transfer of knowledge / technology

What are the strengths and weaknesses of Switzerland?
– Yes, our universities are excellent:
More than half of young Swiss university follow the one hundred best universities in the world, no country has such a result
– No, the Venture Capital industry is very low in Switzerland:
Switzerland underperformed largely in the area of venture capital (investment in Switzerland in 2011: 737 Million for USA 29,500 million).
– No, our start-ups do not grow fast enough:
The excellent survival rate is suspect, this means that start-ups are protected by the academic system or federal funding
– No, there is little IPO in Switzerland:
A small number of IPO (Initial Public Offering) shows weak growth start-ups or SMEs in Switzerland
– Yes, private R&D is very important but for large firms rather than in SMEs:
The share of the private sector is very important in Switzerland, particularly in the life sciences (pharma, biotech and medtech, etc.).
– Yes, we file a lot of patents:
but again it is primarily large enterprises, the proportion of patents is very important in Switzerland, this is partly due to the strong presence of very large firms
– No, the Swiss create firms twice less than the US:
the ntrepreneurial culture is very strong in the U.S., more than double that in Europe,
– Yes, the general conditions of business creation are very favorable:
Switzerland does better than innovative small countries such as Finland, Sweden and Israel
– Yes, technology transfer takes place in Switzerland:
Switzerland has fifty incubators, TechnoParks or other transfer centers Switzerland Silicon Valley

These two models as we have seen are very different. They work well both but the objective differences do not make possible to compare them as is done ll too often, especially in the field of start-ups …

Slicing Pie (how to fairly split equity) – Part 2

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Following my recent post (part 1), here is what I keep from the book without giving all details. Moyer probably needs to sell a few copies!

Moyer introduces the Grunt Fund as a mechanism to allocate equity between founders. He is using the classical metrics I have used in the past (again see Equity Splits in Start-ups) but he adds one interesting point: a dynamic allocation based on future contributions such as time and cash, weighted with your value (reputation, experience, etc). His process is simple:
– Appoint a Leader
– Assign a theoretical value to the ingredients provided by the various Grunts.
– Keep track of the contributions and calculate the possible equity whenever you need based on the relative contributions by each Grunt.

A Grunt Fund makes some people uneasy. They like to know what they’re getting into and they like the I’s dotted and the T’s crossed. That’s fine. If this is you, then don’t use a Grunt Fund – get a job instead. [Page 50] Then be careful about who and what you need. It’s up to you to decide what you need, but be fair!

Moyer mentions on the following page Noam Wasserman’s The Founder’s Dilemma (which I have not read) as a theoritical validation of his approach.

Without entering too much detail, Moyer gives value to time (2x what would a normal salary be) and cash (4x the actual amount). This is subjective. The critical element is that all Grunts agree with the rules. It can change from one company to the other… “Remember, you need to compensate them for not only the work they did, but also for the risk they take.” [Page 64]

When it comes to ideas or intellectual property, Moyer has principles I am quite close to: “Don’t get me wrong, ideas are critical to a business’ success. But turning the idea into a reality is where the value is built, not in coming up with the idea in the first place.” [Page 82]

Sometimes you will need to remove someone. There are 3 possibilities:
– he/she resigns without cause. You need to reduce his slice;
– you terminate him/her without cause. The slice should be kept;
– you terminate with cause. He/she may lose the slice.
[Chapter 5 + Pages 141-145]

The Grunt Fund is for the early days only. When do you stop using it? When you have a predictable business model, or when you have raised $1M. [Page 114]

As a conclusion (and Moyer mentions it many times), “a Grunt Fund is a moral contract, not a legal contract. It tells us how to treat each other fairly. […] A Grunt Fund is the foundation of a trusting relationship.” [Pages 121-122]

Start-Up

What we may still learn from Silicon Valley

Author Archives: Hervé Lebret

Against Intellectual Monopoly

Steve Jobs by Walter Issacson

Venture Capital in Europe and in the USA

Stanford Impact via Entrepreneurship

The Beylat Tambourin report and innovation ecosystems.

Innovation: High Stakes for France

What’s Criteo worth?

Business Model Generation – never too late!

The Swiss innovation model: is it the best?

Slicing Pie (how to fairly split equity) – Part 2