Author Archives: Hervé Lebret

Venture ideas

I usually do not mention my activity at EPFL in this blog, but here is an exception. This week, I organized with venturelab the 10th edition of ventureideas, a conference where we invite entrepreneurs to share their experience. All the venture ideas @ EPFL can be found with the link on the name.

This week we had Rich Riley, Senior VP, Yahoo and Paul Sevinç, founder of Doodle and their talks can be viewed below. I am very proud of these events and of all the guests we had in the past. Let me just give you a few names:
– Pierre Chappaz, founder of Kelkoo
– Eric Favre, inventor of Nespresso
– Aart de Geus, founder and CEO of Synopsys
– Daniel Rosselat, founder of Paleo
– Marc Burki, founder of Swissquote
– Neil Rimer, GP of Index Ventures…

Cisco’s A&D

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For those who read my book, it will be clear there is no typo in my title. It is not R&D but really, A&D, acquisition and development. Cisco has been known to consider M&A as the best source of innovations for its future development. So I was not surprised to see that Cisco did two acquisitions recently: ScanSafe, Starent. But what is crazy with them is that between reading this and writing this post, they had done another one (which is not included in my numbers, sorry!): DVN. This gave me the impetus to look at how A&D has developed since I published Start-Up. So here are the numbers (put in parallel with the growth of its employees and sales).

or if you prefer visual info:

Final piece of info: where are the acquistions coming from? No surprise, mostly Silicon Valley:

Is there too much venture capital ?

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This is an open-ended debate between those who think there is not enough capital for start-ups and entrepreneurs and those who believe too much money kills the ideas (lack of discipline, too many me-too companies being some arguments).
I have a tendency to believe there is too much money these days and let me illustrate the argument.
A recent analysis showed how much money was committed and invested over the past two decades. Here are the numbers.

Despite the Internet bubble, we have not come back to the level of the early nineties.

Now there is a second argument, marvelously explained in the post VC’s Mathematical Challenge by Matt McCall. If the money invested by VCs ($35B) is at the same level of the combined value of M&A and IPOs, the VC industry is just in trouble. Just have a look at his post.

So yes, it is tough to raise money. You may have heard of the Sequoia R.I.P. document. However Sequoia just annouced they have done more early stage investments in the last 12 months than in the two previous years.

And apparently, yes, there is finally less fund raising.

Here are two illustrations:

– I was in Washington a few days ago and read the following article:

– you may read the post of Xconomy entitled Is Venture Up or Down?

In conclusion, I think there was too much money and the recent news may indicate we are finally going back to the right levels… any thought?

What Have VCs Really Done for Innovation?

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“What Have VCs Really Done for Innovation?” This is the title of a post by Vivek Wadhwa dated September 20. You can find the full account on Techcrunch. I have to admit I was not happy with the content. Instead of saying immediatly why, I will let you read comments made by others as I shared their point of view. You can also read the post and all the comments, but they are numerous!

So, for example, I agreed with the following three comments:

by Ashok
It is true that the claims made by VCs are not realistic and vastly exaggerated. But, at the same time, we cannot forget that they have played key role in many innovative fields. By its very nature, a Venture Capitalist will invest only in a new promising project where he can hope to earn a handsome profit. There is nothing wrong in a VC selectively investing in projects. After all, we have to appreciate that for every one grand success, a VC may have seen 9 failures losing his money invested in projects which could not lead to big money. So, you have to judge the role of VCs also by their failed projects. Who would like to invest in a project which is likely to fail? Yet, it is a fact that a big percentage of projected financed by VCs fail. Does it not show the high risk involved in what VCs do? This being the position, what is wrong if they are selective in financing the projects? Therefore, the author’s observations “The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.” are not fully justified.
What about their failed projects? Did they not smell blood? Then why did they invest? Why did they fail then?
Unfortunately, the author has tried to present one-sided story without taking into consideration the problems which VCs might be facing.
Of course, at the cost of repetition, I would say that the tall claims made by the VCs are also not correct. To conclude, it is neither black nor white; it is some shade of grey. Truth lies somewhere in between the two extremes

then by Chris Yeh
This is one of the most dangerous and wrong-headed posts that I have read all year. And I’m flabbergasted by the lack of critical thinking displayed in the comments section.
There is definite truth to some of what Vivek has to say. The NVCA’s estimates are bogus, because they equate investing in a company with being responsible for its success. This is an egregiously egotistical assumption.
It may very well be true that the venture industry as a whole trails index investing. It’s hard to pick winners. But so does the entire actively managed mutual fund industry.
But the statement that “VCs at best have little to no impact on these companies and at worst have a negative impact” is absurd.
First, there is a major survivorship bias problem with the data. By interviewing successful companies, the study fails to prove whether VC makes success more or less likely. All it says is that the majority of successful new businesses in the US do not rely on VC.
A number of commentators seem to be of the impression that VCs make easy money by investing in companies after all the risk has been removed by the entrepreneur. This is talking out of both sides of one’s mouth. If the VCs aren’t taking risks, then how can they be delivering sub-par returns? By definition, they must be taking risks.
Venture capital plays an important role in the startup ecosystem. It provides high-risk equity capital to startup companies. Not every company can be a bootstrapped consumer Internet company. Many important businesses (semiconductors, hardware, biotech) require significant up-front capital. If VCs went away, would there be enough funding for these business? Do you seriously think banks would start lending to these companies?
I also wager that most of the commentators pooh-poohing VC would be glad to accept funding for their startups.

finally by ethanboss
… Of course there are VCs that don’t add value. As there are entrepreneurs who fail.: most of them. How ridiculous to claim that Sergey and Brin had already succeeded when KP and Sequoia invested. That shows a total lack of understanding of what it takes to build companies.
Also, I suppose capital would also grow on the trees for these “innovative” companies to go and harvest, so there is no need for VCs…
In the old days, when capital was hard to access there were some great entrepreneurs (few) that could get to profits without much help and capital. Some still do it but are the exception. The real world is a little different. You need capital and help with networks and other things to build a LARGE innovative company. Those things don’t grow on trees.

so here is the comment I made on September 25.

Vivek

I agree with many other people that you are too single-minded. I do not fully disagree with some elements of your analysis, which explains why you have so much support, BUT…

I was once a venture capitalist and I have neither an MBA nor a law degree but engineering degrees including a PhD and more importantly two years spent in Silicon Valley where I developed a passion for innovation and start-ups which I translated in becoming a VC.

One more fact in addition to the other contributions:

Surprisingly, Bill Gates had venture capitalists: this is taken from Microsoft IPO prospectus: “Mr. Marquardt has been a director of the Company since 1981. Since 1980, Mr. Marquardt has been a general partner of TVI Management. He has been with TVI Management since 1980. He is also a director of Archive Corporation and Sun Microsystems, Inc.” TVI had about 6% of Microsoft shares before the IPO.

Now what have VCs really done for innovation? You would have been more credible by saying what are they doing. But if you use the past, let me put some historical perspective:

– If investors (VC was not developed yet) had not funded Fairchild in 1957, Intel in 1968, Silicon Valley may not exist as it is. Your friend Vinod is maybe an exception, but there were many others. Arthur Rock helped in funding or funded directly Fairchild, Intel, Apple Computers.

– The story of Genentech is well-known (go on my blog for more if you wish): when Bob Swanson, a former VC at KP became convinced biotech had a future, he first convinced Boyer, the researcher, then his former colleague Tom Perkins to try. Both were skeptical, so you are right Entrepreneurs are in the driving seat, but without the inventor and the investor, Genentech and then the biotech industry may not have existed. The innovation did not exist yet and the VCs contributed a lot.

– Who do you think were the first VCs such as Gene Kleiner and Don Valentine and many others? They were former entrepreneurs who had the vision that funding the next generation would fuel innovation.

I am also doing an analysis of startups created with Stanford technology or by Stanford Alumini. The surprising fact is that so far about 30% of the companies (I have a total of 2’700) were funded by VCs. It does not mean VCs were responsible for their success, but they had their contribution (in the group are companies such as Cisco, Yahoo, eBay, Google, Rambus, Atheros and so many others)

Paul Graham says that for innovation, you just need nerds and rich people. I agree with him. The nerd is the brain and the investor is the blood. And then both will need a team, managers, employees which will constitute the full body. VCs do not contribute to inventions, but they help in their commercialization, which is I think the definition of innovation.

You are not only singled minded but I think you are hurting the innovation ecosystem. I see too many entrepreneurs and future entrepreneurs scared with investors because they focus on your point of view. Of course, there have been terrible stories. But do not forget entrepreneurs need resources to succeed. Repeat entrepreneurs may bypass investors, business angels may help when resources are not too huge (maybe like in software though this is not even always true). But what about young people who develop semiconductors, biotechnologies, green technologies and have no money.

Money is never cheap or fun. But you need it. Let me finish with two quotes which show that I support some of your views but I still disagree with your overall vision.

In the book Founders at Work, one entrepreneur says about investors: “You can’t live with them, you can’t live without them” and even better Robert Noyce, Intel’s founders: “Look around who the heroes are. They aren’t lawyers, nor are they even so much the financiers. They’re the guys who start companies”

cheers

Herve

Women and High-Tech Entrepreneurship.

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Here is my third contribution to Créateurs, the Geneva newsletter, where I have been asked to write short articles about famous success stories. After Adobe and Genentech, here are some thoughts about women and high-tech entrepreneurship.

Women Entrepreneurs? Carol Bartz, Sandy Kurtzig…

… but also Ann Winblad, Catarina Fake, Kim Polese, Candice Carpenter, Mena Trott.
The list may go on but would not be much longer. Why so few women in high-tech entrepreneurship? And even worse, why are they so little known? The answer is simple: the situation is just an illustration of their position in science, in high-level positions in companies or in society more generally. A few anecdotes will show however that they have nothing to prove their male counterparts.

Sandy Kurtzig is a school dropout. She stopped the PhD program she was following at Stanford University and joined General Electric. She discovered there that computer science must help in improving manufacturing (such as in inventory management or logistics) and left again to found Ask Computer in 1972 with $2’000 from her own savings. “No venture capitalist would have given me money in the beginning. First software was seen of no value and then I was a woman.” She declined an acquisition offer from Hewlett-Packard in 1976 and in 1981 Ask Computer went public on Nasdaq. (The reader should remember that Apple had gone public in December 1980 and Logitech was founded in January 1981.) When she left Ask in 1989, the company had $189M in sales. Her advice to entrepreneurs? Believe in yourself, hire the right people and share success. Do not be afraid of making mistakes.

Carol Bartz also began her career in a big company: 3M is the inventor of the famous post-it. She heard there: “you are a woman, what are you doing here?” She left the company when he understood she would not be promoted because she was a woman. A few years later, she moved to Silicon Valley. “Even in this region, being a woman is belonging to a minority.” Her comment will not prevent her from becoming CEO of Autodesk in 1992. (Autodesk is the world leader for 3D software for architecture and mechanical design with $2B in sales in 2008.) That same year, in 1992, she was diagnosed with cancer. She will have chemotherapy while managing her company. She succeeded twice. “With private life and work, you do not have time to wonder if you are all right or not.” Work was a distraction and the leadership she showed was a strong motivation for her colleagues.

She is also fighting for the position of women in science: “I sincerely believe that women are dissuaded [from doing science]. They are told it is not important. Another female entrepreneur, Ann Winblad adds: “The daughter of a friend of mine is worried about appearing too nerdy if she invests in science. However some of the successful women – myself, Carol Bartz – all of us were math whizzes and we really had fun teenage lives as well as adult lives and have been very successful. The problem is that we need role models like Steve Jobs with this inspirational product, the iPod. Something is getting lost in the message because not many say I want to be like them.”

In January 2009, Carol Bartz became Yahoo’s CEO. The task may not be easy. Should we listen to Caratina Fake, founder of Flickr: « There is a lot of institutionalized sexism working against women in business and I think that people aren’t even aware that it’s there. » This post is unfortunately too short to celebrate women as entrepreneurs- Those who succeeded had to be exceptional and those who try also, without any doubt. The barriers entrepreneurs face are amplified for women. I will just conclude by copying the poet in saying that, in the start-up world maybe “Women are the Future of Men”.

To know more:
Carol Bartz in “Betting It All” by Michael Malone (Wiley, 2002).
Sandy Kurtzig in “In the Company of Giants” by R. Dev Jager and R. Ortiz (McGraw Hill, 1997)

Next article: A European in Silicon Valley, Aart de Geus.

The Art of Selling

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I have never be good at sales. I am not sure why, but it requires either qualities or experience I do not have. Selling the book Start-Up was a good example! So when I had to organize a workshop on sales, I checked a few things including the following videos which I found interesting. Some are GREAT!

Steve Blank Engineers and Founders: The First Sales Team

Frank Levison Real Sales and Customers in Business

Just in case you missed the point: Businesses Must Have Customers

Dan Spinger: Negotiating with Customers and Clients

Guy Kawasaki Seed the Clouds and Watch the Sales Grow

Randy Komisar Exploring New Sales and Marketing Channels

Tina Seelig Classroom Experiments in Entrepreneurship

Last but not least, even if not really politically correct

Bob Parson : Build 3 Mega Million $$$ businesses

The Anatomy of an Entrepreneur

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A new report has been published thanks to the Kauffman foundation. The study, entitled “The Anatomy of an Entrepreneur,” led by co-authors Vivek Wadhwa, Raj Aggarwal, Krisztina “Z” Holly, and Alex Salkever gives very interesting features about the background and motivations of entrepreneurs.

The paper can be found on the Kauffman foundation web site and here are some key lessons:

– founders are generally well-educated, middle class; they have a family and experience. So this kills a little the school drop-out, young, nerdy entrepreneur…

They do not always or often think about becoming an entrepreneur early in their life:

Another interesting element is about role model or mentor:

Now, when the study focuses on young entrepreneurs, the view is slightly different:

It is where the Yahoo, Google founders come in the picture probably.

Finally, there are many serial entrepreneurs. I am a little surprised because I am not sure succesful entrepreneurs are necessarily serial entrepreneurs. In any this would not contradict the findings and this is interesting:

If there is one thing I want to add, it is about the definition of “founder” that the authors have used:

a “founder” was “an early employee, who typically joined the company in its first year, before the company developed its products and perfected its business model.”

Depending on how many of these founders were employees rather than entrepreneurs may have an impact on the data which are provided here. A well-funded VC-backed company may attract in its first year very experienced people who are not necessarily entrepreneurs. But this being said, all this is of real interest.

No Business Plan? No Worry?

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A study dated December 2008 shows that submitting a business plan to venture capitalists would be at best a symbolic act, at worst of no interest or at least with no relation to the investment decision.

The paper entitled “Form or Substance: The Role of Business Plans in Venture Capital Decision Making” was written by David Kirsch, Brent Goldfarb and Azi Gera of the University of Maryland and published in the Strategic Management Journal.

Based on the analysis of more than 1000 documents, les authors have tested 7 hypotheses relative to business plans:

1- the impact of a standard document,

2- statements of prior non-VC external private equity funding

3- the articulation of financing requests

4- reference to management team members

5- reference to prior educational human capital

6- reference to the prior entrepreneurial experience of founding team members

7- reference to the prior professional business experience of founding team members.

The results are quite striking: hypotheses 1, 2, 3, 5 and 7 are not validated et only hypotheses 4 and 6 would received a limited validation.

Their conclusions are quite clear: “business planning artifacts are not important sources of information for venture decision makers. The submission of planning documents is, at best, a ceremonial act.” and they add “neither the presence of business planning documents nor their content serve a communicative role for venture capitalists… Critical information is learned through alternative channels.”.

But I need to add, and this is now a personal point of view, that all this does not mean that a business plan is not necessary for any entrepreneur who wishes to raise capital…

Bob Swanson & Herbert Boyer: Genentech

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Here is my second contribution to Créateurs, the Geneva newsletter, where I have been asked to write short articles about famous success stories. I began last quarter with Adobe and its founders John Warnock and Charles Geschke, here is now Bob Swanson, Herbert Boyer, founders of Genentech.

Bob Swanson and Herbert Boyer: Genentech

In the start-up world, biotechnologies do not seem to belong to the same world: they seem to always be reserved to high-caliber scientists not to say Nobel prize winners that investors would back with their money. So… where is the entrepreneur?

The story about the Genentech beginnings is probably the best illustration that a visionary entrepreneur is also necessary in biotechnologies. Much more than just a start-up, it is an entire industry that Bob Swanson founded.

The legend says that Bob Swanson, a 29-year old venture capitalist, met Herbert Boyer, a professor at the University of California in San Francisco (UCSF). The money of Bob and the ideas of Herbert made possible the creation of Genentech in 1976, followed by its IPO in 1980. The story deserves however a little more attention. Bob Swanson was not really an investor. He is an entrepreneur. he has been hired by Kleiner and Perkins (KP) who had understood that the real value of a venture capital firm is to create company and not only to fund them. They understood this after the success of Tandem and Jimmy Treybig whom they financed from day 1 in 1974. (See KP first fund).

Bob Swanson is fascinated by the potential of biology and genetics. (He has a BS in chemistry from MIT and an MBA). After helping KP for one their portfolio company, he leaves the fund to dedicate himself to his new passion. He meets many professors in the Bay Area but all of them explain him that their work is about science, leading edge science for sure and very far from commercial applications.

Herbert Boyer is not a typical professor. Together with Stanley Cohen, he is the inventor of a patented technology, which was not common in the academic world of the seventies. Known as the Cohen-Boyer patent, it describes how to manipulate the DNA and it is so fundamental that any new technology in the field needs to use this patent, which means obtaining a license on the technology and paying royalties to its owners, Stanford University and UCSF. In total, more than $250M was generated in royalties over 20 years.

The beginnings of Genentech are a combination of history and legend. Swanson calls Boyer who tells him he is very busy but he agrees on a 10-minute talk on a Friday afternoon. Swanson is obsessed about one single thing: the applications of research. Boyer replies that there is certainly some potential but it will require another 10 years of research. “Why, why, why?” Swanson does not stop saying to the point that Boyer finally concludes “why not? May be it can be faster.” The 10-minute talk has become a 3-hour discussion. Genentech is born, at least in two minds full of beer!

They still have to convince the skeptics. Among them, the potential investors. A week later, Tom Perkins meets with the two men and he remembers: “the technical risks were huge. I was very skeptical. I did not know anything in biology.” Kleiner is however very impressed by the energy of Swanson and the expertise of Boyer. He decides to try, step by step in order to diminish the risks and minimize the initial investment. Kleiner invests $100’000 which will last nine months.

The rest is History. Genentech synthesizes insulin in 1978 and growth hormone in 1979. Genentech also raised $10M with private investors before going public on Nasdaq in 1980. For the first time, a biotech company goes public with no revenue and its first product is not approved yet (it will be in 1985 only). In 1990, Roche and Genentech will sign a strategic partnership which makes the Swiss company its major shareholder. In 2009, Roche acquired all the remaining shares of Genentech.

Swanson was not an investor, but a visionary entrepreneur. Boyer was not a professor in his ivory tower. They were also lucky to have the best of mentors, Tom Kleiner. A lot of energy and passion, great ideas, some money. It is an almost accidental meeting which is responsible for the growth of a industry worth tens of billions of dollars.

Icing on the cake, the Genentech capitalization table at its IPO:

Pour en savoir plus:

Internet Archive:
http://www.archive.org/search.php?query=genentech

The Genentech web site:
http://www.gene.com

Next quarter: Women entrepreneurs, Carol Batz and Sandy Kurtzig

Belgium and Start-Ups

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After Finland, Sweden, here comes Belgium. A recent study has been published: “Le financement des spin-offs universitaires en Belgique” by Fabrice Pirnay (HEC-ULg) & Sarah Van Cauwenbergh (CeFiP) – May 2009. It is about spin-offs from universities in the French and Dutch-speaking parts of belgium. I am not sure it is available online though.

Because it is not a marketing tool, it may not make everyone happy as it shows once again that there are weaknesses in our innovation systems and that we are also far behind the USA. I participated to a workshop to discuss the study and the lessons I want to remember are that if we want to favor growth, we need ambition, i.e. high quality teams, resources and an international strategy. Because tehre is a chicken and egg issue between money and people, I remain convinced that international exposure is a good initial bet, I mean sending people abroad as well as inviting people to come where we live. We also need mot role models, mentors so that we should use our diaspora and our alumni.

Now instead of going any further in a complex analysis, here are the advice of an unusual roel model: Jacques Brel. My colleague Bernard Surlemont (qui m’avait invité à ce workshop) showed me this great document where the Belgian singer talks about passion, fear of failing and work vs. talent. They are in French only…

Passion

Fear

Work