You start. You struggle against initial inertia to gain velocity. You succeed. You grow. Your success breeds more success. Momentum is now your friend. But the world changes: technology, markets, society… And your hard won momentum keeps hurtling your (now large and profitable) company down the same trajectory. And momentum is now your enemy. Ah, the joys of…inertia.
The recent sensation caused by an ex-Microsoft insider’s NYT op-ed is just one more example of this seemingly inevitible ‘circle of (corporate) life.’:
Microsoft’s huge profits — $6.7 billion for the past quarter — come almost entirely from Windows and Office programs first developed decades ago. Like G.M. with its trucks and S.U.V.’s, Microsoft can’t count on these venerable products to sustain it forever. Perhaps worst of all, Microsoft is no longer considered the cool or cutting-edge place to work. There has been a steady exit of its best and brightest.
What happened? Unlike other companies, Microsoft never developed a true system for innovation. Some of my former colleagues argue that it actually developed a system to thwart innovation. Despite having one of the largest and best corporate laboratories in the world, and the luxury of not one but three chief technology officers, the company routinely manages to frustrate the efforts of its visionary thinkers.
Innovation is a new way of doing something or “new stuff that is made useful”
I’ve of course added my two cents to this discussion, with my thoughts on the subject drawing on my personal experiences (and those of friends and colleagues) of having tried (very hard) to sponsor a pro-active approach to disruptive innovation in a very large company. For those of you not familiar with my hypothesis on the question, I’ll save you the trouble of digging through my blog, it boils down to the complex weave of organizational and personal dynamics that unavoidably emerge when you assemble large groups of people in one organization:
Loss aversion dominates: most people (and sub-groups) fear loss much more than they enjoy gain. This is why the status quo is so closely guarded (at any level of resolution, from the individual through to the overall company.)
Dancing with the one that brought you: at any level of seniority, it is likely that the person in charge got to be that person in charge by being particularly skillful or adept at navigating the existing business and/or organizational model. It’s like the America’s Cup: the winner sets the rules (and has no incentive to adopt “new rules” for which they are probably less well adapted.
In fact, Machievelli eloquently summed it up 500 years ago:
It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new system. For the initator has the enmity of all who would profit by the preservation of the old institutions and merely lukewarm defenders of those who would gain by the new ones.
These principles form the core of the corporate immune system which considers any disruptive innovation as a threatening virus. So what is a big company to do? Should they accept the inevitability of decline (hopefully slow, profitable and graceful) or can they postpone or avoid this fate?
In some (most?) cases, I would suggest that they accept decline but this does not mean giving up. On the contrary it means aggresively (and even creatively managing the exisiting assets to create as much value as possible as the business model and or product ‘runs off’. This indeed was my prescription for Microsoft when I wrote two years ago that they should break-up the company and re-jig the capital structure, running the Windows/Office businesses for cash (with a debt financed balance sheet) and let a thousand new baby Microsofts bloom. A conventional view would see this as a failure of management and/or ambition. Obviously I think this attitude is ass backward: running the core products for cash while releasing enormous amounts of human and financial capital, which in turn could be used to create hundreds of new companies could – using any metric you like – only be considered a triumphant success. But convention, inertia and ego means that this path to success is rarely if ever taken by the leaders of market giants. Just in the last couple weeks the idea that Google might becoming the ‘next Microsoft’ has gained currency (at least in the valley.) I asked this same question (in May 2008:)
I know it has been asked a million times before but is Google the next Microsoft? (At least from a financial point of view…) At the start of 1996, MSFT traded at c. $6/share. Four years later they peaked at almost $60/share. GOOG IPO’ed at c. $85/share in 2004, and just over three years later peaked at over $700/share. Both moves of approximately 10x. Since 2000, MSFT has been more or less range bound at around $30/share, despite continuing to grow it’s top and bottom lines and produce prodigious amounts of cash. I’m not suggesting history will repeat itself exactly – perhaps we have not yet seen the peak in GOOG’s share price (sell at $850?), and I’m certain they will continue to grow their top and bottom lines and produce prodigious amounts of cast in the next 5-10 years. But…will the stock eventually settle at around $500 – 600/share…? Is it conceivable that Google, like Microsoft before it, will become the place where good companies are bought only to disappear?
However, like with human life, I think there are probably a number of recipes to extend the natural corporate life (and the quality of those extra years) and to leave a more valuable legacy when and if the company ultimately disappears. Starting with investing some of their excess capital in the innovation ecosystem that surrounds them. As I have found however, this idea is anathema to most large companies. And with some reason. The history of ‘corporate venturing’ is indeed (as Azeem Ahzar eloquently writes) riddled with failure. My view is that this is because it is exceeding hard to do this in house: the corporate antibodies as described above will almost always do their job and sabotage any in-house venture program. And yet just investing as an LP in an outside venture fund – even if one that happens to focus on markets relevant to the company – is an understandably unsatisfactory and probably equally ineffective alternative.
But we think there is a third way: a focused, strategic innovation program run independently from, but in close collaboration with the company. Maybe we can help your company. You know where to find us: where innovation grows.
Today Markit Group announced that General Atlantic has invested $250 million, valuing the 7 year old company at a whopping $3.3 billion. Founded by Lance Uggla, Kevin Gould and Rony Grushka in 2003 to address the growing need for quality data in the burgeoning credit derivatives market, what followed was several years of unbelievably good execution and disciplined acquisitions which has positioned the company as a critical component at the heart of the trillion dollar OTC derivative markets. The products they provide aren’t considered sexy (something that is often given all too much importance in this status conscious industry) – but their data, valuations, indices, trade processing and other products and services are the plumbing that is key to the continuing operation of many financial markets. They are a great example of creating value by building a great platform and understanding how to monetize data. I had the good fortune to be a non-executive director from 2003 to 2006 and I can say without hesitation that this team is one of the best I’ve ever seen and fully deserve the success they have achieved. (Congratulation guys. Awesome, truly awesome.)
And I am certain there is more to come. Their primary constraint has and will likely continue to be the physical/logistical limitations of growing as fast as they have but each year they only improve and in terms of acquisitions the company they most remind me of (in terms of disciplined and deliberate execution) is Cisco. Besides, General Atlantic doesn’t invest in companies where they don’t think they can make 20-30% annual returns or more.
And yet many (most) people in the ’start-up’/'tech’ scene whether in the UK or the US have never (or only vaguely) heard of Markit. (For example, I counted only about 50 or so tweets referencing the announcement today, less than for any TechCrunch launching start-up…) Why is that? Obviously I can’t say for sure but (in no particular order) would guess the explanation perhaps lies in the following:
not venture capital funded; funding initially came from it’s cornerstone customers, the investment banks, and then later from some very smart hedge funds
focused on the wholesale financial services industry (and not on consumer or media or other mass markets)
key products and services (and associated economics) unknown to those outside finance and even worse generally considered ‘boring’
management team laser focused on execution, not PR (although to be fair they had this luxury not needing to sell to the mass market)
and so folks like TechCrunch and VentureBeat don’t know or write about them (aka “if a startup isn’t listed in CrunchBase does it really exist?” syndrome)
Indeed for me, Markit is a poster child for the cognitive, cultural and expertise chasm that exists between ‘Wall Street’ and ‘the Valley’ (or the ‘City’ and the ‘Roundabout’ to use the less good UK-centric metaphor.) They might as well be on different planets. Indeed bridging this divide is at the core of what we set out to do at Nauiokas Park and was the driver that led Paul Kedrosky and Tim O’Reilly to launch the Money:Tech conference in 2008 (which sadly didn’t survive the financial crisis and quite frankly was met by a deafening indifference by the vast majority of the Wall Street side of the equation.)
And yet, the opportunities available to those who can successful bridge this gap are enormous. Well, anyway that’s what we think. And the crisis in venture capital ostensibly caused by too much capital? I’m going to disagree with Paul and Fred and suggest it’s not too much money overall; rather it’s too much money concentrated with too few investors, focused on too few sectors, who end up all chasing the same deals. So to the LPs out there my message would be: don’t shrink the pool, enlarge the opportunity space. Oh, and try to make sure you’ve got exposure to the next Markit Group.
I would set upon transforming the company into a retail financial services powerhouse, focusing in particular on developing markets like India and Brazil; and
I don’t have time to articulate the whole thesis here (and besides, if they want the whole thesis they can hire me!) There are some hints in my Platforms, markets and bytes presentation.
All this will no doubt help Nokia come up with better, if not magic, products. The firm may even reach its goal of 300m users by the end of 2011 because its efforts are not aimed just at rich countries, but at fast-growing emerging economies where Nokia is still king of the hill, such as India. There, services such as Nokia Money, a mobile-payment system, and Life Tools, which supplies farmers with prices and other information, fulfil real needs, says John Delaney of IDC, another market-research firm.
Which only strengthens my view that their path to salvation lies in (yet another) complete re-invention, this time to a 21st century, sixth paradigm, retail financial services platform (built on a mobile substrate.) They might even want to keep (at least some of) their handset engineering know-how: it might come in handy for building handsets that are particularly well adapted to mobile financial services.
In any event, if Nokia want their share price to go up, they better hurry up and change their frame of reference. I mean really, who would you rather compete with? Apple? Google?
A couple of months ago, I had the privilege to have been invited to speak at eComm 09 in Amsterdam. I have posted on this previously but recently the video of my talk was posted and perhaps will make it easier to understand my accompanying presentation. If you can spare 20 minutes (there is an additional 10 minutes of q&a at the end) and are interested in understanding how Nauiokas Park defines our opportunity space, please have a look as it is probably the most succinct expression of the worldview we bring to investing and analyzing potential investment opportunities.
And here is the presentation again, in case you would like to follow along as you listen to the video:
Well-built developer platforms are the future of every industry. (-ReadWriteWeb)
Note: Their is a small glitch around 7:40 where the video skips over a few seconds; funnily enough (for the conspiracy theorists out there) this is exactly where I say that had ZSIN’s existed, the extent of the disasters that occurred in the mortgage securitization markets would have been at least an order of magnitude smaller…)
Fred Destin wrote an excellent post mapping out the appropriate roles for a founder/CEO vs a non-executive/investor in a start-up. Actually, his advice holds true for any company but I suspect is much more often a problem in start-ups due to the executive teams generally having little or no real experience of working with and for a Board of Directors. I’m not going to rewrite or paraphrase his post, here is an exerpt but really if you are a start-up executive, please just go read it:
If you really believe in what you are doing, you come to the board telling board members what you are planning to do, taking considered advice on whether this is the right strategy, considering that advice and executing on what is, in your best judgement, the right path for the business. That’s what you are there to do. Take decisions fast, don’t fall for analysis-paralysis, trust your gut, execute and iterate. As Tim Ferriss would say, ask for forgiveness, not permission.
I particularly liked his list of why executives need to know how to manage their non-executives and filter their input:
Here are the top five lighthearted reasons why VC’s should not drive your strategy:
We forget 50% of what we said at the last board
We don’t know the people inside the company and hence have no clue what the team can really execute
We meet many smart people and hence we have way too many ideas that you cannot possibly implement
We are focused on the 5 year vision, yet we are focused on the quarter too, even we are confused
We don’t need to deliver on it, you do. We come and collect when the job is done.
Item 1 and 3 hit particularly close to home!
The (dysfunctional) situation Fred describes reminds me of American football where the coaches (non-executives) are constantly telling the players (executives) what to do. I think the dynamic that is needed in a corporate setting is much more rugby, the coaches work with the players throughout the season, helping them to develop both their individual skills and a positive team dynamic, scouting the competition and staying on the lookout for new talent, but ultimately when the players run out onto the field, they are on their own. They need to make their own decisions and they determine who wins and who loses. The coach? Well he sits in the stands and watches. I’ve never seen one yet who scored a try or kicked a goal.
Using the tried and tested TED 20min format, it was a great opportunity for me to collect my thoughts into (what I hope was) a coherent overview of how I think technological and economic forces will shape the optimally adapted ‘industrial stack’ for the sixth paradigm. It’s a great summary of the prism through which we look at potential investment opportunities and I hope will help us articulate this more powerfully to entrepreneurs and prospective investors.
I’d love to hear any feedback (good, bad and ugly) from any of the eComm delegates who saw my presentation and hope to continue the conversation with you and others here. You can also follow me on twitter @nauiokaspark.
Thanks to Paul and Lee for inviting me and especially to those of you who took the time to respond to my call for input – it was tremendously valuable in helping me to shape and refine my thinking and in building the presentation; just a few years ago, assembling this kind of distributed brainpower would have been impossible, and I hope I never lose my ‘childlike sense of wonder’ at the boundless possibilities that technology enables.)
I finally got around to reading the now infamous Netflix presentation on corporate culture. I had more than a dozen people point it out to me and must admit this actually raised my level of skepticism – “sure, ok another vapid corporate culture slideshow…”
I was wrong. I wish I had written this. These 9 values and how they should be implemented align entirely with my thinking and – my former colleagues will have to confirm / refute this – how I tried to run the businesses I was responsible for at DrKW, and how I tried to use my influence on the Management Committee to get the firm to adopt these values. In this latter goal I would have to say I failed miserably. As for the former, I think I was more successful but ultimately it was perhaps futile, surrounded as we were by a sea of culture that was strikingly different.
The sad thing is, I’m convinced had we adopted this culture – and as a relatively small investment bank it was within our control – I think the financial and business outcome for DrKW would have been quite different. I would go so far as to say it would continue to exist today and would have thrived as a nimble and unique competitor in the financial wreckage of the past two years. Instead, it was inevitably destined to disappear: to small to save, big enough to blow up.
But DrKW was unfortunately not unique in rejecting this positive culture. I can’t think of any investment banks that would entertain truly practicing even two or three of the Netflix values, let alone all nine. (I’ve only ever worked for three banks so maybe I’m wrong. Please correct me if you think this is the case.) And yet were they run along these lines, I am certain that the worst of the afflictions that beset the financial system would not have materialized. The crisis would not have been. I know that is a pretty strong statement. But I don’t think it is hyperbole.
There are many talented and extraordinary people in the financial services industry who, fed up with the toxic cultures, leave it as soon as they can afford to. I’m sure you could build an incredibly successful company by attracting this talent with a cultural framework like this. Maybe we’ll be able to do it. I’m sure someone will. I can’t wait.
I’m going to keep this short, mainly because I’m not an expert by any stretch of the imagination. So discount this as a layman’s viewpoint as needed.
The most common, almost Pavlovian, stock response I hear from (both IT and senior management) financial services firms with respect to why they don’t see cloud computing as relevant to their high-level business strategy (ie ok around the edges but really just an IT cost/benefit thing..) is:
Of course you know, our business is different, it needs to be secure. The hardware needs to be sitting under my desk.
Ok, fine I made the last bit up, but you know they’re thinking as much. So without digressing into a debate as to just how secure most financial services IT is, the question I always respond with is this: does your organization know how to run a more secure data centre than Amazon or Google (or any other present or future specialist cloud infrastructure supplier)??? Really think about it. Do you make your own hardware? Perhaps you can make banking microchips better than Intel… (From Appirio’s CIO Guide to On-demand: )
On-premise does not equal secure: the biggest driver towards private clouds has been fear, uncertainty, and doubt about security. For many, it just feels more secure to have your data in a data center that you control. But is it? Unless your company spends more money and energy thinking about security than Amazon, Google, and Salesforce, the answer is probably “no.”
VPN-Cubed® is the first commercial solution that enables customer control in a cloud, across multiple clouds, and between private infrastructure and the clouds.
VPN-Cubed provides an overlay network that allows YOU control of addressing, topology, protocols, and encrypted communications for YOUR devices deployed to virtual infrastructure or cloud computing centers. When using public clouds your corporate assets are going into 3rd party controlled infrastructure. Enterprise checks and balances require you to exhibit control over your computing infrastructure. VPN-Cubed gives you flexibility with control in 3rd party environments.
The other myth to dispell is that no one is suggesting migrating any or all infrastructure to a cloud environment overnight, or even as soon as possible. The decision whether or not to move existing infrastructure to a cloud (private or public) and when is indeed probably more of a ‘routine’ (but big) question for IT (although management should be interested in the answer.) The point I’m trying to make, the point that is relevant for the executive committee is:
How does the nature of my business – what products and services I provide to my customers and how – potentially change because of this new technological substrate?
This is the question that should animate the weekend executive strategy retreat. In order to answer that question, you need to have some understanding of the technology but not how it works so much as what it can do. I don’t need to know how the microchip works in a digital camera to think about how I can use that camera. The question management should be brainstorming is:
If we were to start with a blank page, with the technology that exists today (and will likely exist in the next 5-10 years) how would you best build a company to serve our customers, present and future? What does FaaS (Finance as a Service) look like?
This isn’t going to happen overnight so the suggestion is not to ‘throw the cards up in the air’ and panic. And incumbents have many advantages on their side (customer inertia being the most valuable). But it will happen. And quickly in the geological timescale of large organizations so they need to start moving, start mapping out this future. And – here is a shameless plug for Nauiokas Park – one facet of that should be placing a lot of small bets on emerging, disruptive start-ups that have the luxury of moving more quickly, experimenting more radically, with faster evolutionary cycles. (Like a genomics company experimenting using fruit-flies and mice first to isolate winning adaptations.) While at the same time preparing their supertankers for a significant change in direction.
Maybe we should offer to moderate these strategic retreats. Do you think we would get any takers? If you work in a financial services company, ask your CEO and let us know.
Update:
If you are looking for a good (albeit long) explanation of what VPN-Cubed does and why it really is a “game-changer” read this post from Mark Masterson who sums it up as follows:
So, let’s sum up. Enterprise cloud computing is a type of cloud computing that is suited to the specific requirements of existing companies, and allows them to leverage resources in the Cloud to provide economical ways of adding capacity to their existing environments. First, their existing data centre (or some portion of it) is virtualised. Once this is accomplished, capacity from external cloud providers can be added (and dropped) dynamically, using technologies like VPN-Cubed, allowing enterprises to use the cloud to elastically (and transparently) scale out to the cloud. And because all network traffic is securely encrypted, enterprises can effectively make use of public, cloud infrastructure as if it was part of their internal datacentre — entirely behind the (virtual) firewall. Moreover, the same technology can be leveraged to allow the use of multiple, disparate cloud providers, effectively solving the ‘eggs in one basket’ problem. Different cloud providers can be leveraged to allow for failover redundancy, load balancing, even the leveraging of different providers on a dynamic basis, using metrics such as SLA compliance, or changes in cost. And an enterprise might want to do this not because it will reduce costs, or allow a switch from capital to operating expenditures (although both of those things might be true or not, depending on the context), but because it will increase their overall agility.
When speaking to start-up investors about their track record most of the time the conversation revolves entirely around the investments they have made in the past. The winners, the losers and why. More rarely do people talk about the investments they didn’t make. This is understandable for a number of reasons, one of the most important being there is usually no obvious record to fall back on and there is no way to short bad start-ups. So one relies on the investor keeping track of the investment opportunities they looked at and passed on, and further keeping tabs on how these companies did. Not many investors do this – at least not publicly, one (great) exception being Bessemer who with great humor points out their heroic misses – opportunities they declined that turned out to be home runs – in what they term their ‘anti-portfolio.’ But it would also be interesting to see a record of the deals an investor didn’t do that failed. But this is even harder (if one is to avoid noise) – even a small, relatively new investor like us sees hundreds of proposals and even this depends on what one considers as having ’seen’. Is it an email in passing saying XYZ is raising money, would you like to look? Is it spending a few hours going through an executive summary / pitch book / website finding out more? And it is also important (if this information is to be meaningful) to qualify why the investment wasn’t made. Is it because it didn’t fit a certain sectoral or geographic investment criterea? ie Good prospect but not for us. Is it because of a conflict with an existing portfolio company? ie Good idea but we like these guys better or they were first in the door and now we’re stuck. Is it because of apathy or lack of resources (time, money)? ie Good idea but just can’t focus and isn’t top of the list? Or is it because, well it’s just not a very good opportunity? ie Mediocre or downright bad idea.
In order to have the discussion, an investor needs to keep a record of all of this. How many do? We are trying to – or at least have plans to do so – but I’ll admit it’s harder than it sounds. It’s not something that generally gets anywhere near the top of a priority list, when the days are filled with making and managing the investments you do make. (And when you are trying to raise capital and/or keep existing investors happy or informed if you are a professional.) Don’t get me wrong, it’s not rocket science and I think it probably comes down to spending a bit of time and energy upfront to put a workflow in place to be able to capture and manage this information efficiently. And to be truly useful, this record needs to be ‘timestamped’ and auditable: we all suffer from hindsight bias. ie We definitely would have invested in Google given the chance, and obviously we passed on Webvan….
OK, fair enough, but why is this important? It’s because I think knowing which investments (and why) an investor didn’t make, and comparing these to the ones they did make, is a much better way to analyze their skills and approach. I think this is true in any asset class, only in most (all?) others it is practically impossible to do the kind of analysis I describe above if they are a long only investor (private equity perhaps being the exception.) Of course for long/short hedge funds this type of thinking is embedded in their performance.
Nauiokas Park is too new for this kind of analysis to be relevant but I was thinking about it in the context of my prior angel investing experience. I didn’t keep a complete record but there are a few deals that come to mind, two of which I was fortunate enough to blog about before the outcome was known, one after (discount appropriately) and so are public record. Hopefully you’ll trust me on the other two.
The first example is a company called SpiralFrog which is now the poster child for the second wave of bad ‘internet’ investments. I was approached in early 2006, through my Wall Street/City network to look at this, as people new I was interested/knowledgeable about “tech” start-ups and had had some success as an angel investor. When I saw the prospectus (and yes it was a prospectus) and looked at who else was involved as investors, I was immediately suspicious: this wasn’t a nimble start-up, it was packaged like a Wall Street deal – the scale and approach were way too heavy. Looking into the plan and the projected financials it just got worse. I passed and when they launched to considerable fanfare, I wrote this in September 2006 and followed up with this a year later.
The third is Powerset. What attracted me was the great team they pulled together and my conviction that semantic technologies were going to become increasingly important and valuable. I didn’t directly have the opportunity to invest but was one degree away and think I could have if I had agressively pursued.
Zopa is the fourth. I was approached by a friend when they were raising their initial outside round. I loved the idea but didn’t think it could get traction – at least not enough, fast enough to disrupt the market it was targeting, especially given how free and easy it was to get credit (something I new about…) I think I was right then. But I still love the concept and would be open to taking a closer look again in the future should the opportunity present itself. My focus would again be on understanding whether or not they can scale and whether or not the business model is optimal.
The final example is Skype. I didn’t directly have the chance to invest, but again at one degree of separation I could have tried. That said, I’m pretty sure had I been given the opportunity I would have passed: I didn’t see (until everyone had figured it out) how it could be a good investment despite loving the product. I’ve changed my mind and if I were running a big private equity fund, I’d definitely be trying to run my slide rule over them to see if I could make eBay a better offer than the public market.
Good investing is about managing your failures, your losing trades. The best way I know of doing this – whatever the asset class – is working hard to figure out what could go wrong before putting on the trade. (I guess it’s the bond trader in me…) There is always something that can go wrong. If it is big or likely enough you should pass. If not, by having a clear understanding and focus on these risk factors, you give yourself the chance to adapt and/or mitigate before its too late. This is especially true in venture investing as many risk factors in these companies tend to be endogenous; obviously if your basic premise turns out to be wrong that’s tough (but not impossible) to mitigate and sometimes it doesn’t work out. But by actively knowing what is going wrong and why at least you can avoid throwing good money after bad while also knowing when the odds are in your favor and you should double down.
Every executive committee member of a large bank, exchange or insurance company should read Kirk Wylie’s latest post to understand why their cultures are broken and why they so regularly find their organisations blithely running off the edge of a cliff, comfortable in the knowledge that, “well, hey at least we’re all doing it so it must be ok” and safe in the knowledge that their is a big taxpayer airbag (or trampoline?) at the bottom protecting them from any nasty consequences. Of course they are unlikely to – except in the unlikely event that it gets published in one of the traditional echo chamber publications like the FT or the WSJ.*
I’ll resist the temptation to copy/paste the whole post here but please go read it as this excerpt doesn’t give it justice:
Independent, entrepreneurial techies can actually make the biggest impact in the organizations that fight against them the most: they’re the ones that need them the most. Use them as agents for change, challenging assumptions, challenging entrenched attitudes, challenging technical group-think. Otherwise, your worst employees (the ones who can’t really get a better job elsewhere) win, and you as an organization fail.
Kirk is speaking of technologists, but the same thing applies across the organization. But big organizations kill entrepreneurship, actually it’s in their DNA. It’s not news, tall poppies and all that. As I was leaving 16 years of working – mostly happily – in big organizations I spent a lot of time thinking about why this was (and also why I hadn’t noticed it earlier in my career.) The answer to the second question was really because of luck. For 90% of my investment banking career I had the good fortune to be right in the heart of building three new and transformational markets: first the Ecu/Euro market, then the European credit markets and finally the move to ‘electronic’ capital markets. Throughout this part of my career, innovation, entrepreneuralism and independence actually helped me succeed because there was no pre-existing status quo to upset. This only became apparent to me in hindsight.
The answer to the first question is now obvious to me, but it wasn’t always so and really only revealed itself when I left and was able to step back and look at the machine from the outside. The expression ‘well-oiled’ machine says it all. This is the ultimate compliment used to describe a successfully managed organization. So where does non-linear innovation, disruption, questioning fit in a well-oiled machine? It doesn’t. In fact the more ‘well-oiled’ the machine, the less tolerant it is of exceptions. (Which also explains why I operated happily for so long at DrKW!) Switching metaphors, entrepreneurship is seen as a virus in these companies and they produce potent ‘corporate antibodies’ to seek out and subdue any such viral outbreak and they do everything (pace Kirk) to innoculate themselves against them in the first place.
But what is a CEO to do? The ‘well-oiled’ bit is equally important. I am sympathetic to this. (I mean if I was in charge I wouldn’t want too many of me’s running around, that would be chaos.) It’s not an easy question to answer and is made even harder (especially if you are running a public company) by the fact that the visible benefits of the entrepreneurial genes are only realized over time – I’d guess at least 4-5 years at a minimum and sometimes it might take as long as a full business cycle. And yet the average leadership tenure in these organizations is at best at the short end of that, and the compensation and stock market cycles are much shorter. I’ll be frank and say up front, I don’t have an answer but I’ve got a couple ideas I think are worth trying.
The first is to set – from the top – a deliberate human resource policy of seeking to “doping” the organization with a limited and controlled number of people like Kirk. (Doping is the process of adding controlled impurities to a material – for instance a semiconductor, or metallic alloy – to improve it’s useful properties.) This needs to be managed very deliberately, like a program – put a senior HR person in charge of this and manage it: these people will likely have a higher turnover, complain more often, get into trouble, want to change projects and/or departments and so need their own career track. I’m not sure what the correct ratio is, but I would guess it’s on the order of 1-2% of total staff, not necessarily evenly distributed throughout the company. (I knew my Materials Science degree would come in handy one day!)
The second is to create – and then protect institutionally, not personally – a specific department dedicated to exploring ‘white space’. When I say protect institutionally, I mean frame it like a trust so it cannot be undone or hacked by successive waves of management and is insulated from the quarter on quarter, year on year vagaries of the economy and/or the companies results. If you don’t do this, you will inevitably fall victim to the problems Azeem enumerates in his great post on why corporate venture capital (almost always) doesn’t work. Before all the serious, “pragmatic” people out there roll your eyes all at once (if indeed any such types would consider wasting time reading a blog) this doesn’t and shouldn’t need to be a big ask. Again probably on the order of 1-2% (even less for the biggest companies), of resources. The best example in practice I can think of is Xerox PARC, although the irony there is that Xerox didn’t really figure out how to plug PARC’s non-linear thinking and brilliant innovation back into the company (or at least not very well.) But perhaps that is not a bad thing (in proving my point) because I would posit that all other things being equal, Xerox’s share price has been higher (than it otherwise would have been) because they owned this asset. This cheap, deep out-of-the-money call option on the future. As far I as can tell, this is also what BT is trying to do with BT Design led by my friend JP and it is heartening to see that – at least so far – he is being allowed to continue to pursue this vision despite (and hopefully even because of?) the very poor results of the past couple years. I don’t know of any truly analogous initiatives in big finance.
And indeed that is (one of the reasons) we decided to set up Nauiokas Park. Clearly we’re not the whole solution, but we think we can play a key role for big financial institutions: a way to have (some of) their cake and eat it too: by entrusting a relatively small amount of financial capital to us, we think we can create just such a verdant ‘garden of innovation’, allowing them to harvest the fruits of some of the most dynamic entrepreneurs active in their industry, while protecting and nuturing them, away from the noxious antibodies of the corporate organism. Indeed, taking a page out of John Seely Brown, I guess you could describe our mission as seeking to create a vibrant knowledge ecology for finance and markets, and help our stakeholders profit from it:
There’s a fundamental change from finding ways to innovate inside a corporation to leveraging the knowledge ecologies of many little companies in places like Silicon Valley. You find that the shift turns much of the classical R&D into A&D – that is, acquisition and development. Larger companies can buy the research they need and instantly acquire a diverse portfolio of research groups.
I’ll be honest though, it’s not an easy sell. Even for the corporate leaders who ‘get it’ the reflex instinct is to think (sometimes aloud) “makes sense, but we can do that ourselves”. Well, you can’t prove a negative, but we’ve spent a long time inside these same big financial institutions, and our many years of experience led us to conclude that it is bloody hard to do (for all the reasons above and more.) On the bright side, being challenged makes you think harder and forces you to refine and adapt your ideas, ultimately making them better. Hearts and minds. Hearts and minds. Wish us luck.
* Just to be clear, I have nothing against the FT or the WSJ per se, I read them regularly (well WSJ not so much) and think they are solid publications. I’m not suggesting they aren’t important sources of information and opinion – you’d be stupid not to read them if you are in finance – just that, and this is the wonderful thing about the world in 2009 – I think you need to read much more widely and in particular embrace at least a diversity of viewpoints, if not views.
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=35a6ad52-3063-4ef3-8a1a-119bb62ae260)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=2289b14f-e2bb-4fc6-bf72-e2826b3127f9)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=a433372a-261d-4f6b-a992-de776f0e46a5)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=b171628d-4670-47e6-ac8e-09f38e4919b7)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=6c045a30-b5ea-457b-b57b-fd78f3a84ac1)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=2731f032-664d-45fd-a394-4e55b626aa6e)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=d30f8d3b-dece-40cd-aa2e-1a6fd0f64f3f)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=baec3867-9b36-406f-bbee-579562627d65)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=14a9a084-38dc-46db-aa2c-5b3b078c8819)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=504a15d2-106a-4591-817c-4a0beb4dc0df)
