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.