Sean Park Portrait
Quote of The Day Title
Condense fact from the vapor of nuance.
- Hiro Protagonist, Snow Crash

I’m a scorpion; it’s my nature.

McKinsey surveyed a bunch of executives and found that:

84 percent of executives say innovation is extremely or very important to their companies’ growth strategy. The results also show that the approach companies use to generate good ideas and turn them into products and services has changed little since before the crisis, and not because executives thought what they were doing worked perfectly. Further, many of the challenges—finding the right talent, encouraging collaboration and risk taking, organizing the innovation process from beginning to end—are remarkably consistent. Indeed, surveys over the past few years suggest that the core barriers to successful innovation haven’t changed, and companies have made little progress in surmounting them.

As I’ve written many times before, I think they are barking up the wrong tree.  They are trying to have their cake and eat it too which in the context of a traditionally organized (read 20th century business school optimal model) large company is like trying to pee in the corner of a round room.  ie Pursuing ‘non-linear’ innovation is not only difficult for these kinds of organisations, it actually requires a framework that is often diametrically opposed to the framework that governs the rest of their business, the business that actually pays the (current) bills.  And so it is entirely unsurprising that companies find it hard / impossible to assimilate this within their structures, culture and reward systems.  Perhaps paradoxically, one could argue that the better managed a large company is for its current/core business, the worse this disconnect;  in poorly managed large companies there is probably more room to roam “off the reservation” so to speak…  But I don’t think anyone – including me – would suggest that it would create overall value to manage poorly just in order to pick up a bit of innovation juice around the edges.

So what’s a big company to do?  Well I think they should look to invest some of their capital outside their walls.  Not corporate venture per se – the corporate antibodies end up killing / ensuring failure of dedicated corporate venture initiatives 9 times out of 10.  (A notable exception to this rule – the one of ten (hundred?) – is Intel Capital.  If you think your company can do this then go for it.  I personally suspect that one of the reasons Intel Capital managed to avoid institutional purgatory is that Intel has a very strong entrepreneurial culture and leadership (deep into the firm not just at the top) that had first hand memories of building businesses from the ground up.  Google Ventures may enjoy similar success for the same reasons…)  For the rest, I would suggest setting aside a certain amount of capital to make passive minority investments either directly or via specialist sector-specific early stage investors (like us if you are a financial institution, yes I’m talking my book) in companies innovating – especially in those using ‘non-linear’/disruptive approaches – in their markets.

Passive – meaning no board seats, no control – because the alternative would result in adverse selection bias or mission dilution/suffocation or both.  Adverse selection, because the best, brightest and most ambitious start-ups in your sector will not take your money if you ask for control and mission dilution / suffocation because if they do take your money and give you some control, your corporate antibodies will do everything they can to assimilate and/or crush what they will correctly see as a threat to the companies core business.

So why bother at all?  Why not just wait to see who emerges as winners and then buy them once the risk is gone?  Principally for two reasons (in order of importance):

  1. Because you have to have a “position” to really harvest the informational value:  this is the trader in me speaking – anyone who has ever traded any asset knows instinctively that the difference between an ‘opinion’ and actually having a ‘position’ is huge.  Indeed any good trader who needs to follow any particular market closely – even if this market isn’t their first order concern and/or they don’t (yet) have any strong conviction – will take a small/nominal position in said market in order to ‘be in the flow’ and truly feel the rhythm of that market.  Put another way, picture the impact of an internal board presentation on top 10 new industry trends and 20 new companies ‘to watch’ vs a presentation of ‘this is how the 20 companies we have invested in are doing’ and tell me honestly that both will have the same impact…
  2. Because you just might not get the chance to buy the winners – either at all (think Google, Facebook, etc.) or it will cost you very very dearly and worse you probably won’t have enough information to truely know / understand what you are buying (the most toxic manifestation of this is what I call the ‘panic buy’ – eg NewsCorp/MySpace.) In other words, the buy later strategy has it’s own set of very real risks.  And even when/if you do ‘buy later’ a company that you haven’t invested in, as a result of (1) above you will almost certainly be able to better mitigate some of these ‘buy later’ risks.

So why don’t more big companies do this?  I’m not sure.  Would be interesting if McKinsey would ask this question (they are more likely to get answers than The Park Paradigm, not sure I have a lot of Fortune500 C-suite readers!)  I suspect it is because the time horizons needed to be successful in such a strategy (5-10 years) far exceed the time horizons of most senior executives.  And related to this, that they are afraid – quite possibly correctly – that “Wall Street”/”the City” will chastise them for spending any money on ‘speculative’ investments,  that it is “not their job” and that they should “focus on their core”.  Funny however how the most successful executives and companies however manage to ignore the peanut gallery and pursue their plans with conviction and diligence.  Perhaps these are the companies who may listen and find value in my suggested approach…

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  • Thoughtful post, thank you. I think a lot of big companies struggle with this because of their capital-budgeting process, which puts a premium on predictable returns from naturally-adjacent businesses, and seeks out economies of scale (the dreaded "shared services" mindset) achievable with the existing portfolio. So, there is often an internal protocol whose values and procedures are at odds with this approach: and because that process also brings with it a lot of glamor and authority ("I just came from a Board meeting and they approved..."), the incumbents are in no mood to change that. It's the intersection of "good governance" (which means that the shareholders expect the company only to put capital to work in ways they understand) and internal corporate politics (which is really rent-seeking behavior by the usual cadre of ex-bankers and ex-consultants who hold those corporate-development jobs).

    Warren Buffett tells his companies (I'm paraphrasing here) "don't diversify, I can do that myself, I need you to stick to your knitting." I think that's actually a sound perspective. What gets lost is that speculative early-stage investing may not be diversification at all, it may be (if done right) the system that protects the existing business by identifying and co-opting the disruptors of tomorrow. But in many companies it's tarred as being about diversification, and that's what kills it.

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