Innovation Ecosystems

Clare Fairfield

Key Terms

• Innovation• Venture Capital• Invention ≠ Innovation

Innovation

• Invention ≠ Innovation• Innovation Ecosystems must be Created• Education is the Framework for Developing

Sustainable Innovation Ecosystems

Venture Capital

• Term “Venture Capital” thrown around freely• Venture Capital is only a single element in an

extremely complicated system that is almost universally not understood or even recognized

• Often erroneously used as short hand for the concept of innovation or economically valuable innovation

• Common mistake is a singular focus on venture funds• Deal Chasing vs. Deal Making

US 20th Century Experience as a Guide

• Learn from the successes and mistakes of US educational and investment innovation practitioners—failure is the best teacher

• Experience teaches that attempting to duplicate Silicon Valley/Boston is an extremely difficult proposition

• Understanding the evolution of the US system provides a development roadmap and a cautionary tale

6

20 Year Investment Class Performance (1985-2004)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

The Once an Eagle Problem

7

The Paradox of Early Stage Returns Highest rate of return Hardest to execute Attracts ever increasing levels of investment in venture capital

resulting in: Declining ratio of professionals to dollars managed Relative decline in early stage investment activity Declining population of early stage venture capitalists Investors with a passion for being rich, not for developing people and

technologies Significantly larger deal size

Early Stage Investors vs. Financial Engineers Risk of Long Term Loss of Institutional Investor Support

8

Historical Realities

• Venture capital funding rate 1-2%

• Venture capital success rate 10-20%

• Venture capital failure rates 20-40%

• Investment IRR hurdle rates driven by these statistical realities

2,500 Business Plans

25 VC Investments

5 Wins

The Venture Fund Lifespan Funnel

10

2007 VC Investments By #139

30

1,3137 31

21

1

140

21

43

3

12

1

7

20

62

19

1543

819

43 55

54

859

762

140

162

7

18

7

MD 87DE 3

CT 31RI 3MA 356

NJ 76

3

DC 15

HI 4

74

1

NVCA Yearbook/Thompson Venture Economics

2

12

2

1

6

1119

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

070.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Venture Investing By Stage

Startup-SeedEarlyExpansionLater

Proprietary & Confidential 121996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

VC Commitments vs. VC Distributions1996 - 2007

DistributionsCommitments

Bill

ions

of $

2007 NVCA Yearbook

Essence of Innovation

• Scalable Deal Flow• Deal Flow = Sustainable Sources of Quality

Investment Opportunities

Building Innovation Ecosystems

• Decades vs. Years• The political cycle does not match the

innovation cycle• The venture capital cycle does not match the

innovation ecosystem cycle• Deceptively easy to talk about—excruciatingly

difficult to execute• A systemic approach is the critical factor

Pitfalls to Avoid

• Short Term Focus on Job Growth• Focus on Short Term Investment Returns• Focus on Technology Value• Unrealistic Development Timeframes• Systemic Misalignment of Interests with

Financial Investors• Wishful Scaling

Innovation/Entrepreneurial Ecosystems

• Sustainable innovation systems will only appear within a robust ecosystem

• Investment in Technologies & Companies– Not enough by itself– A critical catalyst– Least important success factor

• Requires the simultaneous presence of all key innovation ecosystem factors

Essence of Innovation

• Deal Flow• Deal Flow = Sustainable Sources of Quality

Investment Opportunities

Systemic Approach• Coordinate Policy

– Government---Investors---Educators---Service Providers– Scientists---Corporate Execs---Entrepreneurs---Students

• Fund Size/Compensation Structure• Creating Quality Deal Flow

– Reduce Risk– Increase Success Rate

• Tech Transfer/Commercialization Policies• Government Support Programs• Full Spectrum Financial Support• Culture that Tolerates and Supports Failure• Service Provider Excellence

Education is the Foundational Activity

• A critical lack of knowledge and understanding exists at all levels of innovation systems across the globe

• Innovation & Entrepreneurship taught at all educational levels

• Institutionalized education and involvement of government, business, and academic policy makers and officials

• Support for education and operation of venture investors and innovation service providers

Education as Framework• Education is a Positive Wrapper• Produces sustainable infrastructure• Facilitates Accelerated Relationship Building

– Government– Investors– Academia– Business

• Applied Model Coordinated with Traditional Academic Model– Scalable– Flexible & Fresh

• Provides Platform for Ongoing & Regular Points of Contact & Interaction• Provides Workable Framework for a Global Model

Essence of Innovation

• Deal Flow• Deal Flow = Sustainable Sources of Quality

Investment Opportunities

22

The Value of Education

Undergraduate Graduate Combined

Number of Businesses Started 42 41 83

Success Rate 88% 93% 90%

Average Annual Growth Rate 57% 80% 69%

Average Age (Years) 4.2 5.2 4.7

Team Experience• Over 200 direct venture capital/private equity investments within multiple investment

funds and educational programs.• Founding investment in several of the world’s leading venture capital and private equity

firms including: Kleiner, Perkins, Caufield and Byers; Kohlberg, Kravis & Roberts; TA Associates; and Brentwood Associates.

• Creation of university-based entrepreneurial education programs and centers.• Professional venture industry educational program design and delivery. • Participation with the US Congress, the US National Science Foundation, the US Department

of Commerce and the US Small Business Administration in governmental innovation programs, investment programs and innovation policy formation.

• Exposure to and participation in international innovation and venture capital programs and development efforts in multiple countries.

• Startup operational experience. • Operational business experience. • Venture development legal experience.• International relations and international innovation activities.

Thank You

clare.fairfield@gmail.com