Monthly Archives: November 2011

Mind the Gap: the seed funding of university innovation

I recently read Mind the Gap: The University Gap Funding Report published by innovosource.

Disclaimer: I usually do not mention my activities at EPFL on this blog and this report deals exactly with the type of funds I manage there: the Innogrants. I was indeed interviewed for this report as one of the active members of the Gap Funding community and the Innogrants are one of the examples mentioned.

Mind The Gap is a great report because it describes a concept which was born a little before 2005, the seed funding, I should even say the pre-seed funding, by universities of their innovations, including start-ups. The next figure illustrates not only gap funding but all the existing tools enabling academic innovation.

Let me just briefly quote it (but you should know the report is not free, so I cannot summarize it in too much detail. The author allowed me however to give you a 25% discount code: USHAPE). In any case, it is extremely rich in data and information.

“This “gap” extends from where the government funding of basic research ends to where existing companies or investors are willing to accept the risk to commercialize the technology.” [page 9]. The author reminds us that “Failure is commonplace in these sorts of pursuits, but ask where you would find yourself (or where you are going) without GPS and the internet, and most recently a little iPhone “assistant” named Siri that originated from the DARPA funded CALO (Cognitive Agent that Learns and Organizes) program through a university consortium.” [page 20]

As a side element, there are also the emerging accelerators, “Popularized in recent years with the likes of Y Combinator and TechStars, accelerators combine access to talent and support services with “stage-appropriate” capital in return for a stake in the company or other repayment structures.” [page 22] but this is another subject!

There are already some “famous” gap funding tools: “another study by the Kauffman Foundation [1] investigated two well-known proof of concept centers at MIT (Desphande Center) and UC-San Diego (von Lebig Center) and reported general process and impacts.” [page 26]

[1] C. and Audretsch, D. Gulbranson, “Proof of Concept Centers: Accelerating the Commercialization of Univeristy Innovation,” Kauffman Foundation, 2008.

I do not want to quote much more this 100-page deep and very interesting analysis. My final comment is that a critical element is the leverage gap funding enables. You will find a full analysis on pages 88-90. In his Report Summary, the author depicts the value of gap funding through:

High commercialization rates
– 76-81% of funded projects commercialized on average
Attraction of early stage capital
– $2.8B leveraged from public and private investment sources
Business formation and job creation
– 395 new start-up companies
– 188 technology licenses to existing companies
– 7,761 new jobs, at cost of $13,600 gap fund dollars per job
Building a community of innovation
– Thousands of faculty and students engaged in the process
– Incorporate networks of technical and business professionals in the evaluation, mentorships, and leadership of these technologies
Organizational returns
– $75M returned to the organizations through repayments, royalties, and equity sales
– Maximize resource allocation and downstream savings, by permitting early failures through exploratory and evaluation tactics
– Empower universities to continue to take risks that support the type of breakthroughs that define our present, and the type of innovation that will carry us into the future

Let me finish with what I contributed to the report, i.e. a short description the EPFL innogrants:

When I met Jochen Mundinger in October 2006 it did not take me much time to make up my mind. I had previously seen many startup ideas and Jochenʼs Internet project looked to me original and powerful. Prior to any due diligence, I told him that if my analysis was positive, he would get a 12-month grant to work on his start-up. Because of this program, I am lucky enough to be able to make fast decisions and by January 2007, Jochen was working on his project. He did not wait until the end of his grant to found routeRank and by October 2007, with the support of business angels. Today, the service has grown and been recognized by the famous MIT TR35 award in 2010.

And then there was Andre Mercanzini, a Canadian citizen, who certainly has the drive and enthusiasm of many North-Americans. Andre obtained his PhD at EPFL following a few start-up experiences in the US. Andre has developed electrodes for Deep Brain Stimulation. The path was not as fast and easy as for Jochen. Though Aleva Neurotherapeutics was founded in mid-2008, Andreʼs prototypes needed further validation to attract venture capital (a major use of the grants). The Swiss ecosystem is rich with mentors and support so that Andre developed further his project to the point of raising $10M in his series A round in August 2011.

These are just two examples of EPFL innogrants. Initially backed by Swiss bank Lombard Odier, it has since received support from KPMG and Helbling, an engineering firm. The fact that similar initiatives were launched in Switzerland is another illustration that gap funding attracts and seduces. The Innogrants are a bet on young people. Since 2005, 48 projects have been funded out of more than 300 ideas and 24 companies created. We admit at EPFL that failure is part of the process and even if no start-up is ever launched, the grant is a learning experience. We also have the vision that Innogrants become role models and hope that more and more students will be less shy about expressing their dreams.

What’s a start-up?

Why should I ask such a question 4 years after publishing my book and isn’t this obvious? I do not think it is when I see how many times I need to clarify the difference between a start-up and any corporation. After all, any corporation being launched is a start-up, right? Not so. Thanks to my colleague Pascal :-), I just read another article by Steve Blank, Why Governments Don’t Get Startups, who gives the perfect definition:

“While large companies execute known business models, startups are temporary organizations designed to search for a scalable and repeatable business model.”

In my book, I had said it this way: “A start-up is a company which is born out of an idea and has the potential to become a large company” and I had also added “Apple, Cisco, Google, Intel, Microsoft, Oracle, Yahoo, YouTube. You certainly know these names. These companies did not exist forty years ago. They are technology giants today.”

Why do I like Blank’s definition? Because of his use of “temporary” as well as “search for a scalable and repeatable business model”. Apple, Cisco, Google, Intel, Microsoft, Oracle, Yahoo, YouTube clearly belong to the start-ups; I had not mentioned that non-existing business model.

Now Blank adds something:

“Scalable startups require risk capital to fund their search for a business model, and they attract investment from equally crazy financial investors – venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model. When they find it, their focus on scale requires even more venture capital to fuel rapid expansion.”

This is the typical Silicon Valley model of fast and usually non-organic growth. Gazelles have often yearly revenue growth of at least 50%, not to say 100%. Look again at the growth rates of Gazelles and Gorillas in my post on the topic or at the revenue growth below (table 8-8 from the book).

I see at least two opened debates:
– In Europe, the growth is often slower, at least less than 100%! Is slow growth compatible with a start-up definition?
– Blank sees two phases of VC funding, the first one to search and validate the business model, the second one to fuel rapid expansion. At least Oracle and Microsoft never had the second funding and their growth was more than 100% during their first 10 years!

The Lean Startup – Eric Ries

After reading Clayton Christensen, Geoffrey Moore and Steve Blank, I was expecting a lot from The Lean Startup by Eric Ries. I was disappointed. It could be that I did not read it well or too fast, but I was expecting much more. But instead of saying what I did not like, let me begin with the good points.

Just like the previous three authors, Ries shows that innovation may be totally counterintuitive: “My cofounders and I are determined to make new mistakes. We do everything wrong. We build a minimum viable product, an early product that is terrible, full of bugs and crash-your-computer-yes-really stability problems. Then we ship it to customers before it’s ready. And we charge money for it. After securing initial customers, we change the product constantly. […] We really had customers, often talked to them and did not do what they said.” [page 4]

On page 8, Eric Ries explains that the lean startup method helps entrepreneurs “under conditions of extreme uncertainty” with a “new kind of management” by “testing each element of their vision”, and “learn whether to pivot or persevere” using a “feedback loop”.

This is he Build-Measure-Learn process. He goes on by explaining why start-ups fail:
1- The first problem is the allure of a good plan. “Planning and forecasting are only accurate when based on a long, stable operating history and a relatively static environment. Startups have neither.”
2- The second problem is the “Just-do-it”. “This school believes that chaos is the answer. This does not work either. A startup must be managed”.
The main and most convincing lesson from Ries is that because start-ups face a lot of uncertainty, they should test, experiment, learn from the right or wrong hypotheses as early and as often as possible. They should use actionable metrics, split-test experiments, innovation accounting. He is also a big fan of Toyota lean manufacturing.

I loved his borrowing of Komisar’s Analogs and Antilogs. For the iPod, the Sony Walkman was an Analog (“people listen to music in a public place using earphones”) and Napster was an Antilog (“although people were willing to download music, they were not willing to pay for it”). [Page 83]

Ries further develops the MVP, Minimum Viable Product: “it is not the smallest product imaginable, but the fastest way to get through the Build-Measure-Learn feedback loop.” Apple’s original iPhone, Google’s first search engine, or even Dropbox Video Demo were such MVPs. More on Techcrunch [page 97]. He adds that MVP does not go without risks, including legal issues, competition, branding and morale of the team. He has a good point about intellectual property [page 110]: “In my opinion, […the] current patent law inhibits innovation and should be remedied as a matter of public policy.”

So why did I feel some frustration? There is probably the feeling Ries gives that his method is a science. [Page 3]: “Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught.” [Page 148]: “Because of the scientific methodology that underlies the Lean Startup, there is often a misconception that it offers a rigid clinical formula for making pivot or persevere decisions. There is no way to remove the human element – vision, intuition, judgment – from the practice of entrepreneurship, nor that would be desirable”. I was probably expecting more recipes, as the ones Blnak gives in The Four Steps to the Epiphany.

So? Art or science? Ries explains on page 161 that pivot requires courage. “First, Vanity Metrics can allow to form false conclusions. […] Second, an unclear hypothesis makes it impossible to experience complete failure, […] Third, many entrepreneurs are afraid. Acknowledging failure can lead to dangerously low morale.” A few pages before (page 154), he writes that “failure is a prerequisite to learning”. Ries describes a systematic method, I am not sure it is a science, not even a process. Indeed, in his concluding chapter, as if he wanted to mitigate his previous arguments, he tends to agree: “the real goal of innovation: to learn that which is currently unknown” [page 275]. “Throughout our celebration of the Lean Startup movement, a note of caution is essential. We cannot afford to have our success breed a new pseudoscience around pivots, MVPs, and the like” [page 279]. This in no way diminishes the traditional entrepreneurial virtues; the primacy of vision, the willingness to take bold risks, and the courage required in the face of overwhelming odds” [page 278].

Let me mention here a video from Komisar. Together with Moore and Blank, he is among the ones who advise reading Ries’ book. I am less convinced than them about the necessity to read this book. I have now more questions than answers, but this may be a good sign! I have been more frustrated than enlightened by the anecdotes he gives or his use of the Toyota strategy. In na interview given to the Stanford Venture Technology program, Komisar talks about how to teach entrepreneurship. Listen to him!

To be fair, Eric Ries is helping a lot the entrepreneurship movement. I just discovered a new set of videos he is a part of, thanks to SpinkleLab.

Fred Destin had also a great post on his blog about the Lean Startup and you should probably read it too to build your own opinion. Lean is hard and (generally) good for you. Fred summaries Lean this way and he is right: “In the real world, most companies do too much development and spend too much money too early (usually to hit some pre-defined plan that is nothing more than a fantasy and / or is not where they need to go to succeed) and find themselves with an impossible task of raising money at uprounds around Series B. So founders get screwed and everyone ends up with a bad taste in their mouth. That’s fundamentally why early stage capital efficiency should matter to you, and why you should at least understand lean concepts.”

Let me finish with a recent interview given by Steve Blank in Finland:
I have devoted the last decade of my life and my “fourth career” to trying to prove that methods for improving entrepreneurial success can be taught. Entrepreneurship itself is more of a genetic phenomenon. Either you have the passion and drive to start something, or you don’t. I believe entrepreneurs are artists, and I’d like to quote George Bernard Shaw to illustrate:

“Some men see things as they are and ask why.
Others dream things that never were and ask why not.”

Over the last decade we assumed that once we found repeatable methodologies (Agile and Customer Development, Business Model Design) to build early stage ventures, entrepreneurship would become a “science,” and anyone could do it. I’m beginning to suspect this assumption may be wrong. It’s not that the tools are wrong. Where I think we have gone wrong is the belief that anyone can use these tools equally well.

When page-layout programs came out with the Macintosh in 1984, everyone thought it was going to be the end of graphic artists and designers. “Now everyone can do design,” was the mantra. Users quickly learned how hard it was do design well and again hired professionals. The same thing happened with the first bit-mapped word processors. We didn’t get more or better authors. Instead we ended up with poorly written documents that looked like ransom notes. Today’s equivalent is Apple’s “Garageband”. Not everyone who uses composition tools can actually write music that anyone wants to listen to.

It may be we can increase the number of founders and entrepreneurial employees, with better tools, more money, and greater education. But it’s more likely that until we truly understand how to teach creativity, their numbers are limited. Not everyone is an artist, after all.”

The Missed Deals of Venture Capitalists

Venture Capitalists are always proud to mention which companies they successfully backed. It is because of their success stories that Sequoia and Kleiner Perkins are so famous in this industry. But the deals the VCs decline are much less famous. In my book, I had mentioned some examples by some pioneers of venture capital:

Investor Missed deal
Arthur Rock Rolm then Compaq
Bill Draper Apple
Burt McMurtry Tandem
Tom Perkins Apple
Don Valentine Sun Microsystems
This is coming from the “Pioneers Lecture” 2002, Computer History Museum – archive.computerhistory.org.

A few VCs use the humour to tell their biggest mistakes. A colleague of mine (thanks Amin 🙂 ) recently mentioned to me that Bessemer has a full list on their anti-portfolio: A123, Apollo, Apple, Check Point, eBay, Federal Express, Google, Ikanos, Intel, Intuit, Lotus and Compaq,
PayPal, Stratacom.

The most striking miss is probably Google: “[One of Bessemer’s partner] Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?

But then what about OVP’s ironic style in their Missed Deals including

Starbucks.

“A guy walks into your office in the late 1980’s and says he wants to open a chain of retail shops selling a commodity product you can get anywhere for 25 cents, but he will charge 2 dollars. Of course, you listen politely, and then fall off your chair laughing when he leaves. Howard Shultz didn’t see this as humorous. And we didn’t make 500 times our money.

To get even (wasn’t our not making money enough?) years later, Howard opened his own venture capital firm right down the street. “

Amazon.

“The Internet boom was just beginning. Amazon had sales of $4M a year. We had a handshake on a term sheet with the CEO to put $2M into Amazon for 20% of the company (a $10M post money value). At the eleventh hour, some guy named John Doerr flew up and offered $8M going in for 20% of the company (a $40M post money value). Handshake? What handshake?

To get even, we buy all our books at Barnes & Noble. We don’t think Amazon has noticed.”

Just a few lessons about the difficulty in reading the future. If you have other links, please comment.

America and entrepreneurship

Nearly 3 years after my unusual post about Obama, here is a post slightly related. Before digging into the topic, I have to admit I have a huge respect for the American president. Even after watching George Clooney’s The Ides of March and the disappointment expressed by many people, I am intrigued and fascinated by his track record. I should add for the anecdote that I was in Washington in October 2009 when he was award the Nobel Peace Prize and in Silicon Valley in September 2011 when he pronounced his recent speech to the Congress. I also quite liked the Titan Dinner.

The White House recently published TAKING ACTION, BUILDING CONFIDENCE and the second initiative is about entrepreneurship. It is worth reading these dense 6 pages and among other things, it is striking to notice that the USA, “the most entrepreneurial nation on earth” [page 17] is extremely worried about an “increasingly unfavorable environment” and a “fallen optimism”. For these reasons, the report suggests 12 initiatives to “help spur renewed entrepreneurship”. (They are listed at the bottow on this post)

Here is my simplistic vision of the proposals:
– a few are about lowering the barriers, i.e. “changing the Rules”, what I tagged with an “R” below.
– a few more are about enabling more money and investment towards start-ups, tagged with an “M”.
These are classical measures, important and necessary.

What I found very interesting are the other ones:
– three are about Intellectual Property and Technology Transfer, a sign that the patent system might be in trouble
– even more interesting, the last three are about the People, the Talent. They mention the Immigrants and the Mentors.

These are great advice, that we should also look at very seriously in Europe!


Click on the picture to enlarge

Win the Global Battle for Talent
Some of the most iconic American companies were started by immigrant entrepreneurs or the children of immigrant entrepreneurs. Today, however, many of the foreign students completing a STEM degree at a U.S. graduate school return to their home countries and begin competing against American workers. A significant majority of the Jobs Council calls upon Congress to pass reforms aimed directly at allowing the most promising foreign-born entrepreneurs to remain in or relocate to the U.S.

Reduce Regulatory Barriers and Provide Financial Incentives for Firms to Go Public
Lowering the barriers to and cost of IPOs is critical to accessing financing at the later stages of a high growth firms’ expansion. A significant majority of the Jobs Council recommends amending Sarbanes-Oxley and “rightsizing” the effects of the Spitzer Decree and the Fair Disclosure Act to lessen the burdens on high growth entrepreneurial companies.

Enhance Access to Capital for Early Stage Startups as well as Later Stage Growth Companies
The challenging economic environment and skittish investment climate has resulted in investors generally becoming more risk-adverse, and this in turn has deprived many high-growth entrepreneurial companies of the capital they need to expand. The Jobs Council recommends enhancing the economic incentives for investors, so they are more willing to risk their capital in entrepreneurial companies.

Make it Easier for Entrepreneurs to Get Patent-Related Answers Faster
There are concerns among many entrepreneurs that, as written, the recently passed Patent Reform Act advantages large companies, and disadvantages young entrepreneurial companies. The Jobs Council recommends taking specific steps to ensure the ideas from young companies are handled appropriately.

Streamline SBA Financing Access, so More High -Growth Companies Get the Capital they Need to Grow
The SBA has provided early funding for a range of iconic American companies. The Jobs Council recommends that the Administration streamline and shorten application processing with published turnaround times, increase the number of full time employees who perform a training or compliance function, expand the overall list of lending partners, and push Congress to fully authorize SBIR and STTR funding for the long term, rather than for short term re-authorizations.

Expand Seed/Angel Capital
The Jobs Council recommends that the Administration clarify that experienced and active seed and angel investors should not be subject to the regulations that were designed to protect inexperienced investors. We also propose that smaller investors be allowed to use “crowd funding” platforms to invest small amounts in early stage companies.

Make Small Business Administration Funding Easier to Access
The SBA has provided early funding for a range of iconic American companies, including Apple, Costco, and Staples. The Jobs Council recommends that the Administration streamline and shorten application processing with published turnaround times, increase the number of full time employees who perform a training or compliance function, expand the overall list of lending partners, and push Congress to fully authorize SBIR and STTR funding for the long term, rather than for short term re-authorizations.

Enhance Commercialization of Federally Funded Research
The government continues to play a crucial role in investing in the basic research that enables America to be the launchpad for new industries. The Jobs Council recommends that the Administration do more to build bridges between researchers and entrepreneurs, so more breakthrough ideas can move out of the labs and into the commercialization phase.

Address Talent Needs by Reducing Student Loan Burden and Accelerating Immigration Reforms
A large number of recent graduates who aspire to work for a start-up or form a new company decide against it because of the pressing burden to repay their student loans. The Jobs Council recommends that the Administration promote Income-Based Repayment Student Loan Programs for the owners or employees of new, entrepreneurial companies. Additionally, we recommend that the Administration speed up the process for making visa decisions so that talented, foreign-born entrepreneurs can form or join startups in the United States.

Foster Regional Ecosystems of Innovation and Support Growth of Startup Accelerators
There is a significant opportunity to build stronger entrepreneurial ecosystems in regions across the country – and customize each to capitalize on their unique advantages. To that end, the Jobs Council recommends that the private sector support the growth of startup accelerators in at least 30 cities. Private entities should also invest in at least 50 new incubators nationwide, and big corporations should link with startups to advise entrepreneurial companies during their nascent stages.

Expand Programs to Mentor Entrepreneurs
Research consistently shows that a key element of successful enterprises is active mentorship relationships. Yet, if young companies do not have the benefit of being part of an accelerator, they often struggle to find effective mentors to coach them through the challenging, early stages of starting a company. Therefore, the Jobs Council recommends leveraging existing private sector networks to create, expand and strengthen mentorship programs at all levels.

Allow University Faculty to Shop Discoveries to Any Technology Transfer Office
America’s universities have produced many of the great breakthroughs that have led to new industries and jobs. But too often, research that could find market success lingers in university labs. The Jobs Council recommends allowing research that is funded with federal dollars to be presented to any university technology transfer office (not just the one where the research has taken place).