Monthly Archives: January 2012

The New Silicon Valley(s)

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Nice series on French-speaking Swiss Radio broadcast les Temps Modernes, this week about five stimulating experiments of high-tech clusters. Probably to fight the depressing mood around WEF and the economic crisis. (And not only because I was given the opportunity this morning to comment the last case! I was only invited on Wednesday… 🙂 )

Monday it was about Russia’s Skolkovo, which I had mentioned in a post a few months ago.

I did not know at all Kenya’s Konza, and this was really refreshing.

You cannot avoid China, but here also surprise, surprise, it was not Shanghai neither Shenzhen, but Zhongguancun.


I had heard of Startup Chile, because Stanford supports the experiment in South America.

Finally, I could comment the stimulating British case, the Silicon Roundabout, in East London. You can listen to or download the mp3 file (in French).

A spontaneous emerging cluster, a name given by a local entrepreneur, no real support by decision makers, at least in the beginning and a nice and enthusiastic atmosphere. And all this attracts people from abroad. Is this finally the cluster Europe has been waiting for? We shall see… The experiment is really interesting and if you want to know more, you may wish to read (French) Le Monde, Le “Silicon Roundabout”, un succès britannique, or The Economist, Silicon Roundabout.

New IPO filings (AVG Technologies) and new start-ups stats

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I noticed at least 4 IPO filings this month, not bad. These are Audience, Infoblox, Millennial Media and most important to me as a European citizen, AVG Technologies. European filings in the USA are sufficiently rare to be noticed, and this time the company has Czech origins. After discussing AVG, I will show you an update of my start-ups data coming from these filings.

AVG did not experience the typical start-up process. Indeed the founders sold their shares to a private equity group in 2001, ten years after the incorporation. The investors then grew the company and attracted new investors including Intel Capital, TA Associates as well as a Polish fund. You may know about AVG, I am using it as a free anti-virus but I did not know it was a European start-up…


Click on picture to enlarge

The revenue growth is quite impressive as you can see in the cap. table (about $150M in 2010 from $100M in 2008). I found a 2000 presentation where the founder gave the facts and figures for 1996-2000. Then the revenues were respectively 17M and 55M Czech Korunas. One Krona was about €0.03, which means in the €0.5-1.5M. Not a bad growth at all. Why did the founders sell, I do not know and I am not even sure what they do today. They do not seem to be role models in Brno. Tomas Hofer seems to be active in another start-up however. If someone has more information on the founders, please comment or contact me.


Tomas Hofer

You can visualize the other cap. tables in my full data document. I do not have much to say about them, but I have updated my stats in the tables which follow, including new data on the amount of VC money raised. I also did a new classification in addition to geography and fields: years of incorporation.


Click on picture to access full pdf data

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

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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.

Patents inhibit innovation, let’s delete them!

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My first post for 2012 is a translation of an interview I gave to French magazine La Recherche. It was published last December and you can have an electronic version of the French version here or a pdf document by clicking on the cover page below. It is followed by my own translation. Now I should say that I was a little surprised by the title which I had not expected. I was more thinking in something like “start-ups are the forgotten children of innovation!” The title focused on my cautiousness about IP and patents in particular. It is certainly too strong, but that is what titles are made for…

Patents inhibit innovation, let’s delete them!

Innovation is a matter of culture. An admirer of Silicon Valley, which he has known for twenty years, Hervé Lebret calls for Europe to be inspired by the dynamism and creativity of its start-ups. But is it good to take everything in this model?

La Recherche: A report of the Commission of the European Union stresses that the EU is more increasingly lagging behind the U.S. in terms innovation with a comparable level of research [1]. How do you explain that?
Hervé Lebret: The main reason for this innovation gap in Europe is cultural. I was always struck by how much the students are interested in the applications of research in the U. S., while in Europe we think more in terms of knowledge. And then there are the role models of young entrepreneurs who have experienced success. It is striking in Silicon Valley: Bill Gates was 20 when he founded Microsoft, Steve Jobs 21 when he founded Apple, Larry Page and Sergey Brin, 25 when they created Google. They are powerful models to which a young student can identify to.
La Recherche: The same report argues that another reason for the gap is partly related to differences the patent system which would be more complex and more expensive in Europe. What do you think?
HL: I am skeptical about legislation or rules in general as an explanation in the differences. It is in the people’s head that things happen. In the U.S., they want to try; they have no fear of failure. I am not convinced that we are more innovative because we would have more patents. Look at Switzerland, which has the largest number of patents per capita: this country does not create many start-ups. Incentives and policies are only working if there is a favorable cultural terrain.
La Recherche: But aren’t patents the key for an innovative company, whose value often relies on its intellectual property?
HL: Software is not patentable, and this did not prevent Microsoft to be successful. With the risk that you see me as iconoclastic, I think that patents are an obstacle to innovation. I wonder whether we should not remove them, except perhaps in specific areas, such as biotechnology, where a patent corresponds more specifically to a manufacturing process of a molecule.
But in most industrial fields, you need to own thousands of patents to protect the innovation which is commercialized. The maintenance of this portfolio of patents is extremely expensive and that money could be better used in research and development. Whereas in the past the patent favored the inventor, it has become a defensive weapon to protect dominant positions. Look at the war between Apple and Google: the first alleges that the second has developed its operating system Android by violating certain of its patents. This goes against the theory that the traditional patent protection the weak inventor, who can develop an idea during years without fear of being stolen.
Does the weakness of venture capital, which would deprive young innovative companies from the capital needed for their development, explain some of the shortcomings of innovation in Europe?
H.L. Contrary to general belief, there has always been venture capital in Europe, especially in France. This is not a quantitative but qualitative problem: venture capital in Europe is run by people from finance or consulting, not entrepreneurs.
Again, this is a cultural difference. But this is changing. Former entrepreneurs have recently begun to create venture capital funds or to become business angels. In France, I think of Bernard Liautaud, founder of software company Business Objects, or Xavier Niel, founder of Free, the phone operator, who both joined venture capital firms. The founders of Skype have created Atomico, their own funds.
You do not hide your admiration for Silicon Valley. If the secret of its strength is, as you support, cultural, how can we be inspired in Europe?
H.L. We can draw on customs, practices, an important one being cooperation. In Silicon Valley, curiosity is shared. People know that the exchange of ideas is successful, and are not afraid of ideas being robbed. The two Google founders were PhD students in two different laboratories at Stanford University, but they have talked! It is not unusual o talk to your competitor to solve your own problems: in the 1960s, the major industry semiconductor players in California met at the Wagon Wheel bar in Mountain View to discuss their work. In Europe, many laboratories, academic and probably more private, have a culture of secrecy, they fear the exchange.
What do you put in place at the Ecole Polytechnique Federale de Lausanne (EPFL), where you teach, to develop a taste for innovation and entrepreneurship among students?
H.L. I strongly believe in the role of exemplary models. So I organize conferences with successful entrepreneurs who share their experience. This shows students that these are passionate people, who are not afraid to try, even if just one in a thousand will be successful. These models inspire. But inspiration is nothing without resources. Hence the program “Innogrants”: a salary of one year for a young researcher who is released from its research and teaching in order to concentrate on her or his innovative projects. If it works, it is hoped that the private sector will further invest. Fifty Innogrants were awarded in five years. Half of them have led to the creation of companies in life sciences, micro-or nano or information technology. And five of them have found private investors.
It nevertheless remains modest …
H.L. Yes, we must remain humble: all we can do is create a breeding ground for the creation of innovative companies, as we do with Innogrants. In total, in the last fifteen years, EPFL innovators have created about a dozen start-ups per year. Fifteen have raised venture capital, 300 million Euros in total. Four or five have been sold to industry groups, sometimes these were nice exits. Endoart, founded in 1998 at EPFL specialized in the production of remotely controllable medical implants; it has been sold nine years later for 100 million dollars to Allergan! But we feel there is a kind of modesty, self-restraint of European entrepreneurs compared to their American counterparts.
A former researcher at EPFL criticized the leadership of the university of “copy as closely as possible the American university model” [2]. Do you think everything is good in the American model?
H.L. These criticisms focus on science, not on innovation. The competitive standing of researchers, the instability of the statutes is not a good idea in research. It is very important to let the imagination speak. There is a danger to keep people under permanent pressure. But in terms of innovation, the U.S. model works.
You estimate that at most one in a thousand start-ups meets success. Isn’t this a huge waste?
H.L. We should not measure everything in terms of money or performance. What counts is creativity. For me, the Silicon Valley is the new Athens. As Greece, it is a culture: what this region brought in fifty years is fabulous. Digital technologies that were invented forever changed the way we inform, we cultivate and entertain ourselves. This is probably why the death of Steve Jobs, who was an iconic character, had so many repercussions in October. Furthermore, if one thinks in macroeconomic terms, I do not think that the American model is based on waste only. In the U.S., venture capital weighs about twenty billion dollars a year. For twenty years, 400 billion have been invested. And one company, Google, is now worth $200B. Finally, the creation of economic value is similar to the money invested. It is a collective success, even if it is based on thousands of individual failures, which are often very hard humanely.

The entrepreneur should be at the center of innovation policy

Isn’t the $200 billion market capitalization of Google exaggerated when compared to the actual value of the company?
H.L. The world of venture capital has unfortunately become a financial asset like any other. It is no longer a world of former entrepreneurs who pursue their business while investing in those of others. There is too much money, too much speculation in the U.S. venture capital. But I remember that the start-ups appeared before the Nasdaq, the stock market where shares of high technology companies are traded. Silicon Valley began in the 1960s and 1970s in the context of the counter-culture in California. Steve Jobs did not hesitate to say that some of his creativity came from drugs when he was young. The growing role of finance in the economy only started in the 1980s. Originally, the financiers were the patrons of great artists. That said, I think the current trend of large groups limiting their spending in research and development is catastrophic. Shareholders want 15% return and push to cut spending on research. Good start-up can only emerge if there is also good private research.
Do we see a slowing of the technological innovation?
H.L. I am indeed concerned about the lack of success in current innovation: the 1970s were marked by the transistor, the 1980s by the personal computer; the 1990s by the networks. But in the 2000s, I see nothing new. The Web 2.0 is not a technological revolution, it is a consolidation. More generally, biotechnology was rather disappointing; there is no revolution in energy, chemistry. It is not clear that nanotechnologies are really promising technological breakthroughs. I fear that the 2000s did not create start-ups which are equivalent to Intel in the 1960s, Apple, Microsoft or Genentech in the 1970s, Cisco in the 1980s, or Google in the 1990s. There is Facebook, but this company does not rely on high technology innovation. That said, there has always been a general pessimism about the future of innovation, so I hope to be wrong!
You mention companies in information technology or biotechnology. Is this model of start-up transferable to capital-intensive areas, and where there are already major players, such as aerospace, automotive, chemicals?
H.L. The established players are not necessarily the most innovative. Clayton Christensen from Harvard Business School, showed in 1997 that an established company is great at improving existing products [3]. It is innovation by evolution, not revolution. Renault can invent the electric car, but not a new mode of transportation. Besides, the idea of the minivan, which was then copied, did not come from internal R&D at Renault, but from the company Matra, who did not have the same experience in automotive, which made it more creative. It is also for this reason that the big companies, especially pharmaceuticals, outsource their innovation: they prefer to leave the start-up take the risks, and then buy them. Even an old startup such as Cisco replaces the term “research and development” by “acquisition and development”.
Why do you insist so much on start-ups? An academic institution can also license its patents to the industry, or form mixed private / public laboratories…
H.L. The basic problem is towards whom an innovation policy is directed. My belief is that the entrepreneur must be central. This is not what is done in France: the clusters are clusters of established companies, not tools to promote creativity and entrepreneurship. I insist on start-ups because I think they are the forgotten piece of innovation policies. Of course there is innovation in large groups. But I wonder if they can do disruptive innovative. They can set a goal – the flat screen, the smart phone, or, today, the electric car – that will come out in twenty years. But can they do something entirely new, as did Google? Or Genentech, which revolutionized the manufacture of drugs using genetic engineering techniques? I believe that only start-ups are able to do so. Christensen said if you want to make a major innovation, create a branch and place it as far as possible of your research center as the worst enemy of innovation in a company is conservatism. Innovation is the highest in small teams: this is what happens in the start-up.

■■ Interview by Nicolas Chevassus-au-Louis

[1] European commission, Innovation Union Competitiveness Report 2011, http://ec.europa.eu/research/innovation-union.
[2] Libero Zuppiroli, La Bulle universitaire. Faut-il poursuivre le rêve américain ? Éditions d’en bas, 2010.
[3] Clayton Christensen, The Innovator’s Dilemma, Harper’s, 1997.

Hervé Lebret. A graduate of Ecole Polytechnique and Stanford University, with a Ph.D. in electronics, he worked, after a few years as a researcher, as a venture capitalist, in Geneva from 1997 to 2004. Since then he has been teaching management of technology and manages a seed fund at the Ecole Polytechnique Federale de Lausanne.

> Hervé Lebret, Start-up. What we may still learn from Silicon Valley Create Space, 2007. www.startup-book.com
> www.oecd.org/sti/scoreboard An oecd study on patents
> http://vpiv.epfl.ch/innogrants The site of the Innogrants at EPFL.