When Peter Thiel talks about Start-ups – part 5: a vision of the future of technology

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I am still not sure how Thiel’s class notes on start-ups will finish, but they are more and more fascinating, class after class. At least his vision of this world is.

Class 14 is about cleantech and energy. “Alternative energy and cleantech have attracted an enormous amount of investment capital and attention over the last decade. Almost nothing has worked as well as people expected. The cleantech experience can thus be quite instructive. […] To think about the future of energy, we can use the [another] matrix. The quadrants shake out like this:
– Determinate, optimistic: one specific type of energy is best, and needs to be developed
– Determinate, pessimistic: no technology or energy source is considerably better. You have what you have. So ration and conserve it.
– Indeterminate, optimistic: there are better and cheaper energy sources. We just don’t know what they are. So do a whole portfolio of things.
– Indeterminate, pessimistic: we don’t know what the right energy sources are, but they’re likely going to be worse and expensive. Take a portfolio approach.”

Both for energy and transportation, Thiel’s fills his quadrants with interesting examples:

and he adds: “Petroleum has dominated transportation. Coal has dominated in power generation. […] Typically a single source dominates at any given time. There is a logical reason for this. It doesn’t make sense that the universe would be ordered such that many different kinds of energy sources are almost exactly equal. Solar is very different from wind, which is very different from nuclear. It would be extremely odd if pricing and effectiveness across all these varied sources turned out to be virtually identical. So there’s a decent ex ante reason why we should expect to see one dominant source. This can be framed as a power law function. Energy sources are probably not normally distributed in cost or effectiveness. There is probably one that is dramatically better than all others.”

But the analysis explaining the cleantech bubble were far from clear. “One problem was that people were ambiguous on what was scarce or problematic. Was there resource scarcity? Or were the main problems environmental?” […] “To have a successful startup, you must have good answers—or at least a good plan for getting those answers.” Answers to many issues such as
– the market
– the secrets
– the team and its culture
– the funding
and unfortunately many mistakes were made.

Regarding the market, there was the issue of both explaining how to become a leader of one segment (PV, wind,…) and why a segment was better. Regarding the secret: “If you want to start a company, you should have some important secret. But in practice, most wind, solar, and cleantech ventures relied on incremental improvements.” Even worse, “most cleantech companies in the last decade have had shockingly non-technical teams and cultures. Culture defaulted toward zero-sum competition. Savvy observers would have seen the trouble coming when cleantech people started wearing suits and ties. Tech people and computer people wear t-shirts and jeans. Cleantech people, by contrast, looked like salesmen. And indeed they were. This is not a trivial point. If you’re dealing in something that’s incremental and of questionable durability, you actually have to be a really good salesman to convince people that it’s dramatically better.” Finally “a good, broad rule of thumb is to never invest in companies who are looking for less than $1 million or more than $1 billion. If companies can do everything they want for less than a million dollars, things may be a little too easy. There may be nothing that is very hard to build, and it’s just a timing game. On the other extreme, if a company needs more than a billion dollars to be successful, it has to become so big that the story starts to become implausible.”

If Thiel were to bet on soemthing, it would apparently be Thorium as a nuclear fuel.

Class 15 is about other future bets.

Thiel is a strong believer in contrarian (and sometimes huge) bets. He is interested in or at least puzzled by transportation, robotics, weather and energy storage. And his way of choosing is to look at what did not work (yet) in the past: “Various VC firms in Silicon Valley warned expressed concern about [investing in unique technologies]. They warned us that investing in SpaceX was risky and maybe even crazy. And this wasn’t even at the very early stage. […] (Danielle Fong:) People like to act like they like being disruptive and taking risks. But usually it’s just an act. They don’t mean it. Or if they do, they don’t necessarily have the clout within the partnership to make it happen. (Peter Thiel:) It is very hard hard for investors to invest in things that are unique. The psychological struggle is hard to overstate. People gravitate to the modern portfolio approach. The narrative that people tell is that their portfolio will be a portfolio of different things. But that seems odd. Things that are truly different are hard to evaluate. […] The upside to doing something that you’re unfamiliar with, like rockets, is that it’s likely that no one else is familiar with it, either. The competitive bar is lowered. You can focus on learning and substantive things over process, which is perhaps better than competing against experts.”

Class 16 is about maybe the highest of all bets: life and death.

I have not so far mentioned the sentence which comes at the top of each series of class notes: “Your mind is software. Program it. Your body is a shell. Change it. Death is a disease. Cure it. Extinction is approaching. Fight it.”

The problem.

“Like death itself, modern drug discovery is probably too much a matter of luck. Scientists start with something like 10,000 different compounds. After an extensive screening process, those 10,000 are reduced to maybe 5 that might make it to Phase 3 testing. Maybe 1 makes it through testing and is approved by the FDA. It is an extremely long and fairly random process. This is why starting a biotech company is usually a brutal undertaking. Most last 10 to 15 years. There’s little to no control along the way. What looks promising may not work. There’s no iteration or sense of progress. There is just a binary outcome at end of a largely stochastic process. You can work hard for 10 years and still not know if you’ve just wasted your time.

To be fair, we must acknowledge that all the luck-driven, stats-driven processes that have dominated people’s thinking have worked pretty well over the last few decades. But that doesn’t necessarily mean that indeterminacy is sound practice. Its costs may be rising quickly. Perhaps we’ve found everything that is easy to find. If so, it will be hard to improve armed with nothing but further random processes. This is reflected in escalating development costs. It cost $100 million to develop a new drug in 1975. Today it costs $1.3 billion. Probably all life sciences investment funds have lost money. Biotech investment has been roughly as bad a cleantech.”

The perspectives.

“Drug discovery is fundamentally a search problem. The search space is extremely big. There are lots of possible compounds. An important question is thus whether we can use computer technology to reduce scope of luck. Can Computer Science make biotech more determinative?”

“These are big secrets that play out over long time horizons, not web apps that have a 6-week window to take over the world.”

“The sequencing of the genome is like the first packets being sent over ARPANET. It’s a proof of concept. This technology is happening, but it isn’t yet compelling. So there is a huge market if one can make something compelling enough for people to actually go and get a genome sequenced. It’s like e-mail or word processing. Initially these things were uncomfortable. But when they become demonstrably useful, people leave their comfort zones and adopt them.”

“Biotech got quite a burst in late 70s early 80s, with new recombinant DNA and molecular biology techniques. Genentech led the way from the late 70s to the early 80s. Nine of the 10 biggest American biotech companies were founded during this really short time. Their technology came out some 7-8 years later. And that was the window; not very many integrated biotech companies have emerged since then. There was a certain amount of stuff to find. People found it. And before Genentech, the paradigm was pharma, not biotech. That window (becoming an integrated pharmaceutical company) had been closed for about 30 years before Genentech. So the bet is that while the traditional biotech window may be closed, the comp bio window is just opening.”

“There’s really no rush to spill the secret plans. This space is very much unlike fast-moving consumer Internet startups. Here, if you have something unique, you should nurse it.”

“Slow iteration is not law of nature. Pharma and biotech usually move very slowly, but both have moved pretty fast at times. From 1920-1923 Insulin moved at the speed of software. Today, platforms like Heroku have greatly reduced iteration times. The question is whether we can do that for biotech. Nowhere is it written in stone that you can’t go from conception to market in 18 months. That depends very much on what you’re doing. Genentech was founded the same year as Apple was, in 1976. Building a platform and building infrastructure take time. There can be lots of overhead. Ancillary things can take longer than a single product lifecycle to accumulate. [… the] VC is broken with respect biotech. Biotech VCs have all lost money. They usually have time horizons that are far too short. VCs that say they want biotech tend to really want products brought to market extremely quickly. “Integrated drug platform” is an ominous phrase for VCs. More biotech VCs are focused on globalization than on real technical innovation. VCs typically found a company around a single compound and then pour a bunch of money into it to push it through the capital-intensive trial process. Most VCs not interested in multi-compound companies doing serious pre-clinical research.”

And as a conclusion of class 16, “Startups are always hard at the start. There are futons and ironing boards in the office. You have to rush to clean up for meetings. But maybe the hardest thing is just to get your foundation right and make sure you plan to build something valuable. You don’t have to do a science fair project at the start. You just have to do your analytical homework and make sure what you’re doing is valid. You have to give yourself the best chance of success as things unfold in the future.”

Class 17 is about the brain, artificial intelligence, maybe the last frontier in technology, certainly going further than the previous topics addressed here.

Not much more to add except maybe the short description of the approach by 3 start-ups:
– Vicarious is trying to build AI by develop algorithms that use the underlying principles of the human brain. They believe that higher-level concepts are derived from grounded experiences in the world, and thus creating AI requires first solving a human sensory modality.
– Prior Knowledge (acquired by Salesforce since Thiel’s class) is taking a different approach to building AI. Their goal is less to emulate brain function and more to try to come up with different ways to process large amounts of data. They apply a variety of Bayesian probabilistic techniques to identifying patterns and ascertaining causation in large data sets. In a sense, it’s the opposite of simulating human brains.
– The big insight at Palantir (…) isn’t regression analysis, where you look at what was done in the past to try to predict what’s going to be next. A better approach is more game theoretic. Palantir’s framework is not fundamentally about AI, but rather about intelligence augmentation.

And one more comment: “For the most part, academics aren’t (working on strong AI or crazy things) because their incentive structure is so weird. They have perverse incentive to make only marginally better things. And most private companies aren’t working on it because they’re trying to make money now.(…) Bold claims also require extraordinary proof. If you’re pitching a time machine, you’d need to be able to show incremental progress before anyone would believe you. Maybe your investor demo is sending a shoe back in time. That’d be great. You can show that prototype, and explain to investors what will be required to make the machine work on more valuable problems. It’s worth noting that, if you’re pitching a revolutionary technology as opposed to an incremental one, it is much better to find VCs who can think through the tech themselves. When Trilogy was trying to raise their first round, the VCs had professors evaluate their approach to the configurator problem. Trilogy’s strategy was too different from the status quo, and the professors told the VCs that it would never work. That was an expensive mistake for those VCs. When there’s contrarian knowledge involved, you want investors who have the ability to think through these things on their own.”

End of part 5!

When Peter Thiel talks about Start-ups – part 4: it’s customer, stupid!

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Thiel’s classes 9 to 12 leave the pure field of start-ups to the higher levels of economy, business and innovation. Thiel gives general advice such that customers are important and more important than competitors with the recurring “obsession” that peace and correlated monopoly are better than war and deadly competition.

Class 9 is about customers and more specifically how to find them. “People say it all the time: this product is so good that it sells itself. This is almost never true. […] The truth is that selling things is not a purely rational enterprise. There is much stranger stuff at work here. […] Most engineers underestimate the sales side of things because they are very truth-oriented people. In engineering, something either works or it doesn’t. […] Engineering is transparent. […] Sales isn’t very transparent at all. (As a side comment, I advise again to read Packer about transparency and politics in SV, in fact look at what follows!) […] A good analogy to the engineer vs. sales dynamic is experts vs. politicians. If you work at a big company, you have two choices. You can become expert in something. The other choice is to be a politician. […] The really good politicians are much better than you think. Great salespeople are much better than you think. But it’s always deeply hidden. In a sense, probably every President of the United States was first and foremost a salesman in disguise.

Thiel loves quadrants but does not draw one here, he just explains it:
– Product sells itself, no sales effort. Does not exist.
– Product needs selling, no sales effort. You have no revenue.
– Product needs selling, strong sales piece. This is a sales-driven company.
– Product sells itself, strong sales piece. This is ideal.

Thiel has similar views on marketing “Advertising is tricky in the same way that sales is” and he uses the famous quote: “Half the money I spend on advertising is wasted: the trouble is I don’t know which half.” Sales follow a power law similar to the one existing in value creation. Viral marketing rarely works… and viral marketing requires that the product’s core use case must be inherently viral.

In his class 10, Thiel begins to explore the future and shows how difficult it is to identify opportunities. He even mentions the nice quote (but never said in reality) “everything that can be invented has been invented” (falsely) attributed to U.S. Patent Commissioner Charles H. Duell in 1899. Again both in terms of technology innovation (vs. computers) or globalization (vs. China), he advises not to compete but to collaborate.

But the worst competitor is time… “More interesting are cases where people are right about the future and just wrong on timing. […]And being too early is a bigger problem for entrepreneurs than not being correct. It’s very hard to sit and just wait for things to arrive. It almost never works.” Andreessen who was Thiel’s guest approved: “For entrepreneurs, timing is a huge risk. You have to innovate at the right time. You can’t be too early. This is really dangerous because you essentially make a one-time bet. It’s rare are to start the same company five years later if you try it once and were wrong on timing. Jonathan Abrams did Friendster but not Facebook.”

And Andreessen also agrees about sales: “The number one reason that we pass on entrepreneurs we’d otherwise like to back is focusing on product to the exclusion of everything else. We tend to cultivate and glorify this mentality in the Valley. We’re all enamored with lean startup mode. Engineering and product are key. There is a lot of genius to this, and it has helped create higher quality companies. But the dark side is that it seems to give entrepreneurs excuses not to do the hard stuff of sales and marketing. Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a viral marketing strategy.”

Again about timing: “You can go wrong in a few ways. One is that the future is too far away […] It’s like surfing. The goal is to catch a big wave. If you think a big wave is coming, you paddle really hard. Sometimes there’s actually no wave, and that sucks. But you can’t just wait to be sure there’s a wave before you start paddling. You’ll miss it entirely. You have to paddle early, and then let the wave catch you. The question is, how do you figure out when the next big wave is likely to come?”

A few not related topics:
– You need to find the balance that lets you think about patents least. It’s basically a distracting regulatory tax.
– What’s ideal is to have a founder/CEO who is a product person. Sales operators handle the sales force. Larry Ellison [is no exception and] is a product guy.
– Being CEO is a learnable skill. With the “world class” CEO model, you miss out on Microsoft, Google, and Facebook. The CEOs of those companies, of course, turned out to be excellent. But they were also the product people who built the companies. [Do not misunderstand] everybody thinks management is a bunch of idiots, and that engineers must save the day by doing the right things on the side. That’s not right. Management is extremely important. Great management and a great product person running the company is characteristic of the very best companies.

Class 11 is also about the future, but in terms of “secrets” which may be important to know how to identify real opportunities: “Some secrets are small and incremental. Others are very big. The focus should be on the secrets that matter: the big secrets that are true. The big ones so far have involved monopoly vs. competition, the power law, and the importance of distribution. “Capitalism and competition are antonyms.” That is a secret; it is an important truth, and most people disagree with it.”

Thiel explains why secrets are important: “Four primary things have been driving people’s disbelief in secrets.
– First is the pervasive incrementalism in our society. People seem to think that the right way to go about doing things is to proceed one very small step at a time. […] Academics are incented by volume, not importance. The goal is to publish lots of papers, each of which is, in practice at least, new only in some small incremental way. […]
– Second, people are becoming more risk-averse. People today tend to be scared of secrets. They are scared of being wrong. Of course, secrets are supposed to be true. But in practice, what’s true of all secrets is that there is good chance they’re wrong. If your goal is to never make mistake in your life, you should definitely never think about secrets. Thinking outside the mainstream will be dangerous for you. […]
– Third is complacency. There’s really no need to believe in secrets today. Law school deans at Harvard and Yale give the same speech to incoming first year students every fall: “You’re set. You got into this elite school. […]
– Finally, some pull towards egalitarianism is driving us away from secrets. We find it increasingly hard to believe that some people have important insight into reality that other people do not. Prophets have fallen out of fashion. Having visions of the future is seen as crazy. In 1939 Einstein sent a letter to President Roosevelt urging him to get serious about nuclear power and atomic weaponry. Roosevelt read it and got serious. Today, such a letter would get lost in the White House mailroom.”

But… “There is no straightforward formula that can be used to find secrets.”

Class 12 is about war and peace again, but I do not have much to comment here except a quote from Reid Hoffman: “A side note on invention and innovation: when you have an idea for a startup„ consult your network. Ask people what they think. Don’t look for flattery. If most people get it right away and call you a genius, you’re probably screwed; it likely means your idea is obvious and won’t work. What you’re looking for is a genuinely thoughtful response. Fully two thirds of people in my network thought LinkedIn was stupid idea. These are very smart people. They understood that there is zero value in a social network until you have a million users on it. But they didn’t know the secret plans that led us to believe we could pull it off. And getting to the first million users took us about 460 days. Now we grow at over 2 users per second.” Peaceful secrets are safer than competing for known things.

When Peter Thiel & Friends talk about Start-ups – part 3: company culture, founders, team, investors

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Part 3 of my series of comments about Thiel’s class notes at Stanford mainly cover his Class 5-8. But first I should add that Thiel invited a “honor class” of innovators during his 19 classes. Quite fascinating!

1st row: Stephen Cohen, co-founder and Executive VP of Palantir Technologies,
Max Levchin, co-founder PayPal and Slide,
Roelof Botha, partner at Sequoia Capital and former CFO of PayPal,
2nd row: Paul Graham, partner and co-founder of Y Combinator,
Bruce Gibney, partner at Founders Fund,
Marc Andreessen, general partner Andreessen Horowitz,
3rd row: Reid Hoffman, co-founder of LinkedIn,
Danielle Fong, Co-founder and Chief Scientist of LightSail Energy,
Jon Hollander, Business Development at RoboteX,
4th row: Greg Smirin, COO of The Climate Corporation,
Scott Nolan, Principal at Founders Fund and former aerospace engineer at SpaceX,
(Elon Musk was going to come, but he was busy launching rockets),
5th row: Brian Slingerland. Co-Founder, President & COO at Stem CentRx,
Balaji S. Srinivasan, CTO of Counsyl,
Brian Frezza, Co-founder, Emerald Therapeutics,
6th row: D. Scott Brown, co-founder of Vicarious,
Eric Jonas, CEO of Prior Knowledge,
Bob McGrew, Director of Eng, Palantir,
7th row: Sonia Arrison, Associate Founder of Singularity University,
Michael Vassar, the Singularity Institute for the study of Artificial Intelligence (SIAI),
Aubrey de Grey, Chief Science Officer at the SENS Foundation.

Thiel covered how to build a company from the ideas and vision of founders, through hiring and sometimes funding from investors. But he began with a critical though fuzzy concept, the company culture: “A robust company culture is one in which people have something in common that distinguishes them quite sharply from rest of the world.”

He mentions also some important dimensions of the culture:
– Consultant-nihilism or Cultish Dogmatism: “You want to be somewhere in the middle of that spectrum. To the extent you gravitate towards an extreme, you probably want to be closer to being a cult than being an army of consultants.” which could be why Thiel said earlier,
pre-money valuation = ($1M*n_engineers) – ($500k*n_MBAs).
– To Fight or Not To Fight (i.e. Nerds or Athletes or again Zero-sum and Non zero-sum). “So you have to strike the right balance between nerds and athletes. Neither extreme is optimal. Consider a 2 x 2 matrix. On the y-axis you have zero-sum people and non zero-sum people. On the x-axis you have warring, competitive environments and then you have peaceful, monopoly/capitalist environments. The optimal spot on the matrix is monopoly capitalism with some tailored combination of zero-sum and non zero-sum oriented people. You want to pick an environment where you don’t have to fight. But you should bring along some good fighters to protect your non zero-sum people and mission, just in case.”
I was just told this is crytic… I agree… another reason to read Thiel directly!

“Foundings are obviously temporal. But how long they last can be a hard question. The typical narrative contemplates a founding, first hires, and a first capital raise. But there’s an argument that the founding lasts a lot longer than that. The idea of going from 0 to 1—the idea of technology—parallels founding moments. The 1 to n of globalization, by contrast, parallels post-founding execution. It may be that the founding lasts so long as a company’s technical innovation continues. Founders should arguably stay in charge as long as the paradigm remains 0 to 1. Once the paradigm shifts to 1 to n, the founding is over. At that point, executives should execute.”

Max Levchin: The notion that diversity in an early team is important or good is completely wrong. You should try to make the early team as non-diverse as possible. There are a few reasons for this. The most salient is that, as a startup, you’re underfunded and undermanned. It’s a big disadvantage; not only are you probably getting into trouble, but you don’t even know what trouble that may be. Speed is your only weapon. All you have is speed. […] How to hire? A specific application of this is the anti-fashion bias. You shouldn’t judge people by the stylishness of their clothing; quality people often do not have quality clothing. Which leads to a general observation: Great engineers don’t wear designer jeans. So if you’re interviewing an engineer, look at his jeans. There are always exceptions, of course. But it’s a surprisingly good heuristic. […] PayPal also had a hard time hiring women. An outsider might think that the PayPal guys bought into the stereotype that women don’t do CS. But that’s not true at all. The truth is that PayPal had trouble hiring women because PayPal was just a bunch of nerds! They never talked to women. So how were they supposed to interact with and hire them?

“No CEO should be paid more than $150k per year” (in Silicon Valley)
“Another important insight is that people must either be fully in the company or not in it at all.”

Dilution and funding
Building a valuable company is a long journey. A key question to keep your eye on as a founder is dilution. The Google founders had 15.6% of the company at IPO. Steve Jobs had 13.5% of Apple when it went public in the early ‘80s. Mark Pincus had 16% of Zynga at IPO. If you have north of 10% after many rounds of financing, that’s generally a very good outcome. Dilution is relentless. The alternative is that you don’t let anyone else in. It’s worth remembering that many successful businesses are built like this. Craigslist would be worth something like $5bn if it were run more like a company than a commune. GoDaddy never took funding. Trilogy in the late 1990s had no outside investors. Microsoft very nearly joined this club; it took one small venture investment just before its IPO. When Microsoft went public, Bill Gates still owned an astounding 49.2% of the company. So the question to think about with VCs isn’t all that different than questions about co-founders and employees. Who are the best people? Who do you want—or need—on board?

The VC model in a nutshell: a power law. “To a first approximation, a VC portfolio will only make money if your best company investment ends up being worth more than your whole fund. (And the investment in the second best company is about as valuable as number three through the rest.)”

I have not yet read the following classes…

When Peter Thiel talks about Start-ups – part 2: value creation

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As promised, here are additional comments from my reading Peter Thiel’s class notes on start-ups at Stanford University (after the general ones in part 1 about innovation). And today, it’s about value creation. When I teach valuation techniques at EPFL, I provide similar information: value creation is future cash flows adjusted for time value (check Wikipedia for valuation using DCF). The difficulty with DCF is that in the case of start-ups most of the value appears in the very long term and given the uncertainty of start-up projection revenues, it makes DCF nearly useless… This is why, for start-ups, it is often easier to use techniques based on multiples & comparables (again check Wikipedia for valuation using multiples.)

Thiel enlighted me here by providing a very interesting explanation of why DCF still makes sense for start-ups. First he defines “Great Technology Companies”: “Great companies do three things. First, they create value. Second, they are lasting or permanent in a meaningful way. Finally, they capture at least some of the value they create.” Surprisingly (for me), the second thing is the most important: they are lasting or permanent in a meaningful way. He then introduces DCF with a growth rate:

and then he adds: “Tech and other high growth companies are different. At first, most of them lose money. When the growth rate—g, in our calculations above—is higher than the discount rate r, a lot of the value in tech businesses exists pretty far in the future. Indeed, a typical model could see 2/3 of the value being created in years 10 through 15. This is counterintuitive. Most people—even people working in startups today—think in Old Economy mode where you have to create value right off the bat. The focus, particularly in companies with exploding growth, is on next months, quarters, or, less frequently, years. That is too short a timeline. Old Economy mode works in the Old Economy. It does not work for thinking about tech and high growth businesses. Yet startup culture today pointedly ignores, and even resists, 10-15 year thinking.”

I will not add much more here but just mention that Thiel has in this Class 3 & 4 very interesting arguments about why competition may not be that good and monopoly not that bad for the economy and individuals… “Whether competition is good or bad is an interesting (and usually overlooked) question. Most people just assume it’s good. The standard economic narrative, with all its focus on perfect competition, identifies competition as the source of all progress. If competition is good, then the default view on its opposite—monopoly—is that it must be very bad. But exactly why monopoly is bad is hard to tease out. It’s usually just accepted as a given. But it’s probably worth questioning in greater detail.”

He does the analysis not only for companies but also for individuals with a moving section about fierce competition at Princeton, Yale or Harvard with an interesting comparison with Stanford: “Of all the top universities, Stanford is the farthest from perfect competition. Maybe that’s by chance or maybe it’s by design. The geography probably helps, since the east coast doesn’t have to pay much attention to us, and vice versa. But there’s a sense of structured heterogeneity too; there’s a strong engineering piece, the strong humanities piece, and even the best athletics piece in the country. To the extent there’s competition, it’s often a joke. Consider the Stanford-Berkeley rivalry. That’s pretty asymmetric too. In football, Stanford usually wins. But take something that really matters, like starting tech companies. If you ask the question, “Graduates from which of the two universities started the most valuable company?” for each of the last 40 years, Stanford probably wins by something like 40 to zero. It’s monopoly capitalism, far away from a world of perfect competition.”

He finishes with an analysis consistent with his first class on zero to one: “If globalization had to have a tagline, it might be that “the world is flat.” Technology, by contrast, starts from the idea that the world is Mount Everest. If the world is truly flat, it’s just crazed competition. (…) And yet, the single business idea that you hear most often is: the bigger the market, the better. That is utterly, totally wrong. The restaurant business is a huge market. It is also not a very good way to make money.
(…)
Where does venture capital fit in? VCs tend not to have a very large pool of business. Rather, they rely on very discreet networks of people. That is, they have access to a unique network of entrepreneurs. So VC is anti-commoditized. That kind of dynamic arguably characterizes all great tech companies, i.e. last mover monopolies. Last movers build non-commoditized businesses. They are relationship-driven. They create value. They last. And they make money.”

More to come…

When Peter Thiel talks about Start-ups – part 1

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““We wanted flying cars, instead we got 140 characters.” The Founders’ Fund

Peter Thiel is probably one of my favorite characters when I think of start-ups and Silicon Valley. Here are just two posts where I mentioned him:
– Technology = Salvation in October 2010
– The promise of technology. Disappointing? in November 2013 (about the great article by George Packer from the New Yorker: No Death, No Taxes – The libertarian futurism of a Silicon Valley billionaire.
And I should not forget short mentions related to The Social Network and PayPal.

An EPFL acquaintance and business angel (thanks Dave :-)) just told me about the course Thiel gave at Stanford in 2012 and the comprehensive notes taken by one of his student, Notes Essays—Peter Thiel’s CS183: Startup—Stanford, Spring 2012. I copied and pasted the notes from this 19-session class, and it makes a 233-page pdf document. Indeed, Thiel will publish this together with his student as a book next summmer: Zero to One: Notes on Startups, or How to Build the Future.

As I did with Mazzucato, I plan to posts a few articles about this piece of work which I find really interesting. His first chapter is about the need for start-ups in innovation and technology, and it motivates the title Zero to One:

“Progress comes in two flavors: horizontal/extensive and vertical/intensive.
– Horizontal or extensive progress basically means copying things that work. In one word, it means simply “globalization.”
– Vertical or intensive progress, by contrast, means doing new things. The single word for this is “technology.”
Intensive progress involves going from 0 to 1 (not simply the 1 to n of globalization).
[…]
Maybe we focus so much on going from 1 to n because that’s easier to do. There’s little doubt that going from 0 to 1 is qualitatively different, and almost always harder, than copying something n times. And even trying to achieve vertical, 0 to 1 progress presents the challenge of exceptionalism; any founder or inventor doing something new must wonder: am I sane? Or am I crazy?
[…]
Teaching vertical progress or innovation is almost a contradiction in terms. Education is fundamentally about going from 1 to n. We observe, imitate, and repeat. Infants do not invent new languages; they learn existing ones. From early on, we learn by copying what has worked before. That is insufficient for startups. At some point you have to go from 0 to 1—you have to do something important and do it right—and that can’t be taught. So case studies about successful businesses are of limited utility.”

Then he addresses “why start-ups?” and “why do a start-up?”

“Size and internal vs. external coordination costs matter a lot. North of 100 people in a company, employees don’t all know each other. Politics become important. Startups are important because they are small; if the size and complexity of a business is something like the square of the number of people in it, then startups are in a unique position to lower interpersonal or internal costs and thus to get stuff done.
[…]
The easiest answer to “why startups?” is negative: because you can’t develop new technology in existing entities. Anyone on a mission tends to want to go from 0 to 1. You can only do that if you’re surrounded by others to want to go from 0 to 1. That happens in startups, not huge companies or government.
[…]
Doing startups for the money is not a great idea. Perhaps doing startups to be remembered or become famous is a better motive. Perhaps not. A better motive still would be a desire to change the world. The U.S. in 1776-79 was a startup of sorts. What were the Founders motivations? There is a large cultural component to the motivation question, too. In Japan, entrepreneurs are seen as reckless risk-takers. The respectable thing to do is become a lifelong employee somewhere. The literary version of this sentiment is “behind every fortune lies a great crime.” Were the Founding Fathers criminals? Are all founders criminals of one sort or another?

More to come soon. But if you like this, just read Thiel!

After Banksy and Invader, Pully’s Mirror Mosaic Man…

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What is fascinating with Street Art is that you might not be aware of it but when you begin to see it, it does not stop appearing in front of your eyes. After following Banksy in New York and then discovering Space Invader’s work in Switzerland (Lausanne, Geneva and Bern), a colleague mentioned to me the poetic mirror mosaics in Pully. I spent a few hours walking around and they blossomed everywhere!

The beauty of life also comes from chance as Paul Auster artistically expresses it in his novels (check The Music of Chance). While I was taking a picture of one of these mirrors, someone behind me asked “So you like my snail?”. It was “Mirror Mosaic Man”. We had a short chat. I mentioned Space Invader in Lausanne and Pully’s artist told me I should contact Pierre Corajoud who publishes very nice little books about walks around Lausanne. Pierre Corajoud had indeed published a small booklet about Invaders in Lausanne. I thank him here again for offering me a copy because unfortunately, many works have been destroyed or stolen after its publication and Corajoud took his book out of the shelves. A pity! I hope the mosaics will not disappear… Here is the map though.

Afficher Mirror Mosaic Man on a bigger map

Finally here is a pdf document with all the works I saw or found online. But the best is to go and find them directly on site!
GillesPandel-Pully-2020

also on Scribd:

Bern Space Invaders (and in the Rest of the World – including Paris, Basel, Ravenna…)

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A very short post which is a complement to Space Invaders in Lausanne and in Geneva.

Space Invaders arrived in Bern in 2000 and for those passionate by his work and close to Switzerland, he was also in Basel in 2013 and Anzère in 2014…

Here is the map and you can also have download my pdf which includes what I have found so far… An update will come when/if I go to Bern!

PS: I went to Bern on June 15, 2014. A strange coincidence étrange is that I finished reading that day La Vie mode d’emploi by Georges Pérec. I thought then that Bartlebooth is a kind of analogy for Street Art and its fans… I just updated also the pdf above and here are the ones which survived after nearly 15 years. Another coincidence: they are 8 surviving pieces out of 29, similarly to start-ups where 50% still survive after 5 years and about 25% after 15 years…

PS2: from time to time, I add chapters to my Space Invaders discoveries. Here is a synthesis essentially based on the artist site and using other passionate data: SpaceInvaders around the World (pdf – 8Mo)

You may find in other posts data about Lausanne, Geneva, Basel, Grenoble, Brussels. In September 2014, I began to compile data about Paris. Here are pdfs files about specific arrondissements:
the 1st,
the 2nd,
the 3rd,
the 4th,
the 5th,
the 6th,
the 12th,
the 13th,
the 14th,
the 15th,
the 16th,
the 17th
and also the 1000+ Paris Invaders. Below is my Paris map.
You will find more recent Paris data here.

In October 2014, I followed in invasion of Ravenna. Here is what I found on line: Space Invaders in Ravenna.

Something rotten in the Silicon Valley kingdom?

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I have already recently discussed the difficulty Silicon Valley has in talking about or dealing with politics, for example in The promise of technology. Disappointing? and even more in Silicon Valley and (a)politics – Change the World. I was referring to two articles (which I considered as exceptionally great) written by George Packer in the New Yorker in 2011 and 2013. It is an article published on January 27 on the same web site, Tom Perkins and Schadenfreude in Silicon Valley by Vauhini Vara which motivates me in asking the question: Is there something rotten in the Silicon Valley kingdom?

All this is rather indicative of a serious situation that deserves the attention. Four days earlier, Le Monde published the article by Jérôme Marin, In San Francisco, anti-Google protests go too far. The summary of all this can be done simply, but I encourage you to read these articles (especially those by Packer whose depth analysis is really of interest):

Many new millionaires (in particular employees of Twitter and Facebook), and even some billionaires (see Technology Billionaires in 2013) contributed to the recent acceleration of the gentrification of San Francisco. However, the authorities of San Francisco rather encouraged the phenomenon and to a large extent, the debate begins to rage. On the one side a population that expresses its frustration at this new situation by blocking the famous private buses carrying these high-tech employees from their home to their office (see A Google bus blocked, anger rises in San Francisco by the same Jerome Marin) or a Google employee at his home. On the other side, the “slip” of Tom Perkins comparing these protests to attacks of the Nazis against the Jews…

These reactions illustrate a increasingly visible debate between the proponents of the Invisible Hand (let the rich be richer and the market will self-regulate for the benefit of all) and opponents increasingly exacerbated by the consequences of the global deregulation. As if Occupy Wall Street was moving to Silicon Valley. As Americans usually react fast, the city of San Francisco has taken the decision to have these private buses pay for the use of public bus stops. Vauhini Vara also mentions that Mark Zuckerberg has become the largest private donor in 2013 in the USA (with $1 billion …) and Sergey Brin ranks fifth .

My opinion is of little importance and I’ll let you judge. Let me just add (and you will understand where I am assuming that you care!) that large U.S. companies pay ridiculous amounts of tax lawfully using the possibilities offered by the law of international trade. In 2011, Le Monde published USA: profit does not necessarily mean tax, and waht follows comes from it:

Out of 280 companies among the 500 largest U.S. companies, 111, or 40%, enjoyed an average tax rate of 4.6%. There must be a rational explanation for this particular treatment you must think, falling profits for example, justifying a lower tax burden? The problem is that according to the data compiled in this report, this argument does not hold. The 111 companies we are talking about even recorded a total greater than the benefits of th oher companies combined. Between 2008 and 2010 the telecom operator Verizon has accumulated $32.5 billion in profits, the conglomerate General Electric totaled 10.4 billion profits, and toy manufacturer, Mattel, won over a billion dollars over the period. However, none of these companies did pay federal income tax.

“This is not a report against businesses, the study says in its preamble. Instead, like most Americans , we want the business to go well. In a market economy, we need managers and entrepreneurs, as we need workers and consumers. But we also need a better balance in terms of taxation.”

U.S. billionaire Warren Buffett recently called on governments to make him pay more taxes at the individual level for a greater tax fairness. Will multinational companies be capable of the same citizen behavior?

Since I started by mentioning that Sillcon Valley has changed the world, I conclude from memory with a quote I heard on France Culture this morning: “If you do not change the course of History, it is History that will change you.”

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.

Lessons from Failure: a rare and interesting account from Everpix

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Two EPFL entrepreneurs asked me what I thought of the Everpix story. If you do not know it, you should read the following links:
– A very good article from the Verge: Out of the picture: why the world’s best photo startup is going out of business. Everpix was great. This is how it died.
– A very detailed account of the Everpix story by its founders on Gifthub with tons of documentation and archive: Everpix-Intelligence

I knew some actors: Pierre-Olivier Latour is an EPFL alumnus whom I met during my Index years and again in 2006 when I visited Silicon Valley with the future founders of Jilion. Neil Rimer, one of the investors in Everpix was my boss before I joined EPFL.

From left to right, Zeno Crivelli, Pierre-Oliver Latour, myself and Mehdi Aminian in 2006 in Silicon Valley.

The story will certainly feed the recurring debate about taking VC money or not, and I think it is a bias debate! You can read my recent posts about Founders Dilemmas, which address the issue:
– The Founder’s Dilemmas – The Answer is “It depends!”
– Swiss Founder’s Dilemmas
Again taking VC mmoney is not an easy thing. It is tough to get and when you have it, the constraints increase. You can watch the video Venture Capital Is a Time Bomb from the founder of 37signals if you do not know what I am talking about.

I think the debate is biased because it is not about VC vs. no VC. Not many entrepreneurs have the choice of not taking investor money (Business angels are not that different from VCs.) It is about do you want to have an impact and grow (then you often need investors) OR do you want to control and stay independant. And it is often OR not AND… I know many people (including entrepreneurs and investors) disagree with me. My recent experience has not changed this belief that I’ve had for 15 years.

You should read Founders at Work if not already. One of them claims: “VCs? you can’t live with them, you can’t live without them.” I think this is closer to the truth. He said exactly: “VCs are an interesting bunch; you can’t live with them, you can’t live without them. They are instrumental in your success because they give you money and a really strong endorsement. They have this mafia-like network of connections and they help you with deals and find the right executives. They are really working your case. In my experience, it rarely happens that they turn against you, because you’re a team and if the team isn’t working, the company will likely fail. Occasionally, when you’re a screw-up, they’ll have to make a tough decision and fire someone, but that’s rare in my opinion. Because they wouldn’t invest in your company if they didn’t believe in you and your team. So I’ve always had a good experience working with VCs.”

So back to Everpix. I do not really have a point of view as I did not know the details. But let me quote both actors from The verge article: “The founders acknowledge they made mistakes along the way. They spent too much time on the product and not enough time on growth and distribution. The first pitch deck they put together for investors was mediocre. They began marketing too late. They failed to effectively position themselves against giants like Apple and Google, who offer fairly robust — and mostly free — Everpix alternatives. And while the product wasn’t particularly difficult to use, it did have a learning curve and required a commitment to entrust an unknown startup with your life’s memories — a hard sell that Everpix never got around to making much easier.” “It succeeded in every possible way,” said Jason Eberle, who built the web version of Everpix, “except for the only way that matters.”

While the investors point was: “While the product was clearly superb and had a very small but very loyal following, we were not comfortable enough with the other aspects of the business to kick up our level of investment,” said Neil Rimer, adding, “Having a great product is not the only thing that ultimately makes a company successful.” There is the remaining issue of how much value creation VCs want and can all entrepreneurs address it: “You guys seem to be a spectacularly talented team and some informal reference checking confirmed that, but everyone here is hung up on the concern over being able to build a >$100M revenue subscription business in photos in this age of free photo tools.” Said a partner at another firm: “The reaction was positive for you as a team but weak in terms of whether a $B business could be built.”

The debate will no doubt continue, but it is close to what can inspire me this story. Not to forget the conclusion of Latour: “I have more respect for someone who starts a restaurant and puts their life savings into it than what I’ve done. We’re still lucky. We’re in an environment that has a pretty good safety net, in Silicon Valley.”

Start-Up

What we may still learn from Silicon Valley

When Peter Thiel talks about Start-ups – part 5: a vision of the future of technology

When Peter Thiel talks about Start-ups – part 4: it’s customer, stupid!

When Peter Thiel & Friends talk about Start-ups – part 3: company culture, founders, team, investors

When Peter Thiel talks about Start-ups – part 2: value creation

When Peter Thiel talks about Start-ups – part 1

After Banksy and Invader, Pully’s Mirror Mosaic Man…

Bern Space Invaders (and in the Rest of the World – including Paris, Basel, Ravenna…)

Something rotten in the Silicon Valley kingdom?

Founding Angels

Lessons from Failure: a rare and interesting account from Everpix