And the Winner is – Acquired. Entrepreneurship as a Contest Yielding Radical Innovations - Thomas Rønde
Post on 24-Jun-2015
DESCRIPTIONLook through the contribution from Thomas Rnde, Professor at Copenhagen Business School, @ the seminar 'Germany in Danish Business Research'.
- 1. And the Winner is Acquired.Entrepreneurship as a Contest Yielding RadicalInnovationsForthcoming in Research PolicyJoachim Henkel, TUMThomas Rnde, CBSMarcus Wagner, University of WrzburgGERMANY IN DANISH BUSINESS RESEARCHCBS, Nov. 4, 2014
2. 2Sources of Innovation: Start-ups or Incumbents? Schumpeter: I: entrepreneurs II: large incumbents Numerous studies, empirical and theoretical: start-ups ~ radical innovations incumbents ~ incremental innovations But: older studies usually assumedproduct market competition reality: successful start-upsoften acquired by incumbents Does it matter for innovation if entrants aim for being acquired byan incumbents?Schumpeter, 1932Source of figure: http://www.schumpeter.info/ 3. Security Voice Routing Optical Wireless Content3Example for Innovation by Acquisition: CiscoSwitchingStorageHomeNetworkingSource: Cisco, presentation at TUM, 6/2005 4. 4 Motivation Empirical study: EDA Sketch of model and analysis ConclusionsAgenda 5. 5EDA Industry EDA overall (2006, ca.): $ 5 bn sales, 23,000 employees Three large incumbents Cadence ($ 1.48 bn, 5,200) Synopsys ($ 1.10 bn, 5,130) Mentor ($ 0.79 bn, 4,230) Numerous start-ups (1999: approx. 80) Many acquisitionsQuellen: 10-ks, A. Sangiovanni-Vincentelli (2003), Report Q3 2006 des EDA Consortiums 6. 6EDA Industry EDA: Electronic Design Automation Automation of design of computer chips using softwareLOGIC EDA CHIP DESIGN 7. 7EDA IndustryEDA software is a system product. Example Synopsys:Design for Manufacturing Product FamilyTCAD from acquisition ofIntegrated Systems Engineering1993 founded as ETH spin-off2004 acquired for $ 115 mio.Source of figure: http://www.synopsys.com/products/solutions/dfm.html 8. = 421989 1991 1993 1995 1997 1999 2001 2003 2005 = 32765432101989 1991 1993 1995 1997 1999 2001 2003 20058Frequent AcquisitionsThe three established EDAfirms acquire start-ups at ahigh and increasing level(1989-2005 = 105)76543210Sources: Websites, 10k-Berichte76543210Synopsys1989 1991 1993 1995 1997 1999 2001 2003 2005CadenceMentor = 31 (11) 9. 9Start-ups in EDA: Evidence from InterviewsStart-ups A) have to do innovate [Innovative technology] is the only thing they sell, so its either make itor break it.(2)B) have to aim for radical innovation: ... there [in small firms] has to be a radical core, I would say,otherwise it is not possible So they are relying on start-ups, which then are starting from scratch so they can apply very new methodology with very new techniques withoutbeing restrained by all customers or all the methodologyC) can hardly remain independent in the long run: The goal is always to be acquired.  The more successful we are,the more urgent it becomes to be acquired.(3)Numbers (2, 5, 3) denote the interview patner. 10. Motivation Empirical study: EDA Sketch of model and analysis Conclusions1100Agenda 11. 1111Set-up One established firm (I) and N entrants All conduct R&D to develop a new product Firms choose from a given set of possible R&D projects,characterized by their success probability p Profit for I from a project, if successful: p(p); otherwise: 0 The function pp(p) assumes its maximum in ]0,1[ at p = p* Only the incumbent can market the innovation start-ups aim at being acquired by I All firms maximize expected profits: Entrants: Expected acquisition price Incumbent: Expected product market profit minus acquisition price 12. The Assumptions Illustration for p (p) = 1- p12p* p0p(p) pp(p)1 13. 1133Timingtime Stage 1: firms pick their R&D projects (pI , p1, p2) (Nature: R&D outcomes are realized) Stage 2: Competition among the start-ups to beacquired by the incumbent (Product is sold, profits are realized)Alternative interpretation:patented inventions are tradedin a market for technology 14. Analysis: Game Theory A Game is a situation where: The players have to make decisions The payoff is affected by other players actions The case in setup considered here We look for a stable situation (or, Nash equilibrium): Everybody is expected to behave in a certain way All players are doing the best that they can for themselves given whatthe other players are expected to do Nobody has an incentive to deviate from the expected behavior 15. The Equilibrium Illustration for N = 215p p 1p *= p* 2* pI*0p(p) pp(p)1 16. Intuition Entrants choose risky strategies as they need to have the bestavailable technology to be acquired Incumbent chooses a safer strategy to have a fall-back option anda good bargaining position in negotiations with a successful entrant The more entrants there are, the stronger is the push to pursueradical projects with low success probability/high value: Success probability of the most radical project undertaken inequilibrium is decreasing in the number of entrants Result is robust to a number of changes: More entrants, more incumbents, different timing of the game, etc.16 17. 17 Motivation Empirical study: EDA Sketch of model and analysis ConclusionsAgenda 18. 1188Conclusions Explains focus of start-ups on riskier and, if successful, more radicalinnovations, based only on their need of being acquired Incumbent chooses a safer strategy to have a fall-back option and a goodbargaining position in negotiations with a successful entrant Parsimonious model with very rich structure Model fits well what we observe in EDA in real life, mixed with other mechanisms (HR, organizational rigidities, focus onexisting customers) Industries where model fits are characterized by systems products: Software, electronics, telecom Contribution to understanding sources of innovation and markets for ideasThank you