Author Archives: Hervé Lebret

The Lean Startup – Eric Ries

8 Replies

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

3 Replies

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

2 Replies

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).

10 lessons from the Dropbox story

1 Reply

Forbes recently published Dropbox: The Inside Story Of Tech’s Hottest Startup or is it its legend already? (I should thank my colleague Mehdi for mentioning the link to me, 🙂 )

It looks so similar to many of Silicon Vallley success stories that we should sometimes be a little skeptical about such beautiful stories. In any case, it is worth reading and here are my 10 lessons from it:

1- YOUNG GEEK – Drew Houston, the “typical” American start-up founder, began playing with computers at age 5 and began to work with start-ups at age 14. Steve Jobs knew this kid who had reverse-engineered Apple’s file system. He was 24 when Dropbox was launched.
2- ROLE MODEL – “No one is born a CEO, but no one tells you that” is what Houston learnt but when he saw one of his friends starting his own company he thought “If he could do it, I knew I could”.
3- COFOUNDER – In 2007, Paul Graham selected him in his Y Combinator program but insisted he has a cofounder. This would be MIT dropout, Arash Ferdowsi.
4- FRIENDLY ANGEL – Months later, they are supported by Pejman Nozad (famous with Saeed Amidi for their family rug business turned into office space [Logitech, Google] turned into investing [PayPal]).
5- VENTURE CAPITAL – Soon, Nozad introduced them to Michael Moritz (Sequoia’s legendary investor in Yahoo and Google) who invests $1.2M.
6 – MIGRANTS – Both Ferdowsi and Nozad have roots in Iran. They chatted in Farsi when they first met.
7- TALENT & PASSION – “I was betting they have the intellect and stamina to beat everyone else” claims Moritz. “Houston and Ferdowsi moved offices again and often just slept at work.”
8- LEAN & SPEED – Ycombinator funded Dropbox in June 2007, Sequoia in Sept. 2007, followed a year later by $6M from Accel and Sequoia. 9 employees in 2008 (with 200’000 users) and 14 people in 2010 with 2M users.
9- CUSTOMERS – In 2011, Dropbox should make $240M in revenues, from only 4% of its 50-million user base. 70 people and profitable.
10- RESOURCES – Being profitable did not prevent Dropbox to raise another $250M from Index, Greylock, Benchmark and existing investors. At a $4B valuation.

Silicon Valley – more of the same?

2 Replies

I was cleaning and filing old papers in my office, when I found “old” books about Silicon Valley and noticed how this amazing region has not really changed in the last 30 years. Let me just elaborate. The first book I looked at is Silicon Valley Fever.

Here is the back cover:

The next one is The New Venturers

with its back cover too:

Both were written in the mid-eighties. The New Venturers does not seem to be printed anymore and I wrote on Amazon in 2009, when I bought it, “In the mid 80s John Wilson published this book about venture capital. At the time, it was about business and how venture capital works. It has now become a history book and it shows how Silicon Valley developed in part thanks to venture capital. It is full of anecdotes, facts and figures. A great book… ”

Silicon Valley Fever is also out of print and there is no review for that one on Amazon! It is also a book I enjoyed reading. As a funny coincidence, the authors began their book with their history of Apple whereas my first chapter was the history of Google. Each decade has its role models. There is a section about Women and Entrepreneurship that Pemo Theodore would certainly appreciate: “The Silicon Valley has been called “one of the last great bastions of male dominance” by the local Peninsula Times Tribune. […] They are under-represented in management and administration. Few women have technical or engineering backgrounds. […] Why there are few women in positioning of responsability in Silicon Valley is complex and puzzling. Until recently, the overwhelming majority of engineering garduates were men. […] Scientific and engineering professionals in the finance community and in start-ups are likely to be men: these power-brokers rely exclusively on tehir personal networks. […] Twenty of the largest publicly held Silicon Valley firms listed a total of 209 persons as corporate officers in 1980; only 4 were women. The board of directors of these 20 firms include 150 directors. Only one was a woman: Shirley Hufstedler, serving on the board of Hewlett-Packard.” But the authors are optimistic: they explain that any woman with a technical background or an interest in high-tech has opportunities: “A Martian with three heads could find a job in Silicon Valley. So for women with a technical background, it’s terrific. […] An exception to masculine dominance is Sandy Kurtzig. “I wanted to start in a garage like HP, but I didn’t have one. So I started in a second bedroom of my apartment.” At first, Kurtzig did sales, bookkeeping and management of her start-up. As long as she had only five or six employees, they worked out of her apartment. It went into rapid growth and had annual sales in 1982.”

Part I of the book is historical, part II is the culture of Silicon Valley and part III is about its future (as foreseen in 1984). The final book I found is certainly not out of print. Written 10 years later by Annalee Saxenian, Regional Advantage is the reference book about Silicon Valley. It is one of my bibles. Saxenian compares the culture of Silicon Valley and Route 128 (the Boston cluster).

Funnily enough, she had this honnest recognition in 1998: “In 1979, I was a graduate student at Berkeley and I was one of the first scholars to study Silicon Valley. I culminated my master’s program by writing a thesis in which I confidently predicted that Silicon Valley would stop growing. I argued that housing and labor were too expensive and the roads were too congested, and while corporate headquarters and research might remain, I was convinced that the region had reached its physical limits and that innovation and job growth would occur elsewhere during the 1980s. As it turns out I was wrong.” (Source: A climate for Entrepreneurship)

Let me just put here pictures of the preface of the book that you can find on Amazon or Google books. It is enlighting and will be my conclusion of this post: Silicon Valley was and is the innovation center with many ups and downs that these three books describe with their own style.

dot.dead, a Silicon Valley mystery

2 Replies

I seldom mention novels here. In fact, I only did it one with the excellent “The Ultimate Cure” by Peter Harboe-Schmidt. I nearly bought by accident dot.dead, the first novel written by Keith Raffel, a Silicon Valley entrepreneur turned into a thriller writer. And I enjoyed it.

There is no point in telling you anything about the story. It may not be very realistic, but which mystery novel is? The description of Silicon Valley, Palo Alto and Stanford University is nice and accurate though  and you have the feeling you are back there if you know the places. What I also enjoyed and what is relevant for this blog are the links with the high-tech start-up world.So let me quote Raffel.

– An interesting comment about motivation to be an entrepreneur (page 42), maybe the most surprising thing in the book! “She asked if the hard work required to start a business was worth it. […] -[It is] a kind of Catch-22. To found a successful company, you had to think it was more important than anything. But if you were intelligent enough to run such a company, you had to know it wasn’t. Realizing that, you could not have the drive needed to start the next Sun, HP…”

– A much less important detail (page 45): “[The company] had gone public at $12 a share. After three two-for-one splits, [he] had sold the company for $42 a share. An investment like this might explain the […] comfortable circumstances.” I let you compute the multiple!

– Of course, when you read a fiction about Silicon Valely, you may try to guess if the author found inspiration in real individuals. Paul is the easy one (page 16): “While not quite at the level of Bill Hewlett or Dave Packard, Paul still rated as a Silicon Valley legend. Born in Hungary, Pál Békés had been a baby when his parents carried him across the border into Austria during the 1956 revolution. Paul Berk, as his parents rechristened him, graduated from the Bronx School of Sciences at sixteen and from Stanford…” Well it is not exactly the personal history of Andy Grove at Wikipedia but close enough: “During the Hungarian Revolution of 1956, when he was 20, András István Gróf left his home and family and escaped across the border into Austria, where he eventually made his way to the United States in 1957. There, he changed his name to Andrew S. Grove. Arriving in the United States in 1957, with little money, Grove retained a “passion for learning.” He earned a bachelor’s degree in chemical engineering from the City College of New York in 1960, and earned a Ph.D. in chemical engineering from the University of California, Berkeley in 1963.”

– The other people I tried to identify with less success are the board members of the company (page 57): in addition to Paul, there is
” Bryce Smithwick, board member as well as corporate counsel. sat to Paul’s right, leaning forward an Armani-clad leopard.
” Darwin Yancey, the technical genius behind Paul’s previous company. As usual Darwin’s glasees had slipped down his nose so that he peered at Paul with his head cocked back. Darwin had worked eighteen hour days [in the previous start-up] but to everyone one surprise had not followed Paul to [his new start-up]. Instead, he retired with his millions in the south of France. “My wife told me that our firrst twenty years of marriage belonged to work and that the next twenty years belonged to her.”
“A rare representative of her gender in the macho world of top venture capitalists, Margot Fullbright had cofounded Chance and Fullbright. Seated next to me, she had her hands folded on the table like a prim schoolgirl. A sideways glance showed me that the short skirt of her expensive suit was designed to show off the thighs of a Parisian runway model, not a buisiness executive. But Margot, approaching fifty, had a body toned as much as shiatsu, Bikram yoga, and two-thousand-dollar-a-day spas could achieve. Known for her ability to do complex calculations in her head, her mind was in even better shape.
“The fifth board member, wearing his trademark bowtie, hie crew-cut hiar beginning to show a few flecks of gray, was leon Henderson, a Stanford professor. A handful of former students, inculding three Fortune 500 CEOS, had thrown him a sixty-fifth birthday party the previous January. I myself had taken his entrepreneurship course and now met him vevery month or two for breakfast at Stanford’s Tresidder Union, where he offered me parctical advice on management and product positioning.

I do not know who these people are. There are a few women in VC, including Ann Winblad and Esther Dyson. Raffel is right, it is a macho world. They could all exist and look like SV stereotypes.


Ann Winblad (left) – Esther Dyson (right)

Another detail on bankers (page 100): “I had the natural prejudice against investment bankers. We worked seventy-hour weeks to make a start-up successful. Then, when the payoff came, investment bankers got a six-percent cut for a few weeks’ effort.”

Raffel could not avoid telling his Silicon Valley history (page 107). Nicely written: “Riding in the back of my parents’ Country Squire station wagon thirty years earlier, I would have been passing apricot orchards and horse trails. We didn’t know it, but they had already been condemned when William Shockley opened a company in 1955 to exploit his invention of the transistor. In an almost biblical sense, Shockley Semiconductor was the progenitor of hundreds of the firms flourishing in the Valley, for people from Shockley begat Fairchild and people from Fairchild begat Intel and someone from Intel begat Apple, and so on. In a variation on the biblical theme, two of Shockley’s most promising disciples, Gordon Moore and Robert Noyce, revolted against the founding father of the Valley to start that first competitor, Fairchild Semiconductor. Shockley was left claiming betrayal and ended his days using his Nobel Prize to defend his indefensible view on eugenics. This drama set the tone for Valley culture: young, brilliant technologists breaking away from companies run by the previous generation of entrepreneurs and founding their own.”

I plan to discover soon if Raffel’s latest novels bring pieces of interesting data.

Another French start-up going public!

Leave a reply

They may not be that many, but it is at least the 3rd French start-up going public in 2011, after Sequans and Envivio. Whereas these two ones went public on Nasdaq and NYSE, Mauna Kea Technologies went public in August on Paris Euronext. I did not anything about MKT until recently but I looked at their IPO prospectus.

A nice entrepreneurial story. Two founders, apparently friends before high school, launched MKT in 2000. Benjamin Abrat (MBA, a few years with Givaudan) and Sacha Loiseau (Ecole Polytechnique, PhD in astrophysics and a postdoc at Caltech) are the typical young entrepreneurs with not so much experience but probably a lot of mutual trust.

Not so common, in France at least, is the funding history:
– a seed round of €1.6M with the renowned French business angels: Marc Vasseur (Genset), Jérôme Chailloux (Ilog), Jean-Luc Nahon (Isdnet), Christophe Bach (Isdnet), Patrice Giami (Isdnet), Philippe Maes (Gemplus) and Daniel Legal (Gemplus)
– a 1st round in 2004, €5M
– a 2nd round in 2007, €20M
with a €50M IPO this year. here is my usual format for the equity history and structure.


(click on image to enlarge)

In an interview (in French), Sacha Loiseau gives his views on what French PhDs are lacking:
“What do you think of the PhD training ?
S. L. : It brings autonomy and initiative, two important qualities for fundamental or applied research. However, the French system does not cover other important topics, which are essential to the business world: the customer, teamwork, market intelligence, intellectual property and technology transfer, as well as mastering the English language. The strong point is that, facing tough problems, PhD students learn how to find a solution, often alone. This is a great asset for companies which must always innovate, but it may not favor teamwork, openness to the world… Many PhD students, I think, are isolated and do not know what their competitors do.”

High-tech start-ups: the new star system.

Leave a reply

America loves its heroes! Two recent events seem to show that after Hollywood’s Walk of Fame and the Hall of Fames in sport, high-tech entrepreneurship is creating its own star system:

– it began with Boston’s Kendall Square. See for example the Xconomy article: Entrepreneur Walk of Fame Opens in Kendall Square: Gates, Jobs, Kapor, Hewlett, Packard, Swanson, and Edison are Inaugural Inductees.
– it was followed by Stanford recent Engineering Heroes project. This one is a project only with a very long list of more than 60 nominees.

Well you could build your own list. I think Boston missed Robert Noyce. Stanford will have to decide on its initial winners. The value of such lists is obviously the role model effect it should induce.

Venture Capital: Art or Science?

Leave a reply

I just read the chapters related to venture capital in the book The Masters of Private Equity and Venture Capital. These are the chapters 7 to 11 built from interviews of:
– Garth Saloner, Stanford Professor
– Bill Draper, founder of Draper Richards and of Sutter Hill
– Richard Kramlich, founder of NEA
– Steven Lazarus, founder of ARCH Venture Partners
– Pitch Johnson, founder of Asset Management Company

You may not know their names but Draper, Kramlich and Johnson are famous “grandfathers” of Silicon Valley venture capital. You may remember them if you read my chapter on the history of venture capital and the graph below shows how instrumental they were:

I have to admit my favorite chapter was about Pitch Johnson. (So if you are bored with my lengthy post at some point, jump to the Johnson chapter before quitting!) I had been in contact with him in the past when he sent me a great poster about the early history of the west coast VC. I had also quoted Johnson in my book; I quite liked what he had to say about entrepreneurship: “Entrepreneurs are the revolutionaries of our time.” And he had added: “Democracy works best when there is this kind of turbulence in the society, when those not well-off have a chance to climb the economic ladder by using brains, energy and skills to create new markets or serve existing markets better than their old competitors”

So is VC an art or a science? It is certainly not the only topic of this book but all contributors give their views on the question (and on a few other issues I will also mention).

Chapter 7 – Garth Saloner – The Entrepreneur and the Venture Capitalist

Saloner, a Stanford professor, gives an overview of what VC was and is about. He begins to say that VC is not what it was: “Rich and reliable returns no longer seem quite so dependable” (p. 143) so that VCs “Move toward a more conservative mix in their investment portfolios” because of “stressful market conditions”.

One of the sections of his chapter is called “Tough to predict”. “A VC cannot tell which of the many opportunities that cross the desk will be a 30 bagger”.  [A 30x multiple] … “And it can be nearly as difficult to predict which will return zero. These uncertainties drive the typical venture investor toward a home-run model.”

A third topic he studies follows another section title: “Whose side are you on anyway?” He answers by stating that the VC has a responsibility towards its LPs.  “The typical VC has every incentive to play long ball while many entrepreneurs will be simply happy to see their product come to market. And therefore the VC may be more aggressive.” The disparity in perspective is rooted in two aspects:
– the preferred stock structure which may induce fast exits if success does not seem to appear,
– the time and money, which gives an incentive to shut down if the time effort is too high.
“But even the success does not eliminate this tension: the entrepreneur may prefer a longer time horizon,” VCs need liquidity. The author is not sure that Bill Gates, Steve Jobs, Michael Dell or Larry Ellison would have been given the opportunity with venture capitalists in control of the board room.

In conclusion the final section is called: a successful, if uneasy, marriage.

Chapter 8 – Bill Draper – Pioneer Investing

Bill Draper is indeed a pioneer of Venture Capital. You may read more about him on another post of mine, The Startup Game.

“Venture investors put their money into technologies that have not yet come to fruition, untested business ideas, undeveloped markets, and often entrepreneurs with virtually no track record. It is a pioneering from of investment.”

One of the sections here is “Seeing into the future”. “It is not a simple formula. Experiences become lessons, lessons become practices, and practices help us to succeed or fail.” … “It is essential to be quick footed, connected and on top of the latest technological changes in order to succeed.” … “The face of genius changes all the time.” Draper clearly explains the difficulty of the VC activity which makes it (according to my understanding of his views) more an art than a science.

Draper also talks about returns and money making: “Instead of worrying about their carry – in other words, their share of the profits, and fretting about the increase in value of their portfolio, some venture capitalists were more concerned about their fees, or the amount of money that they charged based on the funds under management. The rise of the megafunds and the Wall Street transaction mentality inevitably increased the competitive pressure on everyone.” … “The last thing they want to do is share deals, that is unfortunate because cooperation brings more talent to the table.” There is a nostalgia of the good old days, that have suffered from greediness.

But Draper is an optimist: “Skype was still in the idea phase, but it promised to be an amazing breakthrough. Zennstrom and Friis epitomize what it means to be a disruptive innovator.” … “Society would not be as advanced, interconnected and civilized as it is today were it not for the scores of talented venture capitalists who provided the platform for brilliant and passionate entrepreneurs to develop and nurture their world-changing ideas and innovative technologies.”

Chapter 9 – Richard Kramlich – Change for the Better

Kramlich is more on the science side (again according to my understanding). Let me quote him: “Some changes can be anticipated and planned for. Others are as surprising as a satellite that becomes space junk.” … “Our ability to anticipate, manage, respond to and capitalize on change has been an essential ingredient of our ability to grow into a firm that over our 32-year life span has helped 165 companies make initial stock sales.” … “We spend a considerable time managing change.” NEA has industry teams with experts such as a Nobel Laureate. “VCs are savvy risk takers, able to adapt to changing markets, they nurture creative ideas that might become huge successes. They know that sometimes they will fail completely.”

He also sees different approaches: “Some people are natural agents of change” … “Jim Clark is one of the rarest examples who operates almost exclusively on instinct.” … “A fast-change artist.”

He also added about Metcalfe, founder of 3com: “I had a difficult time telling if this was genius or folly”

And he concludes with “At NEA, [we] have developed some fairly sophisticated tools to avoid the dead ends. What are the holes where the incumbents are not playing? We have applied this sort of thinking to solar power, and have invested in 15 companies. But I am not sure their investments in the solar industry have been stellar… He also discusses greed (he claims NEA only takes 1% management fee vs. 2% on average) and the megafunds (he claims he can put in action billion-dollar funds in order to invest in companies such as Tele Atlas)

Kramlich definitely insists on systematic analysis, expertise and processes even if he recognizes intuition, art and guts play a role for others.

Chapter 10 – Steven Lazarus – Beyond the Ivory Tower

The roots of ARCH Venture Partners are unusual as Lazarus funds began in a university framework, which is why the author of the book summarizes this chapter with the comment “It is possible to systematically commercialize the research from university laboratories”

Lazarus is more humble. He describes ARCH as “an experiment designed to help commercialize laboratory research.” … “Systematically rummaging through university labs.” but he adds: “We made plenty of mistakes.” … “The techniques that have been so helpful to me might be helpful to anyone trying to manage an enterprise that embraces risk in order to grow companies and turn a profit.” … “The scouts also needed to be good judges of talent.” … “We launched ARCH as a technology incubator but the most successful investment turned out to be a company that had nothing to do with technology.”

One of the sections is “Facing the risks”. “We were identifying science literally at the site of inception. We faced three risks: technology, market and financing.” (Surprisingly he does not mention the people or team risks.)

Lazarus is also on the science side of venture capital but when you read between the lines, you may see some of the artistic features.

Chapter 11 – Pitch Johnson – Fostering Innovation

As I said above, this was my favorite chapter. “The crucial decisions must be made on the basis of inadequate information.” … “Back an entrepreneur without knowing if the idea is powerful, the market big enough and the management strong enough.” [About Amgen in which he invested] “The company must control variables, be able to replicate results, learn from mistakes, and incorporate new information. Beyond that, there was the human factor.”

“I have learnt the tools and techniques, the importance of working with the best people, perhaps the single most vital ingredient of success, I have learnt the pitfalls to avoid. With a lot of lessons over time, one has a good chance of backing the right people with the right ideas in the right markets.” … “The art of our business is to select only the best people with the strongest ideas. The people with drive, the ones who can execute, who can work with others.”

He has also a funny and critical (for him) anecdote: “As I rose in the ranks [of the company he first worked for], I was eligible for stock options. I got 42 shares. The founders each owned hundreds of thousands, I decided I needed to do something else.”

He also has quite a unique model of venture capital: he decided to quit VC and run his own money, more like a business angel. The main advantages: “Not the same time horizon. The luxury of patience.” He also criticizes some abuses: “VC has become a big money management business. AMC is just $60M. But since 2007, VC is back to basics: starting companies, find people, with breakthrough ideas. Whereas in the dot-com, it was quick-hitting with no intention of really innovating.” As an example, he claims he was an investor in Boole and Babbage for 30 years !!

“Many styles of entrepreneurs work. What counts is matching the right CEO with the particulars of the challenges facing a company. Informal or hierarchical styles, both work.” (He compared Tandem to Teradyne as examples of both styles.)

Art or Science? Clearly a lot of art, a lot of technique and know-how too. Clearly not an industry, but more a craft. And as we all known, craftsmen are just in-between artists and scientists.