Creating the Next Silicon Valley

Creating the Next Silicon Valley – The Chilean Experiment Steve Blank, SteveBlank.com Jan. 4, 2011, 9:00 AM 8 facebook coach online outlet coach online outlet coach factory outlet online linkedin twitter email print Steve Blank Steve Blank is a retired serial entrepreneur with over 34 years of experience in high technology companies and general management as a founder and executive. He is on the faculty at Stanford. Recent Posts Here's what happened when I was asked to lie on my résumé Here's what happened when I was asked to lie on my résumé How To Get Meetings With People Who Don't Have Time For You I spent two weeks of December in Chile as a guest of Professor Cristóbal García, Director of EmprendeUC at the Catholic University of Chile, which just signed up a 3-year collaboration partnership with Stanford’s Technology Ventures Program. I did a keynote on innovation hubs at the newly created DoFuture program, spoke at Santiago’s Startup Weekend on Customer and Agile Development, and at a Conference in Patagonia supported by the Ministry of Economy’s Innovation Division. I got smarter about the world outside of Silicon Valley, met some wonderful people who made me feel part of their family and shared some thoughts about entrepreneurship. This post is a personal view of what I saw in what I call “Chilecon Valley” — in no way does it represent the views of the fine institutions I teach at. Read this with all the usual caveats: visiting a place for a few weeks doesn’t make you an expert (heck I’ve lived in Silicon Valley for over 30 years and I’m still surprised), I’m not an economist, and the odds are I misunderstood or misinterpreted what I saw or just didn’t see enough.Creating the Next Silicon Valley – The Chilean ExperimentChile has decided that it wants to be an innovation hub in South America. In my short time in Chile, I spent time meeting with: Chilean entrepreneurs; as part of Santiago’s Startup Weekend as well as EmprendeUC-DUOC New Ventures Contest Awards ceremony. The government; the Innovation Division of the Ministry of Economy, the Chilean Economic Development Agency, (CORFO) which sponsored Start-Up Chile and Do Future in Patagonia as well as Fundacion Chile, the main R&D agency and the National Innovation Council. Universities; including the business, design and engineering schools in the Catholic University of Chile who are hard at work teaching and encouraging their students to think big and to start companies. Independent non profits such as the Innovation Forum, encouraging entrepreneurship and innovation in education. The good news:Entrepreneurship and innovation is being talked about continually in Chile. This isn’t some small-time effort. The country is dead serious in all levels of government and universities about making this happen. They’ve been thinking hard and smart about the lessons to be learned not only from Silicon Valley, but with only 16 million people, they are also looking for lessons from other small innovation clusters such as Israel, Singapore and Finland. These countries are great models of countries too small to sustain startups of scale on just domestic consumption yet have managed to create innovation with a global reach.What needs work:As an outsider I was incredibly impressed with how far Chile has progressed in making the country an innovation hub. However I had questions about the challenges that still needed to be addressed.Venture CapitalPerhaps it was just who I was meeting, but for a country so focused on innovation and startups the lack of venture capitalists was noticeable. Given the interesting things going on in the engineering labs I visited and the startups I met, one would have thought the place would have been crawling with VC’s fighting over deals. Instead it felt like the government – through CORFO - was doing most of the risk capital investing. Given that great VC’s are much, much more than just a bag of money, this means that startups lack experienced board members with practical experience. There seemed to be very few who knew how to coach entrepreneurs and to build companies. Finally, it wasn’t clear if everyone was on the same page; that for a Chilean startup to scale it was going to have to reach past Chile and go global. There seemed to be few tools, techniques and strategies to do so. A sign of progress will be when some of the CORFO guys leave the government and start their own VC firms.Corporate ConnectionsEntrepreneurship in Chile seems to be disconnected from the country’s largest industries and core resources. The clearest example is the country’s copper mining industry, which contributes 20% of the Chilean Gross Domestic Product. (Chile produces 35% of the world’s mined cooper.) The largest company, the state-run Chilean National Copper Corp CODELCO, has $23 billion in sales. Yet the copper companies import nearly 100% of the advanced technology they use. Interestingly, CODELCO is required to contribute 10% of its revenues to the armed forces, but the mining industry seems to have coach outlet sale little or no connection with innovation and entrepreneurship efforts in universities and startups. (Perhaps it’s because the Ministry responsible for Mining is separate from the Ministry responsible for the Economy and Innovation.) I suggested that Chile’s mining industry could contribute to building innovation leadership by funding a multi-tiered initiative in the country’s leading universities: Professional management training (obvious and immediate payback) Applied engineering (top 10 annual challenges from the mining companies) Basic research (copper based materials science, robotics, materials handling) Small Business versus coach online outlet Scalable Startup versus Corporate EntrepreneurshipThere’s confusion in both the Government and Universities about the difference between small business entrepreneurship (startups designed to be family businesses,) scalable startup entrepreneurship (startups designed from day one to scale big inside Chile and then expand globally) and corporate entrepreneurship. I suggested that they think about educating (and funding) each class of entrepreneurs differently and realize different regions of Chile have different needs.  In Santiago the concept that startups are not smaller versions coach online outlet of large companies and traditional business school classes and methods don’t apply, is starting to take hold and will help shape how they educate entrepreneurs. In contrast, over lunch with the governor of Ultima Esperanza (the “Last Hope” province on the Southern tip of Chile,) it became clear that there’s a pressing need for training and education in small business entrepreneurship, dramatically different then the scalable startup education wanted in Santiago. These three types of entrepreneurship need to be explicitly recognized, encouraged and managed.A Magnet For TalentMy sense is that Chile has not yet “declared a major.” Saying that you support entrepreneurship and innovation is a start, but the sentence needs to be finished. Entrepreneurship and innovation in what field?  Where will Chile establish technical and innovative leadership?  Is the only way they will attract talent by paying entrepreneurs to come to the country? Or will students and entrepreneurs come to Chile because it is one of the best places in the world for innovation in certain specific industries (pick your favorite – alternative energy? materials science? food science? cellulose outputs? video games and film? South American web commerce hub? automated mining? UAV’s? etc.) Already there are multiple centers of excellence in the engineering schools in Santiago with strong entrepreneurial professors. Yet no dean, provost or government minister seems to want to issue a declarative sentence that says, “For the next five years we’re going to focus on building world-class leadership in these three areas.” (Perhaps because the cost of a public failure is so high in Chile. See below.) I suggested that what seems to be missing is a stated goal for Chile to become a magnet for talent in specific domains. Why will people from South America stream to Chile, besides its magnificent geography?  In what fields will Chile’s universities and entrepreneurial culture create such an irresistible pull? A Culture that does not accept failureChileans I met were concerned that their culture was not accepting of business and/or personal failure. This is not the land of second chances where failure means you are an experienced entrepreneur. Partially due to a lack of bankruptcy or commercial courts, the bankruptcy process in Chile is draconian. In discussions with accounting and financial professionals, I learned that getting caught up in it feels like a Dickens’s novel, it can take years to shut down a company. In addition, in Chile the cost of personal failure is high. If you fail, you’ve failed your family, your community and your country. As a result, societal pressures favor people who avoid risky ventures. Because its entrepreneurs are unlikely to make commitments or definitive statements which they know might be risky, i.e. “we’re going to be a leader in our market” or “our startup will be $100 million in five years,” Chile can’t foster the “reality distortion field” that underlies a dynamic entrepreneurial culture. I suggested that perhaps using a science analogy could help change Chilean perspectives about the risk and experimentation it takes to build new ventures. Entrepreneurship and incubators could be described as an “Innovation Laboratory”  - similar to a scientific laboratory where entrepreneurs develop and test hypothesis (iterative guesses) about new business models. And like science, starting a new venture is not a linear process but one that involves failures, dead ends and changes in direction.Lessons From the Valley At one of my presentations the audience was a mix of deans of multiple schools at Catholic University, government officials from the Ministry of the Economy, active entrepreneurs and students. I offered that Silicon Valley’s rise was serendipitous, that you can’t reverse engineer an accidental Entrepreneurial Cluster formed in the Cold War. However, we can point out the elements that made our valley successful, and point out the ones that may be helpful in Chile; the role of Universities and defense-driven university R&D, the rise of venture capital, a failure-tolerant culture and the emerging science of entrepreneurial education. Slides 22, 36, 97 and 117 are the key points.Come To Chilecon ValleyIf you’re serious about understanding centers of entrepreneurship outside the U.S., Chile is now one of the required stops. The progress in the last few years has been nothing short of outstanding. I’ll be back. Lessons Learned Chile is trying to engineer an entrepreneurial cluster as a National policy They’ve gotten off to a good start with a committed Ministry of the Economy The universities are on board with passionate faculty and excited students The country needs to build a deeper Venture Capital industry Chilean core industries need to view entrepreneurship as an asset, and technological innovation as an opportunity to leap forward Second chances are hard to come by in current Chilean business climate and culture Filed under: Teaching, Venture Capital Read the original article on SteveBlank.com. Copyright 2011. More from SteveBlank.com:The Innovation Insurgency Scales – Hacking For Defense (H4D)Entrepreneurs are Everywhere Show No. 41: Chris Schroeder and Andy CunninghamEntrepreneurs are Everywhere Show No. 42: Sunny Shah and Curt Haselton

Earnings: Beyond That Big Fourth-Quarter Spike

Earnings: Beyond That Big Fourth-Quarter Spike Editor's Note: This is an updated version of a story that originally ran on Jan. 11. Although corporate profits in the fourth quarter will likely be dramatically better than a year ago, CEOs aren't pounding their chests yet. coach online outlet Most chief executives acknowledge that the fourth quarter brought higher sales but remain reluctant to provide guidance that looks much into the future, says Hank Herrmann, chief executive of Waddell & Reed Financial (WDR), an Overland Park (Kan.) fund company that manages $70 billion. "A few [companies] are building backlogs, but not a lot. A few people are talking about their book of business improving some, but not a lot," he says. "Part of it is most CEOs still doubt the strength of final demand. The first quarter will be the first time where they start to feel confident about the demand they see. The fourth quarter still has too much of a seasonal element and [they worry that] the inventory rebound could be ephemeral." Once companies see evidence of new job creation and decide they need to have capacity in place to meet an eventual rise in consumer demand, Herrmann believes CEOs will be more willing to take a chance on offering more constructive guidance for the future. Peter Cardillo, chief market economist at Avalon Partners, senses more enthusiasm among CEOs, based on signs of stronger economic activity ahead. Cardillo expects companies to start providing slightly longer-term earnings estimates, but with guarded outlooks. Just how strong will earnings be? The weekly outlook published by Thomson Reuters (TRI) on Jan. 8 estimated a 184% increase in profits for the companies in the Standard & Poor's 500-stock index. The highest year-over-year growth rates are expected in financials (up to $2.4 billion, from –$81 billion a year ago), materials (up 163% to $3.0 billion), and consumer discretionary (up 114% to $15.5 billion), while the lowest anticipated growth is in energy (down 24% to $18.5 billion) and industrials (down 13% to $154.8 billion). Results for the handful of companies that reported in the first week were a mixed bag, however, and didn't inspire uniform confidence for the rest of this earnings season. Technology bellwether Intel (INTC) increased its profits 10 times from a year ago to 40¢ a share, easily beating analyst forecasts, on a 28% jump in revenue. Aluminum producer Alcoa (AA)) narrowed its net loss to 28¢, including restructuring charges, from $1.19 a share a year ago, but missed the consensus outlook for a 6¢ profit. The company's 5.3% drop in revenue, which still beat analyst forecasts by 12%, suggests more rough times for other industrials. JPMorgan Chase's (JPM) earnings of 74¢ a share beat Wall Street's consensus estimate by 13¢ a share, but its $1.82 billion, or 6.7%, revenue miss doesn't bode well for other financials. The week of Jan. 18 will be a big one for financial earnings, including Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C), while Google (GOOG), American Express (AXP), and General Electric (GE) are also scheduled to report. The easy comparisons with the fourth quarter of 2008—the worst in index history—make for growth forecasts that border on being ridiculous, says Howard Silverblatt, head of index services at Standard & Poor's (MHP). "Earnings [for the S&P 500] usually tend to be in the $22 [per share] range. They fell all the way to negative 9¢ [a year ago], the only negative ever." coach factory outlet online Better Comparison: Q3 2009? The difference between –9¢ and the $16.09 that S&P estimates for the latest quarter equates to a growth rate above 17,000%, says Silverblatt. For a more practical comparison, he points to S&P 500 earnings of $15.22 in the fourth quarter of 2007, and $21.99 for the last three months of 2006—before the economy began to teeter. Jeffrey Kleintop, chief market strategist for research at LPL Financial in Boston, wrote in an e-mail message that he expects profits for the S&P 500 to come in slightly above the mean estimate of $16.05. If the financial sector were eliminated from the year-over-year comparison, he said, earnings would be up by only 8%. Kleintop is one of a handful of professionals who believe comparisons with the 2009 third quarter—instead of the year-ago quarter—make more sense on this occasion. He expects an annualized 5% revenue growth rate during the fourth quarter, plus a 0.4% increase to margins, to boost earnings 8% above third-quarter levels. Year over year, the technology sector turned in the best performance in 2009 with a fourth-quarter increase of 59% and should draw the most scrutiny this earnings season, says Silverblatt at S&P. Investors expect higher earnings from coach factory outlet online pent-up demand for upgraded computer models. Capital expenditures on technology fell 22% in 2008 and are expected to increase 28% in 2010—returning to 2008 levels, he says. S&P analysts forecast that profits for the energy sector should rebound 50% from a year ago, while industrials are expected to report a drop of 21% from the fourth quarter of 2008. Health-care earnings are expected to be up 18.7%; the bulk of spending anticipated to result from congressional legislation won't be factored into profits until 2011 and 2012, Silverblatt says. Results for the financials are projected to swing from a net loss of $13.93 a year ago to a profit of $1.72 in the latest quarter. It's hard to gauge how strong energy profits were in the fourth quarter, given how depressed refining margins and oilfield service earnings remain, David Bianco, chief U.S. equity strategist for BofA Merrill coach outlet online Lynch Global Research told Bloomberg BusinessWeek in an interview. In a Jan. 5 research report, Bianco said he was more confident that oil prices are trading higher on the fundamental outlook for supply vs. demand, instead of merely on U.S. dollar weakness, as they did during the October 2009 rally. Higher oil prices on a stronger dollar should drive expansion of price-to-earnings multiples in energy stocks, he said in the report. The financials' earnings won't tell you that much coach outlet sale by themselves, says Bianco, who suggests they be considered in relation to the level of loss reserves that companies are taking. A bank could have lower earnings because it took a bigger loss reserve, "so it's not so much what is their bottom line, but how do they get to it?" he asks. If a bank says it built a loss reserve in 2009 large enough that it doesn't need to add to it this year, there should be tremendous earnings growth in 2010, he says. BofA Merrill Lynch is forecasting 50% earnings growth for the financials as a group in 2010. S&P 500 Sales Plunged $1.54 Trillion This will be the first quarter since the recession started in 2007 in which the market looks for evidence of substantial revenue growth. Investors will no longer be satisfied to see profits climb only on sharp cost reductions, as they've done in the two previous periods. The intensity of the focus on higher revenues makes sense when you consider that sales for the companies in the S&P 500 plunged $1.54 trillion between October 2008 and the end of September 2009, according to Silverblatt. "That's bigger than the stimulus [package] and the health-care bill," he says. Whatever revenue companies were able to preserve or increase in the latest quarter will more readily turn up as profit, thanks to increased operating leverage that resulted from cost-slashing, he says. "That's why everyone's going nuts over sales," says Silverblatt. "That's why [mergers and acquisitions] are getting so much attention. It's one way to increase sales. You increase marketing and advertising, or you go out and buy [sales growth]," whether through whole companies or separate divisions. Bianco at BofA Merrill Lynch will listen to earnings conference calls for signs of how sustainable companies believe their profit pickup has been, based on whether they see better prospects for higher revenue in 2010. Given the extent of budget cuts, it's a matter of how much cost companies need to restore as the economy starts growing again, he says. Consumer discretionary companies probably had the strongest growth in revenue, even though holiday sales, up 3% from 2008, don't look "rip-roaring strong," says Bianco. Revenue growth will be more impressive for some nonretailers in the sector, such as McDonald's (MCD), Disney (DIS), Nike (NKE), and Coach (COH), because it won't result only from depressed year-ago numbers, he says. coach outlet sale Their gains derive partly from positive currency translation effects from foreign sales because the dollar strengthened in the latest quarter. A Secular Boom in Cloud Computing? Herrmann at Waddell & Reed also wants to see which companies are confident they can sustain revenue growth in the year ahead. Companies that should be able to keep increasing revenues look relatively cheap compared with historic valuation levels because the market is recognizing only cyclical strength. He expects heightened appreciation for the secular growth potential of segments of the retail, technology, and health-care industries in the months ahead. "Technology has been labeled a cyclical story, mostly due to the difficult decade just ending," Herrmann says, "Now we're going into a realization that there's a strong secular story. We're in the early stages of a transition to cloud computing. It may be a slow start, but there will be quite a number of years where that will be a strong tailwind." What do earnings prospects suggest for the longevity of the stock market rally, now entering its 11th month? Equity investors remain skeptical of a sustained economic recovery, according to BofA Merrill's Jan. 5 report. Its earnings estimate of $17.30 for the S&P 500 suggests an annualized rate of $70. On that basis, investors are still demanding an equity risk premium above 450 basis points, higher than the average of 360 basis points between 1960 and 2008. As quarterly earnings continue to improve, the S&P 500 should grind higher as investors gain confidence in BofA Merrill's normalized earnings forecast of $79 for 2010, the report said. Bianco and his team are emphasizing stakes in energy and industrials, on Asia-led global growth, as well as in financials, on a U.S. recovery that lacks inflation and keeps interest rates low. While some Wall Street pros are eager for companies to return to providing longer-term earnings outlooks as the economy improves, not everyone believes that would be helpful so early in the recovery process. "Given the state of the economy, I'm not willing to look more than a year out, especially in [the technology] sector," says Ryan Jacob, portfolio manager of the $38.8 million Jacob Internet Fund (JAMFX). "You can get into trouble because things can change so quickly." Before it's here, it's on the Bloomberg Terminal. LEARN MORE