Comments for Create innovation ecosystems: lands of opportunities

Gilles De Buijst, Alice de Walque, Guillaume Delande, Robin Josse, Clémentine Henrioulle

(Article) Wasserman, N. (2008). The founder’s dilemma. Harvard Business Review, 86(2), 102-109.

THE FOUNDER'S DILEMMA ---------------------------------- ---------------------------------- KEY INSIGHTS Key Insight 1: Most founders won’t be CEO in the long term. In the long term, most of the founders won’t achieve both success and management control. According to the paper; 50% of founders have to give up on their CEO role only 3 years after their venture was launched. And only a small 25% lead their companies’…
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THE FOUNDER’S DILEMMA
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KEY INSIGHTS
Key Insight 1: Most founders won’t be CEO in the long term.
In the long term, most of the founders won’t achieve both success and management control. According to the paper; 50% of founders have to give up on their CEO role only 3 years after their venture was launched. And only a small 25% lead their companies’ IPO.
Key insight 2: Founders might not be the right person to be the CEO.
Founders tend to be passionate, overconfident about prospects and naïve about problems they will face. At the start, these characteristics, may be necessary to get new ventures up. But these emotions later create problems. The dramatic broadening of the skills that the CEO needs at a certain stage stretches most founders’ abilities beyond their limits. Success makes founders less qualified to lead the company.
Key Insight 3: myths about entrepreneurs’ earnings
In reality, entrepreneurs make as much money as if they had been employee, even accounting for the value of equity each person held. If accounting for the higher risk, we can conclude they make less. More precisely, 51% of entrepreneurs made the same money as -or made less than- at least one person who reported to them.
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IMPLICATIONS
Implication 1: Determine the motivation: ‘Rich’ vs ‘King’
A founder has to be honest about his motives for getting into business. Wasserman makes a distinction between founders that wish to be Rich and founders that wish to be Kings. The first category would rather raise the financing needed to capitalize their company appropriately and cede control to investors. Hence, they may lose their CEO position. The second category would want to retain control over the company and board, at the cost of under-resourcing the company. Thus, limiting its growth potential.
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Implication 2: Stay consistent : Launch the business accordingly
KING: Those desiring control should restrict themselves to businesses where they already have the skills and contacts they need or where large amounts of capital aren’t required. RICH: Founders who want to become wealthy should be open to pursuing ideas that require resources. They can make the leap sooner because they won’t mind taking money from investors or depending on executives to manage their ventures.
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Implication 3: Investors: Controlling risks, controlling the board
Investors, to minimize risks, want to take control over the board (and by doing so, have a strong position to decide on the CEOs appoint). Some venture capital firms will require a 50% share early on while others may demand for a lower share at the first stages but, knowing that the company will host other funding stages, will incrementally increase their share in the venture, thus acquiring more control over time and letting the CEO-founder lead the venture for a longer time.
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LIMITATIONS
Limitation 1: Binary thinking
The reality is oversimplified to being King or Rich. For the purpose of interpreting the reality, Wasserman simplifies the motivation of founders to money and control.
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Limitation 2: Defending personal values
We believe an ethical dimension is missing. Some entrepreneurs launched a business wanting them to reflect and respect their personal values. In order to preserve those values inside the company, the CEO-founder may be less tempted to step out of his CEO post.
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Limitation 3: Time span of the transition?
At which moment in time does it become urgent to change the CEO? The paper does not clearly assess how to identify the right moment. On one side it seems important to anticipate the situation (thus dismiss the CEO before problems/lack of skills become flagrant) but at the same time you can not dismiss a CEO without having observed a lack of skills or committed errors.
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FURTHER REFERENCES
Tjan, A. (2011). The Founder’s Dilemma: To Sell or Not to Sell?. Harvard Business Review. Retrieved from https://hbr.org/2011/02/the-founders-dilemma-to-sell-o.

Ning Gao,Bharat A. Jain (2011). Founder CEO management and the long-run investment performance of IPO firms. Journal of Banking & Finance. 35(7),1669-1682.

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Aurore Adant, Sophie Calcus, Nelson Cloquet, Charles Vidrequin, Géraldine Vanden Herrewegen

Kremer, M., & Williams, H. (2010). Incentivizing innovation: Adding to the tool kit. Innovation policy and the economy, 10(1), 1-17

Today, firms can protect their innovations with intellectual property rights, regulated by institutions. IPR can either hinder innovation or provide incentives for it. This article discusses alternative mechanisms to intellectual property rights to spear innovation. The first key insight of the article is that R&D can be promoted either through up-front support for R&D inputs or PUSH programs (for example:…
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Today, firms can protect their innovations with intellectual property rights, regulated by institutions. IPR can either hinder innovation or provide incentives for it. This article discusses alternative mechanisms to intellectual property rights to spear innovation.

The first key insight of the article is that R&D can be promoted either through up-front support for R&D inputs or PUSH programs (for example: Patents) or through commitments to reward successful products or PULL incentives (for examples: Prizes, Advance Market Commitments, Medical Innovation Prize Fund). The second key insight is that public policies can play a role in providing incentives for innovation. And finally, incremental experimentation can help to test and refine new mechanisms to encourage R&D to provide incentives for innovation.

This article has three implications. First, managers should implement innovation thesis, to align the innovation with the overall strategy and the goal of the firm. It would help the company to fix his view for the future, his strategic objectives concerning innovation and to fix boundaries for which the company would invest or not in the innovation. Second, managers have to create an innovation framework to implement its innovation thesis. The framework can be summarized into three basic steps which are creating ideas, testing ideas and scaling ideas. The framework shows each phase of each product and therefore help the company to manage its investments and product development practices. Finally, managers have to fix innovation practices, which means that the teams who develop the products have to be aligned with the innovation framework. The principle of innovation practices is that no product can be taken to scale until its business model has been validated.

In terms of limitation, it is important to have clear identification. Indeed, if you wish to incentivise innovation as a policy maker, you must pay attention to the criteria of choice. If you decide to commit in a specific market or a certain prize, the objectives must be clear and defined. Then, the classic problem is: Should you give the reward to someone that will try to make the best use of the prize money or give it to the more innovative idea? The jury’s decision may be biased. Also, you have to pay attention to the transferability of incentives. AMC is stuck in a social and medical environment and are often offered by government or social oriented financial entity (e.g. Melinda and Bill Gates foundation). Their scope is limited. Because if you look at the competition a company that signs an AMC is supposed to offer a product that is better than what is already in the market. It means that a government could offer an opportunity that would disrupt the competition on the drug market. Finally, incremental experimentation is one way to improve the mechanism, but when you are dealing with an innovation ecosystem, there are outside actors in the loop that you have to convince. Those people represent their company, and for them it would be hard to accept a mechanism that is not “mature” yet. In theory, it can be rational to adopt that, but in practice you want to lower risks for your belongings.

Further references:
1) Moser, P. (2013). Patents and Innovation: Evidence from Economic History. Journal Economic Perspectives, 27(1), 23–44. This article questions the existence of patent laws and their impact on innovation.
2) Williams, H. L. (2013). Intellectual Property Rights and Innovation: Evidence from the Human Genome. Journal of Political Economy, 121(1), 1–27. This article questions the IPR on existing technologies and if that hinder subsequent innovation in the medical field.
3) Grootendorst, P., Hollis, A., Levine, D. K., Pogge, T., & Edwards, A. M. (2011). New approaches to rewarding pharmaceutical innovation. Canadian Medical Association Journal, 183(6), 681–685. This article is about the pharmaceutical industry and raises questions about the effectiveness of patents about innovation activity.

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Engels Doryann, Gérard Thibault, Izere David, Rian Elias and Srhir Karim

Molina‐Morales, F. X., & Martínez‐Fernández, M. T. (2009). Too much love in the neighborhood can hurt: How an excess of intensity and trust in relationships may produce negative effects on firms. Strategic Management Journal, 30(9), 1013-1023.

The authors aim to provide a better understanding of the effect of social networks on innovation through the analysis of territorial agglomerations of firms. They attempt to propose a particular shape of the relationships between representative variables of the social capital and innovation within the context of an industrial cluster. They have used social interactions and trust as indicators of social capital,…
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The authors aim to provide a better understanding of the effect of social networks on innovation through the analysis of territorial agglomerations of firms.
They attempt to propose a particular shape of the relationships between representative variables of the social capital and innovation within the context of an industrial cluster.
They have used social interactions and trust as indicators of social capital, and they have analyzed their impact on the innovation of firms that belong to a territorial cluster.
They argue that beyond a certain point, further increases in the intensity of social capital produce no additional benefits, or even decrease returns in terms of innovation and value creation for the firms involved.
In the literature, we find several articles that show the positive effect of social capital on the company’s performance and innovation. However, social capital can become a resource with paradoxical effects.
On one hand, people in a firm need to spend time cultivating relationships by frequent visits and meetings with other firms, and processing their incoming information from direct contacts.These costs can become high and reduce the number of interactions with others. Indeed, these costs may result in neglecting potentially interesting opportunities, in favor of maintaining old relationships. This can lead to too little diversity in economic relations.

Social interaction relations, often established for other purposes, constitute information channels that reduce the amount of time and investment required to gather information. It also facilitates the transfer of “difficult-to-transfer” information like tacit knowledge by intensive and repeated interactions.
In the case of trust, it has been found to be important to innovation since it lessens the need for rigid control systems. Enhancing creative thinking and allowing people to devote additional time to beneficial actions and endeavors are just a sample of the benefits of trust within and between organizations. It also facilitates the transfer of high quality information as well as the exchange of confidential information.

On the other hand, several studies show that strong links can lock in routines and reduce the innovative capabilities of businesses.
Excessive trust can be a factor that blocks access to various external sources of resources. Indeed, the comfort provided by the existence of privileged partners leads to neglecting or ignoring new opportunities.

Moreover, we can add that trust needs time to establish itself and it’s difficult to determine what the right balance is. Indeed, it is not easy to determine when we are in excess. The saturation stage is sometimes subtle to distinguish.

In conclusion, the purpose of the study is to better understand the effects of social networks on innovation within companies. The curvilinear relation may be the reason for the limitations of the use of social networks. This indicates the actions that companies must take. The clusters are traps in their own network. The success of before can be the threat of today. Thanks to the study, we have observed that some companies that invest more are less innovative.

Further reference
Suire R., Vicente J. “Théorie économique des clusters et management des réseaux d’entreprises innovantes” Revue française de gestion (2008), n°184, 119-136.
Birley S. “The role of networks in the entrepreneurial process” Journal of business venturing, volume 1, 2002,107-117.

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AVAUX Nicolas, GELDERS Alice & GELIN Rémy

[video] BusinessTown (2017). 10 Myths About Entrepreneurs. Retrieved from https://www.youtube.com/watch?v=6TJK-Ddx-xU.

Those myths are false. 1st myth :: “Entrepreneurs are high risk takers”. (i) They weigh the risk and the reward and they calculate things : they accept risk is part of the game. (ii) They try to throw things in their favor. To create business plans, strategies and think about their marketing. (iii) They think, but try also to find safe ways to experiment.…
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Those myths are false.
1st myth :: “Entrepreneurs are high risk takers”.
(i) They weigh the risk and the reward and they calculate things : they accept risk is part of the game.
(ii) They try to throw things in their favor. To create business plans, strategies and think about their marketing.
(iii) They think, but try also to find safe ways to experiment. They try things as in real situation and test them in small quantities.
The main implication is that there are two major ways to reduce risks. To make business models, and to focus on the core-questions you need to answer in advance to increase the chance to be a successful entrepreneur and prototyping : entrepreneurs should (test their idea on a small scale before the launch of the project)
Limitation : by prototyping, you need all the team to agree on the strategy. This may take a lot of time, and you may miss an opportunity
Second myth: “Entrepreneurs are born” ⇒ They are made.
Third myth: “Entrepreneurs are mainly motivated to get rich” ⇒ . They also have a need for archievement, proactivity, opportunity-oriented.
Fourth myth: “Entrepreneurs give little attention to their personal lives” ⇒ Entrepreneurs work hard, but still usually have a good personal life.
Fifth myth: “Entrepreneurs are often high tech wizards” → most of the people making successful businesses have not anything to do with technology.
6th myth: “Entrepreneurs are loners and introvert” ⇒ But there are also plenty of entrepreneurs which are outgoing and extrovert
Implication : There is no right profile to be an entrepreneurs.
Limitation : some characteristic nevertheless best fits to be entrepreneurs in specific areas.
7th myth: “Entrepreneurs are job hoppers” ⇒ most entrepreneurs have a steady job history
8th myth: “Entrepreneurs financed their business venture capital” → People usually use personal savings, you know friend and family.
9th myth : “Entrepreneurs are often ruthless and deceptive” → Ruthless and deceptive entrepreneurs will have difficulties to keep “talented” employees.
Implication for managers is that they should take into account the HR issues (and for example implement holacracy
Limitation is that it could be very difficult to implement such management style for companies which have already a significant size with change management issues.
10th myth :”Entrepreneurs have limited dedication” → you have to be really dedicated.When managers get bored, they tend to drift in directions that don’t make any sense.

APPENDIX : FURTHER REFERENCES
Marcati, A., Guido, G., & Peluso, A. M. (2008). The role of SME entrepreneurs’ innovativeness and personality in the adoption of innovations. Research Policy, 37(9), 1579-1590.
→ Theoretical analysis of personal traits influencing innovation, linked with the Five Factor Model
Carland, J. W., Hoy, F., Boulton, W. R., & Carland, J. A. C. (2007). Differentiating entrepreneurs from small business owners: A conceptualization. In Entrepreneurship (pp. 73-81). Springer, Berlin, Heidelberg.
→ Highlights the differences between entrepreneurs and small business owners, which is not clear in the video
Delmar, F., & Davidsson, P. (2000). Where do they come from? Prevalence and characteristics of nascent entrepreneurs. Entrepreneurship & regional development, 12(1), 1-23.
→ Results : good understanding of the characteristics associated with men, but limited ability to predict nascent entrepreneur status for women.

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Antoine Thomas

Shane, S.A. (2009) Why encouraging more people to become entrepreneurs is bad public policy? Small Bus Econ (2009) 33:141–149

Authorities often think that creating more start-up companies will transform depressed economic regions, generate innovation, and create jobs. This belief is limited because the average start-up is not innovative, creates few jobs, and generates little wealth. Indeed, the vast majority of people founding new businesses are founding businesses that have more in common with self- employment instead of people building…
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Authorities often think that creating more start-up companies will transform depressed economic regions, generate innovation, and create jobs. This belief is limited because the average start-up is not innovative, creates few jobs, and generates little wealth. Indeed, the vast majority of people founding new businesses are founding businesses that have more in common with self- employment instead of people building companies that grow, generating both jobs and wealth.

Currently, governments help entrepreneurs with loans, subsidies, regulatory exemptions, and other advantages if they start businesses. The issue is that they do it for any kind of business. Some people tell that it might seem illogical to go against massive entrepreneurship. After all, companies like Google in Internet search and Genentech in biotechnology, are examples of start-ups that had a huge success.

Looking at the relationship between firm productivity and firm age, we can show that firm productivity increases with firm age. But it’s not sure that the typical start-up makes up for its poor productivity when it gets older because typical U.S. start-up is dead in five years. If we look at the correlations between rates of new firm formation and economic growth over the medium-to-long term, we see that firm formation declines as economic growth increases. So as we see, there are some contradictions.

There is one big issue: When governments use their money to encourage the creation of new businesses, they stimulate more people to start new companies mainly in industries with lower barriers to entry and high competition and rates of failure. That’s because the typical entrepreneur has trouble picking the right industries and often chooses the ones that are the most accessible, not the ones that are best for start-up. (Johnson 2004) It is like this because unemployed people are more likely to start businesses than people who have jobs, as the latter have more to loose.

We also have to have in mind the job creation myth behind start-up creation: According to Acs and Armington (2004), companies with at least one employee that are less than two years old provide a total of 1 % of all employment in the US. And concerning the job quality: Wagner (1997) showed that jobs in new firms pay less, offer worse benefits and less job security than jobs in existing firms.

The solutions proposed by the article are the following: First stop subsidizing the formation of the typical start-up and focus on a reduced amount of businesses with growth potential and secondly, looking at the capital of the founder and his motivations, the industries in which companies are founded, their business ideas and strategies, and their legal forms and capital structure to predict if the start-up might have good chances to be successful.

The implications for policy makers could be the following: First, reduce the incentives that we give marginal entrepreneurs to start businesses by reducing the transfer payments, loans, subsidies, regulatory exemptions, and tax benefits that encourage more and more people to start businesses, and they should also reallocate resources to programs that support high growth companies. Moreover, governments should organise contests to be able to target start-ups that are promising, instead of funding start-ups in general. They should also give financial incentives for R&D in order to foster companies planning to grow. Another implication could be to hire former entrepreneurs to become business angels. Furthermore, as we seen during the course, it isn’t only about financial help, it can also be coaching or logistic help. And finally, firms that receive financial support from VC’s get better results, so policies should follow this trend in order to recognize in which type of sectors to subsidize.

Of course, some limitations have been found: For instance, reducing the number of start-ups that are funded could lead to many people staying unemployed. For some people, being self-employed is the only solution. Even if the start-up they launch won’t create many new jobs, at least those people are able to work in a setting that corresponds to them. Moreover, there is a weak evidence for the assumed link between technology-based firms or R&D intensity and high growth firms. We can also highlight the fact that most high growth firms are often part of another company (pre-incubation) and that politicians who would reduce subsidies to any firm creation will get a rather bad image, meaning not everyone can benefit from the fund and that not everyone is capable of building a successful start up. Thus, they may have no political incentive to do so.

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