I regularly look at the largest technology companies in the USA and Europe and obviously this year, I had the impact of Covid in mind. Here are the tables I build once a year (and that you could compare to the ones published in January 2020 here or in 2017 here.
I am adding below their PS (price to sales, ratio of market cap to revenues) and PE (price to earnings, ratio of market cap to profits when positive) as well as the growth of the market cap. and revenues. There are 3 new companies I had not studied last year (Airbnb, Paypal and AMD) for which the growth is therefore not mentioned.
There would be many comments to give btu I will be fast:
– The GAFAs are the clear leaders, 4 of them are trillion dollar companies. Facebook is a little surprinsingly not as impressive and Tesla is appearing on top.
– The COVID did not have a big impact, not to say it had a positive impact on technology companies (in financial more than in economic terms)
– Again, looking at averages we see Europe is lagging in market caps, employement, sales and profits by factors close to 10…
My friends at INRIA just mentioned to me a short but great interview of Steve Jobs by French Television in 1984, when he was asked if France could have similar start-ups to Silicon Valley. Here is his answer:
Even if you hear more the French translation, you can hear his voice too: – Research level is good but concrete applications seem to be a problem, and this is an important step for innovation
– This is coming from a lack of companies ready to try
– The risk is seldom taken by large corporations, but by small ones
– You need many small firm with talented students and venture capital
– You also need champions you take as models, that enable saying “innovation is this”
– There is a more subtle problem, a cultural one: in Europe, failure is serious. If you fail in Europe right after university, it follows you for ever. In the USA, we keep failing all the time.
– What you also need is a solid software industry, because software is the new oil. You need hundreds of small firms and then you can dominate an industry.
– You need talented students, a good understanding of technology and encougare young people to create small firms.
– It’s all about private initiative. Big companies should not interfere, neither the government should. We should let entrepreneurs own it.
Thirty-five years later, is the situation different? And if he was still alive, would he say the same things? I let you judge …
Since I published my book in 2007, I have regularly been doing the exercise of comparing the largest US (former) start-ups and their European counterparts. You can look at my data in 2016 in The top US and European (former) start-ups in 2016. Here are my update lists:
Things have not changed that much. Yahoo is out. Rovio is in…
After my initial notes (part I), the importance of culture (part II), the recipe (part III) in the Rainforest by Hwang and Horowitt, here are my final notes about venture capital. It may indeed be their best chapter, even if the topic has produced probably hundreds of books and thousands of articles… Their (apparent) bias as venture capitalists is only apparent. Their description is close to what I experienced but I may be biased too!
The subtitle of the chapter is “Big V, Little C” and their quote to begin the chapter is “if you want to make money, do private equity. If you want to have fun, do venture capital”. They then borrow to AnnaLee Saxenian: “In Boston it was the entrepreneurs who dressed nicely and showed up on time to impress the investors. In Silicon Valley it was the opposite.” […] “In other words, the venture – that is the startup – is always more important than the capital, with a Big V and a Little C.” [Pages 218-21]
They explain why investing in the seed and early stage is costly for venture capitalists. “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price. […] Investing earlier in a deal must be counter-balanced by a strong potential of a massively disproportionate payout at the end. Otherwise, it is simply not worth the risk. […] Lowered transaction costs due to trust and social norms make high-risk seed-stage and early-stage venture capital more profitable [in Silicon Valley].” [Pages 228-29]
In other areas, subsidized capital plays a role. But it does not mean VC should not be understood: “There are two ways to build a venture fund. One takes as little as thirty minutes to learn. The other can take twenty years or more. The short course is to learn the formal legal structuring and financial processes of a typical venture fund. […] the more difficult and time-consuming course is to learn the human behavioral dynamics that happen in and around venture funds. […] Questions such as:
– how do you treat others in situations where mistakes and failures happen almost daily?
– how to build a reputation for trust, candor and integrity when millions of dollars are at stake?
– what type of value can you provide an entrepreneur who probably knows far more about the business than you do?
– how do you actively listen to an entrepreneur, and then see beyond their words to the true prospects of a company?
– how do you know when a CEO is not fit to run a company anymore?
– how do you help a tiny company build life-or-death relationships with huge, powerful customers or strategic partners?”
It reminds me what I learnt 20 years ago: it takes 5 years and $10M to make an investor.
The authors conclude their chapter with marvelous documentary SomethingVentured: “[VCs]’re working really hard, they’re very bright, they’re working together, and they’re collaborating. And there’s a lot of fun involved in achieving things together as a group. So I don’t think you can underestimate how much fun the people… had doing what they did. I think they’re extremely proud, but when they talk about these stories, they’re laughing, they’re smiling. There’s just this excitement and energy about building something.” [Page 242]
After my initial notes (part I) and the importance of culture (part II) in the Rainforest by Hwang and Horowitt, here are my new notes about their recipe to build efficient ecosystems for entrepreneurial innovation. I will finish with a part IV about venture capital.
Again the authors remind us that “innovation is chaotic, serendipitous and uncontrollable, so processes that are linear and controlled are rarely self-sustaining. In contrast, what we strive for in a Rainforest is a system that yields immense impact, is low-cost, and generates internal sustainability. The only possible way to achieve these goals is to build a community of innovators where transaction costs have been reduced through the creation of trust, social norms, connectivity and diversity.” [Page 183]
So their recipe is not so much a recipe as a cure. In fact they say “rather than thinking like macroeconomists, to change behavior, we must think like psychiatrists […] We build rainforests by shaping the outward behavior of innovators. Over time, those behaviors can create changes in attitude, and eventually, the changes in attitude can lead to change in beliefs”. [Page 200-1]
In the recipe [pages 194-200], there is Hardware made of 4 “P”s: People, Professional, (i.e. institutions), Physical (i.e. infrastructure) and Policy. Hardware is necessary but not sufficient. There is also Software, with 5 pillars, Diversity, Extra-Rational Motivations, Social Trust, Rules (see my previous post) and Interpretation of the Rules. The Keystones will make all this possible.
The Rainforest canvas may be a helpful tool to assess the situation of an ecosystem in its physical and cultural components:
About Role Models, they have the interesting Porsche principle. “This principle holds that one of the greatest motivators for professors or graduate students on campus to start new companies is when one of their colleagues drives up in a new Porsche after selling their startup”. [Page 210] To be honest, today, at EPFL and probably elsewhere, I would call it the Tesla principle… (see my previous post…The University-based Startup Porsche Principle. Or is it the Tesla Principle?)
In their epilogue, the authors explain that “Perhaps, instead of fighting the chaos, we need to become more comfortable with it. Perhaps we just need a better map. The Rules of the Rainforest provide a useful map – one that shows the way to balance the freedom of chaos with the beauty of collaboration. […] It requires a ‘joyful participation’ in the ups and downs, the mistakes and the failures that are inevitable. Thus, love is like a solution to chaos. ” [page 280] They use a magnificent quotation from Richard Feynman to whom a student asked to write a message to his mother so that she would be interested in science. Here it is: “Tell your son to stop trying to fill your head with science – for to fill your hear with love is enough. Richard Feynman (the man you watched on BBC ‘Horizon'”.
Here is a slideshare presentation by the authors, which beautifully summarizes their vision.
After my introductory post about The Rainforest – The Secret to Building the Next Silicon Valley by Victor W. Hwang and Greg Horowitt, which focused on the importance of trust, here is a second piece about culture. The final part will describe how the authors claim they know the recipe to build rainforests. What is remarkable with the Rainforest is the ambition to explain that innovation is mostly cultural so that at the micro-level it cannot really be engineered, but at the macro-level rainforests can be built. I am not sure the authors are right, but the effort is really to be recognized.
One lesson of the Rainforest is that outcomes cannot be engineered. […] Serendipity itself cannot be engineered but an environment that is conducive to serendipity can be. [Page 65]
In their chapter 3 about People, they begin with Keystones, not Entrepreneurs. “What defines a Keystone? Over the years, we have observed certain individuals practicing a unique manner of human interaction that is critical to the growth of entrepreneurial innovation. […] These people are usually missing, or at least too scarce, in almost all regions that have failed at generating significant amounts of entrepreneurial innovation.” [Page 71]
These people are integrative, influential and impactful, they are brokers of social trust (by contrast to entrepreneurs who are people who absorb information, learn from practice and seek opportunities). “The San Francisco Bay Area has a vastly higher percentage of people who are involved in multiple firms. 4.5% of the actors counted in the Bay Area were involved in three or more startups, compared to 2.9% in Boston, 2% in San Diego, […] 1.2% in Austin […] 0.7% in Portland. […] The bay Area has a significantly higher share of individuals who are extremely connected and contribute to the growth of multiple startup ventures”. [Page 74]
The authors also show the diversity of psychologies, the diversity of backgrounds in people which are still connected and work together. “We see these unconscious behaviors at work with innovators everywhere in the world. Scientists versus entrepreneurs. Startups versus large corporations. Investors versus investees. These tribal conflicts can be obstacles to the development of Rainforests.” [Page 109] All the more that: “Similarly the process of building a startup company is one in which people must often rely on gut-level decision-making. Entrepreneurial innovation, by its nature, is virtually a never-ending series of educated guesses. Almost every decision is based substantially incomplete information.” [Page 106]
America is the building of a society not burdened by historical tribes. […] They are less chained to the past. Instead Americans tend to be identified by self-reliance. […] People still run to California today. It is commonly regarded as the land of pioneers, nonconformists, artists, and rebels. [Page 116] Culture is critical to the way economic systems function because it provides the rules of engagement between people that hopefully can maximize their collective well-being. [Page 118] The authors are not naïve but claim that all these people need to find the right balance. A venture capitalist is caught between trying to own as much of a company as possible and trying to leave enough equity in the hands of the entrepreneurial team to keep them fully incentivized. […] A VC wants to preserve a reputation. [Page 119] Innovative behavior is not driven by rational maximization. There are in fact other forces, which can be called extra-rational: competition, altruism, adventure, discovery, creativity, meaning, concern.
Here I cannot avoid mentioning the great (counter-)example of Orson Welles about the Scorpio and the Turtle… Hopefully nature is not everything, culture matters.
One mistake of policy makers is to underestimate these extra-rational motivations. “Governments and corporations often try to incentivize innovation by focusing on financial mechanisms, such as tax breaks, subsidies, grants and loans. But overall, this strategy has been poor. They cannot be only the ends in themselves.” [Page 127]
Traditional incentives, benefits and costs: [Page 124] Benefits:
Some possibility of making more money Costs
Sacrifice a stable income and career perhaps forever
Risk social disapproval from family, friends, potential spouses
Difficulty and fear of working with strangers outside conventional circles of trust, culture, ethnicity, language
Difficulty and extra effort in communicating effectively
Huge investment of time, effort, stress
Possibility of losing everything (depending on laws, regarding bankruptcy, partnerships, etc.)
Rainforest incentives, benefits and costs: [Page 126] Benefits:
Perceived and possibly real opportunity of making more money (following role models that have validated the path already)
Joy of discovery, novelty, adventure, creativity, passion
Social approval (as a peer member of a community of innovators)
Joy of friendship, sharing, love working on a team, building new trust, common values and goals
Fulfillment from the possibility of making a difference in society, leaving a legacy for future generations
Thrill of competition
Freedom and independence Costs
Little social punishment, often encouragement, from family and friends for taking a worthwhile risk
Some anxiety from meeting new people, but offset by the joy of making new friendships
Huge investment of time, effort, and stress, but viewed in a neutral or even positive light because pursuing a personal passion
Little risk of losing everything because new opportunities emerge in the process of experimentation
Much lower probability of failure from a broad community of fellow innovators.
And the authors claim what are needed are 7 rules [Page 156]: – Break the rules and dream
– Open doors and listen
– Trust and be trusted
– Experiment and iterate together
– Seek fairness, not advantage.
– Err, fail and persist.
– Pay it forward.
People usually think of Silicon Valley as an anomaly in the otherwise “normal” history of the world, but what if we reversed that proposition? What if we envisioned Silicon Valley as the natural endpoint of a 50,000-year story? Perhaps it could be the latest stage in the evolution of human society, from a culture based on tribes to a culture based on pragmatic individuals. [page 152]
There may be nothing really new in this book about ecosystems, but the messages are strong and clear. You may need an infrastructure, but without culture, nothing will happen, no innovation will emerge. I might write a few posts about this book as I just began reading it recently. And as usual, here are my notes / extracts.
Despite hundreds of books and thousands of papers on the subject, real-world innovation is little understood. […] Having the right ingredients will not necessarily result in successful innovation. You need to prepare those raw ingredients, combining them in just the right way. […] We argue that the two pillars of innovation’s conventional wisdom – free markets and clusters – are unable to provide comprehensive answers to the mystery of systemic innovation. [Pages 18-20]
Funnily enough, I gave my own recipe in 2007: “Two main ingredients are needed, rich people and nerds; this has been said already. Do not add any bureaucracy, do not add concrete. In order to attract and keep enough nerds, there is a need for a large and nice plate. A university is a good choice. But it must not be a university like any other; it must be a superb university. There are some; a few are being built from scratch. It needs a unique personality, and it needs to be creative. Not only on its campus, but also in its surroundings, so that the ingredients feel comfortable in the plate. They should be fresh, i.e. they should be young and dynamic. Young and dynamic people are the founders of start-ups. Graham also mentions liberal environments, which, he claims, tolerate strange and brilliant individuals. Then the ingredients have to be put in the oven for a very long time. Silicon Valley began in 1957, Silicon Fen in 1960. It took ten years, maybe even twenty years, to make these two regions successful; it is about the time it takes to grow infants into adults. The oven should not be too hot, so that the desire is not killed, then the temperature should be increased to maintain the enthusiasm. A temperate, pleasant climate is therefore necessary. If all the conditions are in place, the result will probably be interesting”. [Page 176. Start-Up: What We May Still Learn From Silicon Valley]
The world of innovation does not happen at the macro-level. Innovation is a “body contact sport.” It is a micro-level phenomenon. When applied to innovation, rational choice theory might make sense if you’re a theorist thinking abstractly about the way the world should work. It does not accurately describe the way the world actually works. [Page 37] You cannot understand the macro without understanding the micro. […] the world is far more complicated – one must deal with a range of complex social and psychological factors, personal networks, and information flows. [Page 48]
Free market proponents sometimes support investments in scientific research as a way to stimulate new innovation. […] Scientific research, however, does not always lead to economic growth. Each $1 increase in scientific research does not necessarily result in a $1 increase in economic activity in the overall system. The research alone is not sufficient. […] In the real world, the path from discovery to commercial product is so long, tortuous, and serendipitous that the vast majority of world-changing technologies never see the light of day. Society has a surprisingly huge backlog of scientific discoveries that are “stuck in the pipeline”, stalled by the human barriers that prevent them from reaching the marketplace. [Page 40]
For instance, the state of Kansas actively invested in its high-tech entrepreneurs. The University of Kansas provided research grants to develop products for commercial application. The university promoted regional collaboration, entrepreneurial training and even direct assistance. The results of these endeavors, however, were nothing like those of Silicon Valley. And the vast majority of the world looks a lot more like Kansas than California. [Page 41] A cluster is a description of a phenomenon, not a prescription for policy. [Page 42]
Whereas a company is a group of individuals working together, a cluster is a region of individuals or companies working together. In both cases, these relationships result in lower transaction costs. And in both cases, those savings are derived from the fact that people are closer together, can communicate more easily, and trust each other more. [Page 46]
And again let me give you an extract from my book, now quoting Richard Newton: “The Bay Area is the Corporation. […When people change jobs here in the BayArea], they’re actually just moving among the various divisions of the Bay Area Corporation.” [Page 102 – Start-up]
I am not sure anyone has “The Secret to Building the Next Silicon Valley”, but I will post more when I am more advanced in reading the Rainforest!
The recently published The State of the European Tech, co-sponsored by Atomico and Slush is an extremley interesting analysis of the European tech start-up and VC scene. it is a rather long 118-slide document but most (not all) pages provide food for thought.
Here are a couple of comments, in the page order:
– The introduction is too optimistic (slides 5-7). I doubt their title: the future is being invented in Europe. But it has always been Atomico’s founder vision: see Europe and Start-ups : should we worry? Or is there hope? The future will tell us… One interesting point though: London, Berlin and Paris are the 3 hubs main European hubs and Paris was probably underestimated (in the past).
– The entrepreneurial mindset is continuously improving (slides 15-16). Repeat entrepreneurs are more numerous (slide 18). And they mention their importance not so much as future successful entrepreneurs (you may know my doubts – check Serial entrepreneurs: are they better?) but because of the experience and network they bring.
– I love slide 21 with EPFL #4 world wide in Computer Science (though I hate these rankings!). Switzerland is clearly on the map together with the UK. I am honestly less convinced about the impact of business schools in tech (slide 22). Talent exists in Europe but may not be available for tech (slide 23).
– Again the three top hubs are obvious: together London, Paris and Berlin outnumber Silicon Valley. But the ranking from #4 to #20 is mostly linked to city size, not so much any unique positioning. Tech is creating jobs faster than other industries (slide 26). Never too late! But again Europe is fragmented with 153 identified tech hubs (slide 34)
– Migrants (slides 27-29). Again the UK is #1. France and Germany follow. And Switzerland is well-ranked (except for non-Europeans).
– Local entrepreneurs want to stay home (slide 37): 60% prefer home to another place in Euope (17%) or Silicon Valley (12%), even if 25% of founders incorporated outside of their home country (slide 38). Clearly Europe exists! Even if slide 39 shows more local migrations inside Europe, with the exception of London and Berlin again and the links between hubs are weak (slide 41)
– The slides about venture capital are the most surprising. Slide 46 shows that the European investments have jumped from less than $5B before 2013 to $13B in 2015-16. (In comparison the US is about $30B). And the growth is consistent from early eseed ($0-2M) to early stage ($2-5M) and later stage ($10-50+M). I assemble here their data about the UK, Germany, France and Switzerland (slides 50-52). A new generation of investors is confirmed, those who were entrepreneurs 1st (slide 60). The early such actors were Atomico, Liautaud/Balderton, Niel/Kima. But many emerge. A new generation of funds also emerge (slide 64), and yes, US funds invest in Europe (slide 65)
– Their section about deep tech is less convincing (to me). Probably I did not fully understand what they meant by that and why it would be so special. Slides 78-9 about US tech giants coming to Europe and about their acquisitions in Europe is worth checking though.
– I was not convinced either about the growing awareness of European corporations of the importance of tech. Their investments and acquisitions are still small compared to their US counterparts (slides 84-86). But slide 83 is the confirmation of a scary situation. This is another illustration of the Darwinian and Lamarckian innovation. Look at next figure.
– The section about scale-ups and exits (slides 89-101) could have been called unicorns & IPOs. I see bubbles and low value creations. Not good enough and not enough tech…
– Finally the lside about perceived risks is worth spending some time. they classify them as Business issues (40%); Economic issues (30%); European issues (22%); International issues (8%). But somehow their classification is subjective. For example if you combine risk aversion (4%), fear (2%), ambition (2%), that is 8%. And talent (4%), innovation (3%) and education (2%) would be another 9%. These elements which I consider as cultural could be considered as quite high…
All these notes were taken while reading so don’t see them as a deep analysis and you should build your own views about this really interesting analysis.
Since I published my book in 2007, I have regularly been doing the exercise of comparing the largest US (former) start-ups and their European counterparts. In 2010, I had the following tables:
What I call former start-ups are public high-tech companies which did not exist 50 years ago. Of course Europe is struggling; this has been (and still is) my concern and the reason of my book. Now here is my latest exercise.
I will let you make your own opinion about how things have evolved. I see quite striking elements. The main one comes from a presentation I saw a few days ago about the evolution of the American biggest market capitalizations. Here it is… quite impressive…