Tag Archives: Innovation

Google Innovation: Culture and Practices

When I heard about a talk on innovation at Google, I was obiously interested all the more that the brief summary looked great. here is the video on youtube, and below the summary:

It was given by Dan Russell, Research Scientist and Search Anthropologist, Google and was part of the Series of the CITRIS Research Exchange from UC Berkeley on March 16, 2011.

12:00 p.m.
Wednesday, March 16
Banatao Aud., 3rd floor, Sutardja Dai Hall, UC Berkeley
http://events.berkeley.edu/?event_ID=39124

About the talk:

As a company, Google clearly relies on innovation to keep our business alive and growing. Translating that desire into a continual innovation practice is central to the outlook and world-view that Google has as a corporate culture. Innovation isn’t just for the futurists, but a part of what everyone in the company is expected to do on a day-to-day basis.
People who work on internal processes, for example, are expected to be as innovative as engineers and product managers who drive externally visible products. Innovation isn’t something that the company can just leave to a few bright minds, but is deeply embedded in the culture of the company.

Beyond culture, though, there are a few pragmatic behaviors that help Google be innovative. A commonplace belief is that innovation originates with an identified market or user need. While we design for the user, we recognize that innovative ideas originate in many places—sometimes with user needs, but also occasionally from technology opportunities that suddenly become available. In these cases, the user need might not be clearly identified at the outset of research, but become evident only over time. Ultimately, of course, an innovation has to be user-relevant, but we understand that not everything starts that way.

One of the key drivers of Google innovation is our focus on data-driven analytics of our products. We instrument just about everything we can think of, log the data (anonymizing along the way to preserve privacy), then analyze it extensively. We recognize that innovation often proceeds in an evolutionary fashion, and that apparently large leaps in design and novel concepts are often hidden beneath a great deal of under-the-covers work the precedes the public announcement.

In user-interface design, for example, we don’t just do A/B testing, but often A/B/C/D/E/F/… testing. And one of the deep lessons of such an extensive testing program is that we recognize that our intuitions are often incorrect. Large changes in the design may very well lead to poor performance shifts, while tiny, sometimes imperceptible changes can have profound consequences. In many of our products, the UI changes significantly over time, particularly as we learn from our experiments, but also as new technology and data becomes available.

Innovation is thus often smoothly evolutionary, albeit looking like punctuated evolution from the outside, but driven by continual rapid iteration and redesign, always driven by an objective function that includes goodness-of-fit to the environment and exaptation of opportunities as they arise.

Finally, we find that innovative products really are the product of many minds. A very small team might drive the initial design and creation of the concept, but having multiple people look at, evaluate, comment-upon and lend supporting insights is valuable. The trick is to allow these additional insights to be supportive, and not weigh the original ideas down with extraneous freight. Keeping an innovation clear, clean and useful to the consumer is an important practice to avoid losing the key insight and value in the innovation.

Start-Up Nation: Israel

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Thanks to an opportunity I got to meet with the Israel Chief Scientist, and the fact I was offered Start-Up Nation at the end of the meeting, let me give you my views on this very interesting book. But first a few things about Israel and innovation.

As the map (adapted from John Kao, Harvard and showed at the OCS meeting) indicates, Israel is an innovation superpower. Cisco, Intel, Microsoft, Novartis, Nestle and many others are located there. Check Point is just one of the many start-up success stories. Israel has more start-ups quoted on Nasdaq than Europe and venture capital is very active there. Finally the office of the chief scientist manages and funds the public side of innovation in Israel. All this is perfectly analyzed in the book Start-Up Nation that I have just read.

I thought I knew a lot about Israel, but the book is rich in anecdotes. The history of Israel is well described and innovation was probably a necessity to survive. If there is a point I appreciated less is the importance the authors give to the military. They may be right, that’s not the point, but I thought the topic came too often in the chapters. This remains a great book and a must read for anyone interested in high-tech innovation and entrepreneurship.

I’d like now to quote a few things I liked. It’s not structured at all, but I invite you to read the book!

From the Introduction

Google’s CEO and chairman, Eric Schmidt said that the United States is the number one place in the world for entrepreneurs, but “after the U.S., Israel is the best.” Microsoft’s Steve Ballmer has called Microsoft “an Israeli company as much as an American company” because of the size and centrality of its Israeli teams.”

The authors begin by explaining that adversity and multidimensionality as much as the talent of individuals, are critical: “it is a story not just of talent but of tenacity, of insatiable questioning of authority, of determined informality, combined with a unique attitude toward failure, teamwork, mission, risk, and cross-disciplinary creativity.”

Chapter 1- Persistence

The usual joke Americans need to put, but it is a good one!
Four guys are standing on a street corner . . .
an American, a Russian, a Chinese man, and an Israeli. . . .
A reporter comes up to the group and says to them:
“Excuse me. . . . What’s your opinion on the meat shortage?”
The American says: What’s a shortage?
The Russian says: What’s meat?
The Chinese man says: What’s an opinion?
The Israeli says: What’s “Excuse me”?
—MIKE LEIGH, Two Thousand Years

– No inhibition about challenging the logic behind the way things have been done for years.
– A rude, aggressive culture which tolerates failure.
– Israeli attitude and informality flow also from a cultural tolerance for what some Israelis call “constructive failures” or “intelligent failures.”
– It is critical to distinguish between “a well-planned experiment and a roulette wheel
(During the meeting with the chief scientist, there was a similar argument: “if we have a 5% success rate, we’d better give the responsability to donkeys to choose and if it is 70% success rate, we do not take enough risks”)
– Amos Oz talks about “a culture of doubt and argument, an open-ended game of interpretations, counter-interpretations, reinterpretations, opposing interpretations. From the very beginning of the existence of the Jewish civilization, it was recognized by its argumentativeness.”

Chapter 2- Lesson from the military

– Narrow hierarchy and autonomy gives a lot of responsibility to individuals, authority is discussed
– People are mature earlier.
– No need to wait for order to act.
– “The key for leadership is the soldiers’ confidence in their commander. If you don’t trust him, if you’re not confident in him, you can’t follow him.”
– “If you aren’t even aware that the people in the organization disagree with you, then you are in trouble”

– “Real experience also typically comes with age or maturity. But in Israel, you get experience, perspective, and maturity at a younger age, because the society jams so many transformative experiences into Israelis when they’re barely out of high school. By the time they get to college, their heads are in a different place than those of their American counterparts.”… “The notion that one should accumulate credentials before launching a venture simply does not exist.”

A dense network – the whole country is one degree of separation (Yossi Vardi)

Chapter 5- Order and chaos

– Singapore’s leaders have failed to keep up in a world that puts a high premium on a trio of attributes historically alien to Singapore’s culture: initiative, risk-taking, and agility; in addition to being real experts who can improvise in situations of crisis.
– Innovation is fundamentally an experimental endeavor (improvisation over discipline)
– Learn from mistake with no fear of losing face.
– Nobody learns from someone who is being self defensive
– Fluidity, according to a new school of economists studying key ingredients for entrepreneurialism, is produced when people can cross boundaries, turn societal norms upside down, and agitate in a free-market economy, all to catalyze radical ideas.

Chapter 7 – Immigration

Immigrants are not averse to starting over. They are, by definition, risk takers. A nation of immigrants is a nation of entrepreneurs.—GIDI GRINSTEIN

Sergey Brin spoke in an Israeli high school: “Ladies and gentlemen, girls and boys,” he said in Russian, his choice of language prompting spontaneous applause. “I emigrated from Russia when I was six,” Brin continued. “I went to the United States. Similar to you, I have standard Russian-Jewish parents. My dad is a math professor. They have a certain attitude about studies. And I think I can relate that here, because I was told that your school recently got seven out of the top ten places in a math competition throughout all Israel.” This time the students clapped for their own achievement. “But what I have to say,” Brin continued, cutting through the applause, “is what my father would say—‘What about the other three?

The authors mention the seminal work of AnnaLee Saxenian (Regional advantage, the New Argonauts). As a few examples of Israel tech. diaspora mentioned in the book:
– Dov Frohman – Intel – 1974 – Wikipedia link. Apparently Israel has been the core of Intel innovation in the past decade and Intel is the largest private employer in Israel.
– Michael Laor – Cisco – 1997 – Linkedin profile. Cisco has acquired 9 israeli start-ups since Laor came back (more acquisitions than in any other country except the USA)
– Yoelle Maarek – Google – http://yoelle.com now at Yahoo!

But one should not forget Mirabilis/ICQ (see below) or Check Point. Check Point was established in 1993, by the company’s current Chairman & CEO Gil Shwed, http://en.wikipedia.org/wiki/Gil_Shwed at the age of 25, together with two of his friends, Marius Nacht (currently serving as Vice Chairman) and Shlomo Kramer (who left Check Point in 2003 to set up a new company).

Chapter 9 – Yozma

Another member of the tech. diaspora: Orna Berry – PhD USC – Unisys-IBM then Ornet and Gemini then OCS chief… The VC industry was really launched through the Yozma effort as well as Israeli incubators. Gemini was the first Israel fund. See the wikipedia article about venture capital in Israel.

Another quote on start-ups vs. more mature industries: “In aerospace, you can’t be an entrepreneur,” he explained. “The government owns the industry, and the projects are huge. But I learned a lot of technical things there that helped me immensely later on.”

Chapter 12 – Transdisciplinarity

“There’s a multitask mentality here.” The multitasking mentality produces an environment in which job titles—and the compartmentalization that goes along with them—don’t mean much.
– “Combining mathematics, biology, computer science, and organic chemistry at Compugen”
– “Putting this together required an unorthodox combination of engineering skills.”

The term in the United States for this kind of crossover is a mashup. And the term itself has been rapidly morphing and acquiring new meanings. … An even more powerful mashup, in our view, is when innovation is born from the combination of radically different technologies and disciplines. The companies where mashups are most common in Israel are in the medical-device and biotech sectors, where you find wind tunnel engineers and doctors collaborating on a credit card–sized device.

But the authors do not forget to mention that Israel is A country with a motive

Role models

Though Israel was already well into its high-tech swing by then, the ICQ sale was a national phenomenon. It inspired many more Israelis to become entrepreneurs. The founders, after all, were a group of young hippies. Exhibiting the common Israeli response to all forms of success, many figured, If these guys did it, I can do it better. Further, the sale was a source of national pride, like winning a gold medal in the world’s technology Olympics.

“There’s a legitimate way to make a profit because you’re inventing something,” says Erel Margalit “You talk about a way of life—not necessarily about how much money you’re going to make, though it’s obviously also about that.”

“Indeed, what makes the current Israeli blend so powerful is that it is a mashup of the founders’ patriotism, drive, and constant consciousness of scarcity and adversity and the curiosity and restlessness that have deep roots in Israeli and Jewish history. “The greatest contribution of the Jewish people in history is dissatisfaction,” Peres explained.

Again “Not just talent, but tenacity, insatiable questioning of authority, determined informality, unique attitude toward failure, teamwork, mission, risk and cross-disciplinary creativity.”

As a conclusion

“So what is the answer to the central question of this book: What makes Israel so innovative and entrepreneurial? The most obvious explanation lies in a classic cluster of the type Harvard professor Michael Porter has championed, Silicon Valley embodies. It consists of the tight proximity of great universities, large companies, start-ups, and the ecosystem that connects them—including everything from suppliers, an engineering talent pool, and venture capital. Part of this more visible part of the cluster is the role of the military in pumping R&D funds into cutting-edge systems and elite technological units, and the spillover from this substantial investment, both in technologies and human resources, into the civilian economy. … But this outside layer does not fully explain Israel’s success. Singapore has a strong educational system. Korea has conscription and has been facing a massive security threat for its entire existence. Finland, Sweden, Denmark, and Ireland are relatively small countries with advanced technology and excellent infrastructure; they have produced lots of patents and reaped robust economic growth. Some of these countries have grown faster for longer than Israel has and enjoy higher standards of living, but none of them have produced anywhere near the number of start-ups or have attracted similarly high levels of venture capital investments. What’s missing in these other countries is a cultural core built on a rich stew of aggressiveness and team orientation, on isolation and connectedness, and on being small and aiming big. Quantifying that hidden, cultural part of an economy is no easy feat. An unusual combination of cultural attributes. In fact, Israel scores high on egalitarianism, nurturing, and individualism. In Israel, the seemingly contradictory attributes of being both driven and “flat,” both ambitious and collectivist make sense when you throw in the experience that so many Israelis go through in the military. There is no leadership without personal example and without inspiring your team. The secret, then, of Israel’s success is the combination of classic elements of technology clusters with some unique Israeli elements that enhance the skills and experience of individuals, make them work together more effectively as teams, and provide tight and readily available connections within an established and growing community.

If you have arrived here, you were interested enough in this long article. Logically, your next move would be to buy Start-Up Nation!

Early mornings on innovation at the Swiss National Radio

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I was invited this morning on RSR, the (french-speaking) Swiss National Radio, to talk about innovation and start-ups in their morning (5am to 6am!) Petits Matins. For those who know about the topic, nothing fundamentally new, with the slight exception that I learnt recently that a common feature to many entrepreneurs would be dyslexia (two studies were made in the USA and the UK). In total, a 30-minute conversation on my favorite topic, that you may listen on the RSR website if French is a language you like. Many thanks to Manuela Salvi, the talended RSR journalist.

More importantly, I could invite a guest on the phone at 5:45am (what a gift!) I was delighted to let Peter Harboe-Schmidt talk about his novel The Ultimate Cure, a beautiful thriller with a Lausanne-based biotech start-up as the background. I had already mentioned that book on this blog. Peter just announced the novel had just been translated in French.

Boulevard of Broken Dreams

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A colleague of mine (thanks Jean-Jacques) recently mentioned to me this book by Josh Lerner, which full title is Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do About It . I was all the more interested that Lerner is the author of many academic papers on high-tech entrepreneurship, and particularly of one about serial entrepreneurs: “Performance Persistence in Entrepreneurship” [pdf format here] with Paul Gompers, Anna Kovner, and David Scharfstein, Journal of Financial Economics, 62 (2007), 731-764. I will come back in the future on this topic which I am currently studying.

So what should we do about the public efforts is what Lerner is trying to help us with and his answer shows how challenging the topic is. What is beautiful about the author (my personal point of view) is that he likes history (just like me). Just like Steve Jobs! Just read again what I posted about Jobs on mentors; “You can’t really understand what is going on now unless you understand what came before”.

Lerner’s initial chapter is “A Look Backwards” He shows how entrepreneurs and investors benefited and suffered from each other in the 70s and 80s, including the excess of speculative bubbles, the PC burst of the 80s for example. He also shows how important public support was in the very early days through the funding of research (mostly the cold war militaries) and the legal actions to ease venture capital (SBIRs, Erisa Acts) so that he does not really agree with Rodgers (founder of Cypress) who wanted government out of Silicon Valley (page 32) so that he claims that “The Public sector did play a key role in shaping the evolution of Silicon Valley” (page 35).

Then, in the following chapters he shows how complex it is to find facts: “consistent information on venture-backed firms that were acquired or went out of business doesn’t exist” (page 59) which means that quantitative analysis is rare. And remember he is a respected academic, so he knows! What he tried to do then, is to show some of the obvious mistakes: incompetence in allocating public resources (page 73), capture, that is use of subsidies by the wrong groups (page 80), by “organizations that are mandated to help entrepreneurs” (page 83). “Seven of the incubators gave less than 50% of funding in cash to incubated firms” (just one example from Australia, page 84) or the SBIR program which has exhausted its usefulness (page 85).

So his advice is:
– enhancing the entrepreneurial culture (page 90) [through the right laws, the access to technologies, tax incentives and training],
– increasing the venture market’s attractiveness (page 100) [through allowing partnerships, creating local markets, accessing human capital abroad],
– avoiding common mistakes: timing [be patient], sizing [not too small, not too large], flexibility [learn by doing], create the right incentives [and here it is a complex situation as perverse effects from good ideas often occur] and evaluate [which does not happen often enough].

Indeed, his introduction (pages 12 and following ones) summarized it all: you need rules, experience, time, incentives and assessment. But with all his experience and knowledge about high-tech entrepreneurship, Lerner is very humble with the lessons: the topic is really complicated, all these advice have to be implemented together and it is really their careful interconnections which will make an ecosystem lively or not. Then it is my personal conclusion that such favorable conditions will be useful if entrepreneurs use them intelligently. So the reason why all this fails has many roots…

I cannot finish this post without comparing it to my book. It is indeed very similar in its conclusions with slightly different facts and figures. So you would learn complementary and consistent things by reading both! My thesis is we need an entrepreneurial culture and access to people from Silicon Valley who have the experience. Everything else is necessary but not sufficient.

There will never be another Silicon Valley

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Well who am I to predict the future? In fact I do not know but I really doubt it. Famous bloggers have mentioned the topic again recently. In Techcrunch it was Can Russia Build A Silicon Valley? by Vivek Wadhwa. And in the Equity Kicker, it was Building an ecosystem to rival Silicon Valley by Nic Brisbourne. I reacted to both in the following way:

What a topic! Clearly something which has been around for… at least 35 years (I mean how to replicate SV). The fact that we still discuss it shows how complex it is. It has been my main concern in the last years and for the beauty of the debate (that’s what blogs are about, right?) let me play the devil’s advocate fully. At an extreme, I do not think there will ever be another Silicon Valley. For example, Kenney claims in his book on SV it requires 5 basic ingredients: universities of high caliber (Stanford and Berkeley in SV), a strong investor base, service providers, high-tech professionals (who accept to leave their big companies for start-ups so from Intel, Cisco, Apple, MSFT, even Google now to the next wave) and last but not least an entrepreneurial culture. All this is not easy to gather. But even worse, SV was probably an accident, a monster which was never successfully replicated. Saxenian showed in Regional Advantage how even the Boston area failed and the fact that Paul Graham moved ycombinator fully out of Boston to SV is just another sign. In Europe, Sophia Antipolis was a first experience … in 1972 so? So you need a rare combination of ingredients in the recipe and hope the oven is at the right temperature for a long, long time. Now I am playing devil’s advocate so things are not so bad. As a positive reaction, let me add my own analysis: I am not sure governments are good at innovation, they are good at stimulating research. The US federal govt has put billions through DARPA, NIH, DOE, etc, and this obviously helped Stanford, Berkeley to be the best universities worldwide (see the rankings) and the Internet to be created. Long term investment in infrastructure is what gvts are good at (education, research, transport…) Then, yes, bridges with SV are critical. It is exactly how Israel, Taiwan, then India and China have been successful with their diasporas. Countries should invite back the experienced migrants. When he has time, Brin should help Russia or Levchin Ukraine, or even Grove Hungary etc… I am less sure tax credits, admin, legal tools have been so useful in the 50’s, 60’s and 70’s when SV was its in early days. As a conclusion, it is and will remain for a while a great topic.

Of course, my reaction was not as important as the source of the posts: Russia wants to be more innovative and commissioned a report to assess experiments of innovation ecosystems. The result is the following report: Yaroslavl Roadmap 10-15-20 (pdf format.)

There isn’t anything really new in this report, at least for innovation experts. But it is a very good synthesis of what the USA, Israel, Finland, India, and Taiwan have tried, be successful in, but also in what they failed. The historical summaries are great and full of good lessons. I had the feeling the authors put too much emphasis on infrastructure vs. culture. It is my own bias again! They mention culture a lot, but they may be aware also that it’s the most difficult thing to create… If you like the topic, you should certainly download and read the pdf, and build your own opinion.

Gazelles and Gorillas – high growth startups

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Since I have been interested in start-ups, i.e. 1997, I have always been puzzled about the macroeconomic impact of start-ups, i.e. fast growing companies, mostly in high-tech. The famous Intel, Apple, Microsoft, Cisco, Yahoo, and other Google have an impact, but what is it exactly for the economy?

Surprisingly, it is not that well-known. I have read in the past weeks some recent papers on the topic that you may download if you are interested. The Kauffman foundation which I have mentioned already is doing a great job and particularly Dane Strangler. He is the author of High-Growth Firms and the Future of the American Economy and of Exploring Firm Formation: Why is the Number of New Firms Constant? as well as Where Will The Jobs Come From?

Thanks to his reports, I became aware of older studies such as Gazelles as Job Creators – A Survey and Interpretation of the Evidence and High-Impact Firms: Gazelles Revisited both dated 2008. Finally the Brittish government has its own study, High growth firms in the UK: Lessons from an analysis of comparative UK performance. This last report is interesting as it not only considers gazelles, the fast growing companies, but also gorillas, the young fast growing companies which reached a large size in less than 10 or 15 years.

The first answers were provided in 1981 by David Birch who showed that large firms were not the providers of job creation anymore. But even today, the answer to the question is not so clear. At least it took me longer than I would have thought to understand what all these reports claimed. So for example, here is a table of how small, mid-size and large firms create jobs in the USA. The numbers come with no real guaranty as I have compiled them from a number of sources, mostly the High-Impact Firms: Gazelles Revisited

So what does this mean? First high-impact firms contribute to most of the new job creation in the USA. What are high-impact firms? These are the firms which grow at a 20% annual rate (in jobs and sales*), the fast growing firms. As you may see, low-impact firms also create jobs but only if they are SMEs (small and mid-size). It explains why we think that fast-growing small firms are so important.

But it is an over-simplification. High-impact firms are not small and all these studies also show that:

– they are not young. On average, they are 25-years old.

– they are not necessarily high-tech, they can be found in all sectors of the economy.

– a minority is VC-backed. This is obvious as we have here about 300’000 gazelles and probably only a few thousand companies are VC-backed each year in the US.

More on gazelles here. Now, what about Gorillas? Gorillas are extremely fast growing and young companies. The UK report above defines them as less than 15 years old, with the same growth as gazelles. I remember that Geoffrey Moore defines them as leaders in their market. Well, not much is known about them. The UK report mentions there was no Gorilla in the UK whereas Yahoo, eBay, Amazon, Yahoo and Google were Gorillas in the USA.

Dane Strangler in his report is providing more interesting data. They are not the gorillas per se, but probably quite close:

– In any given year, the top-performing 1 percent of young firms generate roughly 40 percent of new job creation.
– Fast-growing young firms, comprising less than 1 percent of all companies, generate roughly 10 percent of new jobs in any given year.

Qiote impressive! Well, I still do not have all the answers I would like to have, but I now know gazelles are important, and gorillas maybe even more. And at the end, what is the impact of high-tech, of venture capital is just another but interesting story!

*: Growth in terms of jobs is more complex than 20%… experts use the Employment Growth Quantifier (EGQ), that is the product of the absolute and percent change in employment over a four-year period of time and take it as bigger than 2 for “high-impact”… A 20% increase in sales is also a factor 2 over the same period of time.

The crisis and the American model

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I seldom do it this way. I will not translate my French post about a personal analysis of the crisis and the American model. A crisis which is much more general than the financial and economic crisis. It is also a crisis of creativity, invention and innovation at least in Europe. So we look at the USA for a model and solutions. This creates tensions. Many of my friends and colleagues disagree with my fascination for the USA, which by the way, is limited to a very small number of things!

So I give a few directions including a previous post on the book by Lee Smolin, The Trouble with Physics. Go to French or if you do not, at least go and watch No One Knows About Persian Cats. Where’s the link? I think our crisis is about individuals and society, the inability of the university, of the school, of the family, of the society in general to let people express their dreams, their self-confidence, their creativity and their inventiveness. The pressure is so high that (self-)censorhsip and fraud prevail sometimes.

You may think I am out of my mind. So let me finish with the way I finished my book by quoting Wilhelm Reich from “Listen, Little Man”. A small essay by the number of pages, a big one in the impact it creates. “I want to tell you something, Little Man; you lost the meaning of what is best inside yourself. You strangled it. You kill it wherever you find it inside others, inside your children, inside your wife, inside your husband, inside your father and inside your mother. You are little and you want to remain little.” The Little Man, it’s you, it’s me. The Little Man is afraid, he only dreams of normality; it is inside all of us. We hide under the umbrella of authority and do not see our freedom anymore. Nothing comes without effort, without risk, without failure sometimes. “You look for happiness, but you prefer security, even at the cost of your spinal cord, even at the cost of your life”.

I am quite convinced that our crisis at least in Europe is about self-confidence, trust, creativity, inventiveness and innovation. It has not much to do with the technology, the economy and a lot to do with how individuals can grow in the society. If you followed me until now, thanks! Please, please, react!

What Have VCs Really Done for Innovation?

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“What Have VCs Really Done for Innovation?” This is the title of a post by Vivek Wadhwa dated September 20. You can find the full account on Techcrunch. I have to admit I was not happy with the content. Instead of saying immediatly why, I will let you read comments made by others as I shared their point of view. You can also read the post and all the comments, but they are numerous!

So, for example, I agreed with the following three comments:

by Ashok
It is true that the claims made by VCs are not realistic and vastly exaggerated. But, at the same time, we cannot forget that they have played key role in many innovative fields. By its very nature, a Venture Capitalist will invest only in a new promising project where he can hope to earn a handsome profit. There is nothing wrong in a VC selectively investing in projects. After all, we have to appreciate that for every one grand success, a VC may have seen 9 failures losing his money invested in projects which could not lead to big money. So, you have to judge the role of VCs also by their failed projects. Who would like to invest in a project which is likely to fail? Yet, it is a fact that a big percentage of projected financed by VCs fail. Does it not show the high risk involved in what VCs do? This being the position, what is wrong if they are selective in financing the projects? Therefore, the author’s observations “The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.” are not fully justified.
What about their failed projects? Did they not smell blood? Then why did they invest? Why did they fail then?
Unfortunately, the author has tried to present one-sided story without taking into consideration the problems which VCs might be facing.
Of course, at the cost of repetition, I would say that the tall claims made by the VCs are also not correct. To conclude, it is neither black nor white; it is some shade of grey. Truth lies somewhere in between the two extremes

then by Chris Yeh
This is one of the most dangerous and wrong-headed posts that I have read all year. And I’m flabbergasted by the lack of critical thinking displayed in the comments section.
There is definite truth to some of what Vivek has to say. The NVCA’s estimates are bogus, because they equate investing in a company with being responsible for its success. This is an egregiously egotistical assumption.
It may very well be true that the venture industry as a whole trails index investing. It’s hard to pick winners. But so does the entire actively managed mutual fund industry.
But the statement that “VCs at best have little to no impact on these companies and at worst have a negative impact” is absurd.
First, there is a major survivorship bias problem with the data. By interviewing successful companies, the study fails to prove whether VC makes success more or less likely. All it says is that the majority of successful new businesses in the US do not rely on VC.
A number of commentators seem to be of the impression that VCs make easy money by investing in companies after all the risk has been removed by the entrepreneur. This is talking out of both sides of one’s mouth. If the VCs aren’t taking risks, then how can they be delivering sub-par returns? By definition, they must be taking risks.
Venture capital plays an important role in the startup ecosystem. It provides high-risk equity capital to startup companies. Not every company can be a bootstrapped consumer Internet company. Many important businesses (semiconductors, hardware, biotech) require significant up-front capital. If VCs went away, would there be enough funding for these business? Do you seriously think banks would start lending to these companies?
I also wager that most of the commentators pooh-poohing VC would be glad to accept funding for their startups.

finally by ethanboss
… Of course there are VCs that don’t add value. As there are entrepreneurs who fail.: most of them. How ridiculous to claim that Sergey and Brin had already succeeded when KP and Sequoia invested. That shows a total lack of understanding of what it takes to build companies.
Also, I suppose capital would also grow on the trees for these “innovative” companies to go and harvest, so there is no need for VCs…
In the old days, when capital was hard to access there were some great entrepreneurs (few) that could get to profits without much help and capital. Some still do it but are the exception. The real world is a little different. You need capital and help with networks and other things to build a LARGE innovative company. Those things don’t grow on trees.

so here is the comment I made on September 25.

Vivek

I agree with many other people that you are too single-minded. I do not fully disagree with some elements of your analysis, which explains why you have so much support, BUT…

I was once a venture capitalist and I have neither an MBA nor a law degree but engineering degrees including a PhD and more importantly two years spent in Silicon Valley where I developed a passion for innovation and start-ups which I translated in becoming a VC.

One more fact in addition to the other contributions:

Surprisingly, Bill Gates had venture capitalists: this is taken from Microsoft IPO prospectus: “Mr. Marquardt has been a director of the Company since 1981. Since 1980, Mr. Marquardt has been a general partner of TVI Management. He has been with TVI Management since 1980. He is also a director of Archive Corporation and Sun Microsystems, Inc.” TVI had about 6% of Microsoft shares before the IPO.

Now what have VCs really done for innovation? You would have been more credible by saying what are they doing. But if you use the past, let me put some historical perspective:

– If investors (VC was not developed yet) had not funded Fairchild in 1957, Intel in 1968, Silicon Valley may not exist as it is. Your friend Vinod is maybe an exception, but there were many others. Arthur Rock helped in funding or funded directly Fairchild, Intel, Apple Computers.

– The story of Genentech is well-known (go on my blog for more if you wish): when Bob Swanson, a former VC at KP became convinced biotech had a future, he first convinced Boyer, the researcher, then his former colleague Tom Perkins to try. Both were skeptical, so you are right Entrepreneurs are in the driving seat, but without the inventor and the investor, Genentech and then the biotech industry may not have existed. The innovation did not exist yet and the VCs contributed a lot.

– Who do you think were the first VCs such as Gene Kleiner and Don Valentine and many others? They were former entrepreneurs who had the vision that funding the next generation would fuel innovation.

I am also doing an analysis of startups created with Stanford technology or by Stanford Alumini. The surprising fact is that so far about 30% of the companies (I have a total of 2’700) were funded by VCs. It does not mean VCs were responsible for their success, but they had their contribution (in the group are companies such as Cisco, Yahoo, eBay, Google, Rambus, Atheros and so many others)

Paul Graham says that for innovation, you just need nerds and rich people. I agree with him. The nerd is the brain and the investor is the blood. And then both will need a team, managers, employees which will constitute the full body. VCs do not contribute to inventions, but they help in their commercialization, which is I think the definition of innovation.

You are not only singled minded but I think you are hurting the innovation ecosystem. I see too many entrepreneurs and future entrepreneurs scared with investors because they focus on your point of view. Of course, there have been terrible stories. But do not forget entrepreneurs need resources to succeed. Repeat entrepreneurs may bypass investors, business angels may help when resources are not too huge (maybe like in software though this is not even always true). But what about young people who develop semiconductors, biotechnologies, green technologies and have no money.

Money is never cheap or fun. But you need it. Let me finish with two quotes which show that I support some of your views but I still disagree with your overall vision.

In the book Founders at Work, one entrepreneur says about investors: “You can’t live with them, you can’t live without them” and even better Robert Noyce, Intel’s founders: “Look around who the heroes are. They aren’t lawyers, nor are they even so much the financiers. They’re the guys who start companies”

cheers

Herve

Entrepreneurial Impact: The Role of MIT

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A new report has been published about the Entrepreneurial Impact of MIT

It is full of data and even if obviously self-serving, it remains very interesting. Let me just quote what I noticed:

– Growth: the number of “first-time” firms has increased from about 2’000 in the 70s to 6’000 in the 80s and 10’000 in the 90s.

– Origin: Non-US founders had slight visibility in the 40s, grow to 12% in the 90s and 17% in the 00s. 30% of MIT foreign students founded a company at some point.

– Age: Before and during the 70s, 24% of first-time entrepreneurs were under 30, growing to 31% in the 80s and 36% in the 90s. There is no real difference between industry segments.

– Serial entrepreneurs: I have a small disagreement on that point as I am not sure serial matters, but… about 40% are serial entrepreneurs so 60% are not…

– Engineering vs. business degrees: EE/CS degrees is 22%, management is 16% for the 90s. Clearly science and technology matter.

– Location: in the 50s and 60s, majority of companies were in Massachusetts, but thereafter Silicon Valley has become a critical locus. In the 00s, 26% are in MA and 22% in CA.

Then the report talks about the culture and the ecosystem. It is also very interesting. We should always remember that:

– Tons of money went to research from the militaries and space agencies.

– MIT had more of a tacit and hands-off role, but much encouraging.

– Role models: “entrepreneurs could name about ten other new companies before they started their own”. Authors compare to another study where “Few of the Swedish entrepreneurs could name even one or two others like them”. They quote Schumpeter: “The greater the number of people who have already successfully founded new businesses, the less difficult it becomes to act as an entrepreneur. It is a matter of experience that successes in this sphere, as in all others, draw an ever-increasing number of people in their wake”

– Feedback loop: there is a positive impact of such examples and this may be the main reason of the creation to tech. clusters.

– Culture: the best is a quote by Bob Metcalfe, Ethernet inventor, founder of 3Com and now a partner at Polaris Ventures: “It’s not just that MIT’s entrepreneurial environment flourishes under its institutional commitment to technology transfer,” he said. “It’s also that MIT includes both ‘nerds’ and ‘suits.’ Divergent life forms, yes, but necessary to and working together at MIT on entrepreneurial innovation. And what keeps MIT’s entrepreneurial ecosystem accelerating is that nobody is in charge. There are at least twenty groups at MIT competing to be the group on entrepreneurship. All of them are winning.”

… Nobody is in charge…

– Tech. transfer: the majority of the exclusive licenses go to startup companies. The TLO’s strategic dependence on startup companies has been the reluctance of large companies to invest in “university-stage” technologies, because the risk and cost of development is high and the time to market is long.

– License deals: For startups, instead of cash up front and in lieu of some of the royalties, the TLO usually takes a small equity ownership that is less than 5 percent of the new firm.

And some conclusions:

– Universities that are strong in research and technology are at the forefront of knowledge creation and potential application. When the university is able to couple this capability with the inclination and resources needed to connect ideas and markets, impressive possibilities exist for generating entrepreneurship-based economic impact at the local, as well as national and global levels.

– Numerous changes are needed in most universities over an extended period of time in rules, regulations and, more important, attitudes and institutional culture.

– Until quite recently, MIT had followed a “hands-off” approach toward entrepreneurial engagement, in contrast with many other universities in the United States and abroad. MIT has neither created an internal incubator for ventures nor a venture capital fund to make life easier for prospective startups.

– Instead, MIT has relied internally on growing faculty, student, and alumni initiatives, especially during the most recent thirty years, to build a vibrant ecosystem that helps foster formation and growth of new and young companies.

– Educational programs require investment in and acquisition of faculty to develop and teach such programs. Effective and well-trained academics are, unfortunately, still scarce in most entrepreneurship related disciplines. Fortunately, successful practitioners are available everyplace and the MIT history indicates that they are quite willing and enthusiastic about sharing their time and experiences with novice and would-be entrepreneurs.

For those who have been so far, first you should read the full report and second I aggregate below a few tables from the report:

Born to Grow

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I just finished reading an interesting report entitled “Born to Grow – How to Harness Europe’s most innovative entrepreneurs”

Nothing really new but a very good synthesis of recommendations and I emphasize in bold the ones I consider really critical:

Teach the values of innovation and entrepreneurship in our schools

Celebrate successful entrepreneurs – in prizes and the media

Break the barrier between business and technical universities

Organise researchers to work across scientific disciplines

Train young researchers and managers for global growth – and flexibility

Adopt policies to encourage innovation clusters around universities

Create “free innovation zones” to speed growth in selected clusters

Support the role of large companies in cluster-development

Give priority to creating “lead markets” for innovation

Free information flows – with online portals, benchmarking and patents

Target tax incentives and other financing aids to growth companies

Even better are the features of a high-growth entrepreneur (page 11):

Originality. The greatest entrepreneurs have a better idea: a novel product, service or process that fills a need.

Adventurousness. In the generally risk-averse culture of Europe, it’s rare to find an entrepreneur with the will to quit a cushy job and gamble the future on an idea.

Dedication. Rigor and determination are hotwired into the best entrepreneurs – and that comes naturally to many scientists and engineers.

Ambition. International business success comes easier if the entrepreneur’s plan is global from the
start.

Humility. Perhaps the rarest, but most important, trait in a high-growth entrepreneur is the ability to recognise one’s personal limitations – and seek help from others, rather than try to
run the whole show.

In the nurture of a high-growth entrepreneur:

A thriving ecosystem. Businesses don’t grow in vacuums; they need networks of suppliers, researchers and customers.

Financial backing. It takes money for a start-up to grow from minnow to whale; and deeppocketed, deeply engaged investors are critically important.

A big, open market. A company needs plenty of room for manoeuvre – and some of the brightest entrepreneurial stars have profited when old, regulated markets started to open up.

Big brothers. For many start-ups, it helps to grow in the shelter of big corporations that create their
own ecosystems. Examples: Risto Siilasmaa, whose F-Secure antivirus company thrived in the 3,500-company world created around mobilephone giant Nokia; and Peter Bang and Jesper Balser, whose Danish business-process software firm Navision grew up in Microsoft’s programming environment – and was later bought by it.