1.1.8. Technology Entrepreneurship

Hi, David Hsu here, covering a session on technology entrepreneurship. One interesting aspect of entrepreneurship in the technical realm is that, sometimes technical change or technology can give rise to entrepreneurial opportunities. Just to illustrate, we all know these examples well. The rise of the internet enables companies, like Google or Facebook to appear on the scene, or technical advances like the advent of recombinant DNA affords an opportunity that wasn’t otherwise there for companies, like Genentech to enter into the market. However, just because there’s a technical advance and recognition of that technical advance does not ensure that you’re going to be able to build a commercially successful company. There’s a host of other decisions that are quite important in determining such success. Things like business model design, the choice of resources that you bring to bear, your ability to recruit
key personnel, executives, the pace of entry and expansion. All these other types of decisions are quite important, not just the recognition of an entrepreneurial opportunity that’s afforded by technical advance in terms of predicting commercial success. Now, one thing that can help in addition is particularly in the technical realm when we talk about technology entrepreneurship, is to staff the founding team or early executives with people that have both commercial as well as technical expertise, because being at the frontier of both of those dimensions can help as well, and academic studies have borne that out. One thing that’s interesting and is in some sense is the silicon valley phenomenon, why is it the case that there tends to be extreme geographic co-location of our clustering of technology entrepreneurship? There are a couple of reasons for this. And just as indicators of this, a third of US venture capital flows to just two regions, Silicon Valley and the Greater Boston area. And you might wonder, why is that the case. Well, if you think about it from an orchestration standpoint, where the labor and capital have nowhere to focus, it’s in these regions where there’s a great deal of knowledge that’s important in birthing and involving companies hoping to exploit or commercialize a given innovation. To give just one specific example of this at the birth of the United States biotechnology industry, it was not a coincidence that all the early biotechnology companies were located geographically in the same places, where the frontier knowledge scientists, who at the time were all located in preeminent academic institutions, were located, because that’s where the specialized knowledge was. As the industry kind of evolved that geographic co-location, eased a little bit. But in the very beginning of the industry, it was no accident that there was this co-location between firms and knowledge centers. Just by way of giving some motivation in terms of the economic important of techno entrepreneurship. Here’s some statistics about private and public values. So it turns out that, of all the companies that have gone public in the 1980’s to 2013 time period, some almost 7900 companies, 36 of those companies were venture-capital backed. Now, venture-capital backed is not the same as technology-based entrepreneurship is, but that’s a pretty good proxy. And it turns out that 58% of all technology IPOs were venture capital backed.
And so, we know that certain anecdotes. Bill Gates, Steve Jobs, Mark Zuckerberg. These are all out sized personalities that are really, just
data points in terms of the influence of successful technology entrepreneurship. There’s also second order effects. Once you’ve created a highly successful technology company, that has all sorts of downstream effects. So for example Google, after it did its IPO, initial public offering, it spawned a number of individuals who were quite wealthy who then became angel investors, that is, individuals who were making private and individual investments in a host of other companies as well, as well known, the PayPal Mafia, in which executives, middle managers and even engineers at the old PayPal then went on to really become investors, founders and other key executives of other great companies. And, so I don’t have to mention Peter Reed Hoffman. These are all known and well celebrated ash mores that all fit in this mold. If you think about the technology life cycle, you could capturize the adoption curve with this typical s shaped check adoption curve. There are three distinct patterns associated with this curve. In the beginning, there’s a quite a bit experimentation. Experiments don’t go right, you put in a lot of effort without a lot of progress that explain rather shallow era ferment. Then things suddenly click into place, you’re able to come up with a design that appeals to the mainstream of the market, you get network effects that appeals to the mainstream. That really makes a product or service much more valuable, because of the size of the installed base. Think about Facebook, which is much more valuable just because all of your other friends are on the network. That leads to this period of take-off. And then finally, there’s a saturation point, whether because you’ve tapped out the social network, the people that your product or service could be addressable towards, or there’s physical limitation. The wind won’t blow any faster, so your sailboat is fundamentally. Constrained by the physical limitation of the sale. And so this is a typical pattern, in which technology evolves in commercial space. Now, there’s some challenges associated with those transition points from the era ferment to the takeoff period. And that particular transition point is really trying to appeal to the mainstream. You could develop a product or service that’s very niche. That really appeals only to the early adopters or the early innovator, but that’s not going to be good enough to really cross the chasm, as the well-known book by Jeffrey Moore is titled. To really appeal to the mainstream, and tap in to the,
really, the lion share of the market, what you might want to be thinking about, particularly more in technology settings, is how do you become a platform player? How do you induce those network effects that we talked about before, so that you’re much more likely to be the next LinkedIn. Or Facebook platform, and avoid being disrupted like the Friendsters or the MySpaces of the world. And what that takes are things like, really reducing the entry cost for complimentors to join your network. We’re really serving an underserved market space that’s been neglected by the industry in so that you can then become the next iTunes platform that is really adding real value. Now in terms of trying to get to where you can take out the value, because after all, there’s a supply chain or a value chain here associated with the value creation aspect of a typical technical innovation. And what you want to worry about as the innovator or inventor in this chain is, how large is the slice of the pie? And so let’s discuss what determines the size of the pie you get as one part of this value chain. So there’s essentially these two constructs. Bargaining power and market power. And to the extent that you’re able to increase your leverage as the inventor or as one part of this value chain, the larger is the size of the pie that you’re expected to get. Think about this as how unique are you in the competitive space of others that could enter into domain, and that in turn will shape how unique you are, and how much bargaining and market power that you have.
Now one of the drivers of market, if market and bargaining power really drive the size of the pie that you get as the inventor or any other player in the value chain, what shapes that power? Really three things, appropriability, can you control the knowledge that you’ve created? You have complementary assets that are important in taking out the value and enhancing your bargaining power against others that could also offer a similar function as you. And then, thirdly, the stage of industry evolution. And in particular is this concept of a dominant design. And modern dominant design would be the iPhone. Every smart phone after the onset of the iPhone, kind of has to look, have the features and functions of the iPhone. Before the iPhone, there’s many configurations and we could cover the same example as in the early days of the automobile industry. Before and after the Ford Model T. After the Ford Model T to be a legitimate car, it has to look like what we now know as a car. Before the advent of the dominant design, the Ford Model T, you have all kinds of experimentation and hypotheses as to what a car should look like. These three factors will shape the market in bargaining power of a participant along the value chain. Now, let me break up those three and go into a little bit more detail. Appropriability, what is it? If you can appropriate and control the knowledge that you’ve created from an invention, then you’re able to really steer that and control that knowledge for the use that you want it. To be used for. And it’s essentially, a method of uniqueness and controlling the knowledge that you’ve created through intellectual property. In other forms of protection, so that you can exclude others from coming in and replicating what you’ve done.
Now why in terms of the complimentary assets, the other parts of the organization, like expertise in manufacturing or navigating the regulatory landscape or marketing our sales. How can that be important? Think about a moment of disruption in an industry. There’s a new platform that comes in place. A new products that comes in place. Just to give you an example, drug discovery. Before the introduction of bio technology, done in a very traditional way. There was a period of ferment experimentation. There’s a takeoff period after which you’re appealing to the mainstream. And then, some saturation point in which the return is leveling off. Now comes biotechnology, a much different way of introducing
drug discovery, a way in which you have drug discovery. With the edit of bio technology, the industry and comments were actually shielded from the competitive pressure from bio technology. Even though the underline science was quite disruptive, why? It’s because the old pharmaceutical companies control the complementary assets, that is very difficult to navigate the regulatory landscape. In the United States, it’s the FDA, Federal Drug Administration, as well as marketing, that is, to the doctors that will inform how the ultimate consumers, the patients, will take the drugs. And because there was disruption at the level of drug discovery, but preservation at the level of the organizational complimentary assets, that was really quite important in shielding the pharmaceutical company, companies in their bargaining power. These are the new entrance to biotechnology companies in the face of a new way of discovering drugs, but not in the way that those drugs are consumed by the ultimate consumers. Finally, lets get to industry evolution. I talked about dominant design before, before and after a dominant design. And what’s important is if we overlay the other constructs that we talked about, uniqueness through appropriability as well as the role of complementary assets, what’s interesting here is at the beginning phases of industry evolution, that is the era of ferment, it’s very important to control the ideas, and less important. The complimentary assets in terms of taking out the value.
But, towards the era of saturation, the relative of these importance of these forces almost inverts. That is, it’s no longer that important who controls the ideas. But it’s quite important who’s, how, those products and services are being delivered through those organizational assets and complementary assets towards the end of the life cycle. So in conclusion, we’ve talked about how technology entrepreneurship could be a possible unique entry points. Moments of technical disruption, present entrepreneurial opportunities. There are a whole host of value appropriation considerations as you think, about how to earn returns from that innovation. Thank you.

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