The Harvard Business Review is offering free reprints of the May 2013 cover article, “Why the Lean Startup Changes Everything“
Available here
Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Customer Development, Customer Development Manifesto, Lean LaunchPad, Teaching, Venture Capital | 11 Comments »
“I refuse to join any club that would have me as a member.”
Groucho Marx
In my 21 years as an entrepreneur, I would come up for air once a month to religiously read the Harvard Business Review. It was not only my secret weapon in thinking about new startup strategies, it also gave me a view of the management issues my customers were dealing with. Through HBR I discovered the work of Peter Drucker and first read about management by objective. I learned about Michael Porters’s five forces. But the eye opener for me was reading Clayton Christensen HBR article on disruption in the mid 1990’s and then reading the Innovators Dilemma. Each of these authors (along with others too numerous to mention) profoundly changed my view of management and strategy. All of this in one magazine, with no hype, just a continual stream of great ideas.
For decades this revered business magazine described management techniques that were developed in and were for large corporations – offering more efficient and creative ways to execute existing business models. As much as I loved the magazine, there was little in it for startups (or new divisions in established companies) searching for a business model. (The articles about innovation and entrepreneurship, while insightful felt like they were variants of the existing processes and techniques developed for running existing businesses.) There was nothing suggesting that startups and new ventures needed their own tools and techniques, different from those written about in HBR or taught in business schools.
To fill this gap I wrote The Four Steps to the Epiphany, a book about the Customer Development process and how it changes the way startups are built. The Four Steps drew the distinction that “startups are not smaller versions of large companies.” It defined a startup as a “temporary organization designed to search for a repeatable and scalable business model.” Today its concepts of “minimum viable product,” “iterate and pivot”, “get out of the building,” and “no business plan survives first contact with customers,” have become part of the entrepreneurial lexicon. My new book, The Startup Owners Manual, outlined the steps of building a startup or new division inside a company in far greater detail.
In the last decade it’s become clear that companies are facing continuous disruption from globalization, technology shifts, rapidly changing consumer tastes, etc. Business-as-usual management techniques focused on efficiency and execution are no longer a credible response. The techniques invented in what has become the Lean Startup movement are now more than ever applicable to reinventing the modern corporation. Large companies like GE, Intuit, Merck, Panasonic, and Qualcomm are leading the charge to adopt the lean approach to drive corporate innovation. And the National Science Foundation and ARPA-E adopted it to accelerate commercialization of new science.
Today, we’ve come full circle as Lean goes mainstream. 250,0000 copies of the May issue of Harvard Business Review go in the mail to corporate and startup executives and investors worldwide. In this month’s issue, I was honored to write the cover story article, “Why the Lean Startup Changes Everything.” The article describes Lean as the search for a repeatable and scalable business model – and business model design, customer development and agile engineering – as the way you implement it.
I’m proud to be called the “father” of the Lean Startup Movement. But I hope at least two—if not fifty—other catalysts of the movement are every bit as proud today. Eric Ries, who took my first Customer Development class at Berkeley, had the insight that Customer Development should be paired with Agile Development. He called the combination “The Lean Startup” and wrote a great book with that name.
Alexander Osterwalder‘s inspired approach to defining the business model in his book Business Model Generation provide a framework for the Customer Development and the search for facts behind the hypotheses that make up a new venture. Osterwalder’s business model canvas is the starting point for Customer Development, and the “scorecard” that monitors startups’ progress as they turn their hypotheses about what customers want into actionable facts—all before a startup or new division has spent all or most of its capital.
The Harvard Business Review is providing free access to the cover story article, “Why the Lean Startup Changes Everything. Go read it.
Then go do it.
Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Customer Development, Customer Development Manifesto, Lean LaunchPad, Teaching, Venture Capital | 20 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Kevin Dewalt and Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
The previous post, part 4, was about Beijing’s entrepreneurial ecosystem these are my final observations.
Land Rush
For the last 10 years China essentially closed its search, media and social network software market to foreign companies with the result that Google, Facebook, Twitter, YouTube, Dropbox, and 30,000 other websites were not accessible from China. This left an open playing field for Chinese software startups as they “copy to China” existing U.S. business models. Of course “copy” is too strong a word. Adapt, adopt and extend is probably a better description. But for the last decade “innovation” in Chinese software meant something different than it did in Silicon Valley.
The Chinese Social Media Landscape diagram below from Resonance does a great job of illustrating the players in the Chinese market. (Note that the inner ring shows their global equivalents.)
The downside is that with so much venture and angel capital available, investors have been willing to fund the 10th Groupon clone. For the last few years, there really hasn’t been a demand to innovate on top of the ecosystem that’s been built.
New Rules for China
Not only is the Chinese ecosystem completely different but also the consumer demographics and user expectations are equally unique. 70% of Chinese Internet users are under 30. Instead of email, they’ve grown up with QQ instant messages. They’re used to using the web and increasingly the mobile web for everything, commerce, communication, games, etc. (They also probably haven’t seen a phone that isn’t mobile.) By the end of 2012, there were 85 million iOS and 160 million Android devices in China. And they were increasing at an aggregate 33 million IOS and Android activations per month.
It was interesting to learn about China’s digital divide – the gap between East China and Midwest China, and between urban and rural areas. Internet penetration in Beijing is greater than 70% while it’s less than 25% in Yunnan, Jiangxi, Guizhou and other provinces. While there are 564 million web users with 420 million having mobile web access, 74% of Chinese Internet users make less than $500/month and are students, blue-collar workers or jobless.
Unlike U.S. websites that are sparse and slick, Chinese users currently expect complicated, crowded and busy web pages. However, there’s a growing belief that the “design preferences” of Chinese consumers are just bad design. TenCents WeChat, (designed for an international market) is the first incredibly popular app in China to dramatically raise the bar for what a good user interface and user experience looks and feels like. WeChat may change the game for Chinese U/I and U/X experience. The one caveat about online commerce is that while Chinese users will buy physical goods online (Taobao is huge), they seem to hate to pay for music or software, and the model for games seems to be moving to free play with in-app-purchases for accessories and powers. An interesting consequence of the rigid censoring and control of mainstream media is that blogging – reading and writing – is much higher than U.S.
My guess is the current wave of “copy to China” will burn itself out in the next few years as the smart money starts to move to “innovate in China” (i.e. like WeChat.)
Competition
If you’re a software startup competing in China, the words that come to mind are “ruthless and relentless.” The not so polite ones I’ve heard from others are “vicious, unethical and illegal.” Intellectual property protection is great on paper and “limited” in practice. The large players like Alibaba, Baidu and Tencent historically would be more likely to simply copy a startup’s features than to hire their talent. The large companies strategy seems to be to cover every possible market niche by copying successful models from others.
The slide below from the Zhen Fund shows the breadth of business coverage of each of the Chinese Internet incumbents. Each column represents a company (QQ, Sina, Baidu, Netease, Sohu etc.) and the rows indicates their offerings in open platform, group buying, online games, microblogging, Instant Messaging, BBS, Q&A and E-commerce.
Small startups act the same way, simply cloning each other’s products. Sharing and cooperation is not yet part of the ethos. I can’t imagine a U.S. company setting up some subsidiary here and expecting them to compete while they were following U.S. rules. In some ways, the best description of the market dynamics would be “imagine you were competing with 100 companies who are as rapacious as Microsoft was in the 1980’s and 1990’s.” Eventually, China’s innovation-driven economy needs intellectual property rights and anti-trust laws that are enforced.
Sea Turtles and VPN – the connections to the rest of the world
Entrepreneurs in Beijing were knowledgeable about Silicon Valley, entrepreneurship and the state of software and tools available for two reasons. First, there are continuous stream of “sea turtles”—Chinese who have studied or worked abroad—returning home. (The Chinese government must be laughing hysterically over U.S. immigration policy that’s forcing Chinese grad students out of the U.S.) Many of these returnees have worked in Silicon Valley and startups or went to school at MIT and Stanford. (There is a huge difference between the Chinese who have never left and those who went to school abroad, even for a few months – at least a difference in their ability to relate to me and have a conversation on the same wavelength. It’s clear why families try so hard to send their children abroad. It changes everything for them.)
Second, most websites that a non-Chinese would use are blocked including Facebook, Twitter, Youtube, Google Docs, Scribd, Blogspot, Dropbox, New York Times, etc. Almost every entrepreneur I met was using VPN to circumvent the Great Firewall. When the Chinese government censors (run by their propaganda department) shutdown access to yet another U.S. web site, they create another 100,000 VPN users. And when the government tools to detect encrypted VPN’s get more sophisticated, (as it did last year), Chinese users just use stealthier tools. It’s an amazing cat and mouse system.
(Note to Chinese Communist party – the best name for your propaganda department should probably not be the “Propaganda Department.”)
Beijing’s Academic Hub
Right next door to Zhongguancun are China’s top two universities, Peking University and Tsinghua University. Northwest of Beijing is also home to other universities, including technical universities like USTB, BIT, BUPT, and Beihang. Like Silicon Valley, Zhongguancun also has a critical mass of people who are crazy enough to do startups. Equally of interest is a good number of them end up in the PLA’s GSD 3rd Department (the equivalent of our National Security Agency. ) And some of their best and brightest have ended up in the organizations like the 2nd Bureau, Unit 61398 tasked euphemistically for “Computer Network Operations.”
While I didn’t get much time with the academic community, in talking to students, education seems to still be one of China’s bottlenecks – rote lectures, passive learning, follow the process, exam-based performance, etc. And while startups and entrepreneurship courses are now being added to the curriculum, “How to write a business plan” seems to be the state of the art. China’s education system needs to give more attention to fostering students’ innovative thinking, creativity and entrepreneurship.
Entrepreneurial Culture
Fear of Failure
Though they’re familiar with technology in the valley, I picked up some important cultural difference from students and startup engineers I talked to. Even though they’re next to Zhongguancun, the hottest place for startups in China, there seems to be a lower appetite for risk, a lack of interest in equity (instead optimizing for a high salary) and very little loyalty to any one company. The overall culture still has a fear of failure. Most of their parents still tell them to work for the government or a big company.
Talent
I heard from a few investors that as the startup ecosystem is relatively new, there’s a battle for experienced engineering talent and lack of experienced C-level execs. The lack of a previous generation of successful startup CEOs means the current pool of mentors to coach this generation is almost non-existent.
Because salaries are cheap, startups seem to try to solve every problem by throwing bodies at it. Startup teams feel like they are 2-5x the size of American teams. There seems to be little appreciation or interest in multi-skilled people.
Turnover of employees in capital in Beijing is very high. Employees work here for a few months and are suddenly gone. There’s a noticeable lack of tenacity in young, new entrepreneurs. They start a project, and if it isn’t a home run, they’re gone. Perhaps it’s the weather. Silicon Valley has great weather and lifestyle, and nobody wants to leave. Beijing has awful weather and pollution, it’s a temporary place to get rich and then leave.
Management 101
The board/CEO relationship still isn’t clearly understood by either party. I’ve talked to entrepreneurs who view the investors as a “boss.” A good number of startups in Beijing seem driven by the VCs – and not the founders. This might also be a hangover from the command and control system of a state-driven planned economy. Ironically investors told me that the reverse has been true as well. Some startups acted like the VC was a bank. They took the money and then ignored their board. Over time, as investors add more value than writing checks, this relationship will mature.
Creativity
I was surprised that startup teams ask what seems like the kind of questions Americans learn at their first jobs.
Team: ”We keep spending money trying to get people to our web site but they don’t come back. We are almost out of money.”
Me: ”Ok. Why are you still spending money?”
Team: “long…silence…we need people to come to the website.”
On the other hand, for most of them it probably is their first job. And the educational system hasn’t prepared them for executing anything other than a plan. Iterations and pivots are a tough concept if you’ve never been taught to think for yourself. And challenging the system is not something that’s actually encouraged in China.
They also ask questions I just don’t know how to answer. “How do you know how to be creative? What do we have to do to be creative?” ”You Americans just seem to know how to do things even if you’ve never done them – can you show us how to do that?” This seems to be an artifact of the Chinese rote educational system and its current system of government.
Innovation Ecosystem
On the plane ride home I started to think about the similarities and differences between the innovation ecosystems of Silicon Valley and the TMT segment I saw in Beijing. The motivations are the same – profit – driven by entrepreneurs and venture finance. And the infrastructure is close to the same – research universities, predictable economic system, a path to liquidity, a stable legal system and 24/7 utilities. But the differences are worth noting – it’s a young ecosystem, so startup management tools are nearly non-existent. But there’s a difference in the culture of failure and risk taking – the current cultural pressure is to “work for a big company or the government.” Outward facing Universities are just starting to appear, and while there’s a free flow of information inside China, it suffers from the constraints of the Great Firewall.
But there are two striking differences. The first is the lack of creativity. The Beijing software ecosystem I saw has spent the last decade in a protected market copying successful U.S. business models. ”Copying, adopting and adapting,” is not the same as ”competing, innovating and creating” in a global market. Perhaps products like WeChat, designed for an international market, might be the beginning of real innovation.
The second difference in ecosystems – the lack of freedom to dissent – goes deeper to the difference between the two systems. In the U.S. entrepreneurs are encouraged to “Think Different.” Our touchstone for creativity is the Apple ad that said, “Here’s to the crazy ones, the misfits, the rebels, the troublemakers,… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things….” This spirit of rebellion against the status quo got us Steve Jobs. In China the same attitude is likely to get you jail time. Unless you can speak truth to power, you’ll never have an innovation economy.
Conclusion
China is astonishing. The country has risen. Their economy is the envy of the world. The entrepreneurial and “can do” spirit reminds me of what the U.S. was known for. Chinese citizens are proud of their country and believe the world is theirs in the way Americans did in the 1950’s. Their leadership has shown incredible foresight in engineering an amazing economic engine and formidable military. They come so far, and yet…
To take nothing away from what China has accomplished, a visit to Beijing had all the subtle reminders that this version of capitalism has come without democracy or justice; the guards in the Forbidden City armed with fire extinguishers in case more protestors try to set themselves on fire, the security around Tiananmen Square to prevent protestors from gathering, and the “black jails” to keep rural petitioners out of Beijing. And of course the “great firewall,” attempting to keep information about the outside world from reaching inside China.
The bet the government is making is that if they can keep the economy cooking and distract the masses with ever increasing consumer goods and foreign adventures, maybe it can survive.
All of these are signs of a weak China not a strong one. They are the signs of a leadership frightened not by external enemies but by their own people.
It usually doesn’t end well.
——
all five China blog posts available as a download here
Filed under: China, Customer Development, Technology, Venture Capital | 25 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
The previous post described the evolution of the Chinese Venture Capital system. The next two posts are about what I saw and learned in my short stay exploring Beijing’s entrepreneurial ecosystem.
Entrepreneurship in Beijing
In the few days I was in China I met with several VC’s, angel investors, business press and spoke to hundreds of entrepreneurs. I was blown away by what I saw in Beijing. First, I was amazed by the physical impact of the city itself. This was a modern city in a hurry to make a first impression – think of what Rome looked like in the time of the empire or New York in the 1920’s – now it’s Beijing announcing that China has arrived.
However if you scratch the surface, you can still find a bit of the old Beijing in the hutongs. Drive 50 miles outside the city into the surrounding villages and you see the distance China has to travel to bring the rural areas into the 21st century. In Beijing we hadn’t seen air so badly polluted since we had been in Agra in India in the winter where I swear there was a day you could wave your hand in front of you and see traces of it in the air (and their excuse was they burn dung for heat.)
David Lin and the Microsoft China Accelerator was gracious enough to host two wonderful days of events for me. I trained the Startup Weekend Next Beijing mentors and instructors, presented to several hundred entrepreneurs, and had a great fireside chat with Zhen Fund founding partner Xu Xiaoping in front of another roomful of entrepreneurs.
Kai-fu Lee of Innovation Works was equally generous with his time. We had a fireside chat with a room full of eager entrepreneurs. And he was generous in sharing his insights about the current state of entrepreneurship and investment in China. And through it all Louis Yuan my patient and wonderful publisher from China Machine Press kept me moving through the events.
But what made the overwhelming impression for me was finding an entrepreneurial software cluster on par with the Internet software portion of Silicon Valley. The physical heart of the Beijing startups is in Zhongguancun in the Haidian District, located in the northwest side of Beijing. Startups here are primarily in what they call the TMT (Technology, Media and Telecommunications) segment. Not only does Zhongguancun have Chinese startups, but global technology companies (Nokia, Ericsson, Motorola, Sony Ericsson, Microsoft, IBM, Sun, Oracle, BEA, Alcatel Lucent, Google) all have offices here or elsewhere in Beijing.
If there ever was any question about the value of China’s Torch Program walk around Zhongguancun. It was the first of the 54 Science and Technology Industrial Parks.
China Venture Capital
An entrepreneurial ecosystem is driven one of two ways; either by a crisis (i.e. innovation in the U.S. during World War II,) or during peacetime by profit.
If it’s driven by profit then the ecosystem needs both entrepreneurs as well as Venture Finance.
China now has plenty of both.
China has the biggest Venture Capital industry outside the U.S. To compare the two, in 2011 U.S. venture capitalists invested $26.5 billion in all deals. Out of that total, they funded 967 Internet deals with $6.7 billion.
By comparison, in 2011 Chinese VC’s invested $13 billion in all deals. Out of that total, they funded 268 Internet deals with $3.2 billion. About 1/3 of all China’s Venture Capital investment is made in Beijing and the majority of those investments are in the Technology, Media and Telecommunications (TMT) sector I’ll describe shortly.
As vibrant as the China venture business has been, 2012 was a different story. VC’s pulled back and only invested $3.7 billion in all deals, funding just only 43 deals with $563 million.
Closed for You, Open For Us
First a bit of context in what the VC’s in Beijing are investing in. China has essentially closed its internal search, media and social network software market to foreign companies who wouldn’t play with the government rules on the Great Firewall. (China blocks “objectionable” website content and monitors everyone’s Internet access.)
Google retreated to Hong Kong and Baidu took its place. Facebook was too frightening to Chinese censors, so Renren is the leading social media player. Email? Working professionals/white collar use emails, but most users grew up instant messaging on TenCent’s QQ and most are moving to Weixin/WeChat. Twitter? No, it’s Sina Weibo, and if you want games with your chat – TenCent. Amazon and Ebay? Nope in China it’s Alibaba’s Taobao or 360buy.com. If you’re outside of China, you never hear about these companies or interact with them because they’re geared to serve only Chinese users.
This closed but very large market means that greater than 90% of Chinese software startups focus exclusively on the Chinese market. (The <10% that decide to go global early do so by starting outside of China. Another 10% may try to go global when they’re larger and have the resources for two languages, cultures and regulations. )
This has resulted in a completely different consumer software ecosystem than found elsewhere in the world. Given the closed market to U.S. Internet companies, VC’s in China have guided startups to execute the “copy to China” model. Thinking, if it worked in the U.S., copying a known model is less risky than trying something new and untested. The problem is that this space is getting really crowded – from the bottom up as everyone tries the 200th clone – and from the top down, as the major incumbents try to fill every possible market niche.
The table below maps the type of software in China to their global equivalents in each product category in the Technology, Media and Telecommunications (TMT) sector.
A Huge Market Is Finally Real
For a hundred years the fantasy of global marketers was, “ if only everyone in China would buy one…” That day is final here. The numbers of mobile subscribers are staggering – 1.18 billon, 260 million are 3G. Chinese Internet companies live in a large closed, self-contained ecosystem with 564 million web users with 420 million having mobile web access. 309 million use microblogs and 242 million shop online. (BTW, market research, financial and other statistical information are usually unreliable in China, but even taken with a grain of salt these are staggering numbers.)
The table below from web2asia.com shows the number of users of online social networks as of 2009. Did I mention this is a huge market.
Investment in the Technology, Media and Telecommunications (TMT) sector
The charts below from David Lin, Microsoft Accelerator detail investments in the Technology, Media and Telecommunications (TMT) sector – almost all of it is centered in Beijing. (Note that these numbers differ from the Zhen Fund data -welcome to statistics in China – but they both provide an overall sense of the market size and direction.)
45% of all Venture Capital Investment in China went into the Technology, Media and Telecommunications (TMT) sector.
The number of deals in Technology, Media and Telecommunications more than doubled in 2011 over the previous five years and slowed back down dramatically in 2012. More than 1,600 VC investments in TMT have been made since 2007, with a record high of 436 in 2011.
Internet investments makes up more than 50% of all the deals in Technology, Media and Telecommunications made since 2011, while, E-commerce investments, in turn, accounts for nearly 50% of the investment deals in Internet. Investments in Mobile Internet makes up roughly 11% of all the deals in Technology, Media and Telecommunications, and have been on the rise since 2011.
Series-A round investments dominates Technology, Media and Telecommunications (TMT) deals, making up 60% of all.
Beijing, Guangdong (including Shenzhen) and Shanghai came out as the most dynamic spots for Technology, Media and Telecommunications (TMT) investments.
Beijing Venture/Angel Ecosystem
While Beijing has VC’s and Angel investors happy to write a check there aren’t as many angels/VCs in China versus US per capita. Several VC’s mentioned that there’s a funding gap for seed stage investments. The Angel/Seed network in Beijing feels fragmented and mostly inexperienced (as are a good number of the China VC’s). Kind of reminded me of the drivers in Beijing – they were all driving in a way that made me think they all just got their drivers license – until I remembered that they did. Car sales in China went from 1 million in 2001 to 14 million in 2011.
Other Beijing ecosystem issues I heard about were the things we take for granted: the lack of knowledge sharing (“pay it forward” isn’t part of the culture,) limited mentoring (few experienced mentors,) and a lack of open source education, and no AngelList model. In the U.S. it’s easy to share and browse ideas and deals, but in China there’s a long legacy of guarding knowledge as power, and the justifiable paranoia of someone copying your idea prevents sharing.
Liquidity
Unlike the U.S. there are almost no mergers or acquisitions in this market segment. It’s much easier to just steal their ideas and hire their employees. So big companies rarely acquire startups. Liquidity for most Internet startups happens via IPO’s. 70% of exits in China are via IPO (in the U.S. on NASDAQ or the NYSE or on ChiNext, China’s equivalent of NASDAQ) compared to the 90% of exits in US via mergers or acquisitions. Alibaba (commerce), Tencent (games/chat) and Baidu (search) all have market caps over $40 billion.
The next post, the Gold Rush and Fire Extinguishers – Beijing entrepreneurs, startup culture and some conclusions.
Lessons Learned
Filed under: China, Customer Development, Technology, Venture Capital | 12 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
The first post described how China built a science and technology infrastructure to support advanced weapons systems development. The previous post described how the Torch program built China’s innovation clusters. This post is about the rise of Chinese venture capital and how it helped build the countries entrepreneurial ecosystem.
The Rise of Chinese Venture Capital
China’s move away from a state system that solely depended on a command and control economy started in the 1990s. The first wave of startups began when R&D centers and universities began to provide the technology and seed capital for new startups that were spin-outs or spin-offs. This could be a group of individuals leaving a university or research center or an entire department leaving. For example, in the 1990’s 85% of the start-up funds of the new technology companies founded in Beijing came from the research center or university they left.
The second wave of technology investors were Chinese banks, who provided the majority of the later stage investments in the Torch Program. By 1991, 70% of the Torch funded startups were getting bank financing for expansion and later stages of the new ventures, with local governments acting as guarantors. Like the U.S. SBIR and STTR programs, the Torch Program’s funding for new ventures was limited to seed funding the front end. Being designated as a Torch Program startup gave banks comfort to provide loans to these ventures for technology commercialization.
Technology zones with Science and Technology Industrial Parks were the third source of support for new ventures. Inside the zones were Torch Technology Business Incubators with startups licensed by the local governments. These local governments financially supported the startups because, by locating in these zones, the new ventures were seen as contributing to local economic development. This helped the startups qualify for funding from banks and venture capital firms.
By the mid-1990s, Chinese leaders realized that the Torch program couldn’t be the source of all capital for startups. At the same time neither banks nor local governments had the cash to finance startups on the scale the country needed. The problem was that in China the government didn’t recognize venture capital firms as a legitimate organizational type. The founding of domestic VC firms began with the establishment of local government-financed venture capital firms (GVCFs), followed by university-backed VC firms (UVCFs). (The State Science and Technology Commission and the Ministry of Finance formed the China New Technology Venture Investment Corporation in 1986, but it was a government agency supporting national technology venture policy objectives, rather than a profit-oriented private enterprise. It went bankrupt in 1997.)
A few foreign VC firms like IDG Capital Partners entered China in the early 1990s. Gradually, from the mid-1990s, the perception of venture capital shifted from its being a type of government funding to being a commercial activity necessary to support the commercialization of new technology. But it wasn’t until 1998 that corporate-backed VC firms could be established, and that started a wave of VC funds backed by government, corporate and foreign capital.
A great summary diagram below from OECD’s Report on China’s Innovation Policy traces the evolution of China’s Innovation Ecosystem.
Investing in China Today
Fast forward a decade, today the Private Equity and Venture Capital business is booming in China with over 1000 firms actively investing. Most of the early deals were done by offshore venture funds – with their fund registered in countries outside China and using dollars. The latest trends are as Renminbi (“RMB”) funds (the Renminbi is the official currency in China.) In the past foreign funds who wanted to invest in China had to set up funds using dollars with complicated offshore structures with exits through offshore listings. The Renminbi funds have fewer restrictions on what industries the fund can invest in, less regulatory oversight and access to listing a portfolio company in China. There are two types of Renminbi funds: domestic funds and foreign-invested funds. Domestic Renminbi funds are fully owned by Chinese investors, while foreign-invested Renminbi funds may be partially or fully owned by non-Chinese investors. Both types of funds are organized under Chinese law and use Renminbi to invest in Chinese companies.
The other big change was the creation of ChiNext, China’s equivalent of NASDAQ stock exchange for start-ups, in 2009. The market was created to provide startups and their investors liquidity. Over 100 startups were listed on ChiNext the first year of its launch at sky-high valuations (average of 66 times earnings.) About 60% of the startups listed on ChiNext were backed by Renminbi funds, making the investors of these funds one of the main beneficiaries of the exchange.
The next posts Part 4 Zhongguancun in Beijing – China’s Silicon Valley and part 5, the Gold Rush and Fire Extinguishers describe the Beijing entrepreneurship ecosystem.
Lessons Learned
Filed under: China, Customer Development, Technology, Venture Capital | 9 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view.Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
The previous post described how China built its science and technology infrastructure. This post is about the how the Chinese government engineered technology clusters.
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The Torch Program
In size, scale and commercial results China’s Torch Program from MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the world. Of all the Chinese government programs, the Torch Program is the one program that kick-started Chinese high-tech innovation and startups.
In the last decade Torch managed to break free of China’s state central planning bureaucracies. Of all the Chinese innovation programs, Torch is the one that was run like a startup – iterating and pivoting as it learned and discovered. This enabled Torch to evolve with China’s rapidly global economy.
Torch has four major parts: Innovation Clusters, Technology Business Incubators (TBIs), Seed Funding (Innofund) and Venture Guiding Fund.
Innovation Clusters
Industries have a competitive advantage when related companies cluster in a geographical location. Examples are Hollywood for movies, Milan for fashion, New York for finance and today, Silicon Valley for technology entrepreneurship. The early clusters occurred by happenstance of geography or history. But the theory is that you can artificially create a cluster by concentrating resources, finance and competences to a critical threshold, giving the cluster a decisive sustainable competitive advantage over other places. Israel, Singapore and now China are the three countries that have successfully put that theory into practice.
The Torch program created Innovation Clusters by creating national Science and Technology Industrial Parks (STIPs), Software Parks, and Productivity Promotion Centers.
The first Science and Technology Industrial Park was Zhongguancun Science Park in Beijing. It has become China’s Silicon Valley. (This was the area I visited in this trip to China.) In addition to the one in Beijing, China has set up 53 additional industrial parks and in them are ~60,000 companies with 8 million employees. Industry or technology specific versions of these clusters have been set up; for example Donghu in Wuhan – specializing in optoelectronics, Zhangjiang in Shanghai – focusing on integrated circuits and pharmaceuticals, Tianjin – biotech and new energy, Shenzhen – telecommunications and Zhongshan – medical devices and electronics.
The Science and Technology Industrial Parks contributed 7% of China’s GDP and close to 50% of all of China’s R&D spending.
In addition to the 54 Science and Technology Industrial Parks, the Torch program also set up an additional 32 Torch Program Software Parks.
Another key part of China’s cluster strategy was collaboration between research and business, as well as between large enterprises and tech-based small and medium enterprises. It did so by building a national network of a 1,000+ Productivity Promotion Centers. They provide consulting, promotion, product testing, hiring, training and incubation services to startups.
Technology Business Incubators (TBIs)
While the Innovation Clusters designated specific areas of the countries where high tech was to occur, it’s the Technology Business incubators located inside these clusters where the startup companies physically reside. Much like incubators worldwide, they provide startups with office space, free rent, access to university technology transfer, etc.
By 2011, there were a total of 1034 Technology Business Incubators across China, including 336 as National incubators, hosting nearly 60,000 companies. (20% of the National Incubators were privately-run and their percentage is steadily increasing.) In recent years Business Incubators have developed into diverse models. For example, the Ministry of Education and the Ministry of Science and Technology teamed up to put 45 incubators in universities. There are close to 100 specialized incubators for companies founded by returned overseas Chinese scientists and engineers. There are a dozen sector-specific incubators (a Biomedicine Incubator in Shanghai, Advanced Material Incubator in Beijing, a Marine Technology Incubator in Tianjin, etc.) These incubators are mostly clustered in the eastern coastal regions, and disproportionately target TMT (Technology Media and Telecom) and Biotech.
Some of the startups coming out of these incubators have become large international companies including Lenovo, Huawai, Suntech Power, etc.
Seed Funding (Innofund).
The best analog for China’s InnoFund is the U.S. government’s SBIR and STTR programs. Set up in 1999, Innofund offers grants ($150 – $250K), loan interest subsidies and equity investment. Innofund is designed to bridge early stage technology companies that have innovative technology and good market potential but are too early for commercial funding (banks or VCs.) Innofund applicants have to be in high-tech R&D, have less than 500 people, at least 30% of the employees have to be technical and the majority of the company owned by Chinese. The ultimate goal of Innofund is to get the startups far enough along in technology and market validation so other sources of financial capital (banks, VC’s, corporate partners) will invest.
Since its establishment, there’s been over 35,000 applications with 9,000 projects approved and close to a $1 billion allocated.
Most Venture Capitalists in China viewed the Innofund the same way most U.S. VC’s treat the SBIR and STTR programs – they never heard of it, or they think it takes too much time to apply for too little money. And with the same complaints; tedious, relationship driven application process, bureaucratic reporting requirements, and outcomes often measured in quantity and not quality. However, for startups who have gotten an Innofund grant, it does provide the same positive cachet as an SBIR and STTR grant – the government has reviewed your technology and thought it was worthy.
Venture Guiding Fund
In 2007 the Ministries of Science and Finance raised the stakes to get VC’s focused on funneling more VC money into growing startups – they set up a Venture Guiding Fund. The Venture Guiding Fund invests directly into VC funds, co-invests with VC’s, and covers some VC bets. It does this with four programs: 1) A fund of funds, holding < 25% equity in VC firms, requiring only a fixed rate return; 2) the fund will co-invest with other VC firms matching up to 50% of other VC firm’s equity investment or a maximum of $500K; 3) Risk subsidies for VC firms, where the fund will be compensated for the cost and loss of VC firms which have made investments in technology-based startups; and 4) Grants for portfolio reserves, where the fund will provide grants for technology-based startups which are being incubated and coached by VC firms.
Part 3, the next post describes the rise of Chinese venture capital.
Lessons Learned
Filed under: China, Customer Development, Technology, Venture Capital | 8 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese 
and 
Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. My post about Japan will follow. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
Summary: I’ve lived in Silicon Valley for 35 years, I’ve taught in entrepreneurial clusters in New York, Boston, Helsinki, Santiago Chile, St. Petersburg, Moscow, Prague, and Tokyo, but the visit to the heart of the Beijing startup world Zhongguancun has truly blown me away.
Each of these clusters has wondered how to become the next Silicon Valley. Beijing is already there.
———-
What a long strange trip China has been through. After the creation of the Peoples Republic of China in 1949, all industry was nationalized, agriculture was collectivized, and the private sector was eliminated. All companies were owned by the state, all planning was centralized, and the state determined the allocation of resources. This was the China I grew up with – the one where private enterprise was a crime and marketing wasn’t a profession.
To say China has transformed itself is perhaps the biggest understatement one can make. China has embraced state capitalism in a way Wall Street can only dream about.
Startups, Venture Capital and the Communist Party: how did this happen in China?
The best analogy to describe the relationship of science and technology and the Chinese startup scene is to understand its parallels with the United States during the Cold War with the Soviet Union. During World War II, the U.S. mobilized scientists in a way no other country had. For 45 years – post World War II until the fall of the Soviet Union – the U.S. viewed science and technology as a strategic asset. We made major investments in it, understanding that establishing basic and applied science leadership was necessary for us to build advanced weapons systems to defend our country and deter and if necessary, wage and win a war with the Soviet Union.
These investments took the form of building national research organizations, several for basic science (NSF, NIH) and others for applied weapons research (DOD, DARPA, DOE, etc.) Research universities also became an integral part of the military ecosystem as the federal government pumped billions into supporting science.
Startups, entrepreneurship and commercial applications are happy byproducts of those military investments. For example, as the semiconductor business started, the largest customers for Fairchild’s and Texas Instruments new integrated circuits were the Apollo Guidance Computer and the guidance system for the Minuteman II ICBM.
China is following the same path...
Over the last three decades, to achieve strategic parity with the United States and to construct a modern military, the Chinese have made massive investments in building their science and technology infrastructure. China has gone from a land-based army to one that can support its territorial claims to the South China Sea and Taiwan with anti-access/area-denial weapons. This evolution required a transition, moving from a reliance on the numerical superiority of its land army toward a force boasting sophisticated aircraft and naval platforms, precision- strike weapons, and modern C4SIR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) capabilities. Its Second Artillery Corps not only controls China’s ICBMs, but also its short range missiles pointed at Taiwan, Vietnam, Philippines, and U.S. bases in Guam and Okinawa. And its new terminally guided ICBMs have put U.S. aircraft carriers in harms way in any regional confrontation. Its air force and navy have gone from a self-defense force to one that can project regional power effectively to the first island chain and beyond.
China’s military modernization depends heavily on investments in China’s science and technology infrastructure, reform of its defense industry, and overt and covert procurement of advanced technology and weapons from abroad.
Building China’s Science and Technology infrastructure
Science and startups have come a long way since the 1980’s when the Chinese government owned everything and controlled it through a central planning system. But before startups could happen, China’s basic science, technology and finance infrastructure and ecosystem needed to be built. Here’s how a national policy for science and technology emerged.
Beginning in the 1982, China started a series of science and technology programs in five areas: support of basic research, high technology R&D, technology innovation and commercialization, construction of scientific research infrastructure, and development of human resources in science and technology.
The majority of the science and technology programs are driven by MOST (Ministry of Science and Technology) and NSFC (National Natural Science Foundation). As we’ll see later, the MOF (Ministry of Finance) also has had a hand in funding new ventures.
The diagram below from OECD’s Report on China’s Innovation Policy puts the ministries involved in science in context. (Note that it does not show the military technology ministries.)
Part two the next post, describes China’s Torch Program, the largest government-run entrepreneurial program in the world.
Lessons Learned
Filed under: China, Customer Development, Technology, Venture Capital | 22 Comments »
I often get asked, “how do I get a meeting with a VC?” Here is my slightly tongue-in-cheek view.
Filed under: Customer Development, Venture Capital | 13 Comments »
How to build regional entrepreneurial communities has just gotten it’s first “here’s how to do it” book. Brad Feld’s new book Startup Communities joins the two other “must reads,” (Regional Advantage and Startup Nation) and one “must view” (The Secret History of Silicon Valley) for anyone trying to understand the components of a regional cluster.
There’s probably no one more qualified to write this book then Brad Feld (startup founder, co founder of two VC firms – Mobius and Foundry, and founder of TechStars.)
Leaders and Feeders
Feld’s thesis is that unlike the common wisdom, it is entrepreneurs that lead a startup community while everyone else feeds the community.
Feld describes the characteristics of those who want to be regional Entrepreneurial Leaders; they need to be committed to their region for the long term (20+ years), the community and its leaders must be inclusive, play a non-zero sum game, be mentorship-driven and be comfortable experimenting and failing fast.
Feeders include the government, universities, investors, mentors, service providers and large companies. He points out that some of these, government, universities and investors think of themselves as the leaders and Feld’s thesis is that we’ve gotten it wrong for decades.
This is a huge insight, a big idea and a fresh way to view and build a regional ecosystem in the 21st century. It may even be right.
Activities and Events
One of the most surprising (to me) was the observation that a regional community must have continual activities and events to engage all participants. Using Boulder Colorado as an example, (Feld’s home town) this small entrepreneurial community runs office hours, Boulder Denver Tech Meetup, Boulder Open Coffee Club, Ignite Boulder, Boulder Beta, Boulder Startup Digest, Startup Weekend events, CU New Venture Challenge, Boulder Startup Week, Young Entrepreneurs Organization and the Entrepreneurs Foundation of Colorado. For a city of 100,000 (in a metro area of just 300,000 people) the list of activities/events in Boulder takes your breath away. They are not run by the government or any single organization. These are all grassroots efforts by entrepreneurial leaders. These events are a good proxy for the health and depth of a startup community.
Incubators and Accelerators
One of the best definitions in the book is when Feld articulates the difference between an incubator and an accelerator. An incubator provides year-round physical space, infrastructure and advice in exchange for a fee (often in equity.) They are typically non-profit, attached to a university (or in some locations a local government.) For some incubators, entrepreneurs can stay as long as they want. There is no guaranteed funding. In contrast, an accelerator has cohorts going through a program of a set length, with funding typically provided at the end.
Feld describes TechStars (founded in 2006 with David Cohen) as an example of how to build a regional accelerator. In contrast to other accelerators TechStars is mentor-driven, with a profound belief that entrepreneurs learn best from other entrepreneurs. It’s a 90-day program with a clear beginning and end for each cohort. TechStars selection criteria is to first focus on picking the right team then the market. They invest $118,000 ($18k seed funding + $100K convertible note) in 10 teams per region.
Role of Universities
To the entrepreneurial community Stanford and MIT are held up as models for “outward-facing” research universities. They act as community catalysts, as a magnet for great entrepreneurial talent for the region, and as teachers and then a pipeline for talent back into the region. In addition their research offers a continual stream of new technologies to be commercialized.
Feld’s observation is that that these schools are exceptions that are hard to duplicate. In most universities entrepreneurial engagement is not rewarded, there’s a lack of resources for entrepreneurial programs and cross-campus collaboration is not in the DNA of most universities.
Rather than thinking of the local university as the leader, Feld posits a more effective approach is to use the local college or university as a resource and a feeder of entrepreneurial students to the local entrepreneurial community. He uses Colorado University’ Boulder as an example of of a regional university being as inclusive as possible with courses, programs and activities.
Finally, he suggests engaging alumni for something other than fundraising – bringing back to the campus, having them mentor top students and celebrating their successes.
Role of Government
Feld is not a big fan of top-down government driven clusters. He contrasts the disconnect between entrepreneurs and government. Entrepreneurs are painfully self-aware but governments are chronically not self-aware. This makes government leaders out of touch on how the dynamics of startups really work. Governments have a top-down command and control hierarchy, while entrepreneurs work in a bottoms-up networked world. Governments tend to focus on macro metrics of economic development policy while entrepreneurs talk about lean, startups, people and product. Entrepreneurs talk about immediate action while government conversations about policy do not have urgency. Startups aim for immediate impact, while governments want to control. Startup communities are networked and don’t lend themselves to a command and control system.
Community Culture
Feld believes that the Community Culture, how individuals interact and behave to each other, is a key part of defining and entrepreneurial community. His list of cultural attributes is an integral part of Silicon Valley. Give before you get, (in the valley we call this the “pay it forward” culture.) Everyone is a mentor, so share your knowledge and give back. Embrace weirdness, describes a community culture that accepts differences. (Starting post World War II the San Francisco bay area became a magnet for those wanting to embrace alternate lifestyles. For personal lifestyles people headed to San Francisco. For alternate business lifestyles they went 35 miles south to Silicon Valley.)
I was surprised to note that the biggest cultural meme of Silicon Valley didn’t make his Community Culture chapter - failure equals experience.
Broadening the Startup Community
Feld closes by highlighting some of the issues faced by a startup community in Boulder. The one he calls Parallel Universes notes that there may be industry specific (biotech, clean tech etc.) startup communities sitting side-by-side and not interacting with each other.
He then busts the myths clusters tell themselves; “lets be like Silicon Valley” and the “there’s not enough capital here.”
Quibbles
There’s data that that seems to indicate a few of Feld’s claims about about the limited role of venture, universities and governments might be overly broad (but doesn’t diminish his observation that they’re feeders not leaders.) In addition, while Silicon Valley was a series of happy accidents, other national clusters have extracted its lessons and successfully engineered on top of those heuristics. And while I might have misread Feld’s premise about local venture capital, but it seems to be, “if there isn’t a robust venture capital in your region it’s because there isn’t a vibrant entrepreneurial community with great startups. As venture capital exists to service startup when great startups are built investors will show up.” Wow.
Finally, local government top-down initiatives are not the only way governments can incentivize entrepreneurial efforts. Some like the National Science Foundation Innovation Corps have had a big bang for little bucks.
Summary
Entrepreneurship is rising in almost every major city and region around the world. I host at least one region a week at the ranch and each of these regions are looking for a roadmap. Startup Communities is it. It’s a strategic, groundbreaking book and a major addition to what was missing in the discussion of how to build a regional cluster. I’m going to be quoting from it liberally, stealing from it often, and handing it out to my visitors.
Lessons Learned
- Entrepreneurs lead a startup community while everyone else feeds the community
- Feeders include the government, universities, investors, mentors, service providers and large companies
- Continual activities and events are essential to engage all participants
- Top-down government-driven clusters are an oxymoron
- Building a regional entrepreneurial culture is critical
Filed under: Big Companies versus Startups: Durant versus Sloan, Secret History of Silicon Valley, Teaching, Venture Capital | 15 Comments »
We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win…
John F. Kennedy, September 1962
Innovation
I teach entrepreneurship for ~50 student teams a year from engineering schools at Stanford, Berkeley, and Columbia. For the National Science Foundation Innovation Corps this year I’ll also teach ~150 teams led by professors who want to commercialize their inventions. Our extended teaching team includes venture capitalists with decades of experience.
The irony is that as good as some of these nascent startups are in material science, sensors, robotics, medical devices, life sciences, etc., more and more frequently VCs whose firms would have looked at these deals or invested in these sectors, are now only interested in whether it runs on a smart phone or tablet.
And who can blame them.
Facebook and Social Media
Facebook has adroitly capitalized on market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. Second, social needs previously done face-to-face, (friends, entertainment, communication, dating, gambling, etc.) are now moving to a computing device. And those customers may be using their devices/apps continuously. This intersection of a customer base of billions of people with applications that are used/needed 24/7 never existed before.The potential revenue and profits from these users (or advertisers who want to reach them) and the speed of scale of the winning companies can be breathtaking.
The Facebook IPO has reinforced the new calculus for investors. In the past, if you were a great VC, you could make $100 million on an investment in 5-7 years. Today, social media startups can return 100’s of millions or even billions in less than 3 years. Software is truly eating the world.
If investors have a choice of investing in a blockbuster cancer drug that will pay them nothing for fifteen years or a social media application that can go big in a few years, which do you think they’re going to pick? If you’re a VC firm, you’re phasing out your life science division.
As investors funding clean tech watch the Chinese dump cheap solar cells in the U.S. and put U.S. startups out of business, do you think they’re going to continue to fund solar? And as Clean Tech VC’s have painfully learned, trying to scale Clean Tech past demonstration plants to industrial scale takes capital and time past the resources of venture capital. A new car company? It takes at least a decade and needs at least a billion dollars. Compared to IOS/Android apps, all that other stuff is hard and the returns take forever.
Instead, the investor money is moving to social media. Because of the size of the market and the nature of the applications, the returns are quick – and huge.
New VC’s, focused on both the early and late stage of social media have transformed the VC landscape. (I’m an investor in many of these venture firms.) But what’s great for making tons of money may not be the same as what’s great for innovation or for our country.
Entrepreneurial clusters like Silicon Valley (or NY, Boston, Austin, Beijing, etc.) are not just smart people and smart universities working on interesting things. If that were true we’d all still be in our parents garage or lab. Centers of innovation require investors funding smart people working on interesting things - and they invest in those they believe will make their funds the most money. And for Silicon Valley the investor flight to social media marks the beginning of the end of the era of venture capital-backed big ideas in science and technology.
Don’t Worry We Always Bounce Back
The common wisdom is that Silicon Valley has always gone through waves of innovation and each time it bounces back by reinventing itself.
[Each of these waves of having a clean beginning and end is a simplification. But it makes the point that each wave was a new investment thesis with a new class of investors as well as startups.]
The reality is that it took venture capital almost a decade to recover from the dot-com bubble. And when it did Super Angels and new late stage investors whose focus was social media had remade the landscape, and the investing thesis of the winners had changed. This time the pot of gold of social media may permanently change that story.
What Next
It’s sobering to realize that the disruptive startups in the last few years not in social media - Tesla Motors, SpaceX, Google driverless cars, Google Glasses - were the efforts of two individuals, Elon Musk, and Sebastian Thrun (with the backing of Google.) (The smartphone and tablet computer, the other two revolutionary products were created by one visionary in one extraordinary company.)
We can hope that as the Social Media wave runs its course a new wave of innovation will follow. We can hope that some VC’s remain contrarian investors and avoid the herd. And that some of the newly monied social media entrepreneurs invest in their dreams. But if not, the long-term consequences for our national interests will be less than optimum.
For decades the unwritten manifesto for Silicon Valley VC’s has been; We choose to invest in ideas, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.
Here’s hoping that one day they will do it again.
.
If you can’t see the video above click here.
Filed under: Technology, Venture Capital | 80 Comments »
A man who carries a cat by the tail learns something he can learn in no other way.
Mark Twain
Venture Capitalists who are serious about turning their firms into more than one-fund wonders may want to have their associates actually start and run a company for a year. Running a company is distinctly different from simply having operating experience – (working in bus dev, sales or marketing.) None of that can compare with being the CEO of a startup facing a rapidly diminishing bank account, your best engineer quitting, working until 10pm and rushing to the airport and catching a redeye for a “Hail Mary” close of a customer, with your board demanding you do it faster.
Today, you can start a web/mobile/cloud startup for $500,000 and have money left over. Every potential early-stage Venture Capitalist should take a year and do it before he or she makes partner.
Here’s why.
——-
Venture capital as a profession is less than half a century old.
Over time Venture firms realized that the partners in the firms needs a variety of skills:
Some of these skills are learned in school (finance), some are innate aptitudes (people skills), some are learned pattern recognition skills (shadowing experienced partners, hard won success and failures of their own), and some are learned by having operating experience. But none of them are substitutes for having started and run a company.
How to Become a VC
Early-stage Venture Capital firms grow their partnerships in different ways, some hire:
In surveying my VC friends, I was surprised about the strong and diverse opinions. The feedback varied from:
Carrying the Cat By The Tail
When I finally became a CEO it was after I had spent my career working my way up the ladder in marketing in startups. I did every low-level job there was, at times sleeping under my desk (engineering was doing the same.) By the time I was running a company, having some junior employee tell me why they couldn’t do something because of “how hard it was” didn’t get much sympathy from me. I knew how hard it was because I had done it myself. Startups are hard.
What running a company would do is give early-stage VC’s a benchmark for reality, something most newly-minted partners sorely lack. They would learn how a founding CEO turns their money into a company which becomes a learning, execution and delivery engine. They would learn that a CEO does it through the people – the day-to-day of who is going to do what, how you hold people accountable, how teams communicate, and more importantly, who you hire, how you motivate and get people to accomplish the seemingly impossible. Further, they’d experience first hand how, in a startup, the devil is in the details of execution and deliverables.
My hypotheses is simple: what most VC’s lack is not brains or rolodex or people skills – but hands-on experience as a startup CEO – knowing what it’s like trying to make a payroll while finding sufficient customers while you’re building the product. Sure, a year as a CEO won’t make them an expert, but it will change them quicker than 10 years in the boardroom.
Does it Matter?
There’s a school of thought that says the skill set of a great early-stage VC – awesome people skills, curiosity, likable, etc. – versus the attributes of a great entrepreneur – pattern recognition, tenacity, etc. may not have much overlap. Early stage investing is not a spreadheet, quantitative driven exercise, nor is it about technology – it is a deal business and people drive the deals. And while having experience as a startup CEO may make you a better board member, it may not substantively contribute to your career as an early stage investor – which depend on many more important skills.
Steel in their eyes
Ten years ago starting a company required millions of dollars and first customer ship took years. Now it’s possible to build a company, ship product and get tens of thousands of customers in a year with less than $500K. For venture firms who want to groom/grow associates or operating execs into partners (rather than hiring proven partners), here’s my suggestion:
This process will create a new generation of venture capital partners, ones who have been battle tested in the trenches of a startup, hardened by hiring and firing, tempered by making a payroll and losing orders, and will never forget it’s all about the people.
These VC’s would return to their firms with steel in their eyes. They’d be relentless about accountability from board meeting to board meeting with laser like focus on the one or two issues that matter. They would understand the CEO-VC-board dynamic in a way that few who hadn’t lived it could. They’d be ruthless in their choice of people and teams, looking for those few who have natural curiosity, a passion to win, and who won’t take no for answer.
Lessons Learned
- Venture Capital is still a “craft business”
- Early stage VC’s should have startup CEO experience
- It can now be gained cheaply and quickly
- It will give them perspective and edge that would take a decade to learn
Filed under: Venture Capital | 70 Comments »
I was invited to Finland as part of Stanford’s Engineering Technology Venture Program partnership with Aalto University. (Thanks to Kristo Ovaska and team for the fabulous logistics!) I presented to 1,000’s of entrepreneurs, talked to 17 startups, gave 12 lectures, had 9 interviews, chatted with 8 VC’s, sat on 4 panels, talked policy with 2 government ministers, 2 members of parliament, 1 head of a public pension fund and was in 1 TV-documentary. More details can be found at www.steveblank.fi
This is part 2 of 2 of what I found. Part 1 can be found here.
Toxic Business Press and Contradictory Government Incentives
Unique to Finland with its strong cultural emphasis on equality and the redistribution of wealth is a business press that doesn’t understand startups and is overtly hostile to their success. When MySQL was sold for $1B and the cleantech company the Switch got acquired for $250M, one would have expected the country to celebrate that they had built these world-class companies. Instead the business press dumped on the founders for “selling out.” In 2010 it got worse with an Act in parliament about the Monitoring of Foreigners’ Corporate Acquisitions. Many founders mentioned this as a reason not to incorporate or grow their companies in Finland.
While the government says they love startups, the first thing they did this year is raise the capital gains tax. While it might have been politically expedient, it was not a welcome sign for long-term investment. I suggested they consider an investment tax credit for pension funds that invest in Finnish based VC firms.
Nokia as “He Who Must Not Be Named”
I was in Finland three days before I realized that no one had mentioned the word “Nokia.” After I brought it up in a meeting, you could have heard a pin drop. Nokia was Finland’s symbol of national competence. Most Finns take their failure as a personal embarrassment. (Note to Finland – lighten up. Nokia was blind-sided in a classic disruptive innovation. 50% the fault of a Nokia management that didn’t see it coming, while 50% was due to brilliant Apple execution.) Ultimately, Nokia’s difficulties will turn out to be good news for Finnish entrepreneurs. They’ve stopped hiring the best talent, and startups are not looking so risky compared to large companies.
Nanny-Culture, Lack of Risk Taking, Not Sharing
What makes Finland such a wonderful place to live and raise a family may ultimately be what kills it as a startup hub. There’s a safety net in almost every part of one’s public and private life – health insurance, free college tuition, unions, collective bargaining, fixed work hours, etc. And what’s great for the mass of society – a government safety net verging on the ultimate nanny state – makes it impossible to fail. You find early stage employees expecting to work normal hours, to get paid a regular salary, and not asking or expecting equity. There isn’t much of a killer instinct among the masses.
It’s the rare region where risk equals experience. By nature Finns are not good at tolerating risk. This gets compounded by the cultural tendency not to share or talk in meetings, sometimes to the point of silence. This is a fundamental challenge in creating an entrepreneurial culture. This extends to sharing among startups. The insular nature of the culture hasn’t yet created a “pay it forward” culture.
Summary
The young entrepreneurs I met are bringing impressive energy and intelligence to their goal of building one of Europe’s leading technology hubs in Helsinki. Finland itself has significant engineering talent, and is also attracting entrepreneurs from Russia and the former USSR. It will be fascinating to see if they can lead the cultural change and secure the political support (in a government run by an older generation) to support their vision.
Lessons Learned
- Finland is trying to engineer an entrepreneurial cluster as a National policy to drive economic growth through entrepreneurial ventures
- They’ve gotten off to a good start with a start around Aalto University with passionate students
- Startup incubators, business angels and VCs are starting to emerge
- The country needs to figure out a long term privatization strategy for Venture investing
- Finnish culture makes risk-taking and sharing hard
Filed under: Business Model versus Business Plan, Customer Development, Teaching, Venture Capital | 15 Comments »
I spent the month of September lecturing, and interacting with (literally) thousands of entrepreneurs in two emerging startup markets, Finland and Russia. This is the first of two posts about Finland and entrepreneurship.
——
I was invited to Finland as part of Stanford’s Engineering Technology Venture Program partnership with Aalto University. (Thanks to Kristo Ovaska and team for the fabulous logistics!) I presented to 1,000’s of entrepreneurs, talked to 17 startups, gave 12 lectures, had 9 interviews, chatted with 8 VC’s, sat on 4 panels, talked policy with 2 government ministers, 2 members of parliament, 1 head of a public pension fund and was in 1 TV-documentary.
While a week is not enough time to understand a country this post – the first of two – looks at the Finnish entrepreneurial ecosystem and its strengths and weaknesses.
The Helsinki Spring
Entrepreneurship and innovation are bubbling around Helsinki and Aalto University. There are thousands of excited students, and Aalto university is working hard to become an outward facing institution. Having a critical mass of people who think startups are cool in the same location is a key indicator of whether a cluster can catch fire. Finnish startup successes on a global stage include MySQL, F-Secure, Rovio, Habbo, Playfish, The Switch, Tectia, Trulia and Linux. While it’s not clear yet whether the numbers of startups in Helsinki are sufficient to ignite, it feels like it’s getting there, (and given the risk-averse and paternal nature of Finland that by itself is a miracle.)
The good news is that for a 5 million person country, there’s an emerging entrepreneurial ecosystem that looks like something this:
9-to-5 Venture Capital
Ironically one of the things that’s holding back the Finnish cluster is Tekes, the government organization for financing research, development and innovation in Finland. It’s hard enough to pick which existing companies with known business models to aid. Yet Tekes does that and is trying to act like a government-run Venture Capital firm. At Tekes, government employees (and their hired consultants) – with no equity, no risk or reward, no startup or venture capital experience – try to pick startup winners and losers.
Tekes has ended up competing with and stifling the nascent VC industry, indiscriminately handing out checks to entrepreneurs like an entitlement. (To be fair this is an extension of the government’s role in almost all parts of Finnish life.)
In addition to Tekes, Vigo, the government’s attempt at funding private business accelerators, started with good intentions and got hijacked by government bureaucrats. The accelerators I met with (the ones the government pointed to as their success stories) said they were leaving the program.
Tekes lacks a long-term plan of what the Finnish government’s role should be in funding startups. I suggested that they might want to consider putting themselves out of the public funding business by using public capital to kick-start private venture capital firms, incubators and accelerators. And they should give themselves a 5-10 year plan to do so. Instead they seem to be stuck in the twilight zone of not having a long-term vision of their role. (There has been tons of reports on what to do, all seemingly ignored by an entrenched bureaucracy.)
Lack of Business Experience
Direct government funding of startups has also delayed the maturation of business experience of local angels and VC’s. Finnish private investors don’t yet have enough time-in-grade to have developed good pattern recognition skills, and most lack operating backgrounds. I have no doubt they’ll get there by themselves, but in wouldn’t take much imagination to attempt to recruit some seasoned overseas investors to add to the mix.
Even a more serious challenge is the lack of global business competence. The number of serial entrepreneurs is very low and until recently most of the talented sales and marketing professionals choose to work for Nokia.
Part 2 with more observations about Finland and the Lessons Learned is here.
Filed under: Business Model versus Business Plan, Customer Development, Teaching, Technology, Venture Capital | 22 Comments »
Not understanding and agreeing what “Entrepreneur” and “Startup” mean can sink an entire country’s entrepreneurial ecosystem.
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I’m getting ready to go overseas to teach, and I’ve spent the last week reviewing several countries’ ambitious attempts to kick-start entrepreneurship. After poring through stacks of reports, white papers and position papers, I’ve come to a couple of conclusions.
1) They sure killed a ton of trees
2) With one noticeable exception, governmental entrepreneurship policies and initiatives appear to be less than optimal, with capital deployed inefficiently (read “They would have done better throwing the money in the street.”) Why? Because they haven’t defined the basics:
What’s a startup? Who’s an entrepreneur? How do the ecosystems differ for each one? What’s the role of public versus private funding?
Six Types of Startups – Pick One
There are six distinct organizational paths for entrepreneurs: lifestyle business, small business, scalable startup, buyable startup, large company, and social entrepreneur. All of the individuals who start these organizations are “entrepreneurs” yet not understanding their differences screws up public policy because the ecosystem in supporting each type is radically different.
For policy makers, the first order of business is to methodically think through which of these entrepreneurial paths they want to help and grow.
Lifestyle Startups: Work to Live their Passion
On the California coast where I live, we see lifestyle entrepreneurs like surfers and divers who own small surf or dive shop or teach surfing and diving lessons to pay the bills so they can surf and dive some more. A lifestyle entrepreneur is living the life they love, works for no one but themselves, while pursuing their personal passion. In Silicon Valley the equivalent is the journeyman coder or web designer who loves the technology, and takes coding and U/I jobs because it’s a passion.
Small Business Startups: Work to Feed the Family
Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses. There are 5.7 million small businesses in the U.S. They make up 99.7% of all companies and employ 50% of all non-governmental workers.
Small businesses are grocery stores, hairdressers, consultants, travel agents, Internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his/her own business.
They work as hard as any Silicon Valley entrepreneur. They hire local employees or family. Most are barely profitable. Small business entrepreneurship is not designed for scale, the owners want to own their own business and “feed the family.” The only capital available to them is their own savings, bank and small business loans and what they can borrow from relatives. Small business entrepreneurs don’t become billionaires and (not coincidentally) don’t make many appearances on magazine covers. But in sheer numbers, they are infinitely more representative of “entrepreneurship” than entrepreneurs in other categories—and their enterprises create local jobs.
Scalable Startups: Born to Be Big
Scalable startups are what Silicon Valley entrepreneurs and their venture investors aspire to build. Google, Skype, Facebook, Twitter are just the latest examples. From day one, the founders believe that their vision can change the world. Unlike small business entrepreneurs, their interest is not in earning a living but rather in creating equity in a company that eventually will become publicly traded or acquired, generating a multi-million-dollar payoff.
Scalable startups require risk capital to fund their search for a business model, and they attract investment from equally crazy financial investors – venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model. When they find it, their focus on scale requires even more venture capital to fuel rapid expansion.
Scalable startups tend to group together in innovation clusters (Silicon Valley, Shanghai, New York, Boston, Israel, etc.) They make up a small percentage of the six types of startups, but because of the outsize returns, attract all the risk capital (and press.)
Just in the last few years we’ve come to see that we had been building scalable startups inefficiently. Investors (and educators) treated startups as smaller versions of large companies. We now understand that’s just not true. While large companies execute known business models, startups are temporary organizations designed to search for a scalable and repeatable business model.
This insight has begun to change how we teach entrepreneurship, incubate startups and fund them.
Buyable Startups: Born to Flip
In the last five years, web and mobile app startups that are founded to be sold to larger companies have become popular. The plummeting cost required to build a product, the radically reduced time to bring a product to market and the availability of angel capital willing to invest less than a traditional VCs– $100K – $1M versus $4M on up – has allowed these companies to proliferate – and their investors to make money. Their goal is not to build a billion dollar business, but to be sold to a larger company for $5-$50M.
Large Company Startups: Innovate or Evaporate
Large companies have finite life cycles. And over the last decade those cycles have grown shorter. Most grow through sustaining innovation, offering new products that are variants around their core products. Changes in customer tastes, new technologies, legislation, new competitors, etc. can create pressure for more disruptive innovation – requiring large companies to create entirely new products sold to new customers in new markets. (i.e. Google and Android.) Existing companies do this by either acquiring innovative companies (see Buyable Startups above) or attempting to build a disruptive product internally. Ironically, large company size and culture make disruptive innovation extremely difficult to execute.
Social Startups: Driven to Make a Difference
Social entrepreneurs are no less ambitious, passionate, or driven to make an impact than any other type of founder. But unlike scalable startups, their goal is to make the world a better place, not to take market share or to create to wealth for the founders. They may be organized as a nonprofit, a for-profit, or hybrid.
So What?
When I read policy papers by government organizations trying to replicate the lessons from the valley, I’m struck how they seem to miss some basic lessons.
To date, Israel is only country that has engineered a successful entrepreneurship cluster from the ground up. It’s Yozma program kick-started a private venture capital industry with government funds, (emulating the U.S. lesson of using SBIC funds.), but then the government got out of the way.
In addition, the Israeli government originally funded 23 early stage incubators but turned them over to the VC’s to own and manage. They’re run by business professionals (not real-estate managers looking to rent out excess office space) and entry is not for life-style entrepreneurs, but is a bootcamp for VC funding.
Unless the people who actually make policy understand the difference between the types of startups and the ecosystem necessary to support their growth, the chance that any government policies will have a substantive effect on innovation, jobs or the gross domestic product is low.
Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Teaching, Technology, Venture Capital | 67 Comments »
The combination of Venture Capital and technology entrepreneurship is one of the great business inventions of the last 50 years. It provides private funds for untested and unproven technology and entrepreneurs. While most of these investments fail, the returns for the ones that win are so great they make up for the failures. The cultural tolerance for failure and experimentation, and a financial structure which balanced risk, return and obscene returns, allowed this system flourish in technology clusters in United States, particularly in Silicon Valley.
Yet this system isn’t perfect. From the point of view of scientists and engineers in a university lab, too often entrepreneurship in all its VC-driven glory – income statements, balance sheets, business plans, revenue models, 5-year forecasts, etc. – seems like another planet. There didn’t seem to be much in common between the Scientific Method and starting a company. And this has been a barrier to commercializing the best of our science research.
Until today.
Today, the National Science Foundation (NSF) – the $6.8-billion U.S. government agency that supports research in all the non-medical fields of science and engineering - is changing the startup landscape for scientists and engineers. The NSF has announced the Innovation Corps – a program to take the most promising research projects in American university laboratories and turn them into startups. It will train them with a process that embraces experimentation, learning, and discovery.
The NSF will fund 100 science and engineering research projects every year. Each team accepted into the program will receive $50,000.
To commercialize these university innovations NSF will be putting the Innovation Corps (I-Corps) teams through a class that teaches scientists and engineers to treat starting a company as another research project that can be solved by an iterative process of hypotheses testing and experimentation. The class will be a version of the Lean LaunchPad class we developed in the Stanford Technology Ventures Program, (the entrepreneurship center at Stanford’s School of Engineering).
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This is a big deal. Not just for scientists and engineers, not just for every science university in the U.S., but in the way we think about bringing discoveries ripe for innovation out of the university lab. If this program works it will change how we connect basic research to the business world. And it will lead to more startups and job creation.
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Introducing the Innovation-Corps
The NSF Innovation-Corps program (I-Corps) is designed to help bridge the gap between the many scientists and engineers with innovative research and technologies, but little knowledge of the first steps to take in starting a company.
I-Corps will help scientists take the first steps from the research lab to commercialization.
Over a period of six months, each I-Corps team, guided by experienced mentors (entrepreneurs and VC’s) will build their product and get out of their labs (and comfort zone) to discover who are their potential customers, and how those customers might best use the new technology/invention. They’ll explore the best way to deliver the product to customers, the resources required, as well as competing technologies. They will answer the question, “What value will this innovation add to the marketplace? And they’ll do this using the business model / customer development / agile development solution stack.
At the end of the program each team will understand what it will takes to turn their research into a commercial success. They may decide to license their intellectual property based on their research. Or they may decide to cross the Rubicon and try to get funded as a startup (with strategic partners, investors, or NSF programs for small businesses). At the end of the class there will be a Demo Day when investors get to see the best this country’s researchers have to offer.
What Took You So Long
A first reaction to the NSF I-Corps program might be, “You mean we haven’t already been doing this?” But on reflection it’s clear why. The common wisdom was that for scientists and engineers to succeed in the entrepreneurial world you’d have to teach them all about business. But it’s only now that we realize that’s wrong. The insight the NSF had is that we just need to teach scientists and engineers to treat business models as another research project that can be solved with learning, discovery and experimentation.
And Stanford’s Lean LaunchPad class could do just that.
Join the I-Corps
Today at 2pm the National Science Foundation is publishing the application for admission (what they call the “solicitation for proposals”) to the program. See the NSF web page here.
The syllabus for NSF I-Corps version of the Lean LaunchPad class can be seen here.
Along with a great teaching team at Stanford, world-class VC’s who get it, and foundation partners, I’m proud to be a part of it.
This is a potential game changer for science and innovation in the United States.
Join us.
Apply now.
Filed under: Lean LaunchPad, Teaching, Venture Capital | 27 Comments »
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