We are most fortunate to feature Donald
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
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.
partnerships & growth
is one morning where the introduction will be better than the
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.
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
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.
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
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
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
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
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.
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
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.
# 1: 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.
# 2: GE Equity
The second large and interesting group in this area is
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