Vision on Innovation: 5. Achieving the goals of the Lisbon
strategy
Summary of our analysis so far
The Lisbon Strategy: Noble ambitions, but far from
being achieved: The Lisbon Strategy is to make Europe
the most competitive and dynamic knowledge-based economy in
the world capable of sustainable economic growth with more
and better jobs and greater social cohesion. The Lisbon reform
program defines the way to achieve this goal through a shared
responsibility of the EU and its Member States. The Lisbon
Strategy sets ambitious goals which, we believe, point in
the right direction. However, over halfway the reform period,
we have to face reality: Europe is far from being on track
and The Netherlands is at best an average player in the mediocre
EU team. According to the Summary Innovation Index (SII) of
the
European Innovation Scoreboard (EIS), The Netherlands
has performed below the EU average for most of the period
and only recently made it to the average. As Dutch citizens
and entrepreneurs, we have asked ourselves the question what
should be done to move away from mediocrity and make a true
effort to achieve the goals of the Lisbon strategy.
The innovation debate is valuable, but the sense
of urgency is lacking: We consider it of great value
that the topic of innovation and entrepreneurship has become
a main theme of political debate in Europe. At the same time,
it appears that the sense of urgency and the commitment to
make the necessary radical changes are lacking. The reform
program has triggered a significant amount of analysis, but
few tangible measures. The activities of many steering committees,
review- and monitoring organizations keep a sizeable group
of policy makers fairly busy and provide a decent income for
many consultants, but is lacking true vision and creating
little action. Many of the policy measures that were taken
are simply aimed at correcting the patterns that emerge from
economic indicator systems like the European Innovation Scoreboard
(EIS) and put, in our view, too much emphasis on R&D spending,
patents filed, and the share of the populating graduating
and working in science & engineering as the key drivers of
innovation. We believe a sharper vision, stronger leadership
and higher sense of urgency is essential to make the necessary
reforms. It is about time to get serious.
The creation of young, fast growing companies is
vital and where Europe is under performing: If a
knowledge-based economy is about businesses that capitalize
on market opportunities emerging from new ideas and technologies,
what has been Europe's score so-far ? Based on
on our analysis of the STOXX 1800 index, we believe
that the inevitable conclusion is that Europe in comparison
to the US has been heavily under performing for decades in
the creation of extremely successful fast growing companies.
Where are the European equivalents of companies like Wall-Mart,
Tyco, Merill Lynch, Intel, Federal Express, Comcast, Microsoft,
Apple, Home Depot, Oracle, SBC, Dell, Cisco, Qualcomm, Yahoo!,
Amazon, eBay and Google to name just a few of the post world-war
II US giants. Yes we have Nokia and SAP, but what else ? We
believe it is pivotal to the European innovation policy to
gain a better understanding why European has been under performing
so significantly along this dimension and what needs to be
done to reverse the trend. Fast growing companies not only
take a lion share in the creation of jobs and GDP growth,
but also improve the competitive position of a nation in global
competition. New companies in specific industries can flourish,
because local, leading-edge giants assure the presence of
skilled labor, a network of relevant supplier and supporting
companies and a benchmark for competitive performance.
The root problem is not in R&D or inventing new
technologies, but rather our adverse attitudes to risk and
adaptability stopping us from playing the "trial and error"
game of market focused innovations effectively:
We have reviewed some of the
leading theories on the dynamics of innovation
and studied some of the success stories of the big hitters
in the ICT and media industries, which are largely US based.
We came to the conclusion that the success of those innovative,
fast growing companies is related to their ability to exploit
new technologies to the
change customer behavior, market structure or both.
These companies are familiar with leading edge technology,
but often not the inventor of such technologies. The key observation
is, in our view, that the pace of technological progress outstrips
the ability of industries and markets to consume it. Fast
growing companies are those that were capable to fill this
space and often leverage generally available - though leading
edge - technologies. The real big hitters not only focus on
the right strategic position - one that can ultimately change
customer behavior and market structure - but also manage their
companies exceptionally well through the different
stages of market adoption.
If this is the way how many start-ups in the US became highly
successful, fast growing companies, what stops us in Europe
from doing the same, we asked ourselves ? These are our initial
thoughts:
- Risk attitude: Adverse attitudes to risk
and adaptability, as well as fear of failure, are anchored
in the perceptions Europeans in general and perhaps the
Dutch in particular. This topic is often associated with
the perceive lack of entrepreneurs, but we believe other
aspects may be even more important such as our general tendency
to seek consensus, avoid choices, delay decisions in favor
of more analysis, fragment budgets, select established companies
as suppliers, fight for the share of the pie rather than
its growth and control rather than trust people to their
job. It is pervasive in our society and at odds with the
vary nature of innovation, which essentially is a process
of trial and error at a world-scale. No guts, no glory.
- Lack of early stage venture capital:
Whereas European early stage financing has been considerably
lower than that in the US for as long as this form of financing
exists, the ratio between early stage financing in the Europe
and the US has never been worse than at this moment. The
US invests 16 times as much into high-technology companies
and 4.6 times as much in biotech companies as Europe. American
venture capitalists are prepared to take their risk and
invest more funds in fewer companies than their counterparts
in Europe. Despite the burst of the bubble they earned their
return as well: The market capitalization of just four of
them - Google, eBay, Yahoo! and Amazon.com - was about US$
200 billion, which exceeds the amount raised from venture
capital and IPOs in all the US Internet-related companies
combined.
- Fragmented European market: Europe may
be economically "unified," but language and cultural differences
still mean that what on paper is a trading bloc of some
25 countries and 456 million people is in reality a highly
fragmented market.
- A self-fulfilling prophecy: The US has
effectively created a
virtuous circle of leading-edge high-technology
giants that provide the right factor conditions for new
challengers to become successful and form the leading companies
of the future. Europe is currently not in this game.
How to get more bang for the buck ?
Europe still has an excellent starting position:
As entrepreneurs we are optimist by nature, and we believe
the observed situation and trend can be reversed. The Netherlands,
as for the rest of Europe, is still well positioned to develop
into a strong knowledge-based economy, as the Lisbon reform
aims for. It has a well developed knowledge infrastructure
and highly educated labor force. With 29 Dutch companies in
the STOXX 1800 index, The Netherlands is, in relation to its
population, at par with the United States.
... but we should pick our battles based on a "systems"
view on innovation: We believe that a clear vision
and consistent design and execution of policies are essential
ingredients to leverage our strength and concentrate our resources
in areas where they have the highest impact. We do not believe
that the US has superior brains, far better R&D, a more efficient
government or smarter entrepreneurs. However, a number of
lessons can be learned from the dynamics of innovation processes
that created their strong position in software, computer,
Internet services and other high tech industries. We therefore
advocate the development of a holistic
"systems" view on the long term dynamics of innovation
processes and the levers that can be pulled. Such a shared
"systems" view, we believe, is essential to have a meaningful
discussion on the root-causes, the alternative approaches
to turn the tide and the trade-offs in the allocation of scarce
resources.
The government should largely concentrate on its
traditional tasks and furthermore implement a public/private
funded innovation system run by professionals to support high-ambition
entrepreneurs in building the fast growing companies that
we need: In our view, the government should first
and foremost concentrate on its traditional tasks, i.e. to
assure high quality education and public R&D; promote the
free flow of goods and services, labor and capital within
the EU and the world market at large; assure a "level playing
field" for new companies to be able to compete with dominant
market players. It should furthermore continue its recent
efforts to create a fiscal regime and social welfare system
that provides the right balance between social security, cohesion
and inclusion on the one hand and the proper incentives for
citizens and capital owners to participate in the creation
of new ventures on the other hand.
In our view, the traditional top-down planning processes
for allocating budgets to individual innovation related projects
are inconsistent with the vary nature of innovations. Innovation
is not a linear process from the lab to the market, but typically
the outcome of a bottom-up process of trial and error on a
world scale, involving many cyclic interactions between the
different parties in a value chain. We therefore believe that
the best approach to innovation governance would be to establish
consensus between the different constituents in society at
a strategic level and leave the execution to "trusted" bodies
run by professionals with clearly defined roles and responsibilities,
as well as high-level long-term targets to be monitored and
reviewed annually or biannually. Too many stakeholders are
currently fighting for a small pie of the money, thereby creating
unwanted overhead, unnecessary time delays and a dilution
of funds that is defeating the purpose. A point in case, we
believe, is the process followed in the Dutch ICES/KIS3 (now
KBIS) program, where the distribution of € 800 million in
funds took three years, countless meetings and 35,000 pages
of documentation. In the end, the money was more or less evenly
spread over all stakeholders involved, who after the budget
was secured, just got on with the R&D programs they were working
on anyhow. Along the same lines we do not believe that the
current wave to push the responsibility and the budgets further
down to local regions and cities is the right way forward.
We are sure that there are sufficient entrepreneurs in The
Netherlands to launch the high-ambition, fast growing companies
we need. True, over 2/3 of the Dutch population prefers to
be employed, but this still leaves 1/3 which apparently thinks
differently about that. We believe that the lack of venture
capital for first round financing in the range of € 5 to 20
million is the key factor preventing the birth of companies
that may evolve in the European equivalents of Google, Yahoo!,
eBay and the like. The Technopartner program does not address
this group. It is focused on far smaller investments, new
technology development rather than leveraging available technologies
and altogether too small. We therefore propose to implement
a public/private funded innovation system schematically represented
in the figure below and consisting out-of three professionally
run entities:

- Strategic business investment company (SBIC):
This organization manages an investment fund of at least
€ 300 million, of which 2/3 is to be funded by the government
form the natural gas proceeds ("FES fonds"), the sale of
KPN shares, or through a reallocation of budgets within
the innovation program. The remaining 1/3 will be financed
by commercial investment funds, venture capitalists and
information investors. Existing participations from the
Twinning and and Biopartner portfolio will be transferred
to this fund. The SBIC replaces the Technopartner program
and will assure co-ordination with the investment funds,
currently participating in the Technopartner program. The
SBIC will have long term targets and will be measured on
the results for the portfolio as a whole, rather than on
individual participations.
- Public business development company (PBDC):
This organization acts as incubator and will be lead and
supported by professionals from various industrial sectors
and disciplines with hands-on experience in venturing, strategic
marketing, business development, finance and running operations.
The organization will follow a stage-gate business development
process, guiding the best entrepreneurial initiatives through
a number of distinct phases from initial idea to company
launch, with clear selection criteria and milestones. The
process acts as funnel where only the best initiatives enter
and only those projects will carry on at each stage that
meet the required business development and investment criteria.
The go/no go decisions will be prepared by the PBDC and
approved by the SBIC. Guiding principles are short cycli,
early elimination of initiatives that do not fulfil the
risk and return criteria of the SBIC, close co-operation
with hands-on professionals and evaluation on portfolio
results.
- Technology transfer agency (TTA): This
organization works closely together with the universities
and other knowledge institutes, the "grote technologische
instituten" (GTIs) in particular, and is responsible for
transferring key technologies, knowledge and Intellectual
Property Rights (IPRs) from these institutes to the SBIC
participations. The TTA will guide the process of determining
the commercial terms and conditions for this transfer and
act as a broker between the universities and knowledge institutes
on the one hand and the SBIC and its participations on the
other hand. This way the knowledge institutes will have
a strong financial incentive to support the succesful translation
of their knowledge and technology to commercial ventures,
next to their traditional task of doing research and providing
education.
The relation to SenterNovem and Syntens needs to be further
explored. The SBIC will concentrate its activities on technology
driven high ambition companies with the potential to become
fast growers and industry leaders over time, potentially leaving
the guidance of small scale, local start-ups to Syntens.
A number of the start-ups financed this way will succeed
and develop into fast growing high tech companies which create
new jobs; spur economic growth and provide the successful
role models for young people to go into science and engineering
and become entrepreneurs themselves. Success breeds success
by inspiration and example. Many of the other characteristics
of a healthy knowledge-based economy will follow. The presence
of more successful high tech companies will result in higher
private R&D spending; more people employed in science and
engineering, in turn creating a higher demand for S&E graduates,
leading to a higher inflow of students in these faculties,
thereby increasing public R&D. Some companies will become
the leading edge giants of the future and strengthen the competitive
position of the region in the global competition by improving
the factor conditions and the network of supplier and supporting
companies. This will kick-start the
virtuous circle of leading-edge giants and new challengers
leveraging disruptive technologies: New companies can flourish
due to the favorable conditions created by leading edge giants
and bring disruptive new technologies successfully to market,
thereby creating further economic growth and new jobs, as
well as the large companies of the future.
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