Category Archives: Innovation

Is Intellectual Property out of Breath?

Here is my second paper published by Entreprise Romande after the one on the Challenges of Innovation.

Copyrights, patents, trademarks. Never intellectual property (“IP”) has seemed so visible, but would it be a victim of its success? It is indeed becoming an almost exclusive tool of the rich and powerful and even worse, it may be hindering innovation whereas it was supposed to encourage it.

In July 2011, a consortium including Apple, Microsoft, Sony bought 6,000 patents from now deceased Nortel for $ 4.5 billion. In August 2011, Google replied by acquiring patents from Motorola Mobile for $ 12.5 billion. Finally in September 2011, the United States announced a major reform of patent law, the America Invents Act. These three events in a single summer confirm the increasingly dominant position of IP in the business world. Yet I think it is bad news!

New privileges

If a patent application only requires a few hundred dollars and tens of thousands to maintain over 20 years, should a company enter in legal dispute over it, it might cost millions in damages and attorney fees. Any fragile business might be dead long before winning a case or proving its innocence. Woe to the weak! Large companies are not the only ones to have understood: companies specialized in the valuation of IP portfolios (“patent trolls”) have emerged in recent years and these companies have no ambition to sell products or services around their IP. And Europeans should not think that the problem is American only as illustrated by the recent battle between Nokia and Germany’s IPCom.

IP is now a far cry from the original patent and copyright statements made by the revolutions of the late eighteenth century. It was then about ending the monopoly of corporatism and about supporting inventors and creators. Far be it from me to push the disappearance of intellectual property. I only here mention the example of the laser patents whose saga has at least allowed a wonderful book, closer to a thriller than the complex physics from which ir was born, Laser: The Inventor, the Nobel Laureate, and the Thirty Patent-year War. But I’m not at all convinced that IP could now enable what was possible almost 50 years ago with the laser. And already in the nineteenth century an abolitionist movement had appeared, aware of the limitations of a system that set new privileges.

Hindering innovation

The other debate about IP is best summed up in a recent article in the ParisTech Review: “Are patents hindering back innovation?” The story is old: Boldrin and his coauthors [1] argue that the developments of the steam engine were hindered by patents filed in 1769. Do we know that the microprocessor from Intel was never protected, nor of course the Internet, and it is more or less constrained that Bell Labs granted licenses on the transistor, an event that is perhaps at the origin of Silicon Valley culture: “In the 70s and 80s, many engineers from Fairchild, National and others met over a beer to talk about problems they encountered in the production or sale of semiconductors. The Wagon Wheel Bar was a meeting place where even the fiercest competitors exchanged ideas.” Having recently visited LinkedIn, I’ve heard engineers explain how they solve problems with competitors from Facebook. Discussing with Apple or Google seems much more difficult today.

Intellectual property is not the answer to everything and in its current development, it poses more new problems than it solves. The U.S. patent reform has already attracted much criticism. As for Europe, it seems stuck in its national self-interest as there is no European patent and the lack of patents on software or business models does not give it any advantage. In a globalized and dematerialized world, the IP must protect the creative people, to better enable the dissemination of ideas and techniques. The “open source” software movement as well as recent experiments in the diffusion of artistic works exclusively on the Internet show that new approaches are possible without killing business or innovation. But it seems that the fears of the established players outweigh the passion and creative risk-taking culture.

-[1] Do Patents Encourage or Hinder Innovation? The Case of the Steam Engine. Patent Law Is Highly Controversial. Michele Boldrin, David K. Levine, and Alessandro Nuvolari.
– Laser: The Inventor, the Nobel Laureate, and the Thirty-year Patent War. Taylor, Nick (2000). New York: Simon & Schuster
– Are patents hindering innovation? Paristech Review, September 2011

PS: When writing this paper, I had not measured yet the impact of the Apple-Samsung litigation…

The Tinkerings of Robert Noyce

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I am reading a new book on Steve Jobs and Silicon Valley entitled The Apple Revolution. I will come back on what I think when I am finished reading it. I discovered in the first pages of this book that famous author Tom Wolfe had written in 1983 another article about Silicon Valley centered around Bob Noyce, The Tinkerings of Robert Noyce.

You probably do not remember my previous posts mentioning Noyce, and if not you may want to read them:
– What is the mentor role? in August 2010.
– The Man Behind the Microchip in February 2008.
It is not very surprising that Noyce, the founder of Intel, is mentioned in a book about Apple computer. Noyce was a mentor to Jobs as you may see below or by reading my post above. Don Valentine add further that Noyce and Jobs may have been the two most important personalities of Silicon Valley: “There were only two true visionaries in the history of Silicon Valley. Steve Jobs and Bob Noyce. Their vision was to build great companies…”

Wolfe’s article is great and if you do not have time to read The Man behind the Microchip, you might want to read this shorter version. let me just extract a few things:

About the culture of Silicon Valley, work, openness and …
“The new breed of the Silicon Valley lived for work. They were disciplined to the point of back spasms. They worked long hours and kept working on weekends. They became absorbed in their companies the way men once had in the palmy days of the automobile industry. In the Silicon Valley a young engineer would go to work at eight in the morning, work right through lunch, leave the plant at six-thirty or seven, drive home, play with the baby for half an hour, have dinner with his wife, get in bed with her, give her a quick toss, then get up and leave her there in the dark and work at his desk for two or three hours on “a couple things I had to bring home with me.
Or else he would leave the plant and decide, well, maybe he would drop in at the Wagon Wheel for a drink before he went home. Every year there was some place, the Wagon Wheel, Chez Yvonne, Rickey’s, the Roundhouse, where members of this esoteric fraternity, the young men and women of the semiconductor industry, would head after work to have a drink and gossip and brag and trade war stories about phase jitters, phantom circuits, bubble memories, pulse trains, bounceless contacts, burst modes, leapfrog tests, p-n junctions, sleeping-sickness modes, slow-death episodes, RAMs, NAKs, MOSes, PCMs, PROMs, PROM blowers, PROM burners, PROM blasters, and teramagnitudes, meaning multiples of a million millions. So then he wouldn’t get home until nine, and the baby was asleep, and dinner was cold, and the wife was frosted off, and he would stand there and cup his hands as if making an imaginary snowball and try to explain to her… while his mind trailed off to other matters, LSIs, VLSIs, alpha flux, de-rezzing, forward biases, parasitic signals, and that terasexy little cookie from Signetics he had met at the Wagon Wheel, who understood such things.
It was not a great way of life for marriages.”

About youth and innovation:
“The rest of the hotshots were younger. It was a business dominated by people in their twenties and thirties. In the Silicon Valley there was a phenomenon known as burnout. After five or ten years of obsessive racing for the semiconductor high stakes, five or ten years of lab work, work lunches, workaholic drinks at the Wagon Wheel, and work-battering of the wife and children, an engineer would reach his middle thirties and wake up one day; and he was finished. The game was over. It was called burnout, suggesting mental and physical exhaustion brought about by overwork. But Noyce was convinced it was something else entirely. It was…age, or age and status. In the semiconductor business, research engineering was like pitching in baseball; it was 60 percent of the game. Semiconductor research was one of those highly mathematical sciences, such as microbiology, in which, for reasons one could only guess at, the great flashes, the critical moments of inspiration, came mainly to those who were young, often to men in their twenties. The thirty-five year-old burnouts weren’t suffering from exhaustion, as Noyce saw it. They were being overwhelmed, outperformed, by the younger talent coming up behind them. It wasn’t the central nervous system that was collapsing, it was the ego.”

About status, hierarchy and success:
“And if he was extremely bright, if he seemed to have the quality known as genius, he was infinitely more likely to go into engineering in Iowa, or Illinois or Wisconsin, then anywhere in the East. Back east engineering was an unfashionable field. The east looked to Europe in matters of intellectual fashion, and in Europe the ancient aristocratic bias against manual labor lived on. Engineering was looked upon as nothing more than manual labor raised to the level of a science. There was “pure” science and there was engineering, which was merely practical. Back east engineers ranked, socially, below lawyers; doctors; army colonels; Navy captains; English, history, biology, chemistry, and physics professors; and business executives. This piece of European snobbery that said a scientist was lowering himself by going into commerce. Dissenting Protestants looked upon themselves as secular saints, men and women of God who did God’s work not as penurious monks and nuns but as successful workers in the everyday world.”

Although he was an atheist, Wolfe sees in the values of “Dissenting Protestantism” roots of the Silicon Valley culture. “Just why was it that small-town boys from the Middle West dominated the engineering frontiers? Noyce concluded it was because in a small town you became a technician, a tinker, an engineer, and an and inventor, by necessity. “In a small town,” Noyce liked to say, “when something breaks down, you don’t wait around for a new part, because it’s not coming. You make it yourself.”

Interestingly enough the Apple Revolution also mentions all these points, but in the context of the hippie counter-culture… wait for next post!

Andy Bechtolsheim talks at Stanford about the Process of Innovation

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This morning, I got up at 4am for an unusual event, a talk by Andy Bechtolsheim back at Stanford University. And it was great! I took a couple of screenshots and notes. For those who would not know Andy, here is more below. And I should also add that Bechtoslheim is from Germany, I had mentioned him in a past article: Europeans and Silicon Valley. There should be the full video on Stanford Youtube in a few days…

More than 30 years ago as a Stanford graduate student, Andreas “Andy” Bechtolsheim designed a simple but powerful computer workstation that would help define the modern technology era and launch Sun Microsystems. He’s since founded three more startups, including cloud-networking company Arista Networks, where he is now chairman. His investing foresight is legendary. Not only was he the first major backer for Google, but he’s also been an early-stage investor in VMware, Brocade and others. Bechtolsheim will discuss the process of innovation and describe its importance to Silicon Valley.

Bechtolsheim began his talk with some historical background on innovation. If you want to only read about the lessons, jump to the end! (I am aware some of the screenshots are low-res…). Recent (I mean in the last 50 years) innovations have their roots in semiconductors, networking and the Internet and (Open-source) software as well as in an acceleration in technology development (including Moore’s law and a faster adoption cycle of products.) These are two slides about the semiconductor roadmap:

Then he showed how the Internet from Arpanet, to the browser and finally to social networking has accelerated the innovation cycle.

More importantly, he gave some clues about what innovation is about, and why start-ups have an advantage here. Innovation is not about R&D not even about marketing. It is about bringing a needed product to customers:

And he illustrated his arguments with the Apple case:

– Apple does not make a lot of R&D

– Apple does not really study customers

So how does innovation work. Here are some clues:

And very importantly, he finishes with the innovation culture at Apple, Google, Amazon and the lessons learnt:

In conclusion, Andy had great lessons:
– Innovation is not about R&D or customers, it is about products.
– Timing is critical, so focus.
– Big companies are about evolution not revolution.
– Be the expert in your field and understand the market, both gives you (self-)confidence (to attract people.)
– Failure is not an issue in SV but fail fast. However outside of SV, you may have to hide for 30 years when you fail. In SV, not trying is the risk, not failing.
– He also discussed patenting, “a sore topic”.
– Following another question, he considered a major threat to innovation is the current weakness of venture capital (there is money, but the returns are not good and a lot of money goes in narrow fields – cleantech a few years ago, web2.0, etc)

Well the title was misleading. Innovation is not a process, it is a culture! If you like this, you have to watch the video…

Prophet of Innovation – Joseph Schumpeter and Creative Destruction

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This is a (very long) summary of “Prophet of Innovation – Joseph Schumpeter and Creative Destruction” by Thomas McCraw, Harvard University Press, 2007. In fact, these are extracts from the book and I mentioned the pages as much as I could. If you are courageous enough to read until the end, you might be interested in buying the full book. Schumpeter is clearly the Prophet of Innovation and Thomas McCraw’s book is a great piece of historical and economic analysis. It is about Schumpeter life, which is by itself interesting. His life was not simple, a devastating first wedding, a personal bankruptcy, a short experience as a minister of finance, the rise of Nazism; stability [nearly?] came at Harvard with a new wedding. But it is first and foremost an amazing synthesis of what innovation and entrepreneurship are about. I could nearly feel a Schumpeterian when I read these clear explanations, despite the fact that Schumpeter was clearly a conservative. So let me try to summarize what I kept from this 700-page book (including 200 pages of notes).

Entrepreneurs are the agents of innovation and creative destruction [page 7]

Schumpeter especially emphasizes the role of new companies in making innovations that interrupt the circular flow. New firms “do not arise out of the old ones but start producing beside them”. In transportation for example, “it is not the owner of stage coaches who builds railways”. Schumpeter also argues that “the entrepreneur is never the risk bearer. The one who gives credit [that is, provides the necessary capital] comes to grief if the undertaking fails. … Even though the entrepreneur may risk his reputation, the direct responsibility of failure never falls on him. [Page 74]

In his definition, the entrepreneur is not a run-of-the-mill business executive, or even the owner of chief executive of a successful firm. The entrepreneur is “the modern type of captain of industry” – obsessively seeking an innovative edge. […] He is not driven solely by a wish to grow rich or by any other “motivation of the hedonist kind”. Instead he or she feels “the dream and will to found a private kingdom. […] There is the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity. [He] has some characteristics in common with Max Weber’s “charismatic leader”. [Pages 70-71]

The important players in this process are entrepreneurs and investment bankers, who generate “new purchasing power out of nothing”. The investment banker is not just the middleman standing between savers and users of capital; he is instead “a producer” of money and credit, “the capitalist par excellence”. Schumpeter hammered the function of banks in creating money. Keynes had said to him “there were not more than five people in the world who understood monetary theory”, adding that he, Schumpeter, assumed himself to be one of the five. [On note 21, page 533, the author adds “In the history of American capitalism, banks took a smaller role. This did not mean the United States was any less entrepreneurial, of course. It was the most entrepreneurial country on earth, but not because of its banks. Substantial new businesses were funded through “equity” by wealthy families.]

There are 5 types of innovation [page 73]:
(1) The introduction of a new good – or a new quality of a good.
(2) The introduction of a new method of production.
(3) The opening of a new market.
(4) The conquest of a new source of supply of raw-materials or half-manufactured goods.
(5) The carrying out of a new organization.

An important general lesson is that increases in scales almost always require advances in technology which often reduce marginal costs still further. [Note 35, page 525] Steel and automotive industries are just two examples of his time, or more generally steam, electricity, transistors.

Part II begins with an analysis of why entrepreneurship was never widespread even if there were “early forerunners such as Venice, Florence and the Netherlands.” It was even widely resisted for reasons which are “as much cultural and social as they are economic”. (We are talking about an analysis over centuries from the middle ages until the industrial revolution.)
(1) A conviction that spiritual life suffered grievous damage if people became immersed in materialism.
(2) The absence of a belief in upward social and economic mobility.
(3) No widespread sense of personal freedom and individual autonomy.
(4) The governance of most occupations and crafts by cartels (agreements to divide markets and keep prices high) and guilds (exclusive associations of craftspeople).
(5) Entailed estates market by primogeniture. Entailment (imposition of a specified succession of heirs) and primogeniture (inheritance solely by the family’s eldest son) discourage innovation and risk-taking.
(6) A primitive financial system that lacked paper money, stocks, bonds, or any other credit mechanism.
(7) The absence of the two pillars that support all successful business systems: a modern concept of private property and a framework for the rule of laws.

In 1911, Schumpeter flatly asserted that individual entrepreneurship held the key to economic growth in any country. This explains his fascination of the United States but Schumpeter may have missed that it had a strong entrepreneurial spirit from the start. “Capitalism came in the first ships”. [Pages 145-149] The economy has entered the realm of meritocracy, which is inherently hostile to hereditary class. Entrepreneurship had become a function, not a market of class. [Page 159]

In phase with my quoting Hegel [1] on passion, Schumpeter claims that “no company can ever retain a position at the top of its industry without doing very much more than this – without blazing new trails, without being devoted, heart and soul to the business alone”. Any company [falling into routines] “will soon be overtaken by aggressive, risk-taking competitive entrepreneurs”. “Entrepreneurs need extraordinary physical and nervous energy. The best of them can sustain their efforts on a high level only if they have that special kind of vision – … concentration on business to the exclusion of other interests”. [Page 162] That is why Schumpeter believes in “the Instability of Capitalism”: the whole idea of a capitalist equilibrium is misleading. […] The origins of broad expansions always come from innovations in specific industries, which then ramify into other parts of the economy … such as in textiles, then in steam engines and iron, then in electricity and chemicals. Overall industry-specific innovation does not follow but creates expansion. [Page 163]

He even added that “one cannot assume that capitalism will last forever. No other economic or social system has ever done so, and capitalism may be a transitional phase in a broad movement toward a more egalitarian order. [Note 36 page 566] Outside influences – wars, earthquakes, even many new technologies and inventions – are not the sources of the perpetual changes that characterize capitalism. Instead change is part and parcel of capitalism and it comes from entrepreneurial behavior. [Page 164] Early in the twentieth century, firms such as ATT, GE, Kodak and DuPont set up research departments. They made innovation part of their business routine. At the same time, new firms spring up alongside the giants. […] By definition, innovation causes obsolescence and Schumpeter warns against allowing the old to block the new.

Schumpeter ‘s key point is the insatiable pursuit of success and of the towering premium it pays that drives entrepreneurs and their investors to put so much time, effort and money into some new project whose future is completely uncertain. Financial speculation, though it gets bad press is an important part of the process [page 178]. The entrepreneur tries to preserve his high profit through patents, further innovation, secret processes and advertising – each move an act of aggression [Page 255]. Entrepreneurs reduce cost, then prices, stimulate demand and enable larger volumes. The dynamic process will come many times: “all successful firms have been entrepreneurial at some point, though a given company is certain to be more entrepreneurial at one point and less so at another. When their innovations dwindle, firms begin to die.” [page 181]

Part III – Business cycles – 1939, Capitalism, Socialism and Democracy – 1942, History of Economic Analysis – 1954. “Using theory, statistics and history” is a Schumpeter motto, you cannot just do one approach, you need to combine the three to make good analyses.

Business Cycles. Innovation propels the economy. New firms, entrepreneurs drive innovation. All companies must react, adapt. Meanwhile, powerful elements resist major innovations. Nobody ever is an entrepreneur all the time and nobody can ever be only an entrepreneur. The entrepreneur not only innovates but also carries day to day management. The entrepreneur may but need not be the person who furnishes capital. It is leadership rather than ownership. [Again] Risk bearing is no part of the entrepreneurial function. It is the capitalist who bears the risk. [Pages 254-255] A major theme: “the extreme difficulty of changing traditional ways of doing things”. [Page 257]

Schumpeter places heavy emphasis on the role of marketing. It was not enough to produce satisfactory soaps, it was also necessary to induce people to wash. [Page 258] Then he studies cases: textiles (cotton vs. silk) [page 258], rail [page 261], finance [page 264], automobile [page 266], steel [page 267], electricity [page 268]. But McGraw claims book is a relative failure. He apparently got lost into too many details.

Schumpeter also draws sharp distinctions between inventors and entrepreneurs and between inventions and innovations: “The making of an invention and the carrying out of the corresponding Innovation are, economically and sociologically, two entirely different things.” Often the two interact, but they are never the same, and innovations are usually more important than inventions. [page 259] “Necessity may be the mother of invention, but it does not automatically produce innovation” [page 260]. In conclusion of his book, “without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capitalist propulsion. […] Stabilized capitalism is a contradiction in terms.”

In 1942, he published Capitalism, Socialism and Democracy. It is interesting to see the connections between Marx, Keynes and Schumpeter. They may disagree, but there was some respect due to the broadness of the vision and ambition. “The book begins with a penetrating and wholly serious fifty-eight-page analysis of Karl Marx’s work. […] Marx was the first economist of top rank to see and teach systematically how economic theory can be turned into historical analysis.” But Schumpeter thinks Marx was wrong because of “his oversimplified view of social classes”, not just capitalists and proletarians, he failed to distinguish the entrepreneur from the capitalist, and the wrong argument that “society’s total income would steadily fall”.

His first question was “Can capitalism survive? No I do not think that it can.” Even if capitalism has produced the greatest per capita output of goods ever recorded, […] in favor of the lower income groups, […] by virtue of its mechanisms […] thanks to businesses of grand size. Then Schumpeter introduces his famous term, “creative destruction”. It is an essential fact of capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. He then criticizes the idea of perfect competition, which does not take business strategy into consideration. There is no perfect information. And there is a continued emergence of new products and new ways of doing things, which is the fundamental impulse that sets and keeps the capitalist engine in motion. Perfect competition and static assumptions are wrong [2]. The economy is about oligopolies, which engage in mass production with very large capital investments. All this does not ease equilibrium analysis or mathematical modeling. [Pages 348-354]

Schumpeter proposes a sharper focus on products and marketing as elements of competition. It is not [that kind of perfect] competition that counts, but the competition from the new commodity, the new technology, the new source of supply, the new type of organization. The economics profession did a capital crime: failing to acknowledge that continuous innovation is endogenous to capitalism. It should focus on change, […] with the mistaken idea that monopoly and big business are the same thing. Long-run cases of monopoly are almost non-existent. Technical innovation and organizational remodeling, not monopolistic profits, account for the prosperity of most great companies. Schumpeter identifies capitalist entrepreneurship with technology progress itself. As a matter of historical record, they were “essentially one and the same thing”, the first being the propelling force of the second.

The tendency of some industries to grow into big business while others do not has seldom been well understood, either today or during Schumpeter’s time. […] The economics literature on why firms grow large is very extensive and often controversial. [Note 55, page 613] Many scholars debated whether Schumpeter believed innovation to be helped or hindered by the rise of big business (see the Economist post – https://www.startup-book.com/2012/01/11/innovation-is-not-about-small-or-large-its-about-fast/ ). Indeed Schumpeter could seem inconsistent. He usually argued that size in and of itself does not preclude innovation, and can promote it in ways that would not occur in small businesses. He did not usually argue that small business was inherently less innovative and he admired entrepreneurial startups throughout his career. A typical misreading: “Schumpeter believed that technological innovations are more likely to be initiated by large rather than small firms” is inaccurate, but plausible! [Note 25, page 639].

His political analysis of capitalism, socialism and democracy may look dated even if it has interesting points. But I see bias as we all have when we talk about convictions or faith… [indeed see below!] Still, let me go on quoting. “Capitalism has developed the seeds of its own destruction. Persons of supernormal ability and ambition can reach a much higher standard of living, provided they would pursue business careers. Capitalism substituted impersonal efficiency to the feudal features. So that people have “the individualistic rope” to hang themselves. The bourgeoisie is politically helpless and unable not only to lead its nation, but even to take care of its particular class interest. Furthermore capitalism and in particular big business undercut not only the aristocracy, but also many small producers and merchants. A share of stock for tangible assets takes the life out of the property. And if this trend goes on long enough, there will be nobody left to defend the bourgeois values” [Page 357].

Large businesses do not command the same degree of loyalty from their workers. Employees take economic progress for granted but they have little emotional attachment to the success of their companies. (And because of the uncertainty), they feel personally insecure. Because people have come to expect a continuous flow of new products and methods, innovation itself is being reduced to routine, progress is depersonalized and automatized. Individual entrepreneurship becomes less salient. By reducing everything to a calculus of costs and benefits, it rationalizes. Economic efficiency is only one of the many human goals and not necessarily the most important to every individual so that the future of capitalism cannot be assured on the basis of is superior economic performance. (And do not forget, there are always cycles and crises…) [Page 358]

His criticism of socialism is also dated, but here it is: a socialist system must replace an economy based on mature big-business capitalism, through routine governmental action and will take 50 to 100 years to complete. The noneconomic attributes need to be primary motives but worth the price of reduced economic efficiency. Can innovation impulses be released as in capitalism this way? Furthermore, it has to be assumed that uncertainties or imperfect information are not an issue, that improvements can be disseminated by a central authority, that business cycles are eliminated, that unemployment does not exist, that the disappearance of the private sphere eliminates friction and antagonism. One way is to nationalize big business while neglecting small producers with a way to motivate managers. (Comment: Schumpeter analyzed Germany, the UK and the USA; not France, which in a way has some attributes of his description). [Page 360]

Then he switches to the analysis of democracy. Schumpeter is not sure of what common good is as it may mean different things for individuals. And it is not the same thing as the choice of the majority. He compares voters and voting to customers and buying, with advertising/marketing as similar. McCraw adds “it is as if he were discussing capitalism in America and democracy in Europe.” “He wrote on democracy as simply a mechanism, while ignoring its powerful ethical dimension.” [Pages 369-71]

[In an over-simplistic manner we can see the old tension between left-weak-collective- equality and right-strong-individual-freedom. In the French motto, I am not sure where we put fraternity.] McCraw quotes Churchill for this chapter: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent vice of socialism is the equal sharing of miseries”. But as a conclusion, imperfect competition is according to Joan Robinson the most brilliant part of the book. (With a background in math, I particularly appreciate Schumpeter’s comment: “There is nothing in my structures that has not a living piece of reality behind it. This is not an advantage in every respect. It makes, for instance, my theories so refractory to mathematical formulation.” Indeed, there may have been far too much math in economy and not enough history…)

The part on World War II shows that the combination of high public investment (military spending) and individual entrepreneurship & large scale business may be the winning recipe, a combination of Keynes and Schumpeter, even if they were academic adversaries… [Pages 383-389]. What makes the book really interesting is indeed noticed by the author himself: “by comparison with other major theorists stretching from Adam Smith to Keynes, he insisted on giving opposing arguments not only their due, but far more.” And this will be confirmed by his History of Economic Analysis published posthumously in 1952.

For Schumpeter, the troubling issue was not economic at all but ideological; widespread prejudice against business, held over from the New Deal. Thus entrepreneurs would have to do their work “in the face of public antagonism, under burdens which eliminate capitalist motivations and make it impossible to accumulate venture capital”. (In these last two words, Schumpeter made early use of a term that became commonplace four decades later. He did not invent the phrase – its origin is obscure – but was one of the first economists to use it.) [Page 424]

The History of Economic Analysis is his grand ‘oeuvre. McCraw quotes Moby Dick’s Melville: “To produce a mighty work, you must choose a mighty theme”. The book “tracks important thinkers down both productive and non productive paths. It shows how potentially seminal ideas often get lost, only to be rediscovered decades or even centuries later.” He also describes bias. “All human beings grow up having subconsciously developed a sense of how the world works. […] All analysis begins with a distinct intuition that is almost inherently ideological, and usually our way of seeing them “can hardly be distinguished from the way in which we wish to see them. This is a dangerous situation for researchers.” […] “The first thing a man will do for his ideals is lie.” [Page 456]

As an example, Schumpeter notes that starting with Adam Smith, the classical economists made use of the term “stationary state” to describe both an existing situation and some condition they thought would materialize in the future, persisting to the stagnationist thesis – the notion that the age of innovation has passed and “mature” capitalism was at hand. And Mill’s ill-advised identification of the entrepreneur with the risk-bearer “only served to push the car still further on the wrong track.” Today in the twenty-first century, many economists add entrepreneurship to the three factors of production as traditionally conceived; land, labor and capital. That addition owes a very great deal to Schumpeter’s own work. [However] entrepreneurship is very difficult to measure and virtually impossible to express mathematically. Gains, returns only emerge when an entrepreneur innovates in some important way – and then disappear as the innovation spreads. Meanwhile they have contributed to general economic growth. The best example is the offering of a new product or a new brand. There are means available to the successful entrepreneurs – patents, strategy and son on for prolonging the life of his monopolistic or quasi-monopolistic position and for rendering it more difficult for competitors to close up on him. By connecting strategy to entrepreneurship in his History, Schumpeter shows that he has come to understand the connection far better than he did before. [Page 458] On the anecdotal side, Schumpeter understands better Keynes: “the arteriosclerotic economy whose opportunities for rejuvenating venture[s] decline while the old habits of saving form in times of plentiful opportunity persist.” Keynes saw the need to invest, Schumpeter the need for innovation. The problem is you need both at the same time.

Schumpeter represents advances in economy reasoning as nonlinear. History of Economic Analysis succeeds where much economic writing of our own time fails, having sacrificed the messy humanity of its subject on the altar of mathematical rigor. Above all else, Schumpeter’s History is an epic analytical narrative. It is about real human beings, moored in their own time, struggling like characters in a novel to resolve difficult problems. [Page 461]. Compared to Keynes, Schumpeter had no reason to think that life was something a person could be expected to enjoy automatically. It was one thing to grow up in Britain – stable, prosperous and ever-victorious – and quite another to be a child of vanquished and vanished Austria. No wonder his vision differed so thoroughly from that of sedentary Keynes as well as those of Smith, Ricardo or Mill. Unlike any of them, Schumpeter had to reinvent himself multiple times. For every episode of destruction, he tried to convert his experience intro a recreation or reinvention of some aspect of economics. [Page 468]

As an intermediate conclusion, again his famous quote in Business Cycles: “Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capital propulsion. The atmosphere of industrial revolutions – of “progress” – is the only one in which capitalism can survive”

In the last years of his life, he analyzed again what economics is about. The combination of narrative, numbers and theory could exercise a power that none of the three could do alone. Theories are stylized stories; but without real stories and statistics to back them up, they lose much of their force. He also emphasized a “principle of indeterminateness”, contrasting it with Marx economic determinism and one-size-fits-all fiscal Keynesian prescriptions. Time and chance made most economic predictions risky and all determinism futile. Wars and natural disasters disrupted even the most sophisticated forecasts. Equally important for this principle, is the human element of leadership. “Without committing ourselves either to hero worship or to its hardly less absurd opposite, we have got to realize that, since the emergence of exceptional individuals does not lend itself to scientific generalization, there is here an element that, together with the element of random occurrences with which it may be amalgamated, seriously limits our ability to forecast the future.” Schumpeter quest for exact economics had finally ended. [Pages 475-476].

After Schumpeter’s death, comments were many. “Schumpeter’s writings provided an ideal corrective to Keynes’s fatal omission of innovation’s important role in capitalist evolution. Conversely, Schumpeter’s own shortcomings lay exactly in the areas that Keynes’s theories illuminated – where consumption and investment could be considered as aggregates; where analysts could think in macro-economical terms about the total output of national economies.” On entrepreneurship, “his vision of the innovating entrepreneur, who did have glamour and was not dominated by middle-class values, could grow.” [Page 492].

Finally McCraw summarizes Schumpeter contributions:

“Innovation in the form of creative destruction is the driving force not only of capitalism but of material progress in general. Almost all businesses ultimately fail and almost always because they fail to innovate. Only through innovation and entrepreneurship can any business except a government-sponsored monopoly survive over the long term.” Schumpeter finally thought that entrepreneurship could occur within large and medium-sized firms as well as in small ones, despite bureaucratic obstacles. Thus “new men” founding “new firms” were still vital but they were no longer they only agents of innovation. “The history of the information technology industry confirms his thinking especially well – both the scrappy young firms in Silicon Valley that either perished or remained small-to-medium-sized and others that grew to be giants (Hewlett-Packard, Intel, Oracle, Cisco Systems, Amazon [sic], Google, Yahoo). Outside of Silicon Valley, the same pattern obviously holds for Microsoft and Dell Computer, founded by the teenagers Bill Gates in 1975 and Michael Dell in 1984”.

Two other topics were important, the money question and business cycles. “Daily transactions totaling trillions of dollars are driven by intra-corporate repositioning on currencies, by trading in stocks and bonds by funds management. This pattern fits perfectly Schumpeter’s theory of innovation and credit creation as the touchstones of capitalism.” […] “The rise of mixed economies both in industrialized and emerging countries (the major legacy of Keynes) has tended to flatten the business cycles” [Page 499]. He adds on a related note that we may have forgotten the deepness of “the crises in the 1780s, 1810s, 1830s, 1850s, 1870s, 1890s, 1907-08, 1920-21 and of course 1929-39. In 1929, the Dow Jones peaked at 381, in 1932, it was at 41. After the 40s, the business cycles were much smoother and brought under greater control”. Clearly the 2000 Internet crisis and 2008 financial crisis seem to be smoother.

At the same time, in the new world of academic economics, neither the Schumpeterian entrepreneur as an individual nor entrepreneurship as a phenomenon attracts much attention. A focus on the topic would be a quick ticket out of a job. But paradoxically, they’ve been broad enquiries into the nature of innovation. What is it that drives innovation? Several hundred case studies confirm Schumpeter’s thesis. [Page 500] He further adds a long bibliographical note, an opportunity for new readings! I noticed authors I do not know [yet!], such as Frederic Scherer and Mark Perlman [3].

“Schumpeter regarded inequality of opportunity as unacceptable, but he also held that the results produced by inequality of effort were deserved. He found disparity inevitable and effective in stimulating innovation Schumpeter made also a very subtle point: that the benefits to society of important innovations and the lavish profits accruing to winning entrepreneurs must be measured against the total cost of time and money invested in the same industry by unsuccessful entrepreneurs as well. They receive no returns for their efforts, but their competitive pressure spurs the winners to victory – to the great benefit of society. That the winners receive all the rewards is a mere detail – and a temporary one at that, since the “competing-down” element eventually diminishes that profit, as imitators copy the innovation”. [See my post scriptum on bias]

Not until the late twentieth century, long after Schumpeter’s death, did the significance of his emphasis on innovation, entrepreneurship, business strategy, creative destruction, and ample credit as the wellsprings for economic growth become fully clear.

Post-Scriptum: McCraw’s provides also many and interesting comments about Schumpeter views on the academic world: “A scholar’s most creative years came between the ages of twenty and thirty. For this reason, he urged students and colleagues to avoid the distractions of marrying young. Instead, they should concentrate on their work – sifting their brains for fresh ideas.”

About universities [page 416]: “the layman thinks he knows what a professor is. However, this term denotes a group of people who differ widely in type, function, and mentality. There is the academic administrator; the university politician; the teacher in the sense of a man who imparts current knowledge; the teacher in the sense of a man who imparts distinctive doctrines or methods; the scholar in the sense implied by “learnedness”; the organizer of research; the research worker whose strong point I ideas; the research worker whose strong point is skillful technique, experimentation and its counterparts in the social sciences. And all these – and others – are very different chaps and hardly ever fully understand and appreciate one another. Yet it takes all of them to make a modern university and it takes recognition of all these types and the way they cooperate or fail to cooperate in order to understand what a university is and how it works. And he who insists on merging them into a unitary professorial type and leaves it at that will obliterate not only secondary details, but essentials.”

About mathematics: Schumpeter apparently was never at ease with mathematics even if on his own, he performed daily exercises in calculus and tried to master advanced techniques such as matrix algebra. “Whatever the other advantages math may have, it is certainly the purest of human pleasures.” [Page 470]

About scientific bias: During a famous conference in 1948, he accused his fellow professionals in blindness to their own subjective prejudices. In economic analysis, the outcome of “science” depended in large part on the social situation of the individual thinker. “Logic, mathematics, physics and so on deal with experience that is largely invariant to the observer’s social location and practically invariant to historical change: for capitalist and proletarian, a falling stone looks alike. The social sciences do not share this advantage. It is possible, or so it seems, to challenge their findings not only on all the grounds on which the propositions of all sciences may be challenged but also on the additional one that they cannot convey more than a writer’s class affiliations and that, without reference to such class affiliations, there is no room for the categories of true or false. He adds “Model building consists in picking out certain facts rather than others”. [Page 477]

During that conference, he said that Marx was wrong in the increasing misery of the masses, Keynes was wrong on stagnationism and a state of permanent inanition without government stimulus. He criticized the distaste for big business, where only monopolies should be fought. “Schumpeter had come to realize, that like all other analysts, he had his own vision and accompanying ideology. […] What should be done? Nothing! So long as intellectual freedom reigns, one economist’s skewed vision will be balanced by another’s. Ideological vision is a good thing which motivates the scholars to do their work. [Pages 479-483].

About social “sciences”: The relationship of economics to the other social sciences is a complex story. There has been an on-going de-emphasis of courses in economic history in favor of ever more refined mathematical techniques, which have also invaded sister disciplines such as political science, sociology and economic history. After a lifelong struggle, he concluded that exact economics can no more be achieved than exact history, because no human story with a foreordained plot can be anything but fiction. Because of the infinite mixture of influences on human behavior, no two real economic situations are ever exactly alike [Page 504].

Notes: [1] “Passion is considered as something which is not good, which is more or less bad: humankind should not have any passion. But passion is not exactly the right word for what I just designated here. According to me, human activity derives in general from individual interests, from special aims or, if one prefers, from selfish intents. I mean that mankind puts all the energy of its will and of its nature to serve its goals, while sacrificing any other ambition, or rather while sacrificing everything else. […] We shall say therefore that nothing was ever done without being supported by the interest of those who collaborated. This interest, we shall call it passion when, while pushing back all other interests or goals, the entire individuality projects itself on its objective with all the inner fibers of its will and concentrates on this goal with all its strengths and all its needs. With this meaning, we must say that nothing great in this world has ever been accomplished without passion.” Hegel in Reason in History.
[2] Analysis never yields more than a statement about the tendencies present in an observable pattern. And these never tell us what will happen, but what would happen if the continued to act as they have [Note 11 page 636].
[3] Here are some books mentioned by McCraw
– Entrepreneurship, Technological Innovation, and Economic Growth: Studies in the Schumpeterian Tradition (The International Schumpeter Society Series) Frederic M. Scherer (Editor), Mark Perlman (Editor), 1992
– New Perspectives on Economic Growth and Technological Innovation. Frederic M. Scherer, 1999
– The Growth of the Firm: The Legacy of Edith Penrose by Christos Pitelis (with a chapter on Penrose and Joseph Schumpeter on innovation, profits, and growth).

The Startup Factories: The rise of accelerator programmes

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The Startup Factories: The rise of accelerator programmes is certainly the best analysis I read on the new trend (the new hype?) in start-up support. “Early evidence suggests they have a positive impact on founders, helping them learn rapidly, create powerful networks and become better entrepreneurs. Although incubators are sometimes stigmatised as providing ‘life support’ to companies, these accelerator programmes are notable for the high quality of both mentors and startup teams they work with and the value they add to companies.” [Page 3]

You may not know what are accelerators, so here is what it is about: a programme that gathers a limited number of project owners with
• An application process that is open to all, yet highly competitive.
• Provision of pre-seed investment, usually in exchange for equity (a few $10k for 5-10%)
• A focus on small teams not individual founders.
• Time-limited support comprising programmed events and intensive mentoring (usually 3 months)
• Cohorts or ‘classes’ of startups rather than individual companies (from 10 at seedcamp to 60 at Y Combinator per class)

In addition, the time-limited element puts pressure on entrepreneurs who also want to look good compared to their peers; a demo day / pitch sessions further pressure entrepreneurs to deliver prototypes and visions. Obviously founders, business angels, VCs and even corporates benefit from this new source of deal flow.

Most famous programmes are Y Combinator, Techstars, Seedcamp and Startupbootcamp.

So why have these programmes emerged. The rationals are the following:
– they provide new solutions to innovation [page 24]: “The problem that accelerators solve for venture capital funds is that they create new deal-flow. A number of investors told us that this was the compelling reason for supporting Seedcamp in London in the early days. There simply weren’t enough young founders and companies having any contact with the world of investment. The venture capital community has an interest in growing the overall number of good companies. If they can attract talented people to think about setting up startups rather than going to work for large organisations, that could be good news for the whole sector.”
– they provide access to quality mentors and investors to founders who receive an early validation from the selection from the accelerator process.
– at least in the web and mobile world, start-ups costs are shrinking,
– again in these worlds, it is easier to reach new customers and there are easier routes to revenues
– the concepts around lean start-ups (Eric Ries, Steve Blank) make product development more iterative thanks to efficient interactions with early adopters.

Now the accelerators are not proven models. They are first too young and second, they have been criticized already for the following reasons [page 32]:
– They only build relatively small companies.
– They divert talent from other high-growth startups.
– Good companies still fail after accelerator programmes.
– They exploit startup founders.
– They attract companies that are already struggling.
– They’re helping to create a bubble.
– They’re just ‘startup schools’.

In conclusion: they are interesting for the connections and filtering they provide. They are also of value for the education element including an open culture. But the business model is not validated and although they make sense for software, web and mobile apps, the model is less clear for other technology segments. If you want to know more, you should read this very good report 🙂

The challenge(s) of innovation

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Entreprise Romande asked me to write a short article about Innovation. It was published on March 2, here is my quick (and dirty) translation

Two famous quotes are worth recalling: in 1899, Charles Duel proposed to close the patent office he headed the U.S. stating that “everything that has to be invented has already been.” Less than a century later, Bill Gates stated with conviction that “a computer did not need the equivalent of more than a memory disk.”If these two predictions show that the difficulties of innovation are linked to the difficulty in predicting the future too far, they are unfortunately only legends! It remains no less true that innovators face many obstacles, the first of them being the permanent uncertainty in which swims the one who wants to offer something new.

The difficulties do not stop at the door of the future. In a famous book, Professor Clayton Christensen explains the dilemma of large companies toward innovation. Christensen uses the term Great and not Large because he speaks of the best managed corporations: by being attentive to their customers, they constantly seek to serve them better by improving the constant changes in the quality of their products and services. In doing so, it is extremely difficult to see coming revolutions, all the more difficult to identify that they often start very humbly, with products of inferior quality and very incomplete. Christensen cites numerous examples, but simply note that Microsoft almost missed the turn to a web that did not generate income, Nokia has missed the market for smart phones and I remind you this famous quote by Henry Ford: “If I had asked consumers what they wanted, they would have said a faster horse.”

Any smart player quickly learns from those mistakes. Christensen, who has become an icon in innovation, explains that the major players must simply create spin-offs away from customers and development centers. Despite some initial mistakes, Nespresso has become a flagship product of Nestle. Perhaps less known is the fact that Cisco has become a major player in the world of servers thanks to a start-up it had funded in its infancy and then acquired. The lessons were digested; Christensen and other experts today have become popes of innovation with more refined models

The spin-off concept is nowadays obvious, and good news, there is no need for significant resources, at least initially. Experts advocate rapid iterations in constant contact with potential customers, from the start of a project. It was also understood that one must first find customers willing to test visionary products, even promising but incomplete. Adjustments can be made continuously and avoid unnecessary investments in directions that the market would refuse later. Finally, the transition for visionary customers to more conservative customers will require a specific strategy and often a new team for product development. Systematic procedures that would ensure the success of future innovations? Unfortunately not. In a recent interview to the Finnish press, Steve Blank who believed he had developed a scientific theory of innovation said, ” Over the last decade we assumed that once we found repeatable methodologies (Agile and Customer Development, Business Model Design) to build early stage ventures, entrepreneurship would become a “science,” and anyone could do it. I’m beginning to suspect this assumption may be wrong. It’s not that the tools are wrong. Where I think we have gone wrong is the belief that anyone can use these tools equally well.” In the same way that word processing has never replaced a writer, a thoughtful innovation process will not guarantee success. Blank added that ” until we truly understand how to teach creativity, their numbers are limited. Not everyone is an artist, after all.”

You have to go global, and right from the start

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I do not make the front page so often so it was fun to be on the EPFL one this morning. Forgetting about ego, I talked about my usual obsession, lack of growth of European start-ups. You may read the interview by clicking on the picture or reading it below.

More seriously maybe, you can read a similar analysis by Oseo, the French innovation agency which published “A look at 10 years of creation of innovative companies in France”. the study is in French and looked at 5’500 start-ups created between 1998 and 2007.

What the study says is that 85% of the company are alive after 5 years [against 50% in the USA; I already addressed the topic in Survival or failure – which success?], they have less than 10 employees, and the one important reason of this situation is the difficulty in building relational networks. Nothing new probably and nothing new in the interview below… except maybe that half of the French start-ups have an international strategy right from teh start and 30% have a foreign-only market!

“You have to go global, and right from the start.”

10.02.12 – How do you go about setting up a business? Hervé Lebret, start-up specialist and head of the Innogrant program at EPFL, answers a few questions. “When launching a start-up, you must think globally right from the start”, says Hervé Lebret, head of the Innogrant program, a support tool for entrepreneurs coming from academia. He believes that both the Swiss and Europeans hesitate too much when creating start-ups. As the person responsible for writing a monthly column dedicated to start-ups on the new EPFL website, starting next Monday, he was more than happy to be interviewed.

Does the current economic situation make it harder to find funding?
This may come as a surprise, but I don’t think that things have really changed. It’s hard to find capital, as it has always been, but not impossible. It depends on the business area concerned, but I would even go so far as to say that there is more capital now than there was 15 years ago. Businesses such as Scala or Aleva, with origins in EPFL labs, have raised significant sums from venture capitalists in the last few years, just as Aïmago, Lemoptix or Attolight which secured 1 to 2 million francs from Business Angels.

Are some areas more favorable than others?
It makes it easier if the know-how is present locally, as is the case here with biomeds or nanotechnologies. Cleantech businesses are starting to lose the favor which they enjoyed until recently. But I’m convinced that ideas can come out of anywhere and get a good reception, as long as their communication is efficient. Incidentally, we shouldn’t pay so much attention to the needs of the market. These don’t suffice to predict which start-up will be the next success-story. Promising areas have needs, but no immediate solutions, and when the start-ups enter the market the first needs have often already evolved and are moving in another direction.

How can one ensure a good launch for their start-up?
Only one start-up out of ten succeeds in raising venture capital like Aleva or Biocartis, and grows to a size of 50 to 100 employees. Then out of these, 10 percent will enjoy success over ten years, like Endoart or Swissquote, which employs over 400 people. The main goal should not be survival. On the contrary, these start-ups sometimes last too long. Some 90 percent of them are still there five years on, but they haven’t grown. In the United States there is a higher rate of renewal: only 50 percent of start-ups are still in existence after this same five-year-period. The problem lies in the conservative stance of Europeans, who are wary of quick growth. I think we should bring students’ attention to this aspect very early, starting in high school. You cannot just turn yourself into a businessperson. We need to encourage children and young people to explore and stop stigmatizing failure, which we still do now in Switzerland. We plan to show a fascinating documentary soon on the topic of students who are eager and interested in creating businesses – it’s called Something Ventured.

How do you carve out a place for yourself?
It’s fairly easy, if you have a good idea, to obtain up to 500,000 francs from public funds or philanthropic organizations, which allows the business to survive one or two years. These contacts also provide free marketing, which can in turn help to find initial business angels and make an initial million francs. The limits come from the young businessperson’s excessive humility, from their self-limitations. In order to succeed, you must be a salesman and somewhat extrovert, or team up with someone who is. Network is essential in effective positioning of the company.

How important are start-ups for the economic fabric of Switzerland?
Some forty start-ups are created each year in the Canton of Vaud, fifteen of which come from the academic world. They play an important role in the future of the Canton, of Switzerland and even Europe. Logitech or Swissquote, for instance, have created many jobs. However, Swiss start-ups in general struggle to grow beyond five or six employees. The biggest problem is well known: entrepreneurs lack risk-taking instincts and therefore struggle to grow their businesses. They prefer to do it in stages. In the United States an “all or nothing” policy prevails, and results in a higher success rate. Facebook, which has just declared its entry on the stock exchange, already employs 3000 people. Individuals who have good ideas go straight ahead and are not afraid of failure. They aim directly for global markets. The biggest mistake is to aim first and foremost for the Swiss market. One should aim for the world market straight away by adopting a global perspective and not being afraid of passing off as arrogant is essential.

Author: Cécilia Carron – Source: EPFL Mediacom

The Dark Side of Innovation

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If you read the Englsih version of my blog, you probably do not know the excellent, brilliant Philippe Meyer and his Chronicles on France Culture. He is usually funny, but when he talked last Friday about innovation (which does not happen often), it was tough to smile. You can listen to his mp3 file here.

Philippe Meyer is in fact refering to an article from the New York Times: How the U.S. Lost Out on iPhone Work. Meyer mentions the famous Titan Diner, where President Obama invited some of the Silicon Valley personalities. He talks about the price we pay to have our electronic gadgets, the price paid by the Chinese workers at Foxconn or by the American middle-class and its high level of unemployment.

I do not have any (good) answer to the question. But it is sometimes good to think about the dark side of innovation and economy in general. I am currently reading a biography of Schumpeter. Already, more than a hundred years ago, the problem was addressed by Keynes, Marx and the free-market economists. Have we make any progress? Is the situation worse?

Andy Grove had the same concern in 2010 when he wrote How America Can Create Jobs for Business Week. The Americans are nationalistic, Intel was known to produce almost exclusively in the USA and now Grove is worried. Again I do not have an answer.

Innovation is not about small or large, it’s about fast.

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The debate is recurrent and in my last post, I was questioned about my fascination for start-ups and Silicon Valley. In a way this is related, I will come back on this at the end. Two recent articles nearly surprised me. The first one has a famous author, Clayton Christensen. The Empires Strike Back – How Xerox and other large corporations are harnessing the force of disruptive innovation was published in the latest issue of the MIT Tech Review.

Here are short extracts: “It has been a long time since anyone considered Xerox an innovation powerhouse. On the contrary, Xerox typically serves as a cautionary tale of opportunity lost: many obituaries of Steve Jobs described how his fateful visit to the Xerox Palo Alto Research Center in 1979 inspired many of the breakthroughs that Apple built into its Macintosh computer. Back then, Xerox dominated the photocopier market and was understandably focused on improving and sustaining its high-margin products. The company’s headquarters became the place where inventions in its Silicon Valley lab went to die. Inevitably, simpler and cheaper copiers from Canon and other rivals cut down Xerox in its core market. It is a classic story of the “innovator’s dilemma.” […] But now Xerox is turning things around […] In the past, Xerox’s success would have been an anomaly. Less than a decade ago, when we were finishing the book The Innovator’s Solution we highlighted the fact that disruptive innovations are typically introduced by startups, the rebel forces in the business universe. […] Throughout the 1980s and 1990s, only about 25 percent of disruptive innovations we tracked in our database came from such incumbents, with the rest coming from startups. But during the 2000s, 35 percent of disruptions were launched by incumbents. In other words, the battle seems to be swinging in favor of the Empire, as the following examples confirm. The author mentions examples such as GE, Tesla competing with GM, Dow and Microsoft in the article.

The second article comes from The Ecomist and is entitled “Why large firms are often more inventive than small ones.” Let me quote it a little more extensively: “Joseph Schumpeter […] argued both sides of the case. In 1909 he said that small companies were more inventive. In 1942 he reversed himself. Big firms have more incentive to invest in new products, he decided, because they can sell them to more people and reap greater rewards more quickly. In a competitive market, inventions are quickly imitated, so a small inventor’s investment often fails to pay off. […] These days the second Schumpeter is out of fashion: people assume that little start-ups are creative and big firms are slow and bureaucratic. But that is a gross oversimplification, says Michael Mandel of the Progressive Policy Institute, a think-tank. In a new report on “scale and innovation”, he concludes that today’s economy favours big companies over small ones. Big is back, as this newspaper has argued. And big is clever, for three reasons.” The arguments are that 1-ecosystems are big, 2-markets are globals and 3-problems to be solved on a large scale. This is not for small companies. “He is right that the old “small is innovative” argument is looking dated. Several of the champions of the new economy are firms that were once hailed as plucky little start-ups but have long since grown huge, such as Apple, Google and Facebook. […] Big companies have a big advantage in recruiting today’s most valuable resource: talent. (Graduates have debts, and many prefer the certainty of a salary to the lottery of stock in a start-up.) Large firms are getting better at avoiding bureaucratic stagnation: they are flattening their hierarchies and opening themselves up to ideas from elsewhere. Procter & Gamble, a consumer-goods giant, gets most of its ideas from outside its walls. Sir George Buckley, the boss of 3M, a big firm with a 109-year history of innovation, argues that companies like his can combine the virtues of creativity and scale.”

Well I was not surprised for long. The debate is not about small or large. Let me explain by quoting my book again and more specifically the section Small is not Beautiful [page 111] “There is one misunderstanding concerning start-ups. Because they would be young, recent companies, and because many macroeconomic analyses focus on the jobs generated by small structures, there is a tendency to consider with high regard that “small is beautiful” as if it were a motto for start-ups. The ambition of a start-up is not to stay modest. On the contrary, the successful companies have become large, sometimes dinosaurs. In early 2007, Intel had 94’000 employees, Oracle 56’000, Cisco 49’000 and Sun 38’000. These “start-ups” have become multinational companies. […] The San Jose Mercury News, the daily newspaper at the heart of Silicon Valley, publishes once a year for example the list of the 150 biggest companies. The simple comparison of the list between 1997 and 2004 shows that among the top 50 in 2004, 12 were not part of the first 150 in 1997. Zhang also analyzed this astonishing dynamics by comparing the 40 biggest high-tech Silicon Valley companies in 1982 and in 2002 as provided by Dun & Bradstreet. Twenty of the 1982 companies did not exist anymore in 2002 and twenty one of the 2002 companies had not been created in 1982. These dynamics of birth and death are known and positively acknowledged.”

It is exactly what the Economist article explains: “However, there are two objections to Mr Mandel’s argument. The first is that, although big companies often excel at incremental innovation (ie, adding more bells and whistles to existing products), they are less comfortable with disruptive innovation—the kind that changes the rules of the game. The big companies that the original Schumpeter celebrated often buried new ideas that threatened established business lines, as AT&T did with automatic dialling. Mr Mandel says it will take big companies to solve America’s most pressing problems in health care and education. But sometimes the best ideas start small, spread widely and then transform entire systems. Facebook began as a way for students at a single university to keep in touch. Now it has 800m users. The second is that what matters is not so much whether companies are big or small, but whether they grow. Progress tends to come from high-growth companies. The best ones can take a good idea and use it to transform themselves from embryos into giants in a few years, as Amazon and Google have. Such high-growth firms create a lot of jobs: in America just 1% of companies generate roughly 40% of new jobs. Let small firms grow big The key to promoting innovation (and productivity in general) lies in allowing vigorous new companies to grow big, and inefficient old ones to die. On that, Schumpeter never changed his mind.”

I say it again, there is a difference between start-up and SME. This does not fully answer Christensen argument about the Empire striking back. Well it means large companies have smart managers who learnt from the mistakes of the past. But he also implicitely say that 65% of disruptive innovations come from new comers, not incumbents. Gazelles still have a bright future.

Patents inhibit innovation, let’s delete them!

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My first post for 2012 is a translation of an interview I gave to French magazine La Recherche. It was published last December and you can have an electronic version of the French version here or a pdf document by clicking on the cover page below. It is followed by my own translation. Now I should say that I was a little surprised by the title which I had not expected. I was more thinking in something like “start-ups are the forgotten children of innovation!” The title focused on my cautiousness about IP and patents in particular. It is certainly too strong, but that is what titles are made for…

Patents inhibit innovation, let’s delete them!

Innovation is a matter of culture. An admirer of Silicon Valley, which he has known for twenty years, Hervé Lebret calls for Europe to be inspired by the dynamism and creativity of its start-ups. But is it good to take everything in this model?

La Recherche: A report of the Commission of the European Union stresses that the EU is more increasingly lagging behind the U.S. in terms innovation with a comparable level of research [1]. How do you explain that?
Hervé Lebret: The main reason for this innovation gap in Europe is cultural. I was always struck by how much the students are interested in the applications of research in the U. S., while in Europe we think more in terms of knowledge. And then there are the role models of young entrepreneurs who have experienced success. It is striking in Silicon Valley: Bill Gates was 20 when he founded Microsoft, Steve Jobs 21 when he founded Apple, Larry Page and Sergey Brin, 25 when they created Google. They are powerful models to which a young student can identify to.
La Recherche: The same report argues that another reason for the gap is partly related to differences the patent system which would be more complex and more expensive in Europe. What do you think?
HL: I am skeptical about legislation or rules in general as an explanation in the differences. It is in the people’s head that things happen. In the U.S., they want to try; they have no fear of failure. I am not convinced that we are more innovative because we would have more patents. Look at Switzerland, which has the largest number of patents per capita: this country does not create many start-ups. Incentives and policies are only working if there is a favorable cultural terrain.
La Recherche: But aren’t patents the key for an innovative company, whose value often relies on its intellectual property?
HL: Software is not patentable, and this did not prevent Microsoft to be successful. With the risk that you see me as iconoclastic, I think that patents are an obstacle to innovation. I wonder whether we should not remove them, except perhaps in specific areas, such as biotechnology, where a patent corresponds more specifically to a manufacturing process of a molecule.
But in most industrial fields, you need to own thousands of patents to protect the innovation which is commercialized. The maintenance of this portfolio of patents is extremely expensive and that money could be better used in research and development. Whereas in the past the patent favored the inventor, it has become a defensive weapon to protect dominant positions. Look at the war between Apple and Google: the first alleges that the second has developed its operating system Android by violating certain of its patents. This goes against the theory that the traditional patent protection the weak inventor, who can develop an idea during years without fear of being stolen.
Does the weakness of venture capital, which would deprive young innovative companies from the capital needed for their development, explain some of the shortcomings of innovation in Europe?
H.L. Contrary to general belief, there has always been venture capital in Europe, especially in France. This is not a quantitative but qualitative problem: venture capital in Europe is run by people from finance or consulting, not entrepreneurs.
Again, this is a cultural difference. But this is changing. Former entrepreneurs have recently begun to create venture capital funds or to become business angels. In France, I think of Bernard Liautaud, founder of software company Business Objects, or Xavier Niel, founder of Free, the phone operator, who both joined venture capital firms. The founders of Skype have created Atomico, their own funds.
You do not hide your admiration for Silicon Valley. If the secret of its strength is, as you support, cultural, how can we be inspired in Europe?
H.L. We can draw on customs, practices, an important one being cooperation. In Silicon Valley, curiosity is shared. People know that the exchange of ideas is successful, and are not afraid of ideas being robbed. The two Google founders were PhD students in two different laboratories at Stanford University, but they have talked! It is not unusual o talk to your competitor to solve your own problems: in the 1960s, the major industry semiconductor players in California met at the Wagon Wheel bar in Mountain View to discuss their work. In Europe, many laboratories, academic and probably more private, have a culture of secrecy, they fear the exchange.
What do you put in place at the Ecole Polytechnique Federale de Lausanne (EPFL), where you teach, to develop a taste for innovation and entrepreneurship among students?
H.L. I strongly believe in the role of exemplary models. So I organize conferences with successful entrepreneurs who share their experience. This shows students that these are passionate people, who are not afraid to try, even if just one in a thousand will be successful. These models inspire. But inspiration is nothing without resources. Hence the program “Innogrants”: a salary of one year for a young researcher who is released from its research and teaching in order to concentrate on her or his innovative projects. If it works, it is hoped that the private sector will further invest. Fifty Innogrants were awarded in five years. Half of them have led to the creation of companies in life sciences, micro-or nano or information technology. And five of them have found private investors.
It nevertheless remains modest …
H.L. Yes, we must remain humble: all we can do is create a breeding ground for the creation of innovative companies, as we do with Innogrants. In total, in the last fifteen years, EPFL innovators have created about a dozen start-ups per year. Fifteen have raised venture capital, 300 million Euros in total. Four or five have been sold to industry groups, sometimes these were nice exits. Endoart, founded in 1998 at EPFL specialized in the production of remotely controllable medical implants; it has been sold nine years later for 100 million dollars to Allergan! But we feel there is a kind of modesty, self-restraint of European entrepreneurs compared to their American counterparts.
A former researcher at EPFL criticized the leadership of the university of “copy as closely as possible the American university model” [2]. Do you think everything is good in the American model?
H.L. These criticisms focus on science, not on innovation. The competitive standing of researchers, the instability of the statutes is not a good idea in research. It is very important to let the imagination speak. There is a danger to keep people under permanent pressure. But in terms of innovation, the U.S. model works.
You estimate that at most one in a thousand start-ups meets success. Isn’t this a huge waste?
H.L. We should not measure everything in terms of money or performance. What counts is creativity. For me, the Silicon Valley is the new Athens. As Greece, it is a culture: what this region brought in fifty years is fabulous. Digital technologies that were invented forever changed the way we inform, we cultivate and entertain ourselves. This is probably why the death of Steve Jobs, who was an iconic character, had so many repercussions in October. Furthermore, if one thinks in macroeconomic terms, I do not think that the American model is based on waste only. In the U.S., venture capital weighs about twenty billion dollars a year. For twenty years, 400 billion have been invested. And one company, Google, is now worth $200B. Finally, the creation of economic value is similar to the money invested. It is a collective success, even if it is based on thousands of individual failures, which are often very hard humanely.

The entrepreneur should be at the center of innovation policy

Isn’t the $200 billion market capitalization of Google exaggerated when compared to the actual value of the company?
H.L. The world of venture capital has unfortunately become a financial asset like any other. It is no longer a world of former entrepreneurs who pursue their business while investing in those of others. There is too much money, too much speculation in the U.S. venture capital. But I remember that the start-ups appeared before the Nasdaq, the stock market where shares of high technology companies are traded. Silicon Valley began in the 1960s and 1970s in the context of the counter-culture in California. Steve Jobs did not hesitate to say that some of his creativity came from drugs when he was young. The growing role of finance in the economy only started in the 1980s. Originally, the financiers were the patrons of great artists. That said, I think the current trend of large groups limiting their spending in research and development is catastrophic. Shareholders want 15% return and push to cut spending on research. Good start-up can only emerge if there is also good private research.
Do we see a slowing of the technological innovation?
H.L. I am indeed concerned about the lack of success in current innovation: the 1970s were marked by the transistor, the 1980s by the personal computer; the 1990s by the networks. But in the 2000s, I see nothing new. The Web 2.0 is not a technological revolution, it is a consolidation. More generally, biotechnology was rather disappointing; there is no revolution in energy, chemistry. It is not clear that nanotechnologies are really promising technological breakthroughs. I fear that the 2000s did not create start-ups which are equivalent to Intel in the 1960s, Apple, Microsoft or Genentech in the 1970s, Cisco in the 1980s, or Google in the 1990s. There is Facebook, but this company does not rely on high technology innovation. That said, there has always been a general pessimism about the future of innovation, so I hope to be wrong!
You mention companies in information technology or biotechnology. Is this model of start-up transferable to capital-intensive areas, and where there are already major players, such as aerospace, automotive, chemicals?
H.L. The established players are not necessarily the most innovative. Clayton Christensen from Harvard Business School, showed in 1997 that an established company is great at improving existing products [3]. It is innovation by evolution, not revolution. Renault can invent the electric car, but not a new mode of transportation. Besides, the idea of the minivan, which was then copied, did not come from internal R&D at Renault, but from the company Matra, who did not have the same experience in automotive, which made it more creative. It is also for this reason that the big companies, especially pharmaceuticals, outsource their innovation: they prefer to leave the start-up take the risks, and then buy them. Even an old startup such as Cisco replaces the term “research and development” by “acquisition and development”.
Why do you insist so much on start-ups? An academic institution can also license its patents to the industry, or form mixed private / public laboratories…
H.L. The basic problem is towards whom an innovation policy is directed. My belief is that the entrepreneur must be central. This is not what is done in France: the clusters are clusters of established companies, not tools to promote creativity and entrepreneurship. I insist on start-ups because I think they are the forgotten piece of innovation policies. Of course there is innovation in large groups. But I wonder if they can do disruptive innovative. They can set a goal – the flat screen, the smart phone, or, today, the electric car – that will come out in twenty years. But can they do something entirely new, as did Google? Or Genentech, which revolutionized the manufacture of drugs using genetic engineering techniques? I believe that only start-ups are able to do so. Christensen said if you want to make a major innovation, create a branch and place it as far as possible of your research center as the worst enemy of innovation in a company is conservatism. Innovation is the highest in small teams: this is what happens in the start-up.

■■ Interview by Nicolas Chevassus-au-Louis

[1] European commission, Innovation Union Competitiveness Report 2011, http://ec.europa.eu/research/innovation-union.
[2] Libero Zuppiroli, La Bulle universitaire. Faut-il poursuivre le rêve américain ? Éditions d’en bas, 2010.
[3] Clayton Christensen, The Innovator’s Dilemma, Harper’s, 1997.

Hervé Lebret. A graduate of Ecole Polytechnique and Stanford University, with a Ph.D. in electronics, he worked, after a few years as a researcher, as a venture capitalist, in Geneva from 1997 to 2004. Since then he has been teaching management of technology and manages a seed fund at the Ecole Polytechnique Federale de Lausanne.

> Hervé Lebret, Start-up. What we may still learn from Silicon Valley Create Space, 2007. www.startup-book.com
> www.oecd.org/sti/scoreboard An oecd study on patents
> http://vpiv.epfl.ch/innogrants The site of the Innogrants at EPFL.