Category Archives: Must watch or read

The Power Law and Venture Capital (part 3), planners and improvisers, betting big or diverse

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Mallaby is a marvelous storyteller – thanks to his team probably as he mentions at least 15 collaborators in his acknowledgments. This is part 3 of my posts about the Power Law, following part 2 and part 1.

You will discover so many figures of venture capital and entrepreneurship that it would be impossible to mention them all. But here are illustrations. If you do not know them, chek their names at the end.

What is really impressive in Mallaby’s book, is that whatever the strategy of the investors – for example being improvisers or planners, betting big or small in a small or large number of opportunities, replacing or mentoring the founders, the power law prevails.

As a side and unimportant comment, Mallaby is great at story-telling, he is less good with numbers. But valuations of startups can be tricky when you mix pre-money and post-money, dilution and stock options. Page 155-6 : “The founders tentatively suggested a valuation of $40million up from just $3million when Sequoia had invested eight months earlier. […] Son duly led Yahoo’s Series B financing providing more than half of the $5million […] In a bid without precedent in the history of Silicon Valley, he proposed to invest fully $100million in Yahoo. In return he wanted an additional 30 percent of the company. Son’s bid implied that Yahoo’s value had shot up eight times since his investment four months earlier.” I am not sure all this is correct. I let you check. Or page 147 : “Rather than merely doubling in power every two years, as semiconductor did, the value of a network would rise as the square of the number of users. Progress would thus be quadratic rather than merely exponential; something that keeps on squaring will soon grow a lot faster than something that keeps on doubling.” As Etienne Klein has often said, the “exponential function” is heavily mistreated in the media and now abusively assimilated to a function whose only characteristic is to grow very quickly…

The founders:
Nolan Bushnell, Jimmy Treybig, Bob Swanson, Sandy Lerner, Bob Metcalfe, Mitch Kapor, Jerry Kaplan,
Rick Adams, Marc Andreessen, Jerry Yang, Pierre Omidyar, Larry Page, Mark Zuckerberg, Max Levchin, Elon Musk.

The funders:
Don Valentine, Mike Moritz (Sequoia), Tom Perkins, John Doerr (KP), Jim Swartz, Arthur Patterson (Accel),
Bill Draper, Masayoshi Son (Softbank), Bruce Dunlevie, Bob Kagle (Benchmark), Peter Thiel, Paul Graham.

The Power Law and Venture Capital (part 2) Fairchild and Rock

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Following my previous post about the book The Power Law and Venture Capital, I can only confirm it is a fascinating book about the history of Venture Capital. I have now read chapters 2 & 3 which covers the sixties mainly through Arthur Rock and his funding of Fairchild and the Traitorous Eight.

About Fairchild

Coyle pulled out crisp dollar bills and proposed that every man present should sign each one. The bills would be “their contracts with each other,” Coyle said. It was a premonition of the trust-based contracts – seemingly informal, yet founded, literally, on money – that were to mark the Valley in the years to come. [Page 35]


Source : https://www.sfgate.com/business/article/Tracing-Silicon-Valley-s-roots-2520298.php

Each of the 8 founders put $500 for 100 shares ($500 was two to three weeks of salary), Hayden Stone (through Rock and Coyle) 225 shares at the same price per share and 300 reserved for future managers. Fairchild put $1.4M as a loan to be compared to the initial $5,125, with an option to buy all the stock for $3M. It happened making the founders rich but not as rich as if there had not been that option. Fairchild had made a profit of $2M at the time of acquisition and price to earnings were easily 20x to 30x. SO I had to do my usual cap. table from foundation to exit. Here it is:

What VCs such as Rock looked for

I just scanned pages 48-49 and this is very similar to what you could find in slideshare slides in the previous post.

“Some winning venture capitalists claim to look almost exclusively at the backgrounds and personalities of the founders; others focus mostly on the technology involved and the market opportunity the venture addresses” from The New Venturers, Wilson (1984)

“They look for outstanding people without worrying too much about the details of product and marketing strategy. The right people have integrity, motivation, market orientation, technical capability, accounting capability and leadership. The most important is motivation.
Rock’s style was supportive of entrepreneurs with an implacable will.” from Wilson (1984)

In 7 years, the Davis & Rock $3.4M fund would return $77M or a 22.6x multiple… [Page 50].

If you do not fully understand what I talk about read Mallaby! And of course watch Something Ventured.

The Power Law and Venture Capital – according to Sebastian Mallaby

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Sebastian Mallaby has just published a new book about Venture Capital which looks very interesting. I have already explained here what the Power Law is and will not do it again. But I will quote Mallaby as I do when I read good books.

About the term : “Venture capital” had also cropped up in 1938 when Lammont du Pont, the president of E. I. du Pont de Nemours & Company spoke before the US Senate Committee to Investigate Unemployment and Relief. “By Venture Capital I mean that capital which will go into an enterprise and not expect an immediate return, but will take its chances on getting an ultimate return” du Pont clarified. […] but this phrase making did not stick and the term was not widely used until at least the 60s. [Note 28 page 418]

And what about this : “All progress depends upon the unreasonable man, the creatively maladjusted. Most people think improbable ideas are unimportant, but the only thing that’s important is something that’s improbable”. From Vinod Khosla [Page 3]

About the return of VC. The normal distribution applies to size, weight of individuals, traditional stock markets, but the power law applies to the exceptional – wealth of individuals when not really regulated, as well as venture capital: Like the 7-foot NBA star, unexpected large price jumps are rare enough and moderate enough that they do not affect the average. The S&P500 budged less than 3% in 7763 days out of 7817 between 1985 and 2015, that is 98% of the time. […] Now consider venture capital. Hosley Bridge is an investment company which had stakes in venture funds that backed 7,000 startups between 1985 and 2014. A small subset of these deals, accounting for just 5% of the capital deployed generated fully 60 percent of all the Hosley Bridge returns. [Page 8]

Examples of Khosla’s deals [Page 10]

Startup Investment Return Multiple
Juniper Networks $5M $7B 1,400
Siara A few $M $1,5B >150
Cerent $8M Bought for $7B

About predictions: The revolutions that will matter – the big disruptions that create wealth for inventors [and investors! HL note] and anxiety for workers, or that scramble the geopolitical balance and alter human relations – cannot be predicted based on extrapolations of past data, precisely because such revolutions are so thoroughly disruptive. Rather, they will emerge as a result of forces that are too complex to forecast – from the primordial soup of tinkerers and hackers and hubristic dreamers – and all you can know is that the world in ten years will be excitingly different. […] the future can be discovered by means of iterative, venture-backed experiments. It cannot be predicted. [Page 11] “I always tell my CEOs, don’t plan. Keep testing the assumptions and iterating” Khosla again. [Note 32, page 416] All this of course reminds me also about the Black Swan.

Why is venture capital so different from other sources of finance? Most financiers allocate scarce capital based on quantitative analysis. venture capitalists meet people, charm people, and seldom bother with spreadsheets [*]. Most financiers value companies by projecting their cash flows. Venture capitalists frequently back startups before they have cash flows to analyze. Other financiers trade millions of dollars of paper assets in the blink of an eye. Venture capitalists take relatively small stakes in real companies and hold them. Most fundamentally, other financiers extrapolate trends from the past, disregarding the risk of extreme “tail” events. Venture capitalists look for radical departures from the past. Tail events are all they care about. [Page 14]

[*] Academic survey work confirms that one in five venture capitalists do not even attempt to forecast cash flows when making an investment decision. [Note 36 page 416]

All this is from the introductory chapter only and I liked it very much. Maybe more soon but in the mean time, you can always have a look at my visual history of venture capital.

Larry Page and Peter Thiel – 2 (different?) Icons of Silicon Valley

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I just read two long and interesting articles about these important personalities of Silicon Valley. The one about Larry Page was mentioned to me by a colleague (thanks François!) through its French translation. It is rather old (2014) but still very interesting and relevant : The Untold Story of Larry Page’s Incredible Comeback (Nicholas Carlson – April 24, 2014).

The one about Peter Thiel was recently published by the New Yorker, I find it a little less interesting as there is not much new, but still very clear as usual with this great magazine : What Is It About Peter Thiel? The billionaire venture capitalist has fans and followers. What are they looking for? (Anna Wiener – October 27, 2021)

What do they have in common, I am not sure: they have very different personalities, one is rather secretive, the other very visible. They certainly have in common the belief that technology and entrepreneurship can (still?) change the world, but Thiel puts this as a political statement and I believe he is wrong. Politics are about collective decisions (I hope), wheras entrepreneurship is more individual decisions (I think) even if is does include cultural (therefore collective) features.

Page was born in 1973 in Michigan and Thiel in 1967 in Germany, they both studied at Stanford University, Thiel in the law school, Page in the engineering school. They apparently both funded the Singularity university, something I do not really understand except the link to their extreme belief in technology saving the world…

I have written so much about them, you may want to check that through the tags #thiel or #google. In the article about Larry Page, there are very interesting moments, for example his “lessons” about management:
– Don’t delegate: Do everything you can yourself to make things go faster.
– Don’t get in the way if you’re not adding value. Let the people actually doing the work talk to each other while you go do something else.
– Don’t be a bureaucrat.
– Ideas are more important than age. Just because someone is junior doesn’t mean they don’t deserve respect and cooperation.
– The worst thing you can do is stop someone from doing something by saying, “No. Period.” If you say no, you have to help them find a better way to get it done.

It’s really worth reading these two articles and see again how much diversity there is (or not) in Silicon Valley. The last sentences of the articles about Page says: Instead of ending his life destitute and ignored, [contrary to his icon, Nikola Tesla] Page, still just 41, will spend the final half of his life pouring billions of dollars and countless hours into his wildest visions. “Anything you can imagine probably is doable,” Page told Google investors in 2012. “You just have to imagine it and work on it.”

Whereas the one about Thiel ends in a little more mysterious but enlightening way: Of course, when it comes to Thiel, what registers as mystique may simply be practiced opacity. Strauss, the conservative philosopher, proposed that academics and writers often advance their ideas through intentionally obscure prose — a technique in which “the truth about all crucial things is presented exclusively between the lines,” such that it is legible “not to all readers, but to trustworthy and intelligent readers only.” In interviews, Thiel can come across as “Straussian” — opaque, enigmatic, even oracular. He is a master of conversational redirection, and his arguments can be indeterminate. Religious references and allusions lend his ideas about business or globalization a sense of mysticism, as though the truth of his own speech is lurking just around the corner. Online, clues proliferate — about Thiel’s ideas and much else. Sleuths hunt for meaning, and search for signs indicating that they are among the “trustworthy and intelligent.” For Thiel’s fans, part of his appeal must be the endless opportunities he presents for decoding, deciphering, and hypothesizing. He offers readers the anticipation of revelation. Then again, the truth could be much simpler: when money talks, people listen.

A MIT entrepreneurial history – Epilogue : The Impact and some lessons learnt

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Degroof has produced one of the best books describing entrepreneurial ecosystems as I have already mentioned in 2 previous posts including Part 2 : Ecosystems & Culture.
In the last part of his book, he switches to the impact of MIT and its ecosystem.

This is a well-known topic as you could read in Entrepreneurial Impact: The Role of MIT. Degroof reminds us (pages 183-89) of the biotech startups around Kendall Square (Biogen, Genzyme) as well as the R&D of big pharma relocating around, such as Swiss Novartis. It’s not only about biotech as Lotus Development or Akamai exemplify. He also mentions some alumni who became famous entrepreneurs or investors, Hewlett (36), Perkins (53) or Swanson (69). He does not mention Noyce (53) though, and his tinkerings (more here and there) or Haren (80) for French people. There could be hundreds of others!

He also adds about the impact of local accelerators from CIC in the late 90s to MassChallenge and TechStars. I am a little less convinced about the international impact MIT had in a more topdown institutional way. What is the exact outcome of partnerships in Singapore, Hong Kong, Abu Dhabi, Spain or Portugal. The Deshpande Center certainly inspired many initiatives including the Innogrants I managed at EPFL in the mid 2000s or even what I do today.

Degroof also develops the importance of teaching and training: “In trying to reconcile the tension between rigor and relevance, Aulet argues convincingly that entrepreneurship should be framed as a craft as opposed to a science or an art. Like a craft, it is built on fundamental concepts. A potter, for instance, needs to master the basic mechanical and chemical principles of his craft. Knowing those does not guarantee success, but they considerably improve the chances. Like a craft, entrepreneurship is best learned through apprenticeship, or learning by doing, rather than relying only on lectures or manuals.” [Page 212]

Again I am a little less convinced about this generally-mentioned point: “There is a strong belief at MIT that entrepreneurship is a team sport. It is based on the evidence that teams of founders tend to perform better than individual founders, and that complementary teams tend to do better than homogeneous teams. Following on the heels of the I-Teams class, nowadays, most teams in entrepreneurship-related courses or contests are required to be composed of a mix of engineering or science students with management students. This has become an important feature and a great strength of entrepreneurship training at MIT. Both groups benefit from each other’s contributions. Engineering and science students discover the market dimensions of the projects with the help of their peers from the business school and learn that it is not enough to build a better mousetrap, while the latter benefit from scientific and engineering insights. Both groups are forced to deal with cultural differences and with more complex team dynamics than what occurs in homogeneous teams. The results are stronger teams and more effective projects.” [Page 214]

Entrepreneurship is a complex venture and entrepreneurial ecosystems are complex and fragile settings. Degroof convincingly describes why Boston has become a model. He does not really develop why it has not been as succesful as Silicon Valley, with a similar culture though. Paul Graham’s Ycombinator had moved from Boston to Silicon Valley as mentioned in Why Boston Should Worry. When I visited Novartis people in Boston, some claimed that Silicon Valley was to Boston what Boston was to Europe. Yes, Boston was more innovative than Europe and that is why Novartis moved some R&D to the West, but when Novartis bought Chiron in Silicon Valley, Novartis discovered going further West was again more adventurous. (See Myths and Realities of Innovation in Switzerland).

But these debates are secondary to the lessons learnt and synthesized by Degroof. A lot of inspiration is to be found. And coming back to the great foreword by Metcalfe : recreating MIT’s renowned entrepreneurial ecosystem is not a simple task. There is no copying MIT’s ecosystem and pasting it into another institution. The founding principles and unique cultural elements that came together to create the “secret sauce,” as Jean-Jacques calls it, the ground-up nature of what has grown and thrived at MIT, are not easy to duplicate. That does not mean that there are no concrete lessons to be learned, that there is not knowledge that can be translated and adapted for other universities and economies. Today, as a successful and seasoned entrepreneur, I still frequently look to MIT in my efforts to build a thriving entrepreneurial ecosystem at the University of Texas. I don’t hesitate to reach out to my extensive network at MIT for answers to questions of theory and practice. From there, I have been able to make great strides in my goal. I may not be recreating MIT, but I am modeling what I do after the very best and adapting it to the specifics I have here in Austin.”

A MIT entrepreneurial history – Part 2 : Ecosystems & Culture

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I continued reading the excellent From the Basement to the Dome by Jean-Jacques Degroof and found more inspiring elements about ecosystems, culture and also technology transfer from academic institutions after my first post. Here they are:

6 ingredients of the MIT ecosystem

Degroof gives us the cultural elements of the ecosystem: But what is it about this culture that has been supportive of entrepreneurship? The argument of this book is that entrepreneurship is particularly congruent with at least six elements of MIT’s culture: a well-ingrained, bottom-up organizational dynamic; excellence in all things that one studies or attempts to do, as well as a belief in hard work and fortitude; an interest in problem-solving and having a positive impact on the world; a belief in experimenting and a tolerance of failure; the pride of being viewed as rebels, sometimes eccentric and even a bit geeky, pursuing unconventional solutions; and the tradition of a multidisciplinary approach to problem-solving. [Page 90]

Why startups?

Here is an interesting comment about academic technology transfer: “Established firms are seldom interested in licensing emerging technologies from academia for several reasons. They don’t understand the potential of the technology; the time frame to develop the tech into a viable product exceeds the time horizon that most firms are comfortable with, or else they fear that they could cannibalize their existing business. As a result, in 1987, the TLO’s new director, John Preston, took the initiative to license technology to new ventures in exchange for equity, first as an experiment because there was a great concern at MIT about potential conflicts of interest. During the first year of this policy, six companies were formed based on such licenses, including ImmuLogic and American Superconductor. Sixteen more companies were formed during the second year. [Page 34]

Degroof then describes the multitude of ecosystem tools, all in a bottom-up logic, with serendipity (chapter 6) as a fairly common mechanism. The beginning of chapter 8 on technology transfer with the example of Amberwave is another must-read:

Often the initial performance of the new technology is either lower than that of existing solutions or not high enough to justify the switching cost for potential clients. As a result, established companies often don’t see the potential of new academic technologies. Moreover, in the few cases when the technology’s advantage is obvious or clearly promising, established companies are often concerned lest they cannibalize market share from their existing technology—a technology in which they have invested time and money, and around which they have built whole supply chains and other infrastructure.
It is estimated that an investment equal to 10 to 100 times the cost of the academic research is needed to bring an academic technology to market. This process also requires patience and perseverance. It can take at least two to three years for a patent to get issued once it is filed. When a company finally licenses a technology, it might take an additional five to ten years before it generates revenue. All in all, the uncertain performance of developing academic inventions, the associated costs, and the time lag between invention and revenue generation make investing in embryonic academic inventions extremely unattractive.
This does not mean that large firms never license patents from universities, but more often, inventors are the only ones to understand and to believe in the commercial potential of their technology. They are, therefore, frequently the only candidates interested in founding (and sometimes funding) a company to commercialize their technology. This process involves obtaining a license for the patent or patents based on their invention from their university, since, following the Bayh-Dole Act of 1980, the university owns the intellectual property of government-funded research. The edge that inventors have is the extensive and unique knowledge that they have accumulated through their research efforts and exposure to industry over the years. [Page 156]

Managing technology transfer

And more interesting information here about avoiding conflicts of interests at MIT: Policies do not allow faculty members to use students for research and development (R&D) related to a start-up in which that professor has equity, nor may students be employed by such a start-up. A start-up in which a professor has an interest is not allowed to fund research in that professor’s lab. Similarly, a professor is not allowed to conduct federally funded research in collaboration with such a start-up, with the exception of SBIR and Small Business Technology Transfer (STTR) funding. A start-up venture may not be located in a lab. Employees of a professor’s start-up may not be involved in the research activities of the professor’s lab. Research in the lab may not be influenced by a professor’s other professional activities. A faculty member’s full-time employment at MIT prohibits significant managerial responsibilities in a start-up. [Pages 161-62]

Or about making money with Technology Transfer: Many universities expect their technology transfer activities to be profitable and bring in revenue. Although MIT is one of the most successful and experienced universities in terms of technology transfer, its experience shows that this kind of financial gain is a misleading expectation. “Any university that counts on its tech transfer to make a significant change in its finances is statistically going to be in trouble,” said Nelsen. To that end, her motto during her tenure as head of the TLO was, “Impact, not income.” [Page 162]

Many startup stories

Degroof adds anecdotic descriptions of individual companies, rich with lessons: these are BBN (1948), Teradyne (1960), Analog Devices (1965), Prime Computer (1972), Apollo Computer (1980), Thinking Machines (1983), Harmonix Music Systems (1995), Amberwave (1998) ThingMagic (2000), Momenta Pharmaceuticals (2001), SmartCells (2003), Ambri (2010), Firefly Bioworks (2010), Sanergy (2011), Wecyclers (2012), Nima Sensor (2013), Bounce Imaging (2013), ReviveMed (2016), Biobot Analytics (2017), not forgetting Robert Langer’s 40+ spinoffs from 1987 to today!

Internal venture capital – The Engine

My experience with academic venture capital funds is mitigated to say the least. So this is an interesting experiment: Faced with this perceived market failure, MIT’s leadership pointed to the need for patient capital to bring ventures that are trying to commercialize tough science and need more time than do digital businesses to reach a stage where they are ready for venture capital. […] In October 2016, President Reif announced the creation of The Engine, https://www.engine.xyz , a for-profit but public benefit corporation, separate from MIT, that would act as an accelerator for start-ups trying to commercialize “tough techs” by providing advice and physical facilities, as well as an investment fund of patient capital. […] In addition to going against MIT’s policy of not funding entrepreneurial projects, The Engine also broke with Institute tradition by incubating the entrepreneurial projects of its members, which certainly raised substantial objections within the MIT community. [Page 64]

The Engine has a double bottom line: it seeks financial returns and it seeks impact. The Engine raised $200 million for its first fund, with MIT contributing $25 million. […] The fund invests from $250,000 to $2 million per venture, and its investments are not exclusive to MIT-related firms. The investment is made with a time horizon of eighteen years, rather than the typical five to eight years given in the case of venture capital funds. […] Second, The Engine gives start-ups access to infrastructure, such as expensive, specialized equipment, including some from MIT, that otherwise might represent a barrier to entry to firm foundations. The Engine’s facility was initially located in 26,000 square feet of space in Cambridge, with the ambition of expanding to 200,000 square feet through a network of offices, labs, and prototyping and makerspaces a few blocks from Kendall Square. […] Third, the new initiative comes with a network of professionals and mentors in the so-called hard-tech space. [Page 173]

In 2020, The Engine raised a second $250M with $35M from MIT and Harvard University joined as a new LP. Is this different than VC? Will it succeed? Time will tell…

A MIT entrepreneurial history by Jean-Jacques Degroof

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With an impressive foreword by Bob Metcalfe (the inventor of Ethernet et cofounder of 3Com) who rightly renames MIT a “Innoversity”, Degroof explains in From the Basement to the Dome that entrepreneurship is engrained in the MIT history and culture, not so much from a political decision but from serendipitous events.

Its motto (Mens et Manus, “Mind and Hand” in Latin), its logo, the right given to professors to spend 20% of their time in consulting since the 20s and the creation of the patent committee in 1932 are all indications that practice is as important as theory in engineering science. The importance of military funding through the creation of OSRD was also critical to the richness of MIT’s inventions.

The culture is exemplified by Ray Stata, a cofounder of Analog Devices : “It’s like ‘monkey see, monkey do.’ If you see others start companies and become successful, you say, ‘If they can do it, so can I.’ Whereas if you don’t see that up close and personal, there’s a fear and a mystery about how to do it. The entrepreneurial spirit at MIT gives you confidence.” [Page 17] And what about his experience in business: “I don’t have a clue about how to be a president, but I’m going to take the next twelve months to learn. And if at the end of that twelve months you guys collectively decide, or if the board decides, that I’m not the person who can provide leadership, I’ll step down. But in the meantime, while I’m learning, you’ve got to help me.” Fortunately, Stata’s direct approach worked. “Everybody dug in, and there was then no way I could fail. Over the next twelve months I learned how to be a president, and that process has continued for four decades.” [Page 18]

If you didn’t know Ray Stata, you might have known the building on MIT’s campus with his name.

I wondereed before beginning the reading if Degroof would mention the debate about why Boston did not end being as successful as Silicon Valley. And he does! Early in his book, on pages 24-25. This is a must-read and I am not finished yet. Degroof quotes famous Regional Advantage by AnnaLee Saxenian. I will let you discover.

This table that I had copied a long time ago is another illustration of the differences, not so much between Stanford/Berkeley and MIT/Harvard but about the number of firms spun-off from established firms. Just compare what happened at IBM on the west and east coasts. (PS: I had not initially mention the source of the table, it is part of High-Tech Startups and Industry Dynamics in Silicon Valley, Public Policy Institute of California, Junfu Zhang (2003) San Francisco, California.)

Let me finish this 1st part with another quote by Lita Nelsen, former head to MIT’s Technology Licensing Office: “People say to me, ‘Does MIT have an incubator?’ And my classic answer has been, ‘Yes, it’s called the city of Cambridge.’” [Page 26] This reminds me a quote of Richard Newton, a former professor at Berkeley. He had written stating a colleague of his: “The Bay Area is the Corporation. […When people change jobs here in the Bay Area], they’re actually just moving among the various divisions of the Bay Area Corporation.” This is a critical explanation of ecosystems, they are not so much about institutions but about the fluidity of exchanges between individuals.

Philippe Mustar – Entrepreneurship in Action – final episode

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Here is my last article on the excellent Entrepreneurship in action of which you will find the 5 previous articles with the tag #entrepreneurship-in-action. Here are some final notes:

The ingredients of success

But, those who fund this project are not doing it just for the skills and experience of the three entrepreneurs. They show other qualities that convince to follow them: their passion, their motivation, their ambition. Investors know that these qualities will allow the team to stay focused and better deal with the many uncertainties that lie ahead. To a student who asked a venture capitalist what are the three most important qualities that a project must have to be financed; he replied: the first is the team, the second is the team, the third is the team. Another joke, common in this industry, says that investors prefer to finance a good team with a bad project rather than the other way round (because a good idea carried by a team whose skills do not match those necessary to developing it is unlikely to go far; while a good team will always be able to modify, transform or change an initial idea of ​​low quality). The rest of the story shows that these statements, usually made in the tone of a joke, apply particularly well to Criteo and that those who make them, the venture capitalists, will have to believe in them and hold onto them firmly for several years. [Page 220]

Some criteria explaining success (according to one of the co-founders of Criteo):
– Have been able to focus on a single product
– Aim for excellence in all areas of the company
– Find the right cursor between managing daily problems and anticipating the future
– The ability to make difficult decisions
– Trust in technology

And finally Mustar returns to this process of innovation which looks like anything but a mechanical process:
– A long and winding process, made of many transformations
– An emerging process
– An experimental process
– A process filled with uncertainties, choices to be made, decisions to be made
– A collective process and a distributed action
– A social process

What is an entrepreneur? Are you born an entrepreneur or do you become one?

Mustar addresses in his conclusion a topic as old as startups with all the humility and caution, because it seems like we don’t really know (even if many claim they do know). Apart from the tautological definition, the entrepreneur is the one who creates (and builds) a business, it seems very difficult to find common traits and qualities specifically for entrepreneurs. Still, I am less confortable with his reminder of Peter Drucker’s claim. “Most of what you hear about entrepreneurship is all wrong. It’s not magic; it’s not mysterious; and it has nothing to do with genes. It’s a discipline and, like any discipline, it can be learned.” [Page 287]

I’m a little more comfortable with Komisar’s point of view in How Do You Teach High-Tech Entrepreneurship according to Randy Komisar.

There is no such thing as a monolithic entrepreneurial condition. Even among the very small number of first-time entrepreneurs I interviewed, there is a very diverse range of relationships with entrepreneurship. What characterizes them, beyond the great diversity of their profiles, their temperament, their way of behaving, is more a desire to do, to learn, to succeed, a great capacity for work, listening to others, ambition… but this is by no means specific to entrepreneurs. We find these same desires or aptitudes among employees, executives of large companies, philanthropic activities, athletes, artists, etc. [Page 289]

This journey with these young engineers allowed me to get rid of a conception of entrepreneurship that separates on the one hand an entrepreneur or a team, and on the other an activity of creating a new product and a company. The entrepreneur and the company are built together, in the same movement. [Page 290]

Philippe Mustar – Entrepreneurship in Action – episode 5

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This new episode of Philippe Mustar’s book relates to the history of Criteo, a startup already mentioned on this blog here and there.

For once, I disagree slightly with a quote from the book (which is not from the author): “The profile of the team formed by the three creators of Criteo is a perfect example of the one described theoretically by Kathleen M. Eisenhardt (Professor of Management at Stanford University and Co-Director of the Stanford Technology Ventures Program) as “the best it can be.” Kathleen Eisenhardt, based on a lot of research on the subject, defines (somewhat mechanically she herself admits) what a great team is:
– it initially consists of three, four or five people. If there are only two, it is not enough because there are so many things to do in a start-up and above all, being two does not offer a wide enough diversity of opinions, of points of view. If there are six, seven or eight, it is no longer a team, it is a group whose management and coordination take too much time.
– it is multidisciplinary and transversal, that is to say it combines skills in engineering, marketing, finance. But, these skills must be real, that is to say not based only on a diploma, but on actual experience.
– it includes people who have already worked together, this is an important asset because the creation of a start-up is made up of stressful situations, which are easier to share with people you know.
– finally, and this is more surprising, the “best teams” are those which have people of various ages, not only young people in their twenties but also others who have more experience. This often allows you to see different aspects of the same problem.
For Kathleen Eisenhardt, teams that meet these criteria are the ones that perform best. ” [Page 199]

As much as I can agree if we talk about the management team, I believe that at the time of creation, the founders have different pedigrees. As I wrote in my own book in 2008, “A start-up is a baby created by its parents – the founders. They are responsible for its development and to help it adapt to an evolving world. It does not mean that a founder has to give up control of his start-up. Would a parent give up his child just because he has no experience in feeding and educating? Is the analogy of little value? There is also a responsibility in succeeding in the development. Experts will be used, medical doctors, teachers for the child, professionals, and consultants for the start-up. The Google founders kept such “ownership” during the company’s growth. Eric Schmidt has become CEO but he is more a partner of the two founders. Start-ups seldom develop that well and investors sometimes have to make tough decisions when they take away the “parent” power from the founders. Investors do not like to do this in general and only do it when they consider it absolutely necessary. This is an ideal world but everyone knows reality is more complex”. And I could add, two parents is probably the ideal model.

On the other hand, I fully agree with the sources of innovation: The sociology of innovation has shown that the sources of innovation, like those of the Nile, are multiple and sometimes difficult to identify. It also pointed out that ideas for new products or services are the most common things in the world, and even that they are always bad, always poorly framed and approximate at the origin. As Bruno Latour says: “All important discoveries are born ineffective: they are hopeful monsters,“ promising monsters ”. [Page 251] and the French text by Latour http://www.bruno-latour.fr/sites/default/files/P-92-PROTEE.pdf . [A short parenthesis about Hopeful Monsters, a term I knew only from one of my favorite novels, and I blogged about it here.]

Philippe Mustar – Entrepreneurship in Action – episode 4

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Following two previous articles here and there and there again about this very interesting book, here are a few more lessons.

About selling a product

Expliseat is as rich as DNAScript in lessons especially about the description of how 3 young people with no experience in the field will find and bring together the skills to design, produce and sell. We also see one of the founders leaving the ship without the adventure stopping and finally page 186: During these years, Benjamin also learned that the only economic argument (“we make you earn money”), and more broadly those which are purely rational, are not sufficient to convince the customer:

“If you come up with a purely rational product, it’s not a good product, because the buying process isn’t one hundred percent rational. It was important for us to understand this. With the […] then the […], we said: “this is the best […] on the market”, but for the customer, the best […] is also a [product] which is beautiful, which one desires, which inspires confidence … It requires commercial work on the product to make it attractive. The end goal is that people no longer just buy a [product], they buy [our product], something that is beyond the product, they buy a brand, an industrial experience, a purchasing experience, a customer experience, an after-sales service… This is typically what you do when you buy an iPhone, you don’t buy a phone, you buy an Apple, you buy an experience, well it’s the same thing in industry and B2B ”. [Pages 194-5]

The “process of innovation”

What surprises about this story is the apparent mix of genres: the [product] is not yet certified, nor realized and entrepreneurs are already selling it. We are witnessing a real whirlwind in which the team experiments, manufactures, sells, tests, collaborates with various actors, negotiates certification, modifies the project, transforms the [product], changes alliances, partners and market, goes back, takes a detour to a research laboratory abroad, develops a new prototype… We are far from the classic model of innovation, a linear model where distinct stages follow one another: research, then experimental development, prototyping, industrialization and, last step, commercialization. In such a process, the customer or user is passive, she or he enters at the end and the only room for maneuver is to accept or refuse the innovation.

This linear process is a kind of relay race where the end of one stage marks the start of the next stage; and, within the company, each of these steps is the result of a different department: research department, design office, production department, then marketing and commercialization … This sequential vision has been widely criticized by literature, whether it is evolutionary economic theories, the sociology of innovation or the management of technology.

About the market

Expliseat seems to be coming at the right time in their [market]. Often companies with their innovation arrive too late or too early in the market they are targeting. The Greek word kairos [1] qualifies this moment, it is the time of the right moment, the instant of the opportunity. [Pages 195]

[1] The Greek god Kairos is the winged god of opportunity, to be seized when it passes. He is represented by a young man who has only a tuft of hair on his head. As he passes nearby, either you don’t see him, or you see him and do nothing, or you reach out and grab his hair, thus seizing the possibility, the opportunity.

I’ll let you explore the author’s use of the Scrabble metaphor to show you that there is no real innovation process out there, nor opportunity there, but permanent construction from next to nothing.

About decision making under uncertainty

The founders’ ability to act is found in particular in the multiple choices they are faced with, and in the variety of options available to them. For what type of aircraft can this ultralight seat be produced? What form should this take? What materials to use? Which shareholders to bring into the capital? Where to install the company? Should we do it or have it done/outsourced? Which subcontractor to work with? Which research laboratory should be mobilized to solve a specific problem? Which engineer to recruit? What modifications should be made to the structure of the seat? With which industrial partner to enter into an alliance? Which business strategy to choose? Which business model to adopt? At what price to sell the seat? How to organize the business? Etc.

Along with the diversity of actors that we have highlighted, the process I am studying is also populated with a multitude of choices. These are many options that entrepreneurs explore. Here too, they are as much technical as they are economic, organizational or social. The story of Expliseat is the story of an expedition, its actors engage in unknown territory: which options to choose, which to close, which to open or re-open? “To govern is to choose”, says the maxim of the Duke of Lévis. Many options explored in this story lead to dead ends, others that will be exploited lead to failures, and finally others lead to success – and one could say, after the fact, but only after the fact, that “it was the right choice”. [Pages 203-4]