Race to the top: entrepreneurs and bureaucrats - book review

The Race For the World

David P. Goldman

The Wall Street Journal, September 28, 2012

Entrepreneurship and the Global Economy

By Henry Kressel and Thomas V. Lento

(Cambridge, 266 pages, $45)

To triumph in today's winner-take-all market, entrepreneurs need deep pockets—and deep insights into technology.

Overall returns to American venture capital have lagged behind public markets since the late 1990s, Henry Kressel and Thomas Lento note in "Entrepreneurship and the Global Economy," and a quarter of venture-capital firms have earned all the profits. Why have results been so lopsided? Globalization is a big part of the answer. To succeed, today's ambitious start-ups—whether they are high-tech enterprises or low-tech service companies—must be global from inception. Entrepreneurs need access to deeper pockets than ever. But they also need to know how to maneuver through government mazes in state-dominated economies like China's. It is a winner-take-all world. The authors of "Entrepreneurship in the Global Economy" try to identify what makes a winner.

Mr. Kressel, a senior partner at private-equity firm Warburg Pincus and a former scientist, has helped to incubate dozens of successful companies during the past 30 years. In this sometimes dry but always informative account, he and co-author Thomas V. Lento recount some of their stories. Mr. Kressel, a physicist, ran RCA Labs in the 1970s when it learned how to manufacture integrated circuits and commercially feasible lasers with Department of Defense funding. His team invented the now-standard CMOS chip-production method and launched fiber-optic cable transmission. RCA founder David Sarnoff is Mr. Kressel's exemplary entrepreneur.

Sarnoff, a Jewish boy from Russia who immigrated to America at age 9, made his name at RCA when he launched commercial radio, beginning with an unprecedented national broadcast of Jack Dempsey's title match against Georges Carpentier in 1921. He helped create the first radio network, NBC, and shepherded the development of television and, eventually, the creation of a color-television standard in 1953. The self-taught Sarnoff triumphed by getting right every part of the mix: deep insight into technology; a diplomat's knack for handling regulators; and the staying power to stick with a vision that sometimes took years to pay off. These are the same qualities entrepreneurs need to vault the high threshold for success in the new global economy.

One company funded by Warburg Pincus that was based on an insight into technology was Aicent, founded by Lynn Liu, a Taiwan-born entrepreneur in Silicon Valley. In 2000, Ms. Liu saw an opportunity in the plethora of wireless-data standards around the world: Wireless companies required interchange hubs to exchange data, and Ms. Liu, the authors write, "positioned Aicent as a neutral third-party enabler of data traffic interoperability for carriers around the globe, concentrating at first on Asia." Big Asian carriers, she reasoned, would rather deal with a trusted third party than negotiate dozens of bilateral deals. Working with so many different carriers was difficult but essential to success. "A business like this," Ms. Liu told the authors, "needs to have the greatest number of connected carriers—the whole value is in the network."

One myth that gets shredded by the authors holds that American exporters can't break into the dirigiste Chinese market. All you need, they suggest, is management with a Sarnoff-like ability to hit on all cylinders. Raza Microelectronics Inc., a Silicon Valley start-up, set out to sell its communications chips in China after the dot-com meltdown, when big American manufacturers shunned newcomers. "Overseas markets were more open to network chip innovations from a startup than the domestic US equipment manufacturers, who had well-established chip suppliers," the authors report. "So the company decided that its primary sales target should be China, the world's fastest-growing network equipment maker."

That counterintuitive call came from Pakistani-born chief executive Atiq Raza, who recruited "sixty of the best microprocessor design engineers in the world" and set out to make "the industry's best single-chip data network microprocessor." He also hired a Chinese-born Stanford Ph.D. to head a customer-support group in China before RMI got its first round of venture funding in 2002. Among other things, the "comfort with international dealings that marks the educated immigrant community," the authors say, "must be counted as an important element in the company's growth and success."

To stay ahead of competitors like Cisco, RMI actually helped its customers design their equipment, enlisting a hundred corporate partners to provide complementary chips and software. The costs of continuing innovation were so high that the company was still unprofitable in 2008, when the stock-market crash cut off access to public-market funding. But a 2009 merger with NetLogic yielded $600 million of market value for RMI's shareholders. That is patience rewarded.

In both these cases, the entrepreneurs' success depended on finessing the governments of China and other interventionist countries who apply mercantilist policies to some of the world's fastest-growing economies. The authors conclude: "There are no sure-fire recipes for entrepreneurial success in a world where increasing government interference is to be expected." Governments do a dreadful job of picking winners, they point out, as in the sorry track record of the United States government in alternative energy. The same is often true of big corporations—Sarnoff's 50 years at RCA being a notable exception—which is why economies need start-ups and entrepreneurs. Mr. Kressel, drawing on his own experience at RCA, believes that there can be an important role for government. Investment in research and development for defense and space exploration, he thinks, brings economic benefits apart from its contribution to national security. "Government is best at generating innovations through funding of research and development," the authors write. "After that it should let the inventors and innovators plot the course, instead of the bureaucrats."

Mr. Goldman, president of Macrostrategy LLC, previously headed global fixed-income research for Bank of America.

A version of this article appeared September 28, 2012, on page A15 in the U.S. edition of The Wall Street Journal, with the headline: The Race For the World.