A colleague of mine at EPFL just mentioned a new nice infographics about sharing equity in a start-up: How Startup Funding Works. It has apparently its roots with famous entrepreneur Paul Graham. It could be indeed based on his essay written in 2005. Nice piece of vizualizing. Thanks Sanna 🙂
So following many posts about equity splitting including the one about the nice book Slicing the Pie, here is the visual solution.
What have these 4 things in common? I am not sure. But in the last 12 hours, I had to put this 4 things together. My professional life is about technology, but I am not a technophile. I do not have a smart phone. But I like people and I strangely rediscovered it through high-tech entrepreneurship. There are many, many more important things. I will give you two examples with Bruce Springsteen and Jonathan Franzen, two known supporters of Barack Obama, whom I have mentioned a couple of times here. These are just two (therefore three) examples of why it is possible to like America… follow me, you don’t have to agree.
(Let me just add 5 minutes after publishing this article that we are on July 4!)
Yesterday, I was in Geneva for one of the best concerts of my life. The Boss and his sixteen musicians gave a nearly 3 hour-long show with a generosity I had never seen on stage. I did not know about his “sign requests”. His fans showed him signs with song titles and he picked a few, which he would later sing. Not the kind of music machines I am often used to experience. A kid went on stage and sang alone for a while. This was unique too. He is 63-year old and has the energy of a youngster, the generosity of a wise man. No naiveness. “We have a job to make here tonight.” What a job! I found a site which gave a short account including the songs he chose yesterday (including the signed ones – see in the end). Springsteen belongs to the group of people which show why we can love America.
I also like Jonathan Franzen. I may have read all his writings, The Corrections remains my favorite one. I am currently reading his latest essays. He also shows suffering, misery, hardship in America. A different kind of suffering, but in the end, it is probably the same. Americas is great when it shows its weaknesses. But neither Sprinsteen nor Franzen are depressing, because they are generous, they are passionate. I don’t see any cynism. Hopefully, I am not naive. In one of his latest essays, a commencement address at Kenyon College, he links technology and love… The title is PAIN WON’T KILL YOU and in the NYT he made another version entitled Liking Is for Cowards. Go for What Hurts.
Here is the NYT full version. I think it is worth reading it. But you can use the two previous web links too. I will try to provide my French version later…
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Liking Is for Cowards. Go for What Hurts.
By JONATHAN FRANZEN
Published: May 28, 2011
A COUPLE of weeks ago, I replaced my three-year-old BlackBerry Pearl with a much more powerful BlackBerry Bold. Needless to say, I was impressed with how far the technology had advanced in three years. Even when I didn’t have anybody to call or text or e-mail, I wanted to keep fondling my new Bold and experiencing the marvelous clarity of its screen, the silky action of its track pad, the shocking speed of its responses, the beguiling elegance of its graphics.
I was, in short, infatuated with my new device. I’d been similarly infatuated with my old device, of course; but over the years the bloom had faded from our relationship. I’d developed trust issues with my Pearl, accountability issues, compatibility issues and even, toward the end, some doubts about my Pearl’s very sanity, until I’d finally had to admit to myself that I’d outgrown the relationship.
Do I need to point out that — absent some wild, anthropomorphizing projection in which my old BlackBerry felt sad about the waning of my love for it — our relationship was entirely one-sided? Let me point it out anyway.
Let me further point out how ubiquitously the word “sexy” is used to describe late-model gadgets; and how the extremely cool things that we can do now with these gadgets — like impelling them to action with voice commands, or doing that spreading-the-fingers iPhone thing that makes images get bigger — would have looked, to people a hundred years ago, like a magician’s incantations, a magician’s hand gestures; and how, when we want to describe an erotic relationship that’s working perfectly, we speak, indeed, of magic.
Let me toss out the idea that, as our markets discover and respond to what consumers most want, our technology has become extremely adept at creating products that correspond to our fantasy ideal of an erotic relationship, in which the beloved object asks for nothing and gives everything, instantly, and makes us feel all powerful, and doesn’t throw terrible scenes when it’s replaced by an even sexier object and is consigned to a drawer.
To speak more generally, the ultimate goal of technology, the telos of techne, is to replace a natural world that’s indifferent to our wishes — a world of hurricanes and hardships and breakable hearts, a world of resistance — with a world so responsive to our wishes as to be, effectively, a mere extension of the self.
Let me suggest, finally, that the world of techno-consumerism is therefore troubled by real love, and that it has no choice but to trouble love in turn.
Its first line of defense is to commodify its enemy. You can all supply your own favorite, most nauseating examples of the commodification of love. Mine include the wedding industry, TV ads that feature cute young children or the giving of automobiles as Christmas presents, and the particularly grotesque equation of diamond jewelry with everlasting devotion. The message, in each case, is that if you love somebody you should buy stuff.
A related phenomenon is the transformation, courtesy of Facebook, of the verb “to like” from a state of mind to an action that you perform with your computer mouse, from a feeling to an assertion of consumer choice. And liking, in general, is commercial culture’s substitute for loving. The striking thing about all consumer products — and none more so than electronic devices and applications — is that they’re designed to be immensely likable. This is, in fact, the definition of a consumer product, in contrast to the product that is simply itself and whose makers aren’t fixated on your liking it. (I’m thinking here of jet engines, laboratory equipment, serious art and literature.)
But if you consider this in human terms, and you imagine a person defined by a desperation to be liked, what do you see? You see a person without integrity, without a center. In more pathological cases, you see a narcissist — a person who can’t tolerate the tarnishing of his or her self-image that not being liked represents, and who therefore either withdraws from human contact or goes to extreme, integrity-sacrificing lengths to be likable.
If you dedicate your existence to being likable, however, and if you adopt whatever cool persona is necessary to make it happen, it suggests that you’ve despaired of being loved for who you really are. And if you succeed in manipulating other people into liking you, it will be hard not to feel, at some level, contempt for those people, because they’ve fallen for your shtick. You may find yourself becoming depressed, or alcoholic, or, if you’re Donald Trump, running for president (and then quitting).
Consumer technology products would never do anything this unattractive, because they aren’t people. They are, however, great allies and enablers of narcissism. Alongside their built-in eagerness to be liked is a built-in eagerness to reflect well on us. Our lives look a lot more interesting when they’re filtered through the sexy Facebook interface. We star in our own movies, we photograph ourselves incessantly, we click the mouse and a machine confirms our sense of mastery.
And, since our technology is really just an extension of ourselves, we don’t have to have contempt for its manipulability in the way we might with actual people. It’s all one big endless loop. We like the mirror and the mirror likes us. To friend a person is merely to include the person in our private hall of flattering mirrors.
I may be overstating the case, a little bit. Very probably, you’re sick to death of hearing social media disrespected by cranky 51-year-olds. My aim here is mainly to set up a contrast between the narcissistic tendencies of technology and the problem of actual love. My friend Alice Sebold likes to talk about “getting down in the pit and loving somebody.” She has in mind the dirt that love inevitably splatters on the mirror of our self-regard.
The simple fact of the matter is that trying to be perfectly likable is incompatible with loving relationships. Sooner or later, for example, you’re going to find yourself in a hideous, screaming fight, and you’ll hear coming out of your mouth things that you yourself don’t like at all, things that shatter your self-image as a fair, kind, cool, attractive, in-control, funny, likable person. Something realer than likability has come out in you, and suddenly you’re having an actual life.
Suddenly there’s a real choice to be made, not a fake consumer choice between a BlackBerry and an iPhone, but a question: Do I love this person? And, for the other person, does this person love me?
There is no such thing as a person whose real self you like every particle of. This is why a world of liking is ultimately a lie. But there is such a thing as a person whose real self you love every particle of. And this is why love is such an existential threat to the techno-consumerist order: it exposes the lie.
This is not to say that love is only about fighting. Love is about bottomless empathy, born out of the heart’s revelation that another person is every bit as real as you are. And this is why love, as I understand it, is always specific. Trying to love all of humanity may be a worthy endeavor, but, in a funny way, it keeps the focus on the self, on the self’s own moral or spiritual well-being. Whereas, to love a specific person, and to identify with his or her struggles and joys as if they were your own, you have to surrender some of your self.
The big risk here, of course, is rejection. We can all handle being disliked now and then, because there’s such an infinitely big pool of potential likers. But to expose your whole self, not just the likable surface, and to have it rejected, can be catastrophically painful. The prospect of pain generally, the pain of loss, of breakup, of death, is what makes it so tempting to avoid love and stay safely in the world of liking.
And yet pain hurts but it doesn’t kill. When you consider the alternative — an anesthetized dream of self-sufficiency, abetted by technology — pain emerges as the natural product and natural indicator of being alive in a resistant world. To go through a life painlessly is to have not lived. Even just to say to yourself, “Oh, I’ll get to that love and pain stuff later, maybe in my 30s” is to consign yourself to 10 years of merely taking up space on the planet and burning up its resources. Of being (and I mean this in the most damning sense of the word) a consumer.
When I was in college, and for many years after, I liked the natural world. Didn’t love it, but definitely liked it. It can be very pretty, nature. And since I was looking for things to find wrong with the world, I naturally gravitated to environmentalism, because there were certainly plenty of things wrong with the environment. And the more I looked at what was wrong — an exploding world population, exploding levels of resource consumption, rising global temperatures, the trashing of the oceans, the logging of our last old-growth forests — the angrier I became.
Finally, in the mid-1990s, I made a conscious decision to stop worrying about the environment. There was nothing meaningful that I personally could do to save the planet, and I wanted to get on with devoting myself to the things I loved. I still tried to keep my carbon footprint small, but that was as far as I could go without falling back into rage and despair.
BUT then a funny thing happened to me. It’s a long story, but basically I fell in love with birds. I did this not without significant resistance, because it’s very uncool to be a birdwatcher, because anything that betrays real passion is by definition uncool. But little by little, in spite of myself, I developed this passion, and although one-half of a passion is obsession, the other half is love.
And so, yes, I kept a meticulous list of the birds I’d seen, and, yes, I went to inordinate lengths to see new species. But, no less important, whenever I looked at a bird, any bird, even a pigeon or a robin, I could feel my heart overflow with love. And love, as I’ve been trying to say today, is where our troubles begin.
Because now, not merely liking nature but loving a specific and vital part of it, I had no choice but to start worrying about the environment again. The news on that front was no better than when I’d decided to quit worrying about it — was considerably worse, in fact — but now those threatened forests and wetlands and oceans weren’t just pretty scenes for me to enjoy. They were the home of animals I loved.
And here’s where a curious paradox emerged. My anger and pain and despair about the planet were only increased by my concern for wild birds, and yet, as I began to get involved in bird conservation and learned more about the many threats that birds face, it became easier, not harder, to live with my anger and despair and pain.
How does this happen? I think, for one thing, that my love of birds became a portal to an important, less self-centered part of myself that I’d never even known existed. Instead of continuing to drift forward through my life as a global citizen, liking and disliking and withholding my commitment for some later date, I was forced to confront a self that I had to either straight-up accept or flat-out reject.
Which is what love will do to a person. Because the fundamental fact about all of us is that we’re alive for a while but will die before long. This fact is the real root cause of all our anger and pain and despair. And you can either run from this fact or, by way of love, you can embrace it.
When you stay in your room and rage or sneer or shrug your shoulders, as I did for many years, the world and its problems are impossibly daunting. But when you go out and put yourself in real relation to real people, or even just real animals, there’s a very real danger that you might love some of them.
And who knows what might happen to you then?
Jonathan Franzen is the author, most recently, of “Freedom.” This essay is adapted from a commencement speech he delivered on May 21 at Kenyon College.
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More for myself! (A blog is also my personal journal) Bruce Springsteen in Switzerland: Dedicates ‘Land of Hope and Dreams’ to Nelson Mandela. Bruce Springsteen and the E Street Band were back in action again on Wednesday, playing a 26-song, two-hour-and-52-minute show at the Stade de Genève in Geneva, Switzerland. Highlights included “Frankie” which was played for the first time in 2013 and for only the fifth time this tour and the encores started with Bruce playing “The Promise” solo on the piano, “Youngstown” and “Murder Inc.” were also played. It was the first show this tour that “Wrecking Ball” was not played. In the 118 shows so far this tour, three songs still have perfect attendance: “Waitin’ on a Sunny Day,” “Born to Run” and “Dancing in the Dark.” Bruce dedicated “Land of Hope and Dreams,” the final song of the main set, to Nelson Mandela. Show began at 7:40 p.m. local time (six hours ahead of New Jersey)
Set list
1. Shackled and Drawn
2. Badlands
3. Death to My Hometown
4. Out in the Street (sign request)
5. Hungry Heart (sign request)
6. Candy’s Room (sign request)
7. She’s the One
8. Because the Night
9. Spirit in the Night
10. Frankie
11. The River
12. Youngstown
13. Murder Incorporated
14. Darlington County (sign request)
15. Working on the Highway
16. Bobby Jean
17. Waitin’ on a Sunny Day
18. The Rising
19. Land of Hope and Dreams (dedicated to Nelson Mandela)
Encore:
20. The Promise (solo piano)
21. Born in the U.S.A.
22. Born to Run
23. Dancing in the Dark
24. 10th Avenue Freeze-Out
25. American Land
26. Thunder Road (solo acoustic)
Very good article by the MIT technology review about technology clusters: In Innovation Quest, Regions Seek Critical Mass. Nothing really new, but it shows again and again how difficult it is to build such clusters and to promote an innovation culture. I just extract a few quotes:
“Clusters exist—it’s empirically proven,” Yasuyuki Motoyama, a senior scholar at the Kauffman Foundation, told me. “But that doesn’t mean governments can create one.”
The problem for governments is that they often try to define where and when innovation will occur. Some attempt to pick and fund winning companies. Such efforts have rarely worked well, says Josh Lerner, a professor at Harvard Business School. Governments can play a role, he says, but they should limit themselves mostly to “setting the table”: create laws that don’t penalize failed entrepreneurs, reduce taxes, and spend heavily on R&D. Then get out of the way.
But can entrepreneurs succeed in creating clusters where governments have had so much difficulty? “The conflict now is between two logics on how to create an ecosystem,” says Fiona Murray, a professor at MIT’s Sloan School, who consults as a kind of therapist to clusters, including London’s TechCity. One is “a government logic that says it’s too important to leave to entrepreneurs, and that you that need specialized inputs, like a technology park.” The other is “purely focused on people and their networks.” Murray believes the answer lies somewhere in the middle. Governments are good at organizing but poor at leading.
I will finsih by reminding you the power of SV in the cluster leadership…
France is often criticized for its apparent weakness in entrepreneurship and of its start-ups, but it is clear that the reality is not as negative as the perception; Kelkoo in the past, Criteo probably in a few months as well Deezer. And last week Neolane. I hear the critics say: “Yes, but this is the web.” It would mean you forget Parrot, Soitec, Envivio, Sequans Ymagis, Qualys, Inside… France is quite impressive (at the European level) for its start-up scene.
Neolane is the story of three friends who met at Centrale (one of the top French engineering schools). They co-founded a first start-up just out of school, which they sold before the Internet was really born. They launched a new one, Neolane, in 2001, with the support of Auriga Partners in 2002. Neolane raised more than €15M before being acquired last week by Adobe for €460M. It should not be very far from the largest M&A value of a French start-up. Again the acquirer is from the USA, as it is mostly the case with start-up acquisitions. Let us hope the jobs will not disappear, but it is certainly good news for France and Europe to enjoy such success. And sincere congratulations to my friends at Auriga Partners (I am not sure if they will appreciate or not this article…) Comments welcome!
The founders of Neolane. From left to right, Benoît Gourdon, (Director of Operations for Europe), Stephen Dietrich (President of North America), Stephane Dehoche (CEO) and Thomas Boudalier (CTO).
As you can imagine if you know my blog, I had to build the capitalization table. I decided to focus here on the VC returns, i.e. both multiples on the investments and IRR. This is an interesting exercise as they were many rounds including partial sales. I have always been confused by the difference between multiples and IRRs. Multiples are what matters but IRRs also count as a relative measure of return (if compares with other assets).
NB: all data come from French register of commerce. Some numbers were missing so it is a best effort exercise and it was not the easiest I had to do…
I have already talked about statistics here, and not in good terms. It was mostly related to Nicholas Nassim Taleb‘s works, The Black Swan and Antifragile. But this does not mean statistics are bad. They may just be dangerous when used stupidly. It is what Charles Wheelan explains among otehr things in Naked Statistics.
Naked Statistics belongs to the group of Popular Science. Americans often have a talent to explain science for a general audience. Wheelan has it too. So if you do not know about or hate the concepts of mean/average, standard deviation, probability, regression analysis, and even central limit theorem, you may change your mind after reading his book.
Also you will be explained the Monty Hall problem or equivalent Three Prisoners problem or why it is sometimes better (even if counterintuitive) to change your mind.
Finally Wheelan illustrates why statistics are useless and even dangerous when the data used are badly built or irrelevant (even if the mathematical tools are correctly used!). Just one example in scientific research (which is another topic of concern to me) “This phenomenon can plague even legitimate research. The accepted convention is to reject a hypothesis when we observe something that would happen by chance only 1 in 20 times or less if the hypothesis were true. Of course, if we conduct 20 studies, or if we include 20 junk variables in a single regression equation, then on average, we will get 1 bogus statistically significant finding. The New York Times magazine captured this tension wonderfully in a quotation from Richard Peto, a medical statistician and epidemiologist: “Epidemiology is so beautiful and provides such an important perspective on human life and death, but an incredible amount of rubbish is published”.
Even the results of clinical trials, which are usually randomized experiments and therefore the gold standard of medical research, should be viewed with some skepticism. In 2011, the Wall Street Journal ran a front-page story on what it described as one of the “dirty little secrets” of medical research: “Most results, including those that appear in top-flight peer-reviewed journals, can’t be reproduced. […] If researchers and medical journals pay attention to positive findings and ignore negative findings, then they may well publish the one study that finds a drug effective and ignore the nineteen in which it has no effect. […] On top of that, researchers may have some conscious or unconscious bias, either because of a strongly held prior belief or because a positive finding would be better for their career. (No one ever gets rich or famous by proving what doesn’t cure cancer. […] Dr. Ionnadis [a Greek doctor and epidemiologist] estimates that roughly half of the scientific papers published will eventually turn out to be wrong.” [Pages 222-223]
Shame on me! How is it possible I mention so little AnnaLee Saxenian in this blog, as well as the importance of migrants in entrepreneurship? I had shortly mentioned Regional Advantage in Silicon Valley – more of the same?, but this was more about the openness of Silicon Valley culture and why it did a better job than the Boston area.
It might be because migration was a big feature of my book and nothing new came out thereafter even if the topic is of utmost importance. So let me address the topic of Immigrants again now. In her second book, published in 2006, The New Argonauts: Regional Advantage in a Global Economy Saxenian analyzed the importance of migrants in high-tech entrepreneurship, both for the USA and for the countries of origin of these migrants.
In a related paper, she had written: “In the United States, discussions of the immigration of scientists and engineers have focused primarily on the extent to which foreign-born professionals displace native workers. The view from sending countries, by contrast, has been that the emigration of highly skilled personnel to the United States represents a big economic loss, a brain drain. Neither view is adequate in today’s global economy. Far from simply replacing native workers, foreign-born engineers are starting new businesses and generating jobs and wealth at least as fast as their U.S. counterparts. And the dynamism of emerging regions in Asia and elsewhere now draws skilled immigrants homeward. Even when they choose not to return home, they are serving as middlemen linking businesses in the United States with those in distant regions.” [Brain Circulation: How High-Skill Immigration Makes Everyone Better Off – 2002 – http://www.brookings.edu/research/articles/2002/12/winter-immigration-saxenian] In the end, she added: “Essentially, the new argonauts are people who have learned the Silicon Valley model, usually by doing graduate work in the U.S. and getting absorbed into the Silicon Valley boom. They marinated in the Silicon Valley culture and learned it. This really began in the late ‘80s for the Israelis and Taiwanese, and not until the late ‘90s or even the beginning of the ‘00s for the Indians and Chinese. They began to realize that they could take advantage of their own personal networks in their home countries to provide skill that was scarce in the Valley, and that they could even go home and start businesses there that would tap their old networks. Usually, they were going home and tapping their undergraduate colleagues or their friends from the military, in the case of Israel. They knew and they understood how to work the institutions and the culture of those places, often the language too, better than anyone else in the world.”
From the New Argonauts, I will take only two small paragraphs: “Graduating classes from the elite engineering program at National Taiwan University, for example, came to the United States in the 1980s, as did a majority of engineering and computer science graduates from the prestigious Indian Institutes of Technology. Technical universities from smaller countries like Ireland and Israel also report large proportions of graduates leaving to study in the United States, although their numbers are too small to show up in the aggregate data. [Page 50]
Now the depressing argument! “The technical elite in countries like France and Japan move automatically into high-status positions at the top of the large corporations or the civil service. They have little incentive to study or work abroad, and often face significant opportunity costs if they do. As a result, relatively few pursue graduate education in the United States, and those who do often return home directly after graduation. Those who end up in Silicon Valley for a period are not likely to gain access to capital, professional opportunities, or respect when they return home.” [Page 333]
Saxenian has a long history on the topic. She began in 1999 when she published Silicon Valley’s New Immigrant Entrepreneurs. In two related studies, Saxenian and colleagues had a much deeper quantitative analysis. These were America’s New Immigrant Entrepreneurs in 2007 by Vivek Wadhwa, AnnaLee Saxenian, Ben Rissing, and Gary Gereffi; it was updated in 2012 in America’s New Immigrant Entrepreneurs: – Then and Now written by Vivek Wadhwa, AnnaLee Saxenian and F. Daniel Siciliano.
There is one table I had used in my book which I found striking: Europe has many Silicon Valley migrants as shown below. But we have not been capable (yet) of using them fruitfully as Asia did. We only begin…
Europe sees the value of migration (still only one way, attracting talent) and hopefully we will benefit from accepting the lessons…
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.
I seldom (but sometimes) talk about Science or Mathematics. Mostly when it helps me illustrate what innovation or creativity is about, and sometimes when I see analog crises in all these fields (see for example the posts on Dyson, Thiel or Smolin). And there is another related point: it is often claimed that major scientific discoveries or entrepreneurial ventures are done at a young age.
Yitang Zhang
You probably never heard of Yitang Zhang who has stunned the world of mathematics last month by proving a centuries-old problem. He is a totally unknown mathematician and more surprising, he is (over) 50-year old. For those interested in the problem, you can read Nature’s First proof that infinitely many prime numbers come in pairs. Basically, Zhang proved that there are infinitely many pairs of primes that are less than N apart. Mathematicians still dream to prove that N is equal to 2 – the twin prime conjecture -, but Zhang was first to prove that N exists … even if N is 70 million!
Tumblr made the news these past days, and some discussions about how much the investors, founder and employees made were quite passionate as you may read from Fred Wilson reactions. We may discuss a long time about why Yahoo bought a 26-year old kid company, as could be done with Instagram (see my pots from April 2012), but the point is that there’s been a continuous flow of such stories for decades in Silicon Valley.
26-year old David Karp, founder & CEO of Tumblr.
Indeed I added to my usual cap. tables some numbers on multiple returns and ROIs (return on investment). I do not have exactly the same “huge” numbers that were at the origin of the angry exchanges, but I might be wrong… Now there were two different pieces of info, so I put two cap. tables which are not that different. One gives investor data per round, the other one per specific fund.
Click on picture to enlarge.
Click on picture to enlarge.
Here is my third and final post on Boldrin and Levine’s book. I cover here the final two chapters and the pharma industry (chapter 9) and their conclusions (chapter 10). As lazy as usual, it is mostly some copy-pastes. As a reminder you can find here part 1 and part 2.
The Pharmaceutical Industry
The traditional model predicts that there should be many potential producers of a medicine, that the industry should be dynamically competitive, and therefore highly innovative with newcomers frequently challenging incumbents by means of innovative superior drugs. […] Some people esteem the pharmaceutical industry and some people despise it: there is little middle ground. The pharmaceutical industry is the poster-child of every intellectual monopoly supporter. It is the vivid example that, without the sheltering patents provide inventors with, the outpouring of new wonder drugs we have grown accustomed to would have not materialized, our life expectancies would be a lot shorter, and millions of people would have died of the diseases Big Pharma has instead managed to cure. In the opposite camp, Big Pharma is the scourge of humanity: a club of oligopolistic white men that, by controlling medicine around the globe and refusing to sell drugs at their marginal cost, are letting millions of poor people die. […] This sounds utterly complicated, so let us handle it with care and, for once, play the role of the wise fellows: in media stat virtus, et sanitas. […] How strong is the case for patents in pharmaceuticals? While Big Pharma is not necessarily the monster some depict, the case for patents in pharmaceuticals is a lot weaker than most people think. [Pages 242-243]
The authors make a long and interesting analysis of the history of the chemical industry with France and the UK blocking while Germany and Switzerland could innovate.
[Page 249] Here is how Murmann summarizes the main findings from his historical study of the European synthetic-dye industries during the 1857-1914 period. British and French synthetic dye firms that initially dominated the synthetic dye industry because of their patent positions but later lost their leadership positions are important cases in point. It appears that these firms failed to develop superior capabilities in production, marketing and management precisely because patents initially sheltered them from competition. German and Swiss firms, on the other hand, could not file for patents in their home markets and only those firms that developed superior capabilities survived the competitive home market. When the initial French and British patents expired, the leading German and Swiss firms entered the British and French market, capturing large portions of sales at the expense of the former leaders.
The authors also analyze Italy and India, which did not have until recently strong IP policies. “Interestingly though, we have not been able to find a single independent analyst claiming that the additional amount of pharmaceutical innovation patents may stimulate in the Indian industry, will be substantial and large enough to compensate for the other social costs. More to the point, the positive consequence of patent adoption in countries like India is, according to most analysts, a consequence of beneficial price discrimination. The argument goes as follows: monopoly power allows price discrimination – that is, the selling the same good for a high price to people valuing it a lot (usually people richer than average) and for a low price to people valuing it little (usually people poorer than average). Due to the absence of patent protection, there are very many new drugs that are not marketed in poor countries by their original producer, as the latter is not protected by reliable patents in that country.” [Page 253]
[Another] doubt comes from the following observation: if it were really true that imitating and “pirating” new drugs is that easy, absent patent protection local firms would be already producing and marketing such drugs in the country in question. [Page 254]
Pharma today
A few additional facts : the top 30 firms spend about twice as much in promotion and advertising as they do in R&D; and the top 30 are where private R&D expenditure is carried out, in the industry. Next we note that no more than 1/3 – more likely 1/4 – of new drug approvals are considered by the FDA to have therapeutic benefit over existing treatments, implying that, under the most generous hypotheses, only 25-30% of the total R&D expenditure goes toward new drugs. [Page 255]
Summing up and moving forward, here are the symptoms of the malaise we should investigate further.
– There is innovation, but not as much as one might think there is, given what we spend.
– Pharmaceutical innovation seems to cost a lot and marketing new drugs even more, which makes the final price for consumers very high and increasing.
– Some consumers are hurt more than others, even after the worldwide extension of patent protection. [Page 256]
Where do drugs come from? [Pages 257-260]
Useful new drugs seem to come in a growing percentage from small firms, startups and university laboratories. […]Next there is the not so small detail that most of those university laboratories are actually financed by public money, mostly federal money flowing through the NIH. The pharmaceutical industry is much less essential to medical research than their lobbyists might have you believe. In 1995, […] about $11.5 billion came from the government, with another $3.6 billion of academic research not funded by the feds. Industry spent about $10 billion. However, industry R&D is eligible for a tax credit of about 20%, so the government also picked up about $2 billion of the cost of “industry” research. […] In 2006, total was $57 billion while the NIH budget in the same year (the largest but by no means the only source of public funding for biomedical research) reached $28.5 bn.[…] it is wise to remember that the modern “cocktail” that is used to treat HIV was not invented by a large pharmaceutical company. It was invented by an academic researcher: Dr. David Ho.
It is a fact that, without the strong incentive the prospect of a successful patent induces, those researchers would not be working as hard as they do. That is true, so let us think the issue through once again. We observe that, while the incentive to patent and commercialize their findings should have been increased by the Bayh-Dole act allowing patentability of such research results, there is no evidence whatsoever that, since 1980 when the act was passed, major medical scientific discoveries have been pouring out of American universities’ laboratories.
It therefore remains an open question: did patentability of basic biomedical innovations create an incentive for engaging in more socially valuable research projects and investigations? Which medical and pharmaceutical discoveries are truly fundamental and where do they come from?
Here are the selected fifteen most important medical milestones: Penicillin, x rays, tissue culture, ether (anaesthetic), chlorpromazine, public sanitation, germ theory, evidence based medicine, vaccines, the pill, computers, oral rehydration therapy, DNA structure, monoclonal antibody technology, smoking health risk. How many entries in this list were patented, or were due to some previous patent, or were obtained during a research project motivated by the desire to obtain a patent? Two: chlorpromazine and the pill. […] Now the “list of Top Pharmaceuticals”, these are the current pharmaceutical products selling the most worldwide, and there are 46 of them. Patents had pretty much nothing to do with the development of 20 among the 46 top selling drugs. […] Notice though that of these 26, 4 were discovered completely by chance and then, 2 were discovered in university labs before the Bayh-Dole Act was even conceived. Further, a few were simultaneously discovered by more than one company leading to long and expensive legal battles, however, the details are not relevant to our argument. The bootom line is more than half of the top selling medicines around the world do not owe their existence to pharmaceutical patents.
Rent-seeking and redundancy. [Pages 260-263]
The next question then is, if not in fundamental new medical discoveries, where does all that pharmaceutical R&D money go? […] 54% of FDA-approved drug applications involved drugs that contained active ingredients already in the market. […] 35% were products with new active ingredients, but only a portion of these drugs were judged to have sufficient clinical improvements over existing treatments to be granted priority status. In fact, only 238 out of 1035 drugs approved by the FDA contained new active ingredients and were given priority ratings on the base of their clinical performances. In other words, about 77% of what the FDA approves is “redundant” from the strictly medical point of view. […] Sad but ironically true, me-too or copycat drugs are largely the only available tool capable of inducing some kind of competition in an otherwise monopolized market. ..] The ironic aspect of me-too drugs, obviously, is that they are very expensive because of patent protection, and this cost we have brought upon ourselves for no good reason. […] Insofar as new drugs are replacements for drugs that already exist, they have little or no economic value in a world without patents – yet cost on the order of $800 million to bring to market because the existence of patents forces the producers to “invent something” the USPTO can pretend to be sufficiently different from the original, patented, drug.
Libraries have been written on the obvious connection between marketing and the lack of competition. The pharmaceutical industry is no exception to this rule, and the evidence Professor Sager, and many others, point to has a simple and clear explanation: because of generalized and ever extended patenting, large pharmaceutical companies have grown accustomed to operating like monopolies. Monopolies innovate as little as possible and only when forced to; in general they would rather spend time seeking rents via political protection while trying to sell at a high price their old refurbished products to the powerless consumers, via massive doses of advertising.
The authors finish with an economic analysis of the social cost and benefit of patents and without patents, and propose solution in the final chapter.
Conclusion: The bad, the Good, and the Ugly
Edith Penrose, concluded that “If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it
But the authors claim: “On the basis of the present knowledge” progressively but effectively abolishing intellectual property protection is the only socially responsible thing to do. […] A realistic view of intellectual monopoly is that it is a disease rather than a cure. It arises not from a principled effort to increase innovation, but from a noxious combination of medieval institutions – guilds, royal licenses, trade restrictions, religious and political censorship – and the rent-seeking behavior of would be monopolists seeking to fatten their purse at the expense of public prosperity. [Pages 277-78]
A myriad of other legal and informal institutions, business practices and professional skills have grown up around them and in symbiosis with them. Consequently, a sudden elimination of intellectual property laws may bring about collateral damages of an intolerable magnitude. Take for example the case of pharmaceuticals. Drugs are not only patented, they are also regulated by the government in a myriad of ways. Under the current system, to achieve FDA approval in the United States requires costly clinical trials – and the results of those trials must be made freely available to competitors. Certainly, abolishing patents and simultaneously requiring firms that conduct expensive clinical trials to make their results freely available to competitors, cannot be a good reform. Here patents can only be sensibly eliminated by simultaneously changing also the process by which the results of clinical trials are obtained, first, and, then, made available to the public and to competitors in particular. [Page 278]
The authors look at many intermediate solutions including deregulation, private contracts, subsidies, social norms but they are clearly convinced (and convincing) that an evolution is needed, even if they are pessimistic:
Where, today, is a software innovator to find safe haven from Microsoft’s lawyers? Where, tomorrow, will be the pharmaceutical companies that will challenge the patents of “big pharma” and produce drugs and vaccines for the millions dying in Africa and elsewhere? Where, today, are courageous publishers, committed to the idea that accumulated knowledge should be widely available, defending the Google Book Search initiative? Nowhere, as far as we can tell, and this is a bad omen for the times to come. The legal and political war between the innovators and the monopolists is a real one, and the innovators may not win as the forces of “Stay the Course” and “Do Nothing” are powerful, and on the rise. [Page 299]
Certainly the basic threat to prosperity and liberty can be resolved through sensible reform. But intellectual property is a cancer. The goal must be not merely to make the cancer more benign, but ultimately to get rid of it entirely. So, while we are skeptical of the idea of immediately and permanently eliminating intellectual monopoly – the long-term goal should be no less than a complete elimination. A phased reduction in the length of terms of both patents and copyrights would be the right place to start. By gradually reducing terms, it becomes possible to make the necessary adjustments – for example to FDA regulations, publishing techniques and practices, software development and distribution methods – while at the same time making a commitment to eventual elimination. [Page 300]