June 30, 2020

Innovation conveyor operating principles and how to become a venture builder / Sputnik

As part of the Open Innovations forum, Oleg Obukhov, the Sputnik radio (RIA Novosti) news observer, carried on a conversation with Denis Kovalevich, CEO of TechnoSpark, about the profession of a venture builder, the innovation conveyor operating principles, the artificial intelligence and cooperation between science and business.

Photo by the author and the RUSNANO FIEP Media Office

— How does the pipeline of innovations work in practice and could you give some examples?

— The pipeline of innovations is such a combination of words mainly invented by your colleagues, journalists, looking at what we are doing.

— So, do you like such a metaphoric expression?

— Yes, indeed. It is a considerably acute reflection of the changeover we are making. It is a move away from the conventional entrepreneurial behaviour familiar to the previous economic development, when one entrepreneur has been developing one company all his life. Such a company is often handed down to the children, grandchildren, passing through generations.

— Anyway, it was common previously.

— Yes, so it was accepted. Today we see a phenomenon that the world usually calls the ‘serial’ building of technology companies. The term ‘serial’ means that entrepreneurs build businesses, sell them and start building new ones, sell them again and so forth, thus having enough time to create several, even dozens of companies in their lifetime. Why do they begin to do so, unlike their predecessors? First of all, because this allows the entrepreneur to maintain an exclusively entrepreneurial function and not become, for example, a manager. A manager and an entrepreneur are known to be different business roles. As mathematicians would say, an entrepreneur is a person making transitions from the ‘zero’ point to the point ‘one’, that is, using a set of available resources and opportunities to build a specific business from scratch. Whereas, a manager is someone who takes the business created by the entrepreneur and goes further developing it, so starting from the point ‘one’, this person moves to infinity. So, an attempt to focus on this first step, at the stage of launching businesses, creating companies and their economy, — this is the core activity of those who are today called serial entrepreneurs. And, in this sense, their occupation resembles a conveyor, implying disparate chances and resources at the entrance and operating companies at the exit. Therefore, they called it the innovation production conveyor. They called it so, bearing in mind the definition of innovation given by Joseph Schumpeter. He wrote that innovations are created by an entrepreneur, not an engineer. The engineer creates ‘candidate’ innovations that the entrepreneur either uses or does not use in his work, and therefore in industry, in the real economy. The newly-created businesses are innovative themselves. This is the meaning of the innovation conveyor nickname.

— Could be such a profession now acquired only thanks to experience? Or, are there already some schools to teach, let’s say, a person who would like to be engaged in this sphere, to become a venture builder?

— Today, I would say this profession…

— Can’t be taught?

— According to my estimates, this emerging profession is about 30 years old. As for the first outbursts of this activity, it occurred in Cambridge, England, where a group of entrepreneurs, each of them initially building the own start-up, consolidated their efforts to operate as the partnership, launching several businesses and selling them afterwards. These were sprouts of a profession, or serial entrepreneurship. I would not say this business activity has already become a profession today. Its norms, principles and basic technologies are just being formed. Let’s remember how much time it took to create the professional occupation of a manager. Frederick Taylor and his comrades gave rise to this profession in the 80s of the 20th century. It was turned into the full-fledged profession in the 20-30s of the 20th century. So, in fact, the period for the profession to be fully-formed takes approximately 50 years. In my opinion, we are now somewhere in the middle of this path, when a part of its standards have already begun to develop. Its phenomena can be found all over the world.

In Russia, it is a network of nanotechnology centers that are engaged in this activity, not concerning only TechnoSpark, the Troitsk nanotechnology center. The RUSNANO’s Fund for Infrastructure and Educational Programs is a strategic investor along with private and regional partners. Therefore, finally answering your question: from my point of view, this activity, of course, has not yet been formed as a professional occupation, still staying somewhere in the middle of its life cycle. However, such situations when we will see the first attempts to teach this profession are expected to occur soon. For example, despite the fact that we are not an educational organization and don’t provide training courses, we have a specific product — a separate company that conducts a business role-playing game called Build a company. Sell the company. Not implying education, it gives a chance to participants to carry out self-diagnostics regarding their start-up building skills. I mean, their capabilities to serial technology entrepreneurship. Having passed through the game, people are able to answer the question for themselves whether it is acceptable for them to proceed to such a mode of life and activity, or it is something completely beyond their desires and opportunities.

— And who attends such training courses?

— Once again I would like to note that it is not training. This is a game aimed at self-diagnostics. In the course of game, nobody is taught, there is no even a presenter. It’s more like a computer game. As in any big network computer game, you go through levels, meeting new circumstances and situation changes at each stage. At any moment of the game, you are allowed to quit, saying “I’m over.” Unlike, by the way, real businesses that don’t give you opportunity to get out in such a simple way. It will always cost you something.

We have had 20 or 25 such games over the past year or a year and a half, attended by about two and a half thousand people. These people have now made very clear conclusions on their personal attitude to such a new activity as serial technology entrepreneurship. There will be a very small percentage to say: “OK, it seems to be the occupation that I want to be involved for the next 20-30 years.” These persons will say that serial entrepreneurship is so exciting that it is worth giving up management and turning into venture building.

Photo by the author and the RUSNANO FIEP Media Office

— I would like to ask, who plays this game more often — young people or the older ones?

— First of all, of course, young people. These games were attended by students, recent graduates as well as a large number of our company and other nanotechnology centers’ employees who also made this choice for themselves. However, our company is also specializing in conducting business games for the more mature participants in terms of age. Take the Open Innovations forum with its youth audience, for example. If we have a look at people passing by us right now, we will discover their average age to be about 25-35 years. This is the generation mainly participating in the games. One of them is already a formed person and it will be difficult for him to retrain for a new type of activity. And the younger guys… On the one hand, it is easier for them to change views, and on the other hand, it’s about lack of experience adults may have, for example, those who have already tried to create their own businesses but have not succeeded. Or, on the contrary, it has worked some way. So that, they will be capable of converting this experience and turning it into a serial one, beginning to reproduce it. The sky is the limit. Once again, I think that at the dawn of management, when it was formed as a profession 120 or 130 years ago, very different generations and age categories of people had their hands in the process.

— Any way you look at it, technology and science are developing rapidly. Is there close cooperation, interaction between science and business in Russia?

— I will answer this question from my position, that is, from the position of an entrepreneur, serial entrepreneur. For a serial entrepreneur, what is the meaning of a) science and b) engineering? Science is an activity with the research results to be a final output. A certain effect is under the research and, based on the results of investigations, some entrepreneurs may create some businesses someday in the future. Generally, the time from the science results achievement to the appearance of goods on the shelf covers a period of 20 years or more. Many scientific institutes give licenses to entrepreneurs in a fairly large number in order to use the results of their scientists’ research, as exemplified by the Weizmann Institute in Israel. Royalty is a form of such licenses. It means for scientists and the institute, that receiving their income from the entrepreneur’s use of their labor results is possible only provided that the product appears on the shelf. Imagine a situation, quite an interesting one in the context of life planning, when the professor begins to receive income from his or her research results 20 years after he finished them. For him or her, this will almost always be an unexpected event. And, by the way, this is often a fairly high income. For example, at Leuven University or at the already mentioned Waizmann Institute, there is a couple of hundred professors and academics who are millionaires. In Russia, this is not so common. We still do not see the researcher to make a significant contribution to the partnership with the entrepreneur in the way our Israeli or European colleagues do.

With regard to working with engineers, there is a slightly more understandable form of interaction. For an entrepreneur, an engineer is always the one who comes to work in the company bringing, first of all, the answer to the question “how?” While the entrepreneur is the person to answer the question “what to do,” for example, by giving directions of this kind: “We will make an unmanned vehicle.” This decision is one hundred percent owned by the entrepreneur. This is the entrepreneur’s area of responsibility as he or she should make a decision, take the risks, accumulate all the necessary technologies and resources and not to miss time. And the engineer has to provide a solution to make this car the most cost-effective way. At the same time, naturally, the engineer and the entrepreneur are continually discussing the economics of development process or the product itself. We often have situations when engineers offer a quite expensive version of dealing with the challenge set by the entrepreneur.

— But not on purpose! Engineers somehow find excuses for it.

— Yes, surely, first of all, it is caused by an ordinary engineer’s strive to make the best product, the best in its characteristics, quality and so on. The entrepreneur seeks to make the product the most economical way as he thinks about saving the capital of his consumer.

Henry Ford said: “Our framework is the capital and time saving for our customers.” He used this phrase responding to the letter from the Soviet Union, where it had been said that we had also been introducing ‘Fordizm’ techniques in our country, that we had achieved certain results on conveyor introduction in the 30s and so on. He said: “Good job, but I have to inform you that the only thing we do is saving the buyer’s time, that is why we created the transnational Ford corporation where it is not cars or a car conveyor, which you managed to reproduce, that counts. The most essential things are a network of repair services to fix these cars, a network of spare parts supply, localized in each part of the world, etc. This is what we call the global Ford corporation. Nothing matters more than this. Thus, we save the time and money of our customers. This is our framework, not the best car in the world in terms of technological characteristics.” Here we see an inevitable gap between the perspectives of an entrepreneur and an engineer.

The engineer, who agrees to act within this framework, is ready to work in a line with economy of labour, expenses, resources as well as economy of his or her own labour inputs. Such a person is to become a partner for the entrepreneur. The one, who does not accept, leaves or is most likely to be engaged in engineering research outside the ‘validity area’ of the entrepreneurial framework. As an example, in the Soviet Union, it used to be said that engagement in science refered to personal curiosity satisfaction at public expense.

— I see. And what do you think about such a system of cooperation between science and business in Russia, does it exit? If so, maybe you can give some examples? Or, perhaps, there is an example of other countries where this cooperation is organized in the best possible way?

— I am not ready to speak for the whole country, as I am neither the Minister of Science, nor the Minister of Innovation, even nor the Minister of Industry. Therefore, I will only tell about my activities. In our portfolio, the share of technologies from Russian research institutes, that can be licensed in various forms, is no more than ten percents. On the whole, we buy and transfer foreign technologies. Based on them being applied in Russia, we create engineering jobs and grow new companies with new products. Following this, I think a certain conclusion on the Russian science effectiveness can be drawn. However, we see other examples. Here, it would seem, is Belgium, not a very famous in the technological field country. Leuven is situated there, it is a university campus. The university with very old history was established in the 15th century. This year, the university headed the ranking of the world’s innovative universities outside of America. And the fifth place on the global list, headed by Stanford.

What caused the University of Leuven to become the best in Europe? They taught themselves to do three things. Firstly, they learned to carry out engineering and research work for corporations, that is, for entrepreneurs, on the custom-made basis. In other words, they learned to do not what they want to do, but what the industry needs. All jokes aside, I can say that this is a very difficult changeover, which took them 40 years. Secondly, they learned to make the so-called spin-offs. This is when some of the technologies appeared in the university laboratories, are learnt to be transfered to entrepreneurs, creating new companies in partnership with them. Thirdly, most funny, they learned how to sell companies. Imagine a university selling technology companies, its spin-offs! Over the past 19 years, they have sold 20 or 30 companies. And today, 50% of the University of Leuven income is return on sales of companies and industrial contracts, and only another 50% are gotten from educational services partially, like everywhere, subsidized by the state. It is difficult to imagine such a university or research institute in Russia, isn’t it?

— For now, sure!

— From my point of view, this is an example of successful cooperation of a university or scientific organization, which it is, with entrepreneurship. The staffing structure of the University of Leuven has two and a half thousand professors. And about five thousand researchers and engineers who help them work in laboratories. Together, they make up one of the strongest entities that has developed itself over the past 40 years. It was the best university in Europe 400 years ago, and now they have regained this title. We know almost nothing about him here, although the general manager of KU Leuven is a member of the International Council of the Russian state investment program for the best universities, called 5-100.

— Denis, and does this university use artificial intelligence to find solutions?

— This university’s primary area of activity is not related to information technologies or a large amount of data, which are now the basis for artificial intelligence technologies. They have a couple dozen startups in the ICT industry, but this is one of five and not their largest technology cluster. Biotechnology, mechatronics, nanoelectronics, etc, make the more significant contributions to Leuven’s new economy.

As I see the current situation, of course, artificial intelligence is in focus, above all others, being invested not by the European, but the American entrepreneurs and scientific centers. However, European centers are much closer to our focal area. I mean, to the activities that imply dealing with material technologies, with nanotechnologies in the broad sense of the word. In my opinion, Europe has exactly such a specialization. As Martin Hinul, my senior friend from Leuven University, says: “There are a mainstream and a substream. The mainstream for the next 10—15 years is completely clear. These are the fifty first companies in the world, presented mainly by American entities, maybe with some inclusions of Chinese business. Europe is not a leader in the mainstream, thus, its attempts to compete with them are pointless today. We are required to do things we know better than the leaders, i.e. to make a speciality.” Then he gives an example that artificial intelligence systems, when they are embodied in iron, will require robotics, new mechanics, sensors, motion systems, energy storage, etc. This is where European engineers are experts. Martin Hinul believes that Europe is the most full-of-talents region in the world in the field of material engineering, so it would be better to take this function for the next hundred years, not competing, but specializing. Just like Martin, I find the full power to be in specialization.

— Denis, what, in your opinion, should be the state support of technology entrepreneurship? First of all, needless to say, the experience of Russia is the most interesting aspect.

— To start with, I believe that the reasoning of technology entrepreneurs or entrepreneurship as a whole to require support, is initially incorrect. So to speak of a board of economic players, an entrepreneur is perhaps the only figure that does not require any support.

— Well, essentially speaking, if an entrepreneur applies to power structures seeking for support, it turns out that he or she is not an entrepreneur?

— Most likely, this person either has problems with the business economy and wants to solve them this way, or is not an entrepreneur at all, but only calls himself that. For example, he is an engineer who decided to encase himself into a legal entity and become a resident of a development institute in order to eventually receive a grant issued by this development institute. From my perspective, any support for entrepreneurs, once again I emphasize the word ‘support’, is an oxymoron. This is the first moment. For the second point, this is, without any doubt, a number of technology entrepreneurs in the country. We have extremely few of them, even to say, dramatically few! It is our historic situation. No claims should be made to someone specific, because we have lived in total absence of entrepreneurship and private property for 70 years. So what kind of entrepreneurship or what kind of entrepreneurial culture can we talk about after that? I believe that it is necessary not to support a technology entrepreneur, but to generate…

— Preconditions for stimulation?

— No, neither preconditions, nor for stimulation… These are equal to an injection into the prosthesis. It is necessary, for example, to expose both successful and unsuccessful experience to the public, to form an entrepreneurial reputation environment.

— Advertising successful and unsuccessful entrepreneurial experiences, so that we see how it should or shouldn’t be?

— For people in order to make own decisions on an activity being suited for them or not. The public space is also required to be, let’s say, cleaned up, because there are not so many differences between Oleg Tinkov and Sergey Mavrodi in the mind of an average modern man.
In Russia, they are both called entrepreneurs.

In addition to public space clearing, it is important to clean up the mechanisms that make difficulties to entrepreneurs causing a need to be overcome within their activities today. For example, there are not many good engineers in Russia. Today, their labor market costs are significantly overstated. This is a very highly paid and even overpaid position on the Russian market. Paradoxically. Such an inflated price is created, primarily with the help of donations and grants, a systemic subsidy mechanism, within which many Russian engineers live and carry out their activities. For my business, any grant is harmful. We don’t get grants. We have a very strict rule not to work like that. Only investments. This is because grants destroy business from the beginning.

That’s why I’m talking about clearing innovation operating principles. Not about destruction, but about clearing. Many development institutes are moving towards this concept. Skolkovo can be an example. Having worked in the Skolkovo fund, I have personal experience in issuing grants and know what it is and which way the fund is heading now.

The third point is again not preconditions, but institutions. In the first turn, the legal institutions. Of course, the only thing that allows an entrepreneur to be confident for 10 years to come, as it is realistic to have a planning horizon for the period of 10 years, is reliable institutions that protect his private property. Today we are far away from this situation, since we have other rules and mechanisms in the country. We are watching many different types of raiding, which, of course, do not contribute to or facilitate an increase in the number of entrepreneurs.

Finally, I want to attract your attention to the thesis of Anatoly Borisovich Chubais, who says that the technology entrepreneurship is impossible without losses. At least half of the investment fails.

— You need to be prepared for this, right?

— Everyone should be ready for this. As the owner and co-investor, I also have to be prepared for such a situation, as well as my partners represented by the RUSNANO Fund and other investors who may or may not be connected with the state authorities. The technology business is not the speculation. Don’t confuse them. Speculation is when you place the money today, being absolutely sure to return them with a certain yield in a certain period of time. It’s not risky. Whereas, venture capital investment is completely different. And clearing, that also covers the state mechanisms for controlling investments, is very relevant. RUSNANO often obtain accusations that their certain plant has been closed. Yes, the plants have shut down. It’s an absolute truth. Plants are closed and investments are lost. But specific investments have been lost. You shouldn’t think of them in isolation from the entire package of investments made by RUSNANO or any other technology investor. RUSNANO is simply the largest technology investor in the Russian market, thus attracting greater attention. One company loses, another makes profit. This is normal for the innovations. Moreover, you know, there is such a rule in America: if you haven’t made your way into bankruptcy at least once in your life, then you are still a newcomer, a neophyte. So, a number of investors will not deal with you since you do not have normal, solid entrepreneurial experience.

— Is it due to the fact that it is always interesting to look at how a person, having become bankrupt, comes out of this situation?

— The most crucial thing, he is able to recognise for the first time that getting into bankruptcy and the actions that led him to this, are some specific and certain actions. He gets an opportunity to see these wrong actions. And a chance to draw constructive conclusions based on experience. So, in the future, the possibility for him to repeat these actions will be much lower. If, of course, he is not a professional fraudster or, as it is used to be said in Russia, razvodchik (translated as grifter, ed. note) since there are lots of them on the vast territories of our homeland.

If to have a look at the Russian venture capital market today, the thesis that I am talking about all the time is that the problem of the venture capital market is not the absence of buyers, not the absence of companies that would like to buy startups, the problem is the lack of a product. That is, deficiency of startups suitable for sale. In fact, our business game is about this, there we are trying to convey to the players the intuition to understand that companies suitable for sale are objective business indicators. This appears to be an objective company’s condition, not a derivative of the secret negotiations between the buyer and the seller, each desiring to grab assets of one another at the deal price.

— Denis, thank you very much for coming to us and answering our questions. Let me remind you that our guest is Denis Kovalevich, CEO of the TechnoSpark nanotechnology center. Thank you so much and good luck.

— Thank you, all the best!

Source: Sputnik Radio
Date: October 30, 2017

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