Innovating in a down time

Susan Searle from Imperial Innovations: “It’s a fantastic time to be a start-up.”

“It’s a fantastic time to be a start-up,” she told a Science|Business academic enterprise conference in Stockholm on 2 December. Searle pointed out that both Google and Microsoft were born during a recession. “We need innovation,” she added. “We’ll be actively investing during this time.” Imperial Innovations, a spin-out of Imperial College, has 89 companies in its portfolio and 160 licensed products.

David Eyton, group vice president for research and technology at BP, agreed. “We should carry on pretty much as is, because the payback will come five to ten years from now,” he said. “R&D is not aiming at this year’s revenue stream.” The one area where start-ups are seeing a financial pinch now, he said, is in funding to scale up a project to go commercial. “That step is the most at risk with an economic downturn,” Eyton said.

The take-home message is that in tough times, investors are making tough, but strategic decisions that can benefit startups with the right stuff.

Managing the influx of ideas

BP, which is on a course to decrease its current heavy investment into fossil fuels and put more money into renewable energy and biofuels, spends €500 million a year on innovation, half on universities and half on companies. It already has started a 10-year, $500 million project with the University of California at Berkeley and the University of Illinois to set up the BP EnergyBiosciences Institute dedicated to “blue sky” research that applies biosciences to energy.

Eyton said there is an explosion of possibilities for BP. “In times of crisis the most innovative companies survive and also thrive,” he said. “There is no shortage of ideas. The problem is a shortage of capacity as a company to cope with the number of opportunities out there.” BP has 12 people in its chief scientist office to sort through the avalanche of submitted plans.

At the end of the day, BP goes after good people. “That is the sole basis upon which we invest around the world and hire people,” Eyton said.

The other key is to target money at the right places. “There is no monopoly on good ideas in one part of the world or another,” he said. Would-be funding recipients can get an edge, he said, by presenting their business plan clearly.

Microsoft is taking a different approach to handling the ongoing flurry of innovation activities. It has set up university relationship offices in Europe, the United States and Asia. Microsoft is working on more than 40 projects with more than 100 universities across Europe, and it acquired 20 companies in Europe in the past 12 months.

“There is a temptation now for companies to cut down on innovation,” said Jean-Philippe Courtois, president of Microsoft International. “This is the best time to keep investing in R&D. It’s harder, if you stop the innovation cycle, to catch up after two to three years.”

Looking for the silver lining

The important role of small businesses – they create an estimated 70 per cent of jobs in the world – isn’t lying unnoticed by large companies and governments.

Microsoft recently started the global BizSpark programme that offers software, tech support and visibility to startups. Companies of less than €1 million or $1 million in size can get development software for free (see Science|Business, “Finding the upside in a down market”, 27 November 2008)

Imperial Innovations’ Searle recommends that start-ups take advantage of the misfortunes of larger companies during the economic downturn. “Companies are letting people go, so there are some fantastic people coming out of companies…,” she said. “There is an opportunity to build stronger management teams with people coming out of big companies who normally wouldn’t have come to start-ups.”

Searle also is encouraging government to keep supporting seed and proof-of-concept funding. “Capital will be constrained, so whatever government can do to encourage more risk capital to support this activity would help,” she said.

Room for improvement

Europe still has improvements to make to foster the entrepreneurial spirit that exists in hot pockets like Silicon Valley and Boston in the United States.

It’s important to change the climate of risk aversion and get youngsters to become entrepreneurs, said Microsoft’s Courtois.

“In the United States, an entrepreneur can fail three to four times,” said Frank Brown, dean of INSEAD, the international business school based in Fontainebleau, Paris. “That culture doesn’t exist here in Europe.” He added that there is a fear of failure and answering questions incorrectly even at the grade-school level.

Another critical issue is advanced degrees at universities. “Europe is dying for a lack of investment in PhD programmes,” added Brown. “America has a leg up.” One bright spot he pointed to is Karolinska Institutet, which has a proportionately high number of PhD candidates. “It is investing in the next generation,” he said.

Karolinska, a medical university with 22 departments, has 600 research groups and 2,300 PhD students, said Harriet Wallberg-Henriksson, president of Karolinska. She gave advice for what it takes to create breakthroughs. “To do the opposite. To not give up. To be able to see the unexpected,” she said. And, add a portion of serendipity to that mix.

Alfons Sauquet, dean of the ESADE Business School, said it is not possible to clone Karolinska elsewhere, “but you can take a benchmark and translate it into your own situation.” Barcelona is building a creativity park where it can bring in creative people and provide them with knowledge input from several different background areas.

Sauquet said there’s no magic recipe for all countries to boost innovation, but he does encourage more public-to-private dialogue. The US government invests 2 per cent of its GDP in R&D, he said, but all EU countries are lower than that except for Finland and Sweden.

INSEAD’s Brown added that it is important to get the infrastructure right. “Europe has a 50 per cent share of patents on eco innovation, but only 20 per cent of the development is from Europe. The rest is from the United States.” He said business schools can help to join money with ideas and help with infrastructure.  

Philippe Pouletty, managing partner of Truffle Capital, said Europeans have been too conservative with their investments. There is about €300 billion in cash savings in Europe, he said, but less than 2 per cent is invested in small companies. By contrast, US pension funds are investing 8-15 per cent in alternative financing like venture capital, which is often why that economy can rebound faster after a recession, he said.

“Europeans save money, but don’t invest in the future,” Pouletty said. The companies his firm finances need a lot of cash. “Google got $25 million in financing,” he explained of the US company’s initial venture capital infusion. “If it got only $3 million, it wouldn’t be Google today.”