When tech entrepreneurs attack science

(Cross posted from the Bio Business blog)

One of the most remarkable trends in science-based entrepreneurship is the recent explosion of fake meat companies.

I saw my first fake meat company in 2015 at the graduation event for the first class of startups at the IndieBio accelerator in San Francisco, doing egg whites. Now leading companies like Impossible Foods and Beyond Meat have landed their fake hamburger in fast food chains.

At breakfast yesterday with my boss’s boss, he remarked that some of the burgers are actually quite good, and we agreed that (someday) it has the potential to be a trillion dollar business. This seems to be one of the rare examples where the outrageous predictions by tech entrepreneurs of creating a huge new market might actually be true.

Adoption Paths

The initial pioneers may grab decent exit values, and the long-term future of replacing meat seems compelling. California alone spends 6 trillion liters of water a year on alfalfa alone (feed for cattle and horses), not counting other states, and the water for pig slop and chicken feed. Meanwhile, cow farts play a non-neglgible role in increasing greenhouse gasses. And there is also a sizable niche of the populace that either refused to eat meat, or even wants to deny others the right to do so.

It’s not clear when it will become a trillion dollar market: as I showed in my 2014 paper in the Journal of Technology Transfer, California firms created the solar industry but flamed out because they got into the market 20-30 years too early. Competing with commodity electrons is a tough adoption curve: very few people voluntarily choose to pay 50% or 100% more than market prices for a commodity, although Germany and California show that politicians can force their voters to do so and (mostly) get away with it.

What I didn’t realize until I thought it through is that meat has an easier adoption curve, with a wide range of niche markets that can be sustained at premium prices. You have affluent people who don’t eat meat — or, even better, recently gave up meat — as well as environmentally conscious customers who would like to avoid meat. You have people who are willing to give it a try, out of curiosity. And — as the burger joints have demonstrated — the B2B customer (distribution) is willing to try a niche product to raise average selling prices.

Thus, as the product gets better and the prices get lower, these firms can establish and grow their beachhead in the food market, carving off ever-larger segments of the market. Funded by Sand Hill Road and led by ambitious entrepreneurs, some will hold off for Facebook-style IPOs, but many of the weaker players will be bought up by ADM, ConAgra, Hormel and the like — providing bottomless capital to spur innovation and adoption. (The entry barriers are low enough that Tyson Foods is launching its own product directly, rather than by acquisition).

We Need Science

However, to fully displace meat, there are major technical challenges to be overcome, both in quality and cost. I supervised a student project to research synthetic organs — a more demanding applications — but still getting the texture right will require both science (new insights) and engineering (new applications) to create a quality product at a competitive price.

Thus, I was struck by the decision of one fake meat company to attack GMOs to win market share. Yes, the CEO is a 24-year-old recent Berkeley grad who’s never worked in a company. Yes, her bachelor’s degrees are in toxicology and environmental studies rather than molecular biology or chemical engineering. But the company does have one PhD (food science) in its leadership, so they presumably are doing actual science.

It reminds me (and not in a good way) of the various surveys that showed the gap between what the public thinks and what scientists (writ large) think about GMOs, including a 2015 survey that said 37% of the public thought GMOs are safe vs. 88% of scientists.

More troubling is that the certainty of these opinions seems inversely proportional to actual knowledge. As the NY Times wrote on Monday:

In a paper published early this year in Nature Human Behavior, scientists asked 500 Americans what they thought about foods that contained genetically modified organisms.

The vast majority, more than 90 percent, opposed their use. This belief is in conflict with the consensus of scientists. Almost 90 percent of them believe G.M.O.s are safe — and can be of great benefit.

The second finding of the study was more eye-opening. Those who were most opposed to genetically modified foods believed they were the most knowledgeable about this issue, yet scored the lowest on actual tests of scientific knowledge.

In other words, those with the least understanding of science had the most science-opposed views, but thought they knew the most. Lest anyone think this is only an American phenomenon, the study was also conducted in France and Germany, with similar results.

So I get that trust in authority has been declining since the 1970s. I get that we have many people who don’t understand — or have the time to personally verify — scientific research. And, as Orwell predicted (and Goebbels proved), people are easily persuaded to believe lies if they are repeated often enough in the mass media.

Still, why would companies that depend on scientists to create their products help promote such lies? Isn’t the benefit of saving the planet enough, without having to rely on junk science for the purpose of virtue signaling? And if companies that depend on science attack science, what are the implications for K-12 and university science indication, science policy and the idea of using facts — rather than emotion - as the basis for making science policy?

Channelling Bill Shockley

Cross posted from Open IT Strategies


Techstars (an incubator company) and various aerospace companies have announced plans to launch a space incubator in LA. As TechCrunch reported:

Already a major hub for the space and aerospace startup industry, with companies like SpaceX, Relativity Space, Virgin Orbit, Rocket Lab, Phase Four, and others calling Los Angeles home, the new accelerator will provide another booster for LA’s growing startup scene.

The new aerospace program, called the Techstars Starburst Space Accelerator, will be managed by longtime Techstars managing director, Matt Kozlov, who previously helmed Techstars’ efforts at its health-focused accelerator done in partnership with Cedars Sinai.

LA was the country’s major aerospace hub from the 1930s until the end of the Cold War. But with the end of the space race, the downsizing of missile and military aircraft procurement — and the death of Douglas Aircraft and Lockheed’s commercial aircraft division — jobs were cut drastically and others moved to cheaper parts of the country.

The anchor of the new LA space hub is SpaceX, which moved to Hawthorne in 2008. It had been the headquarters of the firm founded by Jack Northrup in 1937, where it built the B-35, F-89 and F-5 military aircraft. (Its B-2 bomber was built at a secret factory in nearby Pico Rivera).

SpaceX is such a tough place to work that it has encouraged its employees to game the Glassdoor employer rating system. Despite this, 1/3 of the 1,109 SpaceX reviews complain about long hours, as with the review that said “There are times I work very long hours including a few times working 60 straight hours”. Last month, SpaceX — celebrating record success in 2018 — rewarded its loyal workforce with a 10% layoff.

Elon Musk has often imagined himself the next Steve Jobs, although Steve Jobs didn’t think so. Musk clearly needs to grow up and at 47 is well past the age when Jobs did so. Jobs was certainly grown up by 1998 (age 43) when his youngest child was born and he took the reins of Apple once again. Jobs also made his money in the commercial marketplace rather than manipulating investors and government procurement.

Instead, I think Musk is the next Bill Shockley. Shockley is known for inventing the field effect and bipolar junction transistors, which won him a share of the Nobel Prize. Late in life, he was known for saying controversial things about political and social issues.

However, (given his Bell Labs colleagues probably would have invented the transistor without him) perhaps his greatest contribution to mankind was creating Silicon Valley. In 1956, he founded Shockley Semiconductor in Mountain View, California.

He was such an asshole as a boss that the next year eight of his leading employees (the “Tratorous Eight”) quit Shockley to form Fairchild Semiconductor — the first of thousands of spinoff companies to be formed in the Bay Area. The eight included Gordon Moore and Robert Noyce — cofounders of Intel — and Eugene Kleiner, cofounder of Kleiner Perkins.

So between his winning personality, stressful working conditions and past/future layoffs, Musk will be making thousands of skilled ex-SpaceX employees available to the LA aerospace labor market. As with Shockley, perhaps Musk’s greatest contribution will be attracting bright engineers to the region, who later take those skills to help get other startup companies off the ground.

Founders do it better

Successors to successful founders rarely do as well, according to two Bain consultants who’ve studied the topic.

The headline in Monday’s WSJ made it clear:

The Company Founder’s Special Sauce
No one leads a firm as effectively as the person who started it.
By CHRIS ZOOK and JAMES ALLEN
Dec. 18, 2016 5:03 p.m. ET

‘The Founder,” a new film starring Michael Keaton, tells the story of McDonald’s Corporation founder Ray Kroc as he turns a few small restaurants into a ubiquitous international chain. It’s a tale of founder-driven corporate growth—something that has become too rare today. This breed of entrepreneurial spirit makes for a good story, but it’s also crucial for the economy.

Research we published in July finds that of all newly registered businesses in the U.S., only about one in 500 will reach a size of at least $100 million in revenue. A mere one in 17,000 will attain $500 million in revenue and sustain a decade of profitable growth. Despite their rarity, these successful firms are a bedrock of the U.S. economy.

A study out earlier this year from Bain & Company, where we work, shows that over the past 15 years founder-led companies delivered shareholder returns that are three times higher than those of other S&P 500 companies.

Such performance can sometimes continue long after a founder leaves. We analyzed examples of sustained success at 7,500 companies in 43 countries, visiting many in person, to determine what made them stand out. Great founders imbue their companies with three measurable traits that make up what we dubbed “the founder’s mentality.”

Those three traits: insurgency (i.e. disruptive innovation), obsessive focus on customers, and permeating the vision of the founder throughout the entire organization.

I have not had a chance to read their research, but it rings true. I did my dissertation on Apple, once led by Steve Jobs — perhaps the most unique founder of the 20th century; in America, only Henry Ford, Tom Watson Sr., Hewlett & Packard and maybe Howard Hughes come close.

Jobs was driven to make “insanely great” products, to the point of being a tyrant (slightly more human after he had kids). Since his death five years ago, they’ve had mediocre leadership and nothing they have done has come close (something us shareholders must lament).

One caveat: while I lionize great founders — and aspire to be a good founder once again — there is an important confound. Firms have their best people, best ideas, greatest disruption and greatest impact during their initial growth phases; a second round of growth and disruption (as in the Jobs II era, 1997-2011) is virtually unheard of. Big companies don’t grow as much as small ones, nor is the CEO (of any stripe) able to have the same impact. (And unlike Jobs, most tech founders have their greatest impact in this initial period, not running the stable successful mature company).

Still, nothing I’ve seen this year does as good a job summarizing the great debt society owes to those who roll the dice, take great chances and endure years of high-stress intensity to create a new company. The decline in US startups is troubling not only for economic growth, but for the lost opportunities for employees, customers and complementors as well.

Hire the best — and let them go

When I had my software company, in a typical year half of our employees were software testers, for which we hired local college students or occasionally high school students. We mostly got students who grew up nearby, and were attending the local junior college (three miles away) or the CSU or UC a half hour down the road.

The expectation was that this was a temporary job while they were in school. We hired a few college seniors, and a few didn’t work out, but most stayed 3-4 years. We taught them everything they needed to know about both running routine tests and isolating bugs so they could be reproduced by the programmer when it came time to fix it. (I’d like to say I created these processes, but they were created by our former director of product development and QA manager — who both sadly died well before their time).

Most of our business was with HP. When we went to visit their local office for a testing meeting, I was surprised to see how they used a completely different approach. There, QA was a career that you could do after a four year degree and stay with for many years. Because the best college graduates wanted to be programmers, the testers were (for the most part) those interested in computers but not talented enough to be programmers. (Our QA manager had years of experience, but his lack of even an A.A. meant he’d never be hired by HP).

For pretty much all of our student employees, this was the best computer-related job they could get in our local area without a degree. We got brighter employees without prior experience who didn’t stay very long, but we got the benefit of their aptitude and good work habits while we had them. Later on, I realized how fortunate we’d been to have them, as they went on to work at HP, IBM, Microsoft and other tech companies. One has started two companies and has mentored other entrepreneurs. The one student programmer we hired is now a full professor of computer science at MIT.

I was reminded of this when reading a Wall Street Journal column today by Sydney Finkelstein, a Dartmouth leadership professor. I know him from his great book on leadership that (in part) chronicled the leadership failures that brought Motorola crashing to earth in his book Why Smart Executives Fail.

The column has a provocative title and opening:

Why the Best Leaders Want Their Superstar Employees to Leave
By Sydney Finkelstein

Should bosses try to hold on to their star performers?

For most of corporate America, the question might seem like nonsense. Star performers are seen as so valuable that managers should pull out all the stops to keep them—or else see their companies take a big hit in productivity.

Yet some of the best managers not only allow their top performers to leave, but actively encourage it.

He talks about his study of leading execs across 18 industries for his new book, Superbosses: How Exceptional Leaders Master the Flow of Talent. While I might quibble with a point here or there (notably the idea of Larry Ellison as one of “the world’s greatest bosses”), the data are compelling. For example, a sidebar to the article says that at one point, 20 of the 32 NFL coaches either trained with Bill Walsh or someone trained by him.

This is the part of the article that really resonated with my experience:

The stories of these bosses reveal a crucial shared belief: You’re better off having the best people for a short time than average people forever.

The bosses were uncompromising when it came to recruiting. They didn’t want average; they wanted mind-blowing. They searched high and low for unusually talented individuals, often experimenting with nontraditional hires (and tolerating higher levels of churn when some of these hires didn’t work out).

But once unusually talented people were inside the organizations, the bosses accepted that some would leave. Top employees, the bosses realized, were almost always on a rapid growth trajectory. They were ultra-ambitious, perpetually angling for the next big opportunity, and it stood to reason that at least some of them would eventually need to leave the company to keep their careers moving ahead.

Even at our little software company, we were fortunate to have some truly exceptional teenagers and 20-somethings just starting their careers. This lesson is a reminder that — even if I’m no superbosss — for my next startup we should keep a policy of hiring the most talented people we can find, even if we have to train them from scratch or can’t hope to keep them for more than a few years.

Corporate Entrepreneurship: Oxymoron

From Dilbert, August 30, 2015:

I’ve always thought “corporate entrepreneurship” is an oxymoron, and this nicely captures some of the reasons why.

The OED defines an entrepreneur as

c. Polit. Econ. One who undertakes an enterprise; one who owns and manages a business; a person who takes the risk of profit or loss.

with entrepreneurship defined as what the entrepreneur does.

Some scholars want to define the term as only a subset of this (those that produce high-growth startups). Others want it to be a superset — anyone who innovates and creates new value — including corporate “entrepreneurs” — even though they don’t “own” or “take the risk of … loss.”

The closest that large company employees come to being entrepreneurs — with all the risks and rewards — are when they form spinoff (or spinout) companies. Some of these spinoff companies — like the Xerox spinoffs studied by Henry Chesbrough — start with technology, people, some investment but no products or customers; the founders of these companies are truly entrepreneurs, just ones with an inside track for funding. Other spinoff companies — like Agilent from HP or Avago from Agilent — began life with thousands of customers and millions (if not billions of revenues) — and are larger and more bureaucratic than many decade-old companies; it would be a travesty to call “entrepreneur” someone handed such a business portfolio.

A third example often labelled “corporate entrepreneurship” are those that explore possibilities for new business units that will remain in the company. These examples seem to be best described by the portmanteau of “intrapreneurship” — we want our employees to be entrepreneurial,  but they will remain inside the company and contribute its growth and success.

I have participated in various corporate new venture/new value/new line of business activities, both in industry and academia. I’m also head of my second startup, and I can tell you that the risk, the effort, the lack of support (including bureaucracy) and (hopefully) the potential reward make it completely different than an internal new venture.

So “entrepreneur” is not a synonym for “innovator” or “business model innovator” or the equivalent. That’s why my business card — and that of a few other faculty — says “Professor of Innovation and Entrepreneurship.”

Incubating, accelerating and funding life science startups

On Thursday I visited the SF Indie Bio Demo Day. The San Francisco life science accelerator was graduating its first class of 12 early-stage startups.

Indie Bio was launched and funded by SOSVentures, a $200m seed fund based in Cork, Ireland. Its launch was seen as a reaction to the decision of Y Combinator to take on 5 biotech firms last summer, although Indie Bio founders insisted that their plans predated Y Combinator’s interests.

Y Combinator
The Mountain View-based Y Combinator is widely considered to have invented the accelerator format — or at least to have perfected it with its 2005 launch in Silicon Valley. Its model includes:

• Cohort admission process (two cohorts per year)
• Incubator-style office space combined with seed-stage equity funding
• Mentoring services to help firms refine their product and strategy
• Mandatory on-site participation of the CEO during the intensive 3-month process
• At the end of the incubation period, a hype-filled “Demo Day” graduation ceremony that both brands and publicizes companies being kicked out of the nest

Most of its 800+ alumni have been software or software-enabled companies that fit its original focus. Its best known graduates are online services companies such as Dropbox, Airbnb, Reddit and Weebly.

While Y Combinator has been a great success — in terms of publicity, investments and picking (and perhaps helping†) winners, there have been questions about whether the model could be used for companies with longer development cycles. There are also obvious economies of scale and scope if each cohort has overlapping technology orientations.

Y Combinator had some successes in hardware — and now a handful of recent life science graduates — but IMHO the generalizability remains an open question.

† There is a longstanding debate in higher ed whether schools such as Stanford and the Ivies mold their students into successes, or merely pick students who are bound to succeed no matter what. There are obvious parallels to angels, VCs and incubators

Indie Bio
As a former software entrepreneur who has spent the past four years teaching business at a biotech graduate school, I was eager to see how the Silicon Valley formula would be adapted for starting life science companies. On average, life science startups are different — with greater technical uncertainty, capital costs, development costs and time to market.

SF Indie Bio has adapted the accelerator format of Y Combinator: in some cases, the language and terms are almost identical. However, a crucial difference is the need for wet labs; healthcare IT companies can be incubated at a software incubator, but therapeutics, device and most diagnostic companies cannot. Designing and staffing a wet lab isn't cheap, and every life science incubator faces the challenges of which equipment is needed and how to cover it.

Another advantage for Indie Bio is an (acclaimed) life science-specific incubator team. Ryan Bethencourt and Ron Shigeta earlier started the Berkeley Biolabs, while Arvind Gupta is a venture partner with the parent venture fund. At this week’s Demo Day, there were clearly synergies between the companies in the first cohort, particularly for the tools companies that had ready-made customers while those customers saved capital as free beta sites.

Ron Shigeta, Ryan Bethencourt and Arvind Gupta at Thursday’s rollout

As with other Bay Area incubators and accelerators, the Indie Bio location means that tenant companies are close to a wide range of potential investors.

The companies in the first round received $100K of cash and in kind funding in exchange for an 8% equity stake. The next round of firms will get this, and also the option of a $150K of cash in exchange for a convertible note.

Seizing a Place in the Value Chain
After visiting Indie Bio — and talking to its founders and entrepreneurs — I got a better sense of where an accelerator would fit in the entrepreneurial value chain of a life science company. (Other life science incubator/accelerators seem to have been launched in Berlin, Houston, Israel, and Winnipeg.)

As the name suggests, an accelerator can make a big difference in accelerated a firm's growth. However, it covers only one brief phase of a longer process of development.

Indie Bio focuses on the steps of the lean startup process where entrepreneurs develop the minimum viable product and decide whether to proceed or pivot. However, before firms are ready to join an accelerate they will need to develop their science. This could be at a university, at a biohacker space (such as BioCurious), or a local life science incubator such as QB3 or J&J's JLabs — or the Berkeley BioLabs cofounded by Bethencourt and Shigeta.

At the same time, once they leave the accelerator they will need a home. If the company is small (< 5 employees), it might still fit in an incubator. If they hire multiple employees, they're too big for either an incubator or accelerator and will need an actual office. Either way — as earlier in their development cycle — they will need a shared wet lab rather than just (as with a software or healthcare IT company) access to cloud servers.

Bethencourt and Shigeta are aware of this imperative. They’re working to identify an affiliate or partner facility that the Indie Bio companies can graduate into.

Replaying the "Greater Fool" theory 15 years later

From the “Heard on the Street” section of this morning’s Wall Street Journal:

Testing Silicon Valley’s Greater-Fool Strategy Lofty valuations for venture-backed companies like Uber and Snapchat depend on the stock-market off-ramp staying open
By JUSTIN LAHART
…
There are 65 venture-capital backed companies in the U.S. valued at $1 billion or more, by The Wall Street Journal and Dow Jones VentureSource’s latest count. That is more than half again as many of these so-called unicorns as a year ago.

Even by the standards of rapidly growing companies aiming to go public, they are hardly cheap. Uber tops the list with a valuation of $41.2 billion, and that looks like it is heading higher. … In second, at $16 billion, is Snapchat, which has only recently begun generating revenue. …

Overall, private valuations are about as high now as during the dot-com bubble, according to research firm Sand Hill Econometrics. One reason valuations are so lofty: In an era when generating outsize returns has been extremely difficult, big investors who previously would have tended to take a position in a company on its IPO are instead jumping into late private-funding rounds.
…
[T]he list of tech companies with deep pockets and a desire for acquisitions is pretty short, and the fit needs to be right. So for most big venture-backed companies an IPO is a likelier exit. But the public market’s ability to absorb those companies may be limited.

Sand Hill estimates the total value of U.S. venture-backed companies came to about $750 billion at the end of 2014. That is equal to 2.5% of the total market capitalization of U.S. public companies, according to Federal Reserve data. The only other time venture-backed companies were valued that highly relative to the stock market was in the second quarter of 2000, when the dot-com bubble began to rapidly deflate.

Indeed, one pin in that bubble was the flow of shares of speculative companies into the market. Until late 1999, the availability of dot-com shares was limited, with many held off the market by insiders subject to lockup agreements.

From November 1999 to April 2000, though, the amount of unlocked shares rose to $270 billion from $70 billion, as economists Eli Ofek and Matthew Richardson documented [in their 2003 Journal of Finance article]. This increased the float in dot-com companies to the point there weren’t enough investors willing to pay up for them.

This is interesting on two levels. First, the Web 2.0 stock bubble is now shaping up to burst like the one 15 years later. A crash in valuations will be bad for entrepreneurs seeking funding in the next 3-5 years. As my business plan students (at both KGI and UCI) could explain, potential exit valuations influence (if not determine) the valuation for even the earliest seed stage or Series A round.

However, this time the question is whether the bubble will burst before or after the companies go public. The VCs and investment bankers — as well as the founder and employees of these overvalued companies — would clearly prefer to IPO in hopes of finding a “greater fool.” The buyers of these frothy shares would be betting that they’re not the fool, but instead they can sell to one.

The “greater fool” theory is not new. While Wikipedia (that fount of all truth and wisdom) is not much help, Investopedia helpfully provides a definition for that term:

Greater Fool Theory

DEFINITION OF 'GREATER FOOL THEORY'
A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.

INVESTOPEDIA EXPLAINS 'GREATER FOOL THEORY'
When acting in accordance with the greater fool theory, an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip them quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.

As an entrepreneur, I always had trouble with this approach by other entrepreneurs — and even more so, by the financial professionals who prepare these stock offerings. I realize the stakes are high for the founders and investors holding this illiquid shares — particularly at the tail end of a surge in valuations — but doesn’t excuse succumbing to the corrupting influence of this pressure. Caveat emptor doesn’t isn’t enough to excuse offering shares with no financial basis for their valuation other than market mania.