Innovation
Dublin's Web Summit 2014: Separating hype and reality
By Michael Hennigan, Finfacts founder and editor
Nov 2, 2014 - 1:04 PM

Printer-friendly page from Finfacts Ireland Business News - Click for the News Main Page - A service of the Finfacts Ireland Business and Finance Portal

The 3-day 2014 Web Summit is set to open on Tuesday (Nov 4-6) and the organisers of the immensely successful annual event expect record crowds that has prompted some hoteliers to raise Dublin prices 600% according to a media report. A 1000+ journalists are also expected to be at Dublin's Royal Dublin Society (RDS) conference centre and as usual with high tech, for those who haven't a vested interest, the challenge is to separate the hype and reality.

Among the featured speakers are two Irishmen representing Silicon Valley firms and one based in New York: 1) John Collison, president & co-founder of Stripe, a payment services company that is among the Financial Times' '25 Silicon Valley startups to watch,' which was published On Oct 31 2) Bono, the U2 musician, who is a managing director and co-founder of Elevation Partners, a venture capital firm and 3) Oisín Hanrahan, a co-founder of Handybook, which aims to make scheduling a home cleaner, plumber or handyman as simple as hailing an Uber car.

Last year Enda Kenny, taoiseach, said at the event: "Welcome to Ireland, the new capital of the digital world."

This year the European Commission published a ranking of Europe's tech hubs and Munich, London and Paris were on top with Dublin in 16th place.

This was a good performance for Dublin.

The Digital Hub Development Agency (DHDA) was established in 2003 by the Irish Government, with responsibility for the management of the Digital Hub. The Hub hosts about 70 companies employing more than 800 people and it claims that 170 companies (survival rate not known) have progressed through the enterprise cluster.

In recent times, the area of south inner city Dublin around the Grand Canal Dock - near the confluence of the Grand Canal, and the rivers, Liffey and Dodder - has been dubbed 'Silicon Docks' and several American companies, led by Google on Barrow Street and Facebook, Twitter, LinkedIn, Dropbox, venture capital companies and others, have opened offices in the area.

The use of the tag 'silicon' to evoke Silicon Valley is more a marketing label than reflecting a tech cluster as the companies do not generally do any research or development.

Their main functions are sales, customer support, general administration and data infrastructure. Most of the employees are from outside Ireland because of the demand for fluency in European languages.

According to an interview feature with John Herlihy, Google Ireland's chief, in The Sunday Independent, 71 nationalities are employed in Barrow Street and about 30% of the 2,500 total are Irish.

Paddy Cosgrave, co-founder of the Web Summit

The hype

Of course there are level-headed and grounded tech journalists but alas like Irish property journalists during the bubble, many of them confuse the ubiquitous hype with reality.

Even the normally reliable Economist lost the run of itself last January when it wrote of a 'Cambrian moment' triggered by the plunge in the cost of entry for high-tech startups:

It began its cover story called 'A Cambrian moment - Cheap and ubiquitous building blocks for digital products and services have caused an explosion in startups':

ABOUT 540M YEARS ago something amazing happened on planet Earth: life forms began to multiply, leading to what is known as the “Cambrian explosion”. Until then sponges and other simple creatures had the planet largely to themselves, but within a few million years the animal kingdom became much more varied.

This special report will argue that something similar is now happening in the virtual realm: an entrepreneurial explosion. Digital startups are bubbling up in an astonishing variety of services and products, penetrating every nook and cranny of the economy. They are reshaping entire industries and even changing the very notion of the firm. “Software is eating the world,” says Marc Andreessen, a Silicon Valley venture capitalist.]

Daniel Isenberg , a former entrepreneur who created the entrepreneurship ecosystem project at Babson Executive Education and previously taught at Harvard Business School, replied in The Economist:

THE distinction between tech and non-tech entrepreneurship is false. Today, every business venture, entrepreneurial or otherwise, requires technology to be competitive, whether it is diamond trading, transportation, construction, or energy. There is nothing intrinsically more technological about Twitter and Facebook, say, than about Harley-Davidson or American Express. In fact, medical devices and alternative energy are arguably more technology-intensive, generically, than any of the report’s wide-eyed examples. Furthermore, for any business, anywhere, ignoring the opportunities and necessities presented by technology is backing light speed into oblivion, and no different than ignoring the existence of electricity or cars. And research is showing that as many, if not more, social and economic benefits of entrepreneurship accrue from non-tech entrepreneurship and that the new public policy focus on startups may be badly misplaced."

Prof Isenberg said that many startups are not entrepreneurial and much entrepreneurship is not about startups and he cited Icelander Robert Wessman who came home from Germany in 1999 to save a small failing generic drugs company named Actavis and in a decade it was transformed from a firm with a payroll of less than 100 to 11,000 while doing little core scientific innovation.

Isenberg added that while there has been a jump in tech startups, it is not clear that the actual speed on the highway to scaling-up has been impacted at all. "In fact, the entire highway just may move more slowly as a result of the startup glut - - that is, firms that have the wherewithal to scale into socially and economically valuable ventures, may just be slowed down by the on-ramp traffic build up, the hype, and the valuable resources startups tie up."

Prof Isenberg concluded:

Scaling up is vastly harder than starting up. What is much more certain is that, as anyone who has tried, as I have, can tell you, starting up a venture is just the first baby step on a long hard trudge to scale up. But without the ability to scale way beyond start, all the blood, sweat and tears (and money) will be flushed right down the drain."

Billion dollar+ software companies founded since 2003

81 in North America, 21 in Europe and 35 in Asia (none in Latin America + Africa)

Atomico, the London-based venture capital group led by Niklas Zennström, Skype co-founder, analysed the 137 companies that reached the billion-dollar mark over the past 10 years.

Stockholm is in the lead in Europe with 5 x $1bn  companies

Explore the interactive

The reality and myths

It's striking how the tech industry has made the terms 'startup,' 'entrepreneurship' and 'innovation' synonymous with itself in public and policy settings in Ireland and elsewhere, with the help of politicians and the media.

Technological innovation is very important in the big economies while adoption and adaptability to change are crucial everywhere - the latter includes non-technical innovation and the purchase of technology.

Small economies should not aspire to become world leaders in technology - even in the UK, its biggest high tech company ARM Holdings reported in February 2014 that its processor technology was in 2.9bn chips that had been shipped in 2013, including ones used in smartphones and tablet devices but its global payroll was less than 3,000.

There is a trend for a small number of big transnational companies to dominate the key global business sectors and creative destruction is accelerating - the Japanese were once leaders in consumer electronics but no longer.

According to the Joint Research Centre (JRC) of the European Commission, over 50% of all US firms in the Top 1,000 global R&D spenders in 2009, were founded after 1975, in Europe the figure was 18% and in Japan just 2%.

Young companies are on average almost twice as research-intensive as old companies (3.3% vs. 6.1%) according to the JRC. This suggests that young companies are more likely to be found in research-intensive sectors.

The dataset analysed consisted of 287 companies from the EU, 340 from the US, 199 from Japan and 174 from other countries (OC) . 51 of the EU companies, 185 of the US companies, 3 of the Japanese companies and 87 from the companies from OC were young.

1) Venture capital is the exception, not the norm, as a funding source for even US tech startups. More VC-backed new companies fail than succeed, and since 1999 US VC funds have barely broken even.

Those are just some of the myth-busting facts that were revealed by Diane Mulcahy, director of private equity at the Kauffman Foundation, the leading US entrepreneurship think-tank, and a former VC herself, in the May 2013 issue of the Harvard Business Review (HBR), which focused on entrepreneurship.

"For someone who's starting (or thinking of starting) a company, the myths surrounding venture capital can be powerful," Mulcahy wrote. "In this article I will challenge some common ones in order to help company founders develop a more realistic sense of the industry and what it offers."

2) The failure rate of tech startups is estimated to be up to 90% -  while it is claimed in Silicon Valley that failure is no impediment to future success, that surely ignores the human toll on individuals and their families of effort and sacrifice going up in smoke, with nothing but debt and more to show for it.

3) We have often cited American and British research, which found that high growth firms - the ones that add most jobs - are not typically in the high tech sector and a report from McKinsey in 2010 said: "While many policy makers see innovative technologies as the answer to the challenge of job creation, our analysis indicates that governments are likely to be disappointed in such hopes.” See here.

4) Mariana Mazzucato, professor of science and technology at the University of Sussex, wrote last February on a blog of The Economist:

...once you take into account the number of SME jobs lost after the first three years of their creation, there is very little net job creation by these firms. Only 1% of new enterprises have sales of more than £1m six years after they start. Research at the University of Sussex shows that median sales of a six-year-old firm is less than £23,000 (Storey, 2006). These firms also tend to be the least productive and least innovative (R&D spending—the best measure we have for inputs in the innovation process—in Tech City (also known as Silicon Roundabout in East London) is not higher than in other parts of London or Britain). Indeed, the few high growth innovative firms (about 6% of the total SME group, Nesta, 2011)—those that really should be supported—do not directly benefit from the hype that surrounds SMEs and startups: once they get the funds these are too diluted to make a difference."

5) Bart Clarysse, professor of entrepreneurship, at Imperial College London Business School, in a public lecture in February 2009, exploded the myths surrounding the economic importance of high-technology startups to the Europe.

"People think of the big names like Microsoft, Apple, HP, Intel and Xerox as once being new tech-startups," said Prof Clarysse at the lecture. "Yet most of these highly successful companies did not develop their own ideas. Typically they took existing technologies, developed by pioneering - and sometimes financially unviable - companies. They bought other businesses to help them succeed and appear credible."

Real technology startups tend to grow slowly, have a poor survival rate and contribute little to the wider economy in economic terms. Compared to the US, European startup performance is poor. In Europe, after seven operational years these new firms comprised, on average, 18.5 employees with revenues of £250,000 and a mere 36% likelihood of surviving beyond 10 years.

In the UK in 2009 there were over 2,900 of these companies that had been in business since 1991. Despite spending over £2.5bn, they were responsible for only 40,000 jobs. "They don't become the new Microsoft," said Prof Clarysse, "They just stay micro."

6) A Kauffman Foundation report released last January highlighted the impact of education on rates of business startups and growth in metropolitan areas, while disputing the impact of certain factors that previously have been touted for their influence.

The paper, "Beyond Metropolitan Startup Rates: Regional Factors Associated with Startup Growth" reports on entrepreneurship activity in 356 US metros as examined from three angles: the startup rate for all industries, the startup rate for high-tech sectors and the rate for high-growth firms.

Contrary to the conclusions of most earlier studies, this regionally focused analysis found that the public sector can affect few significant factors to encourage entrepreneurship.

For example, despite billions of dollars in government research expenditures, which commonly are believed to trickle down to the private sector, area research universities and patents do not contribute to higher rates of entrepreneurship.

Education appears to be the most significant factor that the public sector may affect.

Metropolitan areas with more college graduates will produce more startups; however, while college completion often is considered the minimum indicator of high skill, the study showed that a higher high school completion rate will further increase the area's startup rate.

Thus, it appears that policymakers best can influence entrepreneurship by finding ways to effectively connect these two factors.

Further, the study revealed that:

  • Regions that enjoy substantial venture capital and other financial investments do not necessarily generate a higher ratio of startups. Consequently, a rush to create public venture funds holds little promise of generating more startups or establishing a startup culture;
  • High-tech sectors are hotbeds for high-tech startups, but not for all kinds of startups. Thus, promoting high-tech entrepreneurship does not necessarily elevate the overall economy;
  • Larger metros, not surprisingly, tend to have higher entrepreneurial rates, possibly because their economies are more diverse and resilient than those of smaller cities.

7) "Myth-busting Entrepreneurship," notes four commonly held beliefs and attempts to set the record straight.

  • Challenging the notion that small business plays the most important role in growing the economy, Dane Stangler, Kauffman Foundation vice president of Research & Policy, notes that the age of the firm is a more important variable than the size of the firm. "It's new and young companies that create most jobs and innovations, not necessarily small companies," he says;
  • He cites multiple studies that refute the popular stereotype that most entrepreneurs are 23-year-olds starting tech companies in their local coffee shop or their bedroom. "By and large," he says, "the 'peak age' for starting a company is in the mid to late 30s, early 40s";
  • Stangler warns against efforts to recreate Silicon Valley in the hopes of creating a hotbed of high-tech startups. "Silicon Valley is a very unique place that's never going to be replicated. We all need to stop trying to be a Silicon fill-in-the-blank, not just in the US, but anywhere around the world," he says;
  • More recently, Stangler and the research team at Kauffman have been examining the role of business incubators to launch early-stage companies. "Most research shows that incubators are not effective at all for actually producing companies," he says;

Stangler concludes by acknowledging the importance of harvesting more research to uncover myths and propose constructive alternatives.

What does Finfacts want?

In the period 2007-2013, 530 jobs were added in computer related manufacturing in Irish indigenous exporting firms.

3,750 jobs were added in services in ICT (information and communications technology), computer consultancy and programming. Not all these jobs involve high tech skills while about 10,000 jobs or 0.46% of the workforce are in firms supported by venture capital.

About 40% of Irish VC funding is provided by the Irish Government while including foreign firms, almost half of Irish-based ICT staff are in administration functions, according to research by Gartner of the US.

We view it as a foolish policy to rely on scientific research to produce a jobs engine - that is not to argue that Ireland should not engage in such research.

Last December, the Department of Jobs, Enterprise and Innovation told Finfacts:

Minister Bruton and the Department of Jobs are unashamedly ambitious for the potential of scientific research in Ireland to support economic growth and job-creation in Ireland. In recent years we have improved our ratings for basic research to the point where we are now very competitive internationally - the challenge now is to achieve greater returns in terms of commercial outcomes and jobs from this research."

The minister is "unashamedly ambitious" but wonder why the annual patenting data doesn't merit a ministerial comment?

The spending of an inflation-adjusted €24bn on public science policy in a decade merits some evidence rather than official spin.

The current official target "in which Ireland in 2020 is the best country in the world for scientific research excellence and impact," could be achieved with a lot of resources and we could have at least one world class university but the Irish could still remain among the poorest in the Eurozone along with Italy, despite a high GDP (gross domestic product) per capita.

In a 2013 study of 30 countries, Ireland ranked last for business support of university research.

Austria, another small European economy, has Europe's lowest unemployment rate at 4.7% and the rate has been low for decades.

In the latest Times Higher Education World University Rankings, Austria's University of Vienna is at 182nd while according to the OECD's 'Education at a Glance 2014,' in 2012 at 22%, the number of 25-34 year olds with a university degree was the lowest of the developed world and compared with 66% in South Korea and 49% in Ireland - the last South Korean president decried the obsession with getting a university degree.

Austria like Germany has a well-established apprenticeship system that has dual work-education learning.

Computer coding is a growing area of jobs demand in the US and elsewhere while the function is essentially a trade. However, four-year computer science college degrees are a standard requirement for the job but not alone is this unnecessary, the high demand for places means that many young people with potential cannot enter the sector.

In 2012, Richard Bruton, enterprise minister, said "our industrial policy must not just be aimed at attracting the next Google or Microsoft to Ireland – we must strive to create the next Google or Microsoft here in Ireland."

It's of course foolish to compare the domestic US market with the tiny Irish market: overseas exports success usually is preceded by building experience in a domestic market.

In March 2010, the Innovation Taskforce report, of a 28-strong group of mainly insiders, to meet then taoiseach Brain Cowen's aspiration of creating a European Silicon Valley in Ireland , had a vision of up to 215,000 science and technology jobs being added in a decade to vault over the original Silicon Valley to become the world's top tech cluster - at end 2013, IDA Ireland client companies employed 161,000 - 55 years after T.K. Whitaker's seminal 'Economic Development' report.

What Bruton and others fail to realise is that any Irish startup with potential and venture capital funding would be sold to a foreign firm before Ireland could reap a return.

Google has acquired about 150 startups since 2004.

There should be a public input to R&D funding but it shouldn't be based on hunches.

Less than one-third of the client companies of IDA Ireland, the inward investment agency, do even minimal research in Ireland and big US firms such as Microsoft and Intel prefer to locate R&D centres in Israel.

The agriculture and food sector has been left tick over for decades with its dependency on payments from Brussels. It is the sector with the greatest value added potential.

Focus on Irish food industry's bigger potential than chemicals or high tech

Enda Kenny's claim that Ireland is the capital of the digital world is an empty boast when it mainly depends on foreign firms - which on the services side have a bias towards locating administration functions in Ireland.

Innovation is a strong contender for the crown of business buzzword of the decade and it's inevitable that starry-eyed politicains would fall for the hype.

However, politicians can be blind to the fact that the success of McDonald's and Starbucks depended on innovation while firms like Uber, Handybook and Facebook piggybacked on technology produced by others.

Rather than waiting for eureka moments in laboratories there is no Irish business sector that cannot benefit from startups using innovation to gain market traction.

Just over a decade ago, three Irish companies, Elan founded in 1969; IONA Technologies founded in 1991, and Parthus Technologies, founded in 1993, were international stars in the high tech and pharmaceutical sectors. Elan was the 20th most valuable drugs firm in the world. IONA by 2000 had "4,500 customers and partners (including numerous Blue Chip clients), and over 900 employees in 30 offices worldwide," for its business integration software while also in 2000, the London Independent wrote: "Few people in Brian Long's local know what he does for a living. In fact, most people in his native Dublin are barely aware he founded and owns 23% of a $2.8bn company blazing a trail with silicon-chip design just three months after floating on the London Stock Exchange and America's Nasdaq. The rise of Parthus Technologies has been remarkable, even in a sector noted for its hi-tech shooting stars, but its success has gone nearly unnoticed in its home city. Last week alone, shares in the company, which develops semi-conductor intellectual property for mobile devices, rose almost 50%, which doubled the new company's market capitalisation."

There were others as well who were doing business overseas - Smart Force and spin-off Riverdeep, Cognotec, Trintech, Baltimore - what they had in common was that they were either acquired by overseas firms or went bust while the Irish operations of the survivors faded or disappeared.

Last year Elan was sold to a US firm after transforming itself into a financial shell.

It doesn't appear that policy makers have learnt from this history while aspiration trumps evidence.

In summary:

  • A policy should be based on evidence not aspiration;
  • When the 2010 Innovation Taskforce said that up to an additional 215,000 science and technology jobs could be added in Ireland by 2020, it was based on faith not a realistic assessment of the evidence;
  • The area around Cambridge University in the UK, known as Silicon Fen is Europe's oldest high-tech cluster. It has about 50,000 high-tech jobs in 1,400 firms in the cluster after 40 years - 60% employ less than 10 people and only about 2.5% of firms employ more than 200 people;
  • Investment in scientific research should not be tied to commercial outcomes;
  • Invention is not innovation and the commercial potential of university research is necessarily incidental. According to a Brooking Institution paper published last year: "In 2012, a year very much in line with the ten-year trends in this sector, the top 5% of earners (8 universities) took 50% of the total licensing income of the university system; and the top 10% (16 universities) took 70%, nearly three-quarters of the system’s income;"
  • Even when there is a scientific breakthrough at the University of Manchester such as the one atom "miracle" material known as graphene in 2004, it's not obvious that the UK can benefit from its commercialisation;
  • It took the biotech industry in the US more than 40 years to produce a profit but then only because of the performance of its 3 biggest firms;
  • The pioneers in high tech are seldom the firms that prosper - think of Apple, Microsoft, Google and Facebook;
  • Research in the US and UK shows that high growth firms are not typically in high tech;
  • High tech startups but no local scaleups is not a viable policy;
  • In 2007, Danny Breznitz, then a professor at the Georgia Institute of Technology (the Georgia Tech) said on a visit to Ireland to provide advice to Enterprise Ireland, the State's enterprise agency for indigenous firms in the internationally traded sectors, that Ireland's research infrastructure was too narrow in its focus and may not be sustainable. He said Ireland was not creating enough new businesses, and when new businesses are set up, the financial supports were not there to keep them innovating - Breznitz feared that Irish research was too narrowly focussed on biotech and the ICT (information, communications and technology industries). He said that if a country wants sustained economic growth it has to focus on innovation, not only on the research side but on the commercialisation and the growth of productivity. In April 2014 Prof Breznitz wrote in The Economist: "Startups are a great start, they cannot be the goal;"
  • In a 2013 study of 30 countries, Ireland ranked last for business support of university research and the taxpayer picks up most of the tab for public sector-industry collaborations;
  • In Ireland there is a lack of critical assessment of enterprise policy in the Oireachtas (Parliament) while measurement of outcomes is limited.

Related links:

August 2015: Most surviving startups do not grow; Tiny number powers jobs engine

May 2015: Sales of Irish tech firms create 300 millionaires in 15 years and no scaleups

Feb 2015: Israel's Startup Nation not a jobs engine; Nor is Irish high tech

Many high growth firms either fail or fade - Part 1

Top 1% of entrepreneurial firms in 10 countries account for 40% of job creation among startups

Entrepreneurship: Are clusters within city-regions needed for innovation?

Imbalance in focus on tech and non-tech entrepreneurship in Ireland & elsewhere - Part 1

Up to 90% of US high tech startups fail; System of failure by design? - Part 2

Ireland: Why not a prize for failed entrepreneur of the year? - Part 3

Irish Innovation: Israel as Startup Nation, why not Ireland? - Part 2

Declining regular work; Rising low-paid freelancing in Ireland & elsewhere - Part 1-4

Young and jobless? The solution isn’t always university

Q1 2011-Q2 2014: Irish employee jobs up 21,000; 130,000 part-timers seeking full-time work

Irish Economy 2014: Numbers on Live Register + public schemes at 447,000 in October - 20% of workforce

Japan's Labour Market: Lifers, temps and banishment rooms

South Korea: A rich/ poor country - grim model for future world of irregular work?

German living standard highest in Europe; Irish, Italians, Spanish among Eurozone's poorest

IMF says 70% of new employment contracts in Italy are temporary


© Copyright 2015 by Finfacts.ie