Franklin Pitcher Johnson (By A. Burak)
Financial Observer: Should We consider innovations and innovative companies as one of the key drivers of economic development of our country or maybe we can achieve significant economic growth thanks to traditional sectors?
Franklin Pitcher Johnson: Innovative entrepreneurial companies and innovative established companies are vital to the future growth of the Polish economy. The traditional Polish businesses should not be ignored, but the significant growth will come in markets served by innovative technologies.
When we look at “old” 15 EU member states and their positions in European innovation ranking countries with biggest financial problems such as Greece, Spain, Portugal and Italy are performing the worst. Is there a link between poor innovativeness and current financial condition of those states?
The difficulties with the economies of the southern tier of countries are having a negative effect on the formation of entrepreneurial activity in those countries. Among them, however, Spain is the most likely to emerge first with a lively innovative sector because its educational system for technology and business is strong.
Can we also say that the fact of relatively poor innovativeness of those countries in the past would have been one of the causes of their current difficult financial condition?
“Innovation” has become such a catch-all word that it lacks the precision needed for a useful comment. In terms of technological entrepreneurship (using new technologies to serve new or existing markets) the southern-tier countries you mention appear to me to have been behind northern Europe in the creation of such companies, with some noticeable activity in Italy and Spain.
The economic problems of all those countries appear to me to be the result of fiscal policies, and are so large the short-term effect of the present entrepreneurial activity is overwhelmed. It looks to me that the entrepreneurial activity has been slowed by the economic problems rather than the other way round. In the long term, however, the economic growth of these countries will be depend on the emergence of a strong entrepreneurial environment.
However the development of entrepreneurship in Poland is quite satisfying our country is still lagging behind European leaders in ranking of innovations. What’s the main reason for that in your opinion?
Poland’s “ranking,” as you put it, is not high in innovation because most entrepreneurs in Poland do not often think beyond the borders of Poland in conceiving ways of serving markets with new products and services.
You can say that grass is always greener on the other side of the fence but I think We must admit that Israel looks much better than Poland in terms of innovations. What are the key factors that made Israel one of the most innovative countries in the world?
The founding families of modern Israel were mostly European Jews and many of them had been prominent in entrepreneurship, banking and commerce for a long time. After the end of the socialistic period in Israel, the next generation picked up on their family traditions, stimulated the formation of engineering and technical schools and started companies and venture firms with international horizons.
A large number of Russian Jews, unhappy with life in the Soviet Union, came to Israel with strong technical training, went to work in technology jobs in existing companies and eventually joined in starting new firms. Israelis also went abroad, especially to the USA, for training. A minor, but positive , factor was that there were old, educated Palestinian families who were residents of Israel and went to work in old and new companies, although some moved to the USA. Most of the entrepreneurs, however, were from European origins, and a few came from the USA to live in Israel.
Israel is also one of the most successful countries in attracting venture capital funds. How was it possible?
The primary factor was the existence of many entrepreneurs starting companies with good international size potential. The government, however, had a program to put money into venture funds which had substantial private money in them, so that venture funds had good capacity to do deals. The government let the venture capitalists do the deals they chose to do, within very broad guidelines.
On the other hand in Poland we still suffer the lack of capital dedicated to innovative companies. That’s why some Polish businesses are established outside Poland – in Germany, Great Britain or US where the access to capital is much easier. Why big venture capital funds skip Poland?
There have been several venture funds using foreign capital started in Poland, but many of the larger investors have not participated because they perceive the innovative Polish companies to be dedicated to local markets and limited in size and liquidity potential.
Do you see some model solutions present in Silicon Valley and in Israel that could or should be implemented in Poland?
The primary thing in Israel that can be used as model for Poland is the government participation in venture funds as long as the managers have significant private capital under management. Silicon Valley, in its early days, when it got going, was in a country that had a history of entrepreneurship, moderate tax rates, substantial government investment in research and education, the rule of law and very moderate barriers to starting new ventures.
It was also located in a specific region which had two (now three) major research universities, where a strong educational system existed at all levels, where risk-taking pioneers had moved only about a century before, in which failure was tolerated, in which venture capital and professional services quickly moved to serve the entrepreneurs and where the weather made people want to come there. While the Polish people can’t do much about the weather, they can influence government to bring many of the other conditions into being.
According to innovation policy should Poland concentrate on some specific sectors in which we can get strategic advantage quite easily or maybe we should try to support the innovations regardless of the sector?
The government, within broad guidelines, should not be trying to dictate what markets and technologies should be emphasized. The Polish (or any) government should make investments in education and research in area which it thinks Polish businesses (old and new) can compete and grow in local and world-wide markets. The government should establish a low tax environment for capital gains.
Further it should put money into otherwise privately financed venture capital firms who are interested in companies serving markets using new technologies, and make it easy for entrepreneurs to meet the requirements to start companies. The government should step aside, not chose operating companies to back directly, and let the entrepreneurial-venture capital process work.
Currently Polish ministry of science considers creating new investment fund for financing commercialization of scientific research. What would be your advice to the ministry to make such a fund the success story? Or maybe there is a better solution that ministry of science should to consider for supporting the commercialization of scientific research?
The ministry if science should use its budget to finance research in universities and institutes and save its investments for venture funds to invest in companies. Department in universities and research institutes can be formed to facilitate transfer of technology to industry in new companies and old. It is common for faculty members to be involved in start-ups where the technology originates in their own laboratories, even thought the intellectual property belongs to the institution.
In what sectors of economy Poland has the biggest chances of getting strategic advantage in your opinion?
The competition in Europe is less in the health-care and biotech fields, so emphasis can be put on those areas of research and training of potential entrepreneurs. This does not mean that information technology to serve world-wide markets should be ignored, but the competition is greater
Polish pension funds with assets worth about 100 bln PLN are not investing in innovative companies at all. Do you think it’s proper way of securing the savings of future pensioners or maybe they should invest some part of their money in innovative companies directly or indirectly through venture capital funds?
Investments in venture capital firms are a valid use of retirement fund pools in reasonably small percentages since the risk of a fund is much less that investing in any one deal.
Do you think that tax policy tools would foster innovations in Poland? If yes, what kind of tools should we apply?
The primary taxation tool to encourage entrepreneurs and their investors is to keep capital gains taxes low on investments in new or young companies.
Franklin Pitcher Johnson – founder, Asset Management Co. Franklin Pitcher (“Pitch”) Johnson was co-founder in 1962 of Draper and Johnson Investment Company, venture capital company, and became an independent venture capitalist in 1965 as the founder of Asset Management Company. Asset Management Company has made over 250 venture investments during its more than 47 years of operation. He has served as an advisor to several eastern European countries since 1990 in the area of entrepreneurship and privatization, and has helped form venture funds in several countries. Pitch has a BS in Mechanical Engineering from Stanford University and an MBA from the Harvard Business School.