B ey ond U nicorns: The Industrialization of Disruption A case for Europe
Summary Executive Summary Key messages and implications Introduction: Unicorns are just the tip of the iceberg Study design & method I.
T h e necessa ry condit ions f or a syst em a t ic F P C p rodu ct ion: G row t h ena b l ers A. Condition 1: Enabling access to large markets B. Condition 2: Developing adaptive regulations C. Condition 3: Establishing Network-Based Entrepreneurship Programs (NBEP)
I I . D if f erent ia t ing condit ions t o f ost er F P C dev el op m ent : C oncent ra t ed a nd a rt icu l a t ed ca p it a l s A. Condition 1: Investing in and attracting human capital B. Condition 2: Economic capital fitting the entrepreneurial culture C. Condition 3: Promoting on- and offline social capital I I I . T h e condit ion f or a su st a ina b l e p rodu ct ion of F P C : S ociet a l a ccep t a nce A. A societal capacity to absorb the dialectic between creation and destruction B. The case of job creation and social justice Acknowledgments References
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Executive Summary Beyond Unicorns, F u t u re P ow er C om p a nies p rof ou ndl y disru p t ou r econom ies a nd societ ies Unicorns, companies valued at over 1 billion dollars that were founded less than 10 years ago, receive extensive media coverage although they only represent the tip of the iceberg. Beyond Uber, Blablacar or Airbnb, there are many more companies that are almost never mentioned although they are critical for economies and societies: Future Power Companies (FPC). FPC, start-ups that raised more than 15 million dollars within 8 years of existence, are booming in numbers. This report encourages Europe to pay close attention to FPC as the competitiveness gap is increasing with other regions. There are 3 times more FPC headquartered in the USA than in Europe. In Israel, sustained investments in entrepreneurship have been speeding up a solid production of FPC: between 2013 and 2015, the rate of FPC creation was 9% higher in Israel than in France while Israel’s GDP is 8 times lower than France’s. In 2015 the median funding deal value was $2.5M in Europe compared to $8M in China. This effort is fueling a greater population of FPC in general and Unicorns in particular: there are 40% more FPC and almost 3 times more Unicorns in China than in Europe. FPC contribute to the creation of jobs and the diffusion of innovation. FPC are affecting the lives of millions by challenging the ways in which people communicate, work, eat, travel, shop, develop friendships or love relations. While Unicorns offer emblematic examples of radical and rapid transformations of markets, disruption can only be fully apprehended by focusing on FPC at large. T h ree condit ions t o indu st ria l iz e t h e p rodu ct ion of F u t u re P ow er C om p a nies It is possible to steer and industrialize the “production” of FPC. Ecosystems such as Silicon Valley in California, Silicon Wadi in Israel or InnoWay in China are typical cases of territories that generate a high number of FPC. The present study develops an international benchmark and outlines the conditions of possibility for an intensive, high quality, production of FPC in Europe. Three types of conditions are listed. First, we detail necessary conditions without which the industrialization of FPC would not be possible – access to large markets, adaptive regulations and Network-Based Entrepreneurship Programs. Second, we identify differentiating conditions that contribute to the development of FPC performances – the concentration and articulation of human, social and economic capitals fitting the entrepreneurial culture. Third, social acceptance is a stabilizing condition, for a sustainable production of FPC that is virtuous both in economic and social terms. Redefining entrepreneurship: from heroic entrepreneurs to ecosyst em s of p ossib il it ies Fast growth entrepreneurship is not just a matter of luck nor solely a question of individual stamina. Entrepreneurship can be fostered through organized ecosystems made-up of informal communities, anchored within local territories that are structuring a plurality of capitals (including highly educated work force, networks of company founders and investors with entrepreneurial experiences). Far from being a fully digitalized process, entrepreneurship occurs
through physical interactions in specific locations where expertise can be fertilized by combining business, design and engineering; research and practice; national and multicultural identities. These resources must be, from day one, dedicated to the development of replicable and sparing business models and to their expansion across jurisdictions to reach global markets.
S y lv ain B ureau Scientific Director Chair of Entrepreneurship, ESCP Europe
J ean- F ranç ois R oy er Partner EY, Entrepreneur of the Year Program France Leader
F ranck S eb ag Partner EY, VC-IPO Leader
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Beyond Unicorns: The Industrialization of Disruption A case for Europe
Key messages and implications Im plications for F rance: L ocal concentration of capitals to support g row th tow ards g lob al m ark ets Based on the analysis, implications are drawn across social levels that address key players of the industrialization of FPC: start-ups, accelerators, large corporations and regulating bodies in France.
For regulators & the French government
• Encouraging strategies of fast globalization by facilitating linkages and pathways to large markets • Supporting the concentration of human, economic and social capitals within local ecosystems • Managing dynamic interactions between creation and destruction through adaptive regulations
For large corporations
• Developing solutions to manage uncertainty (rather than risk) to control disruptive dynamics • Leveraging coopetitive strategies with FPC • Enabling unlearning and processes of subversion through intrapreneurial organizations
For accelerators & investors
• Developing Network-Based Programs around informal communities to support FPC expansion • Diffusing a culture of ambition with global markets as a primary target • Intensifying investments in FPC and developing long standing relationships with founders
For founders
• Developing global ambitions by starting with local solutions • Valuing informal relationships and leveraging resources within communities • Getting ready to manage destructive dynamics and face resistance from competition and society
Beyond Unicorns: The Industrialization of Disruption A case for Europe
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Introduction: Unicorns are just the tip of the iceberg In recent years, the unicorn phenomenon has accelerated to a present breakneck pace. From 9 unicorns in January 2011, the total number of companies valued at over 1 billion dollars and founded within the past 10 years has reached 176 in September 2016.
F ig u re 1 . T h e Unicorn C l u b ( C BI nsig h t s, 2 0 1 6 )
The fresh companies worth billions are of high scholarly interest and receive increasing media coverage. Virtually, every industry is concerned with the phenomenon: Hardware, Retail, Media, Transportation, Healthcare or Financial Services. Simultaneously, the diffusion and trend of expansion of the notion of “disruptive innovation” is clear. Content analysis shows that the notion has become numerically prominent in the media (Figure 2). The word disruption has Latin origins and etymologically derives from the verb dis-rumpere. Dis in this context refers to a strong intensity; rumpere (to break) means splitting into two pieces or interrupting. In other words, to pursue disruptive innovation is to break, in a radical way, with a previous practice deemed socially and economically acceptable. Clayton Christensen formally defines disruption
F ig u re 2 . M edia occu rrences of t h e t erm 6
as a process by which a product or service initially takes root in simple applications relating to mundane activities and then relentlessly moves up markets, eventually displacing established competitors (Christensen et al., 2015). Since his first work was published in 1995 (Christensen & Bower, 1995), books and papers have flourished and founded an entire industry of attempts to study the phenomenon. In France, Gilles Babinet (forhtcoming) addresses at length the question of disruption as a global phenomenon. Other recent notable issues include The Disruption Dilemma (Gans, 2016) and Lead and Disrupt (O’Reilly & Tushman, 2016). The two books publish extensive works on disruption from the perspective of incumbents and draw insightful connections on how to adapt such radical evolutions.
“ disru p t iv e innov a t ion” ( E Y , 2 0 1 6 )
Beyond Unicorns: The Industrialization of Disruption A case for Europe
The present study promotes the idea that unicorns are just representing the tip of the iceberg of disruptive dynamics. Beyond the buzzword of “unicorns” lies the core challenge of understanding how some territories are enabling the creation of companies that eventually disrupt economies and societies. There are currently 176 unicorns worldwide but thousands of Future Power Companies (FPC) largely unaccounted for and equally producing disruptions at a fast pace. FPC are defined in this survey as fast-growing firms with less than 8 years of existence that raised €15M or more.
We believe that some territories have developed ecosystems that enable the industrialization of disruptions through the growth of unicorns and FPC. The picture is quite diverse across locations. Unicorns are, for one major instance, densely located in two countries: As of September 2016, 101 unicorns were seated in the USA, 34 in China.
Sweden Canada 2
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UK 6
Germany
France USA
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South korea
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Israel 2
China India
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Singapore 3
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F ig u re 3 . G l ob a l rep a rt it ion of Unicorns ( C BI nsig h t s, 2 0 1 6 )
Arguably, Europe is lagging behind in terms of the number of unicorns grown. The gap is even wider against the valuation of companies. The total capitalization of all US Unicorns amounts to a quarter of the French stock index CAC 40. In September 2016, the four of GAFA (Google, Amazon, Facebook, and Apple) had a combined valuation of $1,550B compared to the $1,343B of worth of the CAC 40. The figures suggest that France and other European nations remain behind the world’s leading places of business when it comes to the number and the financial value of successful companies hosted.
As Figure 4 describes, significantly more start-ups, both for FPC and Unicorns, were created in the USA as compared to Europe despite a lower rate of overall company creations. The crucial gap highlighted between stage 1 (company early creation phase) and stage 2 (FPC or Unicorn) is central to the present survey and is analyzed in details in the following sections. The purpose of developing an international benchmark is to help Europe to better understand how it could improve its business environment in the global context.
Beyond Unicorns: The Industrialization of Disruption A case for Europe
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F ig u re 4 . N u m b ers of com p a nies crea t ion a cross t yp es ( E Y da t a b a se)
International discrepancies clearly appear when considering the number of FPC funded in 2014: Between China, the USA and Europe, on the one hand. Within Europe, on the other hand: France-based companies rose around €13M, compared to €30M in the UK and €21M in Germany.
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F ig u re 6 . V C F u nd inv est m ent s in st a rt - u p s rel a t iv e t o dom est ic G D P ( E Y da t a b a se)
French venture capitalists (VC), for instance, would have to multiply their investment stock by 7 to close the gap with Israel. Countries like Finland or Sweden, with a comparably small domestic market of fewer than 10M people, are fairly active in relative VC investment terms. Sweden invested half as much as France in FPC in 2014, a significant effort when considering that its GDP is 5 times lower. The figures tend to show that countries sizes and GDP are not tightly correlated to investments in FPC. If not market size and GDP, what is driving investments and eventually the emergence of FPC? Far from relying on random processes of emergence, we suggest it is possible to industrialize the “production” of FPC, and with it the production of disruption.
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F ig u re 5 . F u nds ra ised b y F C P in 2 0 1 4 b y cou nt ry ( E Y da t a b a se
The case of Israel is of particular interest in that regard. Despite its relatively small size in terms of population, it has managed to become the cradle for two tech unicorns, Infinidat and IronSource, valued at $1.2B and $1.5B. Beyond the two companies, Israel is very successful at promoting start-ups and FPC. The Israeli investment sector is the most active worldwide as measured relatively to national GDP (Figure 6)!
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Beyond Unicorns: The Industrialization of Disruption A case for Europe
The survey outlines the conditions of possibility for this process of production and its quality. We list three types of conditions: • First, conditions of emergence: the necessary conditions for a systematic industrialization of FPC creations • Second, conditions of development: Differentiating conditions to industrialize FPC performances improvement • Third, a stabilizing condition: social acceptance is central for a sustainable and virtuous industrialization of FPC in the long run
Study design & method The phenomenon considered is multi-faced and of great complexity: It concerns the individual as much as it affects societies. A holistic and multidimensional approach is developed in this study in order to fully grasp and to understand the industrialization of contemporary disruption. The results presented derive from an analysis that borrows from many domains (financial, social, legal, political) and draws on a plurality of empirical sources and research techniques: qualitative and quantitative methods were used to study the object’s manifestations at the micro-organizational and the macro-institutional levels. We adopt a European focus and develop an international perspective. Data outlined in the report were primarily collected using the following methods: 1. 23 Interviews with informants acting as entrepreneurs, investors, mentors and/or researchers 2. Content analysis applied to open access online information and proprietary databases 3. Benchmark analysis of surveys and reports relating to entrepreneurship and disruption 4. Selective literature review of scientific publications The propositions developed in this study were tested with 10 experts of the European entrepreneurial ecosystem. After a careful review of the propositions’ relevance in both relative and absolute terms, the report was written to explicit the implications for regulators, entrepreneurs and large corporations. The first draft of the full manuscript was submitted for a second round of review by a set of three new experts. The resulting version of the manuscript formed the basis for the final form of the report. The reviewing process is central to cover a wide scope of empirical fields, academic disciplines, practical and research issues and to increase the quality of the analysis.
Beyond Unicorns: The Industrialization of Disruption A case for Europe
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I
T h e necessa ry condit ions f or a syst em a t ic F P C p rodu ct ion: G row t h ena b l ers
A. C ondition 1 : Enab ling access to larg e m ark ets FPC, as a particular form of organization, has a distinct object, disruption, and method of growth, scalability. FPC are best grasped by measuring their ability to grow. This capacity relies on two fundamental aspects: i. Small marginal costs limiting the resources requirement to support growth ii. The possibility to replicate a business model across countries A large and unified market is adapted and supportive of fastgrowing companies as it limits the need for FPC to invest and move to other markets. Globally, the USA and China offer emblematic examples of markets large enough for fast growth company to expand without committing too many resources. Conversely, fragmented markets, like Europe to some extends, require supplementary efforts to materialize new opportunities. Topical hurdles include the adaptation to different laws, manufacturing norms or languages. As underlined by Stéphane MacMillan, Country Manager for Foodora, this cost of growth is felt with the “marketing campaigns that we need to translate for every country in which we are implanted in Europe.” Problems are of different nature for B2B sales where contracts often have to be negotiated at multiple points in space and time, with each country branch. This is a well-known impediment for the pace of development of a company. However, and regardless of how constraining boarders may appear, the current situation of Europe did not prevent some companies from developing a particular know-how and to grow across countries through the replication of their business model. BlaBlaCar operates in more than 20 countries and certainly is one of the best European examples of this idea. As suggested with the case of Israel, countries with small national market size can also be successful at fostering the creation of FPC. The reasons lie in the resources FPCs find to connect with large markets beyond their domestic environment. Some figures aptly illustrate this tendency: On average companies worth billions that originally developed in countries with fewer than 50M people took 1.4 years to expand globally, compared to 2.9 years for the ones that originate from 50–150M people large countries and 3.3 years for those that emerged in very large countries of 150M people and above (Atomico & Slush, 2015). It is worth mentioning that Israeli entrepreneurs would seem more inclined to think globally from the start and often consider
10 Beyond Unicorns: The Industrialization of Disruption A case for Europe
the USA as a natural market for their expansion. For Muriel Touaty, Head of Technion France, this observation has historical and cultural reasons: “The entrepreneurial mindset is very present in Israel and there is a strong sense of creating new things on a global scale.”
Political implications for Europe Even though the UK has only partially been integrated and connected to the European start-ups scene, the 2016 referendum in favor of a Brexit is arguably casting doubts on the capacity of the European Union to limit the costs of growth for European start-ups. Brexit or not, the challenge would remain identical: Without internationalization and the capacity for a start-up to enter large and integrated markets like China or the USA, growth remains difficult and costly, if not impossible. Highly successful European entrepreneurs have been actively developing this strategy. Significantly, to Alexis Fogel, co-founder of Dashlane, a French FPC, “we needed to go abroad to develop our product, [the] French market is too small, and now 90 to 95% of our business is abroad and mainly in the US.” With the prospect of a hard Brexit, more and more entrepreneurs might follow different paths for internalization, looking for opportunities beyond Europe, in the USA or China. To help more entrepreneurs expanding, acceleration programs should be designed at an international and continental scale. As underlined by Peter Bos, EMEIA Strategic Growth Markets Business Development Leader at EY, today “programs are nationally oriented but a start-up needs to scale up. There is a need for more international ecosystems to help overcome that hurdle.”
B . C ondition 2 : Dev elop adaptiv e reg ulations There are different challenges depending on the subject matter of norms and regulation. We distinguish two instances: (i) regulating usual business (ii) regulating disruption Regulating usual business refers to the rules that apply to regular practices of a fast-growing company, relating to sales, working conditions or taxation. In most countries the picture is ambivalent. Consider France: on the one hand, Carlos Diaz, cofounder of The Refiners, believes “France is a start-up paradise: there are many aids and programs from the government.” A recent book by Fabrice Cavaretta is straightforward: Yes!
France is a paradise for entrepreneurs (Cavarretta, 2016). On the other hand, the traditional regulatory frame remains complex and insufficiently appreciative of start-ups. Creating a company is easy in France, but growing a business is more difficult: 72% of entrepreneurs perceive the inflexibility of the French market as a hurdle (EY, 2016a). Furthermore, in 2011 only 5% of French companies have more than 10 employees, against 18% in Germany and 21% in the US (RAISE & BAIN&Co, 2015). Many entrepreneurs experience difficulties when applying rules that were initially designed for larger and more stable forms of organizations. Regulation sometimes appears ill-suited for company forms that are by definition temporary and growing. Pierre-Henri Deballon, Cofounder of Weezevent, admits quite explicitly “Working 35 hours in a growing start-up is just impossible, and I don’t have time to maintain that, and we don’t want foremen to do it. Labor legislation is just too heavy, and it’s impossible to read it fully, a start-up has other fishes to fry.” Second, regulating disruption, is related to the seemingly conflicting nature of regulation and innovation. By definition, disruptive innovations avoid existing norms of conducts and sometimes to a point of conflict with legal rules. One example out of many is the lawsuit filed against Heetch, a mobile app designed to share rides at nights. Entrepreneurs appreciate the need for regulation. Teddy Pellerin, founder of Heetch, stated in an interview with Les Echos, a French quality newspaper, that his company “belongs to the sharing economy that needs to evolve and to be defined” (Pogam, 2016) However, in some countries a slow and political evolutions of regulatory frames is constraining the growth of many start-ups. In other countries, like the USA or Israel, the legal environment, far from being free of constrains1, is more flexible. The system of common law has historically seem to better fit the legal challenges created by FPC as it accommodates emergent adaptations based on precedents rulings. Substantive law is key here and researches on the link between Law & Management (Laufer, 2015a, 2015b) and between Law & Economics (Supiot, 2015) have triggered fruitful academic debates.
Legal implications for Europe For the first type of regulation, efforts could be made to create a specific regime for start-ups. Muriel Touaty, President of Technion France, suggests “taxes should be lowered for start-ups and midsize companies to foster a thriving entrepreneurial environment.” Taxes are only a small part of the broader discussion but addressing the topic would be a recognition of the peculiarity of start-ups and their need for ad hoc regulation. Moreover, start-ups could be more integrated in the law-making process in order to improve current regulatory frames, to limit complexity or costs relating to the compliance with legal requirements. They have specific objectives and needs and it could prove useful to increase the space of their contribution in the general debate about their regulations. For the second type of regulation, the problem is larger and equally complex. Disruptive solutions are massively produced in contemporary economies. At first, innovation opens up new spaces of possibility that are yet to be subjected to legal regulations, as such many responses to disruption might not even be of legal nature. It is not the role of regulators to follow pace with the ever-changing start-up environment. However, new companies tend to reshape the boundaries and the rules of business sectors at a seemingly accelerating pace; a reality that needs to be better accounted for in the law-making process for innovation to find its best expression. Thus, a balance ought to be found between blind approval and mere rejection in light of social and environmental risks. At any rate, the approach should not be to hinder these transformations and rather to accompany the evolutions (Bureau, 2014b). The risk is to prevent European companies to diffuse their own, new disruptive innovations in an open world and to prevent fair competition with companies subjected to other jurisdictions. Later on, innovations might be so widespread and accepted worldwide that there will be limited or even no possibility to actively shape them. In this scenario, the effect is detrimental to Europe: It will be affected by disruption but most of the value created as a consequence will be captured by non-European companies. 1
There are well known legal risks that are reflected by the frequency of class actions trials against companies which cost some start-ups and more established corporations their existence.
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C . C ondition 3 : Estab lishing N etw ork - B ased Entrepreneurship P rog ram s ( N B EP )
The reciprocal gift act differs from a transaction-based relationship since it creates a bond between donors and recipients that surpasses the value of the gift itself. Material objects or services are given as a means to create and nurture the immaterial, spiritual relationship between the parties (Godbout & Caillé, 2007; Mauss, 1923). An established Start-up programs blossom in every ecosystem. They take relationship is not a prerequisite for gift-giving to take place. different shapes and sizes. Some are more relevant than others. Reciprocal gift-giving establishes an affective relationship, The core idea might be best grasped by the following concept: whereas a pure economic exchange typically creates Network-Based Entrepreneurship Programs. We define NBEP unemotional connections between the buyer and the as programs designed to enable the production of fast-growing merchant (Hyde, 1979). and innovative companies through the use of reciprocal A fruitful example is the Y-Combinator (YC) in Silicon Valley relationships among entrepreneurs, investors and experts. that helped growing Airbnb, Dropbox, Reddit, Wufoo, Heroku These programs rely on replicable processes while avoiding and others that sold for hundreds of millions of dollars. rigid standardization. Put differently, they are plastic enough Conditions to apply to YC vary: A start-up may already have to adapt to the different local needs and constraints and offer raised funds, or may be in need for some money. Twice a year ad hoc solutions to entrepreneurs. Yet, at the same time, and over a 3-months period each time, YC is (financially) they are robust enough to maintain a common identity across supporting a pool of selected start-ups, and gives them sites. NBEP rely on a powerful community where informal advices on various subjects ranging from “who to hire?” to support and networks are paramount and formalization is “how to best prepare for the next fundraising?”: “YC is a limited to a minimum. The driving logic is of reciprocal rather VC fund that looks and operates like a guild of geeks, and than transactional nature. Plainly, people are giving resources hardly looks anything like a traditional fund comprised of VC to others as they know there will be some form of return at partners with MBAs or finance degrees. They are operators, some point. The type of practices we have in mind are neither through and through” (Hansen, 2013). They push founders free or uninterested (people indeed are interested in building to perform during weekly dinners where participants are fruitful relationships) nor are they utilitarian (it is not possible encouraged to talk about their recent achievements. There to precisely value a return on investment). Rather, they are are office hours for entrepreneurs to talk about their projects hybrid practices that rely on trust. Is trust lost, reciprocity, with YC partners, which include some of the most prominent as a mechanism for relationships revolving around gifts and figures of the scene (e.g., Peter Thiel, Joe Gebbia or Elizabeth counter-gifts, is stopped and the individuals who do not Iorns). A lot is made to help start-ups accelerate, regardless play by the rules are excluded from the community (Bureau, of their stage of development. 2014a; Ferrary, 2003).
12 Beyond Unicorns: The Industrialization of Disruption A case for Europe
Implications for Europe F irst , f or l oca l reg u l a t ors: Europe does need more NetworkBased Programs. The Family or Numa, though different, are two organizations developing a similar approach in Paris. The main goal is to help foster a start-up ecosystem where fundamental questions can be addressed so as to support growth. “Our objective is to work with entrepreneurs to help them on the long and difficult road to fund-raising, by giving them radical advice, which they would not have with more lenient organizations” details Miguel de Fontenay, partner at The Family. Similar places in Europe include: SeedCamp in London, The Factory Berlin for Germany, Wayra in Madrid or start-up bootcamps based in London (FinTech), Berlin (HealthTech), Rome (FoodTech), Amsterdam (e-commerce), Barcelona (DataTech) or Istanbul (various specialties). S econd, f or a ccel era t ors: we identify a critical need for NBEP that help entrepreneurs to reach large markets. The Refiners, co-founded by Géraldine Le Meur, Carlos Diaz and Pierre Gaubil, is a network helping French start-ups to develop their companies in the American market. The Refiners’ founders noted that French entrepreneurs were in need of three things when entering the Silicon Valley: (i) guidance to adapt to the local culture, (ii) assistance to meet with influential people and (iii) help to receive funding. Their program has been developed in accordance with that experience: The first month is dedicated to the fine-tuning of business models and to gaining familiarity with the US culture. The following two months are meant to allow time for meetings with influential experts in their respective fields and with investors as a preliminary step towards fundraising. In Europe, there are a few global solutions including the Chair of Entrepreneurship at ESCP Europe, a business school uniquely positioned with campuses in 6 large European countries. The Chair has developed Blue Factory, an established and successful Pan-European incubation program, which enables individuals to connect and network with the European entrepreneurial ecosystem.
Key messages Section 1 S ociet y: For Europe to become an attractive and fecund place for entrepreneurism means viewing the common market as much more than a free-trade arena or the sum of national economies. We identify three necessary conditions for a systematic industrialization of FPC: First, a politically integrated continental territory, that FPC inhabit; second, an adaptive regulatory framework that mediates given social conventions and new innovative practices as much as it links up distant actors, aspirations and arenas; third, network-based accelerating programs, play a decisive role in promoting the performance of individual founders and start-ups and also in helping with failings and failures. The entanglement of these conditions, we suggest, is what gives leading ecosystems such as Silicon Valley in the USA or InnoWay in China their productive force on the global entrepreneurial scene. C u l t u re: Entrepreneurialism is universal but locally is ritualized so that socialization is partly a matter of learning how to take business actions with or among the members of your community. The difference between the past and the present is not about the existence or the absence of such endeavor but the seemingly accelerating pace at which entrepreneurs carry out carefully weighted transactions (utility-based), pursue their own ideas (liberty-based), encounter as equals, exchange gifts and network (community-based).
Beyond Unicorns: The Industrialization of Disruption A case for Europe
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D if f erent ia t ing condit ions t o f ost er F P C dev el op m ent : C oncent ra t ed a nd a rt icu l a t ed ca p it a l s
The level of human, economic and social capitals is instrumental for market entries and subsequent start-up successes.
A. C ondition 1 : Inv esting in and attracting hum an capital Human capital refers to the knowledge and skills a person uses and articulates to perform labor in creating economic value (Becker, 1993). Human capital is central to entrepreneurship.
1 . O n education: The self- m ade m an is the ex ception Top entrepreneur and self-made man are two rare individual qualities. In the USA, 50% of the founders of the first 100 startups have a degree from a top US university (e.g., Stanford, Harvard, MIT or NYU)! 95% of them hold a university degree. A sim il a r sit u a t ion in E u rop e2 : • In Germany 1/3 of FPC entrepreneurs hold a degree from at least one of the top US universities (e.g., Harvard, MIT or Stanford) • In the UK 2/3 of FPC entrepreneurs hold a degree from at least one of the top higher education institutions worldwide (e.g., Imperial College, Oxford, Cambridge, Insead, Harvard or MIT) • In France, 98 % of the entrepreneurs ranked among the top 100 start-ups of 2015 hold a master degree from at least one of the top national institutions (e.g., HEC, ESCP Europe, ESSEC, Ecole Polytechnique, or Ecole Centrale). Among them, 50% hold a degree from a business school The figures stress the importance of the education system to produce FPC entrepreneurs and the quite narrow number of higher education institutions top entrepreneurs attended. This is partly due to the level of ambition that drives both students and their schools. “From the beginning, the ambition at Devialet was to become the world leader in audio systems. This has not changed ever since” says Luc Delambre, Devialet’s Chief Operation Officer. As outlined in section 1, this kind of vision is key to enable growth. We now know that this level of ambition is largely supported in US universities and that it receives increasing acceptance in Europe. 2
ChairEEEE research data
14 Beyond Unicorns: The Industrialization of Disruption A case for Europe
2 . Entrepreneurship is a team
sport
The understanding of team formation and its dynamics is paramount to the training company founders receive. Miguel de Fontenay, Partner at The Family, suggests “investors primarily invest in people and their vision more than in positive financial metrics.” Many entrepreneurs follow that line of thought and suggest that the main reason for raising funds is to be able to hire an A-team, people with experience and advanced expertise. Significantly, Tediber, a fast-growing company, hired the former Chief Marketing Officer of Google France. The case illustrates the level of expertise required by FPC. The quality of each individual would not be enough on its own. There is a need to create fruitful collaborations within and across teams. This is particularly challenging at periods of fast growth and international developments. Carlos Diaz, co-founder of The Refiners, suggests that teams could usefully be devised against country specificities. He offers the example of a tech company that is likely to be successful with marketing, sales and business development located in Silicon Valley and engineering teams based in France. This is Ricardo’s comparative advantage theory reloaded. Dashlane, a French FPC with 90% of the business generated internationally, uses technology and setting screens in its offices to allow Paris and New-York based employees to see their colleagues’ real time activity and to improve coordination across continents. This exemplifies the challenges growth creates for cohesion when companies remain relatively small and keep limited resources.
Implications for Europe The story of Steve Jobs and some happy exceptions put aside, higher education seems to be a prerequisite in the contemporary economic life. Europe shows a great diversity of situations across and within countries. The study focuses on but is not limited to one instance in particular: The case of France.
F irst , f or h ig h er edu ca t ion inst it u t ions: in France, the Grandes-Ecoles system offers top level programs at low prices compared to top US universities. National engineering training is of highest standards and often is considered one of the best worldwide. Business schools produce 50% of domestic top entrepreneurs. However, the institutions have a very limited number of students and they do not seem to offer sufficient competencies to articulate all their potential. Grandes-Ecoles have had an historical tendency to work in silos with few cross-disciplinary programs. Trans-disciplinary educative programs should be particularly encouraged for that reason. The Entrepreneurship Major program offered by the Chair of Entrepreneurship at ESCP Europe provides a unique cross-disciplinary platform that gathers freshmen from varying background: Design students (e.g., ENSCI or Strate), engineering students (e.g., Supélec, Mines or Centrale) and young developers that received coding training at 42 or Epitech. Students work in multi-disciplinary teams for 6 months developing entrepreneurial projects that combine the variety of their competencies. Take Glowee. Glowee is a biolighting system that uses the natural properties of bioluminescent livings. It is particularly innovative as it does not require electricity to function and avoids generating light pollution. Sandra Rey, Glowee’s founder, is a designer and a graduate from Strate who received an MIT Award in 2016 (Innovators Under 35, France). She met Geoffroy de Bérail, ESCP Europe alumni and Glowee’s COO, during the course of their studies at Option E, an entrepreneurship training program. The encounter and the education at Option E were critical for Sandra to go beyond the “design world” and to better understand the entrepreneurship expertise and ecosystem. Universities in France, as distinct from Grandes-Ecoles, are in essence key places to develop human capital for entrepreneurship: They offer state-of-the-art contents in their study programs; they develop expertise in a plurality of disciplines and welcome a large number of increasingly international students. Yet, they do not seem to provide sufficient support for entrepreneurial trajectories and competencies. At the point of writing, only a few of the top entrepreneurs have received their degree from a French University: Less than 5% of the founders of France’s top 100 start-ups of 2015 graduated from university while 90% were trained in a Grande-Ecoles. A recent initiative is worth mentioning: The Pepites, an acronym for the French Pôles Etudiants pour l’Innovation, le Transfert et l’Entrepreneuriat, was created at the level of French Universities to promote entrepreneurship. This is an encouraging sign. However, for Olivier Mougenot, Investment Director at Numa, universities are yet to get properly organized to fully enter the
entrepreneurial world in the digital age (EY, 2016c). In parallel, FPC have faced continuous hiring challenges in their search for talented people. A possible entry point for universities would therefore be to educate middle managers for fastgrowing companies. Access to coding training at university and elsewhere could also be facilitated for prospective students as the demand for this type of competencies is booming. The new entrepreneurial curriculum at Epitech and the creation of 42 in France are necessary pioneers. They can only be examples and more of them would be required to answer the seemingly limitless demand for developers. S econd, f or reg u l a t ors: Salaries for engineers are comparatively much higher in the US, which makes it difficult for French entrepreneurs to attract and retain talents. There are no particular fiscal benefits, and the pay is not competitive. India has earned an international reputation for its training: an Indian engineer seeking for opportunities abroad would probably choose the US over Europe as his first destination. Evidently, international mobility does not solely depend on financial incentives. It requires also infrastructures and the possibility to work in close cooperation with top performers and inspiring people. Family ties are important for the skilled too (Basri & Box, 2008). To develop enticing working conditions and offer fulfilling opportunities should be a priority to decision leaders.
B . C ondition 2 : Econom ic capital fitting the entrepreneurial culture 1 . Accessing capital is critical for em erg ing com panies The available stock for investment is crucial for the development of entrepreneurial ventures: Higher investments enable entrepreneurs to pursue more ambitious projects. They can also serve as a buffer at times of development crisis. VC funds have a natural need to diversify their investments. Consequently, fund size has a direct effect on the amount VC can invest in one single company. Countries with the greatest VC amounts invested are countries where a higher number of unicorns were founded. In 2015 the median funding deal value was $8M in China, a figure that compares to $6M in the USA and $2.5M in Europe. Of greater concern is the observation that the median values are increasing at different rates: 38% in Europe, 50% in the USA and 100% China (EY, 2015b). In the USA, the amount invested is greater and the VC industry is fueling a higher growth for start-up companies. For a similar team and project, European companies are offered
Beyond Unicorns: The Industrialization of Disruption A case for Europe
15
5 times less financing than their American counterparts. In Europe, the median deal value remained stable at $2.5M from 2014 to 2015, whereas in the USA, the figure leaped from $5M to $6M. This can be explained by the fact that American VC raised 5 times more capital than their European counterparts (Atomico, 2015) and that the growth potential is comparatively higher in the USA than in Europe.
Million dollars raised $70 000
$60 000
57936
$50 000
$40 000
$30 000
23681
$20 000
$10 000
7356 1926
1342
996
335
270
$-
F ig u re 7 . A m ou nt s ra ised b y u nicorns a cross cou nt ries in US D m il l ion ( E Y D a t a b a se)
Julien-David Nitlech, Investment Manager at Iris Capital, points out to an interesting phenomenon: There is a growing number of funds deployed in France. Is this announcing a soaring investment momentum? France is also experiencing a growing support from public institutions. Paul Jeannest, Head of the RAISE endowment fund, insists on how “the Hub Bpi is helping start-ups a lot. Equally, as it provides a steady income to most entrepreneurs during two years, you could say Pôle Emploi3 is France’s main VC fund!” Bpifrance’s investment style is comparable to the American Small Business Investment Company program or SBIC operated by the Small Business Administration (SBA). Data from 2013 show that the two public institutions hold a comparable number of funds in portfolio even though the US market is much larger. Bpifrance is the third most active fund in Europe. This suggests how significant the support of public institutions is to the development of FPC in France. This is a quite positive situation providing the dynamics can be sustained over time (EY, 2016c). 3
French national and public job center.
2 . Dev eloping long – term relationships b etw een entrepreneurs and inv estors Peter Bos, EMEIA Strategic Growth Markets Business Development Leader at EY, remarks that “raising funds is not an objective in itself, you have to ask for the amount that your business actually requires, which you’ll know by thoroughly assessing your needs and your strategy.” This view is supported by Pierre-Henri Deballon, founder of Weezevent, who considers it to be remarkable that there still is a confusion between entrepreneurship and fundraising: “very often I hear people saying that they want to raise money because it’s just what a start-up does! (…) But the truth is you don’t necessarily need to raise money to develop your company.” Fundraising must be motivated by clear needs and specific timing. Entrepreneurs ought to create a momentum to convey the idea that the market is ready to welcome their product, by showing substantial metrics such as the number of users. Many investors share the view of Romain Lavault, General Partner at Partech Ventures: “we only invest in seed if we see that there’s already a momentum” (Lavault, 2016).” Early-stage development money is widely available and this is excellent news. Without cash in hand it is impossible to consider growing. As Stéphane MacMillan (Foodora) experienced: “Business is not yet profitable and operations need to be paid for.” Receiving funding at the different stages of maturity is vital for start-ups in order to continuously fuel their growth. Figure 8 is illustrative of the investment situation in France: Many and an increasing number of operations take place during the early stages of development. Receiving funding at different stages of maturity is vital for start-ups in order to fuel their growths. Even if there are discrepancies among European countries, Europe as a whole, focuses too much on early stage money. After the initial investment stage, there seems to be a dearth of money for follow-on financing. The situation arguably is better in
Investments by maturity stage 1st half 2016
Total investments
€387m 32deals €248m 42deals €332m 157deals €39m 66deals
Average amount invested
€12,1m €5,9m
1st half 2015
Average amount Invested
€384m 37deals €140m 34deals €210m 122deals
€10,4m
Total investments
3rd round
2nd round
€2,1m
1st round
€0,6m
Seed capital
€25m 51deals
€4,1m €1,7m €0,5m
F ig u re 8 . F ra nce V ent u re C a p it a l Ba rom et er ( E Y , 2 0 1 6 b )
16 Beyond Unicorns: The Industrialization of Disruption A case for Europe
the UK where a $4.8M in VC activity was recorded in 2015 compared to $2.9M for Germany and $1.9M for France at the same date (EY, 2016b). For later stages, many of the rounds involved here are conducted abroad and quite likely with American investors. Olivier Mougenot, Investment Director at Numa, emphasizes that French VC only invest little money because companies in their view do not seem to need more at the beginning. As a consequence, VC tend not to sufficiently push entrepreneurs to further develop their companies beyond some points. Other argue that too few European entrepreneurs offer projects which could pretend to raise large amount of money. Assuredly this is an issue for both sides: European investors and entrepreneurs could both have higher ambitions.
3 . S tim ulating an ex it m ark et and prom oting b ig g er com panies The perspective of being able to exit at a fair amount is driving many entrepreneurs. To be able to rely on a dynamic exit market with low hurdles for exit is an incentive to invest and to grow companies. In these days, entry tickets are relatively small. Investors are not keen on putting more money in subsequent rounds and entrepreneurs easily settle for small exits. Foreign investors therefore take on follow-up rounds or start-ups are acquired by bigger companies for an amount that is satisfying to most founders. Few IPOs took place in France because the tech sector is not very developed. However, the European M&A sector is very active in comparison to the USA: In the USA, the IPO sector is worth $6B at a ratio of 1:9 with M&A ($54B). In Europe, the M&A sector is 12 times bigger than the IPO sector (EY, 2015b). Financial markets should be able to integrate tech companies at an early stage which is not yet the case in Europe. Additionally, cash-out strategies are widely spread in the USA where investors put in around 10% of the deal at each round. This provides some sense of security to entrepreneurs during the business creation process and may prevent them from selling as early as they receive an (interesting) offer. That mechanism helps entrepreneurs patiently grow their businesses as time requires. 4 5
For instance, Axa’s Idinvest Partners or Crédit Agricole’s OMNS Capital. excluding law, business and economics
4 . V enture C apitalists: A culture w hich should not b e lim ited to technical ex pertise Beyond a new generation of VC and family offices (e.g., Serena Capital, Alven, 360 Ventures Ventures, Kima, Jaina, Isai or Elaia) some VC, in Europe in general and in France in particular, remain more cautious relatively to their American colleagues. In France and in Germany, where financial systems are centered on banks, VC firms originated within banking institutions and insurance companies. Many investment managers came from the parent bank company and the tradition of employing banking and financial professionals as VC took on. Today, many French banks and insurances have sold their VC activities.4 Recent surveys compare the situations in France and the USA (Dimov & Shepherd, 2005; Milosevic & Fendt, 2016). The studies show that VC profiles are less diverse in France with comparatively fewer MBAs, scientists or entrepreneurs acting as investors than in the USA. Yet, these profiles are crucial for scouting and developing the promising entrepreneurial ventures. Take a look at the figures: Six out of ten VC partners in the USA have a MBA degree, compared to less than two in France. 48% of US American VC are natural scientists and engineers compared to 41% in France. Among all French VC partners with scientific background, a majority holds an engineering degree, many started careers in consulting or finance and only one out of six holds a degree in natural sciences, including medicine. France has a low score for graduates in humanities5 compared to the US where one partner in five received training in that field. Another noticeable difference concerns the high proportion of financial and banking specialists in France: seven out of ten VC partners have experience as investment professionals, compared to less than six in the USA. Finally, French VC funds have on average fewer managers with an entrepreneurial background (14% compared to 18% in the USA) and nearly two third of the funds even have no executives members with this type of past experiences. Finally, a vast proportion of VC managers in France has a salary or regular incomes. Financial incentives for driving the success of their portfolios remain underdeveloped. A proven success factors in the USA is the personal contribution of VC partners alongside other fund investors. This practice sends clear and positive signal to other VC partners who may be solicited to invest in followon financing rounds.
Beyond Unicorns: The Industrialization of Disruption A case for Europe
17
C . C ondition 3 : P rom oting on- and offline social capital
money, angels act as advisors. Beside sheer absolute return, emotional connections develop between entrepreneurs and their business angels. This process generally translates into Social capital as discussed in the present report is defined as the willingness to share knowledge and to mentor the next the sum of the resources embedded within, available through entrepreneurship generation (Figure 9) (BNPParibas, 2015). Sharing Knowledge and derived from the network of relationships nurtured by an individual. It is a critical asset to articulate resources in a way Other Mentoring the next generation that promotes growth. 36.1%
25.8%
23.6% 18.4%
1 . B onding or B ridg ing N etw ork : W ho should support the creation of F uture P ow er C om panies?
37.0%
Creating opportunities
29.3%
6.5% 1.5%
17.7% 26.2% 29.1%
2 . O ld B rothers and B usiness Ang els hav e k ey responsib ilities Business Angels are typical provider of bridging social capital. Their role is central to the inception of a growth project: the European trade Association for Business Angels or EBAN estimates that business angels account for 73% of early-stage funding vs. 26% for VC (EBAN, 2014). Apart from supplying
18 Beyond Unicorns: The Industrialization of Disruption A case for Europe
Developing the industry 25.8%
15.6%
12.7% 20.6%
Staying active
Solving problems in society
23.4%
38.1%
Keeping abreast of the industry
Making good investments
Advice led
Capital led
Q : For which of the following reasons did you decide to become an angelinvestor ? N: 1,759 Source: Scorpio Partnership, BNP Parlbas
F ig u re 9 . M ot iv es f or Bu siness A ng el I nv est m ent s ( E Y , 2 0 1 5 b )
In the USA, business angels are very active. A whole sector is building upon generations of entrepreneurs who benefited from it. The founders of Paypal generated impressive revenues with the sale of their company to e-Bay. Subsequently, they reinvested some of the money in the start-up scene; Peter Thiel and Elon Musk, two of Paypal’s cofounders were the most prolific ones. They invested in new projects some of which reached leading business positions in the world (e.g., Facebook, LinkedIn or Yammer). They are actively supporting incubators like the Y-Combinator and have become guiding figures in the Valley. Eventually, Elon Musk created further companies and potential unicorns (e.g., Tesla Motors, Space X or SolarCity). Successful entrepreneurs help growing new businesses by capitalizing on past experiences, personal networks and fame. The history of Paypal is exemplary in many ways. It is a case for dense networks of committed entrepreneurs in a supportive ecosystem. # of paypal confounders involved
Two forms of social capital are distinguished. On the one hand, bonding social capital refers to strong, repeated social connections that result in norms of reciprocity and yield trust (Coleman, 1988). This form of social capital is largely supportive of entrepreneurship as it enables trustworthy relationships, the emergence of solidarity and gift-giving. Many entrepreneurs use bootstrapping techniques to decrease external capital needs. Bootstrapping as a practice mainly is based on bonding social capital: friends and family are largely used to obtain resources and informal support. Young entrepreneurs might use spare spaces at their parents’ place rather than to rent an office. They might casually ask friends for expertise or money. Evidently, the more resourceful one’s close network is, the more one can rely on it and use it to develop a start-up. As a side-effect, this capital tends to limit the scope of possibilities: being bound to one community is limiting the access to a variety of other abundant resources. On the other hand therefore, developing a bridging social capita (Burt, 1982) is essential. The idea is to create connections with distant agents both in terms of perspectives and backgrounds. For connections are enabling to develop resources different from the assets entrepreneurs usually draw on in their regular network. This is the type of network programs like the Y-Combinator offer. Social networks or crowdfunding platforms enable to develop bridging social capital: they help raising the first dollar or increasing the size of a community of backers and supporters (André et al., 2015).
15.4%
8 6 4 2 0 Yammer
Slide
Palamtir
Founding
Yelp
Space X
Geni
Linkedin
Advisary
Youtube
Reddit Open Door
Yahoo
Caplinked Halcyon molecular
Square
(Affirm) Instagram
(?)
(?)
(?)
Airbnb
Eventbrite
Xoom
Funding
F ig u re 1 0 . T h e I nv ol v em ent of t h e P a yp a l N et w ork in A m erica n st a rt - u p s ( L a ig l e, 2 0 1 6 )
Tokbox
Evernote Tumbler
Company name (Date of acquisition; Last rank known.
180
177 157
145 120
115
99
107
134
130
123
172
159
144
141
103
$4,189
$4,117 $3,674
$3,397 $2,905
11
11
2’ Q
11
1’ Q
11
4’ Q
11
3’ Q
11
2’ Q
11
1’ Q
11
4’ Q
11
3’
11
2’ Q
11
1’ Q
11
4’
Investment ($M)
$2,114
$2,017 $1,899
$1,829
$1,523 $1,435
Q
$1,892
$1,497
$1,204 $1,250
Q
$1,876 $1,866 $1,399
Q
6
185
194
1’
Corporate ventures are growing in the world. Quarterly investments have jumped in recent years from $1,8B in Q2/2011 to $4,2B in Q2/2015 (CBInsights, 2015a). This is dividing up the start-up scene. Some say investments support the development of new business models and help incumbents to evolve. Axel Springer was able to successfully navigate the digital revolution with an acquisition spree. About 90 companies where bought since 2005. Examples include
Quarterly Corporate VC Investment and Deal Volume Trend Q1’11 to Q2’15
11
F ig u re 1 1 . F ou r m a in p ossib il it ies f or col l a b ora t ion b et w een st a rt - u p s a nd l a rg e corp ora t ions
3’
Microsoft BizSpark (2008)
Q
Axel Springer Plug&Play (2013)
11
Paypal Startup (2013)
2’
Airbus BizLab (2015)
Q
P rog ram / platform
11
Acceleration prog ram
1’
N o
Q
I nv est issm ent
Airbus Business Innovation Factory (2014&2015)
11
I nv est issem ent
Google Ventures (2009)
4’
Axel Springer (2005) People’s Lab BNP Paribas (2014)
Q
Internal incub ator
11
Y es C orporate v enturing
From the inside to the outside
3’
From the outside to the inside
Q
O rientaion of the innov ation
11
Weiblen and Chesbrough identify 4 roles big corporations play when collaborating with start-ups (EY, 2015a; Weiblen & Chesbrough, 2016). Their roles depend on how innovation is orientated and on the existence of a direct investment:
2’
3 . R elationships b etw een start- ups and larg e com panies need caring to g enerate g row th
Zanox, StepStone, Seloger, or Pixlee. The approach Axel Springer has followed is to buy existing and well established digital players with a proven record of commercial successes, good customers’ relations and a clearly defined business model. The target companies were often ranked among the top 5 players in their respective markets. To name a few6: idealo.de (2006; #5); Zanox. (2007; #2); Digital Window (2009; #3); StepStone (2009; #2). The objective was to develop all acquired companies into a market leader in their respective field by drawing on the experience, the reach and the media power of the purchasing company. The objective was achieved for all of the aforementioned acquisitions by 2014. Axel Springer followed the course of action of a true digital shareholder. The company has guaranteed a full operational independence to the acquired companies. When possible the founding partners and the management were retained. Axel Springer focused on maintaining growth momentum and has always seemed to look for a real partnership: a cultural change imposed by ‘colonial masters’ was to be avoided as the word goes. Around 2014, Axel Springer slightly changed its strategy. The company started trying to broaden the scope of its activity and looked for acquisitions of other companies in a much earlier stage of development than it had previously been the case. The code of conduct was clear too. Principles called “Build, Acquire, Partner” were now to be followed. For Axel Springer an early stage investment does not necessarily translate into an acquisition. In parallel, the company has focused on the creation of its own start-ups and on the development of partnerships with young startups. The main vehicle for this strategy is the Axel Springer Plug & Play accelerator, a 50/50 joint venture with Plug & Play. In order to diffuse similar practices in France and to develop comparable interactions between large corporations and start-ups, Raise was created by David avec Goliath, a platform that offers expertise and possibilities to improve a positive dynamics for all.
Q
Xavier Niel, Jacques-Antoine Granjon, Fabrice Grinda, Marc Simonci, Pierre Kosciusko-Morizet in France are increasingly active in the role of old brothers. Xavier Niel’s track record of 230 investments in various start-ups is certainly leading the way. “Their past investments grant them with an image that is reassuring for trade partners. Their success provides some sort of guarantee. It’s like a stamp that would say that the project is viable” says Luc Delambre, Managing Director at Devialet. Successful entrepreneurs create weak ties, infrequent and intense relationships that are very powerful to increase the chances for a project to grow.
Deals
F ig u re 1 2 . Q u a rt erl y corp ora t e V C inv est m ent a nd dea l v ol u m e, ( C BI nsig h t s, 2 0 1 5 )
Beyond Unicorns: The Industrialization of Disruption A case for Europe
19
Others criticize the involvement of large corporations. In an article published in TechCrunch, Jon Evans, a journalist and software engineer, worries about the lack of ambition of French entrepreneurs (Evans, 2016). He observed that one of the main goals of French entrepreneurs was to get acquired by big groups rather than to disrupt them and jeopardize their leadership. Jean-David Chamboredon, co-CEO of France Digitale, complements this view by highlighting what he calls a caiman syndrome: corporations seem to conceive of start-ups as “cute little caimans.” As soon as they get a little too big for their taste, they try to turn them into purses (Chamboredon, 2016).
Key messages Section 2 C u l t u re: it is argued the cause of European FPC comparatively feeble performances is a slow speed of change in the conception of learning and success. To raise funds has long seemed to provide a higher standard of corporate performance, which generations of European company founders and investors took as the gold standard of entrepreneurialism, dismissing mere timely growth and market disruption. Nevertheless, FPC development by experimenting and failing remains an important and neglected type of business action in our European and many other societies. Learning by doing how to develop a start-up and how to fruitfully spread innovation is central for founders, investors, incubators and incumbents. To develop a cultural understanding of entrepreneurial experiences is key for Europe and has institutional implications for education systems and the corporate life. M a na g em ent : the development of many start-ups inspired by the contemporary sharing economy movement is associated with the disruption of the very company creation process and the disappearance of the traditional role of company founders in Europe. We need more visibility at a European continental level with entrepreneurial expertise to establish a solid reputation as to attract increasing talents and resources. A higher concentration and diversity of capitals is required with a European coordination in order to develop existing FPC performances.
20 Beyond Unicorns: The Industrialization of Disruption A case for Europe
Implications for Europe: F irst , f or st a rt - u p s: further generations of entrepreneurs ought to be produced and a tradition of intergenerational connections has to start. Successful European entrepreneurs have a responsibility to help newcomers. They could usefully leverage their network up to a continental scale. However, individual trajectories cannot be sustained without a supportive ecosystem. Representatives from France Digitale insist: to foster an increasing number of business angels, the issue of taxation must be tackled. In 2016 a new plan was implemented in France and a decreasing tax rate applied: it ranges from 62 % of capital in the first year of acquisition to 23,75 % after 8 year of share holding. As a comparison, in the UK the maximum tax rate is 20 % on the movable capital gains (Ekeland et al., 2016). Israel is also a good illustration of proinvestors policy where the “Angel Law” allows a tax deduction of up to €1M for an investment in a small- to medium-sized tech enterprise (Perez, 2016). To increase interactions and collaborations among top European entrepreneurs would also be relevant. It would help concentrate resources on an international level and develop bridging social capitals. Israelis are for that matter tightly connected with the American entrepreneurial scene. This is key to the development of FPC that operate beyond their native environment. S econd, f or l a rg e corp ora t ions: collaboration between start-ups and large corporations is growing in Europe. Encouraging results should not mask the need to improve the collaboration’s quality between the two worlds. One main issue is to increase a mutual understanding and to avoid the all too often experienced zero sum games where both parties try to destroy the other. Intel capital, the Corporate Venture of Intel, is investing 1 billion $ per year to support the growth of FPC. Companies like Google or Facebook have acquired many FPC in order to help create new markets as much as to control an emergent phenomenon. Further, incumbent companies may offer critical solutions to help expanding a market. The role of insurance companies for car sharing offers an inspiring illustration. Allianz and Axa have considerably facilitated the growth of Drivy and OuiCar respectively. Europeans need more of these moments and spaces to learn and develop these practices.
I I I T h e condit ion f or a su st a ina b l e p rodu ct ion of F P C : S ociet a l a ccep t a nce A. A societal capacity to ab sorb the dialectic b etw een creation and destruction Disruption produces a myriad of creations: new products and services, new markets and new companies. Disruption also comes along with multiple destructions. The dynamics of creation and destruction work together. Creation cannot be conceived of independently from destruction. Four main types of destruction are identified when distinguishing between (i) object and (ii) domain. On the one hand, disruption might affect the others (e.g., society or competition) or the self (the entrepreneur and its creation); On the other hand, disruption has real but differing effects whether it primarily affects the realm of materiality or immateriality. Before defining each form of destruction and using the frame to discuss the case of GAFA, the emerging typology is outlined in Figure 13:
1 . C og nitiv e Destruction and U nlearning Founders of FPC and Unicorns are entrepreneurs equipped with a high level of human capital: they learned a lot. Disruptive entrepreneurship requires learning as much as it requires unlearning and the ability to question core beliefs and certainties. When Larry Page and Sergueï Brin created Google, search engines were perceived as a commodity market for software analyzing contents and listing relevant webpages. The growth of their start-up was less enabled by a deep learning of the existing techniques than it was triggered by the unlearning of the dominant expertise of the time. The two founders destroyed knowledge, beliefs, Disruption O b j ect
M a t eria l
Others (e.g., society)
Self (e.g., entrepreneur)
C om p et it iv e O b sol escence
D econst ru ct ion
S u b v ersion
Unl ea rning
Facebook Amazon destroyed destroyed the many bookstores Facemash
D isru p t ion I m m a t eria l D om a in
Google destroyed Apple destroyed the original power the original search relationships engine expertise between computer scientists and users
F ig u re 1 3 . T h e f ou r dest ru ct iv e dyna m ics ( Bu rea u , 2 0 1 6 ; Bu rea u & K om p oroz os- A t h a na siou , 2 0 1 6 )
and routines of a milieu and developed new ways of making online searches. They shifted the meaning of relevance for scientific referencing by creating page rank and focusing on the number of citations. Page rank is based on the number and the significance of inbound links to the page being assessed. It goes beyond the mere content analysis. For existing companies, this capacity to change and unlearn is made possible through organizational adjustments like new resource allocations, new recruitment processes or restructuring and the creation of a separate organizational unit. Some historic cases have been very well documented: Intel (Burgelman & Grove, 2002), Swatch (Garel & Mock, 2016) or IBM (Prahalad & Oosterveld, 1999). They help understanding how a company evolves on the long-term and sometimes destroys its own historic set of competencies to survive and grow (Gans, 2016). In many other cases (like Kodak or Polaroid), successful firms failed precisely because they rigidly reproduced the choices that had made them successful.
2 . M aterial Destruction and Deconstruction At the very beginning, Mark Zuckerberg never thought of launching Facebook. At first, he created the Facemash as a joke with his roommates at Harvard University: on November 19, 2003, Mark Zuckerberg is uploading a game on the Internet allowing students to vote for the “hottest” person on campus. To determine a winner, students had to compare the faces of two different persons of the same sex and to opine on their attractiveness. Student pictures stored on the club’s directory webpage were hacked for that purpose. The effect was significant compared to the resources used: in only a few hours, around 450 students took part in the game and tallied 22,000 votes. Based on this experience, Mark Zuckerberg realized how powerful an online facebook could be when used within in an existing community. He understood what would later be labelled the viral effects of social networks. Thefacebook.com, which became facebook. com some months later, was launched on February 4, 2004 based on the Facemash experiment. The case illustrates how a company can grow only if it manages to deconstruct its initial form. To create Facebook, the Facemash and Thefacebook.com had to be deconstructed. The solution proposed by a start-up is seldom perfect. It emerges and frequently evolves in an attempt to improve it based on customers’ feedback and available resources. The emergent phase implies some difficult choices: what should be kept? What should be changed? Without a capacity to destroy parts
Beyond Unicorns: The Industrialization of Disruption A case for Europe
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of the original work projects freeze. They cannot improve nor grow. Rapid prototyping, popularized by the design-thinking and Lean Start-up methods, are illustrative of new ways for experimenting with the numerous deconstructions processes that the entrepreneur must manage. Large corporations willing to engage in these processes have many possibilities that include accelerators, fablabs, co-working spaces or labs. These spaces usually are crucial for employees to be able to develop emergent projects that may become profitable. Notable examples Open Bookstores in the U.S. 40,000
35,000
by the arrival of new corporations (e.g., FPC, Unicorns or GAFA). Amazon and its model of online bookstore actively contributed to the destruction of many libraries in the USA as shown (Figure 14). Other instances provide a rather different picture and incumbents might not always be negatively affected by disruptors. As a matter of fact, Tivo disrupted the American TV ecosystem by cooperating with the incumbents (Ansari et al., 2015). This coopetition is not an isolated case as large corporations are increasingly developing alliances with start-ups to manage the process of disruption. Partnerships developing in the car industry to manage the diffusion of autonomous cars form a recent and practical example of the effects of this strategy (CBInsights, 2016a).
4 . Institutional Destruction and S ub v ersion
Many entrepreneurs declare they would want to change the world. Assuredly, some of them are using the rhetoric principally as a marketing strategy. Others certainly feel 26,500 the purpose to change societies and are driven by a strong political ideological background (Jarrodi & Bureau, 2016). Many libertarian entrepreneurs aim at creating disruptive 22,000 solutions to limit the power of the State (Ferenstein, 2015). ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18 Representatives of the movement include Jimmy Wales F ig u re 1 4 . N u m b er of b ook st ores in t h e US A (founder of Wikipedia), Jeff Bezos (founder of Amazon) or Peter Thiel (co-founder of Paypal). Peter Thiel puts his in France include: La Chocolaterie (EDF), the WAI (BNP intentions plainly: “The basic thought was if you could lessen Paribas), the Daher Lab (Daher) or the Airbiz Lab (Airbus). the control of government over money and somehow shift the ability of people to control the money that was in their wallets, 3 . C reativ e Destruction and C om petitiv e this would be a truly revolutionary shift (…). Technologies O b solescence like PayPal have been a major contributing factor toward the weakening of the nation-state over the last few decades (…) Creative destruction is defined as the process “that [and] will lead to a world in which there’s less government incessantly revolutionizes the economic structure from power and therefore more individual control” (Bailey, 2008). within, incessantly destroying the old one, incessantly The posture, far from being just economic, involves a strong creating a new one” (Schumpeter, 1942). The process is the political stance and is of subversive nature. Subversion can driving engine of capitalism. Strategy cannot be approached be defined as a behavior, an attitude or an activity that seeks independently from creative destruction, Schumpeter argues. to destroy the established order (Bureau, 2013). The term Entrepreneurs develop innovations that make traditional carries strong historical connotations and usually brings to forms of supplies obsolete in a rather mechanical way. Do mind a revolutionary or artistic context. It perfectly fits the established companies renounce to adapt to the emergence entrepreneurial activities that disrupt systems, although it of new products or practices, their profits will progressively is seldom used in the management science literature. decrease and their position will eventually be supplanted in the market. Change is endogenous to capitalism and operates The free software movement counts to the most renowned continuously: creative destruction constantly pushes away cases. Richard Stallman, the movement leader, has old products and old enterprises, replacing them with new endeavored to open access to the source code of software ones. Between 1999 and 2009, almost 50% of the Fortune as early as the beginning of the 1980s. The idea’s core is 500 companies disappeared from the list (Goodburn, well expressed in a few words from Stallman’s manifesto 2015). Companies’ discontinuances partially are explained published in 1985: “proprietary modifications will not be allowed” (Stallman, 1985). The project calls into question the 31,000
22 Beyond Unicorns: The Industrialization of Disruption A case for Europe
regulation of intellectual property rights by the State, one of the founding principles of capitalism. At a commercial level, Google and Facebook offer other examples of entrepreneurial activities that have challenged some of the founding principles of our societies such as privacy norms from their start. It is now useful to turn to the case of Apple. In the 80’s, Steve Jobs engaged in a battle against IBM and wanted to change the relationships between computer scientists and users. His wish was to offer more power to the final users, an idea he discussed openly. In 1984, he releases a TV commercial during the Super Bowl as a way to launch the new Macintosh in reference to Georges Orwell’s 1984. The idea is to make people think and understand that Apple is going to free people from the “totalitarianism” of centralized computing. In the add, not a single computer is displayed but images using symbols of authority and control – people are wearing the same grey clothes resembling prisoners and watching a screen from which a man utters words with a dictatorial tone. The scene is contrasted with images of liberty and empowerment symbolized by a young athlete wearing colored clothes and launching a harmer on the screen to stop the man talking. Eventually a message appears on the screen: “On January 24th, Apple Computer will introduce Macintosh and you’ll see why 1984 won’t be like “1984”.” In the cases discussed, the success of innovation lies in the destruction of competition. It lies in the destruction of the very frames and rules that define our institutions and establish what is legitimate or not, thereby constraining the way people apprehend novelty. The effects of disruption cannot be sustained in the long run if one is unable to accommodate its destructive components. The effects of disruption cannot be sustained in the long run if one is unable to accommodate its destructive components
B . The case of j ob creation and social j ustice The job market disruption is discussed in the remaining as to illustrate the more general effects of disruption on society. Disruption tends to have a positive impact on job quantity but simultaneously it creates new social inequalities that have to be addressed for the stability the new economic model.
1 . A q uantitativ e deb ate: F P C create j ob s in the short term Start-ups are creating and destroying jobs at the same time. They create jobs by hiring a lot of people. They also destroy jobs by pressing established companies to adapt their business models7. Sometimes established companies go bankrupt. On average, start-ups are said to have a net positive impact on job creations. According to the Kauffman Foundation, “when it comes to job-creating power, it is not the size of the business that matters as much as it is the age” (Wiens & Jackson, 2015): young companies create more jobs than old companies. Start-ups have a vital role in creating jobs and are responsible for around 2/3 of net job growth among all existing firms in the USA (Figure 15). Several surveys are supporting this figure (Decker et al., 2014). However, it is crucial to balance the positive contribution with the sharp job losses facing many firms of a market in the first years after a FPC entry. Most start-ups fail and most of the survivors do not grow. A few “existing start-ups are high-growth firms that contribute disproportionately to job growth. These highgrowth young firms yield the long-lasting contribution of start-ups to net job creation” (Decker et al., 2014, pp. 9–10). Unemployment Rate:Routine Vs. Nonroutine, Cognitive Vs. Manual
Net Job Creation 5 million
18.0%
4 million
16.0%
2 million 1 million
14.0%
0
Routine Congnitive
2.0% Nonroutine Congnitive Jan 2013
Jan 2011
Jan 2009
Jan 2007
Jan 2005
Jan 2003
0.0% Jan 2001
See deconstruction dynamics as detailed in the previous section
4.0%
Jan 1999
7
6.0%
Jan 1997
F ig u re 1 5 . N et j ob crea t ions in t h e US A ( W iens & J a ck son, 2 0 1 5 )
8.0%
Jan 1995
Source : U.S.Census Bureau Business Dyanamics Statistics
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
-6 million
Nonroutine manual
Jan 1993
11+ Years
-5 million
Routine manual
10.0%
Jan 1991
6-10 Years
-4 million
12.0%
Jan 1989
0-5 Years
Jan 1987
Firm Age
-3 million
Jan 1985
-2 million
Jan 1983
-1 million
Unemployment Rate
Numbers Of Job Created
3 million
Source: current population survaey and author’s calculations. Federal Reserve Bank of St. Louis
F ig u re 1 6 . Unem p l oym ent ra t e: rou t ine v s non- rou t ine; cog nit iv e v s m a nu a l in t h e US A
Beyond Unicorns: The Industrialization of Disruption A case for Europe
23
Similar ratios were calculated for Europe, including for France (EY, 2015c).
2 . A q ualitativ e deb ate: F P C tend to create social ineq ualities
Beyond the diversity of start-ups, the side effects of entrepreneurial activities ought to be taken into account. Many incumbents are facing difficulties due to new, fast growing entrants. Most of the time and as a result, they have to lay off people. Borders is a company that could not find its way in the face of digitalization and the competition of Amazon. The company went bankrupt in 2011 and is a typical case of creative destruction. Job creation in essence is hard to assess in the mid-run. The many adjustments of the job market render any neat calculation virtually impossible. There are points of views: maybe start-ups do not create jobs for the people who lost their jobs as a consequence of their emergence. Regardless of age, every individual is concerned with the need to learn new competencies and to unlearn carefully developed expertise that may have become obsolete8.
According to a recent survey conducted in the USA, the average annual earnings for self-employed is higher than for a salaried workers, while their median annual earnings is lower (Manso, 2016). The result confirms existing claims that a limited number of entrepreneurs earn outstanding amounts of money, while the typical entrepreneur makes less than he would do in a bigger company. Another and more recent survey conducted in Denmark shows that a disproportionate number of low-skilled service jobs contribute to total job creation (Kuhn et al., 2016). At any rate, few start-ups are able to make large turnovers to pay high salaries. In the UK, start-ups on average reach $180K in revenues after sixth year (Coutu, 2014), a figure that in most cases does not allow to pay salaries.
The picture is even sharper in Silicon Valley: on the one hand, At last, new technologies like Artificial Intelligence are the median annual income reached $94K in 2013, far above creating new opportunities and threats for routine jobs that the national median of around $53K; On the other hand, the have long been the most exposed to unemployment (Figure poverty rate in Santa Clara County, the heart of Silicon Valley, 16). Researchers estimate that 45 % of America’s occupations is around 19 % and an estimated 31 % of jobs pay a $16 low will be automated within the next 20 years (Frey & Osborne, per hour or less (Rotman, 2014). Many reasons explain why 2013), with a more significant impact on low-qualified and inequalities are particularly high in this part of the world. The routine jobs (Santens, 2016). Highly skilled workers are immediate co-existence of extreme wealth and poverty in the subjected to job automation to a lesser extent. “Ross”, a same place raises moral issues and question the sustainability lawyer robot, was recently hired by Baker & Hostetler, a global of the dynamics. Eventually, the very notion of work will be law firm (Addady, 2016). The robot is able to understand a challenged by the many new business models that develop as legal issue, to dig into a database, and to articulate answers part of the sharing economy movement. Virtually anyone can act as a taxi driver or a hotelkeeper. This challenge a great based on legal articles and past cases. deal of our most established conceptions of what a job is or what social welfare systems should do9.
24 Beyond Unicorns: The Industrialization of Disruption A case for Europe
8
See unlearning dynamics as discussed in the previous section
9
See subversive dynamics as described in the previous section
Key messages Section 3 I nst it u t ion: by institution in this report, we chiefly mean established corporate organizations rather than matters of practices and customs, although, of course, organizations have their own practices that affect the habits of the people with whom they interact. The institutional disruption that FPC illustrate relies on a process of destruction as much as on creation and affects the classical economic way of conceiving corporate life. Today’s European institutional context reveals and creates its own obsolescence (Schumpeterian approach) and raises increasing social criticism (Political subversion). C og nit ion: the movement needs parallel at the level of the individual to find its best enactment: this means to acknowledge failing attempts (Deconstruction) and to question past experiences and beliefs (Unlearning). It is important to discover how to use these endowments for start-ups to interact with large corporations and to trigger virtuous coopetition circles. This implies, we suggest, to review the traditional understanding of learning as a continuous process: lifelong learning often means to dynamically develop expertise and to unlearn skills and experiences we draw from.
S econd, f or m a na g em ent : perfection and excellence tend to be pursed both in educational systems and in large corporations. In entrepreneurship the capacity to experiment, test and deconstruct is critical. Deconstructive stages should be valued rather than seen as unacceptable risks and failures. Companies ought to incentivize such failures and adhere to the idea of affordable loss much more than to a profit maximization principle11. We do not encourage to define an expected profit. We suggest to define acceptable loss rates at various development stages. This is instrumental to any deconstruction process. T h ird, f or t h e econom y: natural resistance of incumbents and authorities towards new entrants is likely to limit growth and the spread of innovation dynamics throughout Europe. Some European start-ups have supported very valuable projects, not dissimilar to the ones maintained by fast growing firms in the world, but they actually failed to continue in the face of heavy oppositions. Heetch is one example among many. Large corporations too often consider start-ups as a major risk for their operations. They fail to consider the opportunity and the value that might come from collaborating with them. Expertise is required to improve interactions between the corporate and the FPC worlds.
F ou rt h , f or societ y: resistance is experienced beyond the economic level. Societal and institutional resistances limit the diffusion of new practices related to the ways in which we live, educate, love, bond, work, eat or consider our selves. Resistances are useful and relevant as they enable a delay to The challenge for Europe is not so much to support creation. integrate, change and adjust to the emerging of disruptive There are many start-ups emerging every year. Based on the solutions within societies. The acceleration of disruptions number of company creation, one could even consider that presents a potentially high risk for social cohesion: social Europe creates too many start-ups. The most pressing issue inequalities, psychological disorders, racism (Stiegler, 2016). New forms of collective regulations and protections are is to manage destruction. needed to address these issues. Europe developed solutions First, for individuals: people ought to be encouraged to learn to adapt the 19th and 20th centuries. Facing the industrial new knowledge as much as to learn how to unlearn. Expertise revolution and the terrible World Wars 1 and 2, we as developed in any field is very likely to become obsolete within Europeans have invented a new labor law and the Welfare the following 5, 10 or 15 years. At an individual level, the State. Changes of similar magnitude are required in the 21st challenge is to be able to unlearn expertise and to learn new century to avoid a dramatic evolution and to enable the fair ways of thinking and doing. This means viewing learning sharing of the benefits of disruptive dynamics. as much more than a cumulative and purely incremental process. The ideas outlined in this report have important implications for many European educational systems and 11 For more details about the affordable loss principle, visit http://www.effectuation. org/learn/principle/3 traditional corporate training, for it means to critically review the approach to learning with the goal to unlearn past expertise.10
I m p l ica t ions f or E u rop e
10
Experiments with art practices offer innovative teaching methods. For an institutional attempt to develop the practice see the Improbable workshop held by the Chair of Entrepreneurship. Visit: http://improbable.strikingly.com/
Beyond Unicorns: The Industrialization of Disruption A case for Europe
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Acknowledgements The authors would like to thank all contributors to the survey, the participants and the experts, for their precious comments and invaluable insights. Particular thanks go to: Alexis Fogel, Carlos Diaz, Catherine Laffineur, David Checkroun, Hadrien Bureau, Julien-David Niltech, Louis-David Benyayer, Luc Delambre, Marc Fournier, Martin Kupp, Miguel de Fontenay, Miona Milosevic, Muriel Touaty. Olivier Mougenot, Paul Jeannest, Peter Bos,Pierre-Henri Deballon, René Mauer, Stéphane MacMillan and Vladyslav Potapchuk The comments from the last reviewers played a decisive and major role in the improvement of the study. The authors are especially grateful for the research assistance of Jean-Charles Buttolo and Ugo di Mascio. The editing and publishing of the report benefited from the leadership of Grégoire Petit.
26 Beyond Unicorns: The Industrialization of Disruption A case for Europe
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Ab out the C haire Entrepreneurariat ES C P Europe or C hairEEEE The Chair was inaugurated in February 2007 by former French Prime Minister Jean-Pierre Raffarin, ESCP Europe alumni (class of 1972), and was cofounded by ESCP Europe and EY. It forms a singular community of Europeans dedicated to the training and the supporting of entrepreneurs that develop innovative projects in contexts of uncertainty and resources constraints. Since 2013, the ChairEEEE has benefited from the support of its new partner BNP Paribas. The Chair is promoting innovative and experiential teaching approaches with Blue Factory, a business incubation program. Through its activities the Chair has developed unique ties with local entrepreneurial ecosystems and earned a solid academic reputation. Some 1,000 students yearly including freshmen, government officials, managers, engineers and researchers are receiving training in entrepreneurship. In addition, the Chair is supporting 150 projects of entrepreneurs and intrapreneurs that range from sharing economy startups to Airbus space division’s ventures. The ChairEEEE helps stimulating a community of several thousands of members through about 50 events per year such as the EntreprneurSHIP Festival that takes place in Paris, London, Berlin, Turin and Madrid. To support its mission, the Chair develops research and development activities that result put scientific and managerial publications. Numerous studies have been conducted jointly by ESCP Europe and EY, including the seminal research on intermediate sized companies “Comment Grandir en Europe : Hasard ou état d’esprit ?” Please visit and follow us online: www.chaireeee.eu
30 Beyond Unicorns: The Industrialization of Disruption A case for Europe
Beyond Unicorns: The Industrialization of Disruption A case for Europe
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