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Sunday, June 29, 2014

Drag on startups is drag on the economy

We know that entrepreneurs are essential to economic growth in the U.S., but two economists (one of them Nobel) brought this point home last week:
Behind the Productivity Plunge: Fewer Startups
By Edward C. Prescott and Lee H. Ohanian

In the first quarter of 2014 … [productivity] declined at a 3.5% annual rate. This is the worst productivity statistic since 1990. And productivity since 2005 has declined by more than 8% relative to its long-run trend. This means that business output is nearly $1 trillion less today than what it would be had productivity continued to grow at its average rate of about 2.5% per year.

…In our view, an important factor contributing to declining productivity growth is the large decline in the creation of new businesses. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 … compared with the annual average rate for the 1980s.

If history is any indication, many of today's economic heavyweights will ultimately decline as new businesses take their place. Research by the Kaufman Foundation shows that only about half of the 1995 Fortune 500 firms remained on the list in 2010.

Startups also have declined in high technology. John Haltiwanger of the University of Maryland reports that there are fewer startups in high technology and information-processing since 2000, as well as fewer high-growth startups—annual employment growth of more than 25%—across all sectors. Even more troubling is that the smaller number of high-growth startups is not growing as quickly as in the past.
The authors (economists from Arizona State and UCLA respectively) attribute this to the regulatory drag on small business, both in terms of raising the cost of doing business and specifically the complexity of tax compliance.

However, another explanation (which I blogged last year) was the risk aversion of would-be entrepreneurs. Is that due to regulation? Due to a belief that the system is rigged? To the challenges of starting a company in an economy that never fully recovered from the Great Recession? Or — more simply — a loss of optimism by entrepreneurs that they can financially recover if their venture is unsuccessful.

I don’t have an answer, but this is just further evidence that making the US economy more startup-friendly is essential the country’s economic and political future.

Saturday, June 7, 2014

Entrepreneurial opportunities from 3D printing

This week has been my week for 3D printing in Europe. I gave a talk on the industry’s history at a workshop in Germany on the business of 3D printing on Tuesday, and listened to a number of other academics talk about their own research. On Thursday, I visited Materialise, a (soon to be public) 3D printing service bureau in Belgium. On Friday, I interviewed one of the founders of Ultimaker, a Dutch startup and a leading maker of consumer 3D printers.

In my talk, I said the flurry of consumer 3D printing startups since 2005 can be attributed to

The first created both a market and a pool of potential entrepreneurs, while the latter two reduced the entry barriers for those entrepreneurs. Together, this brought dozens of new entrants into making 3D printers in the past decade.

From my interviews (including the two this week), it is clear that 3D printing has had a transformative impact on the entrepreneurial careers of engineers and other technical entrepreneurs. When they learn about 3D printing, they drop everything and try to figure out how to make a career out of working in the industry — usually by making a better mousetrap. (Obviously not everyone who learns of 3D printing does this — but the entrepreneurs are the ones who do so.)

This reminds me a lot of my earlier research on mobile apps and open source software, what I witnessed in internet services (Web 1.0) and the PC revolution, and what I read about the airplane and the automobile. An exciting, high-growth technology attracts hundreds of entrepreneurs, many with more technical than business acumen. The lucky ones ride the growth rocket to make multimillion dollar companies, while others crash and burn.

If (as we all expect) there are scale economies, then the excess entry by firms will bring a dramatic shakeout. In another 10 years, there will be 5-10 major personal 3D printer makers — some of which will have been bought by the existing industrial makers (as Stratasys did with Makerbot) or other companies (HP, IBM, GE, etc.)

On the other hand, many of these companies will survive (or profitably exit) by migrating to niches within the product category, or upstream or downstream (or laterally) to other parts of the value network.
For example, the co-host of our workshop, Frank Piller, showed a plastic model mini-me that was scanned, hand-edited, and then printed in color. At €995 per model, it’s not a high-volume growth business, but it is a way to build resources and capabilities to pursue other opportunities.

This is an exciting time for these entrepreneurs, and for those (like me) studying such entrepreneurs. It will be also an exciting time for engineers to join the industry, just as it was 20 years ago for Internet services or 30+ years ago for personal computing.

Friday, May 23, 2014

New models of biotech entrepreneurship

Thursday night, the Oxbridge Biotech Roundtable concluded its 2014 Onestart Americas $150k business plan competition. Several dozen contestants, mentors, and one LA-area biotech entrepreneurship professor travelled to the City Club in downtown San Francisco to hear the 10 finalists offer elevator pitches, and then see the money awarded to one of the teams.

Following the initial (2013) competition in London, the American competition began with December's submission of pre-proposals by 150 teams. 35 of these teams (including one led by current KGI MBS students) travelled to a February bootcamp at Stanford for additional training and mentoring, before the 10 finalists were announced in April. One of the 10 finalists, Excell Biosciences, was cofounded by a KGI alumnus.

As in the two previous Onestart Europe competitions, the contestants were required to be aged 35 or younger. As in Europe, the US competition was co-sponsored by SR One, the corporate investing arm of GlaxoSmithKline.

The 10 US finalists reflected an interesting mix of geographies and industry segments. From the leading U.S. biotech clusters, only three teams were from the Bay Area, one from Boston and none from San Diego. The competition also included two teams from Toronto, one from Vancouver and one each from Los Angeles, Denver and New York.

The mix of products was broadly representative of life science startup companies
  • 3 therapeutics
  • 3 devices
  • 1 diagnostic
  • 1 healthcare IT (consumer app)
  • 2 process innovations, for manufacturing and for drug delivery
Most of the startups were in some phase of bootstrap funding, and the judges commiserated with the particular difficulty that therapeutic companies face in raising the tens (or hundreds) of millions necessary to come to market.

Have judged, organized and mentored business plan competitions for years, I was struck by several aspects of the OBR finalists compare to typical (college-based) business plan competitions.
  • Of course, a lll of the plans were about technology. That’s true for our KGI competition but not for the typical b-school competition.
  • Second was the depth of the entrepreneurs’ understanding of their technology. Again, at many (not all) b-school competitions, the entrepreneurs are smart individuals who BS their way through a partly thought out concept. On Thursday, the winning entry — Resilience Pharmaceuticals— reflected six years of work, including the 2013 MIT PhD dissertation by cofounder Retsina Meyer.
  • The judges remarked on the depth of the teams (and that, like VCs, ultimately they had to bet on the teams as much as the ideas). The audience only saw one team member make a presentation, but some teams had five or more official members listed in the program. At least four teams were headed by polished PhDs. Apparently the winning team has attracted Boston veterans to join their team, beyond the founders.
  • Finally, some firms had won equity investment prior to the finals. The winner has attracted a commitment from Third Rock Ventures, a leading biotech VC.
Representing SR One, partner Matthew Foy said that the $150K prize “is not the point of Onestart — it was just the carrot to get people’s attention”. They seem to have succeeded in doing so. Overall, in its second year (and third competition), the Onestart sponsors seem to have moved closer to their goal of creating actual entrepreneurs and startups.

It will take a few months to see how many of these 10 companies will actually launch and — more importantly — how many can succeed in bringing a product to market. Still, in terms of the structure of the program (and the nature of the competitors), the sponsors seem to have already done better than all but a handful of school-based competitions.

Wednesday, February 26, 2014

If Facebook kills entrepreneurship, what’s next?

The $19b that Facebook paid to buy WhatsApp is shaking up Silicon Valley, as other Internet startups try to figure out how they can get their own inflated multiple.

But for the rest of the world of tech entrepreneurship — such as life sciences — it could further starve the flow of investment capital they need to get off the ground.

Entrepreneurship guru Steve Blank tweeted Monday
steve blank ‏@sgblank Feb 24
Why Facebook is killing Silicon Valley http://steveblank.com/2012/05/21/why-facebook-is-killing-silicon-valley/ … more relevant today
The earlier article talked about his work teaching entrepreneurship for science-based startups:
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. …

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.
Two years ago — ironically a few weeks before Blank’s blog posting — I started writing my own posting along these same lines. What I wrote (but never posted):
Did software ruin entrepreneurship?
On Friday, I sat between two entrepreneurs at an office party for my old job. One of the entrepreneurs is in clean tech (hardware) while the other is in IT (software). One is in his 30s and one is in his 50s.

The hardware guy was talking about his challenges raising funds. One VC told him (I'm paraphrasing): “I gave Instagram $5 million and got back $200 million. Why should I give you money?” [after their $1 billion acquisition by Facebook].
The remainder of my (incipient) argument was that software promises abnormally low cap short returns, and the amount of money needed to fund a software company is getting smaller by the week, as VC Mark Suster wrote back in 2011.

How will this play out? I see at least four possibilities:
  1. During the dot-bomb (dot-con) era we had too much money chasing too few good ideas, and what resulted was what economists call excess entry. Eventually the bubble burst — and it could again.
  2. Another possibility is that these other ideas don’t get funded. There are business models that made sense in the 1890s or 1950s that no longer make sense — such as ones that are labor intensive or based on craft work — and new businesses here don’t get launched.
  3. Blank points to the genius philosopher-king model — where a really rich guy (it’s almost always a guy) puts his money where is mouth is (again, almost always a big mouth). In a previous century it was Howard Hughes or Richard Branson, while today Blank points to Elon Musk.
  4. The final possibility is that politicians play kingmaker, not with their own money but with Other People’s Money, i.e. yours and mine. (They will be egged on by a incantations of “market failure” of a few economists.) While this may make sense for public goods such as public health, we saw how such large scale private intervention worked with firms like Solyndra.
Of course, these are not mutually exclusive. Musk depends on public subsidies to support the business models of Tesla and SolarCity, although — unlike Fisker and Solyndra — he’s at least offering something people want to buy. SpaceX depends on public procurement, but I believe his announced plans that this is just a bootstrap to get the business off the group (so to speak).

Is there a happy ending? Like Blank, I think the Facebook effect is going to get worse before it gets better.