June 20, 2020

Business builders / eRazvitie

Denis Kovalevich is a man of rather rare profession, although if speaking formally, the activity that he is engaged in, has not even been considered professional yet. He is a serial technology entrepreneur. Denis has shared his vision of the serial entrepreneurship phenomenon and his methods of work in conversation with our media outlet.

— Denis, I would like to start with the question of what it is — to be a serial entrepreneur, and what activities is such a person involved in?

I’ll start a little bit from afar. When a person is asked: “What is a typical entrepreneur of the 20th century?”, then a figure of Henry Ford immediately comes to mind. But what do we know about him in the first instance? The fact that he was building one big company called Ford Motors, for the whole life. And this, in general, is not far from the truth. Thus, this image of a person who creates a business being engaged in it until the end of his life, passing it to his children, is the basic idea of a normal person about what entrepreneurship is. Moreover, it is also basic for most people who are engaged in entrepreneurship to some extent.

Now, have a look: two situations arouse simultaneously at the turn of the 21th century. On the one hand, the flow of new technology development trends started to break through. To break through in the sense that they had been in the business for a long time, but now they all began to grow rapidly, developing and finding application in different spheres of life over a very short period of time. On the other hand, an increasing number of large companies, such as Ford, General Electric, Rosatom, or anyone else, faced the problem that all their business had been developed withing the framework of old industries fully formed in the first half of the 20th century. And if you now imagine that people who are not inclined to performing work, but to entrepreneurship, start creating new companies and growing them, then it turns out that all the old companies must die over time since they understand nothing in the new circumstances.

But these companies have great resources accumulated in the old markets, and there are two ways to use them. The first way is to do as they were acting for the previous hundred years. That means, to hire one more manager and set him the task of creating a new business line. As a result, the Russian Roads company (let’s give it this fictional name, so as not to offend anyone) appears to get a Deputy General Director for the unmanned transport development. Well, then we observe the following. The whole corporation is opposed to this deputy, because they have no idea what he is doing, and why all this is necessary. He has to fight for a budget, to form his own management system and internal divisions as well as to solve the most difficult task that can be called as “find an engineer who knows something about this business”. Who knows anything about it? Nobody, indeed, except for those ten companies in the world that are already engaged in this new area of activity. We can’t call for Elon Musk. It’s even impossible to imagine Elon Mask to work in the Russian Roads company. And so on. That is, the new deputy starts from scratch to go all the way that an entrepreneur usually undergoes. But at the same time, the manager does it for a salary, not for a stock, nor for a share in the company. The old company counteraction, the new market incomprehension, the lack of adequate motivation, — all this set of circumstances creates a situation characterized by the world’s largest companies’ fundamental inability to develop new businesses, technologies and markets. For Russia, there is nothing specific. This is a global situation for the companies around the world.

But is there any alternative? The answer is: “Yes, of course.” Even more, the alternative is very simple — to buy a ready-made business. Not to do everything from scratch yourself, but to create the core of a new business by buying young companies and startups. Following this situation, we have a place for what, in fact, is called serial technology entrepreneurship. In other words, for such kind of business activity that is aimed at selling not a product, but the company that produces this product. If one looks at today’s global statistics, approximately 70-75% of all technology companies created from scratch are built in order to be sold. Otherwise speaking, the initial entrepreneur’s goal is to create a company not for operating it for the whole life, but growing it from scratch and selling it. This is what we call the serial technology entrepreneurship.Everything is almost the same as at Ford’s, except that new companies are released from the assembly line, not new cars. They always have different content, but the same principles of their development and operation. This is the concept of serial production.

The serial entrepreneurship phenomenon appeared about 30 years ago. And not in Silicon valley, but primarily in Europe, particularly in Cambridge, England, because those who are at the forefront, like California, do not need new business methods or approaches. Whereas, it is significantly important for those who are catching up, such as England or continental Europe. So, this phenomenon appeared when a group of entrepreneurs, each of them being previously engaged in their own business, cooperated and established a kind of entrepreneurial artel. Having divided different entrepreneurial functions among their group, they managed to create 2-3 new companies from scratch per year, instead of launching one company every 10 or 20 years and spending half of their lives operating it.

This artel is still alive, and Herman Hauser, its leader, is one of the richest people in England and one of the world’s most famous serial technology entrepreneurs.

This business concept can be quite diverse. For example, the so-called startup studios are a type of serial entrepreneurship in the field of the Internet and IC technologies. And as for my, i.e. TechnoSpark’s work, it is serial entrepreneurship in the field of material technologies related not to virtual, but to material reality.

 

— How strongly are the concepts of “entrepreneur” and “innovation” interrelated?

Joseph Schumpeter put an equal sign between entrepreneurship and innovation 70 years ago. After all, the appearance of a technology innovation does not mean anything, as it may or may not be used. For example, we know that the first drawings of the steam engine and the first attempts to create it were made 2,500 years ago. This technology became feasible only two thousand and a bit more later.

Therefore, the invention itself is by no means an innovation. It will be possible to speak about innovation to appear, only when an entrepreneur feels and finds the new business economic model and includes a specific technology in its process for the purposes of its implementation.

In this sense, the entrepreneur is a person who produces innovations.

— Most people find it difficult to come up with an idea even for a single startup.

And where does a serial entrepreneur get them, and even in such amount? The fact is that it is not an idea to be the basic category in the mind of the entrepreneur. A chance is the basic category. The entrepreneur thinks in terms of chances, discovering them around. While an idea, or engineering conception, is just one of the elements which he uses to create a new technology business. Such elements as intellectual property, equipment, engineering staff, capital… Interestingly, the idea is far from the most crucial one. But how can the entrepreneur see a chance for the first time? Since up to this point, he is not an entrepreneur at all, so he is not even aware of what it means to see a chance. As I can answer, by accident and anyways. Answering to young people who ask me how to find an idea and what to do, I suggest not looking for any ideas. Start doing anything, any technology business. Anything at all. It doesn’t matter where you start. Let’s say you got some experience working on a project to create robots. Then you will probably find a piece of the Internet news dedicated to several super-large companies that have bought several startups developing logistics robotics. And you say to yourself: “Why don’t I build up a company that will start creating logistics robots?” In two years of continuous practice, you will have at least a dozen additional chances in relation to the first one, which you will be able to discover only provided that you are immersed in this particular area.

Two generations of Ronavi robots

In fact, Ford created not one, but more than 90 enterprises in his life, ranging from mining to seaport-building companies. Ford was opened to opportunities and analyzed whether another entrepreneur had already taken them. If you build a conveyor belt for a million cars while there is no ports to load 100,000 cars on liners to deliver them to Europe in the whole America at all, then your business will fail. If you make a logistics robot without necessary inverter suitable for production on an industrial scale, then you will not produce 100,000 functioning robots. Therefore, immersing into any business automatically opens up a huge number of opportunities to you. The entrepreneur would exclaim: “Great, another chance, I’ll create one more company!” And he really creates it and begins to grow it alongside with the one that was a framework for him to see a chance for building a new startup inside.Only having got to see these chances, the entrepreneur begins to search for technological ideas or solutions to satisfy this chance — for example, to make an inverter that would fit the parameters of your robots, but at the same time would be at least 50% and better many-fold cheaper than the inverters able to be made by other companies.

Getting to see a chance is one thing. But meeting and catching it is quite another. Moreover, what you see at the very beginning will probably be very much updated in the future, but you will find out this only after years. An old friend of mine says: “Reflecting is amplified by the energy of delusion.” In other words, to start acting is the most essential thing, and in this point, it seems to me that the only way to “push” a person to entrepreneurship is to give him the opportunity to try and experiment in early childhood. If some of your vision evolves into an experiment, into an action,very quickly, then it is possible to maintain this personal property and to cultivate entrepreneurial skills on its basis in the future. In this sense, the main thing is not an idea, not an idea at all. There are a million times more ideas than their implementations.

— Well, where is it possible to get the technology that meets the chances that you have seen? How are suitable technologies looked for, especially if you work in Russia, where, carefully speaking, there are not too many new solutions being created?

In the global sense of the word, the technology supply is always redundant. Each chance can be always provided with a certain number of candidate technologies. All this activity implies choosing or betting on one of them as its constituent elements. Here, the entrepreneur faces such a concept as technological risk, that is, the probability of the technology chosen to implement the chance not to work, so that the chance is missed. It is a regular situation. The entrepreneur selects the technology, invests, and it does not work or works without achieving multiple costs reducing or labour productivity increasing.

The correct choice is determined by many factors, but the main one stays for the time, the speed for this technology to be applied. By taking a license, purchasing non-exclusive rights or conducting an agreement on a royalty mechanism — it doesn’t matter. But, on the other hand, it is important to understand the extent to which this technology has matured to be mass-produced, that is, to enter the industry.

In fact, time is the only indicator for the entrepreneur to estimate the quality of the resources he engages in activity, including technology, capital, engineers, and so on. The entrepreneur’s task is to create a business as quickly as possible. The faster he accomplishes, the less time he will have to spend, the more competitors, who also see this chance, will fall behind. In this regard, the entrepreneur operates within a completely different dimension than the engineer, evaluating technologies not from the point of their technological component. The first IPhone technologies being applied, had already been quite well-developed at that time. There was not many truly advanced stuff among them. Therefore, as for an ordinary engineer’s perception, the IPhone was not an innovative product at all. But these technologies were chosen by S. Jobs precisely because they could be launched quickly enough.

— I would like to talk about your personal experience of serial entrepreneurship. What is the Troitsk nanotechnology center and what is it area of interest?

The initial idea that we need to create as many new technology companies as possible belonged to one of my partners. For my part, I brought a line related to the technology of venture-building and serial entrepreneurship, which I myself discovered in Cambridge. We proceeded to creating all this in 2011-2012, taking into account the experience that we had received earlier. Previously, each of us, metaphorically speaking, worked out the mileage and some sufficient level of common sense. In particular, I was engaged in innovation at the Rosatom State Corporation for about seven years, being responsible for strategy, strategic planning and innovative development, and later, alongside this, I was creating a nuclear cluster at the Skolkovo innovation center together with my colleagues.

Troitsk nanotechnology center called TechnoSpark (spark is interpreted as a flash, flake of fire) is a public-state company. It is 49% owned by the RUSNANO Fund for Infrastructure and Educational Programs, but is managed and developed by private partners who own the rest 51%. I am one of the nanotechnology center’s shareholders. The nanotechnology center creates startups in the field of materials-based or hardware technologies from scratch. The most common name for this group of technologies in Russia is nanotechnology.

All its products, i.e. the companies created, can be divided into two groups: product companies and contract companies, which are also infrastructure entities.

The goal of product startups is to create a product, then start producing and selling it. Out of the hundreds of startups we have created, about 80 are product startups. At the same time, the range of issues they cover is very wide. These are logistics robots, composite arches for bridges, lasers for ophthalmology and micromachining, flexible electronics, genomics, industrial microbiology, endoprosthetics, lenses with specialized coatings, artificial diamonds…

Genetic tests

Here are a couple of examples. Take a picosecond laser. Developed by our Polarus startup, it is designated, in particular, for applying engravings, similar to those made on the back of IPhones. Although the startup is only two and a half years old, its lasers are already being tested by several Chinese machine-tool companies. It is quite possible for the machines integrated with our lasers to be purchased by that same Foxconn, the IPhones producer, very soon.

Polarus picosecond laser

Our other startup grows artificial diamonds to be used for industrial purposes. For example, if drill bits, used on solid shelves, are strengthened with such artificial diamonds, they will serve not for a couple of years, as usual, but 2-5 times longer. By the way, Troitsk was the first city in the world to create an artificial diamond approximately 35-40 years ago. But it was produced by use of hydraulic pressure that time, while we grow diamonds in CVD reactors.

Drilling tool with CVD.Spark synthetic diamond inserts

But, as I have already said, in addition to 80 product companies, we have 20 contract businesses. These are manufacturing and laboratory businesses that are prohibited of having their own product. They only provide manufacturing or product development services for other companies, specializing in high-accurate metalwork, composites, surface treatment technologies and flexible electronics. Our product startups, as well as any other companies on the market, apply to them. Today, the portfolio of any contract company receives approximately 30% of orders from our startups, and 70% — from outside, provided by the open market.

EnRu battery and inverter

For example, we have a large company engaged in precision metalworking, that is the manufacturing of any metal parts in accordance with certain sizes and types of metal. And there are a lot of instrument-making startups. Making possible for such a startup to create a prototype or produce a small batch very quickly requires buying all the metalworking equipment inward, and then the startup becomes extra expensive, or looking for the market players capable of providing the appropriate service. The easiest way is to contact a contract company. Firstly, it is always nearby, hence speeding up the process, and secondly, a product startup does not risk when transferring its drawings there, because, once again, the contract company has a ban on the own product, so the instrument-making startup can give it documentation not worrying it to start competing with them in their own market.

TEN.Fab contract metalworking

The main question for product startups is how fast they develop new product generations, because in order to launch, for example, logistics robots, it is necessary to make 3-4 generations. Only then you reach a functional, appropriate for the market model. If a startup works quickly, a new generation of robots will be released every two years, which means that the company will be able to start earning something no earlier than in 8 years. This is true for any technology startup, no matter what field it works in.

Today, TechnoSpark is four years old, which means that most product startups have not even reached the middle of their life cycle. The average building time for materials-based startups is 15-20 years globally. In other words, an entrepreneur spends 15 years developing a company and only then sells it. Our goal is to reduce this period by at least half to six-eight years, and in some areas, possibly up to five years. For contract companies, the opposite is true — their business starts immediately.

As soon as you go through the learning curve and acquire the technological knowledge, you start “generating” revenue. Therefore, the key parameter for them is the speed of reaching the point of self-sufficiency.

ChromaSpark laboratory

Last year, the turnover of all our companies amounted to 260 million rubles, this year it will exceed 350 million rubles. 90% of this is the turnover of contract companies already providing services, earning money and achieving self-sufficiency, that is a point where they begin to generate profit and gradually return the investment we made.

Wooden fitting of the TechnoSpark composite case

— And which way does the team developing these startups, work? Who is searching for those chances you mentioned? Who selects technologies? Who is looking for engineering staff?

Different functions and roles are assigned within the framework of startup building. One of the roles implies almost professional attention to what is happening in the technological world in order to derive these chances. Several people are involved in this. Some are more efficient, others less so. As a result, there is a list of companies that we want to build. Next, the prioritization takes place. It is necessary for the reason that we always have much more desire to build than we have time to build. At any given time, we have about 50 vacant businesses, and we will start building a maximum of 10-20 of them in the next quarter. Decisions on which businesses to start building in the near future, and therefore redistribute part of our total team time in their favour, are made at a kind of venture-building council.

Then comes the process of structuring and preparation. In science, we would call this a hypothesis statement. We state our idea of a specific product to appear and a way the startup building will be carried out. After that, it becomes clear what engineer we need, and whether we have such a person inside. We make a rough decision on how much we are ready to invest in this company to be created and on the time frame.

Well, the next stage is the startup building itself, as they say, in the material. In order to create a company, at least two people gather together in a group: one engineer and one venture builder. This role structure is minimal, but sufficient to go on proceeding. In some way, the venture builder is the chief for the engineer, but 90% of his activities are not managerial. He doesn’t sit in the office, monitoring the task completion and waiting for results. He is directly involved in the construction of key company parts. The engineer focuses on the product, while the venture builder deals with everything related to the company itself, from financing to establishing a network of suppliers and technology partnerships with engineering and non-engineering structures.

An important role that exists in the team, is the timekeeper, similar to the goalkeeper. This is a person who is constantly engaged in speeding up the startup building processes. Time is the only subject for him to pay attention, implying duration of the certain company construction operations, the search for opportunities to compress the schedule.

— What about the share distribution in the companies that you create, how is it fulfilled?

In most if any cases, 100% of startups belong to us, the Nanotechnology Center.

At the same time, there is a strict ban on joint-stock ownership of engineers, because it breaks their motivation. Whereas an entrepreneur or shareholder is someone who may not be guaranteed to make a profit in ten years, then an engineer receives money at the moment, so there should not be such a thing that he also has a share in the company. As for venture builders, our relationship is currently implemented, rather, according to the principles of options. But we are planning to improve this system. Becoming a co-owner in any business requires you to make a contribution corresponding to your share. And if the venture builder working with us, is involved in the entire technology development as a whole and bears the corresponding obligations and risks, as we do, then he can qualify for an option. Otherwise, he acts as a performer like the engineer, thus, he is a specialized one, but still a performer who earns today, meaning to receive a salary.

Troitsk nanotechnology center organizes various excursions, competitions and master classes, being attended by about two thousand children annually. The calculation is simple: if TechnoSpark continues to grow at the same pace, then there will be not 100, but 300 companies in five years. Not 200 engineers, but 1,500 of them. With only further increasing trend. The question here is only one: where to get so many people? Look at these photos.

— Venture investors initially assume that a significant part of the projects they provide with financing, will be loss-making, hence making necessary to have them written off.Another not small share of projects will also not bring any profit, but will return at least the investment spent. But one or two, or even three projects out of 20-30 will be so successful that they will not only pay off all losses in terms of other investments, but also bring a good income. So, what is the perspective of the serial technology entrepreneur in regard to their work effectiveness?

It’s different. Firstly, we still have a different length of the investment cycle, it is 10-12 years. This means, if to speak about earning something, it will be no earlier that 10-12 years after the start of work. When we started our project, we understood it in general, but not fully.

For a typical venture fund that invests in the Internet startups, the length of the investment cycle is 5-6 years. The cycle of materials-based projects in European funds, in the same Leuven, where our friends have been professionally engaged in venture investment for 30 years, is about 8-9 years. This is already close to us, but still less.

Second moment. We can’t count our profits the way a venture fund does. There are several reasons. Firstly, all the resources, i.e. staff, capital, equipment, that are used within the process can be transferred from one company building process to another simultaneously conducted. Moreover, we are led by microfinancing logic, and our startups receive capital for their next step for an average three-month period. This is more like an open credit line. We invest as much as the company needs for the next period. We have such a period due its sufficiency for being regular redefined: you have adjusted your understanding of what to do, so you change your money understanding correspondently. Therefore, the assets, unlike venture funds, are not frozen inside startups. If venture funds provide investment, for example, 2 million dollars in a startup, they make this decision once. Following that, they somehow help, but in general, they just wait for the guys to build a company. We never act this way. We call this just-in-time financing — how much capital is needed at the moment, so much will come. As a result, our loss of capital is quite different from that of venture funds. If they invested, for example, 10 million and the startup failed, then the money is lost. This is impossible for us, as we can lose 2-3 quarters, a million rubles, rarely more. The third point is the engineers. Under the construction of 100 companies in ten lines of business at the same time, engineers can easily move from one project to another. For example, this occurs if one company is currently developing more slowly than another, or it simply does not need a large number of engineers at the moment.

We also have such a procedure as company freezing, and we regularly use it. In Russia, it is not known in terms of accounting turnover, but, for example, it is common for the Belgian one. They call it ‘to freeze a company’, which literally means “freeze the company”, “put it in the refrigerator”. That is, in Belgium, I can write a letter to the appropriate authorities to state that I am freezing the company, which means that I do not pay taxes on it. When I figure out what to do with this company next, I will unfreeze it and start acting.

According to our small, but still experience, we stopped at least 10% of companies and decided to close half of them afterwards. In other words, we have completed a specific experiment on them, but the rest are under construction.

At a lecture by Vladimir Volovik, a historian of engineering thinking, organized by TechnoSpark at the Troitsk Gymnasium

Obviously, we cannot have the same level of profitability for each exit from a startup as venture funds have. But I would like to emphasize the following moment. Petr Shchedrovitsky, my old friend and partner, told me an interesting story happened with the same Ford in the 30s of the last century. The Soviet Union sent a delegation from the Central Institute of Labour to the Ford enterprises to deal with conveyor technology in order to use it in Russia. Ford took them through the entire process, showing all the flow charts. Inspired delegates returned to the Soviet Union and started to implement something. Later, questions began to arise. In the course of the correspondence that took place, the Ford’s CEO sent a very unexpected answer to the next question “how do you do this and that”: “Dear colleagues, You should understand that our production framework is to save money of the buyer of our cars.”

And here we have the same thing. We aim to launch a typical startup that is 10-20 times cheaper than at the moment. Today, the average startup price on the global market, if we take the median, is 50-100 million dollars per unit. Some startups are cheaper, some are more expensive (the so-called unicorns), but the median is about the same.

— But Ford wasn’t just thinking about the welfare of his customers. His “a car for every family” concept meant nothing less than capturing a huge market that Ford’s competitors probably didn’t even see. Thus, a cheap car was a means for entering this market.

Exactly! In Europe, there are about a thousand companies with a turnover of more than a billion dollars. I can make a mistake with the number, but this is not terrible, because the main thing is different — as for the companies with a turnover of 50-200 million, there are a hundred times more of them. This is exactly our target market. These companies should also be capable of developing by virtue of buying startups.

A company with a turnover of 50 million dollars has a maximum profit of 10 million. This means that in order to ensure its development by buying startups, that is, acquiring several new companies a year, the average startup must cost plus or minus 1-3 million dollars.
Thus, it is our benchmark — a product called Startup for a Million Dollars. If such a product appears on the market, these medium-sized companies will find themselves able to buy it. But they will definitely never buy a startup for a billion dollars.

Source: eRazvitie
Date: July 20, 2017

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