Is there a recipe for entrepreneurship?

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Students from the Ecole Hôteliere de Lausanne who naturally have a taste for good food asked me the question recently. I took inspiration from Paul Graham and Steve Jobs to provide the ingredients. The text is available in pdf. Here is the full answer…

Is there a recipe for entrepreneurship?

“Launching a start-up is not a rational act. Success only comes from those who are foolish enough to think unreasonably. Entrepreneurs need to stretch themselves beyond convention and constraint to reach something extraordinary.” Vinod Khosla, founder of Sun Microsystems

Europe is aware that it is not as efficient with entrepreneurship as the USA, and Silicon Valley is the extreme illustration of the American model. Google, Yahoo, Apple, Cisco, Oracle, Intel are only a few examples. What are ours? What did we do wrong? My answer is that we have not bet on passionate individuals ready to take risks and face uncertainty: young people who may fail but will learn from their mistakes.

If you are not convinced or surprised with the argument, let me quote some Silicon Valley icons. Steve Jobs said about Silicon Valley success: “There are two or three reasons. You have to go back a little in history. I mean this is where the beatnik happened in San Francisco. It is a pretty interesting thing…You’ve also had Stanford and Berkeley, two awesome universities drawing smart people from all over the world and depositing them in this clean, sunny, nice place where there’s a whole bunch of other smart people and pretty good food. And at times a lot of drugs and all of that. So they stayed… I think it’s just a very unique place.”

The main investor in Apple, Steve Jobs’ company, Don Valentine adds: “Founders are genetically impossible by choice. There were only two true visionaries in the history of Silicon Valley. Steve Jobs and Bob Noyce [Intel’s founder]. Their vision was to build great companies… Steve was twenty, un-degreed, some people said unwashed, and he looked like Ho Chi Min. But he was a bright person… Phenomenal achievement done by somebody in his very early twenties… Bob was one of those people who could maintain perspective because he was inordinately bright. Steve could not. He was very, very passionate, highly competitive.” By the way, Bob Noyce mentored Steve Jobs.

Let me add one more quote by another investor, Tom Perkins: “The difference is in psychology: everybody in Silicon Valley knows somebody that is doing very well in high-tech start-ups; so they say to themselves “I am smarter than Joe. If he could make millions, I can make a billion”. So they do and they think they will succeed and by thinking they can succeed, they have a good shot at succeeding. That psychology does not exist so much elsewhere,”

Quotes may not be any proof, but consider the age of the Silicon Valley entrepreneurs: Steve Jobs was 21, the Google founders were 25, the eBay founder was 28, and the Yahoo founders were 27 and 29. Do not think this is linked to the Internet. Mister Hewlett and Packard were 26 and 27 in 1939 when they founded HP. Founders often come also as a team of two; many are foreigners, immigrants who have something to prove, “hungry people”.

But if we would try to find a recipe, a recipe that Europe could use to bake fresh Entrepreneurs for their economies, what would it be? Paul Graham, an entrepreneur whose blog, www.paulgraham.com, is a must-read, has his strange advice: two main ingredients are needed, rich people and “nerds”. In my recent book, “start-up”, I use his advice for my very own recipe:

– Take rich people and nerds.

– Do not add any bureaucracy, do not add concrete.

– In order to attract and keep enough nerds/cooks in a place, there is a need for a large and nice plate.

A university is a good choice, it needs personality, and it needs to be creative. Not only on its campus, but also in its surroundings, so that the ingredients feel comfortable in the plate.

– The ingredients should be fresh, i.e. they should be young and dynamic.

Graham also mentions liberal environments, which, he claims, tolerate strange and brilliant individuals. [Read again what Jobs said above about SV].

– Then the ingredients have to be put in the oven for a very long time.

Silicon Valley began in 1957. It took ten years, even twenty years, to make this region successful; it is about the time it takes to grow infants into adults.

– The oven should not be too hot, so that the desire is not killed, then the temperature should be increased to maintain the enthusiasm.

A temperate, pleasant climate is therefore necessary.

If all the conditions are in place, the result will probably be interesting.

Lausanne has many assets to become such a place. Lausanne has EPFL, Unil, EHL, IMD. It has rich people. It has a nice climate and nice food, a rich cultural environment. So what we “just” need is the desire to try. Of course, ideas and projects have to be well managed. But first and foremost, we need young people, not afraid of being ambitious. As a final word, I think we should also take more inspiration from Silicon Valley. First, visit the place and understand it better; second, invite back the Europeans who live over there and have experienced this unique culture. We have to learn from them. So you have my recipe for entrepreneurship. The recipe for success is more an Art than a Science and listen again to what Steve Jobs said in 2005 at the first graduate diploma ceremony he ever attended: “Stay foolish, stay hungry.”

Sources:

Paul Graham and Silicon Valley
http://www.paulgraham.com/siliconvalley.html

Steve Jobs at Stanford
http://news-service.stanford.edu/news/2005/june15/jobs-061505.html

“Start-up, what we may still learn from Silicon Valley”
https://www.startup-book.com

Innovation: the driving force in business?

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The Ditchley Foundation is a strange thing for a non-British I assume. I attended in mid-May a workshop on Innovation where gentlemen (and not many women as it is common in technology) discussed about innovation in a beautiful18th century castle!

The discussions were relaxed, friendly but serious and passionate. The main lesson I learnt is that clearly innovation is still seen as a process for established institutions and not really as what start-ups do best. For those interested in a refreshing view on the topic, the synthesis produced by the chairman of Ditchley is of real interest and available online.

An Ode to Disorder

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Too much organization harms Innovation

These are the title and subtitle of a brilliant paper (inFrench only) by Julien Tarby in the Nouvel Economiste dated June 5, 2008. His article echoes my worries about innovation in Europe. His analysis is really interesting. Among other examples, he quotes:

– Samuel Kortum et Josh Lerner: 1 euro invested in venture capital has a 10x return over 1 euro spent in the traditional R&D of companies

– Pascal Picq, a paleo-anthropologue, who develops the evolution theory applied to the enterprise: start-ups which adapt to survive are Darwinian. “Unfortunately the French education system remains Lamarckian, and considers that organizations improve in a development scheme (administration, big companies). It is the country of the planned projects (planes, trains) and not of disuptions. This culture of the norm does not tolerate variability, trial and error and it induces the development of the [existing] fields of excellence and not the creation of new fields.”

If you read French, and because it is free, you shoud run and download it!

Spain has a passion for Innovation

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I had the pleasure to be interviewed on the book “Start-Up” by Doris Obermair. The text is available in Spanish as well as in English in the magazine If… La Revista de Innovation : Más pasión y sueños, menos infraestructura y experiencia (english version)

and the video (in English) is available on the web site Infonomia.

Finally, I will attend the Ifest conference on July 10-11 to talk about the topic of my book. Because of the diversity of the attendants, I think it will be a great event.

Founders at Work

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Another great book, so great I decide to write this post even if I have not finished reading it: Jessica Livingston in Founders at Work has interviewed 32 entrepreneurs about their story. The lessons are convincing, fascinating. Without asking for copyright, I copy here some quotes. The book is just a pleasure to read even if sometimes the Q&A are too specific about the start-up, but I assume it is part of the exercise. A Must-Read.

Paul Buchheit, creator of Gmail about Risk Taking

As I say, for people, it depends on their situation if they can take that risk of joining a startup or moving to a new city if they don’t live in the right place. For me, I was actually single at the time, I didn’t have a mortgage, so the idea of joining a little startup that may well be destroyed was just like, “That will be fun.” Because I kind of thought, “Even if Google doesn’t make it, it will be educational and I’ll learn something.” Honestly, I was pretty sure AltaVista was going to destroy Google.

Mike Ramsay, founder of Tivo about Silicon Valley

I was curious to see what’s the attitude of a typical startup in Scotland compared to here. I found that they are just culturally a whole lot more conservative and cautious. And somewhat lacking in self-confidence. You come over here and . . . I had a meeting recently with a couple of early 20-year-olds who have decided to drop out of Stanford because they got bored, and they are trying to raise money to fund their startup. They believe they can do it, and nothing’s going to hold them back. They have confidence, they have that spirit, which I think is great and is probably unique to this part of the world. Being part of that for so long, for me, has been very invigorating.

Joshua Schachter, founder of del.icio.us about implementing

But the guy who says, “I have a great idea and I’m looking for other people to implement it,” I’m wary of—frequently because I think the process of idea-making relies on executing and failing or succeeding at the ideas, so that you can actually become better at coming up with ideas.

and about VCs

In general, I found VCs to be significantly politer than the folks I worked with. The worst they did was not call me back. I’d never hear from them again. Brad Feld does a nice blog talking about how the VC process works. He says they never call you back to say no—they don’t want to close the door in case they want to open it again, but they don’t want to actually give you a response. Very few VCs actually said, “Sorry, we’re not interested.”

Craig Newmark, founder of craiglist on the definition of start-up

“in the conventional sense, we were never a startup. In the conventional sense, a startup is a company, maybe with great ideas, that becomes a serious corporation. It usually takes serious investment, has a strategy, and they want to make a lot of money.”

PS : June 2024. I published a post about foudners and remembered the notes I used with my students at the time. here they are 16 years later…

Founders at Work - May08

The DNA of Innovation

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They are not many, those who can talk about innovation as well as John Hennessy, President of Stanford University, start-up founder such as MIPS and Atheros, board member of Cisco and Google. He is also a world-renowned specialist in computer science.

In a recent column of the Stanford Magazine, “the DNA of Innovation”, he mentions the three ingredients that are central of a spirit of innovation:

– people, a diverse mix of talents and approaches

– an environment that promotes risk-taking and innovative thinking

– a university must be adept at transferring knowledge to organizations that have the ability to convert that knowledge into something with broader impact.

The full article is worth reading. I also scanned it in pdf format.

Cap. Table: Kelkoo

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Kelkoo is a great case study. It was one, not to say the, success story of the Internet in France and even in Europe. It was acquired by Yahoo for €475M in 2004. It was extremely ambitious from its foundation and had an amazing pan-European strategy thanks to acquisitions in Spain, the UK and Scandinavia: DondeCom, Shopgenie and ZoomIT. Kelkoo raised more than €45M in less than 12 months! Therefore the founders faced a huge dilution linked to three rounds of financings and these three mergers & acquisitions (“M&As”).

The capitalization table and the figures below show the evolution of the numbers. I am aware that these data are dry, tough to read, but if the reader accepts to follow me, he or she may find them of interest. Let us begin by the last table which describes the financing rounds. In 1999, Kelkoo was founded by five individuals (Chappaz, Lopez, Amouroux, Odin and Mercier) and immediately financed by two venture capitalists (“VCs”): Banexi and Innovacom. The two funds provided €1.5M in December 1999 (A round) and then a little more than €4M in March 2000 (B round). There is an important detail to notice: there was a 1 to 50 stock split between the two rounds; it explains the huge difference in the numbers as well as the fact that the price per share of €24.67 of the A round is equivalent to €0.50 after the split. The price per share of the B round was €1.45. The five founders had shared their stock as 1/3 to Chappaz, 1/3 to Lopez and the remaining between the three others. However options were granted to Chappaz and Mercier at B round to give a new founders’ balance. The pies below give therefore different ratios. Dominique Vidal is not a founder but was working with Banexi when Kelkoo was founded. He joined the founders to become a managing director and received initially 338’000 shares. He received more shares with time but the final number is not known (so I make an assumption in his case). Finally a stock-option plan was created to incentivize employees. Those had virtually 19% of the company at round B. We were only in March 2000 and the data are already complex. The capitalization table can be read on the right part with number of shares or on the left part as percent of the company.

(Click on pictures to enlarge or download)

The situation is even more complex with the acquisitions. First DondeCom (Spain) and ShopGenie (UK) in June 2000. Kelkoo kept about 50% of the shares and the new entrants the other 50%. Also in June 2000, Kelkoo raised its C round of €30M. In September another €6M were raised with the same terms. Initially the price per share was €1.99. But there was a major condition: Kelkko had to provide an exit, a liquidity event to the investors in 2001 or the price per share would decrease to €1.70. There was no IPO or M&A for Kelkoo, i.e. no exit, so that the investors received free shares to reduce the price per share. This implies a valuation of €96M for the C round and the investors of that round owned 37% of Kelkoo. Then came the ZoomIT acquisition, which gave a little less then 30% to the new comers.

Yahoo bought Kelkoo for €475M meaning a price per share of €5.7 if the reader accepts that the total number of shares is correct. The last column therefore gives the value of their shares for all stockholders (but it does not indicate it much these cost; this cost would have to be deducted to know the profit before tax). I can not be too far from real numbers but as I said with my previous examples (Skype, mysql) these numbers are never sure at 100%. The capital increases are however well described in documents from the register of commerce that I bought for this study. The exact number of exercised shares is however unsure. These documents were my only source of information for this study. The history of Kelkoo is also written in the book “Ils ont réussi leur start-up” at Village Mondial (Pearson France). Pierre Chappaz is today the CEO of Wikio and is also the author of an excellent blog, Kelblog. Finally, Pierre made a great presentation of his stroy at EPFL in 2005.

Source: www.euridile.fr

(Click on pictures to enlarge or download)

Stanford and Start-Up

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Is there anything nicer than being interviewed by your Alma Mater. The Stanford School of Engineering asked me why I wrote “Start-Up” and for whom. You will find it on the Stanford SOE web site. I tried to explain that the book is not (only) about the innovation infrastructure which failed in Europe but (mostly) about the need to encourage young individuals in taking more risks. A debate about nature and culture which I develop at length in the book.

Cap. table: Skype

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Following the mysql case, here is the Skype capitalization. Skype was founded in November 2003 and acquired by eBay in September 2005 for about $2.6B. The deal was complex as it had a cash component as well as an equity one and because there was an upside potential, up to $4B. The SEC document said “Skype shareholders were offered the choice between several consideration options for their shares. Shareholders representing approximately 40% of the Skype shares chose to receive a single payment in cash and eBay stock at the close of the transaction. Shareholders representing the remaining 60% of the Skype shares chose to receive a reduced up-front payment in cash and eBay stock at the close plus potential future earn-out payments which are based on performance-based goals for active users, gross profit and revenue.” In October 2007, eBay announced the final earn-out to be $530M. I consider here the acquisition was $2.6B.

The two founders, Janus Friis (Danish) and Niklas Zennström (Swede) were the previous founders of Kazaa and had created a holding company, Maitland Holdings, which would own their founder’s shares in Skype. It is not clear if other people had shares in Maitland and I made the assumption that the team of Estonian early developers (Toivo Annus, Jaan Tallinn, Pritt Kasesalu and Ahti Heinla) had such shares but it is possible they had options only. Because the sharing is unknown, I plainly assume that the two founders had about 40% each and the Estonians shared equally the remaining 20%. This is not fully consistent with SEC documents where the Estonians seem to have 5.6% of the eBay shares at acquisition. But I could not find hard facts. However the number of common shares, stock options and preferred A and B shares comes from Legilux, the Luxembourg register of commerce and is therefore correct (see sources below).

Skype had two main rounds and also a seed round before the creation of the company (a convertible loan). The Legilux documents help is assuming that Skype raised €600k of seed money in 2002-2003 with Bill Draper and other angels, its first round of €1.5M in Nov. 2003 (led by Mangrove and Bessemer) and a €14.5M B round in March 2004 (led by DFJ and Index Ventures). The number of shares and the amounts in each round imply in each case a specific price per share.

Skype seemed to have a strong board with its investors, Tim Draper (DFJ), Danny Rimer (Index) and Mike Volpi (Cisco). Volpi later became CEO of Joost, Friis and Zennström’s new venture. Skype had about 200 employees at acquisition; its revenues were $7M in 2004 and expected to be $60M in 2005.

Click on pictures to enlarge or download

Sources: SEC, Legilux, Kazaa and Skype, Eestit Ekspress

Next posts: Kelkoo, Addex.

Nurturing Science-based Ventures

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Nurturing Science-based Ventures – An International Case Perspective by Seifert, Ralf W., Leleux, Benoît F., Tucci, Christopher L.

A new book about start-ups has recently been published and it is mainly centered on Swiss (including EPFL) ventures. The authors do indeed have a strong knowledge of this environment as they are faculties from IMD or EPFL. What is unique with this book is that it does not describe success stories only, but also failures or not famous firms. Indeed failures are often better lessons than successes. You do not always know why you succeed and it may be easier to understand a failure. The authors have built their book as a process and describe in detail the development of start-ups; they begin with the opportunity recognition (chapter 1), they follow with writing a business plan (chapter2), financing a start-up (chapter 3), growing a company (chapter 4) to finally harvesting value creation (chapter 5). The final chapter is dedicated to corporate entrepreneurship (“Intra-preneurship”). I have not read it yet (it is more than 700 pages!) but the numerous case studies (more than 20) look rich and detailed. It is not the first book on the subject but it might be the first one with such a focus on European start-ups.