Category Archives: Start-up data

Start-ups hiding six feet under

Here’s my 4th contribution to EPFL‘s “start-up of the month”

03.06.12 – The fear of failure probably explains the absence of a “European Google”. Whereas, on the other side of the Atlantic, start-ups are born and die in full view of everyone, their counterparts in Europe hang on for dear life, sometimes even when it doesn’t make sense to do so.

The fourth start-up of the month doesn’t exist! At least not at EPFL, nor in Switzerland or in Europe. I mean those start-ups that fail. European start-ups are a real paradox. We often complain about not being able to create successes like Google, Apple or Facebook, but on the other hand we don’t have any big failures either! In his doctoral work published in 2011, Sven de Cleyn – a researcher specialized in technology transfer – demonstrates that less than 10% of European academic start-ups close down [1]. In a survey dating from 2008, ETHZ produced similar metrics, with an activity rate of 88% [2]. EPFL is therefore no exception to the rule.

In fact, this strange phenomenon can easily be explained. European start-ups focus on survival, to the point that Sven de Cleyn had to use this parameter to define success. Failure is so culturally stigmatized that it must be avoided, almost at all cost. This is one of the fundamental reasons behind the difficulties we experience. In the excellent film Something Ventured, the Californians, followers of a Manichean way – success or death – call start-ups the “living-dead”!

Yet, failure is far from being a bad thing – it is actually necessary. Who didn’t fall several times while learning to ski, roller-skate or simply ride a bike? How could we manage not to fail in the far more complex task which involves bringing a technology or innovative product on to the market? Schumpeter, the famous innovation economist, had created the concept of “creative destruction”, explaining that the new replaces the old, and that this is in fact a good thing. He used a striking image to illustrate this: “It’s not an owner of stage-coach lines who is going to build railways!”

In his famous speech at Stanford in 2005, Steve Jobs echoes this sentiment: “Remembering that I will soon be dead is the best tactic I have ever used to help me make the important choices in my life. Because almost everything – expectations, pride, fear of embarrassment or failure, all these things – evaporates in the presence of death, leaving only what really matters. Remembering that you are going to die is the best way I know of avoiding the trap of thinking that we have something to lose.”

So, you may say that that’s easier to say than to do! It’s certainly very difficult to bring up past failures or to cite examples, as entrepreneurs are reticent to confess such things. I could mention a few myself, but without having the consent of the people concerned. I could almost have called this article “Desperately Seeking Start-up Failures”!

It seems that start-ups, like the mythical thorn birds, look to hide away in a thorn bush and impale themselves. We never organize proper funerals for those who fail, but now FailCon has done away with this taboo. This one-day conference is aimed at technology entrepreneurs, investors, developers and designers. It’s dedicated to the study of their own and others’ failures, as a preparation for success. During the first event held in San Francisco in 2011, Vinod Khosla, the famous venture capitalist, admitted having more often failed than succeeded. Failure in not desirable, it’s just part of the system, and it’s high time we integrated it accordingly. When will there be a FailCon in Switzerland?

[1] Sven H. De Cleyn, The early development of academic spin-offs: holistic study on the survival of 185 European product-oriented ventures using a resource-based perspective.University of Antwerp, 2011
[2] Oskarsson I., Schläpfer A., The performance of Spin-off companies at the Swiss Federal Institute of Technology Zurich. ETH transfer 2008.

A great study on European academic spin-offs

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While in Antwerpen (Belgium) where I gave a workshop related to my vision of Silicon Valley described in the book Start-up, I had the nice opportunity (thanks Walter 🙂 ) to meet with Sven De Cleyn whose PhD thesis was published as a very interesting book: The early development of academic spin-offs : holistic study on the survival of 185 European product-oriented ventures using a resource-based perspective. The conversation I had with him convinced me I had to read his work. Although I am not sure I would advise anyone to do so (sorry Sven 🙁 but it is also 335 pages of dense content, including tables and statistical analyses), it is a great piece of work.

I had not seen before such work based on European spin-offs. Of course there is the American equivalent with Shane’s work, Academic Entrepreneurship: University Spinoffs And Wealth Creation and also lesser known but probably as good, the multiple papers of Junfu Zhang, including Entrepreneurship among Academics: A Study of University Spin-offs Using Venture Capital Data. But on the European side?

So let me summarize what I learnt. First an academic spin-off (ASO) is defined as “[1] a new legal entity (company) [2] founded by one or more individuals from an academic parent organization [3] to exploit some kind of knowledge [4] gained in the academic parent organization and transferred to the new company”. Then Sven studied two main questions:
– Research question 1
What characterizes the early development process of knowledge-intensive product-oriented academic spin-offs?
– Research question 2
What are the major criteria that determine the outcome of this process?

And he used 4 main theoretical frameworks (remember, it is a PhD thesis). I quote him again:
– the Resource-Based View of the firm (RBV), which posits that firm can only achieve a sustainable competitive advantage if they possess valuable, rare, inimitable and non-substitutable resources
– the Human Capital Theory (HCT), which explains firm survival and performance in terms of the firm’s knowledge, skills and experience, which can be created and accumulated through education, training and other experiences
– the Social Capital Theory. The central tenet suggests that a firm’s survival and performance are dependent upon the network to which it has access. The difference between SCT on one hand and RBV and HCT on the other, is that social capital, unlike other resource types, is not located within a firm but in the relationship with other actors
– the fourth and last theoretical stream relates to Life Cycle Models (LCMs). A firm’s resource needs are different in the first years after foundation when compared to more mature phases. The LCM theory builds upon the biological evolution of a living organism, where firms evolve through a number of distinct and consecutive stages and in the transition between the stages a number of important hurdles or junctures have to be overcome.

The heart of the dissertation is formed by a quantitative part. The first phase concerns the actual data collection, using personal interviews (in person, by telephone or using Skype) with 185 top managers (preferably one of the active founders) in nine European countries.

In addition here are some more figures about these spin-offs. Not surprisingly (for me!) the employment and turnover are not very high:

Some interesting not to say surprising results include:

+ on the Business side:
– The results of this study confirm that having developed a formal, written business does not contribute significantly to ASO survival probability.
– However, the results also indicate that several important constituent sections of a business plan (e.g. market study, production analysis …) contribute positively to survival likelihood.
– If the founders of the ASO have discussed the first drafts of the business plan with other entities (mostly externals), subsequent ASO survival chances might be affected. The analyses reveal that ASOs whose business plan has been screened, challenged and altered by risk capital providers face an increased failure risk.
– The results indicate ASOs using patents to protect their core technology do not necessarily enjoy higher survival probability.
– The results indicate that product development teams with (potential) customers aboard increase ASO survival likelihood substantially.

+ on the team side:
– Prior entrepreneurial experience (whether in a high-tech venture or not) has a significant positive impact, but this effect disappears and becomes negative for serial entrepreneurs. The latter result is ascribed to entrepreneurial euphoria (successful entrepreneurs tend to search less for relevant information in subsequent new initiatives).
– Heterogeneous team, which are composed of a mixed background, contribute significantly and in a positive way to ASO success probability.
– In first instance, an ongoing active involvement of at least one of the (key) founders has a significant positive effect on ASO survival probability. However, some additional tests reveal that preferably this involvement does not occur as CEO. Secondly, a long-term and strong representation of the founders in the shareholder structure (meaning a shareholdership of at least 50% for the entire group of founders) appears to significantly enhance ASO survival likelihood.

+ about stakeholders:
– The origin of financial resources has no significant impact on its subsequent success (i.e. risk capital does not increase success likelihood when compared to any other funding source). On the other hand, ASOs able to attract subsidies for the development of their business, technology or product have significantly better survival odds than ASOs who don’t.
– Academic continued, long-term support (at least up till the moment of interview) turns out to have a positive and significant impact on ASO success probability.
– In the first place, the results have pointed to the importance of the timing of ASO foundation, as ASOs who developed at least a β-prototype at the time of foundation have significantly higher survival odds.

A couple more quotes that I found striking:
– [page 16] European ASOs are reported to be small-scale ventures (mostly one-man SMEs) with limited growth ambitions and clear visions. Yet, the main contribution of ASO does not lie in a fast organic growth, but rather in its contribution to the transfer of technologies and knowledge throughout their networks and in a reasonable rentability. (This is not a result of De Cleyn, but his own analysis of past research)
– [page 52] Founding teams seem to perform better than individual founders. They tend to experience less failure, more mergers and/or acquisitions and a larger employment growth. This superior performance might be due to a better access to resources and network relationships than solo start-ups have. (Same remark)

Now some personal comments. First the lessons are much richer than this short summary. So if you have an interest in the topic, you should read De Cleyn’s book. But most importantly, for me, it dramatically shows some critical differences between the European and the American scene, at least the scene I know well, Silicon Valley. Sven De Cleyn’s definition of success is basically (I hope I am correct) the opposite of failure, which for example implies that surviving is considered as success. I am not sure it is the vision Americans have (the famous Fail Fast that entrepreneurs use even independently of the objectives of venture capital, which hates nothing more than “living-dead”.) You might be interested in comparing Sven’s data with my own analysis of Stanford related start-ups. A last comment. I asked Sven why he did not cover licensing deals with universities. The answer was twofold. He already had enough material to cover and the topic is more sensitive than others. I agree!

As a short summary, I had not seen such a deep analysis of European start-ups, with so much statistical analysis. And… unfortunately, it seems to confirm the culture gap we have with the USA. It might be that we have a different way of doing things or it might be that we have not really understood what Silicon Valley is really about…

The New Facebook Legacy

Semiconductor start-ups. Is it the end?

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I was lucky to be invited as a panelist at the Global Semiconductor Conference in Geneva on May 8-9. The round-table topic was “how to create more successful start-ups”. But before mentioning that discussion, I’d like to mention the previous panel, which gathered Stan Boland, former CEO and co-founder of Icera Inc, Dennis Segers, CEO of Tabula and Remy de Tonnac, Chief Executive Officer, INSIDE Secure. Stan has sold Icera to nVidia for $367M after raising $250M (a nice but small 1.3x return). Dennis has raised about $200M for Tabula and apologized for preventing start-ups to get that money, whereas Remy just took INSIDE Secure public on the Paris stock exchange, raising €70M after the company raised more than €100M in venture money since its inception.

I was very impressed by INSIDE Secure long history (it was founded in 1994), including unfortunately washout rounds. What was great is de Tonnac’s message stating that start-ups can only survive if they keep their entrepreneurial spirit and innovation DNA. Here is my usual cap. table format for the company. [The history, the list of investors and number of financial rounds are so long that the numbers might be approximation only…]

click on picture to enlarge

This shows once again that it is possible to try and succeed in Europe, but it seems to take much more time than in the USA. Now back to my panel. The motivation for the topic is the smaller and smaller number of funded semicon start-ups as the next figure shows.

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And apparently, the main reason for this “crisis” comes from the huge amount of money these start-ups needs to reach profitability.

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Well, if it was just about the amount of financing needed, biotech would be dead too, and my recent post Biotech IPOs, not so different shows it is not true. There might be at least two other reasons which explain the difference:
– you cannot go public without any revenue as it is the case with biotech, and I am not sure why (is it because the life cycle of semicon products is much shorter?) and
– the financial ratios of semicon companies are not great (Intel, the market leader is worth 2.5x its sales and 10x its profits).
But I am not fully convinced by the argument.

In fact I had another argument which might be simply said a lack of creativity combined with a culture of collaboration which has been lost. Indeed, the day before, another panelist said “why the heck would I share it, if I had the killer app”. Well, one might not share a killer app, but in Silicon Valley, there has been a lot of sharing:

Even today, people at LinkedIn and Facebook help each other even if they compete. I am less sure this happens at Google or Apple though! And here is what the NPR Radio “Morning Edition” had to say about the Silicon Valley ingredients. I strongly believe and agree with de Tonnac that we need more Entrepreneurial Spirit and Innovation DNA.

Edouard Bugnion at EPFL: back to Switzerland!

Biotech IPOs, not so different

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I just read Biotech IPOs Start to Show Some Modest Signs of Life from Xconomy. It’s an interesting article because it focuses on Biotech, a field that many people consider as very different from other high-tech start-ups such as Internet, Software or IT in general. The general idea is that it takes much longer to succeed in biotech. You should read the article if biotech is of interest for you and I will not comment it more than mentioning that the good news is that there have been recent biotech filings and IPOs, the less good news being that the market capitalizations are not huge.

What I am more interested in is updating my regular analysis of start-up data (I have now 131 start-ups; see my latest analysis in March 2012 for example with 116 companies) and see how biotech behaves. Here is the synthesis (if you are interested the detailed list is provided at the end).

So what do I see as specific to biotech start-ups? First it does not take them longer to go public. 8 years vs. an average of 7 years. The difference is not in the exit time. They raise $98M on average, but this does not look so special either. But, and here is the but, their sales are only $11M when they go public. So, it takes them much longer to reach revenues. But it does not prevent them from going public (or even be acquired when they begin to have good results in clinical trials).

Another specific element is about founders. The founders’ average age is 41 (similar to medtech and semiconductor) whereas it is 35 on average. Why is that? because many founders are established, recognized university professors. Often times, they do not work full-time in the start-up but have a role of chief scientist. Indeed, the ownership of founders in the start-up is smaller than average (8% vs. 15%).

I should also add that the founders/employee shares ownership is much smaller too (25% vs. 40%) and the reasons are manyfold:
– founders have fewer shares as I just mentioned
– investors have more equity (50% vs. 45%)
– IPO shares are higher (25% vs. 16%). This comes from the fact (I think) that in order to raise the same amount of money, it is more dilutive for a company with less revenue…
– I did not mention another statistical element, which is they have fewer employees. The detailed table below imples about 100 employees (and you may see many of them have even less than 50 or 20 employees). This induces a smaller amount of stock options… (On average my 130 companies have 500 employees when they go public).

I thought this data was of some interest. Please react or comment!

Appendix: detailed data (notice that I am missing the Amgen data)

click on table to enlarge

Start-Up of the Month: Kandou and the Investors

Facebook strikes again: Instagram

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Two articles caught my attention relatively to the Facebook acquisition of Instagram:

– By The Numbers: Facebook’s $1 Billion Acquisition Of Instagram may mean that we are in a new speculative bubble. There were 37 $1B acquistions since 1992 of venture backed companies and already 3 in 2012…

Instagram co-founders Kevin Systrom, chief executive (right), and Mike Krieger at the company offices in San Francisco. Photo: New York Times / Redux / eyevine

– Who’s getting rich from Facebook’s $1bn Instagram deal? shows that it makes 10+ happy people! And using these data, here is my cap. table. I have to admit that the numbers are also speculative but based on the previous article, they kind of make sense.

Click to enlarge

Once is an exception, twice is a trend: Sequoia Chinese IPOs

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In my regular work of compiling equity structures of start-ups, I fell twice in a row on Chinese start-ups. And twice, Sequoia was a large investor. And twice, they were incorporated in the Cayman islands. I do not know much about China, but this simple “discovery” is of interest. One start-up is in the Internet field, VIPShop, and the other one in biotechnology, NewSummit.

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Here is the rather complex holding structure, which probably made possible a Sequoia investment in a Chinese start-up.

I tried to find some common features among the founders: none seemed to have studied or worked outside of China, which I think is interesting and somehow unusal with high-tech entrepreneurs. Their age: 32, 33, 36 and 37, which makes an average of 34.5. My overall average (see my analysis) over 257 founders is 34.9. I could not find any picture of them but this could be linked to the fact that the sites are usually in Chinese.

Click on table to enlarge

Of Start-ups and Men

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Second contribution to the EPFL “start-up of the month”: after venture capital with Aleva, I focus on the team with SWISSto12.

12.03.12 – A killer product is not the only key to success for a young start-up. Even in the high-tech sector, the human-factor can be vital, and the founders of SWISSto12 know just how to use this to their advantage

Emile de Rijk, Alessandro Macor founders of SWISSto12

SWISSto12 is the ideal model of a “starting” start-up company. It has all the essential (and sometimes counterintuitive) ingredients for success. A critical factor for a good start is the trust and transparent dealings between the individuals making up the original team. The two founders, Emile de Rijk and Alessandro Macor, may not have the experience you (wrongly) think they need, but their dedication will move mountains. They have invented a Terahertz Signal Transmission technology and, because this answers hitherto unsolved problems, SWISSto12 had a client even before it was established! An opportunity arose, and the two scientists made the most of it. More importantly, their innovation may open up new markets no-one had even thought of – such is the beauty of high-tech, with all its uncertainties. No need for a business plan at this stage: what matters is having a vision and finding the right people to make up the best possible team – which is the subject of this note.

First of all, I strongly advise not to embark on such an adventure alone. Professor Ansermet of the Laboratory of the Physics of Nanostructured Materials was impressed by the enthusiasm displayed by the two young scientists and provides friendly support. This is an absolute must.

EFPL backed up this support with its Technology Transfer Office, which helped to patent the technology and grant an exclusive licence to SWISSto12. (If I may make a brief digression here, one often sees entrepreneurs frustrated at the difficulty in negotiating IP rights. Although the perception is rather negative here, exceptions [such as the Bose adventure at MIT] should not obscure a much more transparent reality).

This start-up made the most of all the local support mechanisms: coaching at the PSE, Innogrant, VentureKick, CTI, and I probably forget others as the EPFL ecosystem is so efficient – to the point that this may even be dangerous if you rely solely on these support mechanisms.

SWISSto12 also secured an outstanding mentor in Valtronic founder Georges Rochat, who I recently found out has lived in Silicon Valley and knows the environment inside out. He not only contributes his own experience, but also a network and credibility which are key to the start-up’s development.

When the time came to recruit staff, things became tricky. After the exhilarating first few days, the new team realised that some dynamics were incompatible with a start-up’s culture where everyone lends a hand and “reporting structure” is considered a rather rude expression. A painful, but unavoidable decision was made to separate on good terms. In a start-up company, the main reason for failure is the human factor, much more than the technology, product or market.

I shared the idea of this column with Emile de Rijk, who said that you must “play out in the open and be honest with your partners to as to create win-win situations”. SWISSto12 is about to look for investors and the company’s potential should make it possible to realise these ambitions. I spoke of success criteria earlier. Naturally, there is no guarantee of this and entrepreneurship is always a careful balance regardless of a company’s size, and even more so in the case of a start-up. Still, in my opinion the founders’ passion and enthusiasm, combined with their ambition and lots of good sense, have definitely put them on the right track!