Mark harris

™

European Innovation Academy
Tallinn, January 21-27 2013

Global Technology Entrepreneurship
Prof. Dr. Sc. math. Dr. h.c.

Mark Harris
CEO and Founder
1
Adjunct Professor for Technology Entrepreneurship & Innovation

Differences are Valuable

innoVaventures – UC Berkeley come with their own view – the
Silicon Valley perspective

Regional effects cause entrepreneurship to take its own unique
form everywhere

Through the identification of major regional trends, and an
appreciation for the success models of Silicon Valley, each
participating University can chart its own course to build a
successful program.

© innoVaventures ™
2 All rights reserved

Literature:

Accompanying Literature:

Timmons/Spinelli New Venture Creation ISBN 978-007-125438-0
Steven Gary Blank The Four Steps to the Epiphany ISBN 0-9764707-0-5
Geoffrey A. Moore Crossing the Chasm ISBN 0-88730-717-5
Clayton M. Christensen The Innovator’s Dilemma ISBN 0-87584-585-1
Henry Chesbrough Open Innovation ISBN 1-57851-837-7

Recommended Literature:

David J. Teece Managing Intellectual Capital ISBN 0-19-829-542-1
Annalee Saxenian Regional Advantage ISBN 0-674-75340-2

> www.innovaventures.com >NEWS>Blog>24 October American University in Bulgaria 3 Youtube Videos about 5 hours total.


The 5 Minute University


Introductions / Expectations


Lecture Series

1.  Innovation, Entrepreneurship and Globalization
2.  The Professional Entrepreneur, The Entrepreneurial Venture
3.  Venture & Growth Capital
4.  Opportunity Recognition
5.  Open/Closed Innovation and the Innovator’s Dilemma
6.  Communication Channels
7.  Smart Business Plans


1. Innovation, Entrepreneurship and
Globalization


What is innovation ?

Innovation is an invention, paired with a process
and a market

Entrepreneurship

invention process market


Light Bulb Hall of Fame


Computer Hall of Fame


What is Entrepreneurship ?
What is Technology Entrepreneurship ?


Entrepreneurship is:

A process
Not a person

About BIG companies that happen to be small
Not about small business

Important to BIG business


What is Entrepreneurship ?

„The pursuit of
opportunity beyond
the resources one
currently has under
control“. *

* Source: Professor Howard Stevenson


Entrepreneurship Bridges the Gap

Technology/
Entrepreneurship Value
Opportunity


What is Technology Entrepreneurship ?
Cash
Flow

I II III IV

The technical The
invention company

t
The business
innovation

Derived: Prof. Jerry Engel UC Berkeley
Enhanced: Prof. Dr. Mark Harris

Needed: Technology Entrepreneurship Skills Management Skills (MBA etc)

So Technology Entrepreneurship is not only „What“, but also „When“ !!


The Entrepreneurial Process


The Entrepreneurial Process

Identify
•  Need Opportunity
•  Solution
•  ‘Unfair Advantage’

Acquire
•  Technology rights Resources
•  People
•  Money


The Entrepreneur’s Task….

Key Resources
•  Technology
•  Money People

•  People

Technology Money


Who is the Professional Entrepreneur?
Personal Entrepreneurship Styles
Entrepreneurship is a team sport
•  Many can play – even if they are not ‘born’ entrepreneurs
Three modes
•  Lead
•  Follow
•  Execute
Three functions
•  Create
•  Manage
•  Innovate
Which role is right for you?


Personal Entrepreneurship Styles: Modes: Lead or
Follow

High Performance
entrepreneurial teams are :
Lead Execute •  Self organizing
•  Flexible
•  Self disciplined
•  Common goal
•  Common priorities
•  Common values
•  Enabled by shared
ownership

Same people may play
different roles on different
teams within the same
Follow
company

Personal Entrepreneurship Styles Functions: Create
or Manage

Innovation requires a
combination of creativity
Create Innovate and management – brought
by a team
•  Creation requires the
greatest technical
competency
•  Management requires
technical affinity
•  Different functions are best
suited for different people.
•  Functions rarely are
exchanged
•  All collaborate in BOTH
Manage dimensions


Entrepreneurship is a Team Sport Results are What
Count

High performance technology
Innovation entrepreneurship
Entrepreneurship
•  Is a BLEND of Innovation and
Execution

•  Requires collaboration and
discipline

•  It is best performed by a team
•  Alignment of incentives
directly and dramatically
related to the outcome
Execution


Who is the Entrepreneur?

High
Entre-
Inventor preneur
Creativity
and
innovation
Promoter Manager,
administrator
Low
Low High
General management skills,
business know-how, and networks

Source: J. Timmons, New Venture Creation, p. 25.


The Professional Entrepreneur
Cash
Flow

I II III IV

The technical The
innovation company

Visioning the Future into the Present t
The business
innovation

Needed: Technology Entrepreneurship Entrepreneurship Skills (MBA etc)
Skills


Cash
Flow

I II III IV

The technical The
innovation company

Zone of Collaboration t
The business
innovation

Zone of Competition

Skills


The Importance of Teamwork


Entrepreneurship and Globalization

Global

Regional

Sourcing Selling



Global

Regional
U.S. Start-up

Sourcing Selling



Global

Regional • Local tech team • Beta customers
• Local sourcing U.S. Start-up • Executive selling
• May outsource manufacturing • Scaling direct sales
• Retain quality control • Developing distribution

Sourcing Selling



Global
Outsource
• software development [India]
• manufacturing [China]
• Call Center customer support [India]
U.S. Start-up

Regional • Local tech team • Recurring customers
• Local sourcing • Standardized selling
• Retain quality control • Expanding distribution

Sourcing Selling



VP Sales
Global • Europe [through UK]
Outsource • Asia [through Japan]
• software development [India] • WRO [may license]
• manufacturing [China] Localization
• Call Center customer support [India] Ventures/Co-Branding
Joint
U.S. Start-up Establish subsidiary


Sourcing Selling



VP Sales
Joint


Sourcing Selling



Global

Regional
E.U. Start-up

Sourcing Selling



Global

Regional • Local tech team • Beta customers
• Local sourcing E.U. Start-up • Executive selling
• Retain quality control • Developing distribution
• Hit “glass ceiling”

Sourcing Selling



Early Focus on U.S. Sales
Global • US sales office
• Establish U.S. Subsidiary early
• US Sales support
Asia [through Japan]
WRO [may license]
E.U. Start-up Joint Ventures/Co-Branding

• Pushing ‘glass ceiling’

Sourcing Selling



Outsource • Establish U.S. Subsidiary early
• software development [India] • US Sales support
• manufacturing [China] Asia [through Japan]
• Call Center customer support [India] [may license]
WRO

• Breaking ‘glass ceiling’

Sourcing Selling



Outsource • Establish U.S. Subsidiary early
• software development [India] • US Sales support
• manufacturing [China] Asia [through Japan]
• Call Center customer support [India] [may license]
WRO


Sourcing Selling



Global Depends on Were you are Starting From

U.S. Start-up E.U. Start-up

Regional

Sourcing Selling


Technology Entrepreneurship 
The New Way Forwards EUR
Observations:
Criteria
US
Europe
Comparison
Comment
•  EU 2020 declaration highly
Economies in same
focussed (#1 issue) on GDP (2010)
14.66 T$
14.82 T$
Ballpark
innovation and
entrepreneurship. Europe invents
Domestic Patents +65% more (actually
•  Invention (ideas,patents ) (2009)
82000
135000
much more because no
SW patents in Europe,
is good, but CII)
commercialization is not. Europe only ~
•  Very low VC activity in EU VC activity
1/5th the VC
12.4 B$
2.6 B$
(1/5th US), huge equity (H1 2010)
GAP
•  Attitude of % of population US is 50% higher
that consider 67%
45%
entrepreneurship and entrepreneurship
failure not being an option US is 289% higher
% of Population
a big hindering factor. that become 13%
4.5%
•  Need to catch-up on some entrepreneurs
20+ years of % of population US 40% higher
entrepreneurship education that accept
possible failure in
75%
54%
•  Need to broaden where and a startup
how entrepreneurship is Trying to catch up
Entrepreneurship 20-25years of
taught Education since
1980 s
Early 2000 s
Education and
•  Need to get EU success attitude

rates (20%) close to US © innoVaventures ™
Programs in HE
and now starting
(30%).
Breadth (# types)
8
1-2
in K12

2. The Professional Entrepreneur,
The Entrepreneurial Venture


Cash
Flow

I II III IV

The technical The
innovation company

The business
innovation

Skills


Cash
Flow

I II III IV

The technical The
innovation company

Zone of Collaboration t
The business
innovation

Zone of Competition

Skills


The Importance of Teamwork


FOUR PERIODS of DEVELOPMENT


Cash
Flow

I II III IV

The technical The
innovation company

t
The business
innovation

Skills


Cash
Flow

I II III IV

The technical
The
innovationcompany

The business
innovation t

Attributes that characterize each Phase Needed: Technology Entrepreneurship
Entrepreneurship Skills
(MBA etc)

Skills

Period I: Pure Period II: Period III: Period IV:
Strategic Focus System Building Coporate
Entrepreneurship Management
Defining the concept What business aren’t Finacial Controls Hiring „outsider“
of the business we in?

Gathering Financial IMPLEMENTING the Stable division of labor Going Public
Resources business we are in!

Assembling the Knowing better than Reporting relationship Making acquistitions
startup Team ANYONE else: and authorities

Identifying What will people pay Developing systems of Adding the follow-on
customers internal control Products(s)

Analyzing the How many will they buy Formalizing the terms Shedding those who
competition of a sale can‘t keep up

Building the How to distribute Operational systems Formalizing the culture
prototype

Getting your first How to service the Production, Outsourcing Rationalizing the
customer customer strategy

Distribution, Sales

Service, Warranties *Source: Professor John Freeman
Professor Jerry Engel
UC Berkeley


Cash
Flow

I II III IV

The technical
The
innovationcompany

The business
innovation t

(MBA etc)

Skills

Defining the concept of What business aren’t Finacial Controls Hiring „outsider“
the business we in?

Gathering Finacial IMPLEMENTING the Stable division of labor Going Public

Assembling the startup Knowing better than Reporting relationship Making acquistitions
Team ANYONE else: and authorities

Identifying customers What will people pay Developing systems of Adding the follow-on
internal control Products(s)

Analyzing the How many will they Formalizing the terms Shedding those who
competition buy of a sale can‘t keep up

Building the prototype How to distribute Operational systems Formalizing the culture


Distribution, Sales

UC Berkeley


Cash
Flow

I II III IV

The technical
The
innovationcompany

The business
innovation t

(MBA etc)

Skills

the business we in?

Gathering Finacial IMPLEMENTING the Stable division of Going Public
Resources business we are in! labor

Assembling the startup Knowing better than Reporting Making acquistitions
Team ANYONE else: relationship and
authorities
Identifying customers What will people pay Developing systems Adding the follow-on
of internal control Products(s)

Analyzing the How many will they buy Formalizing the Shedding those who
competition terms of a sale can‘t keep up

Building the prototype How to distribute Operational systems Formalizing the culture

Getting your first How to service the Production, Rationalizing the
customer customer Outsourcing strategy

Distribution, Sales

*Source: Professor John Freeman
Service, Warranties Professor Jerry Engel
UC Berkeley


Cash
Flow

I II III IV

The technical
The
innovationcompany

The business
innovation t

(MBA etc)

Skills

the business we in?

Gathering Finacial IMPLEMENTING the Stable division of labor Going Public

Assembling the startup Knowing better than Reporting relationship Making acquistitions
Team ANYONE else: and authorities

Identifying customers What will people pay Developing systems of Adding the follow-on
internal control Products(s)

Analyzing the How many will they buy Formalizing the terms Shedding those who
competition of a sale can‘t keep up

Building the prototype How to distribute Operational systems Formalizing the
culture


Distribution, Sales

UC Berkeley


Cash
Flow

I II III IV

The technical The
innovation company

The business
innovation

Skills


3. Venture & Growth Capital


New Venture Funding Stream

$" Sales"
$80"

IPO" Cash "
$40" Flow"

$20"

$8"
$1"
time"

Venture Capital Rounds!


Structuring the Financing
The “Why” of multiple rounds

Value is a Step Function:

Value Technology/Product

Marketing

Management

Time


Adding Technology Value

Market Introduction
Regulatory Approvals
Value Manufacturing Prototype
Working Prototype
Patent Application
Feasibility or Prototype
Concept
Time


Adding Market Value

Backlog
Satisfied Customers
Market Launch
Beta Test
Value
Technical Reports Published
Surveys/Concept Testing
Qualitative Research (Focus Groups)
Market Analysis - Published Data
Time


Adding Management Value

Human Resources Mgr

Chief Financial Officer

Value Sales Manager
Manufacturing Vice President
Controller
Marketing Vice President
President
Chief Technologist
Time



I II III IV

Cash
Flow

Time


Valuation in Steps

Predictable
Scale Scale
Market Validated
Traction

Early
ValidationI II III IV

Concept
Defined

Time


Staged Financing

Predictable
Scale Scale
Market Validated IPO
Traction

Early
Series “n”

Series B
Concept
Defined
Series A
Seed

Time


Venture Capital

Investment Capital for Entrepreneurial
Ventures tends to clump
•  By Region
•  By Industry
It is important to encourage local investment in
Entrepreneurial Ventures


Perspective on European Market

Venture Investment, US & Europe
6000,0

5000,0
Investment ($millions)

4000,0

3000,0
Europe

North America
2000,0

Overall Investment
1000,0 US Venture
investment comes
back strong.
,0 Europe’s lowest for
Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1 5 years (632M$).
04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10
Quarter
Source: BLN Business Leaders Network



Venture Investment, Europe by Country
1400

1200
Investment ($millions)

1000 Israel

E Europe
800 S Europe

Ireland
600
Overall Investment N Europe

BENELUX
400
DACH

France
200
UK

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10
Quarter
Source: BLN Business Leaders Network


(Patent applications) Europe (135.000) versus US (82.000)
PART
A1-‐
Table
A1-‐1a,
Breakout
by
Country
of
Origin
Number
of
Patents
Granted
as
Distributed
by
Year
of
Patent
Grant.Granted:
01/01/1963
-‐
12/31/2009

Pre
1996
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
All
Years

Total,
U.S.
And
Foreign
Origin

2401288
109645
111984
147517
153485
157494
166035
167330
169023
164290
143806
173772
157282
157772
167349
4548072

-‐-‐
Subtotal
-‐-‐
U.S.
Origin

1497955
61104
61708
80289
83905
85068
87600
86970
87893
84270
74637
89823
79526
77502
82382
2620632

-‐-‐
Subtotal
-‐-‐
Foreign
Origin

903333
48541
50276
67228
69580
72426
78435
80360
81130
80020
69169
83949
77756
80270
84967
1927440

JAPAN

313267
23053
23179
30840
31104
31295
33223
34858
35515
35348
30341
36807
33354
33682
35501
761367

GERMANY

188840
6818
7008
9095
9337
10235
11260
11280
11444
10779
9011
10005
9051
8914
9000
322077

UNITED
KINGDOM

85906
2454
2680
3467
3576
3669
3967
3843
3631
3450
3148
3585
3292
3094
3175
132937

FRANCE

72160
2788
2958
3674
3820
3819
4041
4035
3868
3380
2866
3431
3130
3163
3140
120273

CANADA

43077
2232
2379
2973
3226
3419
3606
3431
3427
3374
2894
3572
3318
3393
3655
87976

TAIWAN

9245
1897
2057
3100
3693
4667
5371
5431
5298
5938
5118
6361
6128
6339
6642
77285

KOREA,
SOUTH

4649
1493
1891
3259
3562
3314
3538
3786
3944
4428
4352
5908
6295
7548
8762
66729

SWITZERLAND

38555
1112
1090
1279
1279
1322
1420
1364
1308
1277
995
1201
1035
1112
1208
55557

ITALY

26916
1200
1239
1584
1492
1714
1709
1751
1722
1584
1296
1480
1302
1357
1346
47692

SWEDEN

23939
854
867
1225
1401
1577
1741
1675
1521
1290
1123
1243
1061
1060
1014
41591

NETHERLANDS

22611
797
808
1226
1247
1241
1332
1391
1325
1273
993
1323
1250
1330
1288
39435

AUSTRALIA

9010
471
478
720
707
705
876
859
902
953
910
1325
1265
1291
1221
21693

ISRAEL

4861
484
534
754
743
783
970
1040
1193
1028
924
1218
1107
1166
1404
18209

BELGIUM

8628
488
515
693
648
694
718
722
622
612
519
625
520
510
594
17108

AUSTRIA

8656
362
376
387
479
505
589
530
592
540
463
577
457
464
503
15480

FINLAND

4844
444
452
595
649
618
732
809
865
918
720
950
850
824
864
15134

DENMARK

5026
241
333
392
487
436
479
426
529
414
358
439
388
391
390
10729

U.S.S.R.

6963
16
4
6
3
1
0
1
0
0
0
0
0
0
0
6994

CHINA,
PEOPLE'S
REPUBLIC
OF

528
46
62
72
90
119
195
289
297
404
402
661
772
1225
1655
6817

SPAIN

2797
157
177
248
222
270
269
303
309
264
273
295
268
303
317
6472

NORWAY

2890
139
142
198
224
248
265
242
262
243
220
244
247
273
265
6102

INDIA

493
35
47
85
112
131
178
249
342
363
384
481
546
634
679
4759

SINGAPORE

301
88
94
120
144
218
296
410
427
449
346
412
393
399
436
4533

CHINA,HONG
KONG
S.A.R.

845
88
81
160
155
179
237
233
276
311
283
308
338
311
305
4110

SOUTH
AFRICA

2614
111
101
115
110
111
120
113
112
100
87
109
82
91
93
4069

HUNGARY

2242
43
25
50
39
36
60
48
72
48
46
49
47
66
46
2917

NEW
ZEALAND

1106
52
85
114
114
107
124
140
135
142
122
136
113
105
127
2722

IRELAND

805
77
71
71
90
121
141
127
163
186
156
174
146
164
177
2669

RUSSIAN
FEDERATION

139
116
111
189
181
183
234
200
203
169
148
172
188
176
196
2605

MEXICO

1614
39
45
57
76
76
81
94
85
86
80
66
56
54
60
2569

BRAZIL

875
63
62
74
91
98
110
96
130
106
77
121
90
101
103
2197

CZECHOSLOVAKIA

2090
8
9
9
5
0
0
0
0
0
0
0
0
0
0
2121

ARGENTINA

698
30
35
43
44
54
51
54
63
46
24
38
37
32
45
1294

MALAYSIA

88
12
17
23
30
42
39
55
50
80
88
113
158
152
158
1105

LUXEMBOURG

567
18
22
20
22
40
33
37
35
44
41
33
38
24
36
1010

POLAND

626
15
11
15
19
13
16
11
17
16
23
29
32
54
35
932

Others
(142)

4862
200
231
296
359
366
414
427
446
377
338
458
402
468
527
10171

™
Sources: U.S. PATENT AND TRADEMARK OFFICE and EPO (European Patent Office)
© innoVaventures

Creating Value
The Individual Company Perspective


Growth Capital


Company Formation

Founders A, B and C each purchase 1M shares of Common Stock at a
purchase price of $.001 per share.

Person Shares % Total Value
Founder A 1,000,000 33.3% $1,000
Founder B 1,000,000 33.3% $1,000
Founder C 1,000,000 33.3% $1,000
totals 3,000,000 100%
Post-Money Valuation $3,000


Hiring a President/CEO
Creation of an Option Plan

The company hires a chief executive officer who purchases 1M shares of
Common Stock at a purchase price of $.01 per share. Additionally, in
order to attract additional key employees, the Company establishes an
employee stock option plan and reserves 1M shares of Common Stock
for issuance under this plan. The pre-financing valuation is $30,000.

Founder A 1,000,000 20.0% $10,000
Founder B 1,000,000 20.0% $10,000
Founder C 1,000,000 20.0% $10,000
President 1,000,000 20.0% $10,000
Option Plan 1,000,000 20.0% $10,000
totals 5,000,000 100%


Initial Venture Capital Round

$5,000,000 venture capital financing at a purchase price of $1 per share,
representing a pre-financing valuation of $5,000,000 (5M shares with a
value of $1 per share). The new shares are typical venture capital Series A
Preferred Stock, with each share of Series A Preferred Stock being
convertible into one share of Common Stock.

Founder A 1,000,000 10.0% $1,000,000
Founder B 1,000,000 10.0% $1,000,000
Founder C 1,000,000 10.0% $1,000,000
President 1,000,000 10.0% $1,000,000
Option Plan 1,000,000 10.0% $1,000,000
Series A Inv 5,000,000 50.0% $5,000,000
totals 10,000,000 100%
Post-Money Valuation $10,000,000


Series B Preferred Financing
Person
Founder A
$10,000,000 Series B Preferred Stock financing at a purchase price ofFounder B
Founder C
$2 per share, representing a pre-financing valuation of $20,000,000 (10M
President
shares with a value of $2 per share). Like the Series A Preferred Stock, each
Option Plan
share of Series B Preferred Stock is convertible into one share of Common Inv
Series A
Stock. Series B Inv

Post
Financing
Person Shares % Total Value Valuation
Founder A 1,000,000 6.7% $2,000,000
Founder B 1,000,000 6.7% $2,000,000
Founder C 1,000,000 6.7% $2,000,000
President 1,000,000 6.7% $2,000,000
Option Plan 1,000,000 6.7% $2,000,000
Series A Inv 5,000,000 33.3% $10,000,000
Series B Inv 5,000,000 33.3% $10,000,000
totals 15,000,000 100%


Initial Public Offering (IPO)

A total of 5M shares to be sold in the offering, including 3M shares sold by the
Company and 1M shares sold by each of the Series A and Series B investors.
Shares will be sold at a price of $10 per share, representing a pre-financing
valuation of $150,000,000 (15M shares with a value of $10 per share.)
Series A and Series B Preferred Stock automatically converted into
Common Stock. All shares sold in offering will be Common Stock.
Note that the interest of each founder has decreased from 33.33%
at the Company’s formation to 5.55% following the IPO. However,
the value of the interest of each founder has increased from
$1,000 to $10,000,000.
Founder A 1,000,000 5.6% $10,000,000
Founder B 1,000,000 5.6% $10,000,000
Founder C 1,000,000 5.6% $10,000,000
President 1,000,000 5.6% $10,000,000
Option Plan 1,000,000 5.6% $10,000,000
Series A Inv 4,000,000 22.2% $40,000,000
Series B Inv 4,000,000 22.2% $40,000,000
Public IPO 5,000,000 27.8% $50,000,000
totals 18,000,000 100%

Growing the Equity Pie

Predictable
Scale Scale
Traction

Series “N”
Early

Series B
Concept
Defined
Series A
Seed
Founder A 1,000,000 33.3% $1,000
Founder B 1,000,000 33.3% $1,000
Time
Founder C 1,000,000 33.3% $1,000
totals 3,000,000 100%


Predictable
Scale Scale
Traction

Series “N”
Early

Series B
Concept
Defined
Series A
Seed Person Shares % Total Value
Founder A 1,000,000 20.0% $10,000
Founder B 1,000,000 20.0% $10,000
Founder C 1,000,000 20.0% $10,000
President 1,000,000 20.0% $10,000
Time Plan
Option 1,000,000 20.0% $10,000
totals 5,000,000 100%


Predictable
Scale Scale
Traction

Series “N”
Early

Series B
Concept
Defined
Series A
Seed Founder A 1,000,000 10.0% $1,000,000
Founder B 1,000,000 10.0% $1,000,000
Founder C 1,000,000 10.0% $1,000,000
President 1,000,000 10.0% $1,000,000
Option Plan 1,000,000 10.0% $1,000,000
Time A Inv 5,000,000
Series 50.0% $5,000,000
totals 10,000,000 100%


Predictable
Scale Scale
Market Validated IPO Pe
Traction Fo
Fo
Fo
Series “N” Pre
Early Op
ValidationI II III IV Se
Se
Series B
Concept
Defined F
Series A Person Shares % Total Value
Founder A 1,000,000 6.7% $2,000,000
Seed Founder B 1,000,000 6.7% $2,000,000
Founder C 1,000,000 6.7% $2,000,000
President 1,000,000 6.7% $2,000,000
Option Plan 1,000,000 6.7% $2,000,000
Series A Inv 5,000,000 33.3% $10,000,000
Time B Inv 5,000,000
Series 33.3% $10,000,000
totals 15,000,000 100%
© innoVaventures
Post-Money Valuation
™
$30,000,000


Predictable
Scale Scale
Traction

Series “N”
Early

Series B
Concept
Defined Person Shares % Total Value
Series A Founder A 1,000,000 5.6% $10,000,000
Founder B 1,000,000 5.6% $10,000,000
Seed Founder C 1,000,000 5.6% $10,000,000
President 1,000,000 5.6% $10,000,000
Option Plan 1,000,000 5.6% $10,000,000
Series A Inv 4,000,000 22.2% $40,000,000
Series B Inv 4,000,000 22.2% $40,000,000
Time IPO
Public 5,000,000 27.8% $50,000,000
totals 18,000,000 100%

PARADOX OF POWER

Series A:
Power Manager for
of and with others
Founder/ IPO: Influential executive
CEO

I II III IV

Series B, etc. “Control”
Tipping Point

Zone of Freedom Zone of Management
Time


4. Opportunity Recognition


How to Evaluate a Deal from the Company’s
Perspective

Founder’s Issues
Employee’s Issues
Corporate Issues
•  Sufficient Capital
•  Freedom of Operation
Previous Investor and Creditor Issues
Etc.


How to Evaluate a Deal from the Investor’s
Perspective

Potential for Adequate Return
Opportunity for a Home Run?
Potential ‘Fatal Flaws’
Time Requirements
Follow-on Investment Requirements
Portfolio and Fund Compatibility
Etc.


Effect of Eleven Factors on Company
Valuation
Variables Lower Valuation Higher Valuation
Technology
•  Stage of Development Concept Product
•  Patent Status None Filed Issued
•  Time to Market Long Short

Market
•  Demonstrable Need No Yes
•  Size & Growth Small Large
•  Market Penetration Slow Rapid

Management Team Novice Tested

Financial
•  Profit Margins Low High
•  Total Capital Required High Low

Return on Investment
•  Potential Future Valuation Low High
•  Time to Liquidity Long Short


5. Open/Closed Innovation and
the Innovator’s Dilemma

Open Innovation
Henry Chesbrough
ISBN 1-57851-837-7

82

Open Innovation (Intro)

Obviously, talking about Open Innovation, there must be
something like „Closed Innovation“.
So lets first cover the „Closed Innovation Paradigm“

Research Development

Boundary of the firm

Research The Market
Projects

Source: Open Innovation
Henry Chesbrough

83


Assumptions of Closed Innovation:

• We should hire the best and brightest people, so that the
smartest people in the industry work for us.
• In order to bring new products and services to the market, we
must discover and develop them ourselves.
• If we discover it ourselves, we will get to market first
• The company that gets an innovation to market first will
usually win.
• If we lead the industry in making R&D investments in R&D, we
will disciver the best and the most ideas and will come to lead
the market as well.
• We should control our intellectual property, so that our
competitors don‘t profit from our ideas. Source: Open Innovation
Henry Chesbrough

84


Advantages of Closed Innovation:

• The logic of Closed Innovation created a virtuous circle.
• Companies invested in internal R&D, which led to many
breakthrough discoveries.
• Those discoveries enabled those companies to bring new
products and services to market.
• Because of those products they could realize more sales and
higher margins, which enabled them to spend more in internal
R&D, which led to further breakthroughs.
• And because the intellectual property (IP) that arises from this
internal R&D is closely guarded, others could not exploit these
ideas for their own profit.
Henry Chesbrough

85


Origin of Closed Innovation Paradigm:

• First started in the German Chemical Industry in the 19th +
20th century with the creation of a central research Lab.
• Copied by Thomas Edison in a US version, developed and
perfected a number of breakthroughs, and founded General
Electric‘s famed laboratory.
• Bell Labs discovered amazing physical phenomena and
harnessed its discoveries to create the transistor among its
many important achievements.
• US government created an ad hoc central reseach Lab to
conduct a crash project on nuclear fission, which led to the
development of the A-Bomb
• The cold war kept some level of Closed Innovation Source: Open Innovation
going.
Henry Chesbrough

86

Open Innovation Paradigm

Research Development
The New
Market
Boundary of the firm

Research The Current
Projects
Market

Henry Chesbrough

87


Assumptions of Open Innovation:

• Not all the smart people work for us. We need to work with
smart people inside and outside of our company.
• External R&D can create significant value; internal R&D is
needed to claim some portion of the value.
• We don‘t have to originate the research to profit from it.
• Building a better business model is better than getting to
market first.
• If we make best use of internal and external ideas, we will win.
• We should profit from other‘s use of our IP, and we should buy
other‘s IP whenever it advances our own business model.

Henry Chesbrough

88

Comparison: Closed / Open Innovation:

• Examples of Industries: • Examples of Industries:
nuclear reactors, PCs, movies
mainframe computers
• Largely internal ideas • Many external ideas
• Low Labor mobility • High Labor mobility
• Little VC • Active VC
• Few, weak start-ups • Numerous start-ups
• Universities unimportant • Universities very
important Source: Open Innovation
Henry Chesbrough

89

The Innovators Dilemma (Intro)

The Innovator‘s Dilemma
Clayton M. Christensen
ISBN 0-87584-585-1

90

The Innovators Dilemma (Intro)
The Impact of Sustaining and Disruptive Technological Change
P
Revolutionary
Innovation
Product Performance

Performance
Demanded At the high
end of the market

Performance
Demanded At the low
Disruptive end of the market
Technological
innovation

t
Source: The Innovator‘s Dilemma
Clayton M. Christensen

91

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