Despite repeated declarations by state officials about support and the need for the development of high technology, the real innovation activity in the Russian market is low. The introduction of new technologies of the generation of innovative companies startups – may allow if not to reverse, then at least to change things for the better. In this regard, such concepts as “startup factory”, “startup studio”, “serial entrepreneurship,” “innovation conveyor” are introduced into use. One of the main ideologists of the transition to new models of work is Denis Kovalevich, CEO and one of the shareholders of TECHNOSPARK Nanotechnology Center from Troitsk, which is a member of the network of nanotechnology centers of the Rusnano Fund for Infrastructure and Educational Programs.
Mr. Kovalevich, how TECHNOSPARK Nanotech Center corresponds to the model of the startups factory or studio?
In 2012–2013, during creation of TECHNOSPARK Nanotechnology Center in Troitsk, we immediately decided for ourselves that we won’t be engaged in search and selection of “ready” projects. Instead, we should decide which businesses to build, and choose for them the necessary technologies in the “market”. It should be noted that we are the first in the world who tries to implement this approach in the field of material technologies. A few startup studios operate in the internet industry, their experience is valuable, but not always applicable in the building of hardware companies. Naturally, creating a new type of business, we meet new problems and new opportunities. I would like to point out three groups of problems and the corresponding three areas of operation of our startup factory.
First, about half of our startups are “generated” by our own technology companies. I’ll explain how it works, on the example of the development of the logistic robot. The key issue for the success of such a robot in the market is the optimization of its design for mass production. That is, the objective is not to create a single example of device, but the ability to produce it in hundreds of thousand copies in a year with reasonable economy. Accordingly, the system of division of labor requires companies that can produce components for it. If, for example, it turns out that there are no inverters on the market that fit into a robot of our design, we create a company that begins to deal with them. And of course, it develops inverters not only for our robot but for any other robots and applications. Thus, any technological business opens the opportunity to step into other technology businesses, to see empty spaces in the chain of labor division and occupy them, and such niches always exist in new, emerging industries. Always there are more empty spaces than entrepreneurs. Because of this, as well as thanks to the operation of backoffice (accounting, financial, legal and other services), the engineers in our startups are extremely focused on their tasks. We call such a system a “hyperspecialization”. Each of many focused companies solve their tasks faster than one large, vertically or horizontally integrated company.
According to the well-known principle, the achievement of leadership in any field requires about 10 thousand hours. If with the usual organization of work, when a general engineer gets regularly engaged in new subjects and is burdened with the organizational issues, those 10 thousand hours are extended over 15 years, then with the “hyperspecialization” 5 years can be enough to achieve the same results.
The second area of development is linked to addressing the shortage of entrepreneurs – people who are willing to take the risk and to start businesses. Here we also try to use the specialization, dividing entrepreneurial activity into a few different areas just as management has once been divided. The goal is to make entrepreneurship a profession. Let me remind you that in the relatively recent past managers seemed to be unique talents, but now it is a regular profession, which you can learn at a certain expenditure of labor and without any special talent. The entrepreneurship must pass a similar evolution. To do this, we try to divide entrepreneurship into separate specializations, or the roles, which will be much easier to perform than to engage in a wide range of issues, as entrepreneurs had to do before. It is distinctive that each of people in our team alone is not Elon Musk at all, but together they create and develop new businesses, i.e. perform the entrepreneurs’ work.
The third area is linked to the problem of changing public perception of entrepreneurship. The number of entrepreneurs in Russia is catastrophically low compared to any technologically developed country in the world, and the few that work no matter what, are not a point of social reference. The vast majority of students dream to work in a large state corporation as a manager or engineer, that is, to become an executive. The share of those who want to do the work of an entrepreneur is very low. Partly, the image of the entrepreneurship was spoiled in the 1990-ies, when the business was connected mainly with trade. Society has forgotten that exactly entrepreneurs are the ones in charge of creating jobs and generating revenues. It is necessary not to remind about it, but to explain anew. Of course, this problem is the most severe of the three listed, and here our possibilities are quite limited, however, we are trying to restore common sense: developing and conducting a special business game on entrepreneurship, producing the magazine and publishing books, acquainting several thousand students with the nanotechnology centers each year.
Is it possible to start a business without initial capital?
The main capital of the entrepreneur is his time. Why technology startups are so expensive? Because the entrepreneur requires at least 15 years to cover seemingly the only right path from an idea to a market product. Our task is to reduce this period due to specialization and the division of tasks between many companies. Thus arose the metaphor of a “startup conveyor,” where each participant (we call him the “venture builder”) builds in parallel a dozen startups, and specialized infrastructure enables to do it ten times faster than in any other place. Thus, a mass production of technology companies is implemented on the scale of the nanotechnology center.
What is the fundamental difference between an entrepreneur and a manager?
The principle difference is that the very object and the function of management appear after the entrepreneur has finished his work. The entrepreneur creates a business, and a manager, e.g. director, takes this business as an object for management. Thus, they do not compete: one creates a company, the other grows and sometimes develops it. These are different professions, and it is difficult for a manager to become an entrepreneur, as corroborated by my personal experience. If a manager improves the already existing company based on the analysis of its structure and results, the entrepreneur creates a company structure from scratch, he has nothing to analyze and nothing to criticize. The entrepreneur must choose the technology, select personnel, create and run business mechanism, the managers are not able to do the listed above and they don’t need to know it, because it has never been included in the scope of their responsibilities and competencies.
Should the entrepreneur possess any special qualities?
Focusing on special personal qualities, we will never be able to make entrepreneurship a profession. Profession is something that you can normalize and reproduce in isolation from its specific bearer.
But it’s pointless to try to find a “norm of entrepreneurship” as a whole, try to reveal its secret once and for all. The only possible way towards a profession is to begin the process of specialization and division of entrepreneurial work. We currently split it into eight different jobs, including the business architecture, timekeeping, content-building, that is, the selection of technologies for a startup, building of partnerships and systems of cooperation, into which the future company will be integrated, and so on. In the process of accumulating experience concrete specializations can be formalized sufficiently so that people could learn them without being carriers of “a divine spark”.
What is the mechanism of building startups unless they grow out of the experience of previously created companies?
As industrial partners, we participate in several international consortia, which are essentially alliances of different engineering centers, aimed at solving technical problems that are relevant to a specific industry. For example, for the consortium in area of integrated photovoltaics, it can be the task of reducing the cost of functional coatings. Participating in the formulation of such problems, we see empty niches in emerging markets. In particular, in the field of integrated photovoltaic there are no such products as bank loan for construction of buildings with solar walls and roofs and there is also no insurance for such buildings. So, we could create startups for the development of appropriate banking and insurance products in order to sell them to banks and insurance companies that will work in this market. I would like to emphasize that these opportunities are visible due to the fact that we have been engaged in international cooperation in the field of industrial oriented research and development.
Another source of ideas is based on copying. For example, we have created a startup that develops logistic robots, after having learned that the Kiva systems, which used to be the only company in the world able to produce them in mass quantities, was acquired by Amazon, who have ceased the sales of robots for 5–7 years and specialized the company to fit their needs. This is signal about an interesting business market, where there really are places for new companies.
And finally, though not often, we create spinoffs. With a couple of groups of engineers from Institutes of RAS, we have created several startups, particularly in the field of laser and plasma technologies. There are cases of transfer to Russia of spinoffs created by European R&D centers, like we are doing to a company in regenerative medicine, originally created by the world’s largest microelectronic R&D center IMEC (Belgium, Leuven).
Does the risk increase when startups grow out of each other?
In our business model, the situation is contrary – the risks are reduced. For example, company that designs inverter for our robot needs to create other inverters and to sell them to other robot manufacturers. If the inverter was designed within the company that develops the robot, the risks of this business really would increase. Startups created on the basis of our experience do not have a rigid binding to each other, they are building their businesses being open to work with any customers. Thus, the creation of each company focused on the real objectives enhances the stability of business of the whole nanotechnology center.
What risks are estimated when you start a new company?
First of all, we estimate the risk of a false start, that is a situation when for some reasons the conditions for the launch of this business are not ripe yet. But even in the case of such a false start, we can temporarily “freeze” startup at a certain stage, and after some time return to its development.
What do you do if the technology used leads to a dead end?
None of our portfolio companies is bound to one specific technology. Technology for startups is also a variable element, alongside with equipment or a team of engineers. If the selected technology is not suitable for the task, then we opt for another. But the essense of the company’s business remains.
What’s the difference between building startups in the fields of material technology and IT?
The difference consists in time expenses. The typical duration of the cycle from the beginning of the creation of a startup to its sale is 5–8 years in IT, and in 2–3 times longer in material technologies. Startup studios working on IT projects have already cut the average production time for a startup down to three years. We must do the same in our scale of time, that is to reduce the cycle of the building of technology companies to 5–7 years. Of course, these are mean values, because objectively different time is required for different areas of material technologies. For example, a business in the field of genomics will be built objectively longer than a startup in the field of laser technology.
What is the criterion of success of a startup?
The main criterion is the suitability of the startup for sell. At the end of 2016, the entire network of nanotechnology centers of FIEP has sold 26 startups, some with a good yield, some at a discount, but the latter is inevitable in venture capital activities. Generally speaking, the first sale was planned no earlier than 2019, and the fact that the average age of sold companies is 2.5 years tells about the dramatic shortage of supply in the Russian innovation market. In 2015, in Russia according to statistics of the Russian Venture Company only 25 startups were sold, and this is a zero if compared to the world market, where about 2000 startups are sold annually.
What are the current tasks of the development of nanotechnology centers?
First, we want to use more effectively the possibilities of digital technology in our venture-building activities. This year we plan to approach the creation of figuratively speaking a 3D model of a startup, which will contain a detailed description of its activities: what decisions were made when and why, how we have assessed the market, how much have spend, what technological steps have done, etc. Such a model is necessary because startups are bought for the accumulated knowledge about the market and for the technologies that they have. A startup is not a car, its value increases with the length of the run. The buyer requires a transparent company to effectively integrate it into his structure. The creation of system for accounting, engineering, and business tracks is a very difficult task, which nobody has done before.
Second, we want to scale the model of nanotechnology center as a startup factory for that part of the network of nanotechnology centers of FIEP, which is ready to accept it. This task is also nontrivial. To simplify the understanding of the principles of our activities, we have developed a simulation business game “Build a company, sell a company”. The participants have to pass through the same typical stages, as the entrepreneur during building a startup. We will conduct such business games in St. Petersburg, Samara, Novosibirsk, Kazan, etc., where there are the nanotechnology centers, which intend to use venturebuilding business model as their primary one.