Tag Archives: Start-up

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

Leave a reply

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)

Leave a reply

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)

Leave a reply

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)

1 Reply

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.

What’s a start-up? And a spin-off?

Leave a reply

I had given the same title to a post in November 2011! When listening to Pedro Bados, founder of Nexthink (an EPFL spin-off) on Radio Suisse Romande (you can listen to the podcast from time 6’50” (in French!), I needed to come back on the topic.

Let me give again Steve Blank’s definition which I had mentioned in the previous post: “startups are temporary organizations designed to search for a scalable and repeatable business model.” According Pedro Bados, “to be a start-up is more a mindset, focused on permanent innovation, than a question of size.” It is therefore a delicate definition and let me try to give general criteria.

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.

Once you have found what you are looking for, you will need to put more processes in place, you will be less curious, maybe less innovative (at least you will not be 100% innovative anymore) and you stop being a start-up. In a recent post about a new book on Google, I mentioned that “Part II is about growth and it is a change from the chaotic experimental company Google was. Not a dramatic change, but a change.” Google stopped being a start-up at that point. Bados is right. It is not a question of size, not even of age, as long as you fit in this exploring mindset, looking for your business with a lot of creativity. And Blank’s definition is definitely good!

Now what’s a spin-off? It’s a company created from a bigger organization (university, corporation). A spin-off may or may not be a start-up, but most academic spin-offs are indeed start-ups.

A beautiful thriller in the world of start-ups

Leave a reply

Today, Peter Harboe-Schmidt presents L’HOMME QUI NE CROYAIT PAS AU HASARD the French translation of his thriller The Ultimate Cure. I had at the time said how much I liked this novel. Do not hesitate to join him on the EPFL campus this afternoon.

Here is a short piece again:

“Take your start-up as an example. Why did you do it? If you analyzed the pros and cons for doing a start-up, you’d probably never do it. But your gut feeling pushed you on, knowing that you would get something very valuable out of it. Am I right?”
Martin speculated on why he was so drawn to a world that at times could appear to be no more than sheer madness. Like a world parallel to real life with many of the same attributes, just much more intense and fast-moving. People trying to realize a dream in a world of unpredictability and unknowns, working crazy hours, sacrificing their personal lives, rushing along with all those other technology based start-ups. Medical devices, Internet search engines, telecommunications, nanotechnologies and all the rest competing for the same thing: Money. To make the realization clock tick a little faster.
“Funny you should say that,” Martin finally said. “I’ve always thought of this start-up as a no-brainer.I never tried to justify it in any way.”

French start-ups (again)

Leave a reply

I am attached to France for obvious reasons. And recently, I have read a lot about French innovation. It’s not as bad as the general public may think but it is not as good as I would like. Still there are reasons for hope. Let me comment two recent works:
– an article from Le Monde newspaper, entitled Heureux comme un patron de start-up en France
– a report from OSEO (the French Innovation Agency) which I had mentioned before in You have to go global, and right from the start, but which I had read too quickly!

The article from Le Monde is about French Accelerator Le Camping. The article is optimistic (maybe a little too much), but you should read it if you understand French. What I noticed was:

– “The Hexagon can also count on experienced funds such as Partech (but also Idinvest, Apax) who continued to irrigate the area after the bursting of the Internet bubble in 2000. About fifteen venture capital funds finance about a thousand start-ups and inject 200-300 million euros per year in the digital field, said Philippe Collombel. The French industry is one of the best in the world, judges Christopher Bavaria, president of Idinvest. And there are many areas where a little “Frenchy” managed to make a name alongside the leading Anglo-Saxon player: Dailymotion vs. YouTube, Viadeo behind LinkedIn , Deezer on the heels of Spotify …” I think this is dangerously optimistic but nice! We should not be just a copy-paste version of the USA though.

– “Another asset of the Hexagon: its serial entrepreneurs. The first generation began with the Minitel, has launched the digital era in the late 1990s, and overcame the bubble. They include Marc Simoncini (iFrance, Meetic), Jacques-Antoine Granjon (ventre-privée), Patrick Robin (Imaginet, 24h00), Xavier Niel … Twenty years later, they play the “business angels” for the younger: PriceMinister, Dailymotion, Criteo, or Deezer.” Quite true.

– However, “the Business Angels do not support enough entrepreneurs” […] “There are not enough funds enbling jumping from start-up to that of medium-sized companies.”

[You may also be interested about an analysis of the Acceletor trend from the Financial Times, which is also quite good: Start-ups put their foot on the accelerator. “In the past they could have been labelled an incubator, which is apparently different from an accelerator.” […] “Probably the first accelerator was Paul Graham’s Y Combinator in Silicon Valley. Since 2005 it has fostered almost 500 start-ups, including big successes such as AirBnB and Dropbox.” […] “This method of building new companies at warp speed is fascinating. The philosophy is to try lots of different ideas, fail fast, and pivot if something does not work. I like the sense of urgency, the work ethic, the high-pressure environment that helps drive rapid progress, and the incredible opportunities to network and cross-fertilise.” […] “However, in general, I think start-ups take a long time to become viable – years not months – so trying to achieve so much in such a concentrated period of time feels unrealistic.” […] “There are now an estimated 123 accelerator programmes around the world.” […] “Some veterans think many will close, just as many of the projects they incubate will fail. But all this frantic activity will surely boost entrepreneurship, stimulate jobs, and – in the long run – create wealth, so it deserves applause”]

You can find (in French) the OSEO report by clicking on the picture. I was wrong in my previous post, I learnt a few things! And it has more depth than the good Le Monde article. The first one is about the fears and difficulties of entrepreneurs.


Click on picture to enlarge.


Click on picture to enlarge.

Fear of failing with its attached stigma remains high. Finding customers is the biggest challenge, higher then finding investors. Interesting. Then there is an interesting lesson about the age of founders, which you can compare to an analysis I have made on 165 public companies.


Click on picture to enlarge. Source: personal data

This is a popular topic, and you might read again Wadhwa’s study, his Washington Post article or Is There A Peak Age for Entrepreneurship? I am not sure how to read all this, but I have the feeling there is a tendency to higher age recently… The average age of French founders is 41 whereas the public companies I have have founders with an average of 36.5 (and 34 for the companies founded before 1995).

Finally there is an analysis of “models of development of start-ups”.

The authors compare 2 main classes of start-ups (out of 5), the ones being the most common (classes 3 and 5 in the figure). [Class 4 is more an intermediate status en route to either 3 or 5; class 1 is M&A and class 5 have not developed at all.]

“In class 3, 41% of the total population, companies have a lower level of development because the company is “self-centered”. 50% have no partner, no subsidiary. The project leader is still a dominant position in the capital: 68% have a stake greater than 75% in this class; 1 out of 2 still 50% to 75% of capital.”

“In contrast, firms in class 5, have a proven open behavior. They have opened their capital to have the resources to advance an innovation project. 60% of project owners have less than 25% of the start-up in this class, as well as half of them with between 25% and 50% of the capital. Moreover, almost all listed companies are in this class. 80% of these companies are internationalized (export or implantation).”

“These are companies that have had time to grow: almost half who them are more than 8 years old and almost 40% are between 5 and 8 years old today. The maturity only does not explain, however, their momentum. Indeed, they were faced, too, with problems of redefining their business plans as well as those of class 3, even a little more frequently. However, they saw this less as a constraint.”

“In addition, Class 3 focuses more on public funding which is considered a main lever for growth. The youth of this population and the lower opening of their capital can hypothesize that the public support at the pre-seed and seed stages is an essential substitute to private capital.”

“The statistical comparison classes 3-5 on these variables reveals that:
• The median Class 5 has a higher workforce than class 4, which employs, more people than class 3 (respectively 10, 6 and 4 employees);
• Classes 4 and 5 achieve an identical median turnover (about 580k€) higher than the median Iclass 3 (390k€);
• On the median level of equity, it is still significantly higher for class 5 (409k€) than for class 4 (284k€) and Class 3 (149k€), and more than €1million for the upper quartile of the class 5 only 389k€ for the class 3)”

Of course the conclusion of the report is to encourage the filtering and then development towards class 5. but myless optimistic conclusion is that even class 5 companies are not big success stories…

Is venture capital a universal solution?

Leave a reply

Following my post from last Friday, here is a series I have been asked to write for EPFL start-ups. It is logical that it appears also here. This first chronicle is about Aleva, a great EPFL start-up, and it is also abotu venture capital. Here it is.

10.02.12 – Aleva Neurotherapeutics has succeeded in raising 10 million Swiss francs in venture capital. The EPFL start-up has shown that this type of financing is not out of reach for young Swiss companies.

For this initial article in the “start-up of the month” column, it was a “must” to talk about Aleva Neurotherapeutics. Andre Mercanzini, its founder, got his PhD at the Microsystems Laboratory (LMIS4) headed by Prof. Philippe Renaud. What was my motivation? André is a shining example of the enthusiastic and persevering entrepreneur. He obtained an Innogrant in 2008. This grant enables apprentice-entrepreneurs to devote their time to their start-up project for one year. The life of an entrepreneur is not exactly a bed of roses, and as well as enthusiasm you need courage. And you shouldn’t do it alone. By persuading another entrepreneur, Jean-Pierre Rosat, to join the adventure, Andre convinced three venture-capital funds (based in Lausanne, Basel and Zurich) to invest. But it was only in August 2011 that the raising of the 10 million francs became a reality, a full three years after Aleva was founded!

I’m not going to say much about the activity of this start-up. Aleva develops electrodes for neurosurgery and these are implanted in the brains of patients suffering from Parkinson’s disease or severe depression. I am not going to say more about Andre Mercanzini either; he can describe his adventure better than anyone else. On the other hand, I’ve noticed that Andre has already become a role model for other entrepreneurs from EPFL and that he himself had the opportunity to prepare his thesis in a very entrepreneurial laboratory. If you go to the page of LMIS4 mentioned above, you will see that no fewer than 13 start-ups originate from there. Emulation is a key element here.

Risk capital: for start-ups with rapid growth

What matters also to me, beyond the entrepreneurial qualities of the two founders, is to show that venture capital is not an unreachable objective. About 10% of EPFL start-ups have raised such funds. Some entrepreneurs who appeal to institutions in the venture capital area subsequently complain about their conservatism. Others avoid them like the plague, referring to them as “vulture capitalists”. This is open to debate. It’s undeniable that this type of investor is looking for companies with a potential for rapid and global growth, and not all start-ups can fulfill this criteria.

There is now available in the world, in Europe and in Switzerland, much more money than there was 20 years ago, even if there is a lot less than during the “irrational exuberance” period of the Internet bubble. It always has been, and will continue to be, difficult to find money (for any kind of project in fact). However, Aleva, but also Biocartis and TypeSafe (other start-ups from EPFL) have shown that it is possible. Is venture capital a must? I sometimes tend to think so when it concerns high-tech start-ups and I know that I’m sometimes reproached for giving it too much importance. I simply note that a very large number of successful American companies have applied for these funds and that boot-strapped companies are the exception in the USA. In Europe, it’s the opposite!

“In Switzerland, we prefer a small entity that you can control from A to Z”

I would like to finish with a quotation from Daniel Borel, another entrepreneur who studied at EPFL. “The only answer I can suggest is the cultural difference between the United States and Switzerland. When we founded Logitech, as Swiss entrepreneurs, we had to play the internationalization card very early on. The technology was Swiss, but the United States, and later on the world, defined our market, whereas the production quickly became based in Asia. I wouldn’t be at ease with myself if I were to paint a negative picture, because I think that many things evolve and that many good things happen in Switzerland. But it seems to me that in the United States, people are more open. When you obtain funds from venture capitalists, you automatically accept an external shareholder who helps you manage your company, but who can also sack you. In Switzerland, this vision is not so widely accepted: we prefer a small entity that can be controlled from A to Z, rather than a big undertaking that you can only control at 10%, which can be a limiting element.”

You have to go global, and right from the start

Leave a reply

I do not make the front page so often so it was fun to be on the EPFL one this morning. Forgetting about ego, I talked about my usual obsession, lack of growth of European start-ups. You may read the interview by clicking on the picture or reading it below.

More seriously maybe, you can read a similar analysis by Oseo, the French innovation agency which published “A look at 10 years of creation of innovative companies in France”. the study is in French and looked at 5’500 start-ups created between 1998 and 2007.

What the study says is that 85% of the company are alive after 5 years [against 50% in the USA; I already addressed the topic in Survival or failure – which success?], they have less than 10 employees, and the one important reason of this situation is the difficulty in building relational networks. Nothing new probably and nothing new in the interview below… except maybe that half of the French start-ups have an international strategy right from teh start and 30% have a foreign-only market!

“You have to go global, and right from the start.”

10.02.12 – How do you go about setting up a business? Hervé Lebret, start-up specialist and head of the Innogrant program at EPFL, answers a few questions. “When launching a start-up, you must think globally right from the start”, says Hervé Lebret, head of the Innogrant program, a support tool for entrepreneurs coming from academia. He believes that both the Swiss and Europeans hesitate too much when creating start-ups. As the person responsible for writing a monthly column dedicated to start-ups on the new EPFL website, starting next Monday, he was more than happy to be interviewed.

Does the current economic situation make it harder to find funding?
This may come as a surprise, but I don’t think that things have really changed. It’s hard to find capital, as it has always been, but not impossible. It depends on the business area concerned, but I would even go so far as to say that there is more capital now than there was 15 years ago. Businesses such as Scala or Aleva, with origins in EPFL labs, have raised significant sums from venture capitalists in the last few years, just as Aïmago, Lemoptix or Attolight which secured 1 to 2 million francs from Business Angels.

Are some areas more favorable than others?
It makes it easier if the know-how is present locally, as is the case here with biomeds or nanotechnologies. Cleantech businesses are starting to lose the favor which they enjoyed until recently. But I’m convinced that ideas can come out of anywhere and get a good reception, as long as their communication is efficient. Incidentally, we shouldn’t pay so much attention to the needs of the market. These don’t suffice to predict which start-up will be the next success-story. Promising areas have needs, but no immediate solutions, and when the start-ups enter the market the first needs have often already evolved and are moving in another direction.

How can one ensure a good launch for their start-up?
Only one start-up out of ten succeeds in raising venture capital like Aleva or Biocartis, and grows to a size of 50 to 100 employees. Then out of these, 10 percent will enjoy success over ten years, like Endoart or Swissquote, which employs over 400 people. The main goal should not be survival. On the contrary, these start-ups sometimes last too long. Some 90 percent of them are still there five years on, but they haven’t grown. In the United States there is a higher rate of renewal: only 50 percent of start-ups are still in existence after this same five-year-period. The problem lies in the conservative stance of Europeans, who are wary of quick growth. I think we should bring students’ attention to this aspect very early, starting in high school. You cannot just turn yourself into a businessperson. We need to encourage children and young people to explore and stop stigmatizing failure, which we still do now in Switzerland. We plan to show a fascinating documentary soon on the topic of students who are eager and interested in creating businesses – it’s called Something Ventured.

How do you carve out a place for yourself?
It’s fairly easy, if you have a good idea, to obtain up to 500,000 francs from public funds or philanthropic organizations, which allows the business to survive one or two years. These contacts also provide free marketing, which can in turn help to find initial business angels and make an initial million francs. The limits come from the young businessperson’s excessive humility, from their self-limitations. In order to succeed, you must be a salesman and somewhat extrovert, or team up with someone who is. Network is essential in effective positioning of the company.

How important are start-ups for the economic fabric of Switzerland?
Some forty start-ups are created each year in the Canton of Vaud, fifteen of which come from the academic world. They play an important role in the future of the Canton, of Switzerland and even Europe. Logitech or Swissquote, for instance, have created many jobs. However, Swiss start-ups in general struggle to grow beyond five or six employees. The biggest problem is well known: entrepreneurs lack risk-taking instincts and therefore struggle to grow their businesses. They prefer to do it in stages. In the United States an “all or nothing” policy prevails, and results in a higher success rate. Facebook, which has just declared its entry on the stock exchange, already employs 3000 people. Individuals who have good ideas go straight ahead and are not afraid of failure. They aim directly for global markets. The biggest mistake is to aim first and foremost for the Swiss market. One should aim for the world market straight away by adopting a global perspective and not being afraid of passing off as arrogant is essential.

Author: Cécilia Carron – Source: EPFL Mediacom

Innovation is not about small or large, it’s about fast.

2 Replies

The debate is recurrent and in my last post, I was questioned about my fascination for start-ups and Silicon Valley. In a way this is related, I will come back on this at the end. Two recent articles nearly surprised me. The first one has a famous author, Clayton Christensen. The Empires Strike Back – How Xerox and other large corporations are harnessing the force of disruptive innovation was published in the latest issue of the MIT Tech Review.

Here are short extracts: “It has been a long time since anyone considered Xerox an innovation powerhouse. On the contrary, Xerox typically serves as a cautionary tale of opportunity lost: many obituaries of Steve Jobs described how his fateful visit to the Xerox Palo Alto Research Center in 1979 inspired many of the breakthroughs that Apple built into its Macintosh computer. Back then, Xerox dominated the photocopier market and was understandably focused on improving and sustaining its high-margin products. The company’s headquarters became the place where inventions in its Silicon Valley lab went to die. Inevitably, simpler and cheaper copiers from Canon and other rivals cut down Xerox in its core market. It is a classic story of the “innovator’s dilemma.” […] But now Xerox is turning things around […] In the past, Xerox’s success would have been an anomaly. Less than a decade ago, when we were finishing the book The Innovator’s Solution we highlighted the fact that disruptive innovations are typically introduced by startups, the rebel forces in the business universe. […] Throughout the 1980s and 1990s, only about 25 percent of disruptive innovations we tracked in our database came from such incumbents, with the rest coming from startups. But during the 2000s, 35 percent of disruptions were launched by incumbents. In other words, the battle seems to be swinging in favor of the Empire, as the following examples confirm. The author mentions examples such as GE, Tesla competing with GM, Dow and Microsoft in the article.

The second article comes from The Ecomist and is entitled “Why large firms are often more inventive than small ones.” Let me quote it a little more extensively: “Joseph Schumpeter […] argued both sides of the case. In 1909 he said that small companies were more inventive. In 1942 he reversed himself. Big firms have more incentive to invest in new products, he decided, because they can sell them to more people and reap greater rewards more quickly. In a competitive market, inventions are quickly imitated, so a small inventor’s investment often fails to pay off. […] These days the second Schumpeter is out of fashion: people assume that little start-ups are creative and big firms are slow and bureaucratic. But that is a gross oversimplification, says Michael Mandel of the Progressive Policy Institute, a think-tank. In a new report on “scale and innovation”, he concludes that today’s economy favours big companies over small ones. Big is back, as this newspaper has argued. And big is clever, for three reasons.” The arguments are that 1-ecosystems are big, 2-markets are globals and 3-problems to be solved on a large scale. This is not for small companies. “He is right that the old “small is innovative” argument is looking dated. Several of the champions of the new economy are firms that were once hailed as plucky little start-ups but have long since grown huge, such as Apple, Google and Facebook. […] Big companies have a big advantage in recruiting today’s most valuable resource: talent. (Graduates have debts, and many prefer the certainty of a salary to the lottery of stock in a start-up.) Large firms are getting better at avoiding bureaucratic stagnation: they are flattening their hierarchies and opening themselves up to ideas from elsewhere. Procter & Gamble, a consumer-goods giant, gets most of its ideas from outside its walls. Sir George Buckley, the boss of 3M, a big firm with a 109-year history of innovation, argues that companies like his can combine the virtues of creativity and scale.”

Well I was not surprised for long. The debate is not about small or large. Let me explain by quoting my book again and more specifically the section Small is not Beautiful [page 111] “There is one misunderstanding concerning start-ups. Because they would be young, recent companies, and because many macroeconomic analyses focus on the jobs generated by small structures, there is a tendency to consider with high regard that “small is beautiful” as if it were a motto for start-ups. The ambition of a start-up is not to stay modest. On the contrary, the successful companies have become large, sometimes dinosaurs. In early 2007, Intel had 94’000 employees, Oracle 56’000, Cisco 49’000 and Sun 38’000. These “start-ups” have become multinational companies. […] The San Jose Mercury News, the daily newspaper at the heart of Silicon Valley, publishes once a year for example the list of the 150 biggest companies. The simple comparison of the list between 1997 and 2004 shows that among the top 50 in 2004, 12 were not part of the first 150 in 1997. Zhang also analyzed this astonishing dynamics by comparing the 40 biggest high-tech Silicon Valley companies in 1982 and in 2002 as provided by Dun & Bradstreet. Twenty of the 1982 companies did not exist anymore in 2002 and twenty one of the 2002 companies had not been created in 1982. These dynamics of birth and death are known and positively acknowledged.”

It is exactly what the Economist article explains: “However, there are two objections to Mr Mandel’s argument. The first is that, although big companies often excel at incremental innovation (ie, adding more bells and whistles to existing products), they are less comfortable with disruptive innovation—the kind that changes the rules of the game. The big companies that the original Schumpeter celebrated often buried new ideas that threatened established business lines, as AT&T did with automatic dialling. Mr Mandel says it will take big companies to solve America’s most pressing problems in health care and education. But sometimes the best ideas start small, spread widely and then transform entire systems. Facebook began as a way for students at a single university to keep in touch. Now it has 800m users. The second is that what matters is not so much whether companies are big or small, but whether they grow. Progress tends to come from high-growth companies. The best ones can take a good idea and use it to transform themselves from embryos into giants in a few years, as Amazon and Google have. Such high-growth firms create a lot of jobs: in America just 1% of companies generate roughly 40% of new jobs. Let small firms grow big The key to promoting innovation (and productivity in general) lies in allowing vigorous new companies to grow big, and inefficient old ones to die. On that, Schumpeter never changed his mind.”

I say it again, there is a difference between start-up and SME. This does not fully answer Christensen argument about the Empire striking back. Well it means large companies have smart managers who learnt from the mistakes of the past. But he also implicitely say that 65% of disruptive innovations come from new comers, not incumbents. Gazelles still have a bright future.