Mark harris

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Prof. Dr. Sc. math. Dr. h.c.

Mark Harris CEO and Founder

Adjunct Professor for Technology Entrepreneurship & Innovation

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European Innovation Academy Tallinn, January 21-27 2013

Global Technology Entrepreneurship

2 © innoVaventures All rights reserved

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Differences are Valuable

innoVaventures – UC Berkeley come with their own view – the Silicon Valley perspective

Regional effects cause entrepreneurship to take its own unique form everywhere

Through the identification of major regional trends, and an appreciation for the success models of Silicon Valley, each participating University can chart its own course to build a successful program.


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Literature:

Accompanying Literature:

Timmons/Spinelli New Venture Creation ISBN 978-007-125438-0

Steven Gary Blank The Four Steps to the Epiphany ISBN 0-9764707-0-5

Geoffrey A. Moore Crossing the Chasm ISBN 0-88730-717-5

Clayton M. Christensen The Innovator’s Dilemma ISBN 0-87584-585-1

Henry Chesbrough Open Innovation ISBN 1-57851-837-7

Recommended Literature:

David J. Teece Managing Intellectual Capital ISBN 0-19-829-542-1

Annalee Saxenian Regional Advantage ISBN 0-674-75340-2

> www.innovaventures.com >NEWS>Blog>24 October American University in Bulgaria 3 Youtube Videos about 5 hours total.


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The 5 Minute University


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Introductions / Expectations


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Lecture Series

1.  Innovation, Entrepreneurship and Globalization

2.  The Professional Entrepreneur, The Entrepreneurial Venture

3.  Venture & Growth Capital

4.  Opportunity Recognition

5.  Open/Closed Innovation and the Innovator’s Dilemma

6.  Communication Channels

7.  Smart Business Plans


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1. Innovation, Entrepreneurship and Globalization


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What is innovation ?

Innovation is an invention, paired with a process and a market

invention market process

Entrepreneurship


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Light Bulb Hall of Fame


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Computer Hall of Fame


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What is Entrepreneurship ? What is Technology Entrepreneurship ?


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Entrepreneurship is: A process

Not a person

About BIG companies that happen to be small

Not about small business

Important to BIG business


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What is Entrepreneurship ?

„The pursuit of opportunity beyond the resources one currently has under control“. *

* Source: Professor Howard Stevenson


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Entrepreneurship Bridges the Gap

Technology/ Opportunity Value Entrepreneurship


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What is Technology Entrepreneurship ? Cash Flow

II III IV I

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The technical invention

The company

The business innovation

Needed: Technology Entrepreneurship Skills Management Skills (MBA etc)

So Technology Entrepreneurship is not only „What“, but also „When“ !!

Derived: Prof. Jerry Engel UC Berkeley Enhanced: Prof. Dr. Mark Harris


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The Entrepreneurial Process


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The Entrepreneurial Process

Identify •  Need •  Solution •  ‘Unfair Advantage’

Acquire •  Technology rights •  People •  Money

Resources

Opportunity


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The Entrepreneur’s Task….

Key Resources • Technology • Money • People

People

Money Technology


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Who is the Professional Entrepreneur? Personal Entrepreneurship Styles Entrepreneurship is a team sport •  Many can play – even if they are not ‘born’ entrepreneurs

Three modes •  Lead •  Follow •  Execute

Three functions •  Create •  Manage

•  Innovate

Which role is right for you?


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Personal Entrepreneurship Styles: Modes: Lead or Follow

Lead

Follow

Execute

High Performance entrepreneurial teams are :

•  Self organizing •  Flexible •  Self disciplined •  Common goal •  Common priorities •  Common values •  Enabled by shared

ownership Same people may play

different roles on different teams within the same company


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Personal Entrepreneurship Styles Functions: Create or Manage

Innovation requires a combination of creativity and management – brought by a team

•  Creation requires the greatest technical competency

•  Management requires technical affinity

•  Different functions are best suited for different people.

•  Functions rarely are exchanged

•  All collaborate in BOTH dimensions Manage

Create Innovate


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Entrepreneurship is a Team Sport Results are What Count

Innovation

Execution

Entrepreneurship High performance technology

entrepreneurship •  Is a BLEND of Innovation and

Execution

•  Requires collaboration and discipline

•  It is best performed by a team •  Alignment of incentives

directly and dramatically related to the outcome


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Who is the Entrepreneur?

Manager, administrator

Entre- preneur Inventor

Promoter

Creativity and

innovation

General management skills, business know-how, and networks

High

High Low

Low

Source: J. Timmons, New Venture Creation, p. 25.


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The Professional Entrepreneur Cash Flow

II III IV I

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The technical innovation

The company


Needed: Technology Entrepreneurship Skills

Entrepreneurship Skills (MBA etc)

Visioning the Future into the Present


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II III IV I

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The company




Zone of Collaboration

Zone of Competition


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The Importance of Teamwork Entrepreneurship is a team sport


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Entrepreneurship and Globalization

Sourcing Selling

Regional

Global


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U.S. Start-up


Sourcing Selling

Regional

Global

U.S. Start-up U.S. Start-up


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U.S. Start-up


Sourcing Selling

Regional

Global

U.S. Start-up U.S. Start-up • Beta customers • Executive selling • Scaling direct sales • Developing distribution

• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control


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U.S. Start-up

• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution



Sourcing Selling

Regional

Global Outsource • software development [India] • manufacturing [China] • Call Center customer support [India]


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U.S. Start-up




Sourcing Selling

Regional


VP Sales • Europe [through UK] • Asia [through Japan] • WRO [may license] Localization Joint Ventures/Co-Branding Establish subsidiary


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U.S. Start-up




Sourcing Selling

Regional




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U.S. Start-up



Sourcing Selling

Regional




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E.U. Start-up


Sourcing Selling

Regional

Global


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E.U. Start-up


Sourcing Selling

Regional

Global

• Beta customers • Executive selling • Scaling direct sales • Developing distribution • Hit “glass ceiling”



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E.U. Start-up

• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution • Pushing ‘glass ceiling’



Sourcing Selling

Regional

Global Early Focus on U.S. Sales • US sales office • Establish U.S. Subsidiary early • US Sales support Asia [through Japan] WRO [may license] Joint Ventures/Co-Branding


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E.U. Start-up

• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution • Breaking ‘glass ceiling’



Sourcing Selling

Regional


Early Focus on U.S. Sales • US sales office • Establish U.S. Subsidiary early • US Sales support Asia [through Japan] WRO [may license] Joint Ventures/Co-Branding


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E.U. Start-up




Sourcing Selling

Regional


Early Focus on U.S. Sales • US sales office • Establish U.S. Subsidiary early • US Sales support Asia [through Japan] WRO [may license] Joint Ventures/Co-Branding


™Sourcing Selling

Regional

Global

U.S. Start-up E.U. Start-up


Depends on Were you are Starting From


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Technology Entrepreneurship The New Way Forwards EUR

Observations:

•  EU 2020 declaration highly focussed (#1 issue) on innovation and entrepreneurship.

•  Invention (ideas,patents ) is good, but commercialization is not.

•  Very low VC activity in EU (1/5th US), huge equity GAP

•  Attitude of entrepreneurship and failure not being an option a big hindering factor.

•  Need to catch-up on some 20+ years of entrepreneurship education

•  Need to broaden where and how entrepreneurship is taught

•  Need to get EU success rates (20%) close to US (30%).

Criteria US Europe Comparison Comment

GDP (2010) 14.66 T$ 14.82 T$ Economies in same Ballpark

Domestic Patents (2009) 82000 135000

Europe invents +65% more (actually much more because no SW patents in Europe, CII)

VC activity (H1’2010) 12.4 B$ 2.6 B$

Europe only ~ 1/5th the VC

% of population that consider entrepreneurship

67% 45% US is 50% higher

% of Population that become entrepreneurs

13% 4.5% US is 289% higher

% of population that accept possible failure in a startup

75% 54% US 40% higher

Entrepreneurship Education since 1980’s Early 2000’s

Trying to catch up 20-25years of Education and attitude

Breadth (# types) 8 1-2

Programs in HE and now starting in K12


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2. The Professional Entrepreneur, The Entrepreneurial Venture


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II III IV I

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The company






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II III IV I

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The company




Zone of Collaboration

Zone of Competition


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The Importance of Teamwork Entrepreneurship is a team sport


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The Entrepreneurial Venture FOUR PERIODS of DEVELOPMENT


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Cash Flow

II III IV I

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The company





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The Entrepreneurial Venture Attributes that characterize each Phase

Period I: Pure

Entrepreneurship

Period II: Strategic Focus

Period III: System Building

Period IV: Coporate Management

Defining the concept of the business

What business aren’t we in?

Finacial Controls Hiring „outsider“

Gathering Financial Resources

IMPLEMENTING the business we are in!

Stable division of labor Going Public

Assembling the startup Team

Knowing better than ANYONE else:

Reporting relationship and authorities

Making acquistitions

Identifying customers

What will people pay Developing systems of internal control

Adding the follow-on Products(s)

Analyzing the competition

How many will they buy Formalizing the terms of a sale

Shedding those who can‘t keep up

Building the prototype

How to distribute Operational systems Formalizing the culture

Getting your first customer

How to service the customer

Production, Outsourcing Rationalizing the strategy

Distribution, Sales

Service, Warranties *Source: Professor John Freeman Professor Jerry Engel UC Berkeley

Cash Flow

II III IV I

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The company





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Period I: Pure

Entrepreneurship







Gathering Finacial Resources







Identifying customers What will people pay Developing systems of internal control



How many will they buy

Formalizing the terms of a sale


Building the prototype How to distribute Operational systems Formalizing the culture




Distribution, Sales


Cash Flow

II III IV I

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The company





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Period I: Pure

Entrepreneurship









Stable division of labor

Going Public













Production, Outsourcing

Rationalizing the strategy

Distribution, Sales


Cash Flow

II III IV I

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The company





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Period I: Pure

Entrepreneurship























Distribution, Sales


Cash Flow

II III IV I

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The company





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II III IV I

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The company






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3. Venture & Growth Capital


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New Venture Funding Stream

Sales"$"

time"$1"

Cash "Flow"

$20"

$40"IPO"

$80"

$8"

Venture Capital Rounds!


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Structuring the Financing The “Why” of multiple rounds

Management

Technology/Product

Marketing

Time

Value is a Step Function:

Value


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Adding Technology Value

Value

Time

Concept Feasibility or Prototype

Patent Application Working Prototype

Manufacturing Prototype Regulatory Approvals

Market Introduction


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Adding Market Value

Value

Time

Market Analysis - Published Data Qualitative Research (Focus Groups)

Surveys/Concept Testing

Technical Reports Published

Market Launch

Satisfied Customers

Backlog

Beta Test


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Adding Management Value

Value

Time

Chief Technologist President

Marketing Vice President Controller

Manufacturing Vice President

Chief Financial Officer

Human Resources Mgr

Sales Manager


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Time

Cash Flow

II III IV I


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Valuation in Steps

II III IV I

Time

Concept Defined

Early Validation

Market Traction

Scale Validated

Predictable Scale


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Staged Financing

Concept Defined

Early Validation

Market Traction

Scale Validated

Predictable Scale

II III IV I

Time

Seed Series A

Series B

Series “n”

IPO


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Venture Capital

Investment Capital for Entrepreneurial Ventures tends to clump • By Region • By Industry

It is important to encourage local investment in Entrepreneurial Ventures


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Venture Investment, US & Europe

Europe

North America

Perspective on European Market

Overall Investment

Source: BLN Business Leaders Network

US Venture investment comes back strong. Europe’s lowest for 5 years (632M$).


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Perspective on European Market

Overall Investment

Source: BLN Business Leaders Network

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Venture Investment, Europe by Country

Israel

E Europe

S Europe

Ireland

N Europe

BENELUX

DACH

France

UK


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Perspective on European Market (Patent applications) Europe (135.000) versus US (82.000)

Sources: U.S. PATENT AND TRADEMARK OFFICE and EPO (European Patent Office)

PART A1-‐ Table A1-‐1a, Breakout by Country of Origin Number of Patents Granted as Distributed by Year of Patent Grant.Granted: 01/01/1963 -‐ 12/31/2009

Pre 1996 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 All Years

Total, U.S. And Foreign Origin 2401288 109645 111984 147517 153485 157494 166035 167330 169023 164290 143806 173772 157282 157772 167349 4548072

-‐-‐ Subtotal -‐-‐ U.S. Origin 1497955 61104 61708 80289 83905 85068 87600 86970 87893 84270 74637 89823 79526 77502 82382 2620632

-‐-‐ Subtotal -‐-‐ Foreign Origin 903333 48541 50276 67228 69580 72426 78435 80360 81130 80020 69169 83949 77756 80270 84967 1927440

JAPAN 313267 23053 23179 30840 31104 31295 33223 34858 35515 35348 30341 36807 33354 33682 35501 761367

GERMANY 188840 6818 7008 9095 9337 10235 11260 11280 11444 10779 9011 10005 9051 8914 9000 322077

UNITED KINGDOM 85906 2454 2680 3467 3576 3669 3967 3843 3631 3450 3148 3585 3292 3094 3175 132937

FRANCE 72160 2788 2958 3674 3820 3819 4041 4035 3868 3380 2866 3431 3130 3163 3140 120273

CANADA 43077 2232 2379 2973 3226 3419 3606 3431 3427 3374 2894 3572 3318 3393 3655 87976

TAIWAN 9245 1897 2057 3100 3693 4667 5371 5431 5298 5938 5118 6361 6128 6339 6642 77285

KOREA, SOUTH 4649 1493 1891 3259 3562 3314 3538 3786 3944 4428 4352 5908 6295 7548 8762 66729

SWITZERLAND 38555 1112 1090 1279 1279 1322 1420 1364 1308 1277 995 1201 1035 1112 1208 55557

ITALY 26916 1200 1239 1584 1492 1714 1709 1751 1722 1584 1296 1480 1302 1357 1346 47692

SWEDEN 23939 854 867 1225 1401 1577 1741 1675 1521 1290 1123 1243 1061 1060 1014 41591

NETHERLANDS 22611 797 808 1226 1247 1241 1332 1391 1325 1273 993 1323 1250 1330 1288 39435

AUSTRALIA 9010 471 478 720 707 705 876 859 902 953 910 1325 1265 1291 1221 21693

ISRAEL 4861 484 534 754 743 783 970 1040 1193 1028 924 1218 1107 1166 1404 18209

BELGIUM 8628 488 515 693 648 694 718 722 622 612 519 625 520 510 594 17108

AUSTRIA 8656 362 376 387 479 505 589 530 592 540 463 577 457 464 503 15480

FINLAND 4844 444 452 595 649 618 732 809 865 918 720 950 850 824 864 15134

DENMARK 5026 241 333 392 487 436 479 426 529 414 358 439 388 391 390 10729

U.S.S.R. 6963 16 4 6 3 1 0 1 0 0 0 0 0 0 0 6994

CHINA, PEOPLE'S REPUBLIC OF 528 46 62 72 90 119 195 289 297 404 402 661 772 1225 1655 6817

SPAIN 2797 157 177 248 222 270 269 303 309 264 273 295 268 303 317 6472

NORWAY 2890 139 142 198 224 248 265 242 262 243 220 244 247 273 265 6102

INDIA 493 35 47 85 112 131 178 249 342 363 384 481 546 634 679 4759

SINGAPORE 301 88 94 120 144 218 296 410 427 449 346 412 393 399 436 4533

CHINA,HONG KONG S.A.R. 845 88 81 160 155 179 237 233 276 311 283 308 338 311 305 4110

SOUTH AFRICA 2614 111 101 115 110 111 120 113 112 100 87 109 82 91 93 4069

HUNGARY 2242 43 25 50 39 36 60 48 72 48 46 49 47 66 46 2917

NEW ZEALAND 1106 52 85 114 114 107 124 140 135 142 122 136 113 105 127 2722

IRELAND 805 77 71 71 90 121 141 127 163 186 156 174 146 164 177 2669

RUSSIAN FEDERATION 139 116 111 189 181 183 234 200 203 169 148 172 188 176 196 2605

MEXICO 1614 39 45 57 76 76 81 94 85 86 80 66 56 54 60 2569

BRAZIL 875 63 62 74 91 98 110 96 130 106 77 121 90 101 103 2197

CZECHOSLOVAKIA 2090 8 9 9 5 0 0 0 0 0 0 0 0 0 0 2121

ARGENTINA 698 30 35 43 44 54 51 54 63 46 24 38 37 32 45 1294

MALAYSIA 88 12 17 23 30 42 39 55 50 80 88 113 158 152 158 1105

LUXEMBOURG 567 18 22 20 22 40 33 37 35 44 41 33 38 24 36 1010

POLAND 626 15 11 15 19 13 16 11 17 16 23 29 32 54 35 932

Others (142) 4862 200 231 296 359 366 414 427 446 377 338 458 402 468 527 10171


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Creating Value

The Individual Company Perspective


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Growth Capital


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Company Formation

Founders A, B and C each purchase 1M shares of Common Stock at a purchase price of $.001 per share.

Person Shares % Total ValueFounder A 1,000,000 33.3% $1,000Founder B 1,000,000 33.3% $1,000Founder C 1,000,000 33.3% $1,000

totals 3,000,000 100%Post-Money Valuation $3,000


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Person Shares % Total ValueFounder A 1,000,000 20.0% $10,000Founder B 1,000,000 20.0% $10,000Founder C 1,000,000 20.0% $10,000President 1,000,000 20.0% $10,000Option Plan 1,000,000 20.0% $10,000


Hiring a President/CEO Creation of an Option Plan

The company hires a chief executive officer who purchases 1M shares of Common Stock at a purchase price of $.01 per share. Additionally, in order to attract additional key employees, the Company establishes an employee stock option plan and reserves 1M shares of Common Stock for issuance under this plan. The pre-financing valuation is $30,000.


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Initial Venture Capital Round

$5,000,000 venture capital financing at a purchase price of $1 per share, representing a pre-financing valuation of $5,000,000 (5M shares with a value of $1 per share). The new shares are typical venture capital Series A Preferred Stock, with each share of Series A Preferred Stock being convertible into one share of Common Stock.

Person Shares % Total ValueFounder A 1,000,000 10.0% $1,000,000Founder B 1,000,000 10.0% $1,000,000Founder C 1,000,000 10.0% $1,000,000President 1,000,000 10.0% $1,000,000Option Plan 1,000,000 10.0% $1,000,000Series A Inv 5,000,000 50.0% $5,000,000

totals 10,000,000 100%Post-Money Valuation $10,000,000


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Series B Preferred Financing

$10,000,000 Series B Preferred Stock financing at a purchase price of $2 per share, representing a pre-financing valuation of $20,000,000 (10M shares with a value of $2 per share). Like the Series A Preferred Stock, each share of Series B Preferred Stock is convertible into one share of Common Stock.

Person Shares % Total ValueFounder A 1,000,000 6.7% $2,000,000Founder B 1,000,000 6.7% $2,000,000Founder C 1,000,000 6.7% $2,000,000President 1,000,000 6.7% $2,000,000Option Plan 1,000,000 6.7% $2,000,000Series A Inv 5,000,000 33.3% $10,000,000Series B Inv 5,000,000 33.3% $10,000,000


Person Shares % of Total ValueFounder A 1,000,000 6.7% $2,000,000Founder B 1,000,000 6.7% $2,000,000Founder C 1,000,000 6.7% $2,000,000President 1,000,000 6.7% $2,000,000Option Plan 1,000,000 6.7% $2,000,000Series A Inv 5,000,000 33.3% $10,000,000Series B Inv 5,000,000 33.3% $10,000,000

Post Financing Valuation 15,000,000 100% $30,000,000


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Initial Public Offering (IPO)

A total of 5M shares to be sold in the offering, including 3M shares sold by the Company and 1M shares sold by each of the Series A and Series B investors. Shares will be sold at a price of $10 per share, representing a pre-financing valuation of $150,000,000 (15M shares with a value of $10 per share.) Series A and Series B Preferred Stock automatically converted into

Common Stock. All shares sold in offering will be Common Stock. Note that the interest of each founder has decreased from 33.33% at the Company’s formation to 5.55% following the IPO. However, the value of the interest of each founder has increased from $1,000 to $10,000,000.

Person Shares % Total ValueFounder A 1,000,000 5.6% $10,000,000Founder B 1,000,000 5.6% $10,000,000Founder C 1,000,000 5.6% $10,000,000President 1,000,000 5.6% $10,000,000Option Plan 1,000,000 5.6% $10,000,000Series A Inv 4,000,000 22.2% $40,000,000Series B Inv 4,000,000 22.2% $40,000,000Public IPO 5,000,000 27.8% $50,000,000



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Concept Defined

Early Validation

Market Traction

Scale Validated

Predictable Scale

II III IV I

Time

Seed

Series A

Series B

Series “N”

IPO

Growing the Equity Pie

Person Shares % Total ValueFounder A 1,000,000 33.3% $1,000Founder B 1,000,000 33.3% $1,000Founder C 1,000,000 33.3% $1,000



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Concept Defined

Early Validation

Market Traction

Scale Validated

Predictable Scale

II III IV I

Time

Seed

Series A

Series B

Series “N”

IPO


Person Shares % Total ValueFounder A 1,000,000 20.0% $10,000Founder B 1,000,000 20.0% $10,000Founder C 1,000,000 20.0% $10,000President 1,000,000 20.0% $10,000Option Plan 1,000,000 20.0% $10,000



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Concept Defined

Early Validation

Market Traction

Scale Validated

Predictable Scale

II III IV I

Time

Seed

Series A

Series B

Series “N”

IPO


Person Shares % Total ValueFounder A 1,000,000 10.0% $1,000,000Founder B 1,000,000 10.0% $1,000,000Founder C 1,000,000 10.0% $1,000,000President 1,000,000 10.0% $1,000,000Option Plan 1,000,000 10.0% $1,000,000Series A Inv 5,000,000 50.0% $5,000,000



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Concept Defined

Early Validation

Market Traction

Scale Validated

Predictable Scale

II III IV I

Time

Seed

Series A

Series B

Series “N”

IPO


Person Shares % Total ValueFounder A 1,000,000 6.7% $2,000,000Founder B 1,000,000 6.7% $2,000,000Founder C 1,000,000 6.7% $2,000,000President 1,000,000 6.7% $2,000,000Option Plan 1,000,000 6.7% $2,000,000Series A Inv 5,000,000 33.3% $10,000,000Series B Inv 5,000,000 33.3% $10,000,000


Person Shares % of Total ValueFounder A 1,000,000 6.7% $2,000,000Founder B 1,000,000 6.7% $2,000,000Founder C 1,000,000 6.7% $2,000,000President 1,000,000 6.7% $2,000,000Option Plan 1,000,000 6.7% $2,000,000Series A Inv 5,000,000 33.3% $10,000,000Series B Inv 5,000,000 33.3% $10,000,000

Post Financing Valuation 15,000,000 100% $30,000,000


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Concept Defined

Early Validation

Market Traction

Scale Validated

Predictable Scale

II III IV I

Time

Seed

Series A

Series B

Series “N”

IPO


Person Shares % Total ValueFounder A 1,000,000 5.6% $10,000,000Founder B 1,000,000 5.6% $10,000,000Founder C 1,000,000 5.6% $10,000,000President 1,000,000 5.6% $10,000,000Option Plan 1,000,000 5.6% $10,000,000Series A Inv 4,000,000 22.2% $40,000,000Series B Inv 4,000,000 22.2% $40,000,000Public IPO 5,000,000 27.8% $50,000,000



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The Entrepreneurial Venture PARADOX OF POWER

Power of

Founder/ CEO

II III IV I

“Control” Tipping Point

Series A: Manager for

and with others

Series B, etc.

IPO: Influential executive

Zone of Freedom Zone of Management Time


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4. Opportunity Recognition


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How to Evaluate a Deal from the Company’s Perspective

Founder’s Issues

Employee’s Issues

Corporate Issues • Sufficient Capital

•  Freedom of Operation

Previous Investor and Creditor Issues

Etc.


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How to Evaluate a Deal from the Investor’s Perspective

Potential for Adequate Return

Opportunity for a Home Run?

Potential ‘Fatal Flaws’

Time Requirements

Follow-on Investment Requirements

Portfolio and Fund Compatibility

Etc.


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Effect of Eleven Factors on Company Valuation

Variables Lower Valuation Higher Valuation Technology •  Stage of Development Concept Product •  Patent Status None Filed Issued •  Time to Market Long Short

Market •  Demonstrable Need No Yes •  Size & Growth Small Large •  Market Penetration Slow Rapid

Management Team Novice Tested Financial •  Profit Margins Low High •  Total Capital Required High Low

Return on Investment •  Potential Future Valuation Low High •  Time to Liquidity Long Short


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5. Open/Closed Innovation and the Innovator’s Dilemma

Recommended Literature: Open Innovation Henry Chesbrough ISBN 1-57851-837-7


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Open Innovation (Intro)

Obviously, talking about Open Innovation, there must be something like „Closed Innovation“. So lets first cover the „Closed Innovation Paradigm“

Research Development

Research Projects

The Market

Boundary of the firm

Source: Open Innovation Henry Chesbrough


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Assumptions of Closed Innovation: • We should hire the best and brightest people, so that the smartest people in the industry work for us. • In order to bring new products and services to the market, we must discover and develop them ourselves. • If we discover it ourselves, we will get to market first • The company that gets an innovation to market first will usually win. • If we lead the industry in making R&D investments in R&D, we will disciver the best and the most ideas and will come to lead the market as well. • We should control our intellectual property, so that our competitors don‘t profit from our ideas.



™85


Advantages of Closed Innovation: • The logic of Closed Innovation created a virtuous circle. • Companies invested in internal R&D, which led to many breakthrough discoveries. • Those discoveries enabled those companies to bring new products and services to market. • Because of those products they could realize more sales and higher margins, which enabled them to spend more in internal R&D, which led to further breakthroughs. • And because the intellectual property (IP) that arises from this internal R&D is closely guarded, others could not exploit these ideas for their own profit.



™86


Origin of Closed Innovation Paradigm: • First started in the German Chemical Industry in the 19th + 20th century with the creation of a central research Lab. • Copied by Thomas Edison in a US version, developed and perfected a number of breakthroughs, and founded General Electric‘s famed laboratory. • Bell Labs discovered amazing physical phenomena and harnessed its discoveries to create the transistor among its many important achievements. • US government created an ad hoc central reseach Lab to conduct a crash project on nuclear fission, which led to the development of the A-Bomb • The cold war kept some level of Closed Innovation going.



™87


Research Development

Research Projects

The Current Market

Boundary of the firm

The New Market

Open Innovation Paradigm



™88


Assumptions of Open Innovation: • Not all the smart people work for us. We need to work with smart people inside and outside of our company. • External R&D can create significant value; internal R&D is needed to claim some portion of the value. • We don‘t have to originate the research to profit from it. • Building a better business model is better than getting to market first. • If we make best use of internal and external ideas, we will win. • We should profit from other‘s use of our IP, and we should buy other‘s IP whenever it advances our own business model.



™89


• Examples of Industries: nuclear reactors, mainframe computers

• Largely internal ideas

• Low Labor mobility

• Little VC

• Few, weak start-ups

• Universities unimportant

• Examples of Industries: PCs, movies

• Many external ideas

• High Labor mobility

• Active VC

• Numerous start-ups

• Universities very important

Comparison: Closed / Open Innovation:



™90

The Innovators Dilemma (Intro)

Recommended Literature: The Innovator‘s Dilemma Clayton M. Christensen ISBN 0-87584-585-1


™91


Source: The Innovator‘s Dilemma Clayton M. Christensen

The Impact of Sustaining and Disruptive Technological Change

t

Prod

uct

Perf

orm

ance

P

Performance Demanded At the high end of the market

Performance Demanded At the low end of the market Disruptive

Technological innovation

Revolutionary Innovation


™92



Disruptive Technologies: • Disruptive technologies bring to a market a different value proposition than available previously. • Generally, disruptive technologies underperform established products in mainstream markets. • But they have other features that other new customers value. • Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequenty more convenient to use.


™93



Disruptive Technologies: •  So should I focus on developing disruptive technologies ?

•  The conclusion by established companies that investing aggresively in disruptive technologies is not a rational financial decision for them to take is based on three arguements: 1.   disruptive products are simpler and cheaper; they

generally promise lower margins, not greater profits 2.   disruptive products are typically first commercialized in

emerging or insignificant markets 3.   Leading firms‘ most profitable customers generally don‘t

want and indeed can‘t use products based on disruptive technologies


™94



Harnessing the Principles of Disruptive Innovation: •  Harness versus fighting disruptive technologies.

(Example: antique versus modern flight)

Principle #1: Companies depend on Customers and investors for resources Its really customers and investors who decide how money will be spent.

Principle #2: Small markets don‘t solve the growth needs of Large Companies Play with numbers (40-48M$ growth is 20%, 4-4.8B$ is also 20% but 800M$

is larger than any new emerging market) Principle #3: Markets that don‘t exist can‘t be analyzed

Sound market research and good planning are the hallmarks of good management in sustained technological innovation

Principle #4: Technology supply may not Equal Market demand Many companies don‘t realize the speed at which they are moving up-market,

over-satisfying the needs of the origional customers as they race the competition towards higher performance, higher-margin markets. In doing so, they create a vacuum at lower proce points into which competitors employing disruptive technologies can enter.


™95

Prod

uct P

erfo

rman

ce

Time or Engineering Effort

“Sustaining” Technological Innovation Big Companies Need A Continuous Process

First Technology

Second Technology

Third Technology

Strategy: Using Small Markets as “Beach Heads”

Source: Clayton M. Christensen, “Exploring the Limits of the Technology S-Curve. Part I: Component Technologies,” Production and Operations Management 1, no. 4 (Fall 1992): 340. Reprinted by permission.


™96

Source: Clayton M. Christensen, “Exploring the Limits of the Technology S-Curve. Part I: Component Technologies,” Production and Operations Management 1, no. 4 (Fall 1992): 361. Reprinted by permission.

Perf

orm

ance

as

Def

ined

in A

pplic

atio

n “A

”

Time or Engineering Effort

Perf

orm

ance

as

Def

ined

in A

pplic

atio

n “B

” Application (Market) “A” Application (Market) “B”

Disruptive Technology takes over the larger established market!

Older BIG company playing catch-up

New entrant dominates

Technology 2

Technology 1

Disruptive Technology •  new market niche •  small markets •  small companies

Strategy: Using Small Markets as “Beach Heads”


™

6. Communication Channels


™

6. Communication Channels CH 1: PRESENTATION

CH 4: EARS

CH 5: LEFT HAND

CH 3: EYES

CH 6: RIGHT HAND

CH 7: BODY

CH 2: VOICE

CHANNEL IN OUT PRESENTATION ✔ VOICE ✔ EYES ✔ ✔ EARS ✔ LEFT HAND ✔ RIGHT HAND ✔ BODY ✔


™

7. Smart business models ?

•  How to become the next Facebook, Google, etc. ???

•  If this was a pure science and any of us new the exact formula, we wouldn’t be here…

•  Much of that is a function also of the right product at the right time and (besides greatness) tons of luck….

•  Larry and Sergey first failed with their strategy to offer a new search algorithm to Yahoo…. (I wonder if that Yahoo employee who turned it down is still there ??)

•  Or look at the Intel founders Robert Noyce and Gordon Moore, they left Fairchild to follow their passion !!


™

Smart business models ?

•  Follow your passion !! Being passionate about your new business will help you survive J

•  Create your new venture as “global born”. Focusing initially on a local market is fine, but don’t loose sight of the global opportunity

•  Know and understand your customers !!! •  Know and understand your market !!! •  Focus on YEAR ONE !! Get that right. •  Have several exit strategies already when you start.

•  Work with global enablers like ™

101

™

Your path to success !!!


™

Backup


™103 Slide:

Question: What is the shortest distance between points A and B ?

Sure, a straight line: A B

as long as we are in two dimensional space....

in three dimensional space, for example on a globe it is the

GREAT Circle (ARC)

A short excursion in Math:


™Slide:

The Path (Trail) to New Ventures

Start(up)

Gazelle

loop forever

So what is the shortest path for a new venture ?


™

Phase 4 Angel Funding infrastructure

Phase 31st real BizPlans Summer schools

Bootcamps Seed Funding

Phase 2 Coaching

Consulting Mentoring

Experimental labs Industry connections

Phase 1

entrepreneurship education,

Educational BizPlan Competitions

Phase 5 VC / further scale

Educational Process

Real-life practice

Real companies

helps you to bridge the GAP !! ™

Entrepreneurship Education

Seed Funding

Services


™

Phase 4 Angel Funding infrastructure

Phase 31st real BizPlans Summer schools

Bootcamps Seed Funding

Phase 2 Coaching

Consulting Mentoring

Experimental labs Industry connections

Phase 1

entrepreneurship education,

Educational BizPlan Competitions

Phase 5 VC / further scale

Educational Process

Real-life practice

Real companies

helps you to bridge the GAP !! ™

Entrepreneurship Education

Seed Funding

Services


™

InnoVaventures Global Network of Experts


™

InnoVaventures Network of

-in negotiation (Phase I)

-planned (Phase II)

-planned (Phase III)


™

Network of Global Clusters of Innovation


™

Pioneering need

Market

Existing Need

Enabling new

applications Type of Product

Faster, cheaper, better

Lowest Risk Known Business Model Unknown

Creation Risk

Execution Risk

Never

Highest Risk

Never

Dangerous Dangerous

Investment Framework


™

Pioneering need

Market

Existing Need

Enabling new




Creation Risk

Execution Risk

Never

Highest Risk

Never

Dangerous Dangerous

All Stages

Seed Only



™

Pioneering need

Market

Existing Need

Enabling new




Creation Risk

Execution Risk

Never

Highest Risk

Never

Dangerous Dangerous



™

Return on Investment Expectations at Various Stages Financing Business Objectives Expected Time To LiquidityRound (capital use) Annual Return (IPO or merger)

Seed Product Research 75 - 100% 5 - 8 YearsMarket ResearchPreliminary Plan

Start-up Product Development 50 - 75% 4 - 7 YearsWorking PrototypeComplete Management TeamConfirm Market Size

1st, 2nd, 3rd Alpha & Beta Tests 30 - 50% 3 - 5 Yearsrounds Selling

ManufacturingExpand Work Force

Mezzanine Prepare For IPO 24 - 30% 1 - 2 Years

Public Of fering Market Development 10 - 20% ImmediateNew Products


™

Investor Ownership Expectations

Investment"Expected PV (discounted at required ROI)"="Ownership"

required"

Future Value"(1+Necessary ROI)"n(years)"="Expected PV"

="Future Value" Net Income"(year n)" X PE"

How much ownership will the investor want/require?


™

Investor Ownership Expectations

A VERY Simple Example

ASSUMPTIONS Company:

NI in Year 5 $2.5M P/E 15 times NI

Investor: Investment $2.0M ROI 50% Holding Period 5 years


™

How much ownership will the investor want/require?

FUTURE V"ALUE (FV) (Y"ear 5)"

NI X P/E = ($2.5M X 15) = $37.5M"

PRESENT" V"ALUE (PV)"(FV)" $37.5M"(1+i)"n" (1 + .50)"5"

OWNERSHIP REQUIRED"A $2M investment would require ownership of:"Investment" $2M" (PV)" $4.93M"

(i = ROR, n = year)"

= $4.93M"="

=" = 41%"

Post Money Value


™

So the Company’s Value is…..

Post money [investment] value……. $4.93m

Pre-money value is……. $2.93m

Documents

Mark harris