Tag Archives: Failure

The Venture Capital Secret: 3 Out of 4 Start-Ups Fail

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In a recent article from the WSJ (thanks Greg :-), it is claimed that Venture Capital is much less succesful than thought: 3 Out of 4 Start-Ups Fail. Well I am surprised by the surprise. I did some copy paste of the paper below, and I put in bold the things I found interesting. You should jump there and come back here!

I have done my analyis in the past. You can go back to by 2’700 stanford related companies (slide 9 of the pdf) or more anecdotically to Kleiner Perkins first fund.

So yes, there is a lot of failure in VC and the numbers do not count so much. It might be that in the past, there were fewer failures than today, and the reasons would be numerous, but the important point in the paper is the following: “the truth is that if you don’t have a lot of failures, then you’re just not doing it right, because that means that you’re not investing in risky ventures”

 

 

From the WSJ article:

It looks so easy from the outside. An entrepreneur with a hot technology and venture-capital funding becomes a billionaire in his 20s. But now there is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites. About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School. Compare that with the figures that venture capitalists toss around. The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.

Mr. Ghosh chalks up the discrepancy in part to a dearth of in-depth research into failures. “We’re just getting more light on the entrepreneurial process,” he says. His findings are based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010. He also combed the portfolios of VC firms and talked to people at start-ups, he says. The results were similar when he examined data for companies funded from 2000 to 2010, he says. Venture capitalists “bury their dead very quietly,” Mr. Ghosh says. “They emphasize the successes but they don’t talk about the failures at all.”

There are also different definitions of failure. If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail, he says. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail, based on Mr. Ghosh’s research.
Failure often is harder on entrepreneurs who lose money that they’ve borrowed on credit cards or from friends and relatives than it is on those who raised venture capital.

“People are embarrassed to talk about their failures, but the truth is that if you don’t have a lot of failures, then you’re just not doing it right, because that means that you’re not investing in risky ventures,” Mr. Cowan says. “I believe failure is an option for entrepreneurs and if you don’t believe that, then you can bang your head against the wall trying to make it work.”

Overall, nonventure-backed companies fail more often than venture-backed companies in the first four years of existence, typically because they don’t have the capital to keep going if the business model doesn’t work, Harvard’s Mr. Ghosh says. Venture-backed companies tend to fail following their fourth years—after investors stop injecting more capital, he says.

Of all companies, about 60% of start-ups survive to age three and roughly 35% survive to age 10, according to separate studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, a nonprofit that promotes U.S. entrepreneurship. Both studies counted only incorporated companies with employees. And companies that didn’t survive might have closed their doors for reasons other than failure, for example, getting acquired or the founders moving on to new projects. Languishing businesses were counted as survivors.

Of the 6,613 U.S.-based companies initially funded by venture capital between 2006 and 2011, 84% now are closely held and operating independently, 11% were acquired or made initial public offerings of stock and 4% went out of business, according to Dow Jones VentureSource. Less than 1% are currently in IPO registration.

—Vanessa O’Connell contributed to this article.
Write to Deborah Gage at deborah.gage@dowjones.com

What’s a start-up worth, or reflections on Facebook’s IPO fiasco

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Here’s my 5th contribution to EPFL‘s “start-up of the month”

When its IPO was announced last February, everyone agreed that Facebook was worth somewhere in the ballpark of $100 billion. Today, Facebook has lost 40% of its value – how is this possible?


Facebook a perdu plus de 40% de sa valeur

Facebook, unfortunately, isn’t an EPFL start-up, but the controversy surrounding its overvalued stock market debut (Initial Public Offering, or IPO) nonetheless provides a good opportunity to discuss the value of a start-up, in particular, spin-offs from EPFL laboratories.

A company’s value cannot truly be measured scientifically, even though there are techniques that try to do this via revenues and profits – Logitech and Swissquote, who have historical connections with EPFL, are measured like this. The law of supply and demand rules here: the value of a company is the product of the number of shares and the price per share. Companies listed on the stock exchange are thus hostages of the market and its moods.

When companies are not listed on the stock exchange, as is the case in the majority of start-ups, they can still be valued. Interested readers can learn more in the article “Equity Split in Start-ups.” When EPFL start-ups like Eelcee, Abionic, Aleva and Kandou (see previous articles) recently announced they were looking for financing, they were valued by their investors, even though there was no market in which to buy shares. Switzerland, however, provides some information via the registre du commerce (commerce registry) in which each start-up registers the change in its number of shares. From there, if you know the amount of money that has been raised, you can deduce the price per share and thus the value of the company. But I personally wouldn’t make the calculation, out of respect for the discretion desired by the entrepreneurs and the investors.

Again, value is just a subjective thing that depends on the good will of the investors. Facebook, like Google ten years ago, didn’t completely abide by Wall Street’s rules, by which a company agrees to be under-valued at its IPO so that the ensuing trading result in an upward curve. So far, it’s just simple speculation, and we’ll have to wait several years before we know whether or not Facebook’s IPO was a failure or not.

Our start-ups have a similar problem. I’ve known many entrepreneurs who prefer that their companies have the best possible value when they were looking for funding. They forget that the only real value is that which is created over the long term by their products or services, and that the value of a company is a very volatile thing, as Facebook just illustrated so well. Entrepreneurs tend to retain the lion’s share of their companies, even though by doing this they also seem to be ignoring Logitech founder Daniel Borel’s advice: “We prefer a little pie that we control completely to a big pie that we only control 10%, and this can be a limiting factor.”

I’m convinced (even though I’m often wrong) that Zuckerberg’s impact will be similar to Brin and Page’s. Here in Switzerland, I hope that local companies are created whose value is on a par with those of Daniel Borel, Mark Bürki and Paolo Buzzi.

References

Facebook Finally Files For $5B

Facebook data today

Logitech

Swissquote

Equity split in start-ups

Eelcee and composites


Two million Swiss francs for an allergy-detecting device

Swiss register of corporations

The Black Swan and the danger of statistics

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“Thought is only a flash in the middle of a long night. But this flash means everything.”
Henri Poincaré*

When I talked to friends and colleagues about The Black Swan (“BS”), they were surprised about my interest in the movie with Natalie Portman. I cannot say, I have not watched it. I was talking about Nassem Nicholas Taleb’s book and theory. Some other friends classified at it as American b… s…, these superficial books that give advice on anything and that seem to always become bestsellers; my colleagues would classify it as airport literature, not to be read in academic circles.

I read it and enjoyed it, but I have to admit Taleb is sometimes painful. Is it because he was so much frustrated by I do not know whom or what or is it because he is so proud of his certainties? I am not sure. But his ideas are certainly worth thinking about more than a minute. (Whereas you forget about airport American b… s… after 30 seconds). So back to the BS.

You’ll find great accounts of his book or of his theory, e.g.
– Nassim Taleb’s “The Black Swan” by Andrew Gelman,
– The Wikipedia page on the Black Swan theory
– or even another essay by Taleb, the Fourth Quadrant,
so I will not try to do the same.

However defining the Black Swan might be useful! In the Fourth Quadrant, Taleb writes the following:

There are two classes of probability domains—very distinct qualitatively and quantitatively. The first, thin-tailed: Mediocristan”, the second, thick tailed Extremistan. Before I get into the details, take the literary distinction as follows: In Mediocristan, exceptions occur but don’t carry large consequences. Add the heaviest person on the planet to a sample of 1000. The total weight would barely change. In Extremistan, exceptions can be everything (they will eventually, in time, represent everything). Add Bill Gates to your sample: the wealth will jump by a factor of >100,000. So, in Mediocristan, large deviations occur but they are not consequential—unlike Extremistan. Mediocristan corresponds to “random walk” style randomness that you tend to find in regular textbooks (and in popular books on randomness). Extremistan corresponds to a “random jump” one. The first kind I can call “Gaussian-Poisson”, the second “fractal” or Mandelbrotian (after the works of the great Benoit Mandelbrot linking it to the geometry of nature). But note here an epistemological question: there is a category of “I don’t know” that I also bundle in Extremistan for the sake of decision making—simply because I don’t know much about the probabilistic structure or the role of large events. Black Swans are the unknown deviations in Extremistan.

Here are more notes taken while reading.

[Page xxii] The black swan is characterized by “rarity, extreme impact and retrospective (though not prospective) predictability” (with additional footnote: the occurrence of a highly improbably event is the equivalent of the nonoccurrence of a highly probably one.

[Page 8] The human mind suffers from 3 aliments:
-The illusions of understanding, or how everyone thinks he knows what is going on in a world that is more complicated (or random) than they realize;
-the retrospective distortion, or how we can assess matters only after the fact, as if they were in a rearview mirror; and
-the overvaluation of factual information and the handicap of authoritative and learned people – when they platonify.

[Page 15] While in the past a distinction had been between drawn Mediterranean and non- Mediterranean (i.e., between the olive oil and the butter), in the 1970s, the distinction suddenly became between Europe and non-Europe.

[Page 54] There is a major difference and often-made mistake between no evidence of something and the evidence of its non-occurence (mental bias.)

[Page 77] The answer is that there are two varieties of rare events: a) the narrated Black Swans, those that are present in the current discourse and that you are likely to hear about on television, and b) those nobody talks about, since they escape models – those that you would feel ashamed discussing in public because they do not seem plausible. I can safely say that it is entirely compatible with human nature that the incidences of Black Swans would be overestimated in the first case, but severely underestimated in the second one.

[Page 80] One death is a tragedy; a million is a statistic. […] We have two systems of thinking. System 1 is experiential, effortless, automatic, fast, and opaque. System 2 is thinking, reasoned, local, slow, serial, progressive. Most mistakes come from using system 1 when we think we use system 2.

[Page 140] We overestimate what we know and underestimate uncertainty. Another bias, ”think about how many people divorce. Almost all of them are acquainted with the statistic that between one-third and one-half of all marriages fail, something the parties involved did not forecast while tying the know. Of course, “not us” because “we get along so well” (as if others tying the know got along poorly.)”

[Page 174-179] Poincaré is a central personality of Taleb’s theory, in particular through the 3-body problem. According to Taleb, “Poincaré angrily disparages the use of the bell curve.” Now the next figure simply illustrates the concept of sensitivity to initial conditions.

Predicting

Operation 1: imagine an ice cube and consider how it may melt.
Operation 2: consider a puddle of water. Try to reconstruct the shape of the ice-cube.
The forward process is generally used in physics and engineering, the backward process in nonrepeatable, nonexperimental historical approaches. And the backward is much more complex to analyze.

[Page 198] While in theory it is an intrinsic property. In practice, randomness is incomplete information. Nonpractitioners do not understand the subtlety. A true random process does not have predictable properties. A chaotic system has entirely predictable properties, but they are hard to know.
a) There are no functional differences in practice between the two since we will never get to make the distinction.
b) The mere fact that a person is talking about the difference implies he has never made a meaningful decision under uncertainty – which is why he does not realize that they are indistinguishable in practice.
Randomness in practice, in the end, is just unknowledge. The world is opaque and appearances fool us.

[Page 204] Trial and error means trying a lot. In the Blind Watchmaker, Richard Dawkins brilliantly illustrates this notion of the world without grand design, moving by small incremental random changes. Note a slight disagreement on my part that does not change the story by much: the world, rather moves by large incremental random changes. Indeed, we have psychological and intellectual difficulties with trial and error and with accepting that series of small failures are necessary in life. “You need to love to lose”. In fact the reason I felt immediately at home in America is precisely because American culture encourages the process of failure, unlike the cultures of Europe and Asia where failure is met with stigma and embarrassment.
[It’s really Taleb writing and not the blog’s author, but I fully agree !]

[Page 207] When you have a very limited loss, you need to be as aggressive as speculative and sometimes as unreasonable as you can be. Middlebrow thinkers sometimes make the analogy with lottery tickets. It is plain wrong. First lottery tickets do not have a scalable payoff. Second, lottery tickets have known rules.

The economics of superstars

[Page 24] Who is this book written for? You need to understand who your audience is and amateurs write for themselves, professionals write for others. [This irony of the author’s is stimulating. I experienced it, I’m an amateur. But are the masterpieces not then written by amateurs? The Black Swans (The Lord of the Rings, Harry Potter) look often like a work of amateurs. The Yevgenia Krasnova example provided by Taleb is also stimulating]

[Page 214] Someone who is marginally better can easily win the entire pot. The problem is the notion of “better.” People take from the poor to give to the rich. An initial advantage follows someone through life and keep getting cumulative advantages. Failure is also cumulative. The advent of modern media has accelerated these cumulative advantages. The sociologist Pierre Bourdieu noted a link between the increased concentration of success and the globalization of culture and economic life.

[Page 221] Taleb claims new comers mitigate the cumulative advantages. “of the five hundred largest US companies in 1957, only seventy-four were still part of that select group, the S&P 500, forty year later. Only a few hundred had disappeared in mergers; the rest either shrank or went bust.

Actors who win an Oscar tend to live on average five years longer than their peers who don’t. People live longer in societies that have flatter social gradients.

[Page 277] What is poorly understood is the absence of a role for the average in intellectual production. The disproportionate share of the very few in intellectual influence is even more unsettling than the unequal distribution of wealth- unsettling because, unlike the income gap, no social policy can eliminate it. Communism could conceal or compress income discrepancies, but it could not eliminate the superstar system in intellectual life. [I am not sure]

Skepticism

Taleb defines himself as a skeptic and his mentor are Hayek and Popper. He links it with humility in the following: [Page 190] Someone with a low degree of epistemic arrogance is not too visible, like a shy person at a cocktail party. We are not predisposed to respect humble people, those who try to suspend judgment. Now contemplate epistemic humility. Think of someone heavily introspective, tortured by the awareness of his own ignorance. He lacks the courage of the idiot, yet has the rare gust to say “I don’t know”. He does not mind looking like a fool or, worse, an ignoramus. He hesitates, he will not commit, and he agonizes over the consequences of being wrong. He introspects, introspects, and introspects until he reaches physical and nervous exhaustion.

Experts

[Page 146] We know the difference between know-how and know-what. The Greeks made a distinction between techne and episteme, craft and knowledge. We have experts who tend to be experts: astronomers, pilots, physicists, mathematicians, accountants and experts who tend to be… note experts: stockbrokers, psychologists, councilors… Simply things that move and therefore require knowledge do not usually have experts and are often Black-Swan-prone. The negative effect of prediction is that those who have a big reputation are worse predictors than those who had none.

[Page 166] The classical model of discovery is as follows: you search for what you know (say, a new way to reach India) and find something you didn’t know was there (America). It’s called serendipity. A term coined in a letter by the writer Hugh Walpole who derived it form a fairy tale, “The Three Princes of Serendip” who “were always making discoveries by accident or sagacity, of things they were not in quest of.“ […] Sir Francis Bacon commented that the most important advances are the least predictable ones.

[Page 169] Engineers tend to develop tools for the pleasure of developing tools. Tools lead to unexpected discoveries. So I disagree with Taleb’s definition: A nerd is simply someone who thinks exceedingly inside the box. It may not be contradictory but I prefer the engineer-like one: “I think a nerd is a person who uses the telephone to talk to other people about telephones. And a computer nerd therefore is somebody who uses a computer in order to use a computer. [https://www.startup-book.com/2012/02/03/triumph-of-the-nerds/]
And [Page 170] Pasteur claims “Luck favors the prepared”

[Page 170] On the difficulty of predicting, just look at the failure of the Segway which “it was prophesized, would change the morphology of cities.”

[Page 184] Another example of Taleb’s target: optimization… Optimization consists in finding the mathematically optimal policy that an economic agent could pursue. Optimization is a case of sterile modeling [discussed also in Chpater 17].

Politics

[Page 16] Categorization always produces a reduction in true complexity. Try to explain why those who favor allowing the elimination of a fetus in the mother’s womb also oppose capital punishment. [Which reminds me of André Frossard : “The unfortunate thing is that the left does not believe much in original sin and that the right has not much faith in redemption.”]

[Page 52] “I never meant that the Conservatives are generally stupid. I meant to say that stupid people are generally conservative” John Stuart Mill once complained. The problem is chronic: if you tell people that the key to success is not always skills, they think that you are telling them that it is never skills always luck.”

[Page 227] Which may explain “we live in a society of one person, one vote, where progressive taxes have been enacted precisely to weaken the winners”. I am not sure if Taleb does not prefer the aristocratic world. At least he seems to favor his friends from that world.

[Page 255] True, intellectually sophisticated characters were exactly what I looked for in life. My erudite and polymathic father – who, were he still alive, would have only been two weeks older than Benoît Mandelbrot [his mentor on non-linear fractals] – liked the company of extremely cultured Jesuit priests. I remember these Jesuit visitors […] I recall that one has a medical degree and a PhD in physics, yet taught Aramaic to locals in Beirut’s Institute of Eastern Languages. […] This kind of erudition impressed my father far more than scientific assembly-line work. I may have something in my genes dirving me away from bildungsphilisters.

Globalization/Scalability

[Page 28] a scalable profession is good only if you are successful; they are more competitive, produce monstrous inequalities and are far more random. Consider the example of the first music recording, of the alphabet, of the printing press. Today a few take almost everything; the rest, next to nothing [page 30].

[Page 32] In Mediocristan,” when your sample is large, no single instance will significantly change the aggregate or the total”. In Extremistan, Bill Gates in wealth or J. K. Rowling in book selling totally change the average of a crowd. “Almost all social matters are from Extremistan.” [When giving a talk on high-tech serial entrepreneurs at BCERC last month, I was slightly criticized with a “but you are only looking at 2% of the entrepreneurs! And I replied, yes but look at the impact…”]

[Page 85] Intellectual, scientific, and artistic activities belong to the province of Extremistan. I am still looking for a single counter-example, a non-dull activity that belongs to Mediocristan.

[Page 90] You not only see that venture capitalists do better than entrepreneurs, but publishers do better than authors, dealers do better than artists, and science does better than scientists.” (I can add that gold seekers made less money than the people who sold them picks and shovels.)

[Page 102] The consequence of the superstar dynamic is that what we call “literary heritage” or “literary treasures” is a minute proportion of what has been produced cumulatively. Balzac was just the beneficiary of disproportionate luck compared to his peers.

[Page 118] The problem here with the universe and the human race is that we are the surviving Casanovas (who should not have survived and had his life without luck – no destiny].

Statistics

Taleb is not against statistics, but against Gaussian law, averages, etc. [Page 37] “The near-Black Swan are somewhat tractable. These are phenomena commonly known by terms such as scalable, scale-invariant, power laws, Pareto-Zipf laws, Yule’s law, Paretian-stable processes, Levy-stable and fractal laws.”

One thousand and one days or the story of the turkey confirms to me that an individual may not owe to the society that fed them initially!

[Page 239] Standard deviations do not exist outside the Gaussian, or if they do exist, they do not matter and do not explain much. But it gets worse. The Gaussian family (which includes various friends and relatives, such as the Poisson law) are the only class of distributions that the standard deviation (and the average) is sufficient to describe. You need nothing else. The bell curve satisfies the reductionism of the deluded. There are other notions that have little or no significance outside of the Gaussian: correlation and worse, regression. Yet they are deeply ingrained in our methods: it is hard to have a business conversation without hearing the word correlation.

[Page 240] Taleb has nothing against mathematicians, but he refers to Hardy’s views: The “real” mathematics of the “real” mathematicians, the mathematics of Fermat end Euler and Gauss and Abel and Riemann, is almost wholly “useless” (and this is as true of “applied” as of “pure” mathematics).

[Page 252] A critical feature of Gaussian statistics is the inclusion of two assumptions: First central assumption: the flips are independent of one another. The coin has no memory. The fact that you got heads or tails on the previous flip does not change the odds of your getting heads or tails on the next one. You do not become a “better” coin flipper over time. If you introduce memory, or skills in flipping, the entire Gaussian business becomes shaky. (Whereas there is preferential attachment and cumulative advantage in non-Gaussian events.) Second central assumption: no “wild” jump. The step size in the building block of the basic random walk is always known, namely one step. There is no uncertainty as to the size of the step.
[…] I have not for the life of me been able to find anyone around me in the business and statistical world who was intellectually consistent in that he both accepted the Black Swan and rejected the Gaussian and Gaussian tools. Many people accepted my Black Swan idea but could not take its logical conclusion, which is that you cannot use one single measure for randomness called standard deviation (and call it “risk”), you cannot expect a simple answer to characterize uncertainty.

But Taleb goes one step further. [Page 272] “But fractal randomness does not yield precise answer. […] Mandelbrot’s fractals allow us to account for a few Black Swans but not all. […] A gray swan concerns modelable extreme events, a black swan is about unknown unknowns. […] I repeat: Mandelbrot deals with gray swans; I deal with the Black Swan. So Mandelbrot domesticated many of my Black Swans, but not all of them, not completely.

Finance

Taleb shows that the stock crashes are sometimes linked to bad modeling and is particularly critical of the Black-Scholes options. He is very much critical of the stock portfolio theories and related Nobel prizes (Markowitz, Samuelson, Hicks or Debreu, “wrecking the ideas of Keynes”. The story of the LTCM hedge fund is an illustration of Taleb’s points.

Business and technology

[Page xxv] Almost no discovery, no technologies of note came from design and planning – they were just Black swans. […] So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky thanks to aggressive trial and error, not by giving rewards or “incentives” for skill.

[Page 17] The business world – inelegant, dull, pompous, greedy, unintellectual, selfish and boring.
[…] What I saw was that in some of the most prestigious business schools in the world, the executives of the most powerful corporations were coming to describe what they did for a living and it was possible that they too did not know what was going on.

[Page 135] When I ask people to name three recently implemented technologies that most impact our world today, they usually propose the computer, the Internet and the laser. All three were unplanned, unpredicted and unappreciated upon their discovery, and remained unappreciated well after their initial use. They were consequential. They were Black Swans.

Against averages

[Page 295] Half of the time I am a hyperskeptic; the other half I hold certainties. […] Half of the time I hate Black Swans, the other half I love them. […] Half of the time I am hyperconservative; the other half I am hyperaggressive”. I could delete the quotes!

I am not fully finished with the Black Swan, I am now reading the 70-page postcript essay which Taleb added to the latest paperback edition. There might be more to say (and read if you followed me until now…)

* Poincaré is quoted in Le Monde on July 7, 2012, by Cedric Villani, who by the way also mentions Black Swans in Dans les entrailles des cygnes noirs

Serial entrepreneurs: are they better?

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Are serial entrepreneurs better than novices? This is a classical topic in entrepreneurship and it seems to me that urban legend says yes! There has been academic research going that way, with one major argument being that experience matters. However, I just finished my own analysis which I presented at the BCERC conference in Fort Worth (Texas). It is based on my previous work related to Stanford related start-ups: Stanford University and High-Tech Entrepreneurship: An Empirical Study (you can have a look here at the presentation and the article). The article on serial is available on the SSRN network and you can have a look at the presentation in pdf below.


click on picture to view the pdf slides

And the conclusion? I do not find evidence that novice entrepreneurs would be less performant. It is a “work in progress” but if you have a look at the slides, you might see it in particular on slides 7, 9 or even 20. Slide 7 shows average performances according to experience. Slide 9 (q-q graphs) sshows something else: serial founders would do worse with time. Finally slide 20 that serial successful in the past have a new success rate of about 28-29 % which is similar to novices (the novice figure is not on the slide), whereas serial who failed before have a lower success rate. As if talent mattered more than experience…

Start-ups hiding six feet under

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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.

Freeman Dyson: The Scientist as Rebel

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Freeman Dyson is a strange scientific blend of wise and moderate conservatism and pioneer of iconoclasm. He advocates cold analysis but loves what is strange. I just read The Scientist as Rebel, a wonderful book where everyone can find his or her share of intellectual stimulation.

Any relationship with innovation or entrepreneurial high-tech? Very little directly, and the subject is closer to my other articles on the books about reflexions on science (Smolin, Ségalat for example). There are actually many connections between scientific research and technology innovation, not the least being the question of creativity. Another tenuous link: he is the father of Esther Dyson, famous venture-capitalist in Silicon Valley.

Failure is another example. In an interview Dyson gave before writing this book said about its role: “You can’t possibly get a good technology going without an enormous number of failures. It’s a universal rule. If you look at bicycles, there were thousands of weird models built and tried before they found the one that really worked. You could never design a bicycle theoretically. Even now, after we’ve been building them for 100 years, it’s very difficult to understand just why a bicycle works – it’s even difficult to formulate it as a mathematical problem. But just by trial and error, we found out how to do it, and the error was essential. The same is true of airplanes.” From Freeman Dyson’s Brain

The Title “The Scientist as Rebel” also reminds me the quote by Pitch Johnson which I had mentioned in Entrepreneurs and Revolutions: “Entrepreneurs are the revolutionaries of our time.” And he had added: “Democracy works best when there is this kind of turbulence in the society, when those not well-off have a chance to climb the economic ladder by using brains, energy and skills to create new markets or serve existing markets better then their old competitors”

In this book, Dyson writes about ethics, religion, climate change and about scientists as different as Gödel, Erdös, Hardy, Oppenheimer, Feynman of course, Teller the indefensible, and Thomas Gold whom I had never heard of.

The chapter is called “A Modern Heretic.” Gold has covered topics as diverse as
– the physiology of the ear (validated 30 years later despite resistance of many kinds),
– the instability of Earth’s axis of rotation,
– the abiotic origin of natural gas and oil, (i. e. not derived from the degradation of living creatures)
– the existence of life within the Earth’s crust,
– the interpretation of pulsars.
He had no fear of making mistakes on such topics as
– the steady state universe,
– the moon’s surface being covered with a fine rock powder.
Gold was “an intruder but certainly not an ignorant” and added that “science is not fun if the scientist is never wrong.” I just found another blogger article on Gold: The Radical Ideas Of Thomas Gold.

Dyson has written a challenging, exciting book, and I can only encourage its discovery!

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…

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…

European Founders at Work

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European Founders at Work is a very interesting book. It is the perfect complement to Founders at Work, particularly for the European dimension.

One comment though, I noticed 8 UK projects out of a little more than 20 and these 20 are mostly Software or Internet. More diversity may have been great. This being said, the lessons are great! Here are some… (and you will learn much more by reading the book entirely!)

About the US Market (for Europeans)

“I think that Europe has a lot of credibility in certain sectors, particularly media and the creative industry, but I think that in technology, generally, most of the world’s biggest companies were founded in the US and, therefore, the expectation in the US market is that in technology, they are going to be talking and buying from US companies. […] it’s important to become a US team in the US market. […] I think you need to be prepared to make a pretty big investment in the US and you need to be prepared to build up the business for several years,” Jos White – MessageLabs

“I would say that the IT sector, and especially enterprise software, is extremely global but remains dominated by US companies. There are very, very few examples of European IT and software companies that have managed to go global. I believe, the only way to make that happen is to go global very, very quickly, as we did from the outset.” Bernard Liautaud – Business Objects

“In my experience, if you come from a smaller European market, like Hungary or Sweden, you tend to think that it’s a nice next step to go to UK or Germany. The issue is that if you become successful there, it is still only a sixth of that of the US market. So, if you get a US competitor, you immediately become a regional player instead of a global player. So, very early on, I said we shouldn’t even be thinking about opening up offices in Frankfurt or in London because the way to make it globally was to first prove that we can make it on the world’s biggest market, which is the US. That’s going to be the truth at least for the next ten to fifteen years.” Peter Arvai – Prezi

“I think the reality is that it’s not about Europe vs. Silicon Valley. The best entrepreneurs in Europe understand Silicon Valley very well. They have spent time in Silicon Valley and developed relationships in Silicon Valley. Take all of that and all of the value that comes from that because you’re a fool if you think that Silicon Valley isn’t the most sophisticated, vibrant place for technology start-ups on the planet. It probably will continue to be so for the next twenty-five to fifty years because of the network. And the ecosystem is so profound there and keeps on getting stronger with Zynga, with Twitter, with Facebook, etc. I think any European entrepreneur or any entrepreneur in this space that doesn’t want to spend time or learn from Silicon Valley is foolish. But I think there’s a lot of things that you can learn and be aware of as an entrepreneur if you’re not in Silicon Valley, that you can use to your advantage.” Saul Klein – LoveFilm


The interviewed entrepreneurs

About success and failure

“Any successful entrepreneur knows that it was a combination of skill and attitude, with luck, that really leads to success. And there are very fine lines between success and failure” Jos White – MessageLabs

“I learned that the game is never over: you should never give up, stubbornness is somehow a requirement to lead a company to success, and the road to success is inevitably paved with failures. When things start to go wrong, the worst thing to do is panic and change everything.” Olivier Poitrey – DailyMotion

“I think as an entrepreneur you fail all the time. You’ve got failure built into your business. Right? So you don’t really keep track of failure. You never really fail. I think that’s essential when you’re an entrepreneur, that you’re not afraid of failure. You embrace failure. Your whole business is based on trying out stuff, being ready for stuff to fail and just taking the next step as soon as you fail.” Boris Veldhuijzen van Zanten – The Next Web

About ambition

“Come up with an idea which is impossible then try to find somebody who can make it un-impossible and then do deals which have never been done before.” from the Shazam founders

“[A new trend is] You definitely see entrepreneurs being extremely ambitious.” Reshma Sohoni – Seedcamp

“I guess one advice is it’s more exciting if you feel like you’re changing the world in a positive and innovative way. So we’d love to see more of those out of Europe.” Brent Hoberman – lastminute.com

“But it is probably harder in Europe in that it innovates less, because you have less-crazy investors financing crazy entrepreneurs. [Advice:] One, international. Two, innovation and no copycat. And then, three, big ambition.” Loic Le Meur – Le Web

About the team

“There are very few founders that stay with their businesses beyond five years and quite often, in my opinion, it’s because they didn’t manage to surround themselves with the right team.” Bernard Liautaud – Business Objects

“But also obviously you hire people that are better than you” Ian Dodsworth – TweetDeck

“I also learned how hiring the right people from the start is key: the very first people to join will shape the company’s personality. And finding talented people you are pleased to work with is very important to generate emulation from new hires. Olivier Poitrey – DailyMotion

“A common mistake is building the team. If they’re quite scared to part with something … Like when they’re quite scared to part with equity or bringing on mentors. “Do you want to be a big fish in a small pond or a big fish in a big pond?” They’re too closed with their equity and they try to do everything.” Reshma Sohoni – Seedcamp

“Another common mistake is like a cliché now, but it’s just the classic: “I’ll just build another feature and I’ll focus on my product.” Alex Farcet – Startupbootcamp

About entrepreneurship

“The main advice is just start. Many people have hundreds of ideas, but they never really start their own project. And if you fail, start again. Entrepreneurship is, in my point of view, the best and the only way to personal development” Lars Hinrichs – Xing

“There are a lot of moments like that where you don’t know what you’re doing, but this was the whole point.” Giacomo Peldi Guilizzoni – Balsamiq

“ “Do it.” It’s the best decision I’ve ever done in my whole life. […] And I was studying engineering as well, and I had one hundred classmates. And I know that almost zero of them actually went on to start a company, which is kind of crazy because I know a lot of them have good ideas. But none of them quite felt that they were able to pull it off.” Eric Wahlforss – Soundcloud

“I have been lucky enough to be born with optimism.” Richard Moss – moo.com

“Hang in there. Don’t give up. I heard that most start-ups fail because the founders stop working on them.” Richard Jones – last.fm

“I would be realistic and I would say, “Look, if you think you are the lucky sperm that’s going to get the ovule, go ahead and start the business.” It’s a very difficult thing to do with a very high probability of failure. But it is essential for society and even those who try and fail are also helping society. So I encourage people to try, but at the same time warning them how difficult it is. I am tenacious and I am sometimes lucky and I’m good at spotting trends. But I was also lucky. Most people who try businesses fail. That’s the truth and people should be warned about that.” Martin Varsavsky – FON

As a conclusion let me quote Saul Klein in his foreword… “Right now, Silicon Valley is peerless at both supporting innovation and creating serious scale. There’s been no master plan, but the 60-year interplay of government as an early catalyst; academia and established companies as early customers and sources of talent; and of course, investors willing to take risks and a long term view, have given entrepreneurs fertile ground to sow seeds and try to grow monsters with dragon’s teeth ready to conquer the world.You need every element of this ecosystem working perfectly to create monsters. This is serious progress. But the straight facts are that while we are unquestionably masters of invention in Europe, we don’t yet have the ecosystem— or perhaps the attitude. […] For me, the big question is if we are truly able to do this.”

Post Scriptum: I am not finished yet. I love to add cap. tables and not so many of these entrepreneurs are running a publicly quoted company. Strangely enough, one is Russian, Yandex. Its foudner and CTO says something great about sales: “I think one of them is when you create a software product, you have to learn how to sell it, you have to learn how to make it a product. It’s a very basic skill. I think every engineer has to try that at least once, to sell the software he created, regardless of how bad it is. No matter how unpolished your product is, you have to try to explain why it is good for someone else.”

Here is Yandex amazing cap. table…

Click on picture to enlarge

After the lean startup, the anorexic startup

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You must read The Anorexic Startup. Just because it is a funny tale about start-ups. More precisley author Mike Frankel claims it is a “A Tale of Sex, Drugs, and C++”. You will follow entrepreneur and hero, Dale Schmidt, from Day 37 to Day 155 of his great adventure!! You can either download the 15-page pdf on the author’s site or please him by buying it on Amazon for $1.20!

Following my review of The Lean Startup, the author of The Anorexic Startup contacted me and asked what I thought of his work. I read it, smiled first and then laughed. I love this short story and the 10-20 minutes it takes to read is worth your time. Realistic I am not sure, but certainly close to many true stories. The shortest and probably among the best stories I read on the (high-tech) start-up and entrepreneurship words. Enjoy!