Best to think small when looking for big ideas

CONTRARY TO common perception and much of the media focus, it's the small-scale entrepreneurs not the big firms that you need to turn to when you look for those who will lead us out of the recession. So argues Prof Erkko Autio, who currently holds the chair in Technology Transfer and Entrepreneurship at Imperial College London, writes FRANK DILLON

"During downturns large firms lead job destruction. They react quicker to changes in the market and put a greater emphasis on cost cutting," he told The Irish Times.

“Small firms tend to be more resilient. Many of the people who were employed in large firms also become entrepreneurs and the successful ones will help turn the economy. When economic momentum picks up, large firms catch up as they have the resources to hire and poach the best talent,” according to Autio.

The Finnish-born business professor was in Ireland to deliver the inaugural InterTradeIreland Innovation Lecture at UCD, entitled How to Build Momentum for Innovation.

Despite the pain, recessions can still offer good opportunities for innovative and entrepreneurial businesses, he argues. “When times are good, almost any business idea will fly whereas recessions really test the quality of businesses.”

However, only a very small number of entrepreneurs will create world-class businesses with the potential for high value. The top 3-5 per cent of entrepreneurial business are responsible for 75 per cent of value creation, as measured by a range of metrics such as profit, market share and employment creation, he says.

Autio’s thesis suggests that supports for small firms, such as state-provided grants and seed capital, should therefore be targeted in a very concentrated way on the small number of firms who are most likely to succeed in building high value enterprises. “Picking the winners is a very tricky exercise,” he concedes. However, the approach taken in his native Finland is a model we might like to consider.

There, companies looking for support go before panels of experts including business advisors and venture capitalists. If their case looks promising, they are given small amounts of initial support to research their ideas.

Further supports are only provided if they reach certain milestones. At each stage, the best ideas are filtered through the process to the next level so that support gets concentrated on the truly high-potential firms.

Autio sees parallels between Ireland and Finland, which went though its own asset price bubble in the early 1990s. “Banks lent too much and people took loans in foreign denominated currencies which backfired. We lost one-third of our export market value and unemployment shot from 3 per cent to 16 per cent in just one year,” he recalls.

The process of recovery took several years but innovation played a key part and the success of Nokia was a major contributory factory to national recovery, he says.

Autio believes that companies need to take a twin approach to innovation to survive and grow in the current economic climate. His view is that as the global economic momentum has faded, firms can no longer “ride the waves” created by others. Instead, they need to build their own momentum for innovation.

In addition to identifying market needs and adapting their products or services to meet those needs, firms must also find ways of prompting the market to lock in to their innovations ahead of others.

If this successful two-way adaptation is achieved, spectacular growth may follow, even in challenging times, he says.

So how do firms achieve this momentum for innovation? Surprisingly, money often has very little to do with it, he suggests. Instead, radical thinking can provide the key breakthrough that transforms markets.

He cites two interesting examples.

Hughes Technologies, the developer of mSQL, a database application, struggled to obtain growth with a conventional market approach. It decided to make its source code available free over the web. Users downloaded this, experimented with it and resolved a range of technical difficulties. The product morphed into what is now MySQL. By developing a critical mass of worldwide users, the company eventually positioned itself as a leading provider of database applications for Windows PCs. “It created its own wave,” Autio explains.

His second example, Skype, the leading voiceover IP provider, was launched without a marketing budget. Its sole piece of marketing communication he says was a press release issued in August 2003. This achieved huge impact because of the proposition that users could make telephone calls for free over the internet to other users of the service. This is a classic example of network externality, he explains, where users have a vested interest in promoting the technology. This act as a highly effective form of viral marketing.

Compounding its advantage, the business model of Skype is an example of a market disruption at its best. According to Autio, the incremental cost to Skype of adding a user has been calculated as one-tenth of one cent while the cost for a traditional network operator ranges from €100-€200.

These are just two examples of the type of approaches that companies can adopt to achieve breathtaking progress in the market and to steal a march on less nimble incumbents with higher cost bases.

Another company that he feels we should watch is Blyk, founded by a fellow Finn, former president of Nokia Pekka Ala-Pietila. This firm is offering a free mobile telephony service to 16-24-year-olds supported by advertising revenue.

Launched in the UK in 2007, it achieved 200,000 members in its first 12 months and has raised £40 million (€43 million) in recent months as part of a plan to go global.

Autio does not profess to have the panacea for Ireland’s current economic woes. He is certain of one thing, however. “It may not be comfortable to talk about further expenditure at this time but Ireland needs to continue to invest as much as it can in research,” he says.