Tag Archives: Innovation

The Entrepreneurial State (part 3) – the State behind the iPhone

Mazzucato’s book is so important and interesting that it will take me many articles to cover it in a satisfying manner (to me at least).

Part 1 covers the Innovation dilemmas and crises. The “6 myths” she introduces are great.
Part 2 deals with the (forgotten or untold) role of the state in stimulating innovation through research. I had more disagreements with her on how far the State should act in the innovation ecosystem.
– In this part 3, I will focus on Chapter 5, about the role of the State in the iPhone technologies.
– Part 4 will deal with the chapters on Green technologies
– and I will need a part 5 to conclude and share thoughts.

Chapter 5 – the State behind the iPhone

Mazzucato shows here how “Apple concentrates its ingenuity not on developing new technologies and components, but on integrating them into an innovative architecture. […] Apple’s capabilities are mainly (a) recognizing emerging technologies with great potential, (b) apply complex engineering skills that successfully integrate recognized emerging technologies, and (c) maintain a clear corporate vision prioritizing design-oriented product development.” [Page 93]

Therefore “Apple received enormous direct and/or indirect government support derived from three major areas: (1) direct equity investment, (2) access to technologies, and (3) creation of tax or technology policies.” I mentioned already the first area and expressed my doubts. No objection and no discussion about the third area. I agree only partly with the second area: I have the feeling the access was through corporations, which themselves may have had access to government or academic research. Xerox PARC is the most famous examples, but Apple also acquired little-known start-ups which had developed products from such research. Mazzucato built her own “Origins of popular Apple products.”

Iphone Technologies origin

It is a very interesting drawing but I would have liked to see which “entity” developed the mentioned products. In some cases, it is a government related body, such as for the Internet for example (http://en.wikipedia.org/wiki/History_of_the_Internet) and in other cases it is a private entity funded initially with public money.

SIRI is an interesting example as it has some roots here at EPFL. The CALO program was funded by DARPA, but a start-up was launched with venture capital money in 2008, which was then acquired by Apple.

When it comes to displays, Mazzucato quotes Florida and Browdy and “The invention that got away” (1991) about the inability of private actors to build manufacturing capabilities. “The loss of this [TFT-LCD] display technology reveals fundamental weaknesses of the US high-technology system. Not only did our large corporations lack the vision and the persistence to turn the invention into a marketable product, but the venture capital financiers who made possible such high-technology industries as semiconductors and computers failed too.” The paper shows the higher efforts of the Japanese industry pouring hundreds of millions of dollars in the technology development. In my analysis of Stanford-related high-tech companies, I remember being stricken by the amount of funding of Candescent. On the Internet archive dated 1998, I could find the following:
“Candescent Technologies Corporation is a seven-year old company developing a revolutionary new flat panel display [which is] a dramatic improvement over the liquid-crystal displays. In 1991 Candescent formed a strategic alliance with Hewlett-Packard Company. As of May 1, 1998 Candescent had received more than $337 million in funding from investing strategic partners, venture capital firms, institutional investors, US Government-sponsored organizations, and capital equipment leasing firms.” In 2001, it had raised more than $600M with Compaq, Citicorp, Hewlett-Packard, J.P. Morgan, New Enterprise Associates, Sevin-Rosen, Sierra Venture Affiliates, and others. In June 2004, Candescent filed a Voluntary Reorganization case under Chapter 11 of the Bankruptcy Code in the San Jose Bankruptcy Court. In August 2004, Candescent sold substantially all of its assets, including its flat panel display intellectual property to Canon, Inc.”

Again, I do not have major disagreements with Mazzacuto but my experience with innovation is that it is a very uncertain activity and I am not sure it is due only to the lack of private sector support. In the end, neither Japan nor the USA won, but Korea with Samsung and LG.

I knew less about multi-touch screens and the interesting story of FingerWorks, which assets Apple bought when the company went bankrupt.
“The company’s products remained a high-end niche, and something of a curiosity, despite good press and industry awards. In early 2005, FingerWorks went through a rocky period, and stopped shipping new products. Outside reports indicated that they had been acquired by a major technology company. This company turned out to be Apple. In June 2005, FingerWorks officially announced they were no longer in business. The founders continued to file and process patents for their work through late 2007. And as of August 2008 they still filed patents for Apple, Inc.” (http://en.wikipedia.org/wiki/FingerWorks)
Again Apple also worked with Corning to develop ultra-robust screens called the Gorilla Glass (http://en.wikipedia.org/wiki/Gorilla_Glass).

On the microprocessor, I have two similar comments:
– Though there are many sources claimed for the microprocessor, it is often mentioned that Intel really launched the technology as a product and this came as an order from a Japanese company, not from public procurement.
– Much later, Apple bought P.A. Semi. which developed specialized microprocessors. Well even P.A. Semi. had strong links with the DoD so Mazzucato still has a strong point!

As an interesting comparison, the MIT technology review had a hacking session of the Apple I, iPhone and iPad, which shows the brilliance of integration. There were many computers and smart phones, but at Apple, there was the genius of Wozniak and others when Jobs came back – http://www.technologyreview.com/view/425238/classic-hacks-the-apple-i-computer-the-iphone-and-the-ipad-3g/

Iphone Technologies sketch

My reaction is that yes, many not to say most technologies have their roots with public entities, at least at the research stage, but the development is often concretized in small companies, with or without venture capital. Apple buys fewer VC-funded companies than Cisco’s A&D (Acquisition & Development) and clearly most big companies do not do much research. The challenge lies in the ability of translating research results into development, which many start-ups achieve. This is the Silicon Valley model.

I finish my notes on chapter 5 with Mazzacuto: “It is indisputable that most of Apple’s best technologies exist because of the prior collective and cumulative efforts driven by the State.” [Page 112]

The Entrepreneurial State: the important role of government in innovation (part 2)

As I said in The Entrepreneurial State: the important role of government in innovation (part 1), Mariana Mazzucato has written an important book even if I do not agree with all her arguments.

We agree on the issue of funding of technologies, inventions and innovations. It has been generally understood that the commercialization of products and their prior development is the responsibility of the private sector in a capitalist economy. The funding of research (at least basic research) is generally the mission of the state, but applied research (though I never really understood what this is) might be done by the State as well as by the private sector.

Let me open a short parenthesis here: I am not of big supporter of the concepts of basic and applied research, but I understand better other concepts from an early to later stage. Here they are:
Public-and-private-sector

Research has no known output a priori, except knowledge, whereas at a later stage the objectives are a little clearer. This being said, I am not fully comfortable about the arguments Mazzucato brings on the table when she says the State is doing a lot in innovation. But she clearly shows there is a grey zone between the 3 stages I have above. I belong (at least for now) to the group of people who believe it is the mission of the State to be active in the first two ones, and the private sector being in the third. Nothing forbids the private sector to go earlier and the public sector to be more active later, but it is seldom the case. Here are my notes on Chapters 3 and followings:

Chapter 3 – Risk-taking state : from « de-risking » to « bring it on ! »

During a visit of President Mitterand to Silicon Valley, Thomas Perkins which fund started Genentech extolled the virtues of the risk-taking investors who finance the entrepreneurs. Perkins was cut off by Stanford Professor and Nobel Prize Paul berg. He asked, “Where were you guys in the 50’s and 60’s when all the funding that had to be done in the basic science?” [Page 57]

Entrepreneurship, like growth, is one of the least-well understood topics in economics. According to Schumpeter, an entrepreneur is a person willing and able to convert a new idea or invention into a successful innovation (i.e. product, service or process). Entrepreneurship employs the “gale of creative destruction” to replace, in whole or in part, inferior innovations, simultaneously creating new products including new business models. Each major new technology leads to creative destruction. [Page 58]

[Again I need to react: where I fully agree with the Entrepreneurship and Innovation definitions, I am skeptical about the comment on technology: some major new technologies never destroyed anything because they were not commercially successful (artificial intelligence, speech recognition for example and there are many others). I would say major new successful innovations lead to creative destruction. This is important because as Mazzucato rightly says, there is no linear process for innovation and a lot of uncertainty too.]

Entrepreneurship is about risk and is highly uncertain. R&D investments that contribute to technological change not only take years to materialize into new products, but most products developed fail. Silicon Valley model tells a story of “freewheeling entrepreneurs and visionary venture capitalists and yet misses the crucial factor: the military’s role in creating and sustaining it. [Mazzucato shows the same issues in Pharma where the big players develop me-too drugs and let the State fund radical innovations in universities, as is shown in the anecdote above with Mitterand, Perkins and Berg.]

R&D-Funding

Again, I have some concerns with this decription. First in the image above, I would have liked to see the R vs. D and not only the fundamental R vs global R&D. Mazzucato is right in the funding of research, no doubt about it. I used such data for many years where the funding of research in universities by the industry is 4-7% whereas the federal funding is around 60%! You can look at Figures 1 and 2 below. But then, when it comes to innovation, I do not see where the State produced the biotech or IT industry. It made inventions available. You still needed the visionary entrepreneurs and investors as I told about in the Genentech case on my blog a few years ago [see Bob Swanson & Herbert Boyer: Genentech
and Robert Swanson, 1947-1999]

Federal-Private-Res-GEN
Figure 1: Federal and Industry funding of university research in the USA.

Federal-Private-Res-Stanford-MIT
Figure 2: Federal and Industry funding of research at Stanford University and MIT.

Chapter 4 – The US entrepreneurial state.

In this short chapter, Mazzucato shows through four examples how the US government fostered innovation. These are DARPA (the funding of American research by the military), SBIR (The Small Business Innovation Research), Orphan Drugs and Nanotechnologies.

On Darpa, “A series of small offices, staffed with leading scientists, are given considerable budget autonomy, … funding a mix of university-based researchers, start-ups, established firms and consortia… helping firms to get products to the stage of commercial viability”. [Page 78 ] Again the impact of DARPA in funding research is a no brainer. And Yes, I should be said. Mazzucato is right about too much silence on the role of the State. Check as a great reference Rebecca’s Lowen “Creating the Cold War University – the Transformation of Stanford”.

I am less convinced about the SBIR. “Government agencies designate a fraction of their research funding to support small, independent, for-profit firms.” Mazzucato claims Apple was funded with such a fund, Continental Illinois Venture Corp. but I checked Apple IPO document and CIVC was not at the origin of the company. Arthur Rock and Don Valentine convinced Markkula to help the two Steve and invested in January 1979. Even if CIVC invested that early, it was a minority and passive shareholder. Furthermore, CIVC was the VC arm of a bank, so not a purely State investment… She also quotes Lerner and Audretsch, leading professors as references. In a recent book (Boulevard of Broken Dreams – Pages 125-126), the same Lerner explains that the lack of flexibility of SBIR and ATP was detrimental (it had to be pre-commercial funding for ATP; start-ups had to be 51% owned by US citizens or residents, to the point that the presence of venture capital could exclude the firm from SBIR funding!) I have been struggling for years to find the real impact of SBIR and could never find convincing data of an important role. State direct role in VC funding has been a recurrent debate with unclear answers for years.

I do not know about orphan drugs, but I am skeptical about nanotechnologies. “Nanotechnology is very likely to be the next general purpose technology”. [Page 83] “It will be even more important than the computer revolution.” “Today it does not yet create a major economic impact because of the lack of commercialization of new technologies, due to the excessive investments made in research relative to the lack of investments in commercialization. […] This raises a question: if government has to do the research, fund major infrastructure investments and also undertake the commercialization effort, what exactly is the role of the private sector?” [Page 86]

Well again many things are unclear and somehow contradictory in the arguments. If nanotechnology was just another low hanging fruit thanks to the State investment, we should have already seen early results. The US initiative on Nanotech was launched in 2000. There has been a very visible start-ups such as Nanosys or A123 to a lesser extent. Next is Nanosys cap. table as of 2004. One can read the then and additional funding from private sources.

I am now reading chapter 5 and will come back on Mazzucato’s book in a part 3!

Nanosys

The Entrepreneurial State: the important role of government in innovation (part 1)

Mazzacuto’s Entrepreneurial State is I think an important book. The author claims we have been unfair with the role in innovation of government and the public sector in general, which has provided funds for most not to say all R&D (Pharma, IT, Space). I share the blame as I am a strong supporter of start-ups, venture capital, Silicon Valley being the ultimate model. And the idea that the State should just provide the basics (education, research, infrastructure) and let the private sector innovate may have been a big mistake (of mine included). I will not take the blame on the second argument as I always shared with the author the idea that tax breaks and tax evasion makes the judgment even more unfair. Finally, the private sector is very risk averse so that there is less innovation (not only venture capital but corporate R&D, compared to the past when corporate R&D labs at IBM, Bell or Xerox were big or when VCs really contributed to innovation in semiconductor, computers and biotech in the 60s and 70s)

9780857282521_hi-res_2

Let me now quote Mariana Mazzacuto following her book linearly. You can also listen to her when she gave a talk at TedX.

While innovation is not the State’s main role, illustrating its potential innovative and dynamic character – its historical ability, in some countries, to play an entrepreneurial role in society is perhaps the most effective way to defend its existence. (Page 1.)

Entrepreneurship is not (just) about start-ups, venture capital and “garage tinkerers”. It is about the willingness and ability of economic agents to take on risk and real Knightian* uncertainty, what is genuinely unknown. (Page 2.)
Note: *Knightian uncertainty relates to the “immeasurable“ risk, i.e. a risk that cannot be calculated.

Even during a boom most firms and banks (would) prefer to fund low-risk incremental innovations, waiting for the State to make its mark in more radical areas. (Page 7.) Examples are provided from the pharmaceutical industry – where the most revolutionary new drugs are produced mainly with public, not private funds. (Page 10.)

Apple must pay tax not only because it is the right thing to do, but because it is the epicenter of a company that requires the public purse to be large and risk-taking enough to continue making the investments that entrepreneurs like Jobs will later capitalize on. (Page 11) Precisely because State investments are uncertain, there is a high risk that they will fail. But when they are successful, it is naive and dangerous to allow all the rewards to be privatized. (Page 12)

Chapter 1 – (The Innovation Crisis)

The emphasis on the State as an entrepreneurial agent is not of course meant to deny the existence of private sector entrepreneurship activity, from the role of young new companies in providing the dynamism behind new sectors (e.g. Google) to the importance source of funding from private sources like venture capital. The key problem is that this is the only story that is usually told. (Page 20)

It is naive to expect venture capital to lead in the early and most risky stage of any new economic sector today** (such as clean technology). In biotechnology, nanotechnology and the Internet, venture capital arrived 15-20 years after the most important investments were made by public sector funds. (Page 23) The State has been behind most technological revolutions and periods of long-term growth. This is why an “entrepreneurial” state is needed to engage in risk taking and the creation of a new vision.
Note: ** Well maybe not in the 50s to the 70s, certainly in the last 10 years.

Big R&D labs have been closing and the R of the R&D spend has also been falling. A recent MIT study (1) claims that the current absence in the US of corporate labs like Xerox PARC (which produced the graphical user interface technology that led to both Apple’s and Windows’ operating systems) and Bell Labs – both highly co-financed by government agency budgets – is one of the reasons why the US innovation machine is under threat. (Page 24) Rodrik (2004) states that the problem is not in which types of tools (R&D, tax credits vs. subsidies) or which types of sectors to choose (steel vs. software), but how policy can foster self-discovery processes, which foster creativity and innovation – the need to foster exploration trial and error (and this is the core tenet of the “evolutionary theory of economic change” in chapter 2)
References
[1] MIT 2013. Innovation Economic Report, web.mit.edu/press/images/documents/pie-report.pdf‎
[2] Rodrik, 2004. Industrial Policy for the 21st century. CEPR Discussion Paper 4767

Chapter 2 – Technology, Innovation and Growth.

Progressive redistribution policies are fundamental, but they do not cause growth. Bringing together the lessons of Keynes and Schumpeter can make this happen. (Page 31) Solow discovered that 90 per cent of variation in economic output was not explained by capital and labor, he called the residual “technical change”. (Page 33)

An “evolutionary theory” explains this as a constant process of differentiation among firms, based on their ability to innovate. Selection does not always lead to “survival of the fittest” both due to the effects of increasing returns and also to the effects of policies. Selection dynamics in products markets and financial markets may be at odds.

Innovation is firm specific and highly uncertain. It is not the quantity of R&D, but how it is distributed throughout an economy. The old view that R&D can be modeled as a lottery where a certain amount will create a certain probability of successful innovation is criticized because in fact innovation would be an example of a true Knightian uncertainty, which cannot be modeled with a normal (or nay other) probability distribution. (Page 35 – the Black Swan again)

Systems of innovation are defined as the “network of institutions in the public and private sector whose activities and interactions initiate, import, modify and diffuse new technology”. (Equilibrium theory cannot work; rather than using incremental calculus from Newtonian physics, mathematics from biology are used, which can explicitly take into account heterogeneity, and the possibility of path dependency and multiple equilibria.) (Page 36) The perspective is neither micro nor macro, but meso. The causation between basic science, to large scale R&D, to applications to diffusing innovation is not linear, but full of feedback loops. One must be able to recognize serendipity and uncertainty that characterizes the innovation process. […] Using Japan as an example, “the contributions of the development state in Japan cannot be understood in abstraction from the growth of companies such as Toyota, Sony or Hitachi aside from the Japanese State’s public support for industry”. (Page 38)

Regional systems of innovation focus on the cultural geographical, and institutional proximity that creates and facilitate transactions between different socioeconomic actors, including local administrations, unions and family-owned companies… The State does this by rallying existing innovation networks or by facilitating the development of new ones that bring together a diverse group of stakeholders. But a rich system of innovation is not sufficient. The State must develop strategies for technological advance.

Mazzacuto finishes Chapter 2 with 6 myths about innovation I totally agree with!

Myth 1: Innovation is about R&D. “It is fundamental to identify the company-specific conditions that must be present to allow spending on R&D to positively affect growth.”

Myth 2: Small is Beautiful. “There is confusion between size and growth.” What is important is the “role of young high-growth firms. Many small firms are not high-growth. […] Most of the impact is from age.” “Targeting assistance to SMES through grants, soft loans and tax breaks will necessarily involve a high degree of waste. While this waste is a necessary gamble in the innovation process,” it should be targeted on high growth and not SMEs, i.e. support “young companies that have already demonstrated ambition”.

Myth 3: Venture Capital is Risk-Loving. “Risk capital is scarce in the seed stage; it is concentrated in areas of high-growth potential, low technological complexity and low capital intensity.” […] “The short-term bias is damaging to the scientific exploration process which requires longer-term horizon and tolerance to failure.” “Rewards to VC have been disproportional to risks taken”, but Mazzacuto also recognizes that “Venture capital has succeeded more in the US when it provided not only committed finance, but managerial expertise.” Finally “The progressive commercialization of science seems to be unproductive”.

Myth 4: Patents. “The rise in patents does not reflect a rise in innovation”. [I will not come back here on the topic, read again Against Intellectual Monopoly]

Myth 5: Europe’s problem is all about Commercialization. “If the US is better at innovation, it isn’t because university-industry links are better (they aren’t) or because US universities produce more spinouts (they don’t). It simply reflects more research being done in more institutions, which generate better technical skills in the workforce. US funding is split between research in universities and early stage technology development in firms. Europe has a weaker system of scientific research and weaker and less innovative companies.”

Myth 6: Business Requires Less Tax. “The R&D tax credit system does not hold firms accountable as whether they have conducted new innovation that would not otherwise have taken place, or simply pursued routine forms of product development.” “As Keynes emphasized, business investment is a function of the gut instinct of investors about future growth prospects.” This is impacted not by tax break, but by the quality of the science base, education, credit system and human capital. “It is important for innovation policy to resist the appeal of tax measures of different kinds”.

More will follow when I have read chapters 3 and followings. Now I need to share some of my concerns, first by quoting again:

“Entrepreneurship by the State can take on many forms. Four examples: DARPA, SBIR, the Orphan Drug Act, Nanotechnology. (…) Apple is far from the “market” example it is often used to depict. It is a company that not only received early stage finance from the government (through the SBIC program) but also “ingeniously” made use of publicly funded technology*** to create “smart” products.” (Pages 10-11)
Note: *** Internet, GPS, Touch screen, Siri.

“Many of the most innovative young companies in the US were funded not by private venture capital but by public venture capital, such as that provided by the Small Business Innovation Research (SBIR) program.” (Page 20)

My concerns are that
– research is not innovation & the transfer is where entrepreneurship occurs so that investing in research is not innovating or even being entrepreneurial. This is at least my experience in the field.
– SBIR real impact unclear
– Green and nano-tech impact also unclear
But I have not finished reading yet…

What’s a start-up? (part 3)

My colleague Jean-Philippe Solvay recently asked me to a react to a Facebook post asking what is exactly a start-up. And as you may read there, it is not so easy to answer. One of the best references given in the post is swombat.com rather exhaustive analysis.

In the past, I wrote two posts: “part 1” was in 2011, where I had given my definition: “A start-up is a company which is born out of an idea and has the potential to become a large company” as well as the very good definition by Steve Blank: “startups are temporary organizations designed to search for a scalable and repeatable business model.” (There is something I am not comfortable with Steve Blank’s: I would delete “model”, as a start-up may know what it wants to do, but has not validated it yet. And start-ups copying existing business models would not be ones…)

Then in “part 2” in early 2013, I added the following: “A start-up is a corporation which explores, which is looking for a business model, a market, customers and is trying to innovate. It usually looks for a big market (“scalable”) and therefore service businesses do not qualify (except on the web) as they do not often scale. It is also a matter of strong and rapid growth in emerging markets because the competition is tough and there will be few winners. It often go fast. That is why it is more about a mindset: you are curious, in an uncertain world, trying to bring new things to the world. Because you are looking for a business, you do not have enough paying customers, and you will most likely need external capital (business angels, venture capital) except if your future customers accept to pay a lot in advance. This is why there is a strong correlation between being a start-up and having investors.”

I agree with most features given in the facebook or swombat contributions: “start-ups are new firms focusing on innovation and growth in situations of high uncertainty (or risk)”. They do not have to be about technology and if so, they are called high-tech start-ups. Maybe innovation is not so important, as many just copy others, but growth (through scalability) is critical. Consulting or service firms usually do not qualify because the growth is linear, not exponential (with the number of jobs).

Let me add another point: if the start-up term, was created, there has to be a good reason! When was it created? Wikipedia claims it became popular with the dot.com bubble of the late nineties. However, I found the term in Saxenian’s Regional Advantage (1994) and even in Silicon Valley Fever (1984). There is no doubt the term emerged with the technology clusters Route 128 and Silicon valley, the reason why it is associated with high-tech as well as venture capital. But not all start-ups belong to these geographic clusters. Microsoft and Amazon are based in Seattle, which is (at least was) not really a cluster. When they do not belong to a geographic cluster, they belong to a technology cluster, mostly IT (electronics, software, internet) or biotech/medtech. Tesla Motors is considered a start-up because it belongs to the Silicon Valley ecosystem though it is in an industry where very few start-ups exist. I do not think EasyJet was ever called a start-up because it belongs to no (technology or geographic) clsuter. So I would finally define a start-up as “a new firm focusing on growth in situations of high uncertainty, and belonging to a technology or geographic cluster”.

PS: while looking into the topic again, I found a debate on how to spell the word… In 2007, I had decided for “start-up”, but “start up” and “startup” also existed. It seems “startup” is now more and more popular. I stick to “start-up” for the time being, just to be consistent with what I always did.

Does the Swiss culture tolerate failure?

Here is my fourth contribution to Entreprise Romande. I realize now it is often about failure and innovation. This new article maintains the tradition. And because it was a special issue about failure, let me provide a translation of the editorial.

ER_20130705

Entreprise romande – July 5, 2013 – Véronique Kämpfen, rédactrice en chef:

Tolerance for failure favors growth

We are not all equal vis-à-vis failure. The fact is confirmed by a detailed study published by Barclays in late 2012. First, Europeans have more difficulty seeing failure as positive (69%) than Americans (71%), Asians (80%) and Middle Easterners (91%). Second, entrepreneurs have a less negative attitude towards failure than the rest of the population. They often think that failures have shaped their character, that this event has taught them a lot and they were able to bounce back quickly. Entrepreneurs are also far more optimistic than the rest of their fellow citizens. This phenomenon is described in the medical literature: it seems that a high number of successful entrepreneurs are characterized by a genetic form of psychiatric bias, which predisposes them to be creative, enthusiastic and somewhat less apprehensive vis-à-vis risk taking. John Gartner, the psychiatrist at the origin of this study, highlights the specific features of these characters: “Having that kind of confidence can lead to blindness when facing risk, because these individuals do not believe they can fail. (…) However, if they fail, they will not stay down for long and will soon be energized by a completely new idea”.

More generally, the Barclays study shows that tolerance for failure is essential to growth. The process of “creative destruction”, that is obsolete ideas, technology and business models give way to new impulses, is essential to economic progress and job creation. For this process to be effective, we need entrepreneurs who want to take risks, and an environment that supports their efforts. Until now, Switzerland seems to have done OK, as evidenced by its economic health and its high ranking in terms of innovation and competitiveness. As the Swiss are not the champions of tolerance for failure, they must be supported by appropriate framework conditions and encouraged so that those who have the entrepreneurial spirit may try … without taking too much risk! These topics are covered in great detail in the Magazine Entreprise romande. The taboo of failure and bankruptcy is analyzed in all its forms and put into perspective with practical advice and testimonials from entrepreneurs. Happy reading … enjoy the summer!

and here is my contribution:

Does the Swiss culture tolerate failure?

“The Swiss Society gives us so many slaps in the face through education that we are afraid of being creative, because we show then our weaknesses. By expressing our dreams, we do an intellectual striptease; it is feared that others see them as bad, not good, not nice and not fair.” So speaks Elmar Mock, inventor of the Swatch and founder Creaholic. The Swiss school system is indeed not known for its creativity. The famous (in French speaking Switzerland) « faut se gaffer » (“don’t be goofy”) might make you smile. Our teachers too seem to give more importance to the rigor than to the creativity of our little darlings. The room for error is unconsciously repressed. If one accepts the idea that innovation is above all creating in situations of uncertainty, the statement is worrying. Yet Switzerland is world champion of innovation in almost all global reports. Is there a contradiction?

Innovation is a subtle thing. Innovation is not limited to invention and innovation is not about technology only; it is the result of a process, following which are created products, services or new processes that will have to demonstrate that they answer a (commercial or non-commercial) need. The process leading to innovation is long, unpredictable and hard to control, innovation cannot therefore be planned and we have to accept failure.

Clayton Christensen, a professor at the Harvard Business School, built a theory explaining the process of disruptive innovation, the one innovation which allows the emergence of new revolutionary products such as the Internet, the mobile phone, but also the low-cost airlines, the one innovation which also allows new players to emerge and replace their older competitors. According to Christensen, disruptive innovation cannot occur within established institutions. The best companies are listening to their customers and those only want to improve existing products and will rarely desire new products. The U.S. has seen more than 80 major new companies emerge since 1970, and France, only 4. And Switzerland?

Switzerland is world champion of innovation firstly because the framework conditions are excellent. Everything is done for businesses to succeed, minimizing barriers and constraints. Then, because there is a culture of work well done. Apprenticeship, in the early years of training, helps in maintaining this tradition and Swiss companies are known to be listening to their customers in order to improve existing products in the right direction. But what kind of innovation are we talking about? Probably not about the one which enables technology breakthroughs. No, rather of a different type of innovation, incremental innovation, made of “gradual, continuous improvement of techniques or existing products; usually incremental innovation does not fundamentally change the dynamics of an industry, or does not require a change in behavior,” according to wikipedia. Switzerland is champion of incremental innovation through a dense network of highly performing SMEs. Failure is relatively absent, when the attention to every detail is permanent. But is it enough?

Not only the Swiss school system is not known for its creativity, but furthermore our academic spin-offs create few jobs. If we accept the corollary that innovation is a source of growth and new jobs, we might not be as innovative as it might be desired. We are obviously efficient for incremental innovation, but certainly not as good when it comes to disruptions. Except for one example that comes easily to my mind, the Swatch. But Nicholas Hayek was not the product of the Swiss culture! I could add Nespresso, but Eric Favre, inventor of the product, had suffered a strong initial reluctance from Nestlé to the point of saying: “The Swiss economy lacks real entrepreneurs!” The difficulty of integrating risk and radical innovation can make anyone short-sighted when experiencing ongoing changes and cause much bigger failures, as evidenced by the grounding of Swissair, which was seen as a national trauma. The United States has lost TWA and PanAm, but Americans have invented the concept of low cost airlines with Southwest or JetBlue, which have happily replaced the old players. In Europe, EasyJet and similar companies only followed the American model.

The Swiss start-ups never die. They have a survival rate of 90% after 5 years. Whereas across the Atlantic and even in Switzerland for traditional businesses, this rate is less than 50%… This may mean, quoting Xavier Comtesse, that “startups are protected by the academic system or federal funding.” Because failing is an unacceptable stigma? Or because taking risks, an inevitable cause of a greater failure rate, would be too dangerous? Without being so pessimistic, I would add that our start-ups are often excellent engineering offices, with great know-how. With a service business model eventually outweighing new products, the company survives without significant creation of jobs and without growth. I often asked entrepreneurs who failed to share their experience. A real failure! Our experts and mentors do not grow our young entrepreneurs in this direction, and I have heard it so often that I almost got used to it. Our business angels have a great distrust of more aggressive venture capitalists and they fear their more binary approach of “make it or break it. ”

Daniel Borel, the iconic entrepreneur: “In our industry, if we do not innovate constantly, if we do not have the courage to take risks, we disappear. This is why I prefer to get into seven projects even if it means failing three, as not to fail in anything, by chance, having focused on a single project.” […] “We only learn from our failures, rarely from succcess. Success can be your worst enemy: it makes you think you are strong, very strong; you could even walk on water. And it is at this point that you drown. ”

The Swiss culture has certainly a very small tolerance for failure. It promotes a type of innovation (incremental) which may explain its strengths. Its network of strong SMES is probably the result of this conservative and demanding culture. There is reason to be proud of it. But I like the quote from the former star of Hockey, Wayne Gretzky: “I skate to where the puck will be, not where it was.” The question is whether Switzerland will be tomorrow at the right place to get the puck …

The cradle of European Innovation

Sometimes, giving an interview has interesting and strange results. I do not read Korean so I cannot really help! But apparently what was kept from the conversation is that “it is important to make a culture where we are not afraid to fail”. As well as ” Culture is important to propagate entrepreneurship in universities. Even if the (academic) system is very good, it might be far from starting a business without this culture.” I had learnt my name is Russian was Эрве Лебре. Now I know it in Korean: 에레 레브레. And what about my new look according to a Korean photographer… Here is the full article.

◆ 창조경제의 요람 유럽대학 ① ◆

기사의 0번째 이미지
“대학에 기업가정신을 퍼뜨리기 위해서는 문화가 중요합니다. 제도가 아무리 좋아도 문화가 뒤따르지 않으면 창업은 요원한 일입니다.”

스위스 로잔공대 이노베이션파크에서 만난 이노그랜트 프로그램 총괄 책임자 에레 레브레 박사는 “유럽의 대학생들도 한국과 마찬가지로 기업가정신이 부족한 편”이라며 “미국 실리콘밸리처럼 기업가정신이 대학 곳곳으로 퍼질 수 있는 문화를 만들어야 한다”고 강조했다.

이노그랜트는 창업을 원하는 교수나 학생에게 조건 없이 창업자금을 지원하는 프로그램이다. 2005년 스위스의 한 은행이 학교를 위해 내놓은 100만달러를 종잣돈으로 삼아 만들어졌다. 레브레 박사는 “로잔공대에는 기술사업화와 창업을 지원하는 다양한 프로그램이 있었지만 `스타트업`을 중점적으로 돕는 프로그램이 필요하다고 판단했다”며 “이노그랜트 프로그램을 만든 뒤 지난 7년간 56개 아이디어에 자금을 지원했고, 이를 통해 25개 새로운 회사가 탄생했다”고 밝혔다.

이노그랜트 펀딩의 대상자가 되면 교수와 학생을 구분하지 않고 1년간 창업에만 열중할 수 있다.
창업에 실패한다고 하더라도 받은 돈을 학교에 반납할 필요가 없다. 레브레 박사는 “이노그랜트의 펀딩을 받으면 연구나 수업에서 제외된다”며 “1년간 생활자금을 지원해 주기 때문에 돈 걱정 없이 창업 준비에만 신경을 쓰게 된다”고 했다.

이 같은 혜택에 힘입어 이노그랜트 프로그램에 창업을 하겠다며 지원하는 프로젝트는 연간 40~50건에 달한다.

[로잔(스위스) = 원호섭 기자]
[ⓒ 매일경제 & mk.co.kr, 무단전재 및 재배포 금지]
http://news.mk.co.kr/newsRead.php?year=2013&no=583051

Korean-lebret

After posting this article, I received an English translation from the author. here it is:

Create a culture that is not afraid to fail
(This article is a part of the special series of articles titled “Visit European universities, Cradle of the creative economy”)

The EPFL is a unique place of innovation and competence. The EPFL handles innovation through its VPIV. The VPIV is responsible for the technology transfer, supporting start-ups through the Innogrants program and the coordination of all relationships between industry and EPFL. The EPFL turned out 156 new companies between 2000 and 2012. Hervé Lebret, the manager of the Innogrants said “Even if there was a best system, startups are still far-off without culture. It’s about culture. Just like Silicon Valley, we have to make a culture which can spread the entrepreneurship throughout the university.” The Innogrants were created by the EPFL in 2005 to encourage the entrepreneurial spirit and support start-ups. To date, 56 ideas were funded which enabled the creation of 25 start-ups. An Innogrant is a 12-month salary for the project owner in an EPFL laboratory and the beneficiary is freed of teaching or research activities so that the project owner fully concentrates on that project.

In Innovation Quest, Regions Seek Critical Mass

Very good article by the MIT technology review about technology clusters: In Innovation Quest, Regions Seek Critical Mass. Nothing really new, but it shows again and again how difficult it is to build such clusters and to promote an innovation culture. I just extract a few quotes:

“Clusters exist—it’s empirically proven,” Yasuyuki Motoyama, a senior scholar at the Kauffman Foundation, told me. “But that doesn’t mean governments can create one.”

The problem for governments is that they often try to define where and when innovation will occur. Some attempt to pick and fund winning companies. Such efforts have rarely worked well, says Josh Lerner, a professor at Harvard Business School. Governments can play a role, he says, but they should limit themselves mostly to “setting the table”: create laws that don’t penalize failed entrepreneurs, reduce taxes, and spend heavily on R&D. Then get out of the way.

But can entrepreneurs succeed in creating clusters where governments have had so much difficulty? “The conflict now is between two logics on how to create an ecosystem,” says Fiona Murray, a professor at MIT’s Sloan School, who consults as a kind of therapist to clusters, including London’s TechCity. One is “a government logic that says it’s too important to leave to entrepreneurs, and that you that need specialized inputs, like a technology park.” The other is “purely focused on people and their networks.” Murray believes the answer lies somewhere in the middle. Governments are good at organizing but poor at leading.

I will finsih by reminding you the power of SV in the cluster leadership…

WinnerTakesAll

Innovation: High Stakes for France

I had the pleasure to be part of the group who contributed to the Beylat-Tambourin report, Innovation: High Stakes for France, which subtitle is also important: Dynamizing the Growth of Innovative Companies. It was a long process, we started working in September and the final document was presented to the Ministers on 5 April. You can download the report in pdf format or here, should the previous one not work..

The report is in French but as I saw the Wall Street journal mentioning it, I thought I would do a post in English too. However, if you read French, go to the sister blog post: L’innovation en France: le rapport Beylat Tambourin. My French is much better!

What should be noted before discussing the content is that 25 members of the mission come from different worlds (see end of article), which could have made it difficult to find agreement. This was not the case. There were debates, but this report summarizes the proposals without forgetting important points, or dilute the point, I think. I read (only) one satirical article in the media, but I’m not sure that the author had read the report (see end of the article as well)…

CouvBeylatTambourin
Click on the image to download the report in pdf format

I translate (again my apologies for my far from perfect English) here a quote from the introduction: “With the acceleration and the complexity of the issues, public policies sometimes seem poor, often messy. […] They have often been compared to a system of research transfer, itself too weak, and indeed not focusing enough on the creation of high-growth companies with an ability to create jobs. […] But there is no single model of innovation. […] However, invariants exist: research excellence; low barriers between public and private sectors; an entrepreneurial culture; cultural diversity, the ability to attract talent at an international level; a migration policy; and a successful combination of start-ups, large corporations, public research, higher education and investors.” [Pages 1-2]

The difficult definition of innovation
Here’s a great paragraph that I want to quote again: “There is no definition – uncontested and incontestable-of innovation but it is possible to bring out some characteristics of innovation:
– Innovation is a long, unpredictable and hard to control process.
– Innovation is not limited to the invention and innovation is not only technological.
– At the end of this process, are created products, services or new processes that demonstrate that they meet the needs (market or non-market) and create value for all stakeholders.
Another point worth noting: an innovation cannot be decreed, cannot be planned, but it is seen through the commercial (or societal) success it meets. This explains why it often comes at the margins of existing businesses and through interactions with many different actors: “The Internet is the product of a unique combination of military strategy, scientific cooperation and protest innovation” in the famous sentence by Manuel Castells.” [Page 5] ” Accordingly, a vision where the expenditure on R&D is the main concern should be changed in favor of a systemic vision for results, in terms of growth and competitiveness.” [Page 6] In other words, innovation is not the invention and certainly not R&D.

Here are the 19 recommendations, divided into four groups:
I. Developing a culture of innovation and entrepreneurship.
II. Increase the economic impact of public research by the transfer.
III. Support the growth of innovative companies.
IV. Develop instruments of public policy for innovation.

For the first group (Culture):
1. Revise teaching methods in primary and secondary schools to develop innovative initiatives.
2. Implement a large-scale program for entrepreneurship learning in higher education.
3. Promote the dissemination from large groups through spin-offs.
4. Develop a policy for attractiveness of talent around innovation.
For the second group (transfer):
5. Implement the operational monitoring of 15 measures for rebuilding the transfer of public research (see http://www.enseignementsup-recherche.gouv.fr/cid66110/une-nouvelle-politique-de-transfert-pour-la-recherche.html – in French)
6. Promote the mobility of researchers between the public and private sectors.
7. Develop a coherent program for the transfer through the creation of businesses.
8. Focus SATT on maturation [SATT are the new French structures for academic technology transfer].
9. Establish a consistent policy of public-private research partnerships, bringing together different policies (scattered today).
For the third group (growth):
10. Address the lack of equity financing for innovative companies (venture capital and later-stage growth equity) by mobilizing a small part of the French savings and improving the possible exit strategies for investors in these segments.
11. Launch “early stage” sector initiatives.
12. Implement the policy instruments of protection (IP, standardization) serving innovative companies.
13. Harmonize the different labels of innovative companies for better readability and link them to the growth of companies, consistently aligning all support tools available.
14. Encourage large groups and large public institutions to be involved in the emergence and growth of innovative enterprises, integrating new dimensions in their obligation for environmental and social responsibility.
Finally for the last group (public policy):
15. Recognize the role of metropolitan innovation ecosystems as the support for regional strategies as well as for the national innovation strategy.
16. Organize the transfer system to make it more readable and more efficient.
17. Provide the means to develop, pilot and evaluate a comprehensive and coherent strategy of French innovation.
18. Appoint a single operator for the operational consolidation of public finance policies of innovation: the BPI (the Investment Public Bank in its innovation component).
19. Making innovation a real political issue, organizing a broad public debate.

[Again sorry for the imperfect translation. I hope you got the points…]

As explained in the Wall Street Journal in Nineteen Ways to Make France More Innovative, “In the short-term, the government should move away from considering R&D spend as a metric of innovation recommended the authors, and look at jobs created. France outspent Germany on R&D in many areas, said Mr. Beylat and Mr. Tambourin, but the effect wasn’t felt in the economy.”

Another comment concerns the sub-title of the report: Dynamizing the Growth of Innovative Companies.  This is a very important  subtitle, but do not  get me wrong, it is not about start-ups only here, but the message is that innovative companies should be a source of growth, whether large groups, SMEs or start-ups. It may not be a cultural revolution, or is it?

To push the envelope a little further, here is a short excerpt: “France is between the American dream of Silicon Valley, where disruptive innovations are supported by start-ups, the German dream of a well-established industrial Mittelstand, efficient in incremental innovation, and a French tradition of industrial planning in sovereign sectors. This oscillation blurs the representation that France has made of innovation because it mixes breakthrough innovation, incremental innovation and “strategic industrial policy.” We must cut short a myth: if innovation often requires an excellent R&D, it is not limited to R&D. It is not its natural extension. Innovation is above all the process that leads to the marketing of products or services, meeting a need, made by individuals engaged in an entrepreneurial approach. Innovation is thus at the crossroads of several areas, first and foremost research, entrepreneurship, industry and education. There is therefore no conceptual optimization or normative expected pattern.” [Page 6]

And on the cultural aspects: “Innovation is primarily a matter of individuals, state of mind and ambition for the company and for themselves. The dissemination of the culture of innovation and entrepreneurship is vital. These cultures are closely linked: vision, risk-taking, acceptance and learning from failure, capacity for initiative, project culture and commitment to completion are the main components. Finally, the ability to create companies with high growth potential (spin-offs and start-ups), some of which will become world leaders, sometimes in a few years, characterizes an effective innovation system.” [Page 7]

And finally I add a quote from President Obama, which perfectly symbolizes the problem: “We insist on personal responsibility and we celebrate individual initiative. We’re not entitled to success. We have to earn it. We honor the strivers, the dreamers, the risk-takers, the entrepreneurs who have always-been the driving forces behind our free enterprise system – the greatest engine of growth and prosperity the world has ever known.”

The report was presented to ministers on April 5, and to the French Prime Minister on April 8, for the appointment of Anne Lauvergeon as President of Innovation 2030. Genevieve Fioraso [the French minister for research and higher education] noted, however, in her introduction to the submission of this report, that President Obama was able to speak for about an hour on this one chapter of innovation. Where else would this be possible?

Finally, and this is a personal note, this report should be used more as a base for innovation than as a toolbox or a set of recipes. This is the big picture that matters and not the extraction of recommendations that would suit one or the other. “The issues of competitiveness show that innovation must be at the heart of public policy, as illustrated by our recommendations. While this is a technical issue that is inherently complex (because of all the dimensions that make up), where the “right” decisions are sometimes against-intuitive (eg, linear view of innovation seductive but wrong), it seems essential that innovation becomes a real political issue to ensure its adoption by policy makers and citizens.” [Page 121]

Finally I would like to add more quotes on innovative ecosystems. As it begins to be long, I’ll do it in a future article …

Facts and Figures

They show the challenges of innovation, particularly in France. I’ll let you judge for yourself.

R&D Intensity (compares France and Germany in their R&D efforts relatively to firm size)

MissionBT-research-intensity

An interesting typology of research using fundamental and applied research as well as experimental development

MissionBT-research-tipology

… and its evolution in France

MissionBT-research-tipology-evol

A real issue: company growth – number of companies reaching €100M in R&D relatively to company year of foundation

MissionBT-rgrowth-companies

The complexity of the financing situation – as a % of GDP

MissionBT-VC

The complexity of the financing situation – seed, early, late & LBO

MissionBT-PE

As mentioned above this is the origin of 27 members (two presidents, 25 experts).

MissionBT-repartition

 

A few references from the Press:

Nineteen Ways to Make France More Innovative (Wall Street Journal)
Une mission sur l’innovation après le rapport Gallois (les Echos)
Cinq pistes pour favoriser l’innovation en France (L’Expansion)
Le gouvernement va-t-il enfin mener une politique volontariste d’innovation ? (ZDnet)
Un rapport sur l’innovation qui sent la naphtaline (The satirical article by L’Informaticien)

Business Model Generation – never too late!

Last week, I attended a workshop organized by Raphael Cohen. He explained his IpOp process. You can read again the post I wrote a few months ago: Proven Tools for Converting Your Projects into Success (without a Business Plan). It’s really a good tool if you need to develop your own project. Cohen mentioned the famous Business Model Generation by Alexander Osterwalder and Yves Pigneur; and he showed us again its 9 building blocks. It has become such a standard… I never mentioned it here. Better late than never!

bmcanvas_v4.indd

You can download the pdf canvas here.

After the Black Swan, Taleb strikes again with Antifragile

Antifragile, things that gain from disorder by Nassim Nicholas Taleb
Antifragile-Taleb

Here’s probably one of the toughest post I ever had to write and I am not sure it is a good one, even if the topic I am addressing is great and important. But it’s been a challenge to summarize what I learnt: Nicholas Nassim Taleb gives in this follow-up to the Black Swan a very interesting analysis of how the world can be less exposed to Black Swans, not by becoming more robust only, but by becoming antifragile, i.e. by benefiting from random events. His views include tensions between the individual and the groups, how distributed systems are more robust than centralized ones, how small unites are less fragile than big ones. This does not mean Taleb is against orgamizations, governments or laws as too little intervention induces totally messy situations. It is about putting the cursor at the right level. Switzerland represents for Taleb a good illustration of good state organizations with little central government, a lot of local responsibility. He has similar analogies for the work place, where he explains that an independent worker, who knows well his market, is less fragile to crises than big corporations and their employees. One way to make systems less fragile is to put some noise, some randomness which will stabilize them. This is well-known in science and also in social science. Just remember Athens was randomly nominating some of its leaders to avoid excess!

You can listen to Taleb here:

Now let me quote the author. These are notes only but for serious reviews, visit the author’s website, www.fooledbyrandomness.com/. First Taleb is, as usual, unfair but maybe less than in the Black Swan. Here is an example: “Academics (particularly in social science) seem to distrust each other, […] not to mention a level of envy I have almost never seen in business… My experience is that money and transactions purify relations; ideas and abstract matters like “recognition” and “credit” warp them, creating an atmosphere of perpetual rivalry. I grew to find people greedy for credentials nauseating, repulsive, and untrustworthy.” [Page 17] Taleb is right about envy and rivalry but wrong in saying it is worse in academia; I think it is universal! In politics for example. But when money is available, maybe rivalry counts less than where there is little.

Nassim Nicholas Taleb

Now a topic close to my activity: “This message from the ancients is vastly deeper than it seems. It contradicts modern methods and ideas of innovation and progress on many levels, as we tend to think that innovation comes from bureaucratic funding, through central planning, or by putting people through a Harvard Business School class by one Highly Decorated Professor of Innovation and Entrepreneurship (who never innovated anything) or hiring a consultant (who never innovated anything). This is a fallacy – note for now the disproportionate contribution of uneducated technicians and entrepreneurs to various technological leaps, from the Industrial Revolution to the emergence of Silicon Valley, and you will see what I mean.” [Page 42] [Extreme and unfair again, even if not fully wrong!]

“The antifragility of some comes necessarily at the expense of the fragility of others. In a system, the sacrifices of some units – fragile units, that is, or people – are often necessary for the well-being of other units or the whole. The fragility of every start-up is necessary for the economy to be antifragile, and that’s what makes, among other things, entrepreneurship work: the fragility of the individual entrepreneurs and their necessarily high failure rate”. [Page 65] What surprised me later is that Taleb shows that this is true of restaurants (not many succeed) as much as of high-tech start-ups. So it is not only about the uncertainty of new markets, but about uncertainty above all.

Mathematics of convexity

I have to admit Taleb is not easy to read. Not because it is complex (sometimes his ideas are pure common sense), but because it is dense with different even if consistent ideas. The book is divided in 25 chapters, but also in 7 books. In fact, Taleb insists on it, he might have written 7 different books! Even his mathematics is simple. His definition of convexity is a little strange though I found it interested (I teach convex optimization, and you might not know, it was the topic of my PhD!).

Jensen inequality is interesting [Pages 342, 227 – Jensen was an amateur mathematician!]– the convex transformation of a mean is less or equal than the mean after convex transformation. Again individual (concave, we die) vs. collective (convex, antifragile, benefits from individual failures). So risk taking is good for collectivity if with insurance mechanisms. Risk taking + insurance vs. speculation with no value added. An example of a short and deep idea: “Decision making is based on payoffs, not knowledge”. [Page 337]

“Simply, small probabilities are convex to errors of computation. One needs a parameter, called standard deviation, but uncertainty about standard deviation has the effect of making the small probabilities rise. Smaller and smaller probabilities require more precision in computation. In fact small probabilities are incomputable, even if one has the right model – which we of course don’t.” [Taleb fails to mention Poincare yet he quoted him in the Black Swan, but whatever.]

A visible tension between individual and collective interests

Quotes again: “What the economy, as a collective, wants [business school graduates] to do is not to survive, rather to take a lot, a lot of imprudent risks themselves and be blinded by the odds. Their respective industries improve from failure to failure. Natural and nature-like systems want some overconfidence on the part of the individual economic agents, i.e., the overestimation of their chances of success and underestimation of the risks of failure in their business, provided their failure does not impact others. In other words, they want local, but not global overconfidence”. […] In other words, some class of rash, even suicidal, risk taking is healthy for the economy – under the conditions that not all people take the same risks and that these risks remain small and localized. Now, by disrupting the model, as we will see, with bailouts, governments typically favor a certain class of firms that are large enough to require being saved in order to avoid contagion to other businesses. This is the opposite of healthy risk taking; it is transferring fragility from the collective to the unfit. […] Nietzsche’s famous expression “what does not kill me makes me stronger” can be easily implemented as meaning Mithridatization or Hormesis but it may also mean “what did not kill me did not make me stronger, but it spared me because I am stronger than others; but it killed others and the average population is now stronger because the weak are gone”. […] This visible tension between individual and collective interests is new in history. […] Some of the ideas about fitness and selection are not very comfortable to this author, which makes the writing of some sections rather painful – I detest the ruthlessness of selection, the inexorable disloyalty of Mother Nature. I detest the notion of improvement thanks to harm to others. As a humanist, I stand against the antifragility of systems at the expense of individuals, for if you follow the reasoning, this makes us humans individually irrelevant. ” [Pages 75-77]

A National Entrepreneur Day

“Compare the entrepreneurs to the bean-counting managers of companies who climb the ladder of hierarchy with hardly ever any real downside. Their cohort is rarely at risk. My dream – the solution – is that we would have a National Entrepreneur Day, with the following message: Most of you will fail, disrespected, impoverished, but we are grateful for the risks you are taking and the sacrifices you are making for the sake of the economic growth of the planet and pulling others out of poverty. You are the source of our antifragility. Our nation thanks you.” [Page 80]

Local distributed systems, randomness and modernity

“You never have a restaurant crisis. Why? Because it is composed of a lot of independent and competing small units that do not individually threaten the system and make it jump from one state to another. Randomness is distributed rather than concentrated.” [Page 98]

“Adding a certain number of randomly selected politicians to the process can improve the functioning of the parliamentary system.” [Page 104]

“Modernity is the humans’ large-scale domination of the environment, the systematic smoothing of the world’s jaggedness, and the stifling of volatility and stressors. We are going into a phase of modernity marked by the lobbyist, the very, very limited liability corporation, the MBA, sucker problems, secularization, the tax man, fear of the boss…” [Page 108]

“Iatrogenics means literally “caused by the healer”. Medical error still currently kills between three times (as accepted by doctors) and ten times as many people as car accidents in the United States, it is generally accepted that harm from doctors – not including risks from hospitals germs – accounts for more deaths than any single cancer. Iatrogenics is compounded by the “agency problem” which emerges when one party (the agent) has personal interested that are divorced from those of the one using his services (the principal). An agency problem is present with the stockbroker and medical doctor whose ultimate interest is their own checking account, not your financial and medical health.” [Pages 111-112]

Theories and intervention.

“Theories are super-fragile outside physics. The very designation “theory” is even upsetting. In social science, we should call these constructs “chimeras” rather than theories. [Now you understand why Taleb has many enemies.] A main source of the economic crisis started in 2007 in the Iatrogenics of the attempt by […] Alan Greenspan to iron out the “boom-bust” cycle which caused risks to go hide under the carpet. The most depressing part of the Greenspan story is that the fellow was a libertarian and seemingly convinced of the idea of leaving systems to their own devices; people can fool themselves endlessly. […] The argument is not against the notion of intervention; in fact I showed above that I am equally worried about under-intervention when it is truly necessary. […] We have a tendency to underestimate the role of randomness in human affairs. We need to avoid being blinded to the natural antifragility of systems, their ability to take care of themselves and fight our tendency to harm and fragilize them by not giving them a chance to do so. […] Alas, it has been hard for me to fit these ideas about fragility within the current US political discourse. The democratic side of the US spectrum favors hyper-intervention, unconditional regulation and large government, while the Republican side loves large corporations, unconditional deregulation and militarism, both are the same to me here. Let me simplify my take on intervention. To me it is mostly about having a systematic protocol to determine when to intervene and when to leave systems alone. And we may need to intervene to control the iatrogenics of modernity – particularly the large-scale harm to the environment and the concentration of potential (though not yet manifested) damage, the kind of thing we only notice when it is too late. The ideas advanced here are not political, but risk-management based. I do not have a political affiliation or allegiance to a specific party; rather, I am introducing the idea of harm and fragility into the vocabulary so we can formulate appropriate policies to ensure we don’t end up blowing up the planet and ourselves.” [Pages 116-118]

“To conclude, the best way to mitigate interventionism is to ration the supply of information. The more data you get, the less you know.” [Page 128]

“Political and economic “tail” events are unpredictable and their probabilities are not scientifically measurable.” [Page 133]

The barbell strategy and optionality

“The Barbell strategy is a way to achieve anti-fragility, by decreasing downside rather than increasing upside, by lowering exposure to negative Black Swans. So just as Stoicism is the domestication, not the elimination, of emotions, so is the barbell a domestication, not the elimination, of uncertainty.” [Page 159] “It is a combination of two extremes, one safe and one speculative, deemed more robust than a monomodal strategy. In biological systems, the equivalent of marrying an accountant and having an occasional fling with a rock star; for a writer, getting a stable sinecure and writing without the pressures of the market. Even trial and error are a form of barbell.” [Glossary page 428]

“The strength of the computer entrepreneur Steve Jobs was precisely in distrusting market research and focus groups – those based on asking people what they want – and following his own imagination, his modus was that people don’t know what they want until you provide them with it.” [Page 171]

“America’s asset is simply risk taking and the use of optionality, the remarkable ability to engage in rational forms of trial and error, with no comparative shame in failing, starting again and repeating failure. In modern Japan, by contrast, shame comes, with failure, which causes people to hide risks under the rug, financial or nuclear.”

“Nature does a California-style “fail early” – it has an option and uses it. Nature understands optionality effects better than humans. […] The idea is voiced by Steve Jobs in a famous speech: “Stay hungry, stay foolish.” He probably meant “Be crazy but retain the rationality of choosing the upper bound when you see it.” Any trial and error can be seen as the expression of an option, so long as one is capable of identifying a favorable result and exploiting it.” [Page 181]

“Option is a substitute for knowledge- actually I don’t understand what sterile knowledge is, since it is necessarily vague and sterile. So I make the bold speculation that many things we think are derived by skill come largely from options, but well-used options, much like Thales’s situation [who had an option with olive presses – pages 173-174] rather than from what we claim to be understanding.” [Page 186]

Taleb is skeptical with experts, with anyone believing in a linear model academia -> applied science ->practice (“lecturing birds how to fly”); he believes in tinkering, heuristics, apprenticeship, and makes again many enemies for free! He claims the jet engine, financial derivatives, architecture, medicine were first developed by practitioners and then theorized by scientists, not invented or discovered by them.

Tinkering vs. research

“There has to be a form of funding that works. By some vicious turn of events, governments have gotten huge payoffs from research, but not as intended – just consider the Internet. It is just that functionaries are too teleological in the way they look for things and so are large corporations. Most large companies, such as Big Pharma, are their own enemies. Consider blue sky research, whereby grants and funding are given to people, not projects, and spread in small amounts across many researchers. It’s been reported that in California, venture capitalists tend to back entrepreneurs, not ideas. Decisions are largely a matter of opinion, strengthened with who you know. Why? Because innovations drift, and one needs flâneur-like abilities to keep capturing the opportunities that arise. The significant venture capital decisions were made without real business plans. So if there was any analysis, it had to be of a backup, confirmatory nature. Visibly the money should go to the tinkerers, the aggressive tinkerers who you trust will milk the option.” [Page 229]

“Despite the commercial success of several companies and the stunning growth in revenues for the industry as a whole, most biotechnology firms earn no profit.” [Page 237] [Optionality again]

“(i) Look for optionality; in fact, rank things according to optionality, (ii) preferably with open-ended, not closed-ended, payoffs; (iii) do not invest in business plans but in people, so look for someone capable of changing six or seven times over his career, or more (an idea that is part of the modus operandi of the venture capitalist Marc Andreessen); one gets immunity from the backfit narratives of the business plan by investing in people. Make sure you are barbelled, whatever that means in your business.” [Page 238]

“I did here just debunk the lecturing-Birds-How-to-Fly epiphenomenon and the “linear model”, suing simple mathematical properties of optionality. There Is no empirical evidence to support the statement that organized research in the sense it is currently marketed leads to great things promised by universities. [Cf also Thiel lamentations about the promise of technologies – https://www.startup-book.com/2010/10/12/tech-equals-salvation/ ] Education is an institution that has been growing without external stressors; eventually the thing will collapse.” [A conclusion to book IV, page 261]

Why is fragility non linear?

“For the fragile, the cumulative effect of small shocks is smaller than the single effect of an equivalent single large shock. For the antifragile, shocks bring more benefits (equivalently, less harm) as their intensity increases (up to a point).”

Via negativa

“We may not need a name for or even an ability to express anything. We may just say something about what it is not. Michelangelo was asked by the pope about the secret of his genius, particularly how he carved the statue of David. His answer was: It’s simple, I just remove everything that is not David.” [Page 302-304]

[…] “Charlatans are recognizable in that they will give you positive advice. Yet in practice, it is the negative that’s used by the pros. One cannot really tell if a successful person has skills, or if a person with skills will succeed – but we can pretty much predict the negative, that a person totally devoid of skills will eventually fail.”

[…] “The greatest – most robust – contribution to knowledge consist in removing what we think is wrong. We know a lot more what is wrong than what is right. Negative knowledge is more robust to error than positive knowledge. […] Since one small observation can disprove a statement, while millions can hardly confirm it [The Black Swan!], disconfirmation is more rigorous than confirmation. […] Let us say that, in general, failure (and disconfirmation) are more informative than success and confirmation.”

[Funnily, I remember the main critics against my book were the lack of [positive] proposal in the end. I should have said there we many about what not to do!]

“Finally, consider this modernized version in a saying from Steve Jobs: “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.” [Page 302-304]

Less is more

“Simpler methods for forecasting and inference can work much, much better than complicated ones. “Fast and frugal” heuristics make good decisions despite limited time. First extreme effects: there are domains in which the rare event (good or bad) plays a disproportionate share and we tend to be blind to it. Just worry about Black Swan exposures and life is easy. There may not be an easily identifiable cause for a large share of the problems, but often there is an easy solution, sometimes with the naked eye rather than the use of the complicated analyses. Yet people want more data to solve problems.” [Page 305-306]

“The way to predict rigorously is to take away from the future, reduce from it things that do not belong to the coming times. What is fragile will eventually break, and luckily we can easily tell what is fragile. Positive Black Swans are more unpredictable than negative ones. Now I insist on the via negativa method of prophecy as being the only valid one.” [Page 310]

“For the perishable, every additional day in the life translates into a shorter additional life expectancy. For the non perishable, every additional day may imply a longer life expectancy. On general, the older the technology, the longer it is expected to last. I am not saying that all technologies do not age, only that those technologies that were prone to aging are already dead.” [Page 319]

“How can we teach children skills for the twenty-first century, since we do not know which skills will be needed? Effectively my answer would make them read the classics. The future is in the past. Actually there is an Arabic proverb to that effect: he who does not have a past has no future.” [Page 320]

[As can be read later in the book Taleb does not like the Bay Area culture. And it is no coincidence, it is a region with nearly no past, nearly no history, but it certainly help it create Silicon Valley innovations…]

“If you have an old oil painting and a flat screen television, you will never mind changing the television, not the painting. Same with an old fountain pen and the latest Apple computer; [Taleb is really cautious with modernity and innovation, even if a user of it. With architecture, he has similar concerns. Again he prefers tradition to aggressive modernity. Same with the metric system vs. old methods] Top-down is usually irreversible, so mistakes tend to stick, whereas bottom-up is gradual and incremental, with creation and destruction along the way, thought presumably with a positive slope.” [Pages 323-24]

“So we can apply criteria of fragility and robustness to the handling of information – the fragile in that context is, like technology, what does not stand the test of time. […] Books that have been around for ten years will be around for ten more; books that have been around for two millennia should be around for quite a bit of time. […] The problem in deciding whether a scientific result or a new “innovation” is a breakthrough, that is, the opposite of noise, is that one needs to see all aspects of the idea – and there is always some opacity that time, and only time, can dissipate.” [Page 329]

“Now, what is fragile? The large, optimized, overreliance on technology, overreliance on the so-called scientific method instead of age-tested heuristics.”

“By issuing warnings based on vulnerability – that is, substractive prophecy – we are closer to the original role of the prophet: to warn, not necessarily to predict, and to predict calamities if people don’t listen.”

Ethics

“Under opacity and complexity, people can hide risks and hurt others. Skin in the game is the only true mitigator of fragility. We have developed a fondness for neomanic complication over archaic simplicity. […] The worst problem of modernity lies in the malignant transfer of fragility and antifragility from one party to the other, with one getting the benefits, the other one (unwittingly) getting the harm, with such transfer facilitated by the growing wedge between the ethical and the legal. Modernity hides it especially well. It is of course an agency problem.” [Page 373]

[You can/should have a look at table 7, page 377]

“In traditional societies, a person is only respectable and as worthy as the downside he (or, more, a lot more, than expected, she) is willing to face for the sake of others.” [Page 376]

“I want predictors to have visible scars on their body from prediction errors, not distribute these errors to society.” [Page 386]

[Don Quixote was already the sign of the end of the heroism, of the ethical behavior. Taleb’s models are Malraux and Ralph Nader – “the man is a secular saint” [Page 394]. His enemies Thomas Friedman, Rubin and Stieglitz]

[Is “skin in the game” the only way? The only solution? What about transparency?]

About Science

“Science must not be a competition; it must not have rankings – we can see how such a system will end up blowing up. Knowledge must not have an agency problem. One doctoral student once came to tell me that he believed in my ideas of fat tails and my skepticism of current methods of risk management, but that it would not help him get an academic job. “It’s what everybody teaches and uses in papers” he said. Another student explained that he wanted a job at a good university, so he could make money testifying as an expert witness – they would not buy my idea on robust risk management because “everyone uses these textbooks”. [Page 419]

[So true! Check The Trouble with Physics.]

Conclusion

“All I want is to remove the optionality, reduce the antifragility of some at the expense of others. It is simple via negativa. […] The golden rule: “Don’t do unto others what you don’t want them to do to you”. […] Everything gains or loses from volatility. Fragility is what loses from volatility or uncertainty. […] Time is volatility. Education in the sense of the formation of the character, personality, and acquisition of true knowledge, likes disorder; label-driven education and educators abhor disorder. Innovation is precisely something that grains from uncertainty.” [Pages 420-22]

“It so happens that everything nonlinear is convex, concave or both. […] We can build Black-Swan-protected systems thanks to detection of concavity, […] and with a mechanism called convex transformation, the fancier name for the barbell. […] Distributed randomness (as opposed to the concentrated type) is a necessity.”

[General comments]

Taleb sometimes gives the feeling of contradictions: marketing is bad, but Steve Jobs is great; barbell strategy and optionality is great, but isn’t it about risks and downsides transferred to others [Isn’t Thales a pure speculator?], cigarettes are bad but traditions are good.

Also this love of tradition makes people with more background at ease to take risks with barbell strategy; but what about the poor with nothing to lose? Benefits might statistically go to those who already have… [It reminds the story told by J.-B. Doumeng: It is a millionaire who recounts his difficult beginnings: “I bought an apple 50 cents, I polished it to shine and I sold it for one franc. With this, I bought two apples 50cts, I carefully polished and I sold them 2 Fr after a moment, I could buy a cart to sell my apples and then I made a big inheritance … “]

You now know why it has been a challenge. A very strange, dense, fascinating book, but if you like these concepts, you must read Antifragile. In fact you must read the Black Swan first, if you have not and if you like it, I am sure you will read Antifragile.