Category Archives: Silicon Valley and Europe

Boulevard of Broken Dreams

A colleague of mine (thanks Jean-Jacques) recently mentioned to me this book by Josh Lerner, which full title is Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do About It . I was all the more interested that Lerner is the author of many academic papers on high-tech entrepreneurship, and particularly of one about serial entrepreneurs: “Performance Persistence in Entrepreneurship” [pdf format here] with Paul Gompers, Anna Kovner, and David Scharfstein, Journal of Financial Economics, 62 (2007), 731-764. I will come back in the future on this topic which I am currently studying.

So what should we do about the public efforts is what Lerner is trying to help us with and his answer shows how challenging the topic is. What is beautiful about the author (my personal point of view) is that he likes history (just like me). Just like Steve Jobs! Just read again what I posted about Jobs on mentors; “You can’t really understand what is going on now unless you understand what came before”.

Lerner’s initial chapter is “A Look Backwards” He shows how entrepreneurs and investors benefited and suffered from each other in the 70s and 80s, including the excess of speculative bubbles, the PC burst of the 80s for example. He also shows how important public support was in the very early days through the funding of research (mostly the cold war militaries) and the legal actions to ease venture capital (SBIRs, Erisa Acts) so that he does not really agree with Rodgers (founder of Cypress) who wanted government out of Silicon Valley (page 32) so that he claims that “The Public sector did play a key role in shaping the evolution of Silicon Valley” (page 35).

Then, in the following chapters he shows how complex it is to find facts: “consistent information on venture-backed firms that were acquired or went out of business doesn’t exist” (page 59) which means that quantitative analysis is rare. And remember he is a respected academic, so he knows! What he tried to do then, is to show some of the obvious mistakes: incompetence in allocating public resources (page 73), capture, that is use of subsidies by the wrong groups (page 80), by “organizations that are mandated to help entrepreneurs” (page 83). “Seven of the incubators gave less than 50% of funding in cash to incubated firms” (just one example from Australia, page 84) or the SBIR program which has exhausted its usefulness (page 85).

So his advice is:
– enhancing the entrepreneurial culture (page 90) [through the right laws, the access to technologies, tax incentives and training],
– increasing the venture market’s attractiveness (page 100) [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].

Indeed, his introduction (pages 12 and following ones) summarized it all: 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. Then it is my personal conclusion that such favorable conditions will be useful if entrepreneurs use them intelligently. So the reason why all this fails has many roots…

I cannot finish this post without comparing it to my book. It is indeed very similar in its conclusions with slightly different facts and figures. So you would learn complementary and consistent things by reading both! My thesis is we need an entrepreneurial culture and access to people from Silicon Valley who have the experience. Everything else is necessary but not sufficient.

There will never be another Silicon Valley

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Well who am I to predict the future? In fact I do not know but I really doubt it. Famous bloggers have mentioned the topic again recently. In Techcrunch it was Can Russia Build A Silicon Valley? by Vivek Wadhwa. And in the Equity Kicker, it was Building an ecosystem to rival Silicon Valley by Nic Brisbourne. I reacted to both in the following way:

What a topic! Clearly something which has been around for… at least 35 years (I mean how to replicate SV). The fact that we still discuss it shows how complex it is. It has been my main concern in the last years and for the beauty of the debate (that’s what blogs are about, right?) let me play the devil’s advocate fully. At an extreme, I do not think there will ever be another Silicon Valley. For example, Kenney claims in his book on SV it requires 5 basic ingredients: universities of high caliber (Stanford and Berkeley in SV), a strong investor base, service providers, high-tech professionals (who accept to leave their big companies for start-ups so from Intel, Cisco, Apple, MSFT, even Google now to the next wave) and last but not least an entrepreneurial culture. All this is not easy to gather. But even worse, SV was probably an accident, a monster which was never successfully replicated. Saxenian showed in Regional Advantage how even the Boston area failed and the fact that Paul Graham moved ycombinator fully out of Boston to SV is just another sign. In Europe, Sophia Antipolis was a first experience … in 1972 so? So you need a rare combination of ingredients in the recipe and hope the oven is at the right temperature for a long, long time. Now I am playing devil’s advocate so things are not so bad. As a positive reaction, let me add my own analysis: I am not sure governments are good at innovation, they are good at stimulating research. The US federal govt has put billions through DARPA, NIH, DOE, etc, and this obviously helped Stanford, Berkeley to be the best universities worldwide (see the rankings) and the Internet to be created. Long term investment in infrastructure is what gvts are good at (education, research, transport…) Then, yes, bridges with SV are critical. It is exactly how Israel, Taiwan, then India and China have been successful with their diasporas. Countries should invite back the experienced migrants. When he has time, Brin should help Russia or Levchin Ukraine, or even Grove Hungary etc… I am less sure tax credits, admin, legal tools have been so useful in the 50’s, 60’s and 70’s when SV was its in early days. As a conclusion, it is and will remain for a while a great topic.

Of course, my reaction was not as important as the source of the posts: Russia wants to be more innovative and commissioned a report to assess experiments of innovation ecosystems. The result is the following report: Yaroslavl Roadmap 10-15-20 (pdf format.)

There isn’t anything really new in this report, at least for innovation experts. But it is a very good synthesis of what the USA, Israel, Finland, India, and Taiwan have tried, be successful in, but also in what they failed. The historical summaries are great and full of good lessons. I had the feeling the authors put too much emphasis on infrastructure vs. culture. It is my own bias again! They mention culture a lot, but they may be aware also that it’s the most difficult thing to create… If you like the topic, you should certainly download and read the pdf, and build your own opinion.

What is the mentor role?

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I recently read Fred Wilson’s post on The CEO Mentor and Coach. As usual his post and the high number of comments are interesting. I would just like to add one of the best descriptions of a mentor I have read. It is what Robert Noyce represented for Steve Jobs. You can find the full account in the book The Man Behind the Microchip by Leslie Berlin or in a shorter account she gave for the Computer History Museum (pdf file – 6MB).

So here is a short account of Noyce’s mentoring!

“Bob Noyce took me under his wing. I was young, in my twenties. He was in his early fifties. He tried to give me the lay of the land, give me a perspective that I could only partially understand. You can’t really understand what is going on now unless you understand what came before”

“When Noyce left daily management at Intel in 1975, he turned his attention to the next generation of high-tech entrepreneurs. This is how he met Jobs.” Noyce was not attracted initially by the hippie style, “but over time, Noyce’s feelings about Apple began to change. This was due, in no small measure, to Steve Jobs, who deliberately sought out Noyce as a mentor. (Jobs also asked Jerry Sanders and Andy Grove if he could take them to lunch every quarter and “pick your brain”). “Steve would regularly appear at our house on his motorcycle” Bowers [Noyce’s wife] recalls “Soon he and Bob were disappearing into the basement, talking about projects.”

Noyce answered Jobs’ phone calls – which invariably began with “I’ve been thinking about what you said” or “I have an idea” – even when they came at midnight. At some point he confided to Bowers, “If he calls late again, I’m going to kill him,” but still he answered the phone.

Jobs agrees that his relationship was almost more filial than professional. “The things I remember about Bob are the personal things. I remember him teaching me how to ski better. And he was very interested in – fascinated by – the personal computer, and we talked a lot about that.

Super Angels

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I just come back from vacation and all of a sudden I discover that the world has changed! Before my break you had the business angels investing in the early rounds (up to $1M) and the VCs who would seldom invest in rounds smaller than $1-2M. Now the frontier is blurred: you have the seed VCs (Index seed being a recent one) and the Super Angels fighting for the same deals.

If you want to know more, you will find plenty of posts and news such as:

VCs And Super Angels: The War For The Entrepreneur from Techcrunch.

Why Micro-VCs Are So Damn Friendly from Xconomy.

‘Super Angels’ Alight from the WSJ.

Micro VCs Are all BFFs… Forever? by David Beisel.

All this is not so new as Business Week mentioned the phenomenon in May 2009: ‘Super Angels’ Shake Up Venture Capital.

And I should not forget Fred Destin’s blog where i first read about all this: Super Angels, Lean VCs, Proto-Incubators, whatever. Focus on social contract. He also published an article about European SuperAngels.

So what is new here? Well I am not sure, I may just be so much remote that I have missed a big trend. Or is it just that the VC and high-tech world is such in a crisis that it is looking for new models. They were always big angels. Arthur Rock for Intel and Apple, Andy Bechtolsheim for Google or Magma, and Sequoia did the seed round for Yahoo, so what?

Well the VCs have really big funds up to a billion so investing in small rounds is tough but they have understood and move back to seed. Entrepreneurs think angels are nicer, but check again my posts on the Tesla story and Elon Musk.

Finally there is a strong argument that Internet and software companies may not need as much capital as start-ups in the past and another argument that entrepreneurs just look to sell their company to Google for $25M which is not so bad, so they might not need VCs anymore. But then, Silicon Valley faces the risk of not creating new Apples or Googles… So it is probably just “back to the future”…

Why Silicon Valley kicks Europe’s butt

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Listen to Loic Lemeur’s views on why “Why Silicon Valley kicks Europe’s butt”. Nothing special if you read regularly my blog but said by someone who has visibility, credibility and experience on both sides of the ocean.

Check his arguments:
– the main reason is how much time we take for lunch in Silicon Valley (i.e. feeling of urgency)
– all in one place (i.e. critical mass)
– like a campus (i.e. easy connections, young, sunny)
– business happens 24/7 even when you don’t expect it (i.e. obsession)
– seed funding and VCs (i.e. money)
– flexible (i.e. changes happen fast)
– “how can I help” attitude (i.e. open and pragmatic)
– easy to get an appointemnet (i.e. open again)
– people trust by default (i.e. open mindedness)
– diversity (i.e. yes diversity works in the US)
– press and bloggers (i.e. tech friendly culture)
– Europeans begin locally (i.e. not globally)
– too much copy / paste in Europe (i.e. no real innovations?)
– Europeans hire local (i.e. challenging to go global)
– Think in English (i.e. another challenge)
– you guys can fix it (i.e. self-confidence and confidence in others – empowerment, remember class A people hire class A+ people)
– aim at being a world leader (i.e. ambition)
– focus on execution, ideas do not matter (i.e. action oriented)
– gather a community and iterate (i.e. learn by doing, by trials and errors)
– believe in yourself (i.e. …)

Well even if this may be obvious for some of you, I still had to fight against people who disagree about this (check my previous post!)

yYou can compare all this to my summary slide when I talk about Silicon Valley. No frustration in all this as we all have to say these things endlessly, but sometimes, still too often!

Why Silicon Valley kicks Europe's butt

High growth and profits

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Before I talk about the topic I announce in this post, let me mention briefly my coming back in the research world! I published a paper at the BCERC Babson Conference on Stanford high-tech start-ups. You may wish to go through the slides below.

I promise to come back to growth and profits and indeed there is a link to my own paper so be a little patient. But I need to mention one other thing before! The two keynote speakers were great.

First Ernesto Bertarelli, former CEO of Sereno and winner (and loser) of the America’s Cup with Alinghi gave a great 20-minute talk on entrepreneurship. Let me just quote him:
– in entrepreneurship, you need passion, fire and love, these are critical,
– you need a team, you can not win alone so you need to accept to hire better people than yourself and you need to accept change,
– you need vision, i.e. you need to visualize your plan and objectives,
– entrepreneurship = business, i.e. it is about taking chances, about asking yourself why should I not do it,
– if you’re sure to win, it’s boring; the risk of failing is OK and he was honest enough to show his two victories and then his defeat with Alinghi.
In summary, it is not so much a process it is about values.

Second Nicolas Hayek, founder and chairman of the Swatch Group, gave his views about entrepreneurship and business. He said basically the same things. Entrepreneurs are creative people and the pity (with our current crisis) is that we train managers who are not risk-takers, who are not creative people (or only for creative finance!). In fact, we kill creativity with our kids when they are 6-years old and business schools / MBA programs do not change this.

So now that I have mentioned typical keywords of entrepreneurship, (this above is not new at all, but the speakers were great and convincing), I can elaborate on the title of my post . At the Babson conference, there was a paper entitled “MUCH ADO ABOUT NEARLY NOTHING? AN EXPLORATORY STUDY ON THE MYTH OF HIGH GROWTH TECHNOLOGY START-UP ENTREPRENEURSHIP”

As you may imagine, I was shocked. I was discovering a totally new field of research exemplified by Per Davidsson. High growth would not be as important as profits. Said this way, I do not think anyone would disagree. If you are interested, you should read “Davidsson, P., Steffens, P. & Fitzsimmons, J. 2008. Growing profitable or growing from profits: Putting the horse in front of the cart? Journal of Business Venturing” (pdf manuscript here) if you have the restricted access.

The reason why I was shocked is that my experience with high-tech start-ups is that profits come later than sooner as you need to develop a product that no customer would pay for its development. So first you lose money, usually through funding by investors. Then you grow and generate profits.

Indeed Davidsson is not saying the contrary: in his paper, he states that “For external investors, our results imply that high growth in a low-profitability situation is a warning signal rather than an unambiguous sign of positive development. However, we must caution that our results do not necessarily apply to the much more select group of high-potential firms that VCs invest in. First-mover-advantage (FMA) reasoning suggests radical innovators who create entirely new markets play under different rules to the average SMEs. This said, the lack of proof that size leads to eventual profitability is something that has concerned the very researchers who coined the FMA concept: (Lieberman and Montgomery, 1998:1122). Similarly, in the specific context of disruptive innovation, Christensen and Raynor (2003) have argued forcefully for patience for growth but impatience for profit, a notion directly in line with our ‘profits first’ arguments and findings for SMEs more generally. In combination with our results, this provides sound reason for external investors to put more emphasis on establishing profitability through VRIO resources within their portfolio of firms, and having more patience for the growth that can eventually realize the full value of opportunities developed and pursued by these firms.”

So you could think I feel better. Not at all! The paper “Much ado about nearly nothing” by Malin Brännback, Niklas Kiviluoto and Ralf Östermark, from Åbo Akademi University, Finland and Alan Carsrud, Ryerson University, Canada seems to indicate similar results in high-tech to what Davidsson is stating for SMEs. More specifically, another paper, “Growth and Profitability in Small Privately Held Biotech Firms: Preliminary Findings” by Carsrud and his colleagues states that “A high profitability-low growth biotech firm is more probably to make the transition to high profitability-high growth than a firm that starts off with low profitability and high growth.” Well maybe there is no contradiction between my views and theirs. It might be that start-ups are about outliers and probabilities then are, yes, very low to succeed from low profitability. I am still convinced high value creation comes from there and still, I doubt you can focus on profits first, on growth second in high-tech start-ups. It is however an interesting topic which if true, entrepreneurs, investors, policy makers and researchers should know better about!

Any reaction?

Europe vs. USA: growth in IT and Biotech

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It is an exercise I usually like to use as an introduction to high-tech entrepreneurship: give me the name of 10 big sucess stories, and I mean (for example) the name of 10 public companies, which were founded as start-ups in the last 40 years. Usually, it is quite easy to give American names, and more difficult to find European ones. So the tables below give such names for IT first and for biotech second.

I had done the exercise in my book in 2007 but some companies such as Business Objects or Sun Microsystems have been acquired. Here I add the sales and profit numbers to the market caps and the number of employees.

What is striking I think, in addition to the difference in order of magnitudes is the difference between foundation to IPO year. Biotech is slightly different, though I am not sure it is fundamentally different… It is however interesting to notice that time to IPO is much more similar between the two continents in biotech than it is in IT.

Switzerland and Innovation

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On May 26, Switzerland celebrated innovation through a full day of TV and radio broadcasts on French-speaking TSR and RSR. In particular, there was a debate on the topic on popular programme infrarouge. It is in French obviously.

So let me just add my translation of a quote by Daniel Borel, co-founder of Logitech and one of the infrarouge guests, that is extracted from an interview to magazine Trajectoire published on November 16, 2009. I think that it is consistent with what I usually publish here:

“The only answer that I may provide is the cultural difference between the USA and Switzerland. When we founded Logitech, as Swiss entrepreneurs, we had to enter very soon the international scene. The technology was Swiss but the USA, and later the world, defined our market, whereas production quickly moved to Asia. I would not like to look too affirmative because many things change and many good things are done in Switzerland. But I feel that in the USA, people are more opened. When you receive funds from venture capitalists, you automatically accept an external shareholder who will help you in managing your company and who may even fire you. In Switzerland is not very well accepted. One prefers a small pie that is fully controled to a big pie that one only controls at 10%, and this may be a limiting factor”.

The Google Story

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This was the first chapter of my book! I have no real insider information about Google except my brief adventure with the Start-Up logo (that I use in this blog) when their people told me yes, no and finally yes about my right to use it. The book went out inbetween so it has a different cover but I obtained the right! I also failed in selling them a patent as they claimed they buy start-ups but not patents.

Still, I read so much about Google, it was sufficient material for my chapter but also for many presentations I made to students, entrepreneurs and in fact anyone interested in high-tech entrepreneurship and Google in particular… so after a few years of such presentations, I thought it was a good time to put online the Google Story which I hope you will find of some interest!

Survival or failure – which success?

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Failure and success are keywords in the world of start-ups. They even generate some heated debate, at least in Europe, when it is a question of surviving as long as possible until customers materialize or failing fast so that one avoids wasting precious time. The debate is difficult because all entrepreneurs deserve respect (yes, it is a tough job) and because slow and controlled growths (including survival modes) vs. fast and risky growths (with the risk of failing fast) may apply to totally different ventures. Here are therefore some figures that may contribute to the debate.

I must add that my motivation comes from a report published by ETHZ (the Swiss Federal Institute of technology in Zurich) about its start-ups, The performance of Spin-off companies at the Swiss Federal Institute of Technology Zurich. A 90% survival rate after 5 years was shown. But what are the typical survivate rates of firms? I searched the web sites of the US and Swiss institutes of statistics and the following chart illustrates the rates of the two countries for their entreprises overall.

In high-tech, the survival rates seem to be even higher. The authors of the report I mention above give figures as high as 70% to 90% for 5 years. Zunfu Zhang in his excellent “High-Tech Start-Ups and Industry Dynamics in Silicon Valley” (dated 2003 ) published the following curves:

The survival rates after 5 years are 76% for “non-service firms” and 72% for “service firms”. The authors of the ETHZ report added: “The low survival rate in the US – where some of the most successful University spin-offs have been created – raises, however, the question whether a high survival rate is actually desirable or whether too strong a focus on creating ‘surviving’ spin-offs does not eliminate some of the potentially very successful ventures that may not look so promising or too risky.”

As a conclusion to this post, I’d like to extract the following from my book!

As a footnote, I had added, the saying is pronounced “Shi Bai Nai Cheng Gong Zhi Mu” and means “failure is the mother of success”. There is a very similar quote by T. J. Rogers, founder of Cypress and another Silicon Valley icon: “failure is a prerequisite to success”. A Chinese student, Jie Wu, noticed the similarity. I would like to thank him for this. It might be encouraging to end this [post] with a quote, which shows that Silicon Valley mentality can be developed elsewhere. What we need to digest is that failure is not negative, but trying is what counts.