Archive for the 'Innovation' Category

“I’ll see your 10,000 and raise you….

August 16, 2011

In “Dancing with the Stars” I talked about what a classroom with 10,000 students might be like. The transformation of higher education has begun, and the pace of that change is accelerating.

Dick Lipton’s blog Godel’s Lost Letter has since attracted tens of thousands more.  It is a virtual seminar that, for example, coordinated a global effort to referee an important paper in the theory of algorithms.  At times, the number of viewers topped 100,000. Now Stanford’s Peter Norvig and Sebastian Thrun are offering an online course in artificial intelligence that will enroll 58,000 students.

On September 12, I will join with 60 or so colleagues to offer a MOOC for tens of thousands of students.  Georgia Tech  students will get credit, and others will get badges that could be convertible to credit if they ever enroll at Tech.  Other institutions will announce their approaches to certifying achievement in the course. A MOOC is a Massive Open Online Course, a style of college-level teaching that was pioneered by George Siemens and Stephen Downes. The first MOOC, offered in 2008 by George and Stephen was devoted to the subject of their research, a style of learning called connected connectivism. It attracted 10,000 students.

The 2011-12 MOOC is all about transforming university learning and the organizers hope it will attract a much wider global audience.  They are calling it the Mother of all MOOCS.

The course will also be a C21U experiment on self-certification, a concept I discussed in my book. Where will this all lead?  It’s far too soon to predict an outcome, but within the last year, the number of experiments in higher education has exploded.  If you believe like me that innovative change is just what traditional colleges and universities need, that’s a good thing. The way to innovate is to try out lots of ideas.

Culture, Rose-Colored Glasses, and the Michigan Bottle Scam

June 28, 2011

NEWMAN: Wait a minute. You mean you get five cents here, and ten cents there. You could round up bottles here and run ’em out to Michigan for the difference.

KRAMER: No, it doesn’t work.

NEWMAN: What d’you mean it doesn’t work? You get enough bottles together…

KRAMER: Yeah, you overload your inventory and you blow your margins on gasoline. Trust me, it doesn’t work.

JERRY: (re-entering) Hey, you’re not talking that Michigan deposit bottle scam again, are you?

KRAMER: No, no, I’m off that.

NEWMAN: You tried it?

KRAMER: Oh yeah. Every which way. Couldn’t crunch the numbers. It drove me crazy.

Even Kramer got it. Fundamentals matter, but there is a persistent legend in many engineering organizations that culture trumps the bottom line. It’s a legend that propagates because, as change management consultant Curt Coffman has provocatively noted, “culture eats strategy for lunch” when it comes to execution. What Coffman and others who talk about “soft stuff” don’t tell you is that in the end culture doesn’t matter.

The reality is is this: culture only trumps the bottom line in organizations that are heading in the wrong direction. It’s easy to see why: bad execution can be excused when it is in the service of a higher calling.  Sometimes — the legend goes — cultural purity even demands failure. Briefings that begin with a retrospective tour of a company’s glory days or the exploits of its leaders are not going to end well.  It’s a malady that afflicts start-ups, Fortune 100 companies, universities, and political office holders.

It was a rare meeting at Bellcore or Bell Labs that did not begin with a bow to a century of innovation and accolades. Theirs was a tradition so rich that it was bound to color all projects in perpetuity. I knew a  business development managers who intoned “WE ARE BELLCORE!” at the start of engagements. It always sounded to me like a high school football chant designed to cow the opposition.

The remnants of the Army Signal Corp  research lab at Fort Monmouth New Jersey had long dispersed by the time I interned there in the early 1970’s, but stories of the famous scientists who once stalked the cavernous halls of the enormous hexagonal building near Tinton Falls were retold to each new class of PhDs as if  the great men would be dropping in any moment to don lab coats and resume their experiments.

Start-ups are not immune, either. A few weeks ago, I was nearly ejected from a meeting with a CEO who was raising early stage money for suggesting that the distinguished professors who had founded the company might have had less than complete insight into market realities.

The “We are great because…”  meme  is propagated by leadership at all levels. Even in this age of the decline of the celebrity CEO, countless university and corporate websites are travelogues for executive jaunts to far-flung campuses. Supporters of one prominent Silicon Valley CEO would muse to anyone who cared to listen: “I wonder what it feels like to always be the smartest person in the room?”  The phrase found its way into an industry analysts’ briefing at the very moment that the company’s stock was falling off the edge of a cliff. I watched the faces of the analysts, and it was clear that they were pondering entirely different questions.

I’ve had my share of run-ins with employees who were not at all shy about using vaguely remembered words of long-departed leaders to pit culture against execution. In one instance, a series of patents led to an ingeniously conceived system for streaming audio and video from conference rooms and lecture halls. Unfortunately every cost projection showed that the effort required to install and maintain the equipment swamped any conceivable revenue stream. When I confronted the inventors with the inevitable conclusion, I was excoriated in the most graphic possible terms because I had not taken sufficient account of  the intellectual beauty of the system.  The crowning blow: “Dr. [insert the name of any of my predecessors] would have understood my work!”

On another occasion, I was called upon to invest heavily in a newly conceived and revolutionary mathematical method that would transform not only our  business but scores of related industries.  The inventors’ local managers had been completely sold on the idea and were willing to put a substantial portion of their margins at risk to develop it.

Key to the idea was the notion that every textbook in the field had been written by authors who willfully ignored the power of the new theories. The invention involved an area in which I had done research in the past, but  I couldn’t make much sense of the claims.  I dutifully sent drafts of patent disclosures to experts, but the feedback was discouraging.  The claims in the patent disclosures were either false or so muddled that further analysis was useless.

I pulled the plug. Reaction was swift and heated.  Here’s what it boiled down to: the founders would have had faith in the employees, and I did not. They were right about me, but not about the founders.

It is in the nature of engineering organizations to reconstruct the past to suit the present.  Hewlett-Packard was famous for such rose-colored glasses.  When then-CEO Carly Fiorina combined ninety or so business units — each of them concentrating on a slice of a business that overlapped with a half-dozen others, driving down operating efficiencies and, with them, margins — into a total of six, howls could be hear from every HP lab on the planet.  “Bill and Dave would not have done that to us.” A casualty of Mark Hurd’s rapid moves to salvage the strategic advantages of the two year old Compaq merger by slicing investments that did not have a clear path to revenue was the revered software laboratory at HP Labs.  “Destroying the culture!” cried the masses.

Now I happen to think that both moves were unwise, but not because of any cultural imperative that had been handed down from Bill and Dave. The numbers were seldom that hard to “crunch”.  It always boiled down to fundamentals. Risks were taken, but only when the fundamentals made sense.

It is a unique fiction in Silicon Valley that Bil Hewlett and Dave Packard were friendly to anything but an engineering culture that demanded results and held managers personally accountable for their decisions. I once got in trouble with the company’s director of  marketing and communications for suggesting otherwise in a public forum.

“Culture” often reared its head during my tenure at HP — usually as an excuse for ignoring business fundamentals. It was a problem that plagued Joel Birnbaum, my precedessor, Dick Lampman, head of HP labs and others over the years. On those occasions, I was happy to have the words of Bill Hewlett and Dave Packard to fall back on.

I’ll talk about that in my next post.

Big Animal Pictures

April 4, 2011

I’ve been spending more time with alumni.  Zvi Galil, the new dean of computing at Georgia Tech — my successor — has been on a national tour to get acquainted with recent graduates. I accompany him whenever I can to make introductions and to generally help smooth his transition.  Not that he needs it.  Zvi was dean of engineering at Columbia for many years and knows how to get alumni to talk honestly about their undergraduate experiences. We were having lunch with a group of recent graduates when I heard Zvi ask someone at the end of the table, “What’s the one thing you wish we had taught you?”

The answer came back immediately: “I wish I had learned how to make an effective PowerPoint™ presentation!”  If the answer had been “more math” or “better writing skills” I would have filed it away in my mental catalog of ways to tweak our degree programs. It’s a constant struggle in a requirement-laden technical curriculum — even one as flexible as our Threads program — to get enough liberal arts, basic science, and business credits into a four year program, so I was prepared to hear that these young engineers wanted to know more about American history, geology, or accounting. After all, I am a former dean.  I had heard it all before.

But PowerPoint? Everything came to a stop.  Zvi said, “PowerPoint!” It was an exclamation, not a question.  Here’s how the rest  of the conversation unfolded” “Look, the first thing I had to do was start making budget presentations. I had no idea how to make a winning argument.”  From the across the table: ” Yeah, we learned how to make technical presentations, but nobody warned us that we’d have to make our point to a boss who didn’t care about the technology.”  “It’s even worse where I work,” said a young woman. “Everybody in the room has a great technology to push.  I needed to know how to say why mine should be the winner.”  And so it went.  This was not a PowerPoint discussion.  We were talking about Big Animal Pictures. If you understand Big Animal Pictures, you understand  how to survive when worlds collide.

David Stockman directed Ronald Reagan’s Office of Management and Budget (OMB) from 1981 to 1985.  He was a technician.  A financial engineer. He had a Harvard MBA, and spent the early part of his career on Wall Street with Solomon Brothers and Blackstone. It was a checkered career, and if you take seriously the accounts in his memoir of the Reagan years, he never really understood that he was caught between colliding worlds. Which brings me to Big Animal Pictures.

Stockman was a conservative deficit hawk who thought his job was to restore fiscal sanity.  Reagan had beaten Jimmy Carter in part by painting the Democrats as financially irresponsible.  David Stockman’s job was to fix that, and that meant budget-cutting.  Defense Secretary Caspar Weinberger thought that Reagan had been elected to restore America’s military might. Weinberger’s job was to pump more money into defense budgets.  Stockman and Weinberger were on a collision course, and for a year they traded line-item edits to the federal budget. This was a technical duel. Stockman and Weinberger both had considerable quantitative skills. It was a bureaucratic game that Weinberger had learned to play when he worked for Reagan in California, but there was a deepening recession. In the end, it appeared that DoD would have to make do with the 5% increase that the White House was proposing. It was a spending increase that Stockman believed was unwise and unaffordable.

Weinberger’s proposal was 10%.  Stockman could barely contain himself. It set up a famous duel in the form of a budget briefing with Reagan playing the role of mediator. It was going to be a titanic debate.

Stockman showed up with charts, graphs and projections.  The stuff that the OMB Director is supposed to have at his fingertips. Weinberger came armed with a cartoon, and walked away with his budget request more or less intact.

Weinberger’s presentation was a drawing of three soldiers. On the left was a small, unarmed, cowering soldier — a victim of years of Democratic starvation. The  bespectacled soldier in the middle — who bore a striking resemblance to Stockman — was a little bigger, but carried only a tiny rifle. This was the army that David Stockman wanted to send to battle. The third solder was a  menacing fighting machine, complete with flak jacket and an M-90 machine gun. It was the soldier that Weinberger wanted to fund with his defense budget.  Weinberger won the budget debate with Big Animal Pictures.

Stockman was appalled:

It was so intellectually disreputable, so demeaning, that I could hardly bring myself to believe that a Harvard educated cabinet officer could have brought this to the President of the United States. Did he think the White House was on Sesame Street?

Stockman and many analysts concluded that the episode revealed something deep about Reagan’s intellectual capacity. Maybe so, but I think it revealed more about Weinberger’s insight into what it takes to carry an argument when the opposing sides can each make a strong technical case for the correctness of their position: argue for the importance of the end result, not for the correctness of how you will achieve it. It is a classical colliding worlds strategy.

Michael Dell’s 1987 private placement memorandum for Dell Computer Corporation was a Big Animal Picture. Buying computers was a hassle when Dell started his dormitory-based business in 1984.  By 1987, PC’s Limited had sold $160M worth of computers based on a simple strategy: eliminate the middle man, get rid of inventories, and give customers a hassle-free way to buy inexpensive, powerful IBM-compatible computers.  In the midst of a stock market crash, Michael Dell managed to raise $21M based on a short document that ignored the conventional view that private placement business plans had to be highly technical:

Dell has sold over $160 million of computers and related equipment on an initial investment of $1,000. The Company has been profitable in each quarter of its existence, and sales have increased in each quarter since the Company’s inception.

Tacked onto the memorandum, almost as an afterthought were letters from customers — inquiries from people who were interested in buying computers from Michael Dell and testimonial from owners of his made-to-order PCs who wanted to buy more of them.  It was short (45 pages with the letters attached) and, aside from a few pro-forma financials to explain what would be done with the new money, it was almost entirely devoted to painting a picture of what success looked like to Michael Dell.

A copy of the original Dell memorandum wound up on my desk in late 1998.  At the time, my Bellcore department heads were struggling to define businesses that could either be spun out of the company or funded as internal startups. I was drowning in  highly technical market forecasts and details of patent disclosures. Each new spreadsheet screamed: “Idiot! Just look at this equation.  It’s obvious why our approach is better than everyone else’s.”  One afternoon, in exasperation,  I threw Michael Dell’s private placement memorandum on my conference table and said “Make me a presentation that looks like this.” The room got very quiet as they realized what was going on.  I was asking for Big Animal Pictures.

We started four businesses within 18 months.  Three were spun out  and made a modest amount of money for the company and the founders.  We ran one as an internal start-up. It did not do nearly so well. One of the key factors was that we could not duplicate Michael Dell’s Big Animal Picture.

This is not a lesson that engineers and scientists learn easily. In fact, when presented with overwhelming evidence that business decisions are seldom made on the basis of technical elegance and correctness, engineers retreat to the safer ground staked out by David Stockman: “Do you think we are on Sesame Street?” The answer is “Yes!”  Successful engineers and scientists know all about Big Animal Pictures.

Paul R.  Halmos was one of the great mathematicians of the 20th century. He studied the most abstract topics imaginable. One of his crowning achievements, for example, was to create an entire algebraic theory to describe mathematical logic, which was itself an abstract mathematical theory to explain symbolic logic. Symbolic logic was, in turn, an abstract explanation of the kind logic used by Aristotle, and Aristotle’s logic was the formalization of correct patterns of human  inference. Halmos did not deal in uncomplicated matters.

How did Paul Halmos counsel young mathematicians to present their work in public?

A public lecture should be simple and elementary; it should not be complicated and technical. If you believe you can act on this injunction (“Be Simple”) you can stop reading here, the rest of what I have to say is, in comparison, just a matter of minor detail.

The mistake, Paul Halmos noted in his essay How to talk Mathematics is thinking that a simple lecture talks down to the audience. It does not. Halmos (or PRH as he sometimes called himself) seems to have understood worlds in collision.   Of course, a simple lecture in PRH world might open with the phrase “…as far at Betti numbers go, it is just like what happens when you multiply polynomials,” so it’s a sliding scale.

No matter what you’re doing in the technical world, learning how Big Animal Pictures work is a valuable thing.  I sometimes sit on review panels to decide on research funding.  I recently advised a young scientist to use Big Animal Pictures.  She had five minutes to present her work and I knew that the competition would be strong.  Her first instinct was to jump into the technical meat of her research to give the reviewers a feeling for why her approach was better than other approaches. My advice was to not do that.  I wanted her to literally give a BAP presentation that would inform the panel about the importance of her research and why they should care about it.  I later found out that other colleagues had given her identical advice, which she apparently followed with great success.

And it doesn’t matter which of the colliding worlds you are on.  BAPs are always a good idea. My colleague Wenke Lee was recently called upon to give a presentation on the state of computer security research to a  group of mathematicians.  It was all about how powerful mathematics can be used to exploit security flaws and vulnerabilities. Wenke resisted the temptation to dive into the technical details of botnet attacks.  It is, after all, a subject he knows well and he probably would have had fun demonstrating his prowess. But here is how Wenke began his lecture.

He went on for another twenty minutes, but he really didn’t need to. Everyone got the point in the first thirty seconds.


December 7, 2010

The technical presentations were over and a distinguished panel of inventors had given the audience some take-away messages, when Bob Lucky began his trademarked summary of the 2010 Marconi Prize ceremony. There were already empty seats as some of  the locals started heading for the SRI visitors lot when I was roused from a cookie-induced, end-of-conference stupor.  I had heard someone up front call my name.

Bob announced to everyone who was left in the room, “Rich DeMillo is writing a book on the subject.  Rich, how do you know when innovation has occurred?” There’s a mental “passive-to-active” switch that needs to be tripped in situations like this, so it took me a second or so to respond.  In the meanwhile, I said something witty to fill in the time.  “Thanks a lot, Bob,” as I recall. But it was obvious what the answer should be.

Every speaker had said it, and most of them were Marconi Prize recipients themselves.  I have said it many times here: invention without  impact doesn’t count as innovation. And this was a conference devoted to impact on telecommunications.
  • John Cioffi had described the insight that  inserting modems on both ends of a normal telephone lines allowed you to bypass switches and get direct access to the Internet. It was the key innovation in the development of  DSL .
  • In addition to telling the story of how he and  Whit Diffie invented public key cryptography, Marty Hellman talked about the “Who am I to do this?” moments of self-doubt that all inventors experience.
  • Federico Faggin made it pretty clear that the real invention in creating the first integrated circuit (the Fairchild 3708) with self-aligning silicon gates was not having the idea, but actually making it work.
  • Adobe Systems co-founder John Warnock–who shared the Marconi prize with Charles Geschke, the other Adobe founder–said that it often boils down to one person: “Apple without Jobs cannot innovate,” he said.

It had also been a day of sharing stories about Guglielmo Marconi. According to Warnock, Marconi could not stand John Ambrose Fleming, the inventor of the vacuum tube diode, whom Marconi had hired to design Marconi Company’s power plant.  In fact, Marconi was trying to  figure out a way to fire Fleming.  Marconi’s grandson, journalist Michael Braga, was there as well,  so there were also intimate and sometimes surprising family stories.

But everyone had said that you can tell when innovation has happened by its effect on people. In the world of industrial innovation, the impact that matters is economic, so I shot back to Lucky, “Wealth creation!” It was something I believed in deeply and I knew Bob felt the same way. I had worked directly for him at Bellcore.  In Bellcore’s research labs just publishing another journal paper didn’t count for much: everyone was held accountable for translating their ideas into inventions that would matter to the company, its customers, or their customers.

Lucky has a way of nodding when he is processing information, but it’s not necessarily because he is agreeing with you.  Sometimes it takes a little while to find out what his verdict really is. After few seconds of nodding he repeated: “wealth creation.”  I had given the right answer. I really had not intended that to be the closing line of the meeting, but it was. It was true, but it wasn’t the most creative insight of the day. Almost immediately, I thought of a much better answer to Bob’s question, but it was too late.  The SRI auditorium was emptying out.  The moment had passed.

Here’s what I really should have said:

You’ll  know that you have innovated when there are LIARS!

It was a term that John Cioffi had thrown into the discussion at the start of the day.  A L.I.A.R. is a Large Institutional Autocratic Resister.  John had said that you knew when an innovation was real when LIARs said it was their idea. Faggin had said that bringing something important into the world generates resistance.  You have to plan for it in advance. Hellman had talked about the wisdom of foolishness.

Fiber optics pioneer and winner of the 2008 prize, David Payne, said two things that were especially insightful.

  • If you innovate, someone will make a lot of money and someone will lose a lot of money
  • Innovation thrives on being different.  A manager wants efficiency and conformity

In fact, everyone had talked about the biggest impediment to innovation: large established organizations.  John Warnock and his colleagues at Xerox PARC had been charged with creating the office of the future.  They succeeded beyond anyone’s wildest dreams.  PARC created color displays, mice, networks, word processors and email. But Xerox was obsessed with the quality of the printed page, so LIARs dug in their heels. They would not adopt PostScript until all Xerox printers could use it, for example.  In other words, it was never going to be adopted.

LIARs are everywhere.  It’s even worse in academia. A couple of years ago, I was an ed-tech panelist at a large trade show when a vendor of software for higher education told me that in his industry university faculty members are called CAVEmen: “Colleagues Against Virtually Everything.” I wasn’t quite sure how to take that.

Pat Crecine died a few years ago. He was the innovative Georgia Tech president who was instrumental in bringing the 1996 Olympic Games to Atlanta. Crecine recognized the future impact of computing on science, engineering, and technology and created the College of Computing where I was employed as dean from 2002 to 2009. When it was created in 1990 it was only the second such school in the world.

Crecine reshaped Georgia Tech and the LIARS had to lay low while he did it.  He was just too effective at changing large institutions. But it caught up with him. He was unceremoniously booted out a few years later.  It was a devastating personal blow to Crecine, and I don’t think he ever really recovered. At his memorial, former Atlanta Mayor and U.N. Ambassador Andrew Young said of Pat: “He was always right, and he always got everyone mad.”

A few weeks ago, I reminded Andrew Young of this remark, and he said that it was a role that Martin Luther King had given him.  He was supposed to be the irritant that kept them focused on a change agenda.

He said also that it was Jimmy Carter’s concept that political innovation is the result of three ten-day cycles.  First, everyone who is going to have to give something up, gets their forces aligned to kill a new idea, predicting that it would mean the end of civilization as we know it.  That lasts about ten days.

For the next ten days they grudgingly disect the plan, acknowledging that parts of it  actually make things better but that overall it will be a disaster.

The final ten days is spent taking as much credit as posssible for the plan, with a special effort to make it clear that the original idea was something completely different and remains truly awful.

I had drinks in Menlo Park  with Chuck House a few days before Thanksgiving, and we eventually got around to trading stories about Hewlett-Packard innovators we had known and worked with. Chuck is working on a case study of an intense, disruptive,  strategic refocusing of the company that occurred when it was about one tenth its current size.  I said I didn’t think it would be possible today, that there is very likely a law that limits innovation of that kind.

I brought up the idea of  LIARs and he started laughing immediately. Stamping out LIARs was one of the reason Dave Packard and Bill Hewlett tried to keep business units small: the biggest impediment to innovation is large established organizations.

The Internal Start Up: Heading for the Exit

November 17, 2010

It’s not only the clash of investment cultures that tends to doom internal start ups. At least that’s what I told the Bellcore and SAIC CEOs at the post-mortem for the internal division that we had tried to run as a venture-backed business.

It’s also what I said to Bob — who you will recall — wanted to incubate an internal venture inside his Fortune 10 company that would match in excitement and star power the coolest gang of Sand Hill Road funded misfits. He would have to be willing to sacrifice a boatload of management principles that had served him well in his career. I didn’t think he would do that.

Like a generous parent, Bob was in a position to give the new kids everything they needed for success: mentoring, time to succeed, and ample resources. What he did not have was a clear idea of which exit to take. Bob’s idea of a venture failed the value test.  A new venture succeeds when the right leadership team focuses on a market need with staged funding.  The idea was doomed as soon as Bob said,“Look, I’m in charge of new technology and platforms and I’m going to be the venture capitalist funding a new product, so that when it succeeds we’ll be able to fold it back into our current business.

The moment someone in a large company forms a thought like this, the options for maximizing the value of the investment are narrowed to one.  The only exit is one in  which access to internal resources can be used to shoehorn a fit into existing businesses. I had seen the danger of this kind of investment strategy at other companies, and the results were not encouraging. This thinking had infected our Bellcore start-up, but I have been in the executive suites of a dozen West Coast technology companies when the discussion turned to how the value of an internal start up was going to be captured by an existing business line.  It always turned out the same:  because there were no choices to a successful exit, backers literally threw money at the new company. They were thinking way down the line about how to succeed.

There are other options, but they do not necessarily align well with Bob’s goal of internal commercialization:

  1. Sell the technology: it’s always possible that the upside does not justify continued investment.  But if you’ve made a large up front commitment–as opposed to small increments that are tied to market tests– it is hard to execute this option and capture value.
  2. Licensing: the main reason for choosing  licensing as an exit is that there are differing value expectations in the marketplace.  The technology may be used in many different applications by many different players, for example.  You can maintain a central IP position and benefit from this diversity.
  3. Resell your R&D effort: if the technology is a critical product component, there may be other vendors who would like to benefit from your near-term “deliverables.” An R&D contract gives up a little IP in the short run, but you not only recover your development costs, you also continue to expand what you know about the technology and its applications. This is such an interesting–and seldom used–exit strategy that it deserves a post all by itself.  Watch for it!
  4. Sell the right to market or form a joint venture to market and sell: this is a range of exit possibilities that allow you to keep the option of bringing the technology in-house at some later point.  Of course, the attractive thing about such partnerships is that they generate revenue while spreading the risk around several players.
  5. Spin-out/IPO: the obvious counterpoint to the internal start up is to kick the baby bird out of the nest to see if he can fly on his own. I don’t know why our Bellcore start up was not conceived from day one as a spin out.  Bellcore, after all, had a history of spinning out companies to commercialize research technologies.  Some of those companies (Telelogue for voice menus, Elity for CM analytics, and a host of companies for communication network traffic monitoring and tools) were quickly picked up by angel and venture investors who went on to ride the businesses to their own successful exits.

Why Bob was determined to retain ownership in an incubated business says as much about internal corporate culture and priorities as Bob’s own approach to innovation. What seems to be missing when managers fixate on internal startups is the recognition that there are other worlds involved in the success of a new business, and they often  have very different rules.The internal start up is an opportunity for worlds to interact rather than collide. Here is the value chain that Bob had to work with:

  • Creative engineering: internal R&D interacts with a larger, external innovation community.  It  is very good at coming up with gap-filling concepts that need to be externally validated
  • Venture funding: is useful for establising performance metrics based on value and focusing funding to meet performance goals based on those metrics
  • Corporate resources: the company itself is in the driver’s seat.  It sets out the strategy for value capture and makes the option calls that start chains of transactions that are key to success. And by the way, the creative engineers call it home.

This all started because Bob was worrying that normal, internal product R&D would not lead to  “breakthrough product ideas that do not align well with their core business.”  It is a common problem, but there are three fatal errors that doom most attempts to solve it. Here’s how to avoid those errors.

First, don’t set the new venture up for failure by limiting the end game to only those ideas that align well with the core business.  That was what got you in trouble in the first place, and can be avoided by considering up front the full range of exit options.

Second, don’t pretend that you are a venture fund.  The fundamental belief systems are different, and it is simply not possible for a large corporation–one that has to worry about quarterly results and long-term growth–to capture value in the same way that a VC does.

Finally, recognize the role that interacting worlds will play in the success of your venture.  External innovation networks, market-validating communities and the relatively heavier weight corporate resources and processes have a tendency to collide, when what is really needed is a strategy for working together.

Investor vs. Investor

September 29, 2010

Internal start-ups have all of the usual new business challenges.  They need products, customers, and a profitable way of getting customers to pay for the products.  But above all, they need cash, because even the best strategy will crash and burn if money runs out too soon.

[Production note: at this point investors should enter, corporate investors stage left, venture capitalists stage right]. They speak the same language and are genuinely interested in incubating  great new businesses, but don’t let that fool you.  They are from different worlds.

promised to talk about some of the things that doomed the Bellcore internal start-up which I briefly led.  There is no way of  knowing whether a VC-funded company would have fared any better. In fact, one of the companies that we might have merged with was a venture-funded operation that lasted only a few months longer than we did.  Nevertheless, we did learn a lesson or two about corporate sponsorship of start-ups:

Corporate sponsors of new ventures and VCs have different belief systems.  They are fundamentally incompatible, and without early, explicit steps to stop it, corporate attitudes, practices, and beliefs will overwhelm the fragile culture of the start-up.

Let me set the stage a bit.  In 1999, Bellcore (now Telcordia Technologies) was a small company (revenue creeping up on two billion dollars) that was trying to ride the internet wave, but it had inherited a corporate style from its previous owners that was, well, hierarchical.  Big deals dominated the business mix, and internal investment decisions were obsessively analytical.

Bellcore’s new owner was SAIC, a big company serving a hierarchical marketplace that was paradoxically entrepreneurial. Bob Beyster, SAIC’s founder, had insisted on a flat corporate structure in which managers were encouraged to develop independent business.  When my little start-up failed, I  made my wrap-up presentation to the CEOs of both companies.  One of them tended to believe that Bellcore’s internal investment machinery was the right way to grow a new business.  Here’s how it went.

  1. We spent a lot of  money on extensive analytics to gauge market potential.  It was how the investment decisions for Bellcore’s big operations support systems were made and every new round of funding was based on a rosy prediction of a complex market study. In reality, market behavior was unpredictable.  We should have evolved our concepts in the market.
  2. Except for the few top  technologists that I could steal from my own research staff, corporate investors would not permit top talent to be redirected from existing projects — where the  big customers were —  to this risky venture with uncertain prospects. Once both scale and success were clear, we could recruit internally, but until then, we had to rely on good-natured volunteers to help us out.  The only thing we could do was hire externally, but there was little upside to attract the kind of business team that we needed.  A VC sponsor would have known that new ventures do not succeed without a highly talented team.
  3. Speaking of success: the corporate sponsors were only interested if the likelihood of success was high, so we spent a lot of time on the success factors that would be convincing to them.  An angel investor or a VC would have known that, since the likelihood of success of a given venture is quite low, it is better to fail earlier rather than later.
  4. Corporate culture was a culture of ownership, so many business planning meeting focused on patents and intellectual property rights that would build walls around the business.  It was an unfortunate mindset.  This was a time of open standards and sharing, but shared ownership was not part of the equation for our start-up.
  5. Internal sponsors wanted to see scale.  Niche markets were simply not interesting. The business had to embrace all of telecommunications, so part of the operating strategy was to place many product bets simultaneously, a disastrous choice given the meager resources for product development and the lack of real experience on the part of our business development team.  A VC would have told us that a narrow, easily explainable, product focus was key to success.
  6. The corporate sponsors were all senior Bellcore executives, and they were focused on building the core businesses.  They believed that value creation had to be demonstrated by earnings. A VC would have told them that the market recognizes value well before earnings are even possible — it’s the single most obvious characteristic of early-stage investors to constantly seek those kinds of  market signals.

There were ways through this thicket.  That is one of the lessons for corporate leaders who want to launch internal start-ups: avoid colliding worlds by choosing the right corporate role.  Corporate sponsors need to be responsive to the needs of the new venture, but proactive support is just one more opportunity to infect the start-up an alien culture.  An internal start-up needs to be managed, but managing for value makes much more sense than managing to artificial revenue and earnings targets. And freaking out over the possibility of failure is also not helpful.  New business creation is a portfolio game, and any corporation that does not take a portfolio approach is betting against high odds.

An overlay to the story of every internal start-up is corporate machinery.  The milestones that mark the calendar for corporate sponsors are timed to fit the needs of much larger — and more visible — core businesses.  No billion dollar company can afford make its processes dependent on external business and market events.  But that is exactly what a start-up needs to do.  So, even if the new venture survives the Investor vs. Investor duel, it needs protection from the calendar, the  topic for my next post.

The Internal Start-up

September 22, 2010

I had a conversation the other day with a senior executive — let’s call him Bob —  of a Fortune 10 company about their “internal start-up” culture. It seems that they are looking for breakthrough product ideas that do not align well with their core business.  The solution seems obvious: let’s create the same kind of  exciting, market-driven environment that you would find in a start-up!

Everything sounded fine for a few minutes.  They thought that the most creative people in the organization needed to have elbow room that would be difficult to achieve in the risk-averse culture of a hundred billion dollar company.  So how did they plan to achieve that?

  • Freedom to break some rules:  the start-up can use its own  product roadmaps and sales strategies
  • Freedom from process-driven corporate calendars and budgets: the leadership of the start-up is not bound by the revenue and earnings goals of their parent
  • Freedom to take risks: they have permission to fail

It didn’t take long for the discussion to go seriously off track.  When I started in with questions about how they were going to actually pull this off, Bob said: “Look, I’m in charge of new technology and platforms and I’m going to be the venture capitalist funding a new product, so that when it succeeds we’ll be able to fold it back into our current business.” I had seen this movie before.  It’s called When Worlds Collide. When I suggested that Bob lives on a different world and would make a terrible venture capitalist, things got a little heated. As I recall it, Bob said, “In your ear!” A surefire way to put a fine point on your argument.

Bob lives on a planet where the scale of his business creates a climate for successful development of new products that can be sold to familiar customers using existing channels and tried-and-true processes.  Above all, in Bob’s world, it is possible to make big bets. The examples are impressive. Everything from HP’s inkjet printing to the Boeing 777. Unfortunately for Bob and his start-up, none of those things matter.  The start-up lives in a world of new markets, which means new customers, new channels and new processes.

Even though Bob has all the talent he needs for market success,  the likelihood of failure is high. The Newton and the Factory of the Future did not fail because  because Apple and GE could not innovate.  They failed in large measure because corporations foster a system of beliefs that is fundamentally incompatible with  taking capabilities to new markets. When I asked Bob  how the start-up employees were going to be recruiteed and rewarded, whether they had a safety net for returning to the company in case of failure, and how many simultaneous bets he was willing to place, the answers were not encouraging.

I immediately did a deep dive into my archives, hoping to find traces of a long-forgotten venture that I helped steer into the ground.  In the late 1990s Bellcore was poised to enter the online services business, hoping to attract newer, smaller customers than the seven  Regional Bell Operating Companies who accounted for most of the company’s revenue.  This was a time when Bellcore’s Applied Research group was generating a blizzard of patents in e-commerce and software, technology that I have talked about before. We were as smart and nimble as any West Coast start-up, and best of all we had the cash to fund a new venture, the talent to staff it, and the power of an existing sales team to go after those new customers. I was asked to lead the new company.  We would be funded just like a VC-backed start-up…

When the dust settled and I reported lessons learned to the Bellcore’s CEO Richard Smith and later to Bob Beyster, CEO of SAIC,  Bellcore’s parent company, the first thing I said was that there had been no structural reason for failure.  A team from McKinsey had already given us the range of possibilities. We could have set up an independent business unit or spun 0ut a company in which we retained minority ownership.  Setting up a new incubator would have required more time than we thought we had, and, in any event,  Applied Research was already in the incubation business. We had chosen to bypass corporate reporting structure and create a company-within-a-company with direct oversight by a CEO who was committed to our success.  It was exactly the Hughes DirecTV model.

There are three reasons that internal start-ups like ours tend to fail.  Bob was not in the mood to listen because he is banking on success, but the topic comes up in every large enterprise, so I thought it might be a good time to repeat the conclusions here:

  1. Failure is common: Building new business is a portfolio game in which 90% of the returns come from 15% of the investments.  It is fundamentally unlike product development. A “big bet” strategy only succeeds when there is high degree of confidence in your ability to sort out winners and losers.  In a new market, that just never happens.
  2. Market-driven milestones drive success in new ventures.  An internal start-up — even one with strong support at the top — cannot divorce itself from processes that are timed to fit corporate needs.
  3. Corporate sponsors of new ventures and VCs have different belief systems.  They are fundamentally incompatible, and without early, explicit steps to stop it, corporate attitudes, practices, and beliefs will overwhelm the fragile culture of the start-up.

I want to spend the next several days elaborating on these ideas.  I hope Bob is reading.

dy, dynac, and Carly Fiorina

August 25, 2010

I recently heard from Chuck House, co-author with Ray Price of The HP Phenomenon (THPP) about my post The dy Logo.  I had used Chuck’s book as a jumping-off point for a discussion of how difficult it can be to integrate “outsider” cultures, even when the outside ideas have obvious value —  like correctly orienting the logo on a consumer product. It was a riff on WWC that I enjoyed writing.

Chuck’s note was a wonderful read in itself.  He took good-natured issue with some of my characterizations, reinforced other points that we agreed on, and reminded me of a few things that I should have remembered (and were in his book).  I don’t have Chuck’s permission to publish his email in its entirety, so I won’t.  Nevertheless I wanted to share with you a couple of his observations.

First of all, Chuck pointed out that the “dy” logo was actually used at HP in the 1950’s.  From page 64 of THPP:

A spin-out corporation…Dynac allowed a number of HP employees a higher equity stake in their success while giving HP a chance to invest in areas adjacent to its main activities. Dynac’s logo was the HP logo inverted. Later, when it was found that the Dynac name was trademarked, it was renamed Dymec, keeping the same logo.

There are many wonderful things about this story, but I was most fascinated that — even in the 1950’s — corporate leadership would have invented such a thoroughly modern approach to identifying and seeding market adjacencies. Some things were lost over the next couple of decades.  At least, there is no indication that Steve Wozniak’s management was inclined to create a spin-out to  give “HP a chance to invest in areas adjacent to its main activities.”  In any event, most of the HP engineers who argued for keeping the “dy” logo were not even born when Dynac used it, so it is unlikely that their resistance to flipping the shield was a nostalgic bow to a prior golden age.

Chuck went out of his way to reaffirm the comments in his book about Carly Fiorina’s positive  impact on HP.  Despite the obvious oustider-insider clashes, he says that, ” I don’t buy that Carly introduced WWC to HP, or even that she was all that good at it herself…,” but he does think that “…she was the best CEO we’d ever had in a WWC regard by quite a long ways (except Hewlett when he would actually do it…).

To temper my comments about the narrowness of  THPP’s sources, House described for me the considerable pain and expense that he and Price endured in preparing the research.  Ninety percent of the people interviewed about events in the last fifteen years were what Chuck calls “current participants.” It’s hard to characterize that as the reminiscences of old colleagues. Point taken.

It was interesting to me that Carly opened the HP archives to House and Price.  That access was eventually revoked.  In fact, by 2001, access to the archives had become a sensitive issue with Carly, and she asked me to undertake a review of both the libraries and the archive.  I was not very excited about doing it, and other events quickly had a higher priority.

For Chuck’s unvarnished “side-by-side” view of recent HP CEOs — along with a pretty striking analysis of value given versus value received — I will simply point you to his recent blog on the topic.

Technology Hype and Investment Mania are Not Always Irrational

July 1, 2010

It’s funny how the same reading of  history leads to different conclusions. The young investor in the 1840s Punch cartoon above stands in a back alley outside the Capel Court stock exchange asking a purveyor of dubious scrip how to honestly make £10,000 in railways. It is the end of a technology hype cycle in which the modern-day equivalent of $2 trillion was pumped into an investment bubble.  The picture on the right is a desolate and economically insignificant outpost connected by some of the 2,148 miles of railway capacity that entrepreneurs built during the British railway investment mania of the 1830s. The conclusion is that early investors in British railway companies were played for suckers.

The mania probably started with an announcement in the May 1, 1829 edition of the Liverpool Mercury:

“To engineers and iron founders

The directors of the Liverpool and Manchester Railway hereby offer a premium of  £500 (over and above the cost price) for a locomotive engine which shall be a decided improvement on any hitherto constructed, subject to certain Stipulations and Conditions, a copy of which may be had at the Railway Office, or will be forwarded. As may be directed, on application for the same, if by letter or post paid.

HENRY BOOTH Treasurer Railway Office, 25 April 1829

The Liverpool and Manchester Railway was not the first railroad in England, but the competition drew enormous interest.  Contestants used everything from “legacy technology” — horses on treadmills — to lightweight steam engines that could reach up-hill speeds of 24 miles per hour. The legacy technology defeated itself when a horse crashed through a wooden floorboard. It did not hurt that Queen Victoria declared herself “charmed” by the winning steam technology.

Business innovation  — ticketing, first-class seating, and agreements allowing passengers to change carriers mid-trip — was rapid and fueled as much by intense competition as by a chaotic, frenzied stock market in which valuations soared beyond any seeming sense of proportion, causing  John Francis in 1845 to despair: “The more worthless the article the greater the struggle to attain it.” When the market crashed during the week of October 17, 1847 — in no small measure due to to the 1845-6 crop failure and potato famine — and established companies failed, financiers like George Hudson were exposed as swindlers. Thomas Carlyle demanded public hanging.

The collapsing bubble is not the end of the story. Between 1845 and 1855 an additional 9,000 miles of track were constructed.  By 1915 England’s rail capacity was 21,000 miles.  British railways had entered a golden age. The lesson that observers like Carlotta Perez and others draw is that there is a pattern to technological revolutions:

  1. Innovation enables technology clusters, some  of which transform the way that business is done.
  2. Early successes and intense competition give rise to new companies and an unregulated free-for-all that leads to a crash.
  3. Collapse is followed by sustained build-out during which the allure of  glamor is replaced by real value.
  4. This leads to a golden age that results in more innovation as lives are structured around the new technology.

This is a Schumpeterian analysis of innovation that is reflected everywhere, but particularly in the economics of the new technologies of the late twentieth century.  The stamp of the the 1840s British railway mania can be seen in Gartner’s technology hype cycle and in nearly every discussion of the 2000 dot-com collapse.  It is an analysis that is a special problem for angel and other early-stage investors because there is no real guide to tell you when the bubble will burst. Unless you are George Hudson, what investor will find the risk acceptable? A rational early investor will steer clear of technologies that radiate this kind of exuberance.

But what really happened to all that investment in the 1830s? I was amazed to see the recent article by my long-time colleague Andrew Odlyzko at the University of Minnesota who analyzes the British railway mania example and concludes that the early investments did quite well:

The standard literature in this area, starting from Juglar, and continuing through Schumpeter to more recent authors, almost uniformly ignores or misrepresents the large investment mania of the 1830s, whose nature does not fit the stereotypical pattern.

Andrew enjoys taking contrary — often cranky but always well-thought out–  positions on conventional wisdom, so I approached his article with cautious interest.  After all, I thought I knew a little about the railway mania episode.  I had used it myself to illustrate innovation cycles. Like most people, I had focused on the disaster of the 1840’s, so I was drawn immediately into Odlyzko’s argument that during the mania of the 1830’s,  “railways built during this period were viewed as triumphant successes in the end.”:

After the speculative excitement died down, there was a period of about half a dozen years during which investors kept pumping money into railway construction. This was done in the face of adverse, occasionally very adverse, monetary conditions, wide public skepticism, and a market that was consistently telling them through the years that they were wrong.

In other words, the end result of the wildly speculative exuberance of the  1830s was the “creation of a productive transportation system that had a deep and positive effect on the economy.” Investors saw great returns. A shareholder in London and South Western Railway (LSWR) who in 1834 paid a £2 deposit on a share worth £50 and who paid all subsequent calls (totaling £95.5) would have watched the investment grow to 2.31 shares valued at  £200 by mid-1844 and would have received in 1843 alone £4.62 in dividends — a 9.68% annual return.  This defied the more rational demand and cost forecasts:

at the start of the period…in June 1835, such investor would have paid £10, and seen the market value it at £5.5. In fact, over most of the next two and a half years, the market was telling this investor that the LSWR venture was a mistake, as prices were mostly below the paid-up values.

Andrew Odlyzko is a seasoned mathematician who knows better than try to prove a general principle by example.  He says as much in his paper. On the other hand, railway mania has been used for years as an illustration of an innovation cycle, and  Odlyzko has a very different reading of history. The conclusion that is usually drawn from the Railway Mania may lead markets and investors astray because it seriously misrepresents actual patterns. The whole point of a cycle — hype, innovation, or investment mania — is that it can be used as a risk-averse template for rejecting sales pitches that start with “This time is different“.  But that does not mean that it is never different.