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Innovation and Entrepreneurship: Tools for building a resilient society

Jerome Engel, senior fellow and founding executive director, Lester Center for Entrepreneurship, and adjunct professor, emeritus, Haas School of Business | October 31, 2021

How do we Build a Resilient Society?

Presented on Oct 22, 2021, Barcelona Spain at LaSalle Universitat Ramon Llull on the occasion of of my investiture as a Doctor Honorus Causa

The Challenge
We are in the vortex of a revolution.

Technology is a relentless rising tide that pushes us to adapt and revise how we live our lives. Whether in communications, mobility, energy, entertainment, health care, work, or even family life…all are being continually transformed by inventions and new ways of being that we often call innovation.

In March 2020, at the very moment I was leading a venture capital executive program right here [in Barcelona] at this fine University, we were hit by a tidal wave. The tidal wave of the Covid 19 pandemic. Like a tidal wave, it was not clear at first how significant or all-pervasive its impact would be. But as the weeks and months passed, as the significance of the changes wrought became clear, we all realized an increased dependence on innovations that had been emerging around us for years, in telecommunications, biotechnology, retail, banking, personal mobility and more.

What were once novel innovations, whether Zoom, home food delivery, or messenger RNA vaccine therapies, became essential utilities of day-to-day existence.

As an innovation educator, I have to ask the question: What are lessons to be learned here? I will suggest three:

First: Did the vital “new” technologies and innovations arise because of the pandemic?
No. The important, and even life-saving, innovations that became essential did not arise because of the crisis. They were here long before, slowly evolving and emerging. They were the result of years of research and experimentation. And not just in a technical sense. The tools we put to work immediately to ease the transition to social distancing, work-from-home, sustaining productivity, and ultimately saving lives, were not just technical innovations; they were complete customer solutions with functioning business models.

Second: Where did these solutions come from? How is it that they were here, ready to put to work at scale when the need so urgently arose?
These solutions were the result of entrepreneurial ventures that were essentially collaborations of scientists, engineers, and entrepreneurs and venture investors. Together they had anticipated the opportunity, built the tools, and done the hard early groundwork when the urgency of the need was not known or foreseeable. The process involved many independent renditions and versions on a theme: Skype, FaceTime, Messenger, WhatsApp, and their many, now forgotten and failed processors. All were essentially risky experiments with no assurance of payoff. Skeptics would criticize them for being solutions looking for a problem. It was that preparedness that provided the solution when the urgent need arose.

Third: Did these entrepreneurial ventures build their businesses in anticipation of the cataclysm of Covid-19?

No, of course not. They built their innovations to serve what they hoped would be new, incremental markets that over time would be of great value. Covid compressed the time-frame. Covid sharpened the use-case.
This is what shocks to any system do. They accelerate the need to adopt new solutions. They move discretionary decisions into immediate compulsory acts. They do not change the vector of innovation so much as accelerate its adoption.

There is a saying variously credited to Louis Pasteur or Richard Fleming “Luck favors the prepared mind”. Well, we were lucky indeed that entrepreneurial teams had done the work to help us be prepared – however painful the adoption and the adjustment of our lifestyles has been. Today we might update that quote to “Luck favors the prepared COMMUNITY”

Innovation – The Opportunity
Entrepreneurship and innovation are essential ingredients in building a robust and resilient society.

Why is Innovation Hard?
Innovation is an important process. It not only means “progress”, but, as we have learned with Covid-19, and perhaps are seeing with Climate Change and other exogenous stresses on society, it is an essential source of societal resilience. It may indeed be a necessity.

Whom can we look to for this critical resource? Where does it come from? How do we protect it? How do we foster it? Cluster of Innovation theory teaches us that we all can play a part in answering these important questions.

Why isn’t delivering on disruptive innovations the job of big business–The Apples, Googles, and Telephonica’s of the world? Isn’t this their job?
Unfortunately, NO. In fact, quite the opposite. Their most important job is to sustain their existing business. To take care of their existing customers, helping them meet their existing needs and challenges. Their second job is to grow their business. To extend their existing and new solutions to new customers. Certainly, they want to continuously improve their services. And this results in a steady stream of incremental innovations.

It is the rare enterprise that looks to replace their existing solutions with a radical and potentially disruptive new innovations – even when the solution is superior and the technology well understood. In fact, they will fight their adoption and try and forestall or even kill them. We need look no further than the electrical vehicle for proof.

The first commercial available electric car was delivered in 1884. Electric cars dominated auto sales through the early 20th century. However with the evolution of a modern highway system that opened the opportunity for long range travel, the electric car succumbed to the cheaper, more powerful and longer range internal combustion automobile. Modern electric cars were introduced experimentally throughout the second half of the 20th century, yet when environmental degradation and global warming made the need for zero-emission electrical vehicle solution obvious, no major auto companies brought their electric vehicles to the mass market at scale. Not even in California, where government mandates imposed severe penalties for failure to do so. Why? Simply because the electrical vehicle would have conflicted with their existing businesses. In fact, in spite of true breakthrough successes like the General Motors EV-1, the major auto makers fought expensive legal battles to kill government incentives and mandates for electrical vehicles. It took an upstart company named Tesla Motors to fight the industry giants, bringing to market innovative vehicles based on novel lithium battery technology to capture the opportunity at scale – eventually forcing the rest of the industry to follow.

If major enterprise cannot be relied upon for breakthrough innovation, who can we look to, to create the radically new solutions that can provide the resiliency to meet today’s pressing challenges?

It is small entrepreneurial teams, who willingly engage in creating the innovative solutions, free of the incumbent’s constraints. Radically new approaches are potentially disruptive to both market leaders and their customers. So radically new products and services often must seek new markets and new users before they can displace the well-entrenched incumbents.

One example is new financial services based on distributed networks rather than banks. Entrepreneurs bringing these solutions to market did not want initially to compete with banks for their existing customers. They sought new, unserved markets. So many first sought to serve the unbanked populations in emerging economies. Now, a few short years later, the very livelihoods of banks in their core markets are being threatened by the wave of peer-to-peer, AI enabled FinTech solutions.

Solutions that may have initial limited market appeal in existing markets may solve urgent problems in new markets, for new users, in new ways, with new business models.

This is a process of discovery, inspired by a vision of the possible, tempered by a sense of the practical, and managed to achieve sufficient progress to recruit the increasing support of partners, investors, and ultimately customers.

Some of the discovery may be technical, but perhaps more important is the discovery of the compelling use case, what we like to call Product-Market Fit. This type of discovery requires customer insight and empathy–a true understanding of the problem and the practicality of the solution. This journey of discovery is risky and potentially rewarding. It requires not only a strong team to discover, articulate and execute the vision. It requires an extended community of investors and collaborators to provide the resources and context for this creative risk taking. Such a community is a Cluster of Innovation.

Entrepreneurship – The Journey
This path of discovery is the entrepreneur’s journey.

It is rarely understood or reflected in the stories we read in the popular press. The crux of the journey is captured by the image of a “fork in the road.” The “fork in the road” represents the moment of commitment, when any progress forward must mean the loss of another option.

Such decisions are the everyday challenge of the entrepreneur. Whether it is a career choice, a product function, a design feature, a market segment, a target customer, or a use case decision. These are choices of consequence that may be irreversible. They take confidence, and even a degree of courage.

My favorite definition of entrepreneurship, is that coined by Howard Stevenson of Harvard in the 1980s: “the pursuit of opportunity beyond the resources under one’s control”. This definition captures both the recognition that the entrepreneur must continually make perhaps irreversible commitments and that one of the entrepreneur’s greatest skills must be the continuous communication of the opportunity to attract the resources to allow them to continue to forge forward, if only to the next hurdle or proof point.

We are in an era of perhaps our greatest opportunities and challenges. Technology is producing discoveries and capabilities at an accelerating pace, while environmental and societal shocks and disruptions are also escalating and likely to continue. The urgency to improve our understanding of the dynamics of the innovation economy is heightened by the stress induced by the rapid pace of change. Sources of change are both exogenous and intrinsic. Exogenous sources of change and potential disruption include incremental elements, such as environmental degradation and global warming, and sharp changes, such as economic disruption like the global financial crisis of 2008, political instability, or the Covid-19 pandemic. The rapid pace of technology evolution is, of course, a consistent source of change and potential disruption. When these factors collide, tipping points arise that can disrupt society, markets, and day-to-day operations. Long established embedded solutions and practices become inadequate and vulnerable. Society and customers become amenable to trying new solutions. These moments reveal the power of entrepreneurship and innovation as an adaptive capability that rapidly creates value for both the user (the customer and society) and the creator (the entrepreneur and their supporting ecosystem).

What can we do to develop and protect these valuable, perhaps essential, resilient resources of innovation and entrepreneurship?

The Clusters of Innovation Framework—creating and sustaining the “prepared community”

In the spring of 2011 a small group of international leaders in entrepreneurship education gathered to discuss phenomena they were observing in vibrant innovative communities around the world. Many of these communities echoed the ecosystem of Silicon Valley, but there were variations on many themes that reflected the characteristics of the different regions. Moving forward from these discussions, I and my colleagues developed the Cluster of Innovation Framework, a structured way to look at the qualities of communities which encourage and support innovation and entrepreneurship.

When we first developed the Cluster of Innovation Framework , we integrated and extended the insightful industrial and regional economic cluster theory that emerged at the end of the 20th century, principally by professors Michael Porter of Harvard and AnnaLee Saxenian of Berkeley . That theory focused on identifying the relative economic advantages of geographic regions. Building on that foundation, our work developed a framework to describe the particular regional economies of innovation hubs such as Silicon Valley and Tel Aviv and the global networks they formed with other like communities (Global Networks of Clusters of Innovation). Our framework identified the participants (components) and their respective behaviors. We understood at the time that the behaviors of the participants were critical. What our observations of the last 10 years reveal is that the behaviors are in fact the key.

The Cluster of Innovation [COI] Framework can help us understand where each of us participates in this innovation process and community. It provides a set of tools and structures to help articulate, visualize, understand, and navigate the rapidly evolving innovation economy. The Framework functions as a lens that brings the elements (components) of the COI and their behaviors into sharper focus and allows observers to track their evolution over time. This is of increased importance as the innovation economy disseminates around the world.

What is a Cluster of Innovation?—Components and Behaviors

The COI Framework represents a community that fosters a whirlpool of value creation with two central elements: The ecosystem is defined by the participants (Components) and the culture is defined by the nature and manner of their interactions (Behaviors). The components, as defined by the framework, are function-based archetypes of the main actors that operate along the Technology/Product S-Curve of Innovation, and especially in its “sweet-spot” of rapid iteration and value creation. Any organization, independent of its nature or nomenclature, that performs key activities relating to an essential function of the framework, may be considered a component of the COI. The Framework groups these components into two categories: major and supporting components

The Major Components are the entrepreneurs who develop the opportunity, the venture capitalists who invest in them and the major corporations that help take the innovation to scale:

The entrepreneurs recognize the initial potential opportunities and run the early validation experiments. Entrepreneurs are the principal initiators of action in a COI. They recognize, frame and pursue opportunities. Simultaneously, they must excel at resource acquisition.
• Venture Capital Investors provide the capital that is a key fuel to the fires that the entrepreneurs ignite. In addition they provide venture building knowhow. Further, their screening, selection and due diligence provides a “halo” that amplifies the attractiveness of the ventures and attracts additional resources including talent, customers, collaborators and additional capital.
• Major Corporations play a key role in a COI because they are often essential to driving true global customer adoption for many products and services. The COI is also a major innovation input to many major corporations, the best of whom create specialized Open Innovation resources, such as Corporate Venture Capital units designed and dedicated to COI engagement.

The Cluster of Innovation ecosystem also depends on the constructive engagement of a number of supporting community members including universities, government and the community of professional and management talent.

• Universities have distinct and crucial roles in COI. They are often the seat of technology innovation and invention. They provide the seeds from which new ventures spring. In addition to vital research and education, many have specialized resources and practices that encourage knowledge transfer and technology commercialization. We will come back later to look at the University’s role in more detail.
• Government’s role is foundational and cannot be taken for granted. First and foremost it establishes the crucial underlying condition: a safe civil society and the rule of law. In addition it is often is a source of early stage venture funding for entrepreneurs, supplementing and stimulating the venture capital sector.
• The professions and management talent are essential in modern entrepreneurship. They accelerate and augment management’s ability to learn and thrive in an often chaotic environment. In a COI, service organizations, the professions and management adapt behaviors that enable mobility, flexibility and quick recycling of learning and talent.

Understanding how a Cluster of Innovation operates goes beyond just identifying the participants. Understanding how those participants behave is essential to understanding the extent to which that community is a Cluster of Innovation. The behavior of the participants of a COI constitutes their culture. It reflects what they value, their aspirations and their attitudes. It embodies tacit elements of communication, cooperation and competition that may not be captured by written agreements or other media.

The importance of understanding behavior is often overlooked in developing strategies to build effective COI. Focus is often given to the sufficiency of the components, e.g., the sufficiency of venture capital, rather than the way that capital behaves and how that behavior is reflected in the investments it makes, including the legal terms of investment agreements. Understanding appropriate behavior is the key to stimulating and participating in a community that thrives on creating value through entrepreneurship and innovation.

While Clusters of Innovation are certainly not identical, they do share certain common traits and characteristic behaviors that define them and make inter- and intra-COI collaborations easier, more likely and more efficient. These shared characteristic behaviors of the components of a COI include:

• Opportunity-seeking entrepreneurship
• High mobility of resources, including people, money and technology
• Utilizing collaborative alignment of interests as a means of amplifying impact
• Having a global perspective on opportunity
• Utilizing networks and linkages, potentially on a global scale

Fundamentally a COI has a culture of collaboration and co-opetition. There is a pursuit of win-win opportunities and arrangements and “non-zero-sum” thinking. While both entrepreneurs and venture investors seek opportunities for disruption, they are not risk seekers, as is commonly thought. Risk is an intrinsic element of entrepreneurial opportunity. Great entrepreneurs and venture investors are risk managers, and use tools to mitigate risk, such as staged investment, vesting of ownership, and venture governance. COI participants have a fine-tuned tolerance for failure. They recognize occasional failures as an intrinsic risk of new venture creation. The best practitioners strive to derive value and learning from failure.

Thinking globally and forming global ties are also key COI behaviors. Emerging ventures in expanding innovation communities, perhaps because of the influence of IT, mobility and global communications, tend to look at opportunity on a global scale and to form alliances with other ventures across broad geographic distances. These connections form the Global Network of Clusters of Innovation. This is a global web that aids accelerated technology and business adaptation. The hubs of this network have a substantial competitive advantage.

The Role the University–What can the University do?

Today we are gathered as a group of educators at a fine university. Let’s take a more detailed look at the role of the University in a Cluster of Innovation. Let us start with the question I first confronted when I joined the faculty of UC Berkeley in 1990: Can we teach entrepreneurship?

Fortunately, the answer is YES. As importantly, we recently have come to understand that entrepreneurship is not just for those that seek to found new businesses or even pursue a career in business. It is a life skill!
• It teaches us how to express a hypothesis, test it and react constructively.
• It teaches us how to collaborate, to work in teams, to work with partners, as none of us has the resources to succeed alone.
• And perhaps most importantly, it teaches us resilience; the ability to meet challenges and adversity as an opportunity.

How do we teach entrepreneurship?
We often start by introducing the student to the topic with the usual case study techniques, but these have their limitations. They are like fantasy role play—there is no “fork in the road”, no opportunity cost, no irreversible decisions, and no opportunity for students to exercise their “commitment muscles”.

Over the past decade, we have learned that the best way to teach these tacit skills is through true field work, where student teams test ideas against real problems and develop real solutions. We call these immersion-teaching techniques various names including Lean Innovation, the Lean LaunchPad, The Innovation Corps and more. The key is they take students through a hands-on journey where they experience building and testing a business thesis, assessing their idea’s desirability though an intense process of Customer Discovery, designing a business creation pathway through Business Model Design, and assessing the viability of the enterprise through Financial Forecasting and Scaling Strategies.

What is the role of the University beyond the classroom?

This all fine as far as it goes – but we are still in the realm of education. What is the role of the University beyond the classroom or research lab? What is the role of the University to help enable the success of their students, and indeed their entire community, to increase its vitality and resiliency?
The traditionally a University’s mission has three powerful pillars:

• To protect, disseminate and discover new knowledge
• To educate and train talented individuals
• To engage constructively with their communities and society in general

The Entrepreneurial University of the 21st Century needs to reinterpret how it applies these three elements, to become, in the modern business parlance, a Platform for value creation.

What is an Innovation Platform?
21st Century business parlance has extended the word platform, from its usage in the software industry, to mean a common set of standards and a repository of resources, which are available for use to members of a community. The platform’s purpose is to accelerate the development of products and services, while reinforcing a standard of behavior that often includes giving back to the community. These products and services meet end-user needs, provide economic returns to the providers, and through reinforcement of network and spillover effects, benefits to the community and society in general.

The university can be just such a “platform“ for value creation. By going beyond the classroom and the research lab, undertaking to be an enabler, the university becomes an active partner in fostering and hosting the interaction of its key capabilities, its knowledge, its technology, its market insights, and its human constituencies with the broader community.

There are four steps that can be a guide:

First: The University can provide inspiration, where venture creation, experimentation and business model validation are to be part of the foundation of a higher education.

Second: The University can teach the skills and patterns of success. Promulgating the language and understanding of new venture creation should be as important as disseminating key language skills, such as English or computer programming. Teaching the subtleties of creativity, managing risk, hypothesis articulation and validation are critical life skills that apply across a university’s broad disciplines.

Third: The University can be a connector, utilizing its credibility, educational and alumni networks to link entrepreneurial students and faculty to potential collaborators, industrial partners, investors, and government funding. These connections , even if informal. are critically valuable.

Fourth: The University is also a standard setter for culture. What is supported by the university ripples throughout the broader community. By visibly supporting entrepreneurship and innovation the modern university helps broaden societies support for them as well.

Following these principals, the “entrepreneurial university” will be a vital contributor and catalyst to a modern Cluster of Innovation.

Everyone has a role – The challenge is ours

A major lesson of the pandemic is than now is the time to lend our efforts to build resilient societies that can absorb and respond with creativity to the challenges ahead. Technology’s relentless advance is a blessing – that brings with it a clear responsibility. A shrinking world has made collective responses all the more urgent.

Innovation and entrepreneurship can be our tools for building a more resilient society:
• To enhance our collective productivity and well-being,
• To encourage greater self-activation and actualization and
• To Increase the velocity of value creation and resilience to environmental and macro-economic shocks such as the pandemic or the financial crisis.

This progress toward a healthier and more robust society will take good governance and constructive engagement by all the leading members of society. The University has a key role to play, as do all of us.

i. Based on observation of business behaviors and industry dynamics in Silicon Valley
Engel J. & Del-Palacio, I. (2009) Global Networks of Clusters of Innovation: Accelerating Innovation process, Business Horizons; (2011)Global Clusters of Innovation, The case of Israel and Silicon Valley, California Management Review
ii. Porter, M. (1990), The Competitive Advantage of Nation New York: Free Press; (1998), Clusters and the New Economy of Competition, Harvard Business Review; (2000) Location, Competition, and Local Economic Development: Local Clusters in Global Economy, Economic Development Quarterly.
iii. Saxenian, A. (1994), Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Boston: Harvard University Press.