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Wednesday, March 28, 2012

Selling out without "selling out"

In June, I heard Panos Desyllas present a conference talk (which I then blogged) on how UK biotech startups got killed after they were acquired. Today, his co-author Marcela Miozzo of Manchester Business School presented the paper here at KGI to a student audience.

To recap, the authors concluded that the acquired firm could be complementary or competing on two dimensions: technology and capabilities. If the firm is complementary on both dimensions, the odds are good it will survive; if they are competing on both dimensions, the odds are the company’s assets will be stripped and everyone “made redundant” (as they say in England).

One question I asked today was: did the entrepreneurs see this coming? Marcela made it sound like they didn’t explicitly look for this, but it sounded like they tended to be surprised.

In particular, she said the scientists were shocked or disappointed to find that their research wouldn’t be continued, and their prospective cure for a particular condition (e.g. Hepatitis) would die with the company. I think this is an area where human health research is different from other technical entrepreneurship — both the central role of scientists, but more particularly the idea of saving lives (or not, if corporate imperatives intervene).

It might be nice to say that the entrepreneurs should know better — that selling their company to certain firms would cause it to be killed — and thus when they exit, they should avoid "selling out." However, as Marcela noted, the entrepreneurs "knew that there were only 4 or 5 companies in the world that could acquire them.”

So in this constrained optimization of exit strategy — in many cases, for startup firms that have to be sold soon before they run out of money — such buy-and-kill outcome may be unavoidable. Perhaps the only bright spot is if the entrepreneurial climate is fertile enough that (in a Schumpeterian sense) the remnants of the former company can be recombined to make a new startup.

Monday, March 5, 2012

Tech startups: cross-functional people or cross-functional teams?

Today was the culmination of the business plan class (ALS 458) here at KGI, with the final presentations by 6 teams — some of whom will be going on to formal business plan competitions elsewhere. So it was the day of the year that the students, and invited guests most celebrate (and ponder) the nature of tech startups.

Our students are unusual in having both science and business training: they come with a science (or engineering) degree, they take science classes, and they take business classes. So in effect, they are cross-functional individuals, with a little bit of knowledge about a lot of things in their heads. Similarly, a company like HP used to pick their marketing staff from among engineers who later got an MBA.

This is also how schools like Stanford and Berkeley set up a mini-business school (or “engineering management” program) within their engineering school. And it’s also why MIT recently set up its Engineering Leadership Program for undergraduates.

On the other hand, a number of schools run business plan classes and programs by assuming individual specialization and deliberately mixing the various specialists. The NSF-funded Georgia Tech Tiger program is perhaps the best known such program among those of us who teach tech entrepreneurship. To some degree, this reflects the supply limitations — you can’t get enough cross-functional people so you merge silo’d programs (with silo’d students) onto a temporary cross-functional team.

Obviously any good tech idea needs to be brought to market through a combination of technology, marketing, finance and manufacturing (or other operations) skills. How do you build such a team in a real startup? And who should be in charge?

I’m an engineer who went into B2B sales and marketing, so it’s easy to guess where my sympathies lie. And at a recent MIT club event on the “Gordon-MIT Engineering Leadership Program,” I heard veteran tech CEOs talk about how it takes a technical person to lead a tech startup.

Still, there are many counter-examples. For every Larry Page, there’s at least one (maybe more) Jerry Yangs.

Steve Jobs offers another model. Sure he was a great marketer — one of the best of the 20th century — and a great CEO. However, if you look at the recent Jobs biography, it was clear that his mechanic father and his childhood electronics experiments gave him an intuition about engineering design that many practicing engineers lack. (Alas, as the original Mac 128 death march demonstrated, he also had completely unrealistic expectations about how long things should take.)

So how do you form a cross-functional team to make the next great tech startup? And how do you allocate decision rights and authority among them? How does this change over the life of the firm, the industry and the technology? And what do you do with your hybrid business-engineers (or business-scientists)? They’re not going to be CTOs or CSOs (are they?), but do you put them as VP of R&D, or division managers, or CEO?

These are all interesting questions. Perhaps someone will research these answers.