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.
