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Apr. 2015
Business
I
nnovation is the key driver
of economic growth
and all modern development in the world. All
growth in the last 250 years is based on inno-
vation. Just 250 years ago, 85percent of the world
population lived in extreme poverty, with less than
1.25 USD a day. Free-enterprise capitalism has created
prosperity not just for a few, but for billions of people
everywhere. Now 20percent of the world population
live still in extreme property. Therefore, the millenni-
um goals of halving the number of people who live in
extreme poverty by 2015 have been overachieved.
The process of innovation involves complementary
contributions from scientists, entrepreneurs,
financial
markets, investment communities and government.
The driving forces for innovation are knowledge,
entrepreneurs and risk-taking investors.
The role of knowledge and entrepreneurs
At the heart of innovation is knowledge. Inspired
talent is the engine of innovation.
The highest growth
rate in enrolment of tertiary education is now in Asia,
with the exception of Central Asia. The region is best
exemplified by China, which has not only expanded
its higher education extensively, but has enlarged its
research system as well. More knowledge and better
understanding of the role of the human factor are criti-
cal in the innovation play.
Driving Forces for
Innovation
By
Peter Jungen
Knowledge,
Entrepreneurs
and Investors:
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We shouldn’t worry innovation gets used up. There
is no empirical evidence for that. For instance the dig-
ital revolution is just at the beginning.
On top of that,
there are billions of innovators coming to markets, as
the world will soon have 7 billion people.
Yet new knowledge alone does not create innova-
tion. Invention and innovation are linked by entre-
preneurs. Entrepreneurs push innovation. It’s the use
of new knowledge which allows the combination of
new methods of production, creation of new products
and of new services. Schumpeter called it “creative
destruction”—creating the new and replacing the old
structures.
Entrepreneurship is about idea creation, defining
a business model, spelling out a revenue model, start-
ing a business, developing the business, financing the
business and growing the business fast.
At the heart of entrepreneurship are fast growing
start-ups. The majority of start-ups fail. 70percent of
start-ups don’t make it past the first five years. How-
ever, fast growing start-ups
are the key to economic
dynamism and job creation. According to the Global
Entrepreneurship Monitor, in the last couple of years
China was the country with the largest contribution
of employees being hired by start-ups that have been
created in the previous five years.
Financing as a key
The financing of new ventures is the other key to
innovation. Venture capital is indispensible.
The venture capital industry in Europe is very
underdeveloped compared to the United States. For
instance in 2013, venture capital in the U.S. grew to
almost 30 billion US dollars, but unfortunately in Eu-
rope the figure was flat at about 3.5 billion dollars, the
lowest in the last 10 years. The US has a bonanza in the
first part of the year of 2014 —Silicon Valley alone has
invested more than the EU. Silicon Valley basically is
Santa Clara County with about 2.5 to 3
million people
investing about almost 40 percent of US venture cap-
ital, i.e. 12 billion, which is about 2.5 times as much as
the EU.
In Europe, many start-ups are still financed by bank
loans instead of equity. We have to resolve this loan vs.
equity issue because it is important for the economy
where capital is invested. It is to finance innovation
rather than, for example, just to finance property as
there are substantial differences in the outcome.
20 percent of the revenues of US firms are from VC
backed firms. VC-backed firms have created about of
11 percent all jobs in the United States. Employment
and revenue growth were strongest by VC-backed
The process of innovation involves complementary
contributions from scientists, entrepreneurs, financial
markets, investment communities and government.
However, in the end it must be realized that innovation
does not rely on government. Innovation must be allowed
to progress in an unhindered, but integrated way.
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firms. The EU Commission report states that the VC
industry is much smaller and younger than in the U.S.,
and that it has a supply shortage as well as a demand
shortage at the same time, which is very precarious.
The vast majority of VCs in Europe are relatively small
with little experience and are not on the institutional
investors’ radar screen.
While the number of funds in the U.S. is increasing
again, the number of funds in Europe is decreasing.
The U.S. has more than 600 funds with a volume of
more than 100 million US dollars. The
comparable
number in Europe is about 30. Germany has only 6 of
that size.
In the first half of 2014, fund raising of the venture
capital industry achieved the highest level since the
first quarter 2001. Europe is flat or decreasing. On top
of that, the percentage of public funding in the Europe-
an venture capital is consistently increasing. In 2007,
it was only 15 percent. It is now almost 40 percent. In
Germany it is more than 50 percent.
Angel investment is even more important for fi-
nancing innovation than venture capital– after boot-
strapping and 3F-Money: Family, Friends and Fools.
According to the “Center for Venture Research”, angel
investment in the U.S. in 2013 was about 25 billion
dollars, invested in 70,000 start-ups by 300,000 an-
gels, of which the majority is seed money. The venture
capital industry always believes that seed capital is
very important as long as they do not have to provide
it and it is provided by others—in this case by angel
investors.
Business angels are uncovered, under-researched,
underestimated, unknown, undervalued and over-
taxed. In the U.S., 60 percent to 70
percent of all tech-
nology-based start-ups will be financed by a business
angel. Business angels invest entrepreneurial experi-
ences, their networking contact and capital. Usually
they are entrepreneurs who either started or ran a
business. If they sold out they are cashed-out entrepre-
neurs.
Business angel investment is pretty risky. As most
start-ups fail, most angel investments also are unsuc-
cessful. Usually 3 or 4 out of 10 exit through write-offs,
3 or 4 are living dead, and maybe only 1 or 2 end up
being successful.
If you want to have more start-ups, you need more
angels. The reason is that they not only finance but
also invest their entrepreneurial experience. Empiri-
cal studies show that angel-financed start-ups have a
much better chance to survive. The combination of an-
gel-funded plus VC-funded
start-ups have the highest
rate of survival. We see more and more professional
angels, professional angel networks and so-called
“super angels” who more and more take on the role of
smaller venture capital funds. Where venture capital
funds have left in the areas of single-digit investments,
super angels and structured angels networks have
come in.
Venture capital investment per capita including an-
gel investments in the U.S. is now about 150 dollars, in
Israel 250, a real start-up country in the world. In the
first half of 2014 in Israel, venture capital investment
per capita was about 500 dollars, and EU continued to
be flat at 10 to 12 dollars. In the Eurozone it was about
5 dollars.
The effect of financing of innovation could also be
studied on the top 500 largest companies in the world
today in the last 30 years. 30 of top 500 were founded
in
the ICT Industry, mostly in the United States, only
3 in Europe. This explains the surprise of many politi-
Business
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