Thursday, July 3, 2008

Are second-generation entrepreneurs a product of nature, nurture or both?

By Mass High Tech Staff

Mass High Tech editor Douglas Banks moderated a panel of the MIT Enterprise Forum in June titled “The DNA of Entrepreneurship: Lessons Learned Across the Generation,” which featured a father/daughter team and a father/son team discussing how entrepreneurship is born — and how it can be passed from parent to progeny and from mentor to mentee. This is a brief excerpt from that evening. The speakers were George Hatsopoulos, founder and chairman emeritus of what is now Thermo Fisher Scientific International Inc.; his daughter, Marina Hatsopoulos, founding CEO of Z Corp.; Gabriel Schmergel, former president and CEO of Genetics Institute Inc.; and his son, Greg Schmergel, co-founder, president and CEO of Nantero Inc.


BANKS: How much interaction was there between you and your fathers when you were building your companies? While you were building your companies, did you go to your fathers for advice? Or did you go to business school professors or peers?
GREG SCHMERGEL: I went to all of the above. I went to business school professors. One of my HBS professors was on the board of (my previous startup) ExpertCentral.com, in fact. I went to some of the partners at some of the consulting firms that I worked at before I started my companies. And of course I went to my father a lot, too, since he knew quite a lot about a lot of the issues that I was facing. Even though I was starting companies in areas different from biotech, I was able to go to him often for questions common to just about any startup like raising money and managing people.
MARINA HATSOPOULOS: We tend not to discuss business a lot at home and things always get focused around politics so there is a lot of heated debate about that.

BANKS: Gabe and George, what got you started in technology entrepreneurship?
GABRIEL SCHMERGEL:  Well, I have a bachelor’s degree in mechanical engineering, like George, but I did not go as far as a master’s or a Ph.D. I did work for a few months after school as a mechanical engineer — I still remember one of those big calculating machines turning the crank, a little bit boring. That was way before computers were around. But if you want to talk about seminal experiences, for me, being a recent immigrant, being in charge of 30, 35 youngsters and a couple of grizzled Korean War veterans, was a tremendous experience. I did not know anything about business. I couldn’t read a balance sheet or anything. I applied to various business schools from Germany, where I was in the army, and was lucky to have been accepted at Harvard. I came back and kind of moved off in a different direction.
GEORGE HATSOPOULOS: Most of us, especially on my father’s side, most of my father’s family, they were academics, professors at Athens Polytechnic. They would look down upon business, and so did my mother. But when I was 14, I went to the library and read about Thomas Edison, and GE in the 1870s. I said, well, that’s what I want to do myself in life. There was an urge. It was not inherited; it was not environmental. Now the technology side was environmental, no question about that, but the entrepreneurship? No.

BANKS: Gabe and George, what were the challenges of starting a company as a first-generation immigrant?
GABRIEL SCHMERGEL: At the age of 16, I got off the boat and I did not speak any English. When we arrived here, my father’s firm had been nationalized in Hungary back in ’48. We had nothing. We came with $16, which my mother actually lost, so we had zero dollars. So it’s kind of a tough way to start. The other side of the coin, however, is that I do believe, as immigrants, you’ve got to focus on making it, period. And that drives you. And in terms of hiring at Baxter and GI, I looked for people who were immigrants: Europeans, Vietnamese, Pakistani, whatever.
GEORGE HATSOPOULOS: I had decided what I wanted to do when I was 14, when I got out of high school. The whole driving force was to build a company. Nothing else mattered. Where we going to live, how we going to find the money, that’s secondary. I’m embarrassed to say that because I’m sure many of you think I’m making it up. [Laughter]

BANKS: The penniless immigrant story is compelling. It’s pretty tough to beat, so Greg and Marina, I’d love to hear your coping mechanism and how you still ended up going into business nonetheless.
MARINA HATSOPOULOS: There were two pervasive characteristics that have really defined who I am as a person: One was the joy of work that both my parents have and the second is a sense that anything is possible. I think that both of those are sort of the essence of an immigrant and the essence of an entrepreneur.
GREG SCHMERGEL: I think growing up with an entrepreneurial family certainly had an impact. George’s story about knowing what he wanted to do early is familiar to me. When I was in third grade in the playground with a couple of my friends, they started talking about what they wanted to do when they grow up. One said, “I want to be a fireman,” and one said, ”I want to be an astronaut,” and I said, “I want to be an entrepreneur.” And they said, “What does that word even mean?” They didn’t know what I was talking about.
GABRIEL SCHMERGEL: Let me just kind of share a little story with you. I spent 14 years at Baxter, ended up running the international division. Then I left or was in the process of leaving Baxter to join the two founding scientists of what became Genetics Institute Inc. So we are living in Chicago at that time. And after the decision was made to make that move, telling my son.
So we are in early 1981, so he was 12 years old. I’m explaining how this works and I’m talking about what is the company and stock and all. And being there I was buying shares at a penny a share. So here he is and he said I want to buy some too. So I have to explain to him that well you cannot buy any because we have the VCs and the original folks and original scientists and that’s kind of it; it’s not for sale. So he was very upset and he said I want to buy some, I want to buy some shares. He knew that buying shares at a penny a share was a good deal. [Laughter]
GREG SCHMERGEL: He didn’t let me and I’m still angry now, especially now that I see how the shares did.

BANKS: George and Gabe, did you see budding entrepreneurs in your children as they were growing up, and what kind of advice were you giving them?
GEORGE HATSOPOULOS: Well I avoided giving advice especially to Marina, but in general to both my children. Especially because my daughter is obstinate and the only way I could have her not follow my advice is if I give her advice. I thought many times having her follow some course by giving advising to follow different course but that’s a little too complicated so I didn’t do it.
BANKS: Was that a good strategy Marina? Did that work for you?
MARINA HATSOPOULOS: Yeah. That definitely worked for me. [Laughter]
GABRIEL SCHMERGEL: Well philosophically I guess my management style is much more blunt and direct. I don’t hesitate to offer advice and I kind of expect that it be followed. Our daughter always loved animals and the animals were the most important thing in her life. So I certainly encouraged her to become a small animal veterinarian. She went to vet school and does it now.
With our son I tried to influence him perhaps subtly or less subtly. After high school he chose government as a major at Harvard, well known school nearby. I thought studying government was kind of a waste of time. I encouraged him to get involved in science, possibly physics. After meeting Feinman I felt the physicists are the smartest people in the world. But he went his own way with government. I tried to kind of push him into another direction of business where I felt there’s a lot more action and a lot more opportunities.
    I remember once he told me that his ambition is to become Ambassador to in those days the Soviet Union. I said that’s crazy. There’s one ambassador and most likely he’s a big political supporter and donor of whoever is the President. So if you go into business there are unlimited number of opportunities to do any kinds of things. So ultimately it sunk in.

BANKS: Marina and Greg, when you were starting your businesses did it help or did it hurt to have fathers who could write you a big check if they chose to?
GREG SCHMERGEL: The important thing is ‘if they chose to’ and convincing my father to invest in anything is very difficult. I remember when I was starting. My first startup didn’t require any outside funding so we bootstrapped that. Then my second startup, ExpertCentral.com, I came in with the idea for this website that would provide expert advice over the internet. So if your car is broken you can ask an actual mechanic for help. If your cat is jumping on the counter and eating all your food you can ask a pet behavior for help.
And so I came to him with this idea and he was a little confused about how it will ever make any money, which was an issue with a lot of internet companies. He thought it was an interesting idea and that he would think about it. Then once I got JH Whitney, the oldest VC firm in the country to lead the round then he said he would follow along with a little investment. So it’s the ‘if’ in your statement, that’s most important.
MARINA HATSOPOULOS: We have a really strong philosophy at Z Corp. of no friends or family. And so that went all the way through including investments. So we didn’t want any money from friends or family. However on some level it certainly nice to know you’re not going to go starve to death if it doesn’t pan out. So I suppose on some level there was some comfort there.

BANKS: Were there any drawbacks to having fathers who had been there, done that, grown the big company, everybody in town knew them, knew the name? Was there a drawback for you as you were building your companies?
GREG SCHMERGEL: That’s why I didn’t go into biotech, because every time I’d go into anything related to biotech, people would say oh you’re Gabe’s son. That would be the direction of the conversation. So I went into fields where no one had heard of him.
MARINA HATSOPOULOS: I would say it was a plus people could pronounce Hatsopoulos, which otherwise certainly they wouldn’t have had a chance to. It doesn’t help you sell anything, sell machines or anything but it’s nice for name recognition. When you’re looking to raise money people think they might know something about you.

BANKS: Wwhat did you talk about at the dinner table at home? What were conversations like in the Schmergel and Hatsopoulos home?
MARINA HATSOPOULOS: Well I can tell you about our household. There’s always a fight for dominance so the volume kept going up as everyone interrupted everybody else. It was never about business; it was about a lot of other things. The one aspect that I remember most distinctly was really the engineering approach, which would be my brother might get into an argument about how many math students are there in the United States. And we’d be fighting over it and screaming at each other. My father would say, ‘Whoa, let’s start, what is the population in the United States? How many, he would break it down and try to calculate, how can we estimate a number’ for whatever it is that we were arguing about. I remember that really distinctly.
GREG SCHMERGEL: We actually rarely talked about business or entrepreneurial lessons at home or at the dinner table. Instead we would talk about politics, about history and especially about my grades and the action plan for improving them. [Laughter]

BANKS: So if entrepreneurship and business was not talked about in the home, what was it? And talk a little about what is it, Marina and Greg, that drew you into business.
MARINA HATSOPOULOS: I just thought it seemed like something that would be a lot of fun to do. I like bossing people around and it’s fun to create something. When you start with nothing and to create something to get a bunch of people together and you set up a mission and you’ll work toward that mission and you create something, it’s a real rush and it’s a real high. So I think it’s not like the discussion was talking about that, but observing it and going into the office and seeing what it was like. It seemed like that would be a really fun thing to do.
GREG SCHMERGEL: I think it was a little bit of the opposite for me. After growing up with my father I decided I didn’t like being bossed around so I had to start my own company and be the boss so that wouldn’t happen anymore.

BANKS: Was there seminal moment, something that you can point to that says, this is what I want to do? Do we have a lemonade story from the second generation here?
MARINA HATSOPOULOS: I have a lemonade story but it’s not that exciting. In high school I started a business selling carnations at Valentine’s Day. So you could buy a carnation and I would hand deliver it to the person. You would pay extra to have them not know who sent it so that was kind of a bonus because then you can see who. [Laughter]
GREG SCHMERGEL: I never wanted entrepreneurial things growing up. I knew eventually that was what I was going to do for the rest of my life so I wanted to do something else before that started. That’s why I majored in government so I could. [Laughter]
GABRIEL SCHMERGEL: What a waste.
GREG SCHMERGEL: To do something else and learn about something else before I started my entrepreneurial career and did that forever. So my first entrepreneurial experience was after college. I worked at Ernst & Young in a new consulting division for about a year.
   And then one of the partners, we had an idea that we proposed for starting a new business service within Ernst & Young. And Ernst & Young rejected it and said they didn’t want to do it. So we decided to leave and start that company ourselves. So we moved from the fancy Ernst & Young offices with mahogany and marble and all the wonderful view of Boston Common to his garage, which was stinky and noisy. So I wondered for a while if it was the right decision but stuck it through. Eventually we started bringing in money and earning salaries and it turned out to be a very good company.

BANKS: So we talked a little bit about creating a culture of entrepreneurship in the family. I know I’m always curious about how you create a culture of entrepreneurship in a company. Gabe, George, you both ran very large corporations. I think it’s a very difficult challenge in a large company to keep a culture of entrepreneurship. Let’s talk a little bit about creating a culture of entrepreneurship and whether it’s in the family and then moves to the company. Whether there’s similar traits in how you do that or what worked for you and then what didn’t?
GABRIEL SCHMERGEL: Well you want to answer that first, George. You’re a couple of years older than I am [Laughter] and a hell of a lot smarter.
GEORGE HATSOPOULOS: Only a couple of years older, I wish. [Laughter] But I tell you this was very important to me as a matter of fact. The CEO of a very large corporation, probably one of the largest in the world, I don’t mention names right now but as me one. We have labs, which are ten times as big. We spend 10 times as much money as you do or maybe 100 times as much.
How come you come up with things that create new businesses and our huge labs have not done, you have smarter people? I said no, I don’t believe we do because I know a lot of your people and some of them are even smarter than ours but it’s the culture. Then he started saying how do you create that culture? The culture, I said to him actually, that if you came to the labs in Thermo Electron. If you go to labs in your company, I know a number of the people that work in these labs are brilliant people.
   But their ambition is to maybe to get a big award, give a flashy speech and eventually maybe get a Nobel Prize. If that is said in Thermo Electron, they will laugh at him because the job here is to create something useful not to get the Nobel Prize; it’s a cultural thing. Then he said how did you develop that culture? I said well it’s very simple, you try to pick people that are build that way, they believe in this thing. Then you bring in critical mass.
Even if somebody’s not really that accustomed because the people that have the tendency of, especially young people to respect their peers more than they respect their bosses. And it’s unbelievable that statement. People think that if the boss wants something that the lower people will follow. The most influence on, at least people in science and engineering, is the other people around them. They want to impress them so it’s the culture. It’s kind of a critical mass. You need to assemble a critical mass so now that empowers everybody.
   Now it’s true you have to be a little selective and to get some people that lean towards those ideas that you’re trying to emphasize. But even that alone won’t do it; you still have to have a critical mass so when you bring in new people they influence each other. It’s a culture. And reinforced a little bit by DNA. That’s all, that’s all I can say.
GABRIEL SCHMERGEL: When we talk about entrepreneurship in large companies. And my experience was back to Baxter in the ’60s and the ’70s. During that time, Baxter was one of the premier growth companies in the United States, one of the so-called ‘nifty fifty.’
   And actually a book was written by recently, a couple of years ago it was published by a professor in Harvard Business School, Monica Higgins, about the Baxter Boys. Basically Baxter spawned a large part of the biotech industry and just a number of local Henry Tomeer, Jen Zi, Jim Tobin. Baxter at that time had decentralized operating organization and especially international.
   Basically it was country-based so you would — as a young person at the age of 28 or 29 — you would get a job running a small country, Holland or Singapore or whatever. Then if you did well you would move onto a bigger country, to Germany, U.K., Japan and a strategically important company. If you didn’t do well you would be asked to leave and fairly quickly. It was sink or swim. A number of us went to that schooling, so to speak.
   There were survivors or some who did not survive but the Henri Termeers and the Jim Tobins, they all came through that school. So did I, I was one generation ahead of them. I take a lot of credit for having those guys reporting to me during their Baxter career. So it was decentralized. So the CEO retired a new CEO took over and things became centralized. And a lot of these folks started to leave. The interesting book, very interesting book how the biotech industry was, from the business standpoint, built by Baxter alumni.
   So entrepreneurial instincts can develop in a large organization if there is the right kind of leadership in an organization. J & J is a great company, 170 operating units. But I understand just from general knowledge and business publications, they are beginning to centralize. I think they are going to find life very difficult for them.
   Now you also talk about research. I am a firm believer that research cannot be done in large organizations. We are actually seeing the big former model collapsing on a daily basis around us because these large research labs are just not productive. And that’s another whole topic of conversation. But the entrepreneurial spirit can be fostered and maintained in large organizations but only if there is the right kind of leadership. And sink or swim is fine, that’s the deal when you work in one of these companies or J & J. Tremendous growth came and tremendous innovation came. Innovation doesn’t have to be science; it can be business innovations, marketing innovations.
BANKS: So Gabe when you went into Baxter it was already an established company, is that right?
GABRIEL SCHMERGEL: Correct. When I joined Baxter sales were something like $75 or $80 million, that’s in 1967. So in today’s terms it might be half a billion but it was still a medium-sized company with a dynamic CEO, Mr. Graham, a man of tremendous vision and charisma. He would hire what he felt were talented younger people and gave them a chance. As I said, a lot of us succeeded and got bigger and bigger jobs every two or three years. People would fail then they were kindly asked to go on and do something else somewhere else. So it was a tough environment.
   But with Graham, we were working all the time because we were given responsibilities. You were a young man but you were in Holland and everything in Holland is up to you. How you develop the market, register product, government relations, you hire the sales people; you had everything in Holland. And your peers with other companies might have been 10, 15, 20 years older than you. I was running Baxter Europe I was 35. I would go to these meeting, the fellow that was running Pfizer Euro was 50. The fellow that was running Smith Kline French, SKF — that time viewed as a great company — was 50, 20 years older than me. They thought who’s this, the assistant?

BANKS: Greg and Marina, talk about the culture of entrepreneurship in a small company. It seems almost like an oxymoron, right? Obviously in a small startup you got to have this entrepreneurship but is that the case?
GREG SCHMERGEL: You can definitely have a small company that’s non-entrepreneurial if you pick the wrong people for your team or don’t establish the sense of urgency and the sense of mission. Then you can easily get the small company that does as little as a big company. So it’s just as important in a small company to do everything to do everything that George and my father were describing to create that culture and that sense of responsibility and that sense of mission amongst of people. In a small company, in fact even more important, because you do need to fight against the big companies who do have gigantic research labs. We compete with Intel and I’ve raised $32 million for this company, which is probably Intel’s R&D budget for three hours.
MARINA HATSOPOULOS: Yeah. I think the culture is so critically important as the company’s growing. One thing we found is that we’re able to retain our culture and we had a very strong corporate culture. But there were certain periods of time we were growing too fast. In one year, 2001, we actually doubled the entire company in terms of staffing. If you hire too quickly within a short period of time, you adopt the new people’s culture instead of them adopting your culture. It was a very uncomfortable period for about three to six months. We kind of lost our balance a little bit and then had to reestablish our culture. With so much new blood in the company, it was hard to maintain the culture.
   There was one aspect of the entrepreneurial culture, which I think is really important. This may come from the Greek heritage and maybe the Hungarian heritage, but we really believed strongly in hiring very smart people and hearing their opinions. So when we were in a discussion, it didn’t matter what level you were at in the company, everybody’s voice was heard. We just had absolutely no tolerance for people who would suck up or nod their heads and say oh wow what a great idea. Everyone’s opinion was really valued. A lot of times there would be heated debate but I’m convinced that that’s a great way to get to a good solution.

BANKS: What specifically did you do to turn around that culture? You saw it listing a little bit; you needed to get it back. You got to get these people back to the original mission. What did you do specifically? And then Greg I want to come back to you and I want to know what you did specifically at Nantero that you do to keep that sort of David and Goliath mentality?
MARINA HATSOPOULOS: Yeah. It just came to a lot of small decisions in terms of establishing how meetings ran, to letting go people who really weren’t up to snuff. When you hire a lot of people really quickly, you make much bigger mistakes. You make more mistakes than when you’re doing it very carefully. We were really quick to take action when we made mistakes and a lot of small things.

BANKS: Greg, how about you? Anything specific that you can point to that you’ve done to establish the culture at Nantero?
GREG SCHMERGEL: The most important specific thing is the hiring process is picking the right people who have the right attitude from the beginning so that you don’t need to retrain them. Obviously when you’re smaller it’s easier. When you get larger it’s harder to find the people that are naturally entrepreneurial and naturally fit in. For us, keeping the focus on the ultimate mission and the importance and difficulty of that mission is key to maintaining the fervor for accomplishing what we’re trying to do over many years.
   Our company is now seven years old. When we started the company, there was an article written about it saying that Nantero was an insanely ambitious company. Usually you don’t want to hear the word insane used in connection with your company but I thought that one was okay. So the key is that everybody in the company remembers that if you lose focus for a few months when you’re competing with companies like Intel and Samsung that are investing huge amounts of money and creating the next generation of memory.
   Here you are a company of now we have 65 people but a couple of years ago we have 30 people trying to create the next generation of memory that everyone’s going to use in their cell phone and laptops and every electronic device. You really don’t have the luxury of slacking off or getting distracted for even a few months because every minute is critical.

BANKS: Hiring is one of the key issues to corporate culture. Can you talk a little bit about that? You guys have hired a lot of people over the years.
GEORGE HATSOPOULOS: Your turn first and then I’ll... [Laughter]
GABRIEL SCHMERGEL: So let’s not talk about Genetics Institute. On day one we have five people, including me. Now the senior scientists, eventually when we got up to the level of 70 or 80 people, there were eight senior scientists or lab heads. They were actually identified and hired by the two scientific finders, hired in principal. Of course I had to bring them in and arrange the labs and everything for them.
   The two founding scientists were only there part time, one day a week plus during the weekend of course. So they were all outstanding and superior people and they’ve all done well at Genetics Institute. And later some have gone back to academia, one of them is the senior persons at Gilead Science so a tremendous career path for everybody. Now in terms of establishing the culture, one thing that I did, originally it was weekly, the bi-weekly then monthly as the company grew. Ultimately by the time I retired there were so many people I couldn’t quite continue like that.
   But I would meet with the senior scientists every week around 4:00 pm on a given day. And I pretty much tell them everything except the most confidential stuff I couldn’t tell them about; business deals we were working on, what our cost position was. Don’t worry guys, you only have six months cash left, I’m out there trying to raise money.
   So getting the senior scientists involved in what was a scientifically based, scientifically driven company was extremely important. That also allowed a certain amount of bonding and mutual trust to develop. As the company grew, it became a lot harder to maintain these ongoing meetings. And certainly when we went public six years later there were very important legal limitations where certain things just couldn’t be talked about. But the culture was fairly well set.
MARINA HATSOPOULOS: I just wanted to say that we did something that I don’t know why it’s considered very unusual but all our board meetings were public for the whole company so everybody came in. And then we had a small executive session at the end in private. But the bulk of the board meeting was for the whole company to sit in and listen to.
GEORGE HATSOPOULOS: There’s no question the hiring is key to building a success business but not obvious. And every intelligent businessman knows that. What people don’t know, because you can only find that out certain pitfalls that you can only find when you are running the business. One pitfall is that businesses hire people when they have a job. And that, of course, is very bad because job needs come in at random and you need to find the right person right there and you don’t have the time to find the right person.
   Many times, it’s unbelievable, you have to fill that position because otherwise you’re going to lose a tremendous opportunity in the business and you can’t wait. You can’t wait months and months to fill that position. So you finally make rush mistakes. All right. So that preoccupied me for a number of years and I found a solution that is a little costly but nevertheless it pays off. We set up a group of employees at various levels without portfolio.
   And in fact, some of the most successful people that rose by the time 50 years went by, 40 years went by. Because we celebrated our 50th anniversary a few years back. The top people came from that group. That at first my board said this is crazy. You don’t have a job for them. I said well when I see somebody exceptional I want to bring them in. We agreed with the salary and we agreed with compensation with the options and so on. I said many of them, I said well try to find yourself a job in the company because I want you there. By the way the most successful and I can mention their name.
   The most successful of all the businesses we created and when I retired we had 23 public subsidiaries, which we owned between 60 percent and 80 percent of it. The most successful one was created by a man called Arwin Smith from Texas. I find out completely at random. I knew him for a number of years and one day I found out that he’d been hired by somebody. I said Arwin you didn’t tell me you were looking for a job. He lived in Washington. Well no, I wasn’t looking for a job but somebody offered a tremendous opportunity. I want to hire you, what’s the job? He says I don’t know.
   I said what did they pay you, I said I’ll pay you 10 pay more. He said what’s the job? I said you come into Boston and you find it yourself. Find a job. [Laughter] He came in June. I remember very clearly, Arwin Smith came from Washington because he knew Thermo Electron and he believed in Thermo Electron. Actually he left a tremendous opportunity to come to Thermo Electron without a job. The salary was equal but no job. [Laughter] And he came in June and he finally found a job.
   He searched quite a bit, finally found a job in November and the job was to start a new company called Thermo Instruments, which really was the biggest success of all new ventures we did at Thermo Electron, which is what Thermo Electron is about right now. And he came in and everybody knew that we were hiring exceptional people without portfolio. I told the board, we set aside.
   We’re not that big, we cannot afford to set aside so much money and so many options for people without jobs. But people that we know something about. Because if we wait until we find a job, the people will be lost. And really that worked very nicely. Many of them, I don’t want to mention names but I could, they all know it but you wouldn’t know the names anyway. I only mentioned Arwin Smith because he was the most successful of the hires without portfolios.
BANKS: Marina, Greg, are you going to go hire people now without a job?
GREG SCHMERGEL: It’s a little harder to do that when you’re smaller and you’re venture funded. You have to go explain to your VCs why you’re hiring people without a job. But if I had the financial flexibility to do that, it sounds like a great idea. Hopefully I’ll get there.
MARINA HATSOPOULOS: I always kept a file of people who I thought looked really good. I would often times catch them at their next shift and kind of when the time worked out right. So there were a few people like that, that were in the file and when the timing was right, it worked out.
GABRIEL SCHMERGEL: I think George’s story, which is the first time I heard it, is really great. It’s too bad that there aren’t more CEOs of large companies that operate in this kind of philosophy. A lot of CEOs, of course in their defense, I’m not talking about the large companies. Wall Street pressures every three months you have to generate the numbers and all. That works against that but you have to have the courage to do these kinds of things. I think U.S. industry, there again it’s act together because certain countries, India, China down the road are copying and breathing down our necks. So this is just absolutely great George, really great.
GEORGE HATSOPOULOS: I do want to add something because that issue that I’m going to talk about has been raised many times. You know there are a lot of people that have invited me, especially after I retired, to give speeches in various countries.
   How come America is so much more successful than-- Usually in Europe, in many countries they say we have scientists and engineers that are just as good as the Americans and even better. How come we are not as successful? It’s the environment; the environment, risk taking environment, what I describe to you right now what I did. I don’t think that it was acceptable. If I were to say that in any European country that I have a business and I hire people at random, well not at random. [Laughter] I hired somebody because I knew that one day I would use them. That’s unheard of. But this is the environment here accepts much more risk taking than any other country I’ve seen.
GREG SCHMERGEL: One of my top engineers went back to his home country a few years ago after working at Nantero for a couple of years to start a company in the field of nanotechnology. And he tried to raise money and the investors in his country would only give him money if his family guaranteed the money by pledging their homes. They also told him that if the company failed, they were going to blackball him from ever getting a job in the country again. But other than that, no pressure. [Laughter]

BANKS: (A question from the audience) How do you define an exceptional person?
GEORGE HATSOPOULOS: Well it’s way difficult. [Laughter] It’s very risky. First of all, one rule you have to follow is you have to before you do taking such a big risk like I took. A huge risk, the company was not the company today but it was much. It happened, I remember in June of 1970 when I hired Arwin Smith. And it was a small company, relatively small, that’s a huge risk for me to take. Because the salary was very high but I’ve known Arwin Smith for several years and I’ve seen him react to situations. We were friends. It’s not that he was not a customer.
   And you have to observe the person for a long time to see under what conditions. Then occasionally as you see somebody that is unusual, you get sense that the reaction of that person in difficult times has been brilliant. By the way, I might want to mention another recipe. I would advise any manager of a company that wants to create new businesses, whether it’s General Motors or General Electric or Intel or whatever.
   New ideas and that is to make sure that if somebody is undertaking a risky situation and he fails, he’s not punished unless when with the information he had when he made that decision was warranted making that decision. People in bigger companies really don’t accept this concept.
   But I said look, if you have a vice president and he has an opportunity to flip a coin, which we all know is 50/50 probability. And somebody offers him ten times more money if he comes head, then the money he would lose if he comes tails. That person bets that and he loses, would you fire this person? But most big companies would fire that person because he lost. But the fact is that he made a rational decision, a tremendous decision because if he played that game 50 times, he’s going to make a fortune. You see?
   So you have to analyze not by the results but by the analyses that the person because all in business depends on judgment. You face a situation. You always have undefined data. You can’t calculate. Like if I wanted to calculate how an electron will move in an electric field you calculate exactly. But in business there is tremendous uncertainty and therefore you have to make a decision within the framework of uncertainty.
   The most important thing is to see how the people make the decision, not to judge the person whether he had the spot three or four times. Maybe he was lucky to get this spot. Look, that happens in business. I honestly believe that it happens. People sometimes do crazy things and then win. And then everybody runs themselves, he’s a genius. [Laughter] But you look behind it.
   I learned that lesson by playing bridge an uncle of mine that was brilliant. He took me to Regency Club in New York. My bridge was very low level and of course, I was dealing with Goren and all the great players there. And I played and I won so I turned to my uncle and I said, you know I did pretty good; I won. He says you played lousy; it was terrible. You did not finesse that way and you should have done the other or you should have played the other way. I said but uncle I won. He says, it doesn’t matter, you played that poorly and you’re going to be broke. You lucked out one time.
   The idea is how to reason the thing and whether you’re play is enough that if you can play it 100 times, on average, you’re going to win. And you know businessman lack that ability to understand that. This is more the Americans are better than the Europeans, I must say, because they’re more risk takers. And to be a risk taker, you have to reason things out by probability. The decision is bad or good if you analyze enough and maybe you come up with the right decision. So that’s my comment.

BANKS: Lets hear some of your thoughts on why you established your companies in New England, whether the culture of risk had anything to do with it. Would you establish another company in New England today and if not, where would it be?
MARINA HATSOPOULOS: Yeah. I think this is a great place. There’s a tremendously strong academic community, just a great pool of talent to draw from. My own area is on the mechanical side so it just is a better fit. There’s a whole bunch of stuff going on, social networking. I’m not sure that I would do that here but leave that to the west coast. I do think that there is a different approach. But I think there’s a lot of great risk taking going on right here.
GREG SCHMERGEL: All three of the startups that I’ve done have been in New England. So if I do a fourth, fifth and sixth, it would probably also be in New England. I also think it’s a great place to start companies and a great environment with a lot of people who are enthusiastic about funding them and working in them so I don’t see any drawbacks other than the winters.
GABRIEL SCHMERGEL: For me it was very simple. At that time I was living in Chicago, running the Baxter International business. From there I was introduced to the two founding scientists of the company. They happened to be at Harvard Bio Labs. So it was kind of if I was going to join with them, it was going to be basically Cambridge or Boston.
GEORGE HATSOPOULOS: Well I wish I could tell you that I chose to form the company in Cambridge because I had to analyze the thing. I didn’t. I did analyze MIT and I came to MIT so it was natural to form the company here. Now it wasn’t that bad decision anyway because being close to MIT you have a lot of source of talent. And besides, even in retrospect I had analyzed it at that time.
   Right after the war there were a lot of innovative things that happened. Radar was built around MIT. Not that I did all that analyzing; I knew nothing about it. It’s just that I was attracted by MIT and I hadn’t decided where I’m going to start. I didn’t even raise the question where I started the company. But since I was at MIT and I got my Ph.D. here so it was luck. Okay.
   By the way, I have a saying. It’s better to be lucky than bright. If you have a choice, being genius or lucky I think it’s the right decision to be lucky, to take the luck. [Laughter]

BANKS: (A question from the Gabor Garai of forum sponsor Foley & Lardner) He wants to know from Greg and Marina, if they have children whether they want them to be entrepreneurs. If so, how can we in this culture of coddled children and soccer where everybody wins and no risk taking whatsoever actually create good entrepreneurs. Great question.
MARINA HATSOPOULOS: I think it’s an excellent question. We really do coddle our children as my mother tells me all the time. I don’t actually particularly care if they become entrepreneurs or not. But one thing that we do is allow our children a lot of unstructured time. I have four children and it amazes me what they come up when you leave them alone for a couple of hours. They just create these worlds that are extraordinary, like the little tent village under the tree in the front yard. Or they’ll start their own little business in the back room selling things to each other or whatever. That’s the only thing I’d say that we do for our kids.
GREG SCHMERGEL: I’m not married and I don’t have any children. But if I did have some day, I wouldn’t mind if they became entrepreneurs. But I’d probably be scared about trying to make it happen because a lot of things that my father told me to do like major in engineering, join the military I didn’t do. [Laughter] And he never told me to become an entrepreneur and I did do that. So I would probably be scared to try to actively encourage it but it would be fine.

BANKS: (A question from the audience) Why is the U.S. so successful? I appreciate your answer but my question really is what is your evaluation using some index numbers. I believe we graduated about 550,000 engineers in the United States last year. China graduated about 500,000. So do we have the talent here to be original and risk takers or are they just copiers over there?
GEORGE HATSOPOULOS: That, I’m sorry, is a very difficult question, very difficult question. It has preoccupied me and I must tell you I don’t have the answer because first of all, there is some reason why Americans are risk taking. The only explanation of risk taking because at least until the Second World War, a good deal of Americans work came from Europe. Why since they were born in Europe and some of their genes were European genes, whether from England, from Germany, from Holland, from Hungary from all of these other countries? How come on average they are more risk taking.
   The people that have migrated must be more risk takers. So there’s a selection process and that selection process, of course, if there’s any kind of continuity inheritance builds up. That’s how you select horses; you pick the horses that run faster and then you breed them together, then you develop horses. So there is a development program by having several generations.
   But on the other hand, we need the country, the country needs entrepreneurs and risk takers but how do we know that there’s not enough risk taking genes in China? Because if they are, they have to be very far behind the risk taking genes when the ratio of engineers they create is so huge to us. This whole thing is a very difficult question and probably you can do some statistics but I don’t think we have enough data to do that. But it should be getting enough data should be subject to analysis but we probably could not get that data anyway.


BANKS: (A question from the audience) How do you reduce risk in entrepreneurship?
GEORGE HATSOPOULOS:  I have advice I feel very comfortable giving. If you’re going to address a societal problem, it’s better to not pick a problem that has been around a long time. Only pick problems that have suddenly surfaced. It’s logical because problems that have been around, with all these millions of people around us for many years, somebody would have solved the problem. [Laughter]
   Let me give you an example. I remember the question. Remember the downing of the Pan Am plane over Lockerbie, Scotland? It was the first time that some terrorists put in the plane an explosive that because it was plastic, if I recall, and there was no detection for plastic explosives. So knowing my propensity to that, a young man came to me to my office. Anybody could come to my office any time, from the machinists to the janitor to the vice president to the chief engineer.
   So this young man came in and said ‘Dr. Hatsopoulos, you know I was reading the paper about this. Wouldn’t that be a great idea to develop an instrument to detect on board flight a plastic explosive?’ I said this is fantastic. This is brand-new need. We called a number of people and we started the business.
   The problem with plastic explosives is they don’t have vapor pressure so you can’t detect, as with other substances, by smelling it. And what you have to do is take a cloth. You may have gone on a plane and they ask you to swipe your briefcase because if you have touched the plastic explosive, it’s bound to have gone to your luggage. So they ask you to rub your fingers somewhere and they put it in their machine.
   That’s the machine we developed. Now many people make that machine but I tell you for several years we were the only one who made that. Always pick a brand-new need. Don’t look at needs that have been around for 10 years, 100 years, 1,000 because it’s not useful. You’re not smart enough to do that.

BANKS: (A question from the audience) He wants to know whether the lack of barriers in America plays the role in the majority of entrepreneurship here compared to the barriers that exist in Europe.
GEORGE HATSOPOULOS: Yes, there are barriers. But they are not barriers that are imposed by the laws of the government. They are barriers that have developed within the population. Let me give you an example. We came out with a mammography equipment some time.
   The leader in mammography for many years was GE and probably is right now again. But I don’t know; I haven’t followed. And we came up with a new piece of equipment for mammography and we started taking market share from GE so rapidly that when I met with Jack Welch in Waltham one day. He came to visit us. He said you know you’re beating the hell out of us in mammography so on and so forth and we had a discussion on that. Now let me tell you what the observation is.
   When we came up with that, every hospital we went in America looked at, the manager looked at it. He said to his people try it and see if what they claim is correct. And people tried it and they bought our equipment. We tried to do the same thing in Europe and we couldn’t do it. Because who is that Thermo Electron mammography. Mammography is done by Seimans. I’m talking about one of the surgeons in Amsterdam. The attitude, so it’s not the law, that provided that barrier but it’s a barrier though. And the barrier is part of that society.
GABRIEL SCHMERGEL: Right. I fully support that analysis. I lived in Germany for four years. As an example, it’s a fine country and great beer and all but the culture is such that if in Germany if you fail. It’s how they have you for your life. So smart engineers working at Seimans, he or she will stay there because it’s safe. They will get promoted eventually and slowly or whatever.
   Japan, I never lived in Japan but I had about 25, 30 two week trips there. Again, the culture is more restrictive so if you fail it’s held against you. So young Japanese will be more reluctant to strike out on their own. Here in the United States, you can try something and you can fail. If you have the basics, obviously you’re intelligent and a good sales person, you can raise money for another start up. If three or four times you fail in a row nobody will touch you. But one or two failures are part of the game.
   I will just close with one comment that also answers your question. The very best VC firms are the very best VC firms because of their record. You look at ten investments, one is going to be a big winner — one. Two or three is going to be kind of okay. Two or three make their money two or three times with these companies. The rest, the three or four will go down the tubes and one or two maybe they get their money back more or less. I’m using financial logistics as a measure of success. There are many other ways to look at it too.
   But people will accept. And indeed if you start up something, you kind of figure on these chances, one out of ten chance of making it big and a tremendous success. And three or four out of ten that the company will go down the tubes or go bankrupt. Just don’t do it three or four times in a row.

BANKS: (A question from the audience) Our education system is failing compared to international countries like Singapore, Finland in terms of science and math. Has the ability to create entrepreneurship culture in the United States changed from your generation to this one in your opinion? And then Greg, Marina, are you seeing that as well? Is that right? Okay.
MARINA HATSOPOULOS: My perspective on it is that despite all the bad things we hear about our educational system I actually don’t think that’s the real root of our problem right now. I think we’ve got a great culture of entrepreneurship and risk taking. And in my perception the biggest risk we face is that the younger generation lacks the fire that is of in these students that come over from India and China; they have fire. We’re kind of comfortable and I don’t know how you can create that fire when you’re living a really great life that we are.
GREG SCHMERGEL: Yeah. That’s an issue that you’re seeing across history with countries that became great and then became complacent. So hopefully everyone in this room will do their part to become involved in entrepreneurial ventures and fix that.
BANKS: I can’t think of a better way to end this. So that was perfect. The anything is possible theme is great. We heard some great stories. I feel privileged to be a part of it; I hope you do as well.