Steve Blank Technology

The Rise of Chinese Venture Capital – (Part 3 of 5)

Posted on April 12, 2013 by steve blank

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

China’s venture capital system has made a remarkable journey from the “state owns everything” to the free market

It’s done it in a series of evolutionary stages, each new one learning from the last

Listen to the post here: or download the podcast here

Filed under: China, Customer Development, Technology, Venture Capital | 11 Comments »

China’s Torch Program – the glow that can light the world (Part 2 of 5)

Posted on April 11, 2013 by steve blank

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.

—

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

The Torch Program is the worlds largest “lets engineer entrepreneurial clusters” experiment

Torch has four major parts: Clusters, Business Incubators, Seed Funding, and Funds to support Venture Capital firms

Torch was the rare government program that was run like a startup – iterating and pivoting as it learned and discovered.

Listen to the post here: or download the podcast here

Filed under: China, Customer Development, Technology, Venture Capital | 9 Comments »

China – The Sleeper Awakens (Part 1 of 5)

Posted on April 10, 2013 by steve blank

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.)

Basic research: National Natural Science Foundation (equivalent to the U.S. National Science Foundation,) ~$1.75 billion budget. The 973 program (National Basic Research Program) part of the Ministry of Science and Technology.
High technology R&D: 863 Program (State High Technology R&D Program) headed by ex leaders of Chinese strategic weapons programs, and the National Key Technology R&D Program.
Technology innovation and commercialization: National New Product Program, the Spark program for rural innovation, and probably the most important one for startups in China , the Torch Program
Science research infrastructure: National Key Laboratories Program, and the MOST program for the construction of research facilities, R&D databases, and a scientific research network
Development of human resources in science and technology: Programs for attracting returnees or overseas Chinese talent: from the Ministry of Education – the Seed Funds for Returned Overseas Scholars, Chunhui Program, and the Cheung Kong Scholar Program. From the Ministry of Personnel – the Hundred Talents Program. From the National Science Foundation – the National Distinguished Young Scholars Program.

Part two the next post, describes China’s Torch Program, the largest government-run entrepreneurial program in the world.

Lessons Learned

China is working to build basic and applied science and technology leadership

Like the U.S. and the Soviet Union in the Cold War they are using science and technology to build advanced weapons systems

Technology startups are a side effect from these investments

Listen to the post here: or download the podcast here

Filed under: China, Customer Development, Technology, Venture Capital | 25 Comments »

The Endless Frontier: U.S. Science and National Industrial Policy: Part 6a The Secret History of Silicon Valley

Posted on January 14, 2013 by steve blank

The U.S. has spent the last 70 years making massive investments in basic and applied research. Government funding of research started in World War II driven by the needs of the military for weapon systems to defeat Germany and Japan. Post WWII the responsibility for investing in research split between agencies focused on weapons development and space exploration (being completely customer-driven) and other agencies charted to fund basic and applied research in science and medicine (being driven by peer-review.)

The irony is that while the U.S. government has had a robust national science and technology policy, it lacks a national industrial policy; leaving that to private capital. This approach was successful when U.S. industry was aligned with manufacturing in the U.S., but became much less so in the last decade when the bottom-line drove industries offshore.

In lieu of the U.S. government’s role in setting investment policy, venture capital has set the direction for what new industries attract capital.

This series of blog posts is my attempt to understand how science and technology policy in the U.S. began, where the money goes and how it has affected innovation and entrepreneurship. In future posts I’ll offer some observations how we might rethink U.S. Science and National Industrial Policy as we face the realities of China and global competition.

Office of Scientific Research and Development – Scientists Against Time
As World War II approached, Vannevar Bush, the ex-dean of engineering at MIT, single-handledly reengineered the U.S. governments approach to science and warfare. Bush predicted that World War II would be the first war won or lost on the basis of advanced technology. In a major break from the past, Bush believed that scientists from academia could develop weapons faster and better if scientists were kept out of the military and instead worked in civilian-run weapons labs. There they would be tasked to develop military weapons systems and solve military problems to defeat Germany and Japan. (The weapons were then manufactured in volume by U.S. corporations.)

In 1940 Bush proposed this idea to President Roosevelt who agreed and appointed Bush as head, which was first called the National Defense Research Committee and then in 1941 the Office of Scientific Research and Development (OSRD).

OSRD divided the wartime work into 19 “divisions”, 5 “committees,” and 2 “panels,” each solving a unique part of the military war effort. These efforts spanned an enormous range of tasks – the development of advanced electronics; radar, rockets, sonar, new weapons like proximity fuse, Napalm, the Bazooka and new drugs such as penicillin and cures for malaria.

The civilian scientists who headed the lab’s divisions, committees and panels were given wide autonomy to determine how to accomplish their tasks and organize their labs. Nearly 10,000 scientists and engineers received draft deferments to work in these labs.

One OSRD project – the Manhattan Project which led to the development of the atomic bomb – was so secret and important that it was spun off as a separate program. The University of California managed research and development of the bomb design lab at Los Alamos while the US Army managed the Los Alamos facilities and the overall administration of the project. The material to make the bombs – Plutonium and Uranium 235 – were made by civilian contractors at Hanford Washington and Oak Ridge Tennessee.

OSRD was essentially a wartime U.S. Department of Research and Development. Its director, Vannever Bush became in all but name the first presidential science advisor. Think of the OSRD as a combination of all of today’s U.S. national research organizations – the National Science Foundation (NSF), National Institute of Health (NIH), Centers for Disease Control (CDC), Department of Energy (DOE) and a good part of the Department of Defense (DOD) research organizations – all rolled into one uber wartime research organization.

OSRD’s impact on the war effort and the policy for technology was evident by the advanced weapons its labs developed, but its unintended consequence was the impact on American research universities and the U.S. economy that’s still being felt today.

National Funding of University Research
Universities were started with a mission to preserve and disseminate knowledge. By the late 19^th century, U.S. universities added scientific and engineering research to their mission. However, prior to World War II corporations not universities did most of the research and development in the United States. Private companies spent 68% of U.S. R&D dollars while the U.S. Government spent 20% and universities and colleges accounted just for 9%, with most of this coming via endowments or foundations.

Before World War II, the U.S. government provided almost no funding for research inside universities. But with the war, almost overnight, government funding for U.S. universities skyrocketed. From 1941-1945, the OSRD spent $450 million dollars (equivalent to $5.5 billion today) on university research. MIT received $117 million ($1.4 billion in today’s dollars), Caltech $83 million (~$1 billion), Harvard and Columbia ~$30 million ($370 million.) Stanford was near the bottom of the list receiving $500,000 (~$6 million). While this was an enormous sum of money for universities, it’s worth putting in perspective that ~$2 billion was spent on the Manhattan project (equivalent to ~$25 billion today.)

World War II and OSRD funding permanently changed American research universities. By the time the war was over, almost 75% of government research and development dollars would be spent inside Universities. This tidal wave of research funds provided by the war would:

Establish a permanent role for U.S. government funding of university research, both basic and applied
Establish the U.S. government – not industry, foundations or internal funds – as the primary source of University research dollars
Establish a role for government funding for military weapons research inside of U.S. universities (See the blog posts on the Secret History of Silicon Valley here, and for a story about one of the University weapons labs here.)
Make U.S. universities a magnet for researchers from around the world
Give the U.S. the undisputed lead in a technology and innovation driven economy – until the rise of China.

The U.S. Nationalizes Research
As the war drew to a close, university scientists wanted the money to continue to flow but also wanted to end the government’s control over the content of research. That was the aim of Vannevar Bush’s 1945 report, Science: the Endless Frontier. Bush’s wartime experience convinced him that the U.S. should have a policy for science. His proposal was to create a single federal agency – the National Research Foundation – responsible for funding basic research in all areas, from medicine to weapons systems. He proposed that civilian scientists would run this agency in an equal partnership with government. The agency would have no laboratories of its own, but would instead contract research to university scientists who would be responsible for all basic and applied science research.

But it was not to be. After five years of post-war political infighting (1945-1950), the U.S. split up the functions of the OSRD. The military hated that civilians were in charge of weapons development. In 1946 responsibility for nuclear weapons went to the new Atomic Energy Commission (AEC). In 1947, responsibility for basic weapons systems research went to the Department of Defense (DOD). Medical researchers who had already had a pre-war National Institutes of Health chafed under the OSRD that lumped their medical research with radar and electronics, and lobbied to be once again associated with the NIH. In 1947 the responsibility for all U.S. biomedical and health research went back to the National Institutes of Health (NIH). Each of these independent research organizations would support a mix of basic and applied research as well as product development.

The End of OSRD

Finally in 1950, what was left of Vannevar Bush’s original vision – government support of basic science research in U.S. universities – became the charter of the National Science Foundation (NSF). (Basic research is science performed to find general physical and natural laws and to push back the frontiers of fundamental understanding. It’s done without thought of specific applications towards processes or products in mind. Applied research is systematic study to gain knowledge or understanding with specific products in mind.)

Despite the failure of Bush’s vision of a unified national research organization, government funds for university research would accelerate during the Cold War.

Coming in Part 2 – Cold War science and Cold War universities.

Lessons Learned

Large scale federal funding for U.S. science research started with the Office of Scientific Research and Development (OSRD) in 1940
Large scale federal funding for American research universities began with OSRD in 1940
In exchange for federal science funding, universities became partners in weapons systems research and development

More in the next post, “The Secret Life of Fred Terman” Part 6b of the Secret History of Silicon Valley.

Filed under: Science and Industrial Policy, Secret History of Silicon Valley, Teaching, Technology | 13 Comments »

Why Facebook is Killing Silicon Valley

Posted on May 21, 2012 by steve blank

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.

Listen to the post here: or download the podcasts here

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How to Build a Billion Dollar Startup

Posted on April 19, 2012 by steve blank

The quickest way to create a billion dollar company is to take basic human social needs and figure out how to mediate them on-line.

(Look at the first wave of the web/mobile/cloud startups that have done just that: Facebook, Twitter, Instagram, Match.com, Pandora, Zynga, WordPress, LinkedIn.)

It’s your turn.

Hard-wired
This week I’m in New York teaching a 5-day version of my Lean LaunchPad class at Columbia University. While the class teaches a process to search and validate a business model, it does not offer any hints on how to create a killer startup idea. So after teaching several hundred teams in the last few years, one of my students finally asked this question – “So how do we come up with an idea for the next billion dollar company?”

Is It a Problem or a Need?
I’ve now come to believe that the value proposition in a business model (value proposition is the fancy name for your product or service) fits into either one of two categories:

It solves a problem and gets a job done for a consumer or a company (accounting software, elevators, air-conditioning, electricity, tablet computers, electric toothbrushes, airplanes, email software, etc. )
Or it fulfills a fundamental human social need (friendship, dating, sex, entertainment, art, communication, blogs, confession, networking, gambling, religion, etc.)

Moving Needs to Bits = a billion dollars
Friendship, dating, sex, art, entertainment, communication, confession, networking, gambling, religion – would our hearts still beat and would our lungs still breathe without them? Of course. But these are things that make us human. They are hard-wired into our psyche. We’ve been doing them for ten’s of thousands of years.

Ironically, the emergence of the digital world has made us more efficient yet has left us with less time for face-to-face interaction. Yet it’s these interactions that define our humanity.

Facebook takes our need for friendship and attempts to recreate that connection on-line.

Twitter allows us to share and communicate in real time.

Zynga allows us to mindlessly entertain ourselves on-line.

Match.com allows us to find a spouse.

At the same time these social applications are moving on-line, digital platforms (tablets and smartphones) are becoming available to hundreds of millions. It’s not hard to imagine that in a decade, the majority of people on our planet will have 24/7 access to these applications. For better or worse social applications are the ones that will reach billions of users.

Yet they are all only less than 5-years old.

It cannot be that today we have optimally recreated and moved our all social interactions on-line.

It cannot be that Facebook, Twitter, Instagram, Pandora, Zynga, LinkedIn are the pinnacle of social software.

Others will do better.

Others will discover the other unmet and unfilled social needs that can move on-line.

It could be you.

Lessons Learned

Value propositions come in two forms: they solve a problem or they fulfill a human social need

Social Needs are friendship, dating, sex, entertainment, art, communication, blogs, confession, networking, gambling, religion, etc.

They have always been fulfilled face-to-face

They are now moving on-line

The market size for these applications equals the entire human race

These are the ultimate applications

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The National Science Foundation Innovation Corps – What America Does Best

Posted on March 26, 2012 by steve blank

We ran the first National Science Foundation Innovation Corps class October to December 2011.

63 scientists and engineers in 21 teams made ~2,000 customer calls in 10 weeks, turning laboratory ideas into formidable startups. 19 of the 21 teams are moving forward in commercializing their technology.

Watching the final presentations it was clear that the results were way past our initial expectations (comments from mentors as well as pre- and post-class survey data suggested that most of the teams learned more in two months than others had in two years.) So much so that the NSF decided to scale the Innovation Corps program.

In 2012 the NSF will put 150 teams of the best scientists in the U.S. through the Lean Launchpad class. And to help teach these many teams, the NSF will recruit other universities that have engineering entrepreneurship programs to become part of the Innovation Corps network.

Congress Gets It
In-between the 2011 pilot class and the first NSF class of 2012, I got a call from Congressman Dan Lipinski. He sits on the House committee that oversees the NSF – the Science, Space and Technology committee (a place where his engineering degree and PhD comes in handy.) He had read my blog posts about the NSF Innovation Corps and was interested in how the first class went. He wanted to fly out to Stanford and sit in the Lean LaunchPad class about to start in the engineering school.

While I’ve had visitors in my classes before, having a congressman was a first. He showed up with no press in-tow, no entourage, just a genuine search for understanding of whether this program was a waste of taxpayer money or good for the country.

He asked tough questions about why the government not private capital should be doing this. I explained that the goal of the Innovation Corps was to bridge what the NSF calls the “ditch of death” – the gap between when NSF research funding runs out and when a team is credible enough (with enough customer and market knowledge) to raise private capital or license/partner with existing companies. The goal was not to replace private capital but to help attract it. The amount of money spent on the Innovation Corps would be about 1/4 of one percent of the $7.373 billion NSF budget, but it would leverage the tens of billions basic research dollars already invested. It’s payoff would be disproportionately large for the country. It’s one of the best investments this country can make for keeping the U.S. competitive and creating jobs.

After class the Congressman joined the teaching team at our favorite pizza place for our weekly post-class debrief.

If you like science, technology or entrepreneurship, this guy is the real deal. He gets it.

“Innovation, jobs and entrepreneurship” have become popular buzzwords in an election year. But it was pretty amazing to see a congressman jump on a plane to actually find out if he can help the country do so. He issued this press release asking Congress to fully fund the Innovation Corps when he came back to Washington.

The National Science Foundation Innovation Corps combines the best of what the U.S. government, American researchers in academia and risk capital can do together. If we’re correct, we can compress the time for commercializing scientific breakthroughs and reduce the early stage risks of these new ventures. This means more jobs, new industries and a permanent edge for innovation in the United States.

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The 3-person teams consisted of Principal Investigators (PI’s), mostly tenured professors (average age of 45,) whose NSF research the project was based on. The PI’s in turn selected one of their graduate students (average age of 30,) as the entrepreneurial lead. The PI and Entrepreneurial Lead were supported by a mentor (average age of 50,) with industry/startup experience.

This was most definitely not the hoodie and flip-flop crowd.

Part one of the posts on the NSF Innovation Corps is here, part two here. Syllabus for the class is here. Textbook is here.

Here are some of the final Lessons Learned presentations and team videos:

Akara Solutions: Flexible, Low Cost Cooling Technology for LED Lighting
Principal Investigator: Satish Kandlikar Rochester Institute of Technology

If you can’t see the video above, click here.