Strategy of Innovation

Angel investors, hight-net worth individuals, family offices, venture capital/private equity firms, funds of funds, sovereign wealth funds, investment banks or any other institutional investors, this article is for you! 

In this post, I would like to explain to investors located out of France the great opportunity to found, fund and launch Venture Capital investment firms in France. 

 Every day a new startup is created in France. These startups are based on innovative projects, holded by Academic science researchers, engineers or business-marketing professionals from all fields (marketing & buisness concept, internet and web-tech, electronics, telecomunication and high-tech, clean/green-tech, mechanics, optics, chemicals, biotech-pharma, healthcare or medical device .... ).

But our Angel investors networks and clubs are not enough developed, and Private Equity firms, even if some note on their website "VC", prefer to focus on Expansion/Growth Capital investments⁽¹⁾ and Transmission operations such as Leveraged Buy-Out/Mezzanine, Merge&Acquisition and Initial Public Offering, instead of Seed and Venture Capital (Serie-A round)⁽²⁾ investments.

Due to the lack of investors, the French market of equities of privately-held companies, from startups to SMEs, is at present cheap (pre-money valuations of French startups/SMEs are lower than US-ones), but the quality of our basic and applied science, engineering, inventions and technologies is excellent. Indeed, French Government and European Union have a strong Science to Business policy (important grants are available for Research, Development and Innovation) to promote the technology-transfer from Universities into spin-off/spin-out startup companies. But this is insufficient, indeed there is a gap of financing between R&D and technology-transfer stages to early-later startup stage and commercial expansion stages. The financing process of innovation is extremely efficient in countries such as the USA or Israel, because as soon as an innovative startup emerges, Venture Capital firms invest in these companies.  

(1) Expansion/Growth Capital is also called Serie-B, Serie-C and Serie-D investment rounds.

(2) Seed Capital from idea to prototype: €50,000 to €600,000, Serie-A Venture Capital for market introduction: €300,000 to €2,500,000 (except for biotech-pharmaceutical startups developing new drugs, Serie-A can rich-up to €20M).

Some features of Venture Capital industry

- USA continues to be the largest venture capital industry in the world. US VC invested €15 billion vs European VC only €3.7 billion (in 2010)!

- Early-stage VC investments in the US were on average €2.2 million per company, against an average €400,000 per company in the EU!

- A Venture Capital fund in the European Union contains approximately €60 million, a US counterpart has a fund size of €130 million!

- Every week in USA, a dozen of biotech/medical device companies raise $1M to $80M from Venture Capital firms! Europe lags far far behind!

Two major targets for Venture Capital firms seeking to invest in French companies

A) From Science to Business

In France, we have 80 Universities, and each one has a startup incubator dedicated to support the transfer of academic research and cutting-edge technology into spin-off startups. Each incubator holds around 100 technology-based startups (around 8000 startups are currently in our incubators!). We have startups having innovations coming from every academic and scientific fields (Formal Sciences, Physical Sciences, Chemical and Pharmaceutical Sciences, Life and Medical Sciences ...). 

Our tech-starups are undercapitalized compared to US-ones, there is a great opportunity for venture capital investors!

B) From Classroom to Business

Startup incubators dedicated to students in higher-education (Universities, Business Schools, Engineering Schools, .....) are very promising and such incubators are emerging everywhere in France, linked to each higer-education organisation. Indeed, among the 3 million students in French higher-education, we could have several potential Mark Zukerberg (Facebook's founder-CEO) that have crazy dreams and wishing to change the world. Of course, startups launched by students are less technology-based compared to University spin-out startups backed by several years of scientific research. Nevertheless, the success and profitability of such new ventures based on “good ideas” could very high (Facebook, Goolge, eBay ...).      

The incubators provide to student-entrepreneurs a strong support from the university’s academic ressources (business training, expertise and mentoring from Professors, and also from local expert such as Lawyers, Coporate Finance Experts & Accountants, Strategy & Marketing Consultants, CEOs & Managers of growing companies) and facilities (laboratories, engineering, business offices ...).

The incubators increase dramatically the percentage of success compared to startups without having had the support of an incubator. The incubation clearly diminishes the risk of failure:

- Without incubator: Over 50% of small businesses fail in the first year and 95% fail within the first five years (according to the US Small Business Administration)

- With incubator: 90% of new ventures are still alive and are operating 5 year after leaving the incubator. 

Other studies has shown that the survival percentage of new ventures is intimately linked to the capitalisation at the launching (incorporation). More the capital stock (or equity) is higher, more the company has chance to survive during the 5 following years. 

Therefore, the idea of combining in one structure “incubator and seed-capital investment fund” has emerged. 

Some well-known combo incubators [Startup incubator + Seed stage investment fund], all are located in USA :

- Y Combinator http://en.wikipedia.org/wiki/Y_Combinator_(company)  

- 500Startups http://en.wikipedia.org/wiki/Dave_McClure  

- TechStars http://en.wikipedia.org/wiki/Techstars  

Currently, in France we do not have such combo incubators mixing both business mentoring/education and seed investments. There is a real opportunity for investors to take part of such incubators.

In conclusion

The ecosystem of innovation by science & technology is very dense and active in France. We are very good at supporting academic research in applied science and the transfer of technology into startups or big companies. But we still lake venture capital investments (compared to other western countries), and more precisely we lake seed-investors (angel investors) and serie-A venture capital investments up to a couple of millions. Our private equity investment firms focus on middle-sized to big companies and they invest in growth stage or transmission operations (LBO, IPO ...) instead of Venture Capital investments. Therefore, our innovative startups remain undercapitalized, inducing lower pre-money valuations.

The French market of startups and SMEs private equity is at present cheap:

Buy the highest quality at the lowest prices!

That's what I propose to you!  

If a such project could interest you

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Because of the globalization of business, commercial competition is everyday harder and harder. To maintain a leader position, or just to survive, companies must propose rapidly and efficiently to their clients new attractive goods and/or services. For this, they have to innovate, to evolve by creating new market opportunities or by adapting themselves to changing markets.

Therefore, as a responsible CEO or Manager, you know that:

"YOU MUST INNOVATE!"

.... but how?! 

For the very first time in the history, I will reveal the "Secret Magic Mathematic Formula of Innovation" used by Apple, Google, 3M .... . Hereafter, the full demonstration to obtain the formula with which you will innovate safely, without any uncertainty.

Let's start:

• You need some "Explicit Knowledge" or simply "Knowledge"

Knowledge (including all your know-what, know-why, know-who) is everywhere, you can acquire it from your parents and family, during studies at school and higher education, by reading books, articles or blogs, by watching the world around you ... .

But Knowledge without Imagination = An inert book (handbook, textbook, articles, encyclopedia or any other data in a data container such a digital database or the mass of your brain in your skull!)

• You need some "Imagination"

But Imagination without Knowledge = Production of ideas (good and bad ones), useless by itself.

• You need some Tacit Knowledge or simply "Know-how"

But Know-how alone = Craft = A useful skill but without a mission, still valueless

and

(Imagination + Know-how) without Knowledge = Creativity = A piece of art, maybe beautiful (or not) but still useless!

• If you add all the previous ingredients together, you could get:

Knowledge + Imagination + Know-how = Invention

But "Invention" alone = a (tangible or intangible) prototype ... or just a gadget!

• Therefore, you have to add something (X) to the invention to transform it into innovation. Here the final equation:

Invention + X = Innovation

X = Entrepreneurship

Invention + Entrepreneurship = Innovation

But somthing sounds wrong with this formula!

We cannot predict the future, and therefore we cannot predict if a (Invention + Entrepreneurship) can become an innovation. Indeed, we can judge if an invention brought into the market is an innovation (or not = a fail), only in posteriori.

What we have learned in posteriori from all innovations (or what one could name business successes):

A) All innovations have had needed around 35% of Invention (Creativity, R&D, Know-how, Conception, ...) and 75% of Entrepreneurship!

(These percentages are in relation of the use of investment done by innovative companies)

B) All Innovations have in common to have created new behaviours of users, new uses and meanings and therefore new knowledge.

So the final equation could be:

Invention + Entrepreneurship = Innovation + "New-Knowledge"

A) Entrepreneurship

Entrepreneurship is the energy, resources and leadership needed to change, with the use of the invention, the behaviour of users, consumers. Therefore, a good CEO, managing an innovation project, must want to change the world, or at minimum the world of his customers!

Entrepreneurship is not an exact science. It's a mix of talent, leadership, opportunism, business sense/business education/business know-how, financial resources, .... and some Luck!

Entrepreneurship = Talent + Leadership + Business sense/education/know-how + Financial resources + Opportunism + Luck

• Talent is innate and cannot be learned!

• Leadership can be innate or can be learned in business schools, in books, blogs and websites, or from a Mentor.

• Business sense/business education/business know-how can be learned (= Rational analysis of the business opportunity: Strategy and Business Model, Marketing, Business planning ...).

• Opportunism and Luck may be provocated by developing a good "Life and Social Skills". Be curious and have thirst of knowledge! Share your passions and surround your life with people having a high curiosity and thirst of knowledge.

• Financial resources can be supplied by investors.

B) New Meanings and Knowledge

The innovation process is inseparable from the knowledge production. Indeed, innovation cannot be done without a base of knowledge (nothing has been created from the nothingness!), and when an innovation is produced, there is systematically new meanings and knowledge produced at the same time. Consequently, organizations should consider knowledge as “capital”. This immaterial capital is deeply neglected in most organization, due to ignorance its value or due to the pressure of rapid financial return.

Identifying very carefully the knowledge produced during innovation process could have two benefits:

1. The reinjection of the capital "knowledge" produced during the innovation process to the next innovation process is absolutely necessary to ensure the sustainability of future innovations. This is what should do the knowledge management. The knowledge management should not just be the use of a "software" or a suggestion/idea box! Do you deal with the cash of you company with a box? No, of course, therefore respect your knowledge as gold! 
2. If the company makes the effort to share its new base of knowledge with its users/consumers, then its invention is much more likely to be accepted, and thus become an innovation. This is what should do the community management. The community manager should not just share fun things or news about the company in the Facebook fan page or in the Twitter account. He/she should be a talented teacher^* having the mission to educate users, customers.

^*Companies should hire talented and creative teachers!

Finally, what characterizes the failure of an invention to become an innovation is to assume that the company has failed to share its knowledge base and to educate its audience (specially early-adopters and lead-users).

Therefore, (Invention + Entrepreneurship) cannot be equal to Innovation, but rather to New meanings/New Knowledge that the entrepreneur share with his community.

Finally, we have:

a) Invention + Entrepreneurship = New-knowledge

+

b) New-knowledge + Community = Innovation

=

Invention + Entrepreneurship + New-kowledge + Community = Innovation +New-knowledge

Innovation Formula:

Invention + Entrepreneurship + Community = Innovation

The term Knowledge is not anymore visible in the final equation due to the arithmetic rules, but it is still present and very important! It is the key of the success of the innovation process.

In conclusion, yes I lied in the title of this article: "The Magic Mathematic Formula of Innovation" ! There is no magic and no mathematic formula, but rather a cooking recipe and a sort of road map! And what makes the success of a cooking recipe is the dosage and quality of ingredients, sharing passion and of course the experience of the chef!

So, try and don't fear about failure!

People seeking to raise funds ask me often if crowd funding could be suitable for big project having important budget. My answer is to say .... "It depends on your ability, the ability of your project to be loved by the crowd!"

But until now, I did not have any example of a big project having raised big money!

Take a look at the “Iron Sky” film project:  http://www.ironsky.net/

The producer is raising funds by a mix strategy: http://goo.gl/waZ14 

1) Crowd funding (fans support the project by money donation and get goodies and rewards)

2) Crowd mirco-investing (fans can become co-producer by investing and hope to have royalties on future revenues)

3) Secured financing (classical way to get funds for film such as banks …)

Concerning the Crowd funding strategy, Iron Sky has already obtained €616,270 towards the goal of €900,000! The total budget (1+2+3) of this film project is €7,500,000.

More about crowd funding: http://www.strategy-of-innovation.com/pages/List_of_Crowd_Funding_Websites_and_Websites_To_Find_Investors-4605700.html