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
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.
One of the challenges Carter highlights is the lack of a frame of reference for growth across a broad set of leaders. Each comes to the table with a different perspective on growth.
It was this issue that drove me to research how companies achieved $1 billion revenue. I found the pattern to be exponential growth. It is near impossible to achieve this goal with any other kind of growth. The challenge for large corporations becomes the generation of new $1b businesses every year or so in order to move the needle of a $10b+ corporate business. This requires record level performance. Without a corporate venture funnel and a repetitive business building process, corporations struggle -- as Carter highlights.
Posted by: David Thomson | November 10, 2005 at 10:42 PM