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The Entrepreneurial State (part5): conclusion on a great book.

Again I have been very much impressed by the Entrepreneurial State but I also have some major doubts and even some disagreements. Maybe I have been brain-washed in the last 20 years of my life but my experience in Silicon Valley and venture capital and also my less than satisfying experience with planned innovation by the State convince me that entrepreneurship is crucial and maybe more important than the State role in the innovation part (not the research or even the R&D).

Now I fully agree that seed funding by the State of innovation through research and the taxes to be paid by companies are essential. I also agree that VC is less and less risk taking and that corporate R&D is just a D and the R has disappeared both in IT and pharma.

But let me finish with my notes on this excellent book. As a reminder, part 1 was about the innovation crisis, part 2 was about the respective role of the public and private sector in R&D and innovation, part 3 about the Apple iPhone, part 4 about the green revolution and risks and rewards.

Chapter 9 – Socialization of risks and privatization of rewards.

“Innovation has a tendency of allowing those with high skills to prosper and those with low skills to get left behind.” [See also her comment on the New and Old economy in part 4] “Are these the same type of economic actors who are able to appropriate returns form the innovation process if and when they appear? That is, who takes the risks and who gets the rewards? We argue that it is the collective, cumulative and uncertain characteristics of the innovation process that make this disconnect between risks and rewards possible.” […] “When certain actors are able to position themselves at the point – along the cumulative innovation curve – where the innovative enterprise generates financial returns, that is close to the final product or, in some cases, close to a financial market such as the stock market. These favoured actors then propound ideological arguments, typically with intellectual roots in the efficiency propositions of neoclassical economics (and the related theory of “shareholder value”) that justify the disproportionate shares of the gains from innovation that they have been able to appropriate. [Page 186]

This was long but very true.

Finding a way to realign risk taking with rewards is thus crucial not only for decreasing inequality but also for fostering more innovation. […] Put provocatively, had the State earned back just one percent from the investments it made in the Internet, there would be much more today to invest in green tech. Many argue that it is inappropriate to consider direct returns because the State already earns a return via the tax system. The reality is, however, that the tax system was not conceived to support innovation and the argument ignores the fact that tax avoidance and evasion are common. [Page 187]

Mazzucato suggests 3 concrete proposals:
– A Golden share of IPR and a national “Innovation fund” by extracting a royalty. The government should retain a share of the patents; making sure the owner of patents behaves cooperatively, licensing broadly and fairly after an initial period of protection.
– Income contingent loans and equity. “After Google made billions in profits, shouldn’t a small percentage have gone back to fund the public agency that funded the algorithm?”
– Development banks. IF/when the State institution is run by people who not only believe in the power of the State but also have expertise understanding the innovation process, then the results produce a high reward.
[Well isn’t this at least partially what the US do through the Bayh-Dole Act?]

Conclusion

“Rather than relying on the false dream that “markets” will run the world optimally for us “if we just let them alone” policymakers must better learn how to efficiently use the tools and means to shape and create markets – making things happen that otherwise would not. State can do this by leveraging massive national social network of knowledge and business acumen. The State should “stay foolish” as Jobs said, in its pursuit of technological development. It can do so on a scale and with tools not available to businesses. Apple’s success did not hinge on its ability to create novel technologies, it hinge on its organizational capabilities in integrating marketing and selling those low-hanging technologies.

What is needed today is a “systems” perspective, but one that is more realistic on the actual – rather than mythological – role of the individual actors, and the linkages between actors, within and along the risk landscape. It is, for example, unrealistic to think that the highly capital-intensive and high-risk areas in clean technology will be “led” by venture capital. The history of new sectors teaches us that private investment tend to wait for the early high-risk investments to be made first by the State. Yet the returns from these “revolutionary” state investments have been almost totally privatized. While this is especially obvious in the pharmaceutical industry, it is also true in other high-tech areas, with Apple, which have received major benefits from public funds, both direct and indirect, managing to avoid paying their taxes.

First, it is not enough to talk about the “entrepreneurial” State, one must build it, with long-term strategies. There is nothing in the DNA of the public sector that makes it less innovative than the private sector. It is a self-fulfilling prophecy that it is more exciting and fun to work at Goldman Sachs or Google, rather than a State investment bank or a ministry of innovation. The only way to rebalance this problem is to upgrade, not downgrade that status of government. Second a need for a return to cover the losses, beyond the taxes and supply of skilled staff. A direct return. Third, this will have the potential to better inform policies that are directed towards other actors in the “ecosystem” of innovation. (Except the world is global and this may make efforts at the national level not sufficient)

Recommendations
– Reduce State direct transfers such as tax relief,
– Spend money on new technologies and concentrate on firms that can spend on innovation
– Abandon patent box
– Review tax credits so that firms are accountable on innovation, not just R&D
– Reduce enterprise zones
– Return of successful investment in part to government
– Use saved money for massive spending à la Darpa
– Adopt a proactive approach to green technologies
– (Not sure I understood the argument on time investment held before tax exemptions)
– Short-termism is problematic.

The Entrepreneurial State (part 4) – the Green Revolution – Unbalanced Risks and Rewards.

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– Part 1 covers the Innovation dilemmas and crises.
– Part 2 deals with the (forgotten or untold) role of the state in stimulating innovation through research.
– Part 3 is about the role of the State in the iPhone technologies.
Now chapters 6 to 8:

Chapter 6 – Pushing vs. Nudging the Green Industrial Revolution.

The Green technology is another very interesting situation. “Until wind turbines and solar PV panels can produce energy at a cost equal to or lower than those of fossil fuels, they will likely continue to be marginal technologies that cannot accelerate the transition so badly needed to mitigate climate change.” [Page 114] “Demand-side policies (regulations) are critical but they too often become pleas for change. Supply side policies (energy generation) are important for putting the money were the mouth is.” [Page 155]

Again I have been a cautious observer of green technologies with Germany subsidizing many companies which went bankrupt when China arrived with much cheaper products, with France or Japan claiming nuclear energy as the cleanest… Mazzucato rightly describes “the US with a fund-everything approach, hoping that a breakthrough disruptive energy innovation will sooner or later emerge. This has not been the case because many clean technologies require long-term financial commitment of a kind VCs are not willing or able to undertake”. In my ongoing analysis of recent IPO filings, I noticed 11 companies in green technologies out of the 165 filings I have built since 2002. The oldest one was filed in 2009. These companies had raised more than $2B or about $180M per company. They had more than 5’000 employees in total. It looked to me like a speculative bubble so Mazzucato is right when saying investors are impatient. I am not sure they are shy with their money though.

The US has been busy building on their understanding of what has worked in previous technological revolutions. (…) But while it has been good at connecting and leveraging academia, industry and entrepreneurship in its own push into clean technology, its performance has been uneven. (…) A key reason for uneven US performance has been its heavy reliance on venture capital to “nudge” the development of green technologies. (…) Since some clean technologies are still in early stages, when “Knightian uncertainty” is highest, VC funding is focused on some of the safer bets rather than on the radical innovation that is required to allow the sector to transform society. (Pages 126-127) The conclusion that might follow is that the government should focus exclusively on commissioning the development of the riskiest technologies.

Impatient capital can destroy firms promising to deliver government-financed technology. If VCs aren’t interested in capital-intensive industries, or in building factories, what exactly are they offering in terms of economic development? Their role should be seen for what it is: limited. (Page 131)

The expectation is that the opportunity to conduct high-risk and path-breaking research “will attract many of the US’s best and brightest minds – those of experienced scientists and engineers and especially those of students and young researchers, including persons in the entrepreneurial world.” (Page 134)

The history of US government investment in innovation, from the Internet to nanotech, shows that it has been critical for the government to have a hand in both basic and applied research. NIH is responsible for 75 percent of the most radical new drugs. So the assumption one can leave applied research to the business sector and that this will spur innovation is one with little evidence to support it (and may even deprive some countries of important breakthroughs.) (Page 136)

In reality government and business activities frequently overlap. Venture capitalists and entrepreneurs respond to government support in choosing technologies to invest in, but are rarely focused on the long term. In the absence of an appropriate investment model, VC will struggle to provide the “patient capital” required for the full development of radical innovations. It is crucial that finance be patient. (Page 138)

Public finance (such as provided by State development banks) is therefore superior to VC or commercial banking in fostering innovation, because it is committed and patient.

The financial and technological risks of developing modern renewable energy have been too high for VC to support. A key problem is that VCs are looking for returns that are not realistic with capital-intensive technologies. The speculative returns possible in ICT revolutions are not a “norm” to be replicated in all other high-tech industries. (Page 140)

My comments: I agree with the criticism on venture capital. Now the solution introduced of committed and patient development banks is new to me. I understand “patient”, I am less sure about “committed”. Does this mean hands-on, and competent?

But my main concern is again about the difference between inventing and innovating. I need to go back to Apple. According to Wikipedia, a classical definition of Entrepreneurship is “the pursuit of opportunity without regard to resources currently controlled”. The term puts emphasis on the risk and effort taken by individuals who both own and manage a business, and on the innovations resulting from their pursuit of economic success.

When Mazzucato describes the Entrepreneurial State, she describes as much an Inventing State as an Innovating State. There is nothing wrong with it. What Apple has been strong at is using inventions and mostly innovations to integrate them in new products. It is why Apple is doing so little R&D. Can the same company do research and explore new green fields and develop new technologies into new products. I am not sure this has been shown by clear evidence. But we should probably ask historians of technology.

There is one invention that shows how difficult the transfer from invention to innovation might be: the transistor was invented at Bell Labs in 1947. Some of the elements of the invention only were patented (as they had been prior art back in 1925.) By 1951 Bell Labs had licensed (under the government pressure) the technology to more than 40 companies and (then small firms) Texas Instruments and Sony are known for producing early commercial transistors. The inventors received the Nobel Prize in 1957 and one of them moved to Palo Alto and is probably at the origin of Silicon Valley because of his decision. Because of the threat of USSR as an emerging technology power, the US poured a lot of military and space money on the potential of the electronics of the transistor.

The difficulty with nanotechnologies and green technologies is that in the chicken and egg of pull and push, the market needs may be clear, but the technology push looks to me much less so. I am not sure to see where the equivalent of the transistor is for these “promising” fields.

Chapter 7 – Wind and Solar power

This chapter is about the history and current status of these two energies. Wind power players are GE and Vestra from Denmark. There is a long and interesting history. There is a similar long and painful history for solar power. First Solar, Solyndra, SunPower, Evergreen are described in details. Mazzacutto focuses on China’s long-term strategy vs. the more US short term one, as well as Germany’s innovative approach to the market. “Solyndra’s failure highlights the “parasitic” innovation system that the US has created for itself – where financial interests are always and everywhere the judge, jury and executioner of all innovations investment dilemmas.” “Clean technology is already teaching us that changing the world requires coordination and the investment of multiple States, otherwise R&D, support for manufacturing, and support for market creation and function will remain dead ends.” (Page 155)

A framework would include demand-side policies to promote increased consumption as well as supply-side policies that promote manufacture of the technologies with patient capital. (Page 159)

But McKay’s arguments on Sustainable energy – without the hot air makes me cautious…

Mazzacuto still reminds of us of some fundamental elements: coming back on Myth 2 (small is beautiful) “We should not underestimate the role of small firms nor assume that only big firms have the right resources at their disposal. (…) The willingness to disrupt existing market models is needed in order to manifest a real green industrial revolution. (…) It should be a subject of debate whether public support should be handed-off to large firms that could have made their own investments and it is also unclear how they would be willing to shift from the technologies which provide their major sources of revenues.“ As my friend Dominique (:- rightly mentioned as a reaction to a previous post on the topic: “Research funding and how early the research is funded by a company of course depends on its expectations but also on its margins. Back in the seventies large corporations could afford to fund early research because 1) they foresaw stable or growing markets and 2) because their margins were constantly high I believe. Today the speed @ which markets evolve is certainly a deterrent to early stage research by companies…”

Chapter 8 – Risks and rewards: from Rotten Apples to Symbiotic Ecosystems.

Risk taking has been a collective endeavor while the returns have been much less collectively distributed. [Page 165]

The story US taxpayers are told is that economic growth and innovation are outcomes of individual “genius”, Silicon Valley “entrepreneurs”, venture capitalists or “small businesses”, provided regulations are lax (or nonexistent) and taxes low – especially compared to the “Big State” behind much of Europe. [Page 166]

The real Knightian uncertainty that innovation entails, as well as the inevitable sunk costs and capital intensity that it requires, is in fact the reason that the private sector, including venture capital, often shies away from it. It is also the reason why the State is the stakeholder that so often takes the lead, not only to fix markets, but to create them. [Page 167]

Keeping that story untold has allowed Apple to avoid “paying back” share of its profits to the same State. Apple incrementally incorporated in each new generation of products technologies that the state sowed, cultivated and ripened. [Page 168]

Mazzucato has then a very interesting analysis of Old and New Economy Business Model with Old being about stability, generosity, equity and New about volatility, mobility, and low commitments. Jobs are not equal even at Apple, from R&D where products are designed, to China where they are produced, or back to the USA where they are sold by Apple-owned stores; but worse the mobility and globalization has enabled tax evasion and optimization. Apple has a subsidiary in Nevada, Braeburn Capital to avoid income or capital gain taxes. Then is has subsidiaries in Luxembourg, Ireland, the Netherlands and British Virgin Islands for low-tax advantages. Apple IP is owned by Irish subsidiaries, which receive royalties on Apple sales (!) and which ownership is co-owned by another Virgin Islands subsidiary, Baldwin Holdings… GE, Google, Oracle, Amazon and Intel are also famous for tax optimization and tax loss could be $60-80B for the US over a decade. [pages 168-175]

The ultimate purpose of putting tax dollars to use for the development of new technologies is to take on the risk that normally accompanies the pursuit of innovative complex products and systems required to achieve collective goals. [Page 176]

Mazzucato terminates this new chapter with “Where are Today’s Bell Labs?” “One of the reasons unveiled in a [recent MIT] study is the fact that large R&D centers – like bell Labs, Xerox PARC and Alcoa Research Lab – have become a thing of the past in big corporations. Long-term basic and applied research is not part of the strategy of Big Business anymore. What is not clear however is why and how this has changed over time. The wedge between private and social returns (arising from the spillovers of R&D) was just as true in the era of bell Labs as they are today. And what is missing most today is the private component of R&D working in real partnership with the public component, creating what I call later a less symbiotic ecosystem. It is crucial to understand not only how to build an effective innovation “ecosystem”, but also and perhaps especially, how to transform that ecosystem so that it is symbiotic rather than parasitic. [Page 179]

On one side, I see the success of former emerging countries such as Taiwan and Korea, but I was also in the country of the Concorde, TGV, Rafale and Nuclear Power Plants that France has been struggling in selling abroad.

And why is Tesla and Elon Musk such an (early) success if not money is available for disruptive green technologies…

Similarly why was (military and civil) nuclear fission such a success whereas civil nuclear fusion has not given any commercial output 50 years after the military use? I remember reading Richard Feynman about the Manhattan Project and the crazy (entrepreneurial) intensity of the project. Would entrepreneurship be missing at ITER? Innovation and entrepreneurship are very much related and still somehow a mystery.

Planned innovation is a very difficult challenge that Mazzucato is not pushing for and uncertainty remains. Just remember how artificial intelligence has been a disappointment for many decades not to say until now. I’d like to finish here with an interesting article form Newspaper Le Monde:

Innovation is not about planning.
LE MONDE | 30.09.2013 | By Armand Hatchuel.

On September 12, the French, Francois Hollande, and the Minister of productive recovery, Arnaud Montebourg, presented thirty-four “plans for reconquest” from “thermal renovation of buildings” to “the factory of the future” through the “airships for heavy loads”. This announcement was seen as the return of industrial policy planning, and aroused the usual criticism of public voluntarism.
The criticism is questionable because, in this case, it is not really about planning. The themes are primarily intended to stimulate innovation and new industries. However, numerous studies have shown that innovation policy – whether public or private – can only succeed if its design, control and evaluation is clearly away from a logic of planning (Philippe Lefebvre, researcher at the Ecole Nationale Superieure des Mines de Paris : ” Organizing deliberate innovation in knowledge clusters : from accidental to purposeful brokering brokering processes” [Organiser l’innovation dans les écosystèmes : au-delà de l’émergence accidentelle, un pilotage des interactions créatrices], International Journal of Technology Management , Vol. 63 , No. 3/4, 2013).

A LARGE PART OF UNCERTAINTY
For what is a “plan”? In order to guide future action, one builds representations. We “plan” our vacation, which route to take and the loss of a few pounds. Still, while conceding uncertainties, a plan assumes that the goal, the means and the partners are sufficiently known. We may, at the limit, think that the means and partners will be selected “along the way”. But we must at least specify the goal. Agricultural policy, telecommunications policy and housing policy are built as plans which aim is clearly displayed: for example, a quantified production or equipment amount at a national level.
This is not the case anymore for a genuine innovation agenda. One must admit that the purpose is necessarily largely unknown. It is not possible anymore to specify in advance the paths and the most interesting results of the project.
Paradoxically, this does not prevent an innovative concept from mobilizing resources. Who would want a car “consuming less than two liters per 100 km”? But we must recognize that we do not know how this value will be transformed to in effecient technologies and products: will these be small city cars? Intelligent control systems? New types of vehicles and fuels? And we ignore if new businesses or new markets will emerge in the adventure.
History confirms thoroughly the surprising rationality of major innovation programs . In 1854, Austria launched the Semmering Pass competition for the design of the first locomotive for mountains. Many solutions were proposed, but none could succeed. However, the major beneficiaries of the innovations were Semmering … new locomotives in the plains!

OPENING NEW PATHS
Closer to us, neither Toyota nor Apple have ever launched projects to produce the Prius or iPhone. Their success came from their ability to pilot open innovation programs (” green car”, man-machine “magic” interfaces) and take advantage, before their competitors, of the disappointments or discoveries encountered. It is important to open very contrasting paths and pay attention to the crossings and learning that each causes.
For uncertainty does not paralyze action: it prevents its management according to the rigid codes of planning. In recent years, research has clarified the cognitive and collective mechanisms that restrict or enhance the exploration of the unknown. One better understands the control rules adapted to innovation, whether innovative design approaches (expansion of alternatives, conceptual hybridizations, exploration prototyping…) or the management of the various values that emerge (new skills, new markets, new usages…). In this respect, classical rationality is often misleading.
In the logic of the plan, there is the project distinct from its “benefits”. The success of the project is the goal, the benefits being recorded afterwards. This distinction does no longer exist in an innovation program. A “benefit” may be more important than the project itself. Driving innovation is to be prepared for the changing identity of the project and actively cause unexpected “impact”. The indeterminacy between “project” and “benefits” multiplies the sources of value and minimizes financial risks.
Beyond the economic rationality that is optimized in the known world, the rationality of innovation is reflected in the ability of project managers to regenerate solutions, markets and partnerships.
Faced with the challenge of industrial revival, the question is not whether the State should use planning. It is especially important to ensure that major projects launched will be conducted by the State and its industrial partners in the most rigorous approaches and more consistent with the expected intensity of innovation .

Harmand Hatchuel is a professor at Mines ParisTech

The Entrepreneurial State (part 3) – the State behind the iPhone

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Mazzucato’s book is so important and interesting that it will take me many articles to cover it in a satisfying manner (to me at least).

– Part 1 covers the Innovation dilemmas and crises. The “6 myths” she introduces are great.
– Part 2 deals with the (forgotten or untold) role of the state in stimulating innovation through research. I had more disagreements with her on how far the State should act in the innovation ecosystem.
– In this part 3, I will focus on Chapter 5, about the role of the State in the iPhone technologies.
– Part 4 will deal with the chapters on Green technologies
– and I will need a part 5 to conclude and share thoughts.

Chapter 5 – the State behind the iPhone

Mazzucato shows here how “Apple concentrates its ingenuity not on developing new technologies and components, but on integrating them into an innovative architecture. […] Apple’s capabilities are mainly (a) recognizing emerging technologies with great potential, (b) apply complex engineering skills that successfully integrate recognized emerging technologies, and (c) maintain a clear corporate vision prioritizing design-oriented product development.” [Page 93]

Therefore “Apple received enormous direct and/or indirect government support derived from three major areas: (1) direct equity investment, (2) access to technologies, and (3) creation of tax or technology policies.” I mentioned already the first area and expressed my doubts. No objection and no discussion about the third area. I agree only partly with the second area: I have the feeling the access was through corporations, which themselves may have had access to government or academic research. Xerox PARC is the most famous examples, but Apple also acquired little-known start-ups which had developed products from such research. Mazzucato built her own “Origins of popular Apple products.”

It is a very interesting drawing but I would have liked to see which “entity” developed the mentioned products. In some cases, it is a government related body, such as for the Internet for example (http://en.wikipedia.org/wiki/History_of_the_Internet) and in other cases it is a private entity funded initially with public money.

SIRI is an interesting example as it has some roots here at EPFL. The CALO program was funded by DARPA, but a start-up was launched with venture capital money in 2008, which was then acquired by Apple.

When it comes to displays, Mazzucato quotes Florida and Browdy and “The invention that got away” (1991) about the inability of private actors to build manufacturing capabilities. “The loss of this [TFT-LCD] display technology reveals fundamental weaknesses of the US high-technology system. Not only did our large corporations lack the vision and the persistence to turn the invention into a marketable product, but the venture capital financiers who made possible such high-technology industries as semiconductors and computers failed too.” The paper shows the higher efforts of the Japanese industry pouring hundreds of millions of dollars in the technology development. In my analysis of Stanford-related high-tech companies, I remember being stricken by the amount of funding of Candescent. On the Internet archive dated 1998, I could find the following:
“Candescent Technologies Corporation is a seven-year old company developing a revolutionary new flat panel display [which is] a dramatic improvement over the liquid-crystal displays. In 1991 Candescent formed a strategic alliance with Hewlett-Packard Company. As of May 1, 1998 Candescent had received more than $337 million in funding from investing strategic partners, venture capital firms, institutional investors, US Government-sponsored organizations, and capital equipment leasing firms.” In 2001, it had raised more than $600M with Compaq, Citicorp, Hewlett-Packard, J.P. Morgan, New Enterprise Associates, Sevin-Rosen, Sierra Venture Affiliates, and others. In June 2004, Candescent filed a Voluntary Reorganization case under Chapter 11 of the Bankruptcy Code in the San Jose Bankruptcy Court. In August 2004, Candescent sold substantially all of its assets, including its flat panel display intellectual property to Canon, Inc.”

Again, I do not have major disagreements with Mazzacuto but my experience with innovation is that it is a very uncertain activity and I am not sure it is due only to the lack of private sector support. In the end, neither Japan nor the USA won, but Korea with Samsung and LG.

I knew less about multi-touch screens and the interesting story of FingerWorks, which assets Apple bought when the company went bankrupt.
“The company’s products remained a high-end niche, and something of a curiosity, despite good press and industry awards. In early 2005, FingerWorks went through a rocky period, and stopped shipping new products. Outside reports indicated that they had been acquired by a major technology company. This company turned out to be Apple. In June 2005, FingerWorks officially announced they were no longer in business. The founders continued to file and process patents for their work through late 2007. And as of August 2008 they still filed patents for Apple, Inc.” (http://en.wikipedia.org/wiki/FingerWorks)
Again Apple also worked with Corning to develop ultra-robust screens called the Gorilla Glass (http://en.wikipedia.org/wiki/Gorilla_Glass).

On the microprocessor, I have two similar comments:
– Though there are many sources claimed for the microprocessor, it is often mentioned that Intel really launched the technology as a product and this came as an order from a Japanese company, not from public procurement.
– Much later, Apple bought P.A. Semi. which developed specialized microprocessors. Well even P.A. Semi. had strong links with the DoD so Mazzucato still has a strong point!

As an interesting comparison, the MIT technology review had a hacking session of the Apple I, iPhone and iPad, which shows the brilliance of integration. There were many computers and smart phones, but at Apple, there was the genius of Wozniak and others when Jobs came back – http://www.technologyreview.com/view/425238/classic-hacks-the-apple-i-computer-the-iphone-and-the-ipad-3g/

My reaction is that yes, many not to say most technologies have their roots with public entities, at least at the research stage, but the development is often concretized in small companies, with or without venture capital. Apple buys fewer VC-funded companies than Cisco’s A&D (Acquisition & Development) and clearly most big companies do not do much research. The challenge lies in the ability of translating research results into development, which many start-ups achieve. This is the Silicon Valley model.

I finish my notes on chapter 5 with Mazzacuto: “It is indisputable that most of Apple’s best technologies exist because of the prior collective and cumulative efforts driven by the State.” [Page 112]

The Entrepreneurial State: the important role of government in innovation (part 2)

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As I said in The Entrepreneurial State: the important role of government in innovation (part 1), Mariana Mazzucato has written an important book even if I do not agree with all her arguments.

We agree on the issue of funding of technologies, inventions and innovations. It has been generally understood that the commercialization of products and their prior development is the responsibility of the private sector in a capitalist economy. The funding of research (at least basic research) is generally the mission of the state, but applied research (though I never really understood what this is) might be done by the State as well as by the private sector.

Let me open a short parenthesis here: I am not of big supporter of the concepts of basic and applied research, but I understand better other concepts from an early to later stage. Here they are:

Research has no known output a priori, except knowledge, whereas at a later stage the objectives are a little clearer. This being said, I am not fully comfortable about the arguments Mazzucato brings on the table when she says the State is doing a lot in innovation. But she clearly shows there is a grey zone between the 3 stages I have above. I belong (at least for now) to the group of people who believe it is the mission of the State to be active in the first two ones, and the private sector being in the third. Nothing forbids the private sector to go earlier and the public sector to be more active later, but it is seldom the case. Here are my notes on Chapters 3 and followings:

Chapter 3 – Risk-taking state : from « de-risking » to « bring it on ! »

During a visit of President Mitterand to Silicon Valley, Thomas Perkins which fund started Genentech extolled the virtues of the risk-taking investors who finance the entrepreneurs. Perkins was cut off by Stanford Professor and Nobel Prize Paul berg. He asked, “Where were you guys in the 50’s and 60’s when all the funding that had to be done in the basic science?” [Page 57]

Entrepreneurship, like growth, is one of the least-well understood topics in economics. According to Schumpeter, an entrepreneur is a person willing and able to convert a new idea or invention into a successful innovation (i.e. product, service or process). Entrepreneurship employs the “gale of creative destruction” to replace, in whole or in part, inferior innovations, simultaneously creating new products including new business models. Each major new technology leads to creative destruction. [Page 58]

[Again I need to react: where I fully agree with the Entrepreneurship and Innovation definitions, I am skeptical about the comment on technology: some major new technologies never destroyed anything because they were not commercially successful (artificial intelligence, speech recognition for example and there are many others). I would say major new successful innovations lead to creative destruction. This is important because as Mazzucato rightly says, there is no linear process for innovation and a lot of uncertainty too.]

Entrepreneurship is about risk and is highly uncertain. R&D investments that contribute to technological change not only take years to materialize into new products, but most products developed fail. Silicon Valley model tells a story of “freewheeling entrepreneurs and visionary venture capitalists and yet misses the crucial factor: the military’s role in creating and sustaining it. [Mazzucato shows the same issues in Pharma where the big players develop me-too drugs and let the State fund radical innovations in universities, as is shown in the anecdote above with Mitterand, Perkins and Berg.]

Again, I have some concerns with this decription. First in the image above, I would have liked to see the R vs. D and not only the fundamental R vs global R&D. Mazzucato is right in the funding of research, no doubt about it. I used such data for many years where the funding of research in universities by the industry is 4-7% whereas the federal funding is around 60%! You can look at Figures 1 and 2 below. But then, when it comes to innovation, I do not see where the State produced the biotech or IT industry. It made inventions available. You still needed the visionary entrepreneurs and investors as I told about in the Genentech case on my blog a few years ago [see Bob Swanson & Herbert Boyer: Genentech
and Robert Swanson, 1947-1999]

Figure 1: Federal and Industry funding of university research in the USA.

Figure 2: Federal and Industry funding of research at Stanford University and MIT.

Chapter 4 – The US entrepreneurial state.

In this short chapter, Mazzucato shows through four examples how the US government fostered innovation. These are DARPA (the funding of American research by the military), SBIR (The Small Business Innovation Research), Orphan Drugs and Nanotechnologies.

On Darpa, “A series of small offices, staffed with leading scientists, are given considerable budget autonomy, … funding a mix of university-based researchers, start-ups, established firms and consortia… helping firms to get products to the stage of commercial viability”. [Page 78 ] Again the impact of DARPA in funding research is a no brainer. And Yes, I should be said. Mazzucato is right about too much silence on the role of the State. Check as a great reference Rebecca’s Lowen “Creating the Cold War University – the Transformation of Stanford”.

I am less convinced about the SBIR. “Government agencies designate a fraction of their research funding to support small, independent, for-profit firms.” Mazzucato claims Apple was funded with such a fund, Continental Illinois Venture Corp. but I checked Apple IPO document and CIVC was not at the origin of the company. Arthur Rock and Don Valentine convinced Markkula to help the two Steve and invested in January 1979. Even if CIVC invested that early, it was a minority and passive shareholder. Furthermore, CIVC was the VC arm of a bank, so not a purely State investment… She also quotes Lerner and Audretsch, leading professors as references. In a recent book (Boulevard of Broken Dreams – Pages 125-126), the same Lerner explains that the lack of flexibility of SBIR and ATP was detrimental (it had to be pre-commercial funding for ATP; start-ups had to be 51% owned by US citizens or residents, to the point that the presence of venture capital could exclude the firm from SBIR funding!) I have been struggling for years to find the real impact of SBIR and could never find convincing data of an important role. State direct role in VC funding has been a recurrent debate with unclear answers for years.

I do not know about orphan drugs, but I am skeptical about nanotechnologies. “Nanotechnology is very likely to be the next general purpose technology”. [Page 83] “It will be even more important than the computer revolution.” “Today it does not yet create a major economic impact because of the lack of commercialization of new technologies, due to the excessive investments made in research relative to the lack of investments in commercialization. […] This raises a question: if government has to do the research, fund major infrastructure investments and also undertake the commercialization effort, what exactly is the role of the private sector?” [Page 86]

Well again many things are unclear and somehow contradictory in the arguments. If nanotechnology was just another low hanging fruit thanks to the State investment, we should have already seen early results. The US initiative on Nanotech was launched in 2000. There has been a very visible start-ups such as Nanosys or A123 to a lesser extent. Next is Nanosys cap. table as of 2004. One can read the then and additional funding from private sources.

I am now reading chapter 5 and will come back on Mazzucato’s book in a part 3!

The Entrepreneurial State: the important role of government in innovation (part 1)

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Mazzacuto’s Entrepreneurial State is I think an important book. The author claims we have been unfair with the role in innovation of government and the public sector in general, which has provided funds for most not to say all R&D (Pharma, IT, Space). I share the blame as I am a strong supporter of start-ups, venture capital, Silicon Valley being the ultimate model. And the idea that the State should just provide the basics (education, research, infrastructure) and let the private sector innovate may have been a big mistake (of mine included). I will not take the blame on the second argument as I always shared with the author the idea that tax breaks and tax evasion makes the judgment even more unfair. Finally, the private sector is very risk averse so that there is less innovation (not only venture capital but corporate R&D, compared to the past when corporate R&D labs at IBM, Bell or Xerox were big or when VCs really contributed to innovation in semiconductor, computers and biotech in the 60s and 70s)

Let me now quote Mariana Mazzacuto following her book linearly. You can also listen to her when she gave a talk at TedX.

While innovation is not the State’s main role, illustrating its potential innovative and dynamic character – its historical ability, in some countries, to play an entrepreneurial role in society is perhaps the most effective way to defend its existence. (Page 1.)

Entrepreneurship is not (just) about start-ups, venture capital and “garage tinkerers”. It is about the willingness and ability of economic agents to take on risk and real Knightian* uncertainty, what is genuinely unknown. (Page 2.)
Note: *Knightian uncertainty relates to the “immeasurable“ risk, i.e. a risk that cannot be calculated.

Even during a boom most firms and banks (would) prefer to fund low-risk incremental innovations, waiting for the State to make its mark in more radical areas. (Page 7.) Examples are provided from the pharmaceutical industry – where the most revolutionary new drugs are produced mainly with public, not private funds. (Page 10.)

Apple must pay tax not only because it is the right thing to do, but because it is the epicenter of a company that requires the public purse to be large and risk-taking enough to continue making the investments that entrepreneurs like Jobs will later capitalize on. (Page 11) Precisely because State investments are uncertain, there is a high risk that they will fail. But when they are successful, it is naive and dangerous to allow all the rewards to be privatized. (Page 12)

Chapter 1 – (The Innovation Crisis)

The emphasis on the State as an entrepreneurial agent is not of course meant to deny the existence of private sector entrepreneurship activity, from the role of young new companies in providing the dynamism behind new sectors (e.g. Google) to the importance source of funding from private sources like venture capital. The key problem is that this is the only story that is usually told. (Page 20)

It is naive to expect venture capital to lead in the early and most risky stage of any new economic sector today** (such as clean technology). In biotechnology, nanotechnology and the Internet, venture capital arrived 15-20 years after the most important investments were made by public sector funds. (Page 23) The State has been behind most technological revolutions and periods of long-term growth. This is why an “entrepreneurial” state is needed to engage in risk taking and the creation of a new vision.
Note: ** Well maybe not in the 50s to the 70s, certainly in the last 10 years.

Big R&D labs have been closing and the R of the R&D spend has also been falling. A recent MIT study (1) claims that the current absence in the US of corporate labs like Xerox PARC (which produced the graphical user interface technology that led to both Apple’s and Windows’ operating systems) and Bell Labs – both highly co-financed by government agency budgets – is one of the reasons why the US innovation machine is under threat. (Page 24) Rodrik (2004) states that the problem is not in which types of tools (R&D, tax credits vs. subsidies) or which types of sectors to choose (steel vs. software), but how policy can foster self-discovery processes, which foster creativity and innovation – the need to foster exploration trial and error (and this is the core tenet of the “evolutionary theory of economic change” in chapter 2)
References
[1] MIT 2013. Innovation Economic Report, web.mit.edu/press/images/documents/pie-report.pdf‎
[2] Rodrik, 2004. Industrial Policy for the 21st century. CEPR Discussion Paper 4767

Chapter 2 – Technology, Innovation and Growth.

Progressive redistribution policies are fundamental, but they do not cause growth. Bringing together the lessons of Keynes and Schumpeter can make this happen. (Page 31) Solow discovered that 90 per cent of variation in economic output was not explained by capital and labor, he called the residual “technical change”. (Page 33)

An “evolutionary theory” explains this as a constant process of differentiation among firms, based on their ability to innovate. Selection does not always lead to “survival of the fittest” both due to the effects of increasing returns and also to the effects of policies. Selection dynamics in products markets and financial markets may be at odds.

Innovation is firm specific and highly uncertain. It is not the quantity of R&D, but how it is distributed throughout an economy. The old view that R&D can be modeled as a lottery where a certain amount will create a certain probability of successful innovation is criticized because in fact innovation would be an example of a true Knightian uncertainty, which cannot be modeled with a normal (or nay other) probability distribution. (Page 35 – the Black Swan again)

Systems of innovation are defined as the “network of institutions in the public and private sector whose activities and interactions initiate, import, modify and diffuse new technology”. (Equilibrium theory cannot work; rather than using incremental calculus from Newtonian physics, mathematics from biology are used, which can explicitly take into account heterogeneity, and the possibility of path dependency and multiple equilibria.) (Page 36) The perspective is neither micro nor macro, but meso. The causation between basic science, to large scale R&D, to applications to diffusing innovation is not linear, but full of feedback loops. One must be able to recognize serendipity and uncertainty that characterizes the innovation process. […] Using Japan as an example, “the contributions of the development state in Japan cannot be understood in abstraction from the growth of companies such as Toyota, Sony or Hitachi aside from the Japanese State’s public support for industry”. (Page 38)

Regional systems of innovation focus on the cultural geographical, and institutional proximity that creates and facilitate transactions between different socioeconomic actors, including local administrations, unions and family-owned companies… The State does this by rallying existing innovation networks or by facilitating the development of new ones that bring together a diverse group of stakeholders. But a rich system of innovation is not sufficient. The State must develop strategies for technological advance.

Mazzacuto finishes Chapter 2 with 6 myths about innovation I totally agree with!

Myth 1: Innovation is about R&D. “It is fundamental to identify the company-specific conditions that must be present to allow spending on R&D to positively affect growth.”

Myth 2: Small is Beautiful. “There is confusion between size and growth.” What is important is the “role of young high-growth firms. Many small firms are not high-growth. […] Most of the impact is from age.” “Targeting assistance to SMES through grants, soft loans and tax breaks will necessarily involve a high degree of waste. While this waste is a necessary gamble in the innovation process,” it should be targeted on high growth and not SMEs, i.e. support “young companies that have already demonstrated ambition”.

Myth 3: Venture Capital is Risk-Loving. “Risk capital is scarce in the seed stage; it is concentrated in areas of high-growth potential, low technological complexity and low capital intensity.” […] “The short-term bias is damaging to the scientific exploration process which requires longer-term horizon and tolerance to failure.” “Rewards to VC have been disproportional to risks taken”, but Mazzacuto also recognizes that “Venture capital has succeeded more in the US when it provided not only committed finance, but managerial expertise.” Finally “The progressive commercialization of science seems to be unproductive”.

Myth 4: Patents. “The rise in patents does not reflect a rise in innovation”. [I will not come back here on the topic, read again Against Intellectual Monopoly]

Myth 5: Europe’s problem is all about Commercialization. “If the US is better at innovation, it isn’t because university-industry links are better (they aren’t) or because US universities produce more spinouts (they don’t). It simply reflects more research being done in more institutions, which generate better technical skills in the workforce. US funding is split between research in universities and early stage technology development in firms. Europe has a weaker system of scientific research and weaker and less innovative companies.”

Myth 6: Business Requires Less Tax. “The R&D tax credit system does not hold firms accountable as whether they have conducted new innovation that would not otherwise have taken place, or simply pursued routine forms of product development.” “As Keynes emphasized, business investment is a function of the gut instinct of investors about future growth prospects.” This is impacted not by tax break, but by the quality of the science base, education, credit system and human capital. “It is important for innovation policy to resist the appeal of tax measures of different kinds”.

More will follow when I have read chapters 3 and followings. Now I need to share some of my concerns, first by quoting again:

“Entrepreneurship by the State can take on many forms. Four examples: DARPA, SBIR, the Orphan Drug Act, Nanotechnology. (…) Apple is far from the “market” example it is often used to depict. It is a company that not only received early stage finance from the government (through the SBIC program) but also “ingeniously” made use of publicly funded technology*** to create “smart” products.” (Pages 10-11)
Note: *** Internet, GPS, Touch screen, Siri.

“Many of the most innovative young companies in the US were funded not by private venture capital but by public venture capital, such as that provided by the Small Business Innovation Research (SBIR) program.” (Page 20)

My concerns are that
– research is not innovation & the transfer is where entrepreneurship occurs so that investing in research is not innovating or even being entrepreneurial. This is at least my experience in the field.
– SBIR real impact unclear
– Green and nano-tech impact also unclear
But I have not finished reading yet…

What’s a start-up? (part 3)

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My colleague Jean-Philippe Solvay recently asked me to a react to a Facebook post asking what is exactly a start-up. And as you may read there, it is not so easy to answer. One of the best references given in the post is swombat.com rather exhaustive analysis.

In the past, I wrote two posts: “part 1” was in 2011, where I had given my definition: “A start-up is a company which is born out of an idea and has the potential to become a large company” as well as the very good definition by Steve Blank: “startups are temporary organizations designed to search for a scalable and repeatable business model.” (There is something I am not comfortable with Steve Blank’s: I would delete “model”, as a start-up may know what it wants to do, but has not validated it yet. And start-ups copying existing business models would not be ones…)

Then in “part 2” in early 2013, I added the following: “A start-up is a corporation which explores, which is looking for a business model, a market, customers and is trying to innovate. It usually looks for a big market (“scalable”) and therefore service businesses do not qualify (except on the web) as they do not often scale. It is also a matter of strong and rapid growth in emerging markets because the competition is tough and there will be few winners. It often go fast. That is why it is more about a mindset: you are curious, in an uncertain world, trying to bring new things to the world. Because you are looking for a business, you do not have enough paying customers, and you will most likely need external capital (business angels, venture capital) except if your future customers accept to pay a lot in advance. This is why there is a strong correlation between being a start-up and having investors.”

I agree with most features given in the facebook or swombat contributions: “start-ups are new firms focusing on innovation and growth in situations of high uncertainty (or risk)”. They do not have to be about technology and if so, they are called high-tech start-ups. Maybe innovation is not so important, as many just copy others, but growth (through scalability) is critical. Consulting or service firms usually do not qualify because the growth is linear, not exponential (with the number of jobs).

Let me add another point: if the start-up term, was created, there has to be a good reason! When was it created? Wikipedia claims it became popular with the dot.com bubble of the late nineties. However, I found the term in Saxenian’s Regional Advantage (1994) and even in Silicon Valley Fever (1984). There is no doubt the term emerged with the technology clusters Route 128 and Silicon valley, the reason why it is associated with high-tech as well as venture capital. But not all start-ups belong to these geographic clusters. Microsoft and Amazon are based in Seattle, which is (at least was) not really a cluster. When they do not belong to a geographic cluster, they belong to a technology cluster, mostly IT (electronics, software, internet) or biotech/medtech. Tesla Motors is considered a start-up because it belongs to the Silicon Valley ecosystem though it is in an industry where very few start-ups exist. I do not think EasyJet was ever called a start-up because it belongs to no (technology or geographic) clsuter. So I would finally define a start-up as “a new firm focusing on growth in situations of high uncertainty, and belonging to a technology or geographic cluster”.

PS: while looking into the topic again, I found a debate on how to spell the word… In 2007, I had decided for “start-up”, but “start up” and “startup” also existed. It seems “startup” is now more and more popular. I stick to “start-up” for the time being, just to be consistent with what I always did.

Does the Swiss culture tolerate failure?

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Here is my fourth contribution to Entreprise Romande. I realize now it is often about failure and innovation. This new article maintains the tradition. And because it was a special issue about failure, let me provide a translation of the editorial.

Entreprise romande – July 5, 2013 – Véronique Kämpfen, rédactrice en chef:

Tolerance for failure favors growth

We are not all equal vis-à-vis failure. The fact is confirmed by a detailed study published by Barclays in late 2012. First, Europeans have more difficulty seeing failure as positive (69%) than Americans (71%), Asians (80%) and Middle Easterners (91%). Second, entrepreneurs have a less negative attitude towards failure than the rest of the population. They often think that failures have shaped their character, that this event has taught them a lot and they were able to bounce back quickly. Entrepreneurs are also far more optimistic than the rest of their fellow citizens. This phenomenon is described in the medical literature: it seems that a high number of successful entrepreneurs are characterized by a genetic form of psychiatric bias, which predisposes them to be creative, enthusiastic and somewhat less apprehensive vis-à-vis risk taking. John Gartner, the psychiatrist at the origin of this study, highlights the specific features of these characters: “Having that kind of confidence can lead to blindness when facing risk, because these individuals do not believe they can fail. (…) However, if they fail, they will not stay down for long and will soon be energized by a completely new idea”.

More generally, the Barclays study shows that tolerance for failure is essential to growth. The process of “creative destruction”, that is obsolete ideas, technology and business models give way to new impulses, is essential to economic progress and job creation. For this process to be effective, we need entrepreneurs who want to take risks, and an environment that supports their efforts. Until now, Switzerland seems to have done OK, as evidenced by its economic health and its high ranking in terms of innovation and competitiveness. As the Swiss are not the champions of tolerance for failure, they must be supported by appropriate framework conditions and encouraged so that those who have the entrepreneurial spirit may try … without taking too much risk! These topics are covered in great detail in the Magazine Entreprise romande. The taboo of failure and bankruptcy is analyzed in all its forms and put into perspective with practical advice and testimonials from entrepreneurs. Happy reading … enjoy the summer!

and here is my contribution:

Does the Swiss culture tolerate failure?

“The Swiss Society gives us so many slaps in the face through education that we are afraid of being creative, because we show then our weaknesses. By expressing our dreams, we do an intellectual striptease; it is feared that others see them as bad, not good, not nice and not fair.” So speaks Elmar Mock, inventor of the Swatch and founder Creaholic. The Swiss school system is indeed not known for its creativity. The famous (in French speaking Switzerland) « faut se gaffer » (“don’t be goofy”) might make you smile. Our teachers too seem to give more importance to the rigor than to the creativity of our little darlings. The room for error is unconsciously repressed. If one accepts the idea that innovation is above all creating in situations of uncertainty, the statement is worrying. Yet Switzerland is world champion of innovation in almost all global reports. Is there a contradiction?

Innovation is a subtle thing. Innovation is not limited to invention and innovation is not about technology only; it is the result of a process, following which are created products, services or new processes that will have to demonstrate that they answer a (commercial or non-commercial) need. The process leading to innovation is long, unpredictable and hard to control, innovation cannot therefore be planned and we have to accept failure.

Clayton Christensen, a professor at the Harvard Business School, built a theory explaining the process of disruptive innovation, the one innovation which allows the emergence of new revolutionary products such as the Internet, the mobile phone, but also the low-cost airlines, the one innovation which also allows new players to emerge and replace their older competitors. According to Christensen, disruptive innovation cannot occur within established institutions. The best companies are listening to their customers and those only want to improve existing products and will rarely desire new products. The U.S. has seen more than 80 major new companies emerge since 1970, and France, only 4. And Switzerland?

Switzerland is world champion of innovation firstly because the framework conditions are excellent. Everything is done for businesses to succeed, minimizing barriers and constraints. Then, because there is a culture of work well done. Apprenticeship, in the early years of training, helps in maintaining this tradition and Swiss companies are known to be listening to their customers in order to improve existing products in the right direction. But what kind of innovation are we talking about? Probably not about the one which enables technology breakthroughs. No, rather of a different type of innovation, incremental innovation, made of “gradual, continuous improvement of techniques or existing products; usually incremental innovation does not fundamentally change the dynamics of an industry, or does not require a change in behavior,” according to wikipedia. Switzerland is champion of incremental innovation through a dense network of highly performing SMEs. Failure is relatively absent, when the attention to every detail is permanent. But is it enough?

Not only the Swiss school system is not known for its creativity, but furthermore our academic spin-offs create few jobs. If we accept the corollary that innovation is a source of growth and new jobs, we might not be as innovative as it might be desired. We are obviously efficient for incremental innovation, but certainly not as good when it comes to disruptions. Except for one example that comes easily to my mind, the Swatch. But Nicholas Hayek was not the product of the Swiss culture! I could add Nespresso, but Eric Favre, inventor of the product, had suffered a strong initial reluctance from Nestlé to the point of saying: “The Swiss economy lacks real entrepreneurs!” The difficulty of integrating risk and radical innovation can make anyone short-sighted when experiencing ongoing changes and cause much bigger failures, as evidenced by the grounding of Swissair, which was seen as a national trauma. The United States has lost TWA and PanAm, but Americans have invented the concept of low cost airlines with Southwest or JetBlue, which have happily replaced the old players. In Europe, EasyJet and similar companies only followed the American model.

The Swiss start-ups never die. They have a survival rate of 90% after 5 years. Whereas across the Atlantic and even in Switzerland for traditional businesses, this rate is less than 50%… This may mean, quoting Xavier Comtesse, that “startups are protected by the academic system or federal funding.” Because failing is an unacceptable stigma? Or because taking risks, an inevitable cause of a greater failure rate, would be too dangerous? Without being so pessimistic, I would add that our start-ups are often excellent engineering offices, with great know-how. With a service business model eventually outweighing new products, the company survives without significant creation of jobs and without growth. I often asked entrepreneurs who failed to share their experience. A real failure! Our experts and mentors do not grow our young entrepreneurs in this direction, and I have heard it so often that I almost got used to it. Our business angels have a great distrust of more aggressive venture capitalists and they fear their more binary approach of “make it or break it. ”

Daniel Borel, the iconic entrepreneur: “In our industry, if we do not innovate constantly, if we do not have the courage to take risks, we disappear. This is why I prefer to get into seven projects even if it means failing three, as not to fail in anything, by chance, having focused on a single project.” […] “We only learn from our failures, rarely from succcess. Success can be your worst enemy: it makes you think you are strong, very strong; you could even walk on water. And it is at this point that you drown. ”

The Swiss culture has certainly a very small tolerance for failure. It promotes a type of innovation (incremental) which may explain its strengths. Its network of strong SMES is probably the result of this conservative and demanding culture. There is reason to be proud of it. But I like the quote from the former star of Hockey, Wayne Gretzky: “I skate to where the puck will be, not where it was.” The question is whether Switzerland will be tomorrow at the right place to get the puck …

The cradle of European Innovation

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Sometimes, giving an interview has interesting and strange results. I do not read Korean so I cannot really help! But apparently what was kept from the conversation is that “it is important to make a culture where we are not afraid to fail”. As well as ” Culture is important to propagate entrepreneurship in universities. Even if the (academic) system is very good, it might be far from starting a business without this culture.” I had learnt my name is Russian was Эрве Лебре. Now I know it in Korean: 에레 레브레. And what about my new look according to a Korean photographer… Here is the full article.

◆ 창조경제의 요람 유럽대학 ① ◆

기사의 0번째 이미지
“대학에 기업가정신을 퍼뜨리기 위해서는 문화가 중요합니다. 제도가 아무리 좋아도 문화가 뒤따르지 않으면 창업은 요원한 일입니다.”

스위스 로잔공대 이노베이션파크에서 만난 이노그랜트 프로그램 총괄 책임자 에레 레브레 박사는 “유럽의 대학생들도 한국과 마찬가지로 기업가정신이 부족한 편”이라며 “미국 실리콘밸리처럼 기업가정신이 대학 곳곳으로 퍼질 수 있는 문화를 만들어야 한다”고 강조했다.

이노그랜트는 창업을 원하는 교수나 학생에게 조건 없이 창업자금을 지원하는 프로그램이다. 2005년 스위스의 한 은행이 학교를 위해 내놓은 100만달러를 종잣돈으로 삼아 만들어졌다. 레브레 박사는 “로잔공대에는 기술사업화와 창업을 지원하는 다양한 프로그램이 있었지만 `스타트업`을 중점적으로 돕는 프로그램이 필요하다고 판단했다”며 “이노그랜트 프로그램을 만든 뒤 지난 7년간 56개 아이디어에 자금을 지원했고, 이를 통해 25개 새로운 회사가 탄생했다”고 밝혔다.

이노그랜트 펀딩의 대상자가 되면 교수와 학생을 구분하지 않고 1년간 창업에만 열중할 수 있다.
창업에 실패한다고 하더라도 받은 돈을 학교에 반납할 필요가 없다. 레브레 박사는 “이노그랜트의 펀딩을 받으면 연구나 수업에서 제외된다”며 “1년간 생활자금을 지원해 주기 때문에 돈 걱정 없이 창업 준비에만 신경을 쓰게 된다”고 했다.

이 같은 혜택에 힘입어 이노그랜트 프로그램에 창업을 하겠다며 지원하는 프로젝트는 연간 40~50건에 달한다.

After posting this article, I received an English translation from the author. here it is:

Create a culture that is not afraid to fail
(This article is a part of the special series of articles titled “Visit European universities, Cradle of the creative economy”)

The EPFL is a unique place of innovation and competence. The EPFL handles innovation through its VPIV. The VPIV is responsible for the technology transfer, supporting start-ups through the Innogrants program and the coordination of all relationships between industry and EPFL. The EPFL turned out 156 new companies between 2000 and 2012. Hervé Lebret, the manager of the Innogrants said “Even if there was a best system, startups are still far-off without culture. It’s about culture. Just like Silicon Valley, we have to make a culture which can spread the entrepreneurship throughout the university.” The Innogrants were created by the EPFL in 2005 to encourage the entrepreneurial spirit and support start-ups. To date, 56 ideas were funded which enabled the creation of 25 start-ups. An Innogrant is a 12-month salary for the project owner in an EPFL laboratory and the beneficiary is freed of teaching or research activities so that the project owner fully concentrates on that project.

In Innovation Quest, Regions Seek Critical Mass

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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…

Innovation: High Stakes for France

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I had the pleasure to be part of the group who contributed to the Beylat-Tambourin report, Innovation: High Stakes for France, which subtitle is also important: Dynamizing the Growth of Innovative Companies. It was a long process, we started working in September and the final document was presented to the Ministers on 5 April. You can download the report in pdf format or here, should the previous one not work..

The report is in French but as I saw the Wall Street journal mentioning it, I thought I would do a post in English too. However, if you read French, go to the sister blog post: L’innovation en France: le rapport Beylat Tambourin. My French is much better!

What should be noted before discussing the content is that 25 members of the mission come from different worlds (see end of article), which could have made it difficult to find agreement. This was not the case. There were debates, but this report summarizes the proposals without forgetting important points, or dilute the point, I think. I read (only) one satirical article in the media, but I’m not sure that the author had read the report (see end of the article as well)…

Click on the image to download the report in pdf format

I translate (again my apologies for my far from perfect English) here a quote from the introduction: “With the acceleration and the complexity of the issues, public policies sometimes seem poor, often messy. […] They have often been compared to a system of research transfer, itself too weak, and indeed not focusing enough on the creation of high-growth companies with an ability to create jobs. […] But there is no single model of innovation. […] However, invariants exist: research excellence; low barriers between public and private sectors; an entrepreneurial culture; cultural diversity, the ability to attract talent at an international level; a migration policy; and a successful combination of start-ups, large corporations, public research, higher education and investors.” [Pages 1-2]

The difficult definition of innovation
Here’s a great paragraph that I want to quote again: “There is no definition – uncontested and incontestable-of innovation but it is possible to bring out some characteristics of innovation:
– Innovation is a long, unpredictable and hard to control process.
– Innovation is not limited to the invention and innovation is not only technological.
– At the end of this process, are created products, services or new processes that demonstrate that they meet the needs (market or non-market) and create value for all stakeholders.
Another point worth noting: an innovation cannot be decreed, cannot be planned, but it is seen through the commercial (or societal) success it meets. This explains why it often comes at the margins of existing businesses and through interactions with many different actors: “The Internet is the product of a unique combination of military strategy, scientific cooperation and protest innovation” in the famous sentence by Manuel Castells.” [Page 5] ” Accordingly, a vision where the expenditure on R&D is the main concern should be changed in favor of a systemic vision for results, in terms of growth and competitiveness.” [Page 6] In other words, innovation is not the invention and certainly not R&D.

Here are the 19 recommendations, divided into four groups:
I. Developing a culture of innovation and entrepreneurship.
II. Increase the economic impact of public research by the transfer.
III. Support the growth of innovative companies.
IV. Develop instruments of public policy for innovation.

For the first group (Culture):
1. Revise teaching methods in primary and secondary schools to develop innovative initiatives.
2. Implement a large-scale program for entrepreneurship learning in higher education.
3. Promote the dissemination from large groups through spin-offs.
4. Develop a policy for attractiveness of talent around innovation.
For the second group (transfer):
5. Implement the operational monitoring of 15 measures for rebuilding the transfer of public research (see http://www.enseignementsup-recherche.gouv.fr/cid66110/une-nouvelle-politique-de-transfert-pour-la-recherche.html – in French)
6. Promote the mobility of researchers between the public and private sectors.
7. Develop a coherent program for the transfer through the creation of businesses.
8. Focus SATT on maturation [SATT are the new French structures for academic technology transfer].
9. Establish a consistent policy of public-private research partnerships, bringing together different policies (scattered today).
For the third group (growth):
10. Address the lack of equity financing for innovative companies (venture capital and later-stage growth equity) by mobilizing a small part of the French savings and improving the possible exit strategies for investors in these segments.
11. Launch “early stage” sector initiatives.
12. Implement the policy instruments of protection (IP, standardization) serving innovative companies.
13. Harmonize the different labels of innovative companies for better readability and link them to the growth of companies, consistently aligning all support tools available.
14. Encourage large groups and large public institutions to be involved in the emergence and growth of innovative enterprises, integrating new dimensions in their obligation for environmental and social responsibility.
Finally for the last group (public policy):
15. Recognize the role of metropolitan innovation ecosystems as the support for regional strategies as well as for the national innovation strategy.
16. Organize the transfer system to make it more readable and more efficient.
17. Provide the means to develop, pilot and evaluate a comprehensive and coherent strategy of French innovation.
18. Appoint a single operator for the operational consolidation of public finance policies of innovation: the BPI (the Investment Public Bank in its innovation component).
19. Making innovation a real political issue, organizing a broad public debate.

[Again sorry for the imperfect translation. I hope you got the points…]

As explained in the Wall Street Journal in Nineteen Ways to Make France More Innovative, “In the short-term, the government should move away from considering R&D spend as a metric of innovation recommended the authors, and look at jobs created. France outspent Germany on R&D in many areas, said Mr. Beylat and Mr. Tambourin, but the effect wasn’t felt in the economy.”

Another comment concerns the sub-title of the report: Dynamizing the Growth of Innovative Companies. This is a very important subtitle, but do not get me wrong, it is not about start-ups only here, but the message is that innovative companies should be a source of growth, whether large groups, SMEs or start-ups. It may not be a cultural revolution, or is it?

To push the envelope a little further, here is a short excerpt: “France is between the American dream of Silicon Valley, where disruptive innovations are supported by start-ups, the German dream of a well-established industrial Mittelstand, efficient in incremental innovation, and a French tradition of industrial planning in sovereign sectors. This oscillation blurs the representation that France has made of innovation because it mixes breakthrough innovation, incremental innovation and “strategic industrial policy.” We must cut short a myth: if innovation often requires an excellent R&D, it is not limited to R&D. It is not its natural extension. Innovation is above all the process that leads to the marketing of products or services, meeting a need, made by individuals engaged in an entrepreneurial approach. Innovation is thus at the crossroads of several areas, first and foremost research, entrepreneurship, industry and education. There is therefore no conceptual optimization or normative expected pattern.” [Page 6]

And on the cultural aspects: “Innovation is primarily a matter of individuals, state of mind and ambition for the company and for themselves. The dissemination of the culture of innovation and entrepreneurship is vital. These cultures are closely linked: vision, risk-taking, acceptance and learning from failure, capacity for initiative, project culture and commitment to completion are the main components. Finally, the ability to create companies with high growth potential (spin-offs and start-ups), some of which will become world leaders, sometimes in a few years, characterizes an effective innovation system.” [Page 7]

And finally I add a quote from President Obama, which perfectly symbolizes the problem: “We insist on personal responsibility and we celebrate individual initiative. We’re not entitled to success. We have to earn it. We honor the strivers, the dreamers, the risk-takers, the entrepreneurs who have always-been the driving forces behind our free enterprise system – the greatest engine of growth and prosperity the world has ever known.”

The report was presented to ministers on April 5, and to the French Prime Minister on April 8, for the appointment of Anne Lauvergeon as President of Innovation 2030. Genevieve Fioraso [the French minister for research and higher education] noted, however, in her introduction to the submission of this report, that President Obama was able to speak for about an hour on this one chapter of innovation. Where else would this be possible?

Finally, and this is a personal note, this report should be used more as a base for innovation than as a toolbox or a set of recipes. This is the big picture that matters and not the extraction of recommendations that would suit one or the other. “The issues of competitiveness show that innovation must be at the heart of public policy, as illustrated by our recommendations. While this is a technical issue that is inherently complex (because of all the dimensions that make up), where the “right” decisions are sometimes against-intuitive (eg, linear view of innovation seductive but wrong), it seems essential that innovation becomes a real political issue to ensure its adoption by policy makers and citizens.” [Page 121]

Finally I would like to add more quotes on innovative ecosystems. As it begins to be long, I’ll do it in a future article …

Facts and Figures

They show the challenges of innovation, particularly in France. I’ll let you judge for yourself.

R&D Intensity (compares France and Germany in their R&D efforts relatively to firm size)

An interesting typology of research using fundamental and applied research as well as experimental development

… and its evolution in France

A real issue: company growth – number of companies reaching €100M in R&D relatively to company year of foundation

The complexity of the financing situation – as a % of GDP

The complexity of the financing situation – seed, early, late & LBO

As mentioned above this is the origin of 27 members (two presidents, 25 experts).

A few references from the Press:

– Nineteen Ways to Make France More Innovative (Wall Street Journal)
– Une mission sur l’innovation après le rapport Gallois (les Echos)
– Cinq pistes pour favoriser l’innovation en France (L’Expansion)
– Le gouvernement va-t-il enfin mener une politique volontariste d’innovation ? (ZDnet)
– Un rapport sur l’innovation qui sent la naphtaline (The satirical article by L’Informaticien)

Start-Up

What we may still learn from Silicon Valley

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