What Michael Porter Has to Say About the VC Model

I'm not aware of Michael Porter having actually ever written anything about the criteria for a successful VC investment, but as I was reading the part of Competitive Advantage of Nations where Porter recaps his theory of how firms create competitive advantage in the general sense, I was struck by how applicable his words were to many issues in the VC and startup ecosystems:

• On what innovation actually is: "Firms create competitive advantage by perceiving or discovering new and better ways to compete in an industry and bringing them to market, which is ultimately an act of innovation. ... [Innovation] often involves ideas that are not "new" but have never been vigorously pursued. ... Innovations shift competitive advantage when rivals either fail to perceive the new ways of competing or are unwilling or unable to respond. ... Many innovations do not involve complicated technology [but rather have been overlooked or ignored by larger firms because of their own internal barriers to using them]."
• On why startups and VC-backed companies are able to beat large, established, and deep-pocketed incumbents in competitive industries: "It is hard for firms steeped in an old technological paradigm to perceive the significance of a new one.  It is often even harder for them to respond to it.
  
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  To sustain its position, a firm may have to destroy old advantages to create new, higher-order ones. ... The apparent paradox involved in nullifying old advantages often deters firms from upgrading. ... Supplanting or superseding old advantages to create new ones is not considered until the old advantages are long gone. ... The behavior required to sustain advantage, then, is in many respects an unnatural act for established firms."
  
• On sources of innovation: "Sometimes [innovation] results from sheer investment in market research or R&D.  It is striking, though, how often innovators are those firms that are simply looking in the right place, unencumbered by or unconcerned with conventional wisdom. ... Often, innovators are 'outsiders,' in some way, to the existing industry." 
  
• On the commitment need to successfully commercialize innovation: "With few exceptions, innovation is the result of unusual effort. ... The strategy is the personal crusade of an individual or group."
• On the role of the local environment (e.g. Silicon Valley, Israel) in creating startups: "The national environment plays an important role in ... [supporting] the emergence of 'outsiders' from within the nation"
• On what it takes to sustain competitive advantage beyond an initial innovation: "The sustainability of competitive advantage depends on three conditions.  The first is the particular source of the advantage [based in cost, which Porter considers unsustainable, or higher-order, more sustainable sources such as product differentiation, brand reputation, and customer relationships]. ... The second ... is the number of distinct sources of advantages a firm possesses. ... The third ... is constant improvement and upgrading. ... Sustaining advantage requires change."
  

We've Already Created an Israeli Nokia

A couple of years ago Daniel Cohen at Gemini wrote a great piece in VentureBeat called "The quest to create an Israeli Nokia" in which he argued that the black-eye to Israel's high tech scene was that "there are no examples of great Israeli break out companies – no Israeli equivalent of Google, Microsoft or Nokia."  He went on to give a very insightful commentary into the reasons behind this, all of which are based on what I would call "micro" factors - impatience of investors, impatience of entrepreneurs, a think-small mentality, and lack of $1bn experience - which could be overcome by the right people.


In doing some research for a piece that I am planning on writing about what I believe are the structural reasons that Israel has not created a Nokia or a Microsoft, I discovered something very interesting: we have already created a Nokia.  Teva Pharceuticals, despite having sales of around 20% of Nokia, actually has a slightly higher  market cap as of the time of this writing.  Nokia has a slightly higher EV, but even being close is an accomplishment.


Sure, you could say that Teva is not high-tech in the sense of IT, but life sciences/biotech is a pretty big VC sector, and pretty high-tech in its own way.  You could also say that Teva is "Old" (as Danny puts it in his piece), tracing its history all the way back to 1901, but let's not forget that Nokia was founded in 1865!


I am still planning on writing my post about the structural challenges to Israeli entrepreneurs, but first I've got to brush up on my Michael Porter ...