Open Innovation, Ventures and Startups

Occams Razor, Toyota, NASA and Gremlins

I spent a good part of my career as an engineer involved in complex aerospace systems.  When I think of all the complexity that goes into aircraft design, I am impressed that our engineering process deliver such a high quality and safe solution.  I have always thought a great deal of Toyota and their talent.  The loss of life from unintended acceleration is a great tragedy.  Frankly its amazing there are not more automotive deaths given the range of drivers and capabilities.

It could be that Toyota has a fundamental problem with their design.  It could be they should have designed  more fail-safes, and they will. Maybe Toyota is culpable, god only knows.  I do know in aerospace we had driven reliability so deep in our systems we were at a point that a sequence of random failures, converging at a moment in time, was our safety challenge.  In a Six Sigma/Lean world, human error, manufacturing defect, etc are rare sources of failure.

In administration's effort to get to the bottom of the Toyota unintended Acceleration problem, NASA has been ordered to study the effect of solar flairs on the Toyota acceleration system.  Solar flares?  Really?  Are they going to study the impact of solar flares on everything else?  Did we all of a sudden find a new unknown source of failure?  Not likely.

I guess its OK for the government to be through, but there is also a time as an engineer to be practical.  An old principle Occam's Razor says, "given all the possible explanations, the simplest is often correct."  Yes, Toyota could be evil.  Maybe they hid data.  Maybe little green men came down and just targeted Toyota systems instead of the hundreds of other automotive systems, power plant controls, and even triggers on nuclear bombs.  Maybe solar flares are the source of all unexplained failures.  This sort of reminds me of the goofy liberal arts major trying to say something technical to a gathering of geeks.  The geeks then look at the liberal arts guy and gasp for air because they think the comment is so nutty. Sort of Gilligan meets the Professor.

I laughed for several minutes after hearing the NASA story on the news. Then I heard a bunch of reports start describing how government officials think maybe someone could put a wire mesh around the system to eliminate the impact of these solar flares.  Really?  Yes, that's the ticket.  It took the media and some government official to teach engineers about the principles of shielding (Faraday Cage).  What a waste of brainpower and resources.  Society needs to appreciate that we can't fix all problems and we should not waste people's time with nutty theories.

I feel very sorry for those that lost their life and the tragedy for their family's.  Its a terrible situation.

Innovation Lessons: Partners Count

I have always believed in marquee accounts and great partnerships.  I have been suspect of most partnerships.  Right now I am president of one of my portfolio companies, which is giving me a really deep visceral perspective to what great partnerships mean.

Big companies are about sales and distribution, not innovation.  I believe in R&D, but it is not always best spent inside.  Small companies, like my current company, have a deep connection with innovation.  Great partnerships are about big companies that realize their strength is customer relationships, and small companies, realizing their strength is not customer relationships.  Reduced to its base, its that simple.

By example, you have a great product that solves a problem.  You go to a customer that has the problem.  You tell your story.  All along that customer is distracted thinking about the risk of a small company.  They never hear your story, no matter how well it is told.

In comparison, you team with your customers key infrastructure supplier, walk in with the account manager.  Deliver your value proposition, and your partner close the deal.  The customer knows he can ring the big partners neck if things go wrong.  The partner has built good will with the customer, because the partner has implied there is a better solution.  You have a reference-able account that can help you pay the developers that back pay you owe them.

• A good partner is focused on sales.  A bad partner is focused on reverse engineering your product.
• A good partner has a trust relationship with the customer.  A bad partner wants to limit customer options.

It may feel risky to do business with a partner who may have means to be your competitor.  Big partners move slow so the threat is small.  Though, don't let the partner lock you up in some complex agreement.   

In the end, partners count.

Angel Investment Software

In all my time investing, I have been perpetually frustrated keeping track of all the opportunities I see.  Often a deal that looks weak at one moment is great later aligned with a few other opportunities.  One of the angel groups I work with has selected Angel Soft to help integrate all of their deal flow.  A cool feature of angelsoft is the ability to share with other groups.  Its the group share function I like best because early stage investing is often about getting the right talent engaged with a good team to shape the deal.  With Angelsoft we can leverage a whole bunch more talent and perspective so that we can strengthen deals that are still getting their footing.  We will be implementing Angelsoft under OI ventures.

Questions to make you wonder

As I have looked at the corporate venturing world and thought about innovation, I have been trying to assemble a list of questions that help senior leaders understand the priorities of innovation. I am constantly rethinking these, but here are some of my initial thoughts.

1)      Who and how were your best products developed and brought to market?

2)      Why are a majority of the top quartile S&P performers all less than 10 years old?  Why do you think your firm can be different?

3)      Why are so many great companies started by past employees of large firms? What is wrong that these large companies can’t keep this talent to themselves?

Teaching Elephants to Dance

Back in Januray of 2004 I co-authored a short article in the MIT Technology Review that discussed corporate ventures: Teaching Elephants to Dance.

Where do great new businesses come from?

I had lunch yesterday with the director of a corporate venturing unit.  He is starting up the new organization and wanted my opinion on various aspects of his plan.  As he described his efforts I was reminded by the stark data that shows that most corporate venture groups, with few exceptions, start with a flair, last 3-4 years and then are exterminated by new management for failure to perform.

I remember more than ten years ago a new business idea that was floating around McDonnell Douglas.  The idea was to put a cheap GPS receiver on the tail of a dumb bomb.  The thought was you could do this all for about 1/20th of the cost of a cruise missile, but still have some similar capabilities.  The idea was attacked on many fronts - the market is too small, its low margin, we do more sophisticated things, etc.  The principle of the idea came either from a unconventional group at DoD or perhaps a McDonnell researcher focused on automated targeting systems.  Whomever the source they deserve credit, but for this story the relevant point is no one in strategic planning liked the idea!

So fast forward to the recent Iraq war.  This GPS/dumb bomb has come a long way.  Its now called JDAM.  It is a highly effective system because it is cheap and accurate.  I would bet these things are now so effective that you could use it to demolish a building in Las Vegas, right where it stands with no collatoral damage, just like those high priced demolition teams do on TV.  I think McDonnell Douglas, now Boeing, sells something like $800M JDAMs a year which is a nice business, but for a company the size of Boeing is still small (Boeing needs to bring in $100M by lunch every day to meet its total revenue for the year). 

So is this a good product for Boeing?  Its a very good product because it enables even more business.  The existence of the JDAM means that even old B52s can effectively operate today.  As pentagon planers dream up new stealthy systems for future wars using expensive specialized cruise missiles, congress is scratching their head wondering if the old airplanes with JDAMS might not be enough.  And if you look at who built and services these old planes its Boeing (B-52, B-1, AV-8B, F15, F/A-18, and part of B-2).  Boeing is making additional billions of revenues supporting these aircraft because JDAM has keeps them relevant even in today's conflicts.

So, imagine you created a corporate venturing group, you have been operating for 3-4 years, senior management had rotated, and you were faced with the challenge of proving you had a big success.  What would you do?  What could be a big enough deal to move the corporate needle?  $100M by lunch! Likely nothing!

People today probably look at the JDAM program and cite it as a phenomenal success.  A great example of ingenuity.  Why can't we have more new programs like JDAM?  If you quiz these folks and ask them how JDAM got started you will essentially get a blank stare.  A majority of the people in the business development group, strategic planning, or even the corner office probably have been around for at most 5 years.  They have little or no memory back 10 years, perhaps even in this case 15 years.  The real story of how this great new business came to pass is in the mythology of the organization, lost in people's memory.  The one certainty is it was not conceived in a strategic planning session and delivered to the annual report as success in 3-4 years.

As well characterized in the up coming book by David Thomson ( Blueprint to a Billion ) understanding the real value of a innovation driven business opportunity is not obvious up front.  David shows that many of the most successful companies wandered around for 1-20 years determining their real customer, properly positioning their product, and setting a foundation they credit as the source of their ultimate success (always closely managing cash flow).  From that point of departure these business grew steadily for 5-7 years to arrive at their noteworthy place on the front of Forbes - $1B.  What it takes to run a business in the discovery phase is wholly different from the growth phase.

Was Microsoft an obvious winner in the 80's?  Did you know that Infosys was started in 1981 when no one in the United States even knew where India was?  When I first ran into I2 in 1992 they were a 4 person consulting firm.  So if all the great $1B+ public companies took so long, and internal business like JDAM take so long, why do corporate leaders think great new businesses can be started and validated in 3-4 years?  What is the point of reference that corporate leaders can sight for holding internal venturing groups accountable for such quick returns?

In contrast a few firms have a consistent long term attitude about their venturing groups.  Companies like Intel Capital and Motorola Ventures have stuck with their strategies for many years (perhaps more than 10 even).  I have to imagine that mistakes have been made, markets have shifted, but the strategy has remained.  Underperforming managers were replaced, but the program was not killed.  Recent work by some smart professors Gary Dushnitsky at Wharton and Michael Lenox at Duke shows that firms with  a long term venture strategy have higher levels of innovation and growth from new products.

So back to lunch.  I believe that corporate venturing is a source of corporate renewal.  It is like getting a puppy when your best loved dog is reaching her later years.  The puppy invigorates the core business.  I think all companies need to have a persistent corporate venturing group to keep alive the entrepreneurial system so that effective high growth business are continuously created.  The reason companies don't do this is senior managers are not trained to understand long dynamics of growth as articulated in Dave Thomson's work.

My Background

I have been involved in some form of technology, engineering and entrepreneurship throughout my career.  After graduating with an engineering degree from Rensselaer Polytechnic Institute I joined McDonnell Douglas working on fighter aircraft. 

At McDonnell, I spent five or so years working on various technologies to help make it easier to design and build aircraft.  The most notable of these technologies was High Speed Machining, which has since been used to save billions of dollars on the F/A-18 E/F, C17 and many other aircraft.

In 1995, I left McDonnell Douglas, got married, bought a house, and started my MBA at MIT Sloan business school.  I went to business school with the idea of joining McKinsey as a consultant, but quickly was attracted to the Boston start-up community.  During my second year at Sloan, when you are finally allowed to really direct your academic program, I took what was then a new course, ELAB, taught by two world class entrepreneurs, Ken Morse and John Preston.  During the class you work with a local start-up on "The issue keeping the CEO awake at night".  I worked a firm named Sitara Networks.

In parallel, my wife Melissa was hard at work back in St. Louis growing Fielding Pharmaceutical, her family's business.  At the time, Fielding was a small specialty pharmaceutical poising for explosive growth under her and her brothers leadership.  So between MIT, Boston, and Fielding I was surrounded by entrepreneurs (quite a contrast to working at McDonnell Douglas).

When I graduated from Sloan, my wife's business was growing hand over fist so it made more sense for us to stay in Missouri and for me to get a job that minimized travel - so consulting was out.  The then merged Boeing (McDonnell Douglas, Boeing, and Rockwell merger) was integrating.  A senior executive who knew of my involvement in High Speed Machining etc asked me what job I wanted to get me to come back.  So, I took on the responsibility of merging the R&D portfolio and managing the investment decision for new technologies.

So, for about three years I managed the annual process of determining how Boeing invested R&D into its "Component Technology".  What that means is the things that go into the airplane including avionics, software, materials, communication systems, support systems, etc.  This research is conducted for the most part in Boeing's famed Phantom Works.  These investments range from $50K/year to several million dollars.  When I started the job we managed more than 1,500 distinct research projects and many more proposed projects.  In addition to integrating the process of deciding on these investments I was also involved in integrating all these technologies into 8-10 verticals.  We reorganized the R&D group and put a manager over each vertical, aligned all the projects into "thrusts", assured strategic connectivity with the needs of the business units, and made it easier to assure projects were on track for success.  In this job I saw thousands of new technology opportunities each year for about three years.  I also saw hundreds of different technologists that ranged from being dreamers who could never implement to entrepreneurs who could implement but had limited agility within the complexity of a large corporation.

If you have ever been in the R&D investment role you will know you can learn a lot in the job, but the role is so contentious that success means you are less hated than your predecessor.  During my time overseeing these investments I noticed we had several good opportunities which just were not related to Boeing's core business, so we typically shut such projects down.  Surprisingly they would still pop up the next year, having found funding from some sympathetic manager or the government.  In contrast we had critical technologies that it seemed we needed to drag along and overwhelm with resources.  So we decided to create Boeing Ventures.

Startup

Entrepreneurship is the single most powerful economic force in society.  The energy and inspiration of individuals who see an opportunity others don't and their drive to make it a reality, is the source of all things great.

Entrepreneurs exist everywhere - along route 128 in Boston, Silicon Valley, St. Louis Missouri, large corporations (i.e. Boeing where I used to work), and many unexpected locations.  But, entrepreneurs are not always detected.  Classically in large corporations leaders tout innovation, but do they know it when they see it?  Do they know how to encourage it?  Do they know how to manage it?  Can they operate a culture of innovation and execution concurrently?

Based on my 15 years at McDonnell Douglas and then Boeing I have come to appreciate the need to re-think the interaction between large companies and entrepreneurs.  I have learned there is an opportunity to leverage the inspiration of an entrepreneur with the execution discipline of a large corporation.

This blog represents my thoughts and experience working with large companies that are trying to innovate, small start-ups trying to raise money, and funded start-ups that are trying to grow.