It has become a low-growth world of negative interest rates, creating demand for assets that can yield relatively higher returns. Excluding potential geopolitical shocks that could undermine recent assumptions, globalisation allows capital, ideas and people to flow across borders more easily, while technology is creating a virtual network and ecosystem and sources of disruption to incumbents and these higher returning assets.
Both broad trends encourage people to look for competitive advantage through understanding and utilising innovation that can shape our future and capture the value from these changes. Ideas are the starting point for innovation but change requires ideas to be turned into action. This requires capital and knowledge – and, increasingly, collaboration, as the introduction to last year’s paper for the European Commission, The Emergence of Collaborative Funding Models and Platforms, indicates (see page 84).
Looking at the sources of innovation capital in the US and Europe (see table in full report), it is immediately clear that the latter has a third more money trying to support this activity than America’s $940.2bn in 2013.
Though correlation and causality are notoriously hard to distinguish, this raises the question of whether the level of capital is as important as the behaviour sparked by the form of the capital.
More than two-thirds, $832.3bn, of Europe’s innovation capital in 2013 came from loans, compared
with about a third ($318.2bn) in the US. Thus, the US had $622bn in research and development (R&D) and equity like investments, compared with Europe’s estimated $420.3bn.
Governments both reflect a country’s culture and also help shape its entrepreneurial endeavours through the rules, policies and ambitions for their peoples and for small and medium-sized enterprises (SMEs). As Chrystia Freeland, a member of the Canadian parliament, wrote in the magazine Atlantic:
“Successful businesses will be the ones that recognise a truism that should have been obvious from the start – business and politics are in fact inseparable, and the latter makes greater economic integration less certain than business leaders might wish.”
Encouraging debt over equity investments through tax-deductibility of interest is perhaps counterintuitive for society if the shareholders rather than bankers improve entrepreneurial governance and growth rates. Creating new stock might be more use than boosting the value of existing assets that might become redundant before depreciation or amortisation is fully accounted for.
In the European Commission’s (EC’s) 2013 SMEs’ Access to Finance survey, 75% of EU SMEs had used at least one form of debt financing, excluding debt securities and equity, in the previous six months, unchanged from 2011 levels. Equity financing was little used, by just 5% of EU SMEs in the previous six months, which was slightly lower than the 2011 level of 7%, and most likely to be used by SMEs with a stock market listing (17%), by the largest SMEs (10% of those with a turnover exceeding €50m) and by 9% of gazelles (SMEs less than five years old which have grown at over 20% a year).
This is why the EC has placed such emphasis on growing equity investment rates as it prepares the ground for a capital markets union for its 28 member states later this decade. As Jean-Claude Juncker, president of the EC, said in his Political Guidelines for the Next Commission: “To improve the financing of our economy, we should further develop and integrate capital markets. This would cut the cost of raising capital, notably for SMEs, and help reduce our very high dependence on bank funding.”
Having family, friends, professional venture and angel investors and people in the crowd willing to support an idea might count for more than the aggregate dollars invested if they are looking for the ideas and teams that can both start and scale up an entrepreneurial initiative into a world champion.
But ideas and teams need to come from somewhere. And here the role of R&D from corporate and public sources is an important spring. According to the Organisation for Economic Co-operation and Development’s (OECD’s) latest biennial report: “In the decade since 2002, the growth of the science base in the US and the EU has been driven by universities, which have seen a robust increase in their expenditures.
“Over time, there has also been a shift towards university based research across the OECD. In China, the growth of scientific activity has been driven by public research institutes, in particular by large investments by the Chinese Academy of Sciences.”
While plenty of breakthrough ideas and companies are started in a garage – notably the technology firm created by William Hewlett and David Packard – the genesis of entrepreneurial ideas is often triggered from work at a university or research institute, or from seeing unmet market needs at an existing corporation or startup (see below).
Hewlett and Packard were encouraged to set up a business by their Stanford engineering professor, Frederick Terman, who in the 1930s envisaged startups and technology as a way of bringing added-value industries and jobs to California rather than having to export natural resources to the east coast of the US.
So while the entrepreneurial ecosystem itself is broader than the roles provided by corporations and universities, given the importance of these two pillars of innovation capital to developing ideas into commercial and societal success, continuing to refine and improve their links and results will benefit the world.
Understandably, therefore, governments are playing an active role in fostering the early-stage ecosystem through convening links, setting definitions (see below), regulatory and tax frameworks and as a source of capital, academics Martin Haemmig and Boris Battistini found in their review on page 78.
The article on best practices by Global University Venturing editor Gregg Bayes-Brown sketches out the roadmap for the way forward.
Universities and public research institutes (PRIs) are increasingly pressured by government performance reviews to want to work with business as a way of developing financial returns and societal impact from their education and research. However, fewer than half the corporations appear to feel the same way.
From a survey of 114 corporations, 48.1% of respondents said they looked to universities and business schools for portfolio companies, with 37.7% looking for spin-outs from universities, according to Toby Lewis, editor of Global Corporate Venturing. A related survey on page 34 of nearly 50 top universities showed three-quarters of respondents spin out fewer than 10 startups a year.
For the spin-outs that do receive backing, corporations are often a vital supply of capital and support beyond that offered by specialist venture capital firms, angels and their own academic institutions.
That so few corporations look to universities and PRIs, such as the European Organisation for Nuclear Research (Cern), gives a competitive advantage to those that do, albeit one that can bring an expectations gap, as our interviews to support the survey show on page 58. The leading academic, corporate and government groups are the ones thinking innovatively about how and why they can work together.
Corporations, such as search engine provider Google and chip maker Intel’s corporate venturing units, can back multiple university spin-outs each year, according to our analysis of Global University Venturing’s database on page 40, although the majority that are interested in student and faculty as sources of entrepreneurial ideas are less active.
These corporate venturing deals, also as part of a corporate-backed accelerator or incubator, are part of a toolkit used by the most innovative businesses as they seek to exploit any source of competitive advantage through open innovation as well as other tools, such as mergers and acquisitions, joint ventures, licensing and internal research and development, according to the rest of the survey on page 52. Corporations have been partly behind the explosion of accelerators to more than 2,000 over the decade to last year, many of which are sited in or near the main universities and cities to attract people to join cohorts going through the programmes.
But gathering hard data in a rapidly-developing area is complicated given most universities in our survey failed publicly to track student startup and entrepreneurial work numbers.
John McIntyre, managing director of computer networking company Citrix’s Startup Accelerator, through his association with the US training agency Kauffman Fellows has partnered Global Corporate Venturing and Massachusetts Institute of Technology entrepreneurship professor Yael Hochberg to conduct this survey, which will begin to track and answer questions around the effectiveness of accelerator-style programmes and corporate innovation, according to his guest comment on page 69.
Through his work at Tilburg University, Erik Vermeulen is separately running a project on investor readiness to analyse this report and other early-stage and venture data for the European Commission.
Other regions, such as Russia, China, Singapore, Japan and Brazil, are also exploring how their corporations, universities and societies can be ready for innovation. This means starting at the earliest stage.
Sources of Innovation Capital in 2013
Capital type/US ($bn)/Europe ($bn)
1 Loans/312.6/792.2
2 Corporate R&D*/214.2/179.6
3 Family and friends**/207/93.5
4 Public R&D/115/57***
5 Venture/33.17.4
6 Government guarantees and sponsored loans/30/73.4
7 Crowd****/9.5/3.3
8 Angel/19.2/6.1
9 Securitised loans/5.6/40.1
Total: 940.2/1,252.6
* Taken from the 2014 EU Industrial R&D Investment Scoreboard based on a sample of 2,500 companies and equivalent to about 90% of the total expenditure on R&D by businesses worldwide
** US family and friends’ contribution assumed at 18% (SBA) of all borrowing. EU, 5% of funding from family or friends (EC) (2013)
*** EU 20
**** 2014 data
Sources: 1, 3, 6, 9 Boston Consulting Group; 2 European Commission; 4 National Science Foundation Higher Education Research and Development Survey; 5 Ernst & Young using Dow Jones Venturesource; 7 Massolution’s Crowdfunding Industry Report; 8 EBAN; 9 Organisation for Economic Co-operation and Development; Analysis by Global Corporate Venturing
Sources of Entrepreneurs
In March last year, data provider Mattermark published research of more than 1.5 million professionals connected to technology startups to try to identify patterns of prospective entrepreneurs by their education, previous employers, seniority level, role within a company, geography and age.
From its analysis:
- 15% of venture-backed founders have a computer science degree but management consultants are more than two-times more likely to be venture-backed founders than engineers.
- 38% of venture-backed founders are over 40 years old.
- 43% of venture backed founders worked at a venture-backed company immediately before founding.
- Two-thirds of venture-backed founders were not in a senior leadership position prior to founding.
- Contrary to conventional wisdom, being stuck in the same company or position for a long time – even a decade – does not diminish your likelihood of becoming a founder.
The research helped identify 350 people – its “Future Founders” – to be invited by corporate venturing unit Bloomberg Beta, funded by the media company, to begin a programme to connect them to each other and explore starting a company.
The most predictive group of future founders to Mattermark were Stanford graduates with computer sciences degrees who are currently working at, but are not founders of, a venture-backed startup.
Based on the sample population related to the startup ecosystem that Mattermark included in its study, an individual in this group has a 0.66% chance of starting a company. The Future Founders group has a 17% chance, and Roy Bahat, head of Bloomberg Beta, said one, Ryan Hoover, had already been venture funded, although other results were unavailable. Mattermark was unavailable for comment.
How SMEs are defined
Management consultant Boston Consulting Group published its guide to small and medium-sized enterprises and included the differences between Europe and the US.
Standard European definition, according to EU law
Micro enterprises: employing fewer than 10 people, with an annual turnover not exceeding €2m, or a balance sheet total not exceeding €2m.
Small enterprises: larger than micro firms, but employing fewer than 50 people, with annual turnover not exceeding €10m.
Medium-sized enterprises: firms larger than small enterprises, but employing fewer than 250 people, with annual turnover not exceeding €50m.
Mifid II definition: SMEs are defined for the purposes of Mifid II as companies that had an average market capitalisation of less than €200m on the basis of end-year quotes for the previous three calendar years. As the European Securities and Markets Authority points out, this could be interpreted as excluding all SMEs with a lifespan of less than three years from counting towards the 50% threshold.
US Small Business Administration definition
The Small Business Administration (SBA) defines a small business concern as one that is independently owned and operated, organised for profit, and not dominant in its field. Depending on the industry, size standard eligibility is based on the average number of employees for the preceding 12 months, or on sales volume averaged over a three-year period.
Examples of SBA general size standards include:
- Manufacturing: maximum number of employees may range from 500 to 1,500, depending on product manufactured.
- Wholesaling: maximum number of employees may range from 100 to 500, depending on product being provided.
- Services: annual receipts may not exceed $2.5m to $21.5m, depending on service being provided.
- Retailing: annual receipts may not exceed $5m to $21m, depending on the product being provided.
- General and heavy construction: general construction annual receipts may not exceed $13.5m to $17m, depending on the type of construction.
- Special trade construction: annual receipts may not exceed $7m
- Agriculture: annual receipts may not exceed $0.5m to $9m, depending on the type of agricultural product.
Source: Bridging the Growth Gap, March 2015