Why Paris isn't Silicon Valley (and doesn't want to be)

I've been plugged-into the Paris start-up scene for over a year now. It hasn't let me down, only because my expectations were nil. It couldn't really be described as vibrant... although I do get the feeling that things have picked up considerably in the past 5 years. Sure, I do know a few young aspiring French entrepreneurs. Most of them, tellingly, have their greatest aspirations in an eventual relocation to a more exciting climate, normally Silicon Valley. Indeed, several of France's success stories have already transplanted themselves to the other side of the Atlantic.

So what's wrong with this place? It certainly is one of the most beautiful cities on earth, but would one be out of their mind for trying to launch a tech company from here? Sure, Paris lacks the energy and spirit of a well established entrepreneurial hub... but is it only a matter of time? Can this city ever get there? Unfortunately, not in this lifetime... I'm afraid.

Yes, the government and their policies play a role. These are structural issues which could be legislated away overnight if the politicians had the will. More crucially, the real issues are in the country's DNA, in a cultural mindset that is polar opposite to everything embodied in the entrepreneurial spirit. This mentality will change, the question is when & how far down does France have to fall before people realize their mindset is flawed & unsustainable?

The French do one thing well. They really embody the expression "work to live, not live to work". There is something to be said about quality of life. I am a huge believer in it. I once considered relocating to China post-MBA to be part of something big that I felt going on in the region. After spending some time in Shanghai, I realized that opportunities in China might be inspiring from a professional standpoint, but my personal life would have undergone enormous strain in that country. I am spoiled. I am used to fresh air, open spaces, clean streets, and other luxuries normally taken for granted in the west. But placing value on your personal life doesn't preclude having serious professional ambition and pride in professional projects. It is in this respect that Anglo-Saxons and the entrepreneurial spirit directly clash with French attitudes.

One of my most surprising cultural learnings in the past few years has been this: The French despise those who succeed. Those with ambition and a drive to achieve personal rewards are not admired but scoffed.

It's incredible. I don't really know how this happened, but I'm beginning to wonder... maybe it's a well pulled-off brain washing exercise by the French elite to preserve their protected class.

It's no secret that French society is super elitist, one's position in French life is pre-determined by family & schooling.  Social mobility is next to impossible. Even the middle class is well protected. There exists a clear boundary separating management (i.e. the cadre) from non-management... no crossing allowed.

The country's employment laws help to (and are possibly even designed in order to) keep the masses complacent with their lack of upward mobility. The employment laws offer stability for the population in terms of an implicit guaranteed job for life. As a result, ability and performance have become less important than tenure and there is zero incentive to work hard. Once into the system, paychecks are guaranteed and "work" becomes only a noun in the French language and not so much a verb.

It's no wonder the French have adopted a deluded sense of entitlement. Frustratingly low levels of customer service are expected in France, what many fail to realize is that the same ambivalence to work prevails throughout the French workforce. It's amazing the lack of ownership and willingness to take responsibility found at all levels.

It is this sense of entitlement that saps from the culture any drive to achieve greatness on the professional level. It has made hard-work and risk taking an absolutely foreign proposition. Why be an entrepreneur? If you fail, not only do you not get the huge severance check & amazing social safety net, but you will never shake the stigma of failure and will find it nearly impossible to find work again. Those who have done such a ridiculous thing and who have succeeded are not admired, but are actually resented.

The system that props up this mentality, the labor laws and social welfare programs, are going to bleed the country to death. Already corporations have no incentive to locate themselves here nor invest in the country. Unless a startup has a very good business reason to do so, it is almost asinine to register and employ people here. The system is clearly not sustainable. Once it crumbles, the anti-entrepreneurial mentality will follow shortly behind. It is only a matter of when and under what dramatic circumstances will a wave of change wash away the old mindsets paving the way for Paris to become a potential hub for entrepreneurs.

Back to blogging

After a one year hiatus, I'm proud to announce my triumphant return to blogging.  While surely not missed by many, I've now got a year's worth of "entrepreneurial" experience under my belt and have an overwhelming amount of lessons and unsolicited opinions to dole out to anyone who cares.

In the past 15 months, I've been through the following....

- finished a world-class MBA program & simultaneously scrapped a deeply developed business plan to launch a P2P lending network in China (an efficient SME lending model is still desperately needed in China, by the way... but I'm happy that we pulled the plug)

- spent 3 months finding an entrepreneurial mission to which I could devote myself

- spent a further 3 months finding the missing technical piece for my entrepreneurial puzzle... I failed at least 3 times before finding the right solution, an outstanding technical partner

- spent 6 months completing every task imaginable required to go from concept stage to fully functioning social community / ecommerce website... from things I have no right doing (like layout & design) to things I strangely enjoyed (like building sophisticated back-end accounting and ecommerce processes). Of course everything could have been outsourced.. but we are an extreme boot-strapped operation!

- spent the past 3 months working on business development and the building of an outstanding team to help prepare for the launch of www.gourmetkazoo.com

Over the course of these 15 months, I've gone from unfilled international strategy consultant to happily struggling entrepreneur. I've learned intimately about the emotional extremes involved with being an entrepreneur, from on top of the world when things go well to extreme despair anytime things don't go according to plan (i.e. extreme swings almost every other day).

I've chosen to embark on this journey from a continent that is not my own. While I see huge opportunities here, I'm also facing the frustrations of someone with anglo-saxon expectations colliding with business mentality in Europe.

I've also immersed myself in the tech start-up world... a place littered with ideas but too barren of real value propositions. A place full of losers and the occasional big winner.  A place full of jealousy and delusion. A place with so many interesting characters, and where everyone can claim a valid right to be present... regardless of education, experience, or background.

Don't get me wrong, I don't claim to have any special authority on any of the topics to be covered here. I'm just interested in speaking my mind, having a place to express... maybe even occasionally vent, a place to solidify unorganized thoughts into concrete positions, and a place to put forward my own personal life mantras. Any chance to interact with and share ideas with interesting people will be welcomed as well.

Lean & green computing

Recently at an Open Coffee Club event in Paris, I met the founder of Linutop, a company commercializing a sub 300€ tiny computer notable for its simplicity and low energy consumption. The concept fits the definition of a disruptive technology. Computers are getting super powerful today and there are a lot of consumers who have basic needs that are being ignored. Why should someone buy the latest processor, a huge harddrive, and microsoft software when they only really want something to cruise the net with? This market segment is going to become huge as software and processing needs are moved off of PCs and onto "the cloud".

While this company fills the void with a small processor, small flash harddrive and opensource software, their long-term success is questionable as they have not built any sustainable competitive advantages. In such a pure hardware play (where building brand equity is doubtful), long-term sustainability is based only on cost leadership through economies of scale. As this market demand becomes more apparent, the competitors will arrive en masse and force prices down to the marginal cost of production (just ask Dell). Since all the components in these products are basically comodities, this industry will not produce any huge winners over the long run.

Alternatively, I read today about NComputing on VentureBeat. This company has gone a step further and removed the processor and harddrive from the mini-computers entirely. Instead, their baby "computers" must be linked up to a fully loaded mother PC which shares it's resources with it's offspring through a process called virtualization. The resulting "virtual" pcs are very cheap at only $70 a pop. However, to make these children PCs work with the parent, NComputing sells proprietary virtualiztion software ( the software that allows the parent to divide its resources and act like 7 PCs rather than just 1). The software/hardware bundle creates a slighly more defendable position through host-complement effects (it is cheap to add more vitural PCs to an existing network) and experience effects (NComputing's reputation for performance will be valuable as customers invest greater sums to estabolish large networks of vitual PCs rather than one-off mini PCs).

The market for lean & green PCs will be interesting to follow in the coming years. It is sure to only grow in competitiveness with the trends towards vitualization and cloud computing; let's see if any firm is smart enough to end up a big winner.

My problem with the Kiva model

Matt Flannery, CEO of Kiva.org made a request for support this week. Apparently there is a competition by AMEX where the Kiva is in the running for the $1.5M top prize.

I was surprised by his claim that the prize would help generate $12M in new funds for the impoverished. He is basing this off of his historical operating expense to funds lended ratio which just happens to be 1:8. This is by no means an important number... it has zero significance on the future of his business. So, let’s say the prize happened to be $10M... will new lenders follow by bringing $80M of savings into the Kiva marketplace, of course not. Let's be realistic, this award will not do much for the Kiva marketplace besides paying some salaries and keeping the boat afloat a while longer.

I have a few issues with a model like Kiva's. First, the only value they are bringing to the table is increased liquidity in the microcredit marketplace. They are a middleman. They spend a lot of money in order to collect funds from savers in the west and pass them out to microfinance institutions in impoverished countries who actual make and administer the microloans. In general, I think middlemen are only present in inefficient markets. Either Kiva will eventually be squeezed out, or their partner institutions in the impoverished countries will be.

My second issue is that they seem to encourage less efficient micro-finance. Why are they returning less than 100% of investors money. Kiva claims the borrower default rates are less than 2%. We know the interest rates being charged to the entrepreneurs are very high... what am I missing here. How are they screening and controlling the micro-finance institutions they give (other people's) money to? How are incentives properly set up for Kiva and their partners giving away (other people's) money to do it well? Yes, I understand a lot of people are viewing the money they give on Kiva as charitable donations and are happy to get anything back. But it doesn't need to be this way! Think of how many more entrepreneurs would receive the microloans they so desperately need if Kiva could get the system working well and actually return all or more of the lenders' money.

My last issue is that this model is not sustainable. It requires the support of donations to keep it running. All the money they spend in running the website and paying salaries could do more benefit for society if it was given directly to those actually needing microloans. If donations dry up (which will happen when a more efficient mechanism is in place), this model cannot be sustained.

I hope that Kiva is able to adapt their model to be more efficient and transparent. Microcredit is an amazing thing as I spoke about in an earlier post. It just needs to be done well.

Project 10 to the 100th

As part of their 10th birthday celebrations, Google announced project "10 to the 100th". In an effort to source innovative ideas to tackle the world's social problems, they are pledging $10M to fund up to 5 concepts submitted by individual internauts (see note 1).

Is this truly an innovate approach on charity, or more of a publicity stunt? I think crowdsourcing has huge potential. It will be interesting to see if this expiriment in crowdsourcing yields anything valuable. With the funding level set at $10M, this is obviously a small time test by Google. But the administrative work required by crowdsourcing is immense! With a serious crowdsourcing campaign, how much garbage do you have to screen through in order to sift out the true gems... It seems Google will let their employees do the dirty work of filtering through all that rubish; they will be the ones selecting the 100 "best" ideas which will be narrowed down to 20 by us internauts with finally up to 5 winners selected by an advisory committee. To make crowdsourcing work, there has to be an efficient way to deal with volume and not miss those gems. What are the odds that the developer at his cubicle will have the stamina to review 1,000 ideas and not miss one with real potential?

My first suggestion to improve this campaign: I would have loved Google to add economic viability to the judging criterion. Sure, their intention is just to give away some charitable donations and gain publicity. But will you be able to change the world with a few million dollars? Google offers no explanations for how the ideas will be funded after the non-profits have burned through the initial $2M that each idea will receive. Why not encourage ideas that will be self-financing? We know giving away things isn't always the best way to help, think of mosquito nets given away in Africa being (mis)used to overfish rivers instead of protecting people from malaria. And sustainable social improvements can and should often be achieved through econimically viable ideas. These are the ones that will last and spread around the world rather than dieing in the hands of some inefficient non-profit.

One other issue with this contest. Google does not mention it being possible for entrepreneurs to use this campaign as a possible funding source for ideas they themselves would like to implement. Rather, all ideas and funding will be awarded to non-profits sourced by Google or identified by the idea's submitter. Google knows the power of capitalism, why not use it to encourage even more people to bring innovative ideas to the table? Sure, real deliverables would need to be agreed upon along with the funds; but how much risk is there still that non-profits will be inefficient with the awarded funds? They aren't known to be the greatest value generaters.

In summary, this is an interesting initiative... It will probably generate a couple interesting ways to quickly burn through $2M without much to show for it.


note 1: internaut = users of the internet. I really want to see this word become mainstream in the English lexicon. The French have "borrowed" enough English words, I think it is at least owed to them to send one the other way. Plus, for some reason, this word always brings a smile to my face.

Giving credit where it is due

A Good Entrepreneur is a magician, they take a dollar today and make it disappear. After a little hocus-pocus they make that dollar magically reappear at some time in the future in the form of several dollars! That is the magic of creating value. Of course it is the quality of the hocus-pocus that makes the difference between a successful and unsuccessful entrepreneur, many are not able to make the dollar reappear at all.

Problems with this magic show arise if great entrepreneurs are not able to find that first dollar from the crowd. In developed economies, there are solutions. Credit markets are well established, and even risky ideas can find backers through angel funding or venture capital. Unfortunately, in lesser developed economies, even the very low risk / sure thing business plans cannot find a literal first dollar to get them off of the ground.

Microcredit was born to address this problem. Yunus, one of the early champions of microcredit, was adamant that there should be no profit motives behind this loaning of very small amounts (often as little as a dollar or two) to some of the world's most impoverished. However, microfinance players, especially in Latin America, have shown that microcredit can be a commercially viable business. This is a good thing, while nonprofits can help a few, they can never match the reach of an economically viable model.

The economic model for a viable microcredit business is at first shocking. Annual interest rates of more than 100% are required. This is not because defaults are higher on microloans. Quite the opposite in fact. Innovative risk control measures such as the incorporation of "social capital" have kept default rates very low for microlenders. Rather, it is the admin functions like loan screening and collection (fixed costs) which overburden microloans and call for very high break-even interest rates.

Here is the good news... the borrowers actually have projects to invest those dollars in where the rates of return are far in excess 100%! Because they have been starved of capital for so long, micro-entrepreneurs are able to put capital to work in amazing ways with amazing returns. Unfortunately, entrepreneurs in many countries are forced outside of the formal credit markets to source loans. Several countries set caps on interest rate charges (e.g. China), effectively squeezing out the smallest borrowers most in need of capital. These borrowers typically find "loan shark" type options where they end up paying the high interest rates by using unscrupulous lenders with questionable business practices.

Things are slowly changing, but in order to get the estimated $250B which is needed to make a difference into the microcredit markets, for-profit models need to be embraced and expanded.

Government's role in entrepreneurship

I believe encouraging entrepreneurship is an absolutely essential role of any government concerned with the future economic health of their country. It is no surprise to see a strong correlation between economic growth and the ease of doing business in a country. This is not a statement about political systems. We have seen that non-democratic governments are sometimes even more successful at understanding the power of capitalism; look at Singapore and what is happening in China, Vietnam, etc.

With the mobility of people and ideas today, countries need to compete for commerce. Why would anyone choose to set up a business in Brazil where it takes 18 bureaucratic steps and 152 days to get the company officially registered if they had the option to incorporate in Canada

where it takes only 1 step and is completed in 1 day? Why set up a company in France when you will be financially punished to the point of bankruptcy if you need to fire someone? Why do business in the Middle East if you cannot count on the rule of law to back up your contracts. Of course not all ideas and people are as mobile as others. Even so, bureaucracy, corruption, labor laws, etc. are all inhibiting entrepreneurship and thus standards of living across the globe.

In the interest of their domestic economies, politicians must take an active role in making the (sometimes painful) reforms needed to help fuel entrepreneurship.