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Innovation Ecosystems
Clare Fairfield
Key Terms
• Innovation• Venture Capital• Invention ≠ Innovation
Innovation
• Invention ≠ Innovation• Innovation Ecosystems must be Created• Education is the Framework for Developing
Sustainable Innovation Ecosystems
Venture Capital
• Term “Venture Capital” thrown around freely• Venture Capital is only a single element in an
extremely complicated system that is almost universally not understood or even recognized
• Often erroneously used as short hand for the concept of innovation or economically valuable innovation
• Common mistake is a singular focus on venture funds
• Deal Chasing vs. Deal Making
US 20th Century Experience as a Guide
• Learn from the successes and mistakes of US educational and investment innovation practitioners—failure is the best teacher
• Experience teaches that attempting to duplicate Silicon Valley/Boston is an extremely difficult proposition
• Understanding the evolution of the US system provides a development roadmap and a cautionary tale
6
20 Year Investment Class Performance (1985-2004)
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
The Once an Eagle Problem
7
The Paradox of Early Stage Returns Highest rate of return Hardest to execute Attracts ever increasing levels of investment in venture capital
resulting in: Declining ratio of professionals to dollars managed Relative decline in early stage investment activity Declining population of early stage venture capitalists Investors with a passion for being rich, not for developing people and
technologies Significantly larger deal size
Early Stage Investors vs. Financial Engineers Risk of Long Term Loss of Institutional Investor Support
8
Historical Realities
• Venture capital funding rate 1-2%
• Venture capital success rate 10-20%
• Venture capital failure rates 20-40%
• Investment IRR hurdle rates driven by these statistical realities
2,500 Business Plans
25 VC Investments
5 Wins
The Venture Fund Lifespan Funnel
10
2007 VC Investments By #
139
30
1,313
7 31
21
1
140
21
43
3
12
1
7
20
62
19
1543
8
19
43 55
54
8
59
762
140
162
7
18
7
MD 87
DE 3
CT 31RI 3
MA 356
NJ 76
3
DC 15
HI 4
74
1
NVCA Yearbook/Thompson Venture Economics
2
12
2
1
6
1119
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
070.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Venture Investing By Stage
Startup-SeedEarlyExpansionLater
Proprietary & Confidential 121996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
$-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
VC Commitments vs. VC Distributions1996 - 2007
DistributionsCommitments
Bill
ion
s o
f $
2007 NVCA Yearbook
Essence of Innovation
• Scalable Deal Flow• Deal Flow = Sustainable Sources of Quality
Investment Opportunities
Building Innovation Ecosystems
• Decades vs. Years• The political cycle does not match the
innovation cycle• The venture capital cycle does not match the
innovation ecosystem cycle• Deceptively easy to talk about—excruciatingly
difficult to execute• A systemic approach is the critical factor
Pitfalls to Avoid
• Short Term Focus on Job Growth• Focus on Short Term Investment Returns• Focus on Technology Value• Unrealistic Development Timeframes• Systemic Misalignment of Interests with
Financial Investors• Wishful Scaling
Innovation/Entrepreneurial Ecosystems
• Sustainable innovation systems will only appear within a robust ecosystem
• Investment in Technologies & Companies– Not enough by itself– A critical catalyst– Least important success factor
• Requires the simultaneous presence of all key innovation ecosystem factors
Essence of Innovation
• Deal Flow• Deal Flow = Sustainable Sources of Quality
Investment Opportunities
Systemic Approach• Coordinate Policy
– Government---Investors---Educators---Service Providers– Scientists---Corporate Execs---Entrepreneurs---Students
• Fund Size/Compensation Structure• Creating Quality Deal Flow
– Reduce Risk– Increase Success Rate
• Tech Transfer/Commercialization Policies• Government Support Programs• Full Spectrum Financial Support• Culture that Tolerates and Supports Failure• Service Provider Excellence
Education is the Foundational Activity
• A critical lack of knowledge and understanding exists at all levels of innovation systems across the globe
• Innovation & Entrepreneurship taught at all educational levels
• Institutionalized education and involvement of government, business, and academic policy makers and officials
• Support for education and operation of venture investors and innovation service providers
Education as Framework• Education is a Positive Wrapper• Produces sustainable infrastructure• Facilitates Accelerated Relationship Building
– Government– Investors– Academia– Business
• Applied Model Coordinated with Traditional Academic Model– Scalable– Flexible & Fresh
• Provides Platform for Ongoing & Regular Points of Contact & Interaction• Provides Workable Framework for a Global Model
Essence of Innovation
• Deal Flow• Deal Flow = Sustainable Sources of Quality
Investment Opportunities
22
The Value of Education
Undergraduate Graduate Combined
Number of Businesses Started 42 41 83
Success Rate 88% 93% 90%
Average Annual Growth Rate 57% 80% 69%
Average Age (Years) 4.2 5.2 4.7
Team Experience• Over 200 direct venture capital/private equity investments within multiple investment
funds and educational programs.• Founding investment in several of the world’s leading venture capital and private equity
firms including: Kleiner, Perkins, Caufield and Byers; Kohlberg, Kravis & Roberts; TA Associates; and Brentwood Associates.
• Creation of university-based entrepreneurial education programs and centers.• Professional venture industry educational program design and delivery. • Participation with the US Congress, the US National Science Foundation, the US
Department of Commerce and the US Small Business Administration in governmental innovation programs, investment programs and innovation policy formation.
• Exposure to and participation in international innovation and venture capital programs and development efforts in multiple countries.
• Startup operational experience. • Operational business experience. • Venture development legal experience.• International relations and international innovation activities.
