January 03, 2020

Entrepreneur returns / Chemistry and life

December 1, the Russia Today International News Agency hosted the fifth anniversary Nanoindustry Congress attended by more than 600 guests from Russia and abroad. Opening the Congress, A. B. Chubais, Chairman of the Board of RUSNANO management company and Chairman of the Board of the Fund for Infrastructure and Educational Programs (FIEP), emphasized that several new industries have been created in Russia in recent years. These include, for example, industries related to renewable energy, such as the solar cells production and own solar energy. Construction of the Russian first industrial windmill farm with a capacity of 35 megawatts is soon beginning, and the production of components for wind power is going to be launched in the future. The modern packaging industry along with innovative building materials have been created. The Russian nanoindustry capacity is approaching to 1 trillion 300 billion rubles, presented by 500 startups, thousands of enterprises. Thus, according to the speaker, the nanoindustry has managed to succeed in the Russian Federation. And how to develop an industry of a completely different kind, engaged in the production of the companies themselves, which contributed to the rapid emergence of nanotechnology? Solving this problem involves so called serial technology entrepreneurs.

The wrong system?

Investors, business angels, venture funds — there are no more popular figures in the discussion on innovations. Their money is called the blood of projects, both new startups and powerful development institutes are trying to get their representatives on their executive boards. Conditions for capital raising is a key part of the strategy of any modern region or state. The reason is clear: it is the investor who is trusted with the last word when deciding whether the idea is worthy of accepting capital.

This responsibility sharing model assumes that the investor is able to use his experience to distinguish really deserving offers from impracticable projects. He is also responsible for evaluating the project team, business model and market potential — in fact, he gets the lion’s share of entrepreneurial work. Finally, saving the drowning (investing money) is to be done by their own. However, there are few multifaceted geniuses. Therefore, to ensure that the money is not lost, their holders hire a workforce of business analysts and investment experts with diplomas of business administrators. They, in turn, overwhelm applicants for money with document templates required to be filled in (about 1,500 questions for a typical purchase or investment in a startup), hire consultants specializing in specific markets or technologies, prepare multi-page business plans and submit them for approval by the boards of their investment or venture funds.

The result is known: every tenth investment is successful. Experts and supervisors often ask the question: is such performance worth the costs for management that constitute up to 20% of the total fund capital? The reason for the low efficiency is that the traditional for the majority of countries innovation system was developed in completely different circumstances and is outdated in many respects.

The dawn of innovation

By the 15th century, engineering had become a separate field of human activity, industrialization had begun, and economic development had come to be based on the technological labor differentiation. Its effectiveness was showed by Adam Smith on the example of a workshop producing ordinary pins (Inquiry into the Nature and Causes of the Wealth of Nations, 1776): if the work on creating a pin is divided into 18 operations each assigned to a separate person, then the labour productivity will increase 200–250 times. It is the increase in the labour differentiation intensity that was proposed by Smith to be considered as the only source of wealth. Such differentiation is provided by inventors and technology entrepreneurs: the former come up with engineering solutions not existing before, and the latter break down the old industrial structures to replace them with the new ones. It is exactly the constructive destruction and creation that distinguishes such entrepreneurs from those who build their fortune on the redistribution of resources by virtue of wars, trade, management.

The partnership between an inventor and an entrepreneur has generated at least three major types of professional engineering: engineering, design, and applied scientific research. Previously available only to individual geniuses, a profession engineering has become a mass field of activity. Inventors obtained ownership of their intellectual product. For example, the famous Statute on Monopolies, which registered the 14-year term of patent rights and restricted the king’s right to establish monopoly activities, was adopted in England back in 1623.

Following the results of the zero industrial revolution of the late 16th century, the Protestant United Provinces (in fact, modern Holland) have taken a position of the world’s economic center for more than a hundred years. After that, dozens of countries set themselves the tasks of catching-up industrialization. It has an obvious advantage: it is always easier to copy someone’s already developed technological achievements than to do them over again. However, since the particular society was not ready for the industrial revolution, the question arouse concerning the innovation implementation mechanism. And, as a rule, the dominant role in this mechanism was played by the national state. This occurred in Russia and France in the 18th century, in the USA, Germany, Japan, Argentina and Russia in the 19th century and in the USSR, Mexico and China in the 20th century. On the one hand, most of the catching-up industrialization projects relied on the strong engineering schools development, and on the other hand, on the professional development of the state apparatus itself, it replaced the absent technology entrepreneurs. Governments declared to be more successful in concentrating resources on the great breakthrough projects than private owners.

In those countries where the question of the entrepreneurial innovation method superiority over the state one was not raised, institutions were formed to restrict the rights of state structures. A striking example is the Bank of Amsterdam (1609) which was the first central bank institution in the history to regulate the exchange rate in accordance with the balance of business supply and demand, and did not give loans to the city authorities. Or, later, it was Unity Creates Strength Trust (1774), a Dutch investment trust, created to diversify the national risks of entrepreneurs by investing in other countries.

20th century innovation officer

Let’s now think back to the last decades of the 19th — the early 20th century. Smells of oil and gasoline were in the air, reflecting the second industrial revolution growing in intensity, meanwhile the phenomena of the previous revolution were around represented by the English manufactories of the late 18th century. Playing the key role in the industrial process organization, they were tragically not ready to accept a new package of technologies. In an attempt to increase labor productivity, a new innovation process participant appeared at manufactory, that was a hired administrator, or a manager.

Frederick Taylor, a mechanical engineer by training and chief engineer of several American industrial enterprises, noticed a gap between the possibility for the multiple increase in production efficiency and the operational decisions made by the managing owners. On the basis of his engineering experience, he created scientific principles of labour organization, so that he transfered the method of engineering work differentiation and specialization to the sphere of management. Taylor disintegrated the knowledge necessary to manage a technologically complexified production into eight different types of management activities, placing them literally on different floors. Following Taylor, engineer Henry Gantt, his student and fellow, along with Karol Adametsky and Walter Polyakov, created the first professional management tools which were the base maps for manufacture planning, now known to a first-year management student as Gantt Diagrams.

Among the pioneers of the new era, those who managed to use the work results of Taylor and his followers to the full extent, was Henry Ford, who built the first technology transnational corporation from scratch. It is exactly the pair of the transnational corporation (TNC) and the hired management that held the position of the main producer of innovations for most of the 20th century. A significant part of innovations covered the sphere of so-called organizational innovations, i.e. methods and ways of operational activity.

At the same time, traditional engineers were moving to corporate research and development centers in large numbers, reasonably counting on the large companies stability and their management competence. The share of technological outsourcing (the use of external resources), which reached almost 100% at the end of the 19th century, was reduced to a barely noticeable 3% in corporations of the 1960s.

It is not surprising that as far as the second industrial revolution technologies and industries, such as the production of cars, fertilizers, fossil fuel, antibiotics and other large-tonnage products exhausted their potential for efficiency upgrading, the number of inventive organizations independent of transnational corporations, began to grow again, thus, the share of technological outsourcing was 25% in the late 1990s.

However, as technology developed, the management costs increased dramatically: in order to keep up to date, corporate managers began to invest in additional training, in even more specialized management, and, finally, directly in increasing their personnel quantity. It’s been long time since inflation, mainly formed as a result of labour costs increase, couldn’t keep pace with the growth of managers’ incomes. Every product used at the beginning of the 21st century, comprises 50–80% of direct and indirect management costs; the amount of overhead costs is 200–800% in any vertically integrated company! Thus, resulted from the collaboration of engineers and entrepreneurs to increase labour productivity, the management has become one of the key factors of its decline a hundred years later. However, the social role of managers should not be underestimated, it is unlikely for anyone else in the field of innovation to have more restraining influence on the pace of technological development today.

The field prepared

Thus, in addition to the technology entrepreneur, we now see three more groups of participants in the field of innovation. The first one is the inventors who divided labour among themselves, therefore staying extra-productive. As their work results show low applying, they try to deal with some of the entrepreneurial tasks themselves, which, of course, turns out to be failing. The second group is represented by the government officials who sincerely believe that they took into account the mistakes of their predecessors and came up with such new tools that they will definitely succeed in ’riding’ technological development this time. Thirdly, this is a trade union of super-trained managers who are confident that the future of large corporations is stable, whose number of specializations exceeds the number of seats in a medium-sized football stadium. So how should a technology entrepreneur act today, in a situation of a new industrial revolution emerging?

With the inefficient work of various industrial investment consultants, he is forced to ask himself questions. Isn’t it absurdly to make a strong-willed bid at the starting point of creating a new business and to determine all the key technological forks? Is it necessary to spend time preparing volumes of calculations and diagrams, if real knowledge about the economic indicators of a particular engineering solution and the scale of consumption, that has not been formed yet, can only be provided in the process of building a business? These questions were partly answered by William Jevons, a brilliant English economist and philosopher of the 19th century. He introduced the term ’uninvestment’ in relation to business investments, which can be interpreted as disinvestment. According to Jevons, the entrepreneur does not invest but actually implements an opposite process, turning the initial stock of capital goods at his disposal (including finances) into a working enterprise. With initial capital stock decreasing at each subsequent moment, the key question is: will the entrepreneur have time to build a functioning company, that is, a company independently reproducing the required operational and development resources, in the limited time for which he has sufficient resources? It is the uninvestment time limit that the entrepreneur deals with; he invests in the new activity creation the only irreplaceable factor — his time.

The first entrepreneur to achieve results becomes a monopolist for a time, not due to driving competitors out of the markets, but by virtue of being the first to enter the new system of labour differentiation, or rather, by creating it. All the other participants of the innovation race are catch up with him. In this situation, in order to regain their leadership, they can and often do make the most important decision to save time by buying the thing created by the first entrepreneur. It is safe to say that it is the time spent on the business experimentation, encased in the form of a new company, that appears to be the product that is being sold. And the buyer is the one for whom, due to the increased technological changes and the economic futility of trying to do everything on his own, time has become more expensive than money.

Start-up builder

Here, in the field of innovation, another person appears who is likely to become a key figure of the 21st century innovation process. Let’s call him a serial entrepreneur, or a venture builder. His task is not to develop investments or implement inventions, but to create companies for their subsequent sale. Such people appeared about a quarter of a century ago. This entrepreneurship still does not have a common name with its versions being called innovation networks, entrepreneurial partnerships, startup studios or startup production factories in different places. But they all have one thing in common: new technology businesses have become a mass product. In Cambridge, England, an entrepreneurial partnership develops a dozen new companies per year, while the entire hundred-thousandth University campus creates several hundred businesses for the same period. In Leuven, Belgium, the University center for technology transfer, established forty years ago, now actually creates a dozen and a half startups per year independently, and the entire Leuven cluster (also with a population of one hundred thousand people) is known to develop one company every day. The Russian public-private network of startup factories, or nanotechnology centers, produces 150–200 companies annually. These are no longer accidental outbreaks — we are looking at a new type of escalating venture-building business. It should not be confused with venture capital funds since they have capital raised from various sources to be invested in startups not created by their own.

The serial entrepreneurship idea is based on the belief that any individual invention acquires its value only by virtue of its possible participation in a long technological chain. There is no use to invest in the creation of only one technology, for example, in super-productive equipment for weaving composites, if the industry does not have neither cost-effective material suppliers nor a sufficient large-scale consumer. Actually, when a new industry has not emerged yet, the serial entrepreneur has to invest his time and resources simultaneously along the entire future value chain, creating dozens of new businesses at the same time.

New forms of engineer and entrepreneur partnerships serve as a kind of headquarters for such builders of technology companies. For example, in 2014, the Solliance center, the world’s largest alliance engaged in creating solar panels integrated in various surfaces, opened in the high-tech campus of the University of Eindhoven. The efforts to work in this direction were put together by the four major European technology centers (IMEC, ECN, TNO and Julich), the group of leading engineering universities (Eindhoven, Delft, Leuven and Hasselt), several dozen companies that develop and manufacture complex equipment and materials (VDL, DSM, Roth & Rau, etc) and technology companies planning to use these technologies in their further development (ThyssenKrupp, the German metallurgy giant, is among them). Not only was the entire future industrial-scale technology production chain assembled on one site, but, most importantly, those players who claimed to occupy various business positions in the future system of labour differentiation became partners to each other.

The site organized in this way became a demonstration structure model of several future industries including, for example, the industry of new building materials with integrated solar films for roofs, windows and facades. This allowed venture builders, including the Russian ones, to become the Solliance system partners.

Innovation infrastructure payback

Being aware of what to do and where to get the necessary technology, a serial technology entrepreneur starts building a specific business with limited time available. What can help him to do this faster than other entrepreneurs or large technology corporations?

The crucial operational principle of venture building is to focus the efforts of the startup’s engineering team only on the future business technological core by distributing all the other tasks outside with no exceptions. This is not a case of legal, financial, accounting, reporting or other functions. Most of the technological processes must also be transferred outside the startup — from industrial design and prototyping to the individual components development and full-scale production.

The typical startup budget structure is a particular consequence of this model, the share of personnel costs may not exceed 20–30% in this context. Frequently, this contradicts the standards used by most Russian and foreign state development institutions to provide financial support for innovation. The team’s focus on one key business staging point leads to a dramatic acceleration of engineering work. With consideration to the calculation of hours each of us spends on secondary tasks every day, experience shows this time to account for 50–70% of the working day. In addition to reducing direct time losses, maximum concentration allows to involve the mileage length factor that is the amount of accumulated knowledge and skills. According to research, success in any engineering profession directly depends on how long a person does not interrupt his or her work in a particular field. Any person consistently absorbed in certain activity for more than 10,000 hours (seven years of focused continuous work) automatically gets into the top thirty experts on this issue in the world.

A modern innovation cluster, where there are open contract technology services and production facilities, can provide a venture builder with a possibility to quickly distribute all tasks that are not related to the startup basic operations. Service companies do not have their own product, hence they do not compete with the business being created, but rely on increasing the speed and reducing the cost of engineering and manufacturing processes, setting flexible prices for their services in compliance with the task complexity. For example, such infrastructure businesses have become possible to be build within the sphere of mechanical processing due to the combination of the most advanced automatically programmed tools and additive technologies; in industrial biotechnology, the role of infrastructure is played by genomic sequencing and genetic engineering laboratories.

Generally, service businesses of this kind require significant capital, thus, it is extremely difficult to concentrate the infrastructure for several new technology packages at one specific point at the same time, so a single cluster can only afford to deliver one complete package. For venture builders, their activity geography is defined by the local ecosystem specialization: it makes sense to create flexible electronics startups in Eindhoven, Cambridge or Troitsk, and, for example, Leuven, Berlin and Novosibirsk are best suited for the field of regenerative medicine.

However, it is not only about the technological equipment. Engineer leasing is one of the world’s fastest growing infrastructure business sectors. Since a startup needs to engage many engineers only for a limited time from several months to several years, it is more profitable for a venture builder everyway to borrow the necessary specialist from a technical center to carry out a specific task. The engineer also benefits from this type of cooperation with the entrepreneur, as he gets an opportunity to take part in various field-oriented projects within the framework of his basic specialization, without any doubt making his knowledge more profound.

Entrepreneurship factory

Serial technology business building is an intervention into the entrepreneurship inner sanctum, a stake on transformation of an indescribable and inexpressible art of a few business geniuses, as it was previously perceived so, into a new profession. In its logic, this attempt is similar to the one started 120 years ago and implemented in the creation of the profession of organizer — manager. Even 300 years earlier, engineering work was successfully standardized and became widespread. There is no doubt that serial entrepreneurship designates a new economic development style, by analogy to the main invention of the last century, it can be called a conveyor for the innovation production, and then those who previously could not relate themselves to legendary business persons become involved in the startup building.

Any new activity takes several decades to develop, so it will take no less time for serial technology entrepreneurship to become a mass activity being accessible by virtue of labour differentiation and specialization to many millions of people in the world. Let’s just try to be a little more attentive to events already occurring, though barely noticeable, around us, maybe this will allow us to see something different than the ordinary landscape outside the window.

D. A. Kovalevich, co-founder and CEO of TechnoSpark nanotechnology center (supported by RUSNANO FIEP),
P. G. Shchedrovitsky, member of the Board of the North-West center for strategic research, head of the Department of Strategic Planning and Management Methodology of MEPhI National Research Nuclear University, member of the Expert Council of the Government of the Russian Federation.

Source: Chemistry and life
Date: January 31, 2017

This website uses cookies to improve its performance. For more information please refer to our Privacy policy.

I accept