Category Archives: Venture Capital

Is the Venture Capital model broken?

There is (sometimes) a love-hate relationship between entrepreneurs and investors. In fact there is a recurring message that Venture Capital (VC) does not provide an answer to the needs of many young start-ups. I will not enter that debate here as I do not have the answer. But as I recently read four different articles / reports where the current situation of venture capital is analyzed, I hope this post will be helpful to understand why VC is debated so much. These reports are:
– Lessons from Twenty Years of the Kauffman Foundation’s Investments in Venture Capital Funds (published in May 2012)
– Emergent models of financial intermediation for innovative companies : from venture capital to crowdinvesting platforms (publised in 2014)
– Venture Capital Disrupts Itself: Breaking the Concentration Curse (published in November 2015)
– Why the Unicorn Financing Market Just Became Dangerous…For All Involved, published in April 2016.

The Kauffman report

The Kauffman foundation explained in 2012 that the returns of venture capital have not been as good in the last 10 years as they were in the 80s and 90s. The reports also shows something which is quite well-known I think: the VC “industry” is much bigger than in the 90s, but with fewer funds. The explanation is simple: individual funds have grown from $100M to $1B+… The conclusion of the Kauffman foundation is that funds of funds, pension funds, limited partners (LPs) should be careful about where and how they invest in venture capital. Here are some graphs provided in the study.

The VC industry according to the Kauffman foundation

The VC performance according to the Kauffman foundation

In particular, you may see that IRR is a tricky measure as it changes over time (from peak value to final value) during the fund life. The Kauffamn suggests the following:
– Invest in VC funds of less than $400 million with a history of consistently high public market equivalent (PME) performance, and in which GPs commit at least 5 percent of capital;
– Invest directly in a small portfolio of new companies, without being saddled by high fees and carry;
– Co-invest in later-round deals side-by-side with seasoned investors;
– Move a portion of capital invested in VC into the public markets. There are not enough strong VC investors with above-market returns to absorb even our limited investment capital.

The Cambridge Associates report

Cambridge Associates (CA) does not show a very different situation, i.e. there are indeed more bigger funds and a slightly global degraded performance. But CA also claims that the VC performance is not concentrated in a small number of high profile winners. Some elements of information first:

The VC gains according to Cambridge Associates

The VC gains vs. fund size according to Cambridge Associates

Cambridge Associates is not saying the VC world is doing OK, but that the increase in fund size has an impact on the investment dynamics. On the performance, the next figure (from another report) illustrates again the fact that performance may indeed be an issue…

The VC performance according to Cambridge Associates

Bill Curley about unicorns

Bill Gurley is one of the top Silicon Valley VCs. So if he has something to say about the VC crisis, we should listen! No graph in his analysis, but a scary conclusion:

The reason we are all in this mess is because of the excessive amounts of capital that have poured into the VC-backed startup market. This glut of capital has led to (1) record high burn rates, likely 5-10x those of the 1999 timeframe, (2) most companies operating far, far away from profitability, (3) excessively intense competition driven by access to said capital, (4) delayed or non-existent liquidity for employees and investors, and (5) the aforementioned solicitous fundraising practices. More money will not solve any of these problems — it will only contribute to them. The healthiest thing that could possibly happen is a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution.

The crowdinvesting report

So when I read Victoriya Salomon’s report about new financing platforms, I was intrigued. What does she say? “The global venture capital market suffers from unfavourable exit conditions reflected in a drop in the number of VC-backed IPOs and M&As. This trend affects all markets across all regions. In Europe, VC funds have shown less risk appetite by realigning their investment choices on later-stage companies and those already generating revenue. Furthermore, because of the poor performance of many VC funds during the six last years, they struggle to raise new funds, as institutional investors, disappointed by low returns, show a preference for the most successful large funds with a perfect track record. This slowdown particularly affects traditional venture capital investments, while, at the same time, the share of corporate venture capital has significantly increased, exceeding 15% of all venture capital investments by the end of 2012. In Switzerland, the venture capital market has also entered into a phase of decline and is losing ground in the financing of innovation. In fact, Swiss VC companies are suffering from a lack of investment capital and struggle to raise new funds. According to the Swiss Commission for Technology and Innovation, the amount of venture capital invested in Switzerland has shown a disturbing decline of about 40% during the last five years. [Also] venture capital investments in early stage start-ups fell by more than 50% from €161 billion in 2011 to €73 billion in 2012. In contrast, “later stage” participations grew by more than 50% in 2012 reaching €77 billion compared with €34 billion in 2011. While the number of early stage transactions is falling, investment periods are tending to become longer (7 years instead of 4-5) and the capital gain smaller.”

So the analysis is very similar. The VC world has experienced major transformations. The author believes that one solution might be the emergence of new platforms, such as crowdinvesting, which can be described as equity crowdfunding for start-ups. This is indeed an interesting argument. It is a way to scale and extend geographically the business angel activity. Now it could be also that we just need to go back to basics, i.e. less money with smaller funds, investing again like in the 80s and early 90s in less cash spending companies… Whatever the answer, the analysis seems consistent: the VC world has moved in a direction (fewer but bigger funds, in the USA mostly) which may not be good for a world where many more start-ups appear all over the world, not only in Silicon Valley, with relatively modest needs…

So what?

First if all this looked elliptic, not to say cryptic, you should read the reports and articles. They are excellent. Then, in a recent interview; I explained that money is needed, but (too much) money can be dangerous. That is I think the main message… you may read below if you want to have my views…

“A Good but Potentially Dangerous Idea”
Former venture capitalist, Hervé Lebret is now responsible for Innogrants (seed money) at EPFL.
What do you think of the proposal to create a future Swiss Fund?
This may be a good idea, but only under certain conditions. It must be able to hire talented managers because it is an extremely complex business. This is what Israel did when it established its venture capital funds, it brought in experienced American managers. Without the right people, it’s a recipe for disaster. And the fund must have the freedom to invest anywhere, not only in Switzerland. If you want a fund that only invests in Swiss start-ups, we may only create mediocrity.
Why?
Because no European fund can prosper by investing only in its own country. It’s a matter of scale. Only Silicon Valley has sufficient critical mass. The Californian model of venture capital is to lose money in most investments and make a few homeruns such as Google or Airbnb. So you need to have ten thousand ideas to create a thousand companies, then one hundred will grow, ten will be successful and one become Google or Airbnb. You must be able to create such a success every five years, and Switzerland just does not have the critical mass. And it is dangerous to focus too much on money.
Really?
Yes. Money is a necessary, but not sufficient for success. It requires funds, but also talent, a market, a product and ambition. It is not because we make money available to start-ups that success will come – the other ingredients should also be present. It is true that Switzerland lacks venture capital, but this is not what explains that Google, Apple and Amazon were not born here. This is in my opinion rather a cultural question. We lack ambition and rebellion. And this is the only factor that cannot be decreed by the authorities. Entrepreneurs are satisfied to aim at the creation of a viable firm of modest size, in which they retain control. In Switzerland, the start-ups create fewer jobs than McDonalds. Neil Rimer (note: co-founder of venture capital firm Index Ventures) wrote two years ago: “We and other European investors constantly are looking for world-class projects from Switzerland. I think there are too many projects lacking in ambition and supported artificially by organs – which also lack ambition – that give the feeling that there is sufficient entrepreneurial activity in Switzerland.” I have to agree with him.

Andreessen Horowitz: extrapolating the future

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I have already mentioned Andreessen Horowitz (a16z for its friends) in previous posts. First I have been very impressed by Horowitz’s book, The Hard Thing about Hard Things and second, the VC firm is close to Peter Thiel (check When Peter Thiel talks about Start-ups – part 4: it’s customer, stupid!). I also published data about Netscape.

Marc Andreesseen – Photograph by Joe Pugliese – The New Yorker.

I have also mentioned how impressed I have been by a few articles published by The New Yorker, I wonder why I have not subscribed yet. I just finished reading Tomorrow’s Advance Man – Marc Andreessen’s plan to win the future by Tad Friend. Again this is a long, deep and fascinating analysis. When I printed it, I had a 25-page document. But it is worth reading, I promise.

I also read another article about Andresseen Horowitz, which is also interesting even if less profound: Andreessen Horowitz, Deal Maker to the Stars of Silicon Valley from the New York Times. Both articles try to show that a16z might be changing Silicon Valley and the venture capital world (or they are creating another bubble and will disappear when it bursts)

Marc Andreesseen – Robert Galbraith/Reuters for The New York Times.

I really encourage you to read the 25 pages, but here are some short excerpts:

Venture capital became a profession here when an investor named Arthur Rock bankrolled Intel, in 1968. Intel’s co-founder Gordon Moore coined the phrase “vulture capital,” because V.C.s could pick you clean. Semiretired millionaires who routinely arrived late for pitch meetings, they’d take half your company and replace you with a C.E.O. of their choosing—if you were lucky. But V.C.s can also anoint you. The imprimatur of a top firm’s investment is so powerful that entrepreneurs routinely accept a twenty-five per cent lower valuation to get it. Patrick Collison, a co-founder of the online-payment company Stripe, says that landing Sequoia, Peter Thiel, and a16z as seed investors “was a signal that was not lost on the banks we wanted to work with.” Laughing, he noted that the valuation in the next round of funding — “for a pre-launch company from very untested entrepreneurs who had very few customers” — was a hundred million dollars. Stewart Butterfield, a co-founder of the office-messaging app Slack, told me, “It’s hard to overestimate how much the perception of the quality of the V.C. firm you’re with matters—the signal it sends to other V.C.s, to potential employees, to customers, to the tech press. It’s like where you went to college.”

[…] The game in Silicon Valley, while it remains part of California, is not ferocious intelligence or a contrarian investment thesis: everyone has that. It’s not even wealth: anyone can become a billionaire just by rooming with Mark Zuckerberg. It’s prescience. And then it’s removing every obstacle to the ferocious clarity of your vision: incumbents, regulations, folkways, people. Can you not just see the future but summon it?

[…] Most venture firms operate as a guild; each partner works with his own companies, and a small shared staff helps with business development and recruiting. A16z introduced a new model: the venture company. Its general partners make about three hundred thousand dollars a year, far less than the industry standard of at least a million dollars, and the savings pays for sixty-five specialists in executive talent, tech talent, market development, corporate development, and marketing. A16z maintains a network of twenty thousand contacts and brings two thousand established companies a year to its executive briefing center to meet its startups (which has produced a pipeline of deals worth three billion dollars). Andreessen told me, “We give our founders the networking superpower, hyper-accelerating someone into a fully functional C.E.O. in five years.”

[…] A16z was designed not merely to succeed but also to deliver payback: it would right the wrongs that Andreessen and Horowitz had suffered as entrepreneurs. Most of those, in their telling, came from Benchmark Capital, the firm that funded Loudcloud, and recently led the A rounds of Uber and Snapchat—a five-partner boutique with no back-office specialists to provide the services they’d craved. “We were always the anti-Benchmark,” Horowitz told me. “Our design was to not do what they did.” Horowitz is still mad that one Benchmark partner asked him, in front of his co-founders, “When are you going to get a real C.E.O.?” And that Benchmark’s best-known V.C., the six-feet-eight Bill Gurley, another outspoken giant with a large Twitter following, advised Horowitz to cut Andreessen and his six-million-dollar investment out of the company. Andreessen said, “I can’t stand him. If you’ve seen ‘Seinfeld,’ Bill Gurley is my Newman”—Jerry’s bête noire.

Time to read more, right?

“You have money, but you have little capital”

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Here’s my most recent contribution to Entreprise Romande. Thanks to Pierre Cormon for giving me the opportunity of this opinion column.

“You have money goal you-have little capital.” This is essentially the phrase that the US ambassador in Switzerland, Ms. Suzie Levine, delivered at a ceremony in honor of the ventureleaders alumni – a group of young Swiss entrepreneurs – last November 15 in Bern. She said she remembered it after hearing it from one of her recent contacts. I also quote her from memory and since then, I thought about it many times, trying to understand it.

“You”, of course, is Switzerland. We have money, for sure. Switzerland is rich. It is doing well socially, economically and financially. And Swiss companies invest wisely. It would not be fair to take “little capital” at face value, if one defines the capital by what is invested. I feel compelled to repeat “You have money, but you have little capital. »

The first explanation, the most obvious probably is due to the factual finding of the weakness of the Swiss venture capital. The figures vary from 200 million to 400 million per year, depending on whether one defines venture capital as the money invested in Swiss companies (regardless of the origin of the capital) or capital invested by Swiss financial institutions (regardless of the geography of the companies). For comparison, venture capital in Europe is of the order of 5 billion and in the US of 30 billion, or 75 times less in Switzerland than in the US, while the population is 40 times smaller.

A second explanation, perhaps less known, is related to the relative lack of “business angels” (BAs). While Switzerland has the highest density of “super-rich” and one of the highest living standards in the world [1], investments by individuals in Swiss start-ups are limited. Swiss startups unfortunately do not benefit from this potential windfall: the amounts invested by BAs are around 50 million per year and 30 billion in the US. And the situation is even worse: most of the US investment is made in two regions (Silicon Valley and Boston), which does not allow anymore to poner the figures in relation to the population size.

Some players such as SECA, the Swiss association of private investors, or the Réseau through its “manifesto for Swiss start-up” [2] are conscious of the deficit. They lobby to create new venture capital funds of funds and favor private investment in start-ups with lower taxation.

Finally, but this in itself would be the subject of another article, the transition from business angels who provide the first funds (up to a million in general) and venture capitalists who are involved from 5 to 10 million is much less natural than in the US because of a lack of trust and mutual understanding.

However, I fear that the citation / title of this article can not be explained solely by the finding of simple numbers. The third explanation, I should say interpretation of the word capital is that of human or cultural capital. The strength of the US investment in innovation was not financial only. It requires individual attitudes more than economic reasonings.

One note: it may be useful to recall that institutional venture capital – funds from pension funds and corporations – was born out of the vision of a few individuals who believed in the potential of innovation in entrepreneurship; it is the business angels who created the venture capital (not the reverse). This vision comes from a typical American optimism and also more prosaically from the fact that these first business angels had made money by betting on innovation.

The Swiss money is less adventurous and above all – this is often said to me – from a capital creation of more traditional and maybe less innovative economic value. It is also transmitted by inheritance. As it is more hard-won, the fear is stronger of losing it and the confidence lower to make it grow again. Risk taking and lack of stigma associated with failure are typical features of American entrepreneurship, this is well known. We can better understand the (good) reasons for this larger Swiss (and European) conservatism.

Worse: because the financial capital travels easily and many Swiss start-up entrepreneurs look for their investors in London, Boston and San Francisco, this cultural capital is lacking in Switzerland. I do not speak of the quality of the executives in the large companies and SMEs, who perfectly manage their businesses and rarely leave them (rightfully maybe!) to create their businesses. I speak of the non-existence of men and women who have succeeded in the world of startups. One could become tired of always refering to Daniel Borel as the “role model” of Swiss high-tech entrepreneur. Silicon Valley has created in the same period thousands of millionaires in technology, wealthy individuals who systematically reinvest their money, and their time most importantly, in new adventures.

I had found the quote a little unfair, when I first heard it, because I had misunderstood it and at worst easy to fix if it referred to a lack of financial capital. I realize it refers to an even more serious situation as it takes time if we want to change a culture.

[1] Le Matin (May 2012): http://www.lematin.ch/economie/suisse-affiche-forte-densite-superriches/story/25762272
[2] Bilan (June 2014) http://www.bilan.ch/node/1015095

PS: the following table was not in the article but I had included in my book to explain the “cultural” differences between American and European venture capital.

Venture capital

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I was asked this week about how big venture capital is in Switzerland. And also in Silicon Valley. So I checked the data and found what comes below. But try to ask yourself how much money is invested in countries such as Germany, France, the UK, and regions such as Silicon Valley or the Boston area. Any clue? Before providing some answers, I should clarify one point: there are at least two definitions. How much money is raised by funds located in a given area. And how much money is invested in companies established in that area. I focus on the second one as funds can artificially be established in strange places such as Jersey for example. Then you have to remember that money can be invested in a Swiss start-up by Silicon Valley investors. It therefore shows the dynamism of entrepreneurs, not of local investors.

A second point I want to mention again is that high-tech start-ups and venture capital are about exceptions. If you are not convinced, read Peter Thiel or what follows. Marc Andreessen pronounced this at class 9 of How to Start a Startup: “The venture capital business is one hundred percent a game of outliers, it is extreme outliers. So the conventional statistics are in the order of four thousand venture fundable companies a year that want to raise venture capital. About two hundred of those will get funded by what is considered a top tier VC. About fifteen of those will, someday, get to a hundred million dollars in revenue. And those fifteen, for that year, will generate something on the order of 97% of the returns for the entire category of venture capital in that year. So venture capital is such an extreme feast or famine business. You are either in one of the fifteen or you’re not. Or you are in one of the two hundred, or you are not. And so the big thing that we’re looking for, no matter which sort of particular criteria we talked about, they all have the characteristics that you are looking for the extreme outlier.”

Now the numbers through tables:

Many striking facts. Not new ones, I knew about them. but still…
– Silicon Valley leads. By far.
– There had been a bubble in 2000! But the amounts of VC funding post 2000 have remained extremely high compared to the 90s. Would there be too much money?
– The USA easily recovered from the 2008 crisis. Not Europe…

NB: I had done the exercise in 2011 in Venture Capital according to WEF. Let me just add again this table. Notice the numbers are not fully consistent with what I showed above. Just an illustration of the difficulty of definitions (stages, origins…) but the order of magnitude is what matters.

Founding Angels

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I was interviewed last Thursday by Martin Würmseher, a PhD student at ETHZ working on the concept of Founding Angels [0]. “Founding Angels help bridge the so-called gap, which exists between academic research and the commercialisation of the new technologies. Together with inventors, they found start-up companies to further develop the research and commercialise the results. The Founding Angels business model is similar to that of Business Angels, but the operational and financial support of Founding Angels begins before the actual founding of the start-up and, as a member of the founding/management team, continues in the founding and building up of the new start-up company.”

Martin sent me yesterday the transcript of the interview and I liked it very much. Martin authorized me to publish it so here it is!

Interview: 16.01.2014, 11:00-11:45, Skype Call

WM: OK let’s start with your professional activities at the Technology Transfer Office for EPFL – if you can just describe your activities? #00:00:16-6#

HLE: OK, so I am not at the Technology Transfer Office, I am the Vice President for Innovation and TechTransfer. The TTO, the Technology Transfer Office, is one of the units and they manage patent applications, licenses or also research contracts. I am managing another unit called “The Innogrants“, which is also part of the same Vice-Presidency and I am also supporting entrepreneurs. I can give them grants for one year, similar to the PioneerGrants at ETH Zurich that Professor Siegwart I think put in place. Innogrants also organizes conferences called “Venture Ideas” with Venture Lab where I invite entrepreneurs. And I try to support entrepreneurs in ANY [!] manner which they need. #00:01:01-9#

And for your information, before being at EPFL, I was in venture capital with IndexVentures in Geneva. So I have been in the start-up world for many, many years. And before being at IndexVentures I was a researcher in applied mathematics. So my background is technologies and venture capital and now I support entrepreneurs. #00:01:21-7#

WM: OK, so for how many years did you work for a venture capital firm? #00:01:23-5#

HLE: Six years, from 1997 to 2003, and I have been with EPFL since 2004. #00:01:31-2#

WM: OK, then it’s a quite senior position now… and experienced person. #00:01:39-1#

HLE: “Senior” I’m not sure but “experienced” for sure! #00:01:41-5#

WM: In which stage do the people come to you? #00:01:51-8#

HLE: Usually they come because they have an idea and they most often come when they are finishing their Ph.D. and they are thinking: “Maybe I have something that COULD [!] have a commercial interest, I would like to work on the idea.” So I give them the opportunity to work on that idea for ONE [!] year, an Innogrant is a one year salary, but it’s open to any students at EPFL. So a Bachelor or Master student could come and I could fund them, too. And I can even fund people outside from EPFL, coming with an idea and then they would be employed at EPFL for a year. But it’s mostly Ph.D. students, statistically it’s for 80% Ph.D. students and then maybe 10% engineers from the outside with an idea – in terms of the people I fund. #00:02:39-8#

WM: But from all academic fields or are you just focused on Life Science or….? #00:02:46-5#

HLE: No, all technology fields. #00:02:48-6#

WM: And how many people are there coming [to you] per year?   #00:02:52-2#

HLE: So in fact, so if you are interested in the details… – but there is a page on the Innogrants and there are documents that you can download – but basically I have about 60-70 people coming to me and I give about 5 to 10 grants – eight; 10 Grants in the good years, 5 grants in the poor years. #00:03:17-1#

WM: My primary focus is on spin-off / start-up companies: How many start-up companies are emerging from EPFL per year? #00:03:27-1#

HLE: So EPFL creates about… -usually said- one start-up per month, so it’s about 12-15 start-ups per year. In the good year it were 20 in the bad year it were 5. Again these numbers you could find on the same document I was mentioning. In fact I am always comparing with ETH Zurich, which always has about twice the number of start-ups we have, they have about 20-24, we are more in the range of 12-15. #00:03:55-2#

WM: Can you please send me the link to the document. #00:04:00-2#

HLE: Yeah, in fact I will send you the link to both, the webpage of the Innogrants and then the PDF-document. […] [sending; see eMails] [..] #00:05:16-3#

WM: And what are in your eyes the main challenges of the young people to create their own start-up company? #00:05:26-9#

HLE: So there are many, many challenges. Let’s try… I wrote a book on start-ups in 2007 and I have a blog, which is called “Start-up book” and you can have a link about it. In fact, yesterday I put on my blog a very long article about the reasons why European start-ups’ failures compared to the American ones. OK, I think the MAIN [!] challenges, the MAIN [!] challenges and people are not aware of that is the fact that in Europe we don’t have an entrepreneurial culture. The culture in the US or in Israel is so developed, it’s much easier for a young guy with no experience to develop something just because he has around him people who know how to do it. So the main challenge is a) about culture… – and we can have debates, but that’s my point. Then there are two more, let’s say, tangible challenges, which is the lack of experience and the lack of financial resources. People don’t know how to build a company because they don’t have the business or just poor product development expertise. So they need to be surrounded with people who can help them because there are maybe GREAT [!] ideas, but no experience and they lack the financial resources. So what is missing is really: Talent and Money. #00:07:12-4#

That’s what I would say: So first culture, then the amount of money. And when I’m saying “culture”, you know the fear of failing, the risk-taking mentality which is… all these elements. But I can send you this in writing if you want. But then it’s really talent and money. #00:07:29-6#

WM: OK, that was exactly the next question: what do you understand by “culture”? But… #00:07:37-7#

HLE: Well let me send you the link to the article I wrote, in fact I wrote it, to be honest, in 2012… – never published it because it was a kind of working document with a colleague and finally I published it yesterday, so it was a kind of accident. And then you will see what I mean by “culture”, so the 2nd eMail that you will receive in a few seconds [see eMail]. But it would be a very long discussion about culture. But it’s really what I called: “Fear of failing”, “Risk taking attitude”, which is basically: it’s better working for Credit Suisse or ABB or Nestlé because you can have a solid career versus going to a start-up where your parents and your friends will tell you: “Are you crazy??! This is really a bad choice to making your life!” Whereas in Silicon Valley, I studied there for 2 years, most of the engineers are thinking: “Well should I do a start-up first because if I don’t do it now, then I will never do it?!!” So it’s what I called “culture”. #00:09:04-8#

WM: OK, I think I understand it. And with regard to the Professors: Are they usually involved or they pushing, or what is their…? #00:09:14-4#

HLE: Well it depends: It’s very interesting, there is one Professor who is very friendly with start-ups and in his lab, there have been 13 start-ups which have been created. Thirteen… – well it’s probably now 15 but I think it was 13 last year and among them you have very successful ones. His name is Philippe Renaud [1] , it’s in micro technologies and he is very friendly with entrepreneurs. There are also Professors, they just don’t care, it’s not that they are against, but they don’t care. They are focused on their academic career, publishing papers, teaching… – and they don’t think that’s in their mission to to do technology transfer or innovation, so they don’t care. I think it’s a pity, but it’s a free world and people should do what they love. There are cases where I have the feeling that people are even AGAINST [!] start-ups, saying that it’s a harder way to create innovation and they should do it with SMEs, small companies, or established companies. But I don’t think this happens often. #00:10:18-4#

WM: Do you think the Professor is decisive for this attitude or…? #00:10:31-6#

HLE: It’s a good question. When I was studying at Stanford University, all the Professors… -well most of the Professors I had were saying: “If you have a great idea, maybe you should think about creating a start-up…” So it’s, again we are going back to “culture”: So the Professors can be inspirational, so they can have a high impact just because they are encouraging. Whereas if the Professor is just neutral, then the students don’t know what it is about and then the impact is zero. Then if you are talking more concretely about the help, yes they do, because when I was over there, most of the Professors were founders of the start-ups, they would never quit their academic position, they were sometimes chief scientists or they were advisors in the Board. Some of them were even taking a one year sabbatical because they were passionate about the idea and I know many of them who have done that. And of course when a Stanford Professor or a famous Professor is in a start-up, when you go to investors it gives much more credibility or weight because investors have the feeling that you have a strong technical background, whereas students who are alone may have less credibility. So the Professors would never be the managers or never be full-time in a company, but they can still have an impact in terms of credibility. #00:11:55-6#

WM: And in your are in Lausanne how are they usually involved? Are they shareholders or are they just in an advisory position? #00:12:06-1#

HLE: I don’t have the details but I can give you the example of two companies like Kandou or Typesafe , where the Professors were in fact the early CEOs of the companies, so they have taken a one year sabbatical and they are extremely active and hands-on. And I see other cases where the Professors are board members, are small shareholders, advisors. Philippe Renaud is careful because he is helping all his start-ups, he doesn’t have the time to be a board member on all these companies, but he is an advisor for most of them even if it is informal. And I would claim that… -I’m not sure-   but most of the Professors are [co-]founders and shareholders of the start-ups. Yes! #00:12:49-2#

that’s another strategy: they are not managers. #00:12:57-4#

WM: And who is preparing the businessplan of those start-up companies then? Is it….? #00:13:01-8#

HLE: Now I will tell you something that my colleagues at ETH would be shocked about because I know that… certainly Silvio Bonaccio and Matthias Hölling at ETH Transfer… and from what I understand to be an ETH Spin-off, you need to provide a businessplan. When I was in venture capital I was always saying, and I’m saying that to all my students and entrepreneurs, I don’t care about businessplans! The best companies ever never had a businessplan, so businessplans are not important. Of course it’s important for the entrepreneur because it’s a document which helps him to structure his own project. But in terms of the business value of the businessplan, it is nearly zero. So as a venture capitalist I never read a businessplan, I am reading the first page of a businessplan and then I say: “Whow this is interesting…!” Then I go quickly to the team and I say why it is interesting. I put an eye on the numbers, I never believe in the numbers because they cannot be right, they are either too optimistic or pessimistic but they are never right, so I don’t care. So we were just asking for a meeting and in the meeting with them if there was something we liked, we made our own Due Dilligence because you cannot base your decision just on what the entrepreneurs say. And then you decide whether to invest or not. #00:14:23-6#

So who is writing the businessplan?! The entrepreneur, he has to write it and usually it’s a young student… – but again: I’m not sure whether the businessplan is an important element. What is important is: Do these people have the drive to go to potential customers to understand if there is a business [market]. It’s a debate. Of course you need a businessplan, the investors will always ask you for a businessplan, but I think what is important is: Do they have an idea which has some potential and which is credibile? And then they can convince investors by talking to them. [hesitating 3 seconds] #00:15:03-5#

It’s a long debate… #00:15:03-5#

WM: And regarding the financing: Who is responsible for this and when are the Venture Capitalists… ? #00:15:12-5#

HLE: There has to be an entrepreneur right??! The entrepreneur might be a student, might sometimes be the Professor but it’s not often a Professor, but it’s usually a student from the lab. And the one who is writing the businessplan and who is trying to find a funding is this young entrepreneur who is not much experienced. So that’s what I see most of the time. #00:15:33-2#
It’s not… So I’m not sure why you are asking me this but it’s not an external consultant who has some business experience and who is helping the entrepreneur to write his businessplan. There are many such people like the CTI coaches are providing guidance, but the one who is writing the businessplan, these are the people with the idea hereafter, because they are the only ones who understand in this state what they are doing. #00:16:05-2#

WM: OK, and now with regard to external entrepreneurs: Do you have frequent experiences with them? #00:16:18-2#

HLE: Yes we have. #00:16:19-1#

WM: And what are your experiences with external entrepreneurs – are they helpful or are…? #00:16:27-1#

HLE: So are you talking about entrepreneurs who would help these young people… #00:16:34-4#

WM: So a serial entrepreneur. #00:16:37-6#

HLE: Well two things: So it’s clear that if these young people, I am talking to you about, are going to investors it is more difficult for them to find funding. So if they can work with people with experience, like you are saying, it certainly increases the chance of rising money. We have an example, which is a company called “Aleva Neurotherapeutics” which is in the medical field and the technical founders tried for one or two years to raise money and he couldn’t. And today they found this serial entrepreneur and he managed to raise 10 million Swiss Francs. So it’s clear that Serial Entrepreneurs DO [!] bring some credibility. #00:17:20-9#

But I have also examples where these young entrepreneurs could raise the same amount of money with NO [!] Serial Entrepreneur (Examples such as Nexthink, Abionic, Distalmoition). So I am not not… it’s not clear to me that it’s statistically changing the situation. Now let me tell you something about Serial Entrepreneurs… – I am not sure but I think you couldn’t find it on SlideShare; I am also trying to do some research about entrepreneurs; I do not have time to publish serious papers but I go to conferences and I published some papers and I did one this is about Serial Entrepreneurs from Stanford University again, because I have access to a big data base of such people. And what I noticed is that Serial Entrepreneurs with time have a tendency to do worse than better. And I know that there is a paper from a Professor at Harvard (Josh Lerner) saying that Serial Entrepreneurs are important because they bring credibility to firms, and I agree. But they don’t increase… – according to me –   they don’t increase the likeliness of success of companies. So I am not pushing for Serial Entrepreneurs, because Serial Entrepreneurs usually are too self-confident and don’t help young entrepreneurs to do their own homework about learning and doing. So gain it’s a debate, but I am not fully convinced that the young entrepreneur needs to be associated with a Serial Entrepreneur. Now a young entrepreneurs certainly needs to be helped by people who have expertise in start-ups and technology, for sure. But it’s a different story. They may not be entrepreneurs, they may be managers who have worked in other start-ups, they may be former employees. I don’t believe so much in Serial Entrepreneurs. #00:19:10-7#

I am happy to send you the link, I think I can find it on SlideShare… [see eMails] I am sending you now a 3rd eMail with a 3rd link and you can have a look at what I try to do, you will see. #00:19:49-9#

But clearly don’t misunderstand what I am saying: Experience of people in technology IS [!] helping entrepreneurs to build their company, but I am not sure it has to be systematic… – that’s all what I am saying. #00:20:09-0#

WM: I’m just sending you something [see sent eMails with the shortened/extended slides for the Foundation Process] In which cases could you imagine it is reasonable to include an external entrepreneur? #00:21:17-4# #00:21:27-0#

HLE: I think it’s reasonable to include an external entrepreneur when the young entrepreneur is very technically oriented but has no interested in business and is so shy that he does not know how to communicate his idea to the business world… – it can be investors, it can be partners, it can be customers. So if someone is only interested in the technical aspects of his idea, then he needs to be surrounded with the right expertise. But when an entrepreneur who has a great idea is also enthusiastic, knows how to explain simply what he does and he has the drive and energy to do it, I am not sure whether he needs so much people with experience versus just a co-founder who is as enthusiastic as him and can help him in solving the challenges that he will be faced with. So it’s mostly a question of energy versus experience. #00:22:25-5#

WM: For the next question please take a look at the first document that I have sent you [Slides]. So you see here the famous technology transfer gap and on the second slide you see the foundation process: On which step in the foundation process do you see the biggest problems of the young academics in creating their own company? #00:22:59-3#

HLE: So the biggest challenge, and this is something I have heard so many times, is financing! Because, in fact, I am sure to can say it for ETH Zurich and EPFL, having ideas, helping them on the concept, writing businessplans… – you know, you all have these courses sponsored by VentureLab and CTI and even EPFL. Then create a company is not so difficult, you need a little money but it’s not so difficult, and once you have the money it’s easy to find… – even finding office labs is easy. But FINDING FUNDING [!] is a BIG [!] challenge [speaks very slowly and impressive]! It’s a BIG [!] challenge! Maybe because the idea are not good, it doesn’t mean that the money is difficult to find because these people have ideas which shouldn’t be founded. But for me this [rising funding] is for what I see the biggest challenge. #00:23:52-5#

WM: And for the other steps, you do not see any bigger problems? #00:24:03-5#

HLE: Well I am not saying it’s easy, it requires a lot of help, but so I am looking at your second document [extended slides]: Technology Transfer and the Foundation Process. Technology Transfer: some people complain that it’s a lengthy process and it’s difficult to negotiate with universities, but for me there is not much problem. Businessplan competition: There are so many, as you are writing, competitions on courses… – I think someone who is motivated can do it. Consultants: you have tons of consultants from the CTI start-up process, so you can find these people who are helping you. But THEN [!] finding… – I am not even talking about venture capital, because it nearly doesn’t exist in Switzerland, but if you are looking at Business Angels, it’s VERY [!] difficult to convince them and it’s very lengthy and it’s for very little amount of money. I don’t know if you noticed, there was in TechCrunch – this is this big website –   the announcement of an EPFL start-up called BugBuster which raised one million Swiss Francs. And TechCrunch said: “Well the Swiss scene is such that a series A-Round is one million, whereas in the U.S. a 1-million-round is more an Angel round and a serious A-round would be 5 million. #00:25:21-5#

So there is such a lack of understanding about the funding needs, there is a difficulty. Furthermore there is no venture capital. And then technology centers… – you know, you have the Technopark in Zurich, we have our Innovationpark, there are so many office space for start-ups, so I don’t think that it’s an issue. I didn’t see as much difficulties there as in the funding. #00:25:45-3#

WM: OK, you now mean…?! What is not the difficulty? #00:25:52-3#

HLE: So the difficulty is ONLY [!] in funding and everything else is… – it’s a challenge, but it’s a small challenge compared to finding money. #00:26:00-7#

WM: But my question / research question now is on external entrepreneurs. If you go in the second document and there on the first slide you see that the BAs and VCs they enter in a later stage in the foundation process, but exactly in the very early stage there is a financial and operational gap. And here I am working on an idea that was developed by a colleague of mine called “Founding Angel”, those are people who do provide funding… – yes, but they are just co-founders, so it’s from the idea very close to Business Angels, but they start right from the beginning in the area of business idea and business concept development, and then they are co-founders. Typically they have a technical background as well but also experiences in start-up creation. And I am working on the evaluation of this concept whether this would make sense to have such a model besides BAs and VCs. Because as you already mentioned there are some severe difficulties with these two types [of actors] and those difficulties might be overcome by such a FA. #00:27:53-8#

HLE: You are absolutely right. In fact if you look at the best, the biggest success stories in the U.S. in technology, you would often find such cases, as early as in the 50s or the 60s with Fairchild and Intel and then with Apple Computers and then again even with Google and Facebook recently. You find such people, if you have seen the movie “The Social Network” on Facebook, you would see that you have Sean Parker and Peter Thiel, who were such people who helped Mark Zuckerberg and then they went to VCs. If you look at Apple Computers, Steve Jobs and Steve Wozniak had no experience but there was a guy Mike Markkula who became a kind of manager and Business Angel. But what is interesting is that these people are OFTENTIMES introduced to the entrepreneurs by Venture Capitalists, saying: “Guys your idea is very good, but it’s still too early for us but maybe you should work with that guy, he might help us! And then depending on the development we WOULD fund you.” So and then in the case of Apple Computers, Mike Markkula was introduced to Steve Job and Steve Wozniak by Don Valentine, he was a famous Venture Capitalist, and then later he (Valentine) invested in the start-up. #00:29:22-8#

The difficulty in Europe is: Who knows these people? Do they even exist?! Because the big challenge is that a start-up has nothing to do with an established business. So if you go to Nestlé, if you go to a big SME, asking these people to help these entrepreneurs, they may provide traditional business advice, which has nothing to do with the advice we need for high-growth companies. A high-growth company is a very specific entity, so what you need are people who know exactly how start-ups need to grow and these people do not exist in Europe because they have never done start-ups themselves, they are more managers of established companies. So in the U.S. it works, but in Europe in many, many cases I have seen such people who have have given BAD [!] advice to entrepreneurs. #00:30:12-0#

But it’s still a good idea. #00:30:15-3#

WM: But isn’t it exaclty what I say: so these Founding Angels, they are typically experienced founders, so serial entrepreneurs with a technical background and they line up with researchers in a very early stage, so they go into a university to Professors and talk to them informally about new ideas and then they decide if the personal chemistry is right… #00:30:43-7#

HLE: Now let me ask you a question: In the Zurich area, there have been some similar examples but it’s not exaclty what you are telling me now, because what I see is such people are not going to the professors to evaluate ideas. They are going to young entrepreneurs who have already decided to do something and then they help them. If you look at the case of Sensirion which is a very good spin-off from ETH Zurich, right: Felix Mayer, for example the founder of Sensirion is now helping entrepreneurs like the founders of Optotune. So he is doing what you are mentioning, but now he is helping entrepreneurs, I am not sure whether he is helping Professors. The difficulty I see is that I have the feeling that Felix Mayer is very friendly with the concept of building a big SME, but I’m not sure he’s building start-ups the American way. But he is doing that, so it’s an example. #00:31:42-2#

But I am not sure Felix Meyer has the time to go in the labs and assess technologies, he has the time to be the board member for entrepreneurs who want to do things themselves. I don’t think Felix Meyer would leave Sensirion, but he has the time to be a board member. #00:32:01-4#

Well I have the feeling that you are talking to me about people who would become manager of the start-ups, maybe the CEO. Whereas I’m telling you, I see people becoming board members and giving very good advice. Do we agree on what I understand from what you are telling me? #00:32:13-4#

WM: Yes, I know what you want to say. But I have to say that I am personally a little bit involved in a small start-up company through a part-time job, which is in the biotech area. And there was a Professor from the University of Frankfurt in Germany in Biochemistry, he has developed some yeasts for producing 2nd generation biofuels and then he matched up with such a Founding Angel, who is by the way also my boss and they decided together: “Hey let’s found a company together!” The Professor is still at the university and they are developing their technologies further, but the other guy is managing the company, they have 50:50 shares, so it’s an equal participation. #00:33:19-5#

HLE: But if the company needs to grow, to go to the next step of going to funding: Who would manage the company? Would this Business Angel [means FA] be able to be the full-time CEO or is he just… #00:33:32-7#

WM: He is the CEO until financing is guaranteed and then there is a full-time CEO hired. #00:33:47-3#

HLE: Who is managing the technology? #00:33:47-3#

WM: The technology is developed by the academic scientists. #00:33:54-8#

HLE: But then you have to be careful, very careful about the way you manage all this, right. Because is the company just an extension of the lab or is it an independent entity which has it’s own employees? It’s always very difficult to manage such things right, because you still need someone who is technically oriented, but he is part of the company. Or maybe it’s still early, OK, I see your point. I understand what you are saying, it’s something which I have seen sometimes, not so often because there is always a difficulty of how do you manage the TIME [!] of the people involved and are you sure that you are not creating distortions because the business guy and the technical guy are not fully aligned in terms of strategy and on the things ongoing. So it MAY [!] work, but do you have examples of famous start-ups that have been built this way? That’s my question to you. #00:34:53-5#

WM: The problem is that this expression, this idea is quite new; there are maybe several examples, but they are not aware of this name [so “Founding Angel”] or that this is a distinct model with different characteristics compared to Business Angels or Venture Capitalists. As you saw in my last eMail, I have sent you a second eMail […] #00:35:35-7#

I just know one of my colleagues at ETH, Lesley Spiegel, she is very active with start-ups, and there are also some students coming to her asking for some advice for a start-up. I think at the beginning it was more planned as a coaching role, but now it has developed and now she is a co-founder. But she had never heard about this expression before. #00:36:19-7#

HLE: You know what is interesting Martin: If you look at the biotech industry, particularly in the Boston area around MIT and Harvard University, the Venture Capitalists themselves, the good ones, Versant and Polaris, are doing precisely what you are saying. They become the CEO, they put a little money, more than 10’000, usually up to half a million or a million, they do the job and when they have early validations, then they put a lot of money in it with other funds. So the Venture Capitalist are doing precisely that in the biotech industry. Why in the biotech??! Because in biotech, the business is quite simple, you have a molecule, if it works, it might be a blockbuster drug and if it does not work you stop early, but then you need to pull tons of money. And because these Venture Capitalists are usually medical doctors, they understand precisely how it is. But outside of biotech, it’s not so binary – does the molecule work or not?!? In all the other fields, medical devices or anything in information technology it’s about product development and it’s about understanding if the technology you provided is bringing something to the future product. And THEN [!] it’s much more difficult, because these Founding Angels, as you call them, need a VERY BIG EXPERTISE [!] in the field where they are. And then it’s difficult to have them to do it systematically for many ideas one after the other. In biotech a medical doctor can do molecules one after the other, so every three years you can change up to another one (A famous example is Christoph Westphal [2]. In that cases it’s very difficult to build an activity, an industry of these people who would create funds or their own money and they would do it systematically because the challenge for you or for an entrepreneur is: How do I find such people?!? How am I sure that for my specific project I find, in Switzerland, in Europe or in the U.S. someone who is eager to do that? So the concept is good but the matching is the challenge #00:38:33-8#

WM: But usually it should be… – maybe it’s actually not the case, but the perfect situation or how it should work is that they offer themselves to the technical scientists or at least to give the technical scientists… to be popular/known at the department if they [the technical scientists] have an invention… – this is the perfect situation. If they have a good invention and want to create a company but don’t know how, they would know who to call, that they always have the the tickmark next to the desk: “If I have something I would know who to call.” And such a person should only involve in such a project where is technically familiar with because it’s also his own risk, the risk of failure. If it turns out that he has not the glue e.g. about health sciences. #00:39:51-4#

HLE: So let me ask a 2nd question, which is the following: The idea is very early, as you are saying on your slide it’s the very early stage – how much money will you need to reach the state where you can go to the next, which may be Business Angels or Venture Capitalists? So how much time and funding do you need for the Founding Angel to validate the idea? #00:40:18-0#

WM: So I would say about two years. #00:40:18-9#

HLE: Two years; so how much money? #00:40:20-5#

WM: It depends… #00:40:24-5#

HLE: Let’s say half a million right, it’s half a million – two years, half a million. #00:40:27-1#

WM: Yes, typically this company is founded and the research is still done or further developed by the scientists employed by ETH. #00:40:47-1#

HLE: I am not saying the half million is provided by private money, it could be a CTI contract, but you need money. And of course this guy needs to feed himself, he needs at some point…. or he is rich enough, he does not need to work, or he still needs to have his own money. And if the research is done at the lab, I think you are right, it can be developed and it may work. But you have to think about: How does this guy fund himself?   #00:41:17-0#

WM: This is his own problem, there is no salary, he is only shareholder. #00:41:23-2#

HLE: Because many times I have seen people coming to EPFL saying: “I want to help labs and entrepreneurs!” And I am almost asking them: “Do you need to be paid for that or you don’t need??” If you don’t need to be paid, then it’s great because you can do exactly what you are telling me. But if he needs to be paid, then we are in trouble because we don’t know how to pay these people. And most of the time, I tell you, they need to be paid. #00:41:44-2#

WM: No in this model, they are not paid, they feed themselves with former/previous exits, so they are financially independent. As long as… #00:42:03-4#

HLE: So Martin we have such people around EPFL, I can give you the name of people like… – maybe you have seen them also around Zurich. There is one guy called Colin Turner [3], there is another guy called David Brown [4]… (I give you more names in note [5] #00:42:15-9#

WM: Yes can you please send me the contacts – just afterwards. #00:42:21-5#

HLE: I will send you the name and then I can try to find the eMail and then I can even make introduction if you wish. #00:42:34-1#

WM: Yes, just send me the the name or the website. #00:42:34-5#

HLE: Well I’m just typing them in an eMail […] [see 3rd eMail] What is interesting is that these guys are precisely doing what you are saying, they are not asking to be paid, but they don’t become the entrepreneurs, they are board members. They are Business Angels and board members and they are most of the time founding Business Angels, but they don’t have a management position, they are on the board. #00:43:06-7#

WM: But this is also a characteristic: The Founding Angel, he is the manager as long as there is no other person. As soon as there is… afterwards when a BA or VC is involved and there is enough financing to hire a full-time CEO, then he goes to the board. #00:43:29-3#

HLE: You will have to check again, if these people who are founding Business Angels, can work with just the professor or if they really want to work with someone in the lab, who has the drive to become a technical founder, the CTO. Because a professor will become the CSO, the chief scientist, but someone who will become full-time… Do they need someone who will become full-time a technical guy in the company. That’s for me the key, one of the key elements… – another key element. OK I will send you the eMail about the 3 names. Anything else. #00:44:07-8#

WM: No that’s it, thank you. #00:44:14-1#

[…] #00:45:14-7#

HLE: But you have a good idea and it’s something many universities are trying to work on… – for sure. You can check what Alto is doing in Finland, the technical university in Finland, they have putted in place many things called Alto Ventures and they are all inviting formal entrepreneurs from the Finnish scene to help the people. So you could see there similar concepts. #00:45:44-6#

WM: OK I will take a look at it. Thank you very much for taking the time.

[0] Martin gave me more references on Founding Angels:
–Founding Angels as an Emerging Investment Model in High-Tech Areas by GUNTER FESTEL AND SVEN H. DE CLEYN,THE FALL 2013 JOURNAL OF PRIVATE EQUITY. (You may remember I had a post in teh past about De Cleyn’s PhD thesis…)
– Founding angels as early stage investment model to foster biotechnology start-upsGunter Pestel, 2011, Journal of Commercial Biotechnology Vol. 17, 2, 165–171.
[1] Philippe Renaud, the professor with 13 start-ups and http://people.epfl.ch/philippe.renaud?lang=en
[2] Christoph Westphal
[3] Colin Turner, http://www.linkedin.com/in/colinturnerswitzerland,
[4] David Brown http://www.venturekick.ch/index.cfm?page=129749&profil_id=2365&BackPage=129757,
[5] Francois Stieger, former Oracle executive, http://www.forbes.com/profile/francois-stieger/,. Another idea might be former CTI coach and executive, Jean Marc Wismer http://ch.linkedin.com/pub/jean-marc-wismer/0/a1/2a8 who is now CEO of Sensimed. Finally Jean-Pierre Rosat (http://startuptraining.ch/fr/portfolio-items/jean-pierre-rosat-2/ ) and Jacques Essinger (http://www.linkedin.com/in/jessinger) are quite famous here in the medtech field.

Stanford will invest in companies founded by students

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“The prestigious American university Stanford will now invest in start-ups.” Thus begins an article in the newspaper Le Monde. The author, Jerome Marin, is rather negative about this decision, as the following quote shows: “The confusion is fueled even at the top of the university: the president has close ties with several giants of Silicon Valley, including Google as it is a member of the Board.” Without trying to argue, I think the reporter is misled.

But before I give you my point of view , I’d like to mention that I looked for other articles related to the topic, I found at least two :
– That of TechCrunch, close in spirit to Le Monde’s one, Stanford University Is Going To Invest In Student Startups Like A VC Firm. The article is also critical but I think better informed… and it also deals with the tension between the academic and business worlds. “That tension between academia and industry was highlighted this past spring when a number of students dropped out of school to start Clinkle”.
with references to another New Yorker article.
– The press release by Stanford University, StartX, Stanford University and Stanford Hospital & Clinics announce $3.6M grant and venture fund. If you read the statement carefully, it is about a gift from Stanford to StartX and a joint Stanford-StartX fund. StartX is an accelerator created by Stanford students and I understand that the University therefore supports this initiative. There is no mention, however, of a fund managed by Stanford as a VC fund.

The reason I think the reporter is mistaken is when he says that “Stanford will invest in companies created by its students”. As if it was new. Even if I agree that the stakes taken in start-ups in exchange for licensing of intellectual property is not an investment per se, Stanford still has acquired stakes in more than 170 of its spin-offs in the past . In addition the Stanford endowment has invested on an individual basis in many start-ups in the past (not to mention in many VC funds). For example, I found in a database I am building on Stanford-related companies, that Stanford invested in Aion (1984), Convergent (1980), Gemfire (1995), Metreo (2000), Tensilica (1998). Website LinkSv mentions Stanford invested in 143 companies. [I am aware there might be some confusion between investor and shareholder, so the topic remains somehow confusing].

Finally, in the 2000s, the Office of Technology Transfer at Stanford managed two funds, the Birdseed Fund (for amounts of $5k to $25k) and the Gap Fund ($25k to $250k) as shown the 2002 OTL annual report.

It is not at all new that Stanford invests in its start-ups. There has also always been tension, let’s do not deny it either. A little-known example of Cisco-Stanford early relationship. So nothing new under the sun. But you will not be surprised if I add that the overall result seems (is) extremely positive for all stakeholders, the university (including in its academic dimension), individuals, start-ups and the economy in general.

The father of venture capital: Georges Doriot

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Not many people ever heard of Georges Doriot. I knew his name because I know a little about VC (you can always check my visual history of VC). But I did not know much about him. Now that I read Creative Capital by Spencer Ante, I know much more. As usual, when I comment books, I mostly do some copy-pastes. Here they are:

In 1921, Doriot came to America on a steamship. Even though he had no friends or family in the United States, never graduated from college, and dropped out of graduate school, the Frenchman became, arguably, the most influential and popular professor at Harvard University’s Graduate School of Business. Over three generations, Doriot taught thousands of students [Page xiv].

He was early to recognize the importance of globalization and creativity in the business world. “A lot of the things that were attributed to Peter Drucker [link blog] were Doriot’s ideas” says Charles P. Waite [Page xv].

He believed in building companies for the long haul, not flipping them for a quick profit. Returns were the by-product of hard labor, not a goal. Doriot often worked with a company for a decade or more before realizing any return. That is why he often referred to his companies as his “children”. “When you have a child, you don’t ask what return you can expect” Doriot was quoted in a 1967 Fortune story “Of course, you have hopes – you hope the child will become President of the United States. But that is not very probable. I want them to do outstandingly well in their field. And if they do, the rewards will come. But if a man is good and loyal and does not achieve a so-called good rate of return, I will stay with him. Some people don’t become geniuses until after they are 24, you know. If I were a speculator, the question, of return would apply. But I don’t consider a speculator – in my definition of the word – constructive. I am building men and companies.” [Page xvii]

“A creative man merely has ideas; a resourceful man makes them practical.” [Page xviii]

[He] ushered a new era of corporate culture. At Digital, the engineer was king. Hierarchy was out. Controlled chaos was in. Like Jack Kerouac and the Beat Generation, Digital was a petri dish in which the counterculture was spawned in the late 1950s. “He was definitely part of a social revolution that loosened things up.”

For 20 years Doriot was a professor and a business advisor. “How did a man with hardly any experience running a business come to be such a world-class businessman? The answer is that during those years, dozens of companies hired the professor to help guide them through the worst disaster that ever hit the American economy. In that dark decade, Doriot gained a lifetime experience as an officer, director and consultant” [page 64].

American Research and Development Corporation (ARD)

The idea of an entity helping companies by making risky investments was born before World War II but could be implemented only in 1946. On June 6, 1946, the American Research and Development Corporation (ARD) was incorporated under Massachusetts law. It believed in “innovation, risk-taking and an unwavering belief in human potential”. They also realized that organizations with fiduciary resources and the seasoned operators running them were not daredevils skilled in the art of invention and that, conversely, inventors were struggling creative types with no money. ARD sought to bring together these two independent yet largely separate communities.

Typically, ARD preferred to take a hands-off approach. They were there to coach, guide and inspire. Running the business was the job of the entrepreneur. But quite often, circumstances called for more drastic action. [Page 121]

“Never go in venture capital if you want a peaceful life”. [Page 126] In 1953, Doriot was gloomy about the state of venture capital. “Venture capital is not fashionable anymore.” Waves of technologies seemed to come out of nowhere and crash onshore every twenty or thirty years. The trick of a venture capitalist was to catch the wave several years before it crested ad to bail out before it crashed. [Looks like speculation, or doesn’t it?] It is interesting to see how the great interest that existed seven or eight years ago in venture capital has disappeared and how the daring and courage which were prevalent at that time have now waned” wrote Doriot. [page 138]

More about ARD’s facts and figures in the table below.

A star is born – 1957

“In the early 1950s, the postwar euphoria of the previous decade that had infused Americans with a sense of infinite possibilities morphed into a Cold War miasma of fear and paranoia. Yet underneath the surface of fear, a subculture of experimentation and rebellion flourished. In the early – to mid-190s, Allen Ginsberg, jack Kerouac, and William Burroughs developed a radical new form of literature that emphasized “stream of consciousness” writing. Modern abstract painting by Jackson Pollock, Willem de Kooning, and Mark Rothko overthrew European conventions of beauty and form. And in laboratories and universities across the northeastern seaboard, a bunch of scientists and engineers tinkered away on strange but powerful new electronics and computer devices that promised to completely change the way people communicated and conducted business. “ [Page 147]

In the spring 1957 Ken Olsen then at MIT would team up with his buddy Harlan Anderson. They had an idea and a plan. They needed some money. They approached General Dynamics, who “turned them down flat because we didn’t have any business experience.” Then they contacted ARD. ARD had the perfect formula: two grade A men paired with an outstanding idea. ARD offered $70,000 for a 70 percent stake. Ten percent was reserved for a seasoned manager (who would never be found or hired) and the remaining 20% to the 2 founders (12% to Olsen and 8% to Anderson). Because computers were not fashionable, the company project name was changed from Digital Computers to Digital Equipment Corporation (DEC). [Pages 148-150]

The birth of a new industry

1957 was a critical year. America was shocked by the Sputnik. Public money flowed both to R&D with the creation of ARPA (later DARPA) and to venture capital through the new SBIC program. “Many of today’s most successful venture capitalists rightly point out that the SBIC program never created a company of considerable or lasting success. But if the SBIC program did little to advance the art and practice of successful venture investing, it did help propel the venture industry by attracting talented young men who later became pioneers of the field.

In 1957, Doriot also worked at the creation of INSEAD in Paris which was opened in September 1959. Doriot would have 3 careers in his life, a professor at Harvard business school (including helping in the creation of INSEAD), a consultant and even a administrator for the Army, the reason why he was a general and finally a VC with not only ARD but also at the origin of TED (UK), CED (Canada) and EED (Europe).

The success of DEC would make ARD highly successful but would also contribute to its end… As an investment company, ARD was highly regulated; compensation of its employees would become a long battle with SEC and IRS. Only 4 ARD employees would get DEC shares (worth $20M for each individual) and the allocation looked arbitrary to many. “Pressure was growing on ARD to divulge its growing mess of regulatory problems, and to take Digital public. But Doriot did not think Digital was ready to deal with the unforgiving spotlight of public ownership.” [Page 186]

Doriot did not prepare his succession, incentives were low for employees. Some left. Elfers was first and founded Greylock, Waite would follow him. “There was one more reason Elfers left. He realized along with an increasing number of investors in new companies that venture capital and the stock markets mixed as well as oil and water. For Elfers, the solutions to many of ARD’s problems was to take advantage of a new organizational form: the limited partnership (LP). In 1959, the first LP was organized in Palo Alto: Draper, Gaither & Anderson. Then in 1961, Arthur Rock, a former student of Doriot formed Davis & Rock. There were distinct advantages. General partners who ran the firm received not only a management fee, they also received a share of the capital gains. A limited partnership would avoid the glare of public disclosure.” [Page 190]

Still the DEC IPO was a success (see table). “The Digital IPO amounted to a financial revolution. It was really mind-blowing that you could take such a small amount of seed capital and get ownership of a company that was worth more than IBM in a fairly short period of time.” [page 197]

The emergence of Silicon Valley

“Today many financiers and entrepreneurs assume the west coast always dominated the VC business. They simply do not realize the industry was pioneered by ARD and a few other northeastern firms in the three decades following World War II. So why did Silicon Valley take over leadership?” [page 227] Spencer Ante explains that with MIT, Harvard, in Boston and New York as the financial capital, the East Coast had a huge lead; but a hospitable climate, ethnic diversity and the vision of Terman at Stanford were critical for the West. “Terman was disturbed to find most of his top students fleeing to the east coast. In 1934, two of his best students, Dave Packard and William Hewlett, followed the same path. Terman wooed them back.” [page 229] Then following Fairchild, semiconductor makers started popping up all over northern California. “All It needed was a steady supply of venture capital.” It’s ironic to read that Tom Perkins declined joining ARD. He wanted to launch his own firm. With Sequoia, Kleiner Perkins would become one of the top 2 VCs in Silicon Valley. The rest is history… ARD was merged with Textron for $400M in 1972. It had made more than $200M in DEC from an initial $70k seed investment.

“In 1978, there were 23 venture funds managing $500 million. By 1983, there were 230 firms overseeing $11 billion. “ [page 250] No doubt, the East Coast missed some of the features that the West would develop with an open culture and the right incentives, in addition to what Doriot pioneered on the East Coast… He dies on June 2, 1987. He was 87 years old.

Venture Capital in Europe and in the USA

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A very short note on an excellent presentation by Jean-David Chamboredon, partner with ISAI fund, entitled Funding Innovation in Europe. I particularly liked two slides that show the success rate of investment in a start-up, and the other one addressing a subject that is dear to me, the comparison of VC in Europe and the USA. Thank you to my colleague Marie-Laure for mentioning this study have me 🙂

French start-ups (again)

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I am attached to France for obvious reasons. And recently, I have read a lot about French innovation. It’s not as bad as the general public may think but it is not as good as I would like. Still there are reasons for hope. Let me comment two recent works:
– an article from Le Monde newspaper, entitled Heureux comme un patron de start-up en France
– a report from OSEO (the French Innovation Agency) which I had mentioned before in You have to go global, and right from the start, but which I had read too quickly!

The article from Le Monde is about French Accelerator Le Camping. The article is optimistic (maybe a little too much), but you should read it if you understand French. What I noticed was:

– “The Hexagon can also count on experienced funds such as Partech (but also Idinvest, Apax) who continued to irrigate the area after the bursting of the Internet bubble in 2000. About fifteen venture capital funds finance about a thousand start-ups and inject 200-300 million euros per year in the digital field, said Philippe Collombel. The French industry is one of the best in the world, judges Christopher Bavaria, president of Idinvest. And there are many areas where a little “Frenchy” managed to make a name alongside the leading Anglo-Saxon player: Dailymotion vs. YouTube, Viadeo behind LinkedIn , Deezer on the heels of Spotify …” I think this is dangerously optimistic but nice! We should not be just a copy-paste version of the USA though.

– “Another asset of the Hexagon: its serial entrepreneurs. The first generation began with the Minitel, has launched the digital era in the late 1990s, and overcame the bubble. They include Marc Simoncini (iFrance, Meetic), Jacques-Antoine Granjon (ventre-privée), Patrick Robin (Imaginet, 24h00), Xavier Niel … Twenty years later, they play the “business angels” for the younger: PriceMinister, Dailymotion, Criteo, or Deezer.” Quite true.

– However, “the Business Angels do not support enough entrepreneurs” […] “There are not enough funds enbling jumping from start-up to that of medium-sized companies.”

[You may also be interested about an analysis of the Acceletor trend from the Financial Times, which is also quite good: Start-ups put their foot on the accelerator. “In the past they could have been labelled an incubator, which is apparently different from an accelerator.” […] “Probably the first accelerator was Paul Graham’s Y Combinator in Silicon Valley. Since 2005 it has fostered almost 500 start-ups, including big successes such as AirBnB and Dropbox.” […] “This method of building new companies at warp speed is fascinating. The philosophy is to try lots of different ideas, fail fast, and pivot if something does not work. I like the sense of urgency, the work ethic, the high-pressure environment that helps drive rapid progress, and the incredible opportunities to network and cross-fertilise.” […] “However, in general, I think start-ups take a long time to become viable – years not months – so trying to achieve so much in such a concentrated period of time feels unrealistic.” […] “There are now an estimated 123 accelerator programmes around the world.” […] “Some veterans think many will close, just as many of the projects they incubate will fail. But all this frantic activity will surely boost entrepreneurship, stimulate jobs, and – in the long run – create wealth, so it deserves applause”]

You can find (in French) the OSEO report by clicking on the picture. I was wrong in my previous post, I learnt a few things! And it has more depth than the good Le Monde article. The first one is about the fears and difficulties of entrepreneurs.

Click on picture to enlarge.

Fear of failing with its attached stigma remains high. Finding customers is the biggest challenge, higher then finding investors. Interesting. Then there is an interesting lesson about the age of founders, which you can compare to an analysis I have made on 165 public companies.

Click on picture to enlarge. Source: personal data

This is a popular topic, and you might read again Wadhwa’s study, his Washington Post article or Is There A Peak Age for Entrepreneurship? I am not sure how to read all this, but I have the feeling there is a tendency to higher age recently… The average age of French founders is 41 whereas the public companies I have have founders with an average of 36.5 (and 34 for the companies founded before 1995).

Finally there is an analysis of “models of development of start-ups”.

The authors compare 2 main classes of start-ups (out of 5), the ones being the most common (classes 3 and 5 in the figure). [Class 4 is more an intermediate status en route to either 3 or 5; class 1 is M&A and class 5 have not developed at all.]

“In class 3, 41% of the total population, companies have a lower level of development because the company is “self-centered”. 50% have no partner, no subsidiary. The project leader is still a dominant position in the capital: 68% have a stake greater than 75% in this class; 1 out of 2 still 50% to 75% of capital.”

“In contrast, firms in class 5, have a proven open behavior. They have opened their capital to have the resources to advance an innovation project. 60% of project owners have less than 25% of the start-up in this class, as well as half of them with between 25% and 50% of the capital. Moreover, almost all listed companies are in this class. 80% of these companies are internationalized (export or implantation).”

“These are companies that have had time to grow: almost half who them are more than 8 years old and almost 40% are between 5 and 8 years old today. The maturity only does not explain, however, their momentum. Indeed, they were faced, too, with problems of redefining their business plans as well as those of class 3, even a little more frequently. However, they saw this less as a constraint.”

“In addition, Class 3 focuses more on public funding which is considered a main lever for growth. The youth of this population and the lower opening of their capital can hypothesize that the public support at the pre-seed and seed stages is an essential substitute to private capital.”

“The statistical comparison classes 3-5 on these variables reveals that:
• The median Class 5 has a higher workforce than class 4, which employs, more people than class 3 (respectively 10, 6 and 4 employees);
• Classes 4 and 5 achieve an identical median turnover (about 580k€) higher than the median Iclass 3 (390k€);
• On the median level of equity, it is still significantly higher for class 5 (409k€) than for class 4 (284k€) and Class 3 (149k€), and more than €1million for the upper quartile of the class 5 only 389k€ for the class 3)”

Of course the conclusion of the report is to encourage the filtering and then development towards class 5. but myless optimistic conclusion is that even class 5 companies are not big success stories…

The Venture Capital Secret: 3 Out of 4 Start-Ups Fail

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In a recent article from the WSJ (thanks Greg :-), it is claimed that Venture Capital is much less succesful than thought: 3 Out of 4 Start-Ups Fail. Well I am surprised by the surprise. I did some copy paste of the paper below, and I put in bold the things I found interesting. You should jump there and come back here!

I have done my analyis in the past. You can go back to by 2’700 stanford related companies (slide 9 of the pdf) or more anecdotically to Kleiner Perkins first fund.

So yes, there is a lot of failure in VC and the numbers do not count so much. It might be that in the past, there were fewer failures than today, and the reasons would be numerous, but the important point in the paper is the following: “the truth is that if you don’t have a lot of failures, then you’re just not doing it right, because that means that you’re not investing in risky ventures”

From the WSJ article:

It looks so easy from the outside. An entrepreneur with a hot technology and venture-capital funding becomes a billionaire in his 20s. But now there is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites. About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School. Compare that with the figures that venture capitalists toss around. The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.

Mr. Ghosh chalks up the discrepancy in part to a dearth of in-depth research into failures. “We’re just getting more light on the entrepreneurial process,” he says. His findings are based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010. He also combed the portfolios of VC firms and talked to people at start-ups, he says. The results were similar when he examined data for companies funded from 2000 to 2010, he says. Venture capitalists “bury their dead very quietly,” Mr. Ghosh says. “They emphasize the successes but they don’t talk about the failures at all.”

There are also different definitions of failure. If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail, he says. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail, based on Mr. Ghosh’s research.
Failure often is harder on entrepreneurs who lose money that they’ve borrowed on credit cards or from friends and relatives than it is on those who raised venture capital.

“People are embarrassed to talk about their failures, but the truth is that if you don’t have a lot of failures, then you’re just not doing it right, because that means that you’re not investing in risky ventures,” Mr. Cowan says. “I believe failure is an option for entrepreneurs and if you don’t believe that, then you can bang your head against the wall trying to make it work.”

Overall, nonventure-backed companies fail more often than venture-backed companies in the first four years of existence, typically because they don’t have the capital to keep going if the business model doesn’t work, Harvard’s Mr. Ghosh says. Venture-backed companies tend to fail following their fourth years—after investors stop injecting more capital, he says.

Of all companies, about 60% of start-ups survive to age three and roughly 35% survive to age 10, according to separate studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, a nonprofit that promotes U.S. entrepreneurship. Both studies counted only incorporated companies with employees. And companies that didn’t survive might have closed their doors for reasons other than failure, for example, getting acquired or the founders moving on to new projects. Languishing businesses were counted as survivors.

Of the 6,613 U.S.-based companies initially funded by venture capital between 2006 and 2011, 84% now are closely held and operating independently, 11% were acquired or made initial public offerings of stock and 4% went out of business, according to Dow Jones VentureSource. Less than 1% are currently in IPO registration.

—Vanessa O’Connell contributed to this article.
Write to Deborah Gage at deborah.gage@dowjones.com