Category Archives: Start-up data

Skype IPO filing

During The Bubble, 77% Entrepreneurs Failed. Now, It’s Around 40%

My colleague and entrepreneur David Portabella just mentioned to me Conway’s views on his investments. Conway is a famous business angel who invested in AskJeeves, Google and Paypal.

In a nutshell:

– In the 1997-2001 period, 77% of his investments failed. Since 2002, it’s down to 40%.
– Entrepreneurs have a 66 percent chance of being successful on a startup if it’s their second one.
– There is a misconception that “every 10 years we get a Google.” “That’s not true,” he claims it is at a much faster rate.

If I agree that failure is common and success is not so rare, I am less sure about serial entrepreneurs being better. I have hard data from Stanford entrepreneurs and serial entrepreneurs are not any better. I will share these data in the future…

Give back to the community

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My sixth article in the newsletter Créateurs about high-tech success stories: Swissquote. I am leaving Silicon Valley after purely American stories with Adobe & Genentech, then followed by Europeans in SV (Synopsys, VMware) to talk about a pure Swiss success!

Mark Bürki and Paulo Buzzi are the two founders of one of the nicest Swiss (not to say European) success stories: Swissquote. No link to Silicon Valley, no venture capital, an exception to what I am used to promote. “Just a” local online bank launched in 1997 as a spin-off of a software service company, Marvel, which was founded in 1990. Bürki and Buzzi did not launch their start-up in a Garage like HP, Apple or Google; worse, it was in a cellar! The beginnings were not easy, salaries were not always guaranteed…

The USA played a role however. At a conference in Boston, the two founders discovered a new promising platform: the Internet. Sitting at a tiny booth, the founder of an unknown start-up, Amazon. Later, a contract with the IOC, the International Olympic Commitee, for the design of their web site, gave the much needed cash to Marvel. Marvel had also specialized in financial applications and Bürki could see the potential of the Internet for the consumer of stock and financial news.

With a Zurich-based bank as a financial partner, Marvel launched Swissquote in 1997. The beginnings were very encouraging and at that time, most investment banks were competing for the fast-growing start-ups to be quoted on stock exchanges. Swissquote went public in 2001 with less than CHF20M in sales and a huge loss. The future would not be as nice as the pre-IPO boom and the burst of the Internet bubble threatened the mere existence of the company. But Bürki and Buzzi were not part of the mass of entrepreneurs who disappeared as fast as shooting stars. Decisions were tough, many employees were fired but Swissquote survived. In 2009, its sales were about CHF100M with a net profit of CHF35M, and its market capitalization was nearly CHF600M.

In August, and then in November 2006, I had invited the two founders to share their entrepreneurial experience on the EPFL campus. They had explained the importance of a vibrating ecosystem, as they had enjoyed it in Lausanne during their studies, years before. “When we were students in computer science”, Bürki noticed, “the sixty or so students in the department belonged to about twenty different nationalities”, a diversity that can be found in the best technology clusters. Without any business training, they learnt how to manage a company with two hundred people. The two founders are convinced that you learn these things by doing. Two founders. Another important topic. Your co-founder can challenge you with the right questions that a lonely founder may not solve easily.

Bürki also mentioned the vital role of the dream by quoting, in a rather surprising manner, Che Guevara: “Be Realistic, Ask for the Impossible.” As a reminder of their beautiful years at EPFL and also as a sign of their success, Marc Bürki and Paolo Buzzi took in 2008 a typically American decision by creating an endowed chair in quantitative finance.

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

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!

University licensing to start-ups

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There’s been a long standing and passionate debate about what universities “deserve” when they license technologies to start-ups. There is the famous Google vs. Yahoo comparison where Google is an official Stanford spin-off which brought $336M in revenue from the equity the university owned in the start-up whereas Yahoo was considered as a hobby of the founders and no intellectual property was owned by the university. However one Yahoo founder gave some $75M to Stanford.

So what is a typical license between a university and start-up? Well there is no clear answer but the attached pdf file may be of help. I have done some search and found some info, mostly from US universities. I have also tried to find the rationals for or against such deals. The debate remains open and I do not expect a general agreement any time soon. But I hope this is contributing to the topic.

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.

Gazelles and Gorillas – part 2

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Following my post of April 19, Gazelles and Gorillas – high growth startups, I went back to the chapter 8 of my book where I compared the growth of the European and American gorillas. I had not computed then the 5-year and 10 year growth of these very successful companies. The following table gives the results of my work this morning. These are not gazelles (20% growth), there extremely fast gazelles!

Gorillas seem to grow at 100% rates or doubled their sales each year on average… Now growth is never an easy path (ask Steve Jobs about Apple growth!) so let me add much more details. Below, you will see the yearly growth of all these companies and you may notice there are sometimes a lot of ups and downs!

Gazelles and Gorillas – high growth startups