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a look inside the venture catalyst

partnering with power

For entrepreneurs, corporate partners can be a source of capital, distribution channels, technology alliances, beta testing, and much more. For large corporations, entrepreneurs are an engine for innovation and growth which their investors expect, but which they are simply too massive to sustain on their own. At this Netpreneur Coffee & DoughNets event held November 14, 2001, Donald Laurie, author of Venture Catalyst, and Mario Morino of the Morino Institute offered a look inside the way corporate venturers operate, as well as pointers for entrepreneurs seeking to partner with giants.

Copyright 2002 Morino Institute. All rights reserved. Edited for length and clarity.

Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The transcript is provided "as is" and your use is at your own risk.

speakers:

Donald Laurie, Founder and Chairman of Oyster International
Mario Morino, Chairman of the Morino Institute

fran witzel: introduction

Good morning. I am Fran Witzel, Vice President of the Morino Institute's Netpreneur. It is a great pleasure for me to welcome you to our 51st Coffee & DoughNets event.

            Our meeting today is entitled “Partnering With Power” and it deals with partnering with the “800-pound gorillas” of the world. How can startups benefit from these relationships? Will global corporations continue to invest in new ventures while economies and private equity investing are contracting? How do you access and pitch to these companies and players? This is one of the most requested topics for our Coffee & DoughNets events.

            Following the main presentation, you will have a chance to ask questions, then we will hear from Netpreneur’s visionary and benefactor, Mario Morino, before concluding around 9:30. Before I introduce our speaker, we want to recognize the following netpreneurs who have graciously volunteered at today's event: Victor Knox of Knox Network Solutions, and David Williams and Kerry Gunther of BrowserMedia. Please give them a hand for giving us a hand.

            We are most fortunate to feature Donald L. Laurie as our speaker. You will not see Don speaking at one of the many business technology events in town, but you might see him participating in a Business Week round table or speaking at the World Economic Summit in Davos, Switzerland, or chairing the national conference on corporate venture capital investments. Don is founder and Managing Director of Oyster International, a management consulting firm in Boston that works with executives, corporate venture managers, and business development managers to develop and implement growth strategies. He is a recognized thought-leader in the areas of corporate venturing and business leadership and growth. Don is an investor, and he is a director of a number of early stage companies. He is a contributor, along with Peter Drucker and Rosabeth Moss Kanter, to Ultimate Rewards: What Really Motivates People To Succeed, a book on driving organizational excellence. He is co-author of The Work of Leadership and author of the recently released Venture Catalyst: The Five Stages for Explosive Corporate Growth, of which Joe Schoendorf, Executive Partner with Accel Partners, wrote, “[Venture Catalyst] really provides major insight about high-growth companies and how they stay that way.” Ric Fulop, Red Herring Magazine's Entrepreneur of the Year in 1999, said of the book, “Technology and distribution partnerships with large corporations can accelerate corporate growth and ensure the success of early- and later-stage ventures. Don Laurie's conclusions and recommendations are critically important for entrepreneurs and aspiring entrepreneurs.”

                Join me in giving Don a warm welcome.

don laurie: ventures, partnerships & growth

This is one morning where the introduction will be better than the talk.

            I would like to start by bridging to today's events a bit. Leaders have been challenged by the declining economy, security issues related to the World Trade Center, loss of consumer confidence, and rapidly declining sales and earnings. I have never seen anything like it, then I pick up a Wall Street Journal and see the revenues are down 50% and 60%. If your revenues are down 50%, you can cut your work force 5%, but the challenges are enormous when it is such a structural change. Wall Street is going to give a brief reprieve to the top management of these companies and their teams as they deal with the security issues of their employees, the security issues of their corporations, and while they rethink their strategies.

            If you are going at 50% or 60% revenues, you can't operate in yesterday's strategy. Speed is going to be more important than ever. The disoriented, slow-moving management team will lose precious time to their competitors and they will lose competitive advantage as well.

            These executives and these management teams have two mission-critical activities they have to perform. The first is that they will have to deliver quarterly results in the annual operating plan; the second is that they will have to have a pipeline to the future, a pipeline to generate revenue and growth. That is where the entrepreneur comes in. The entrepreneur is going to participate in that revenue and growth development.

 

where’s the growth?

            About three years ago, I was working with Lew Platt who was then CEO of Hewlett-Packard (HP). We were talking about leadership. Lew was concerned about the leadership of HP in particular because they had grown at a rate of 20% for 19 years, and that year they had had 5% growth. He was worried about the entrepreneurial spirit within HP, how they were going to tap into it, and his work as a leader. Suddenly, he stopped and said, “To hell with leadership. Where is the growth?” At that point, he grabbed me and said, “Come on, Don, I want to show you something.”

            He walked me out of the room and took out a graph. He said, “Do you know that no company has ever entered the Fortune 50 and achieved more than 5% growth?”

            I asked, “How about General Electric?”

            He said, “Not without acquisitions.”

            He showed me this graph where you can see the annual growth during the five years before and after a large company enters the Fortune 50. Usually they enter at about a 28% growth rate, and they acquire a big company. After that, it goes flat line. The growth line looks like something from the TV series ER when the patient goes flat.

            I thought about that. There are four routes to growth. First is organic growth, which is through product line extensions, such as: How many people would like a few more features on their PC? How many people here think Windows is incomplete? Then there is geographic growth, but most of these big companies are already in every country on earth. The last market is Bolivia. Should IBM and HP have a big push on Bolivia? When you think about organic and geographic growth, you get 2%, 3%, maybe 4% to 5% growth if you expanded.

             Then you have growth through acquisitions of large global companies. When you acquire a large global company you pay a premium. You bet that you can manage the business better than they can. About 70% of those fail. Good luck.

            Or you can venture. Three or four trillion dollars worth of new wealth has been created by ventures on NASDAQ alone, and that includes the dotcom bubble bursting. Here’s an interesting cocktail story. I like to leave people with a cocktail story. Did you know that Sequoia Capital Partners, a venture firm in Menlo Park, California, funded 20% of NASDAQ? Think about that number. Apple, Cisco, Yahoo. . .  it’s just amazing. However, there is conventional wisdom that says that big companies can't venture. That is one of the things we are going to talk about today, because my thesis is that they have to learn.

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a conflicting of goals and values

            When I go into corporate offices, they show me these graphs that display expected growth over time. They go from 2000 to 2005, but, when they get out four years, they say that the market will grow at 3% from share gains, 2% from product line extensions, and then there is this gap that nobody can explain.

            The language in big corporations is that they say it is a “hockey stick projection.” Maybe you have heard that expression.

            I asked myself, “Why is this?” I began thinking about R&D in these big companies and I realized that there is a tremendous pressure on operating managers to deliver quarterly and annual operating results. They bring in their R&D management team and say, “What can you do for me in the next 12-18 months?” That creates a fundamental shift in these large companies towards incremental change and away from disruptive or breakthrough products.

            If you go back 10 or 15 years, you will find that the balance between building incremental and disruptive products was about 50/50. Breakthrough, disruptive products are things like the Palm Pilot and Viagra, the whole series of disruptive or new technologies that create new markets. The mix now, based on anecdotal evidence, I can probably say is more like 90/10 in favor of incremental products. That’s because, if I'm an operating manager, I will say, “I don't want you working on anything that is further than 18 months to two years out.” Breakthrough products take longer than that. This notion of why the corporation doesn't venture is actually easier said than done for a number of reasons, but one of the reasons is that managing an operating plan and managing the business-building process are very different.

            If you are an executive in any large company, you probably joined that company in a function. You develop in your role and, at some point, they say, “Will you run this $50 million business?” You learn to run a $50 million business, then they promote you and say, “Will you run this $200 million business?” You run a $200 million business, and that means that you direct your sales force, your manufacturing, your logistics issues, etc., and you are basically looking at them in relation to last year. By the time you get to be a senior executive, what you are doing is managing five of these businesses. If one of the managers gets off plan, you fly into Toledo and say, “Let's look at the plan.” You see what's wrong and you get back on plan.

            If you are an entrepreneur, however, you are operating with unmet, unserved customer needs. You are probing around new markets and you're experimenting and adapting. Entrepreneurs fail three times before they succeed. In a big company, if you fail twice, you're out. Correct me, audience. In big companies, if you fail once, you are out. There is just no tolerance in these big companies for failure.

            Managing the business-building process is fundamentally different. I try to explain this because it is hard for big company people, especially, to understand. I say to them, “Think about two young students who go to medical school. One goes on to be a neurologist, the other goes on to be cardiologist. If you have chest pains, where are you going to go?” The big company executives think that running a business is a lot harder than running a small business. It must be; it is smaller. But that is not the point. The point is that managing the business plan is different than managing the business-building process.

            The second dynamic or dimension to this is values. What are the values in the large, global company versus the companies in an entrepreneurial venture? I have this scale. If I'm sitting with a senior executive, I will work him through it, saying, “Mark an X where you fit on this scale.” I will ask you to mentally do the same thing.

            Some of the venture values are independence, space, action, and trust. “I'm an entrepreneur, you have to trust me. Give me space for action because I have to move this organization.” In the large corporation, it is independence, yes, but, “We are responsible. We must have some control.”

            In venture values it’s speed, agility, and rapid response to the market. Experiment, adapt. Experiment as fast as you can. In big corporations, it’s analysis, review. “Show me the facts. We may lose some speed, but we must be thorough.”

            For ventures, first to market is essential: “Competitors are running on either side of me. We are paranoid.” Corporations acknowledge the lethargy. “We are powerful once we get rolling. We are like a locomotive gathering speed.”

            This one is my favorite, then I won't punish you with anymore. The entrepreneur is the key decision maker. Make the decision; tell the board later. In big companies, senior executives in the system must concur. “Jack is critical and he is wall-to-wall busy, not available until two weeks from Thursday.”

            When I first began doing this kind of talk, people almost used to cheer and say, “Yay, venture values! Those are good and the corporate values are bad.”

            Wrong. That is not my message at all.

            My message is that these are exactly the values you want if you are managing predictable quarterly results. You need those kinds of values. I don't want comedians running a company that has to deliver predictable quarterly results, and I don't want these corporate executives managing an organization that needs to operate on speed and trust and experimentation.

            It is easier said than done, but, that said, corporations had better learn.

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cases in strategic models

            This work really began with both Lew Platt and Ralph Larsen. Larsen ran Johnson & Johnson and is the most growth-oriented CEO I know in terms of instilling it in their company. Johnson & Johnson runs 188 business units. It is not a monolithic organization at all.

            What hit me was this: I bet that some companies do this well. I bet that they are all not “800-pound gorillas,” as somebody called them. I bet that some of them perform the task well, so I began to do a little research and meet people and so forth.

            What I learned about these large corporations is that they don't have a framework for thinking about ventures as a source of growth, and they need one. In many cases they don't have the language and they don't have the processes. I created a framework for the outcome. It's not where I started; it is what I learned. I would like to talk you through this framework. [He shows a matrix diagram of four sections each titled Invent, Invest, Partner, and Venture. Beneath is a fifth area titled Acquisition & Integration.] It looks at external ventures, such as companies like many of you operate which they might invest in; and internal ventures, which would be managing their IP and their technology to create new businesses in their own organizations. I also found that some of these people have the skills and experience to do it themselves, and some need partners to complement their skills. Lastly, I didn't have any place to put this, and consultants love two-by-two matrices. I didn't know what to do with the fifth box. It is called “Acquisition & Integration of Ventures,” so I will make a distinction between that and the big acquisitions I spoke of before.

            I will walk you through a number of companies. With each company I will look at the business model, which is how the company makes money, the activities they need to perform in order to make that model sing, and the preconditions for success. For example, I will talk about Cisco later. Cisco can't be successful unless they have a high flying stock. It doesn't matter how good their business model is.

Case # 1: Intel

            Intel is the mother of all corporate venture capital activity. In 2000, they invested $1 billion in ventures at anywhere between $2 million and $10 million per company. Think about investing  $1 billion dollars, $2 million at a time. Put your mind on that. In the year 2000, they had 59 IPOs which dropped about $4 billion to the bottom line of Intel. Usually, the entrepreneurs they invest in also become customers, so they are Intel's eyes and ears on the future.

            They have 200 people in their group. They are organized by industry: broadband, wireless, optical networking, telecommunications systems, etc. In each, they have a strategy and they have a technology map of where those technologies are going. People in the group have a lot of autonomy and a lot of independence. They work with the general managers, but not exclusively. They can invest in what they deem appropriate.

            That is not the most interesting part of Intel, however. The most interesting part is why they got into it, and that is because they wanted to find the “next new thing.” They have a $38 billion single organism called microprocessors, but what is next after that? They invested in 30 optical networking companies, the most any venture firm ever invested, and then they acquired six. They took one of their microprocessor executives and put him in charge of one of the optical electronics groups. They put those six companies under him, and they have a new optical electronics division. They think that optical electronics are where microprocessors were 20 or 30 years ago. They think that they can add value to this through precision manufacturing, because in optical electronics, you are selling prototypes, not products.

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Case # 2: GE Equity

            The second large and interesting group in this area is GE Equity. GE Equity is a division of GE Capital, and they have a very different focus than Intel. Their focus is not the eyes and ears of the future, it is to support the general manager who is running the different systems divisions, such as airplane engines. If you are a GE executive -- this story was more relevant when Jack Welch was the CEO -- but if you were a GE executive, you met with Jack Welch twice a year. The first was when you told him your vision of the business. If you didn't have a vision of the business and a vision of the future and a vision of new technology, you couldn't run the business. The second meeting was to tell him how you were performing on your operating results. The role of GE Equity was to support the visions of the various general managers. Forty percent of the deal flow comes from GE. They have 230,000 employees around the world, and they call them “listening posts.” They bring in deals. The biggest thing for a corporation is, “Do we have deal flow?”

            The most interesting thing about it, for me, is that they are very analytical and they have a disciplined management system. They have deal management and portfolio and financial management. I was going through one due diligence report that was about 18 pages thick. It is dense with print. I could barely get through it. First it covers the industry, then the market, then the technology, then the competition, and then the management team. At the bottom right-hand corner is always the risks, and, on the next to last page, it has what they call the “tornado diagram,” which shows the biggest risk, the next biggest, the next biggest. They are very focused on risk, and they have a half a dozen listed. A lot of corporate venture groups were done in a sloppy way, by rookies, actually. When GE put in their system they said, “We know we are inexperienced so we will do this to compensate for that inexperience.”

            To give you an example, you’ve seen those Penske yellow trucks around? Roger Penske came in and said, “I have this business for a truck light.” I think they were doing $8 million in sales and they needed the next round of financing. GE sent in their plastic engineers to look at their design for the light and walked away with 100% of the plastic business. Somebody said, “Don't we finance 80% of the trucks that are bought” They spoke to the leasing group, who thought the lights were so good that they should be mandatory and not optional.

            Another example is in your credit card. You have this smart strip on it from a company called Gemplus International that GE invested in. The GE engineers came in and began to work with their R&D people. They crushed the product development cycle from 9-12 months to 3-4 months.

            Another company was going through that onerous due diligence I was talking about when they realized that the supply chain management in their manufacturing line wasn't as disciplined as it should be. GE comes back with their due diligence report and, if they invest in you, they will go through that report with you and say, “By the way, you have to enhance the quality in your manufacturing.” They will bring one of their Six Sigma Quality Management group in to work with your management team, and you will pay for it.

            In our framework, now, let’s move from companies that are investing in external ventures to the other box, internal. I will call them entrepreneurs like you, except that they are inside of the corporation, and I will use two examples: Thermo Electron and Corning.

[continued]

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