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Excerpt from
Chapter 1:

Five Paths to Venture Growth

This story began with a conversation I had with Lew Platt, former chairman and chief executive officer of Palo Alto-based Hewlett-Packard. We had been discussing leadership when Lew suddenly turned to me and said, "To hell with leadership. Where's the growth?" He pointed out that HP had been growing at a 20 percent rate for nineteen years, but in the past year the company's growth had slowed to 5 percent. Was I aware, he asked, that virtually no Fortune 50 company ever achieved annual growth rates in excess of 5 percent?

I looked at him in disbelief and asked, "What about GE?"

"Not without major acquisitions," he replied. He stood up, signaled that I should follow him, walked to a file cabinet, and pulled out a series of folders bulging with graphs. One after another, each graph showed a growth curve followed by a plateau. Each company had reached the Fortune 10. He turned to me and said, "We call it the 'stall.'" I was reminded of those hospital movies in which the patient dies and the EKG, which had been showing regular blips, suddenly flat-lines. "No company that approaches the level of revenues required to join the Fortune 10 seems able to avoid the stall. We're approaching $40 billion and the Fortune 10, and we're searching for a route to maintain double-digit growth."

Lew pointed out that although there is no limit to size, there are limits to growth rates. Companies that exceed $20 billion in sales have been particularly constrained, and most companies that reach the Fortune 50 stall and never recover. Many of these Fortune 50 companies vaulted onto the list, not through organic growth but through acquisitions. The Corporate Executive Board, in concert with HP, analyzed the Fortune 50 and discovered that 91 percent had slowed down and never recovered their ability to grow. Companies that had been growing from 9 to 28.6 percent annually never again sustained meaningful growth rates. Instead, they dropped to GNP-level growth rates of 3 to 4 percent per year (see Figure 1.1).

Over forty years, from 1955 through 1998, only eight companies-the growth elite-continued to achieve significant growth. That list includes 3M, American International Group, Dayton Hudson, Hewlett-Packard, PepsiCo, Procter & Gamble, United Parcel Service, and Wal-Mart (see Figure 1.2).

There are many reasons for declines in growth rates. Chief among them is the failure to realize that significant corporate growth must be nourished by a continuous flow of innovation through new product research and development. In many large companies, a decline in confidence combined with ineffective management of internal research and product development led to the stall. General managers who were focused on short-term results eschewed investments in potentially breakthrough products that might take three to four years to develop in favor of incremental improvements that could contribute to the next year's operating results. Technologies that might cannibalize existing offerings were neither encouraged nor funded. Valuable technology and intellectual property languished while talented researchers, lacking focused direction, became cynical and weren't stretched to their full potential. As a result, too many companies have focused on close-in, low-risk product categories, and they have isolated their research-and-development groups from the sales force, which understands customer needs, and managers, who are responsible for shaping corporate strategic direction. Xerox's failure in the 1970s to commercialize its invention of distributed personal computing can be partly attributed to the isolation of the Palo Alto Research Center from the organization as a whole.

Companies that cut research-and-development budgets to boost earnings or fund expensive marketing campaigns risk the long-term viability of their product portfolios, leading to the false conclusion that the potential for research-and-development innovation-and therefore sustainable competitive advantages-no longer exists. This is what happened at RCA when the market for color televisions reached saturation in the mid-1960s: The company pulled the plug on many of its research-and-development investments.

Many companies have made mistakes as they moved products or businesses through the development process. When they focused excessively on engineering that would create "perfect" products, they forfeited first-mover advantage. The elaborate approval processes that so many large companies favor slowed product development cycles. Apple Computer's twenty-four-month development cycle of overengineered products contributed to the company's decline in an industry with six-month development cycles.

Too many companies have rejected next-generation technology, viewing it as inferior to their dominant technologies. And some companies have invested in new competence-based products-which can be developed with existing internal skills, experience, and know-how-only to conclude that the products couldn't be introduced because they were so far beyond current offerings. Kodak turned down an offer to finance Polaroid, rejected an option to acquire the original xerography patents, and mothballed an internally developed VCR because management concluded that consumers would not pay $500 per unit. As a result of its arrogance, from 1960 to 1970, Kodak's market share for cameras declined from 90 percent to 45 percent, and for film from 95 percent to 60 percent.

There is no question that attempts to preserve premium product positions and margins while under attack from new competitors are major contributors to stalls. Nearly half of the companies in the Corporate Executive Board's study, which was conducted in association with HP's growth initiative, stalled because they failed to act when new, lower-cost entrants redefined the rules of the game for their sectors. New, entrepreneurial technologies-such as endoscopic surgical devices, routers, mobile telephones, and PDAs-and business models-such as Internet retailing and online supply-chain management-disrupt conventional business structures and strategies, taking over as the sources of new value creation and growth. The stewards of the large global companies who didn't respond quickly to disruptive technologies-a concept defined by Harvard Business School professor Clayton M. Christensen in his seminal book The Innovator's Dilemma-forfeited their research, new product development, and venture skills. As defenders who refused to cannibalize their businesses, they allowed themselves to be eaten alive by young, fast-moving start-ups.

Wall Street used to reward the voluntary slowing of corporate growth in companies that increased earnings per share. Not anymore. Today Wall Street punishes slow top-line growth. Analysts reward companies that can maintain double-digit revenue growth, and investors deflate the market caps and stock prices of those that cannot. It is not that there was no growth in the computer industry during the period when IBM, Digital Equipment, Data General, and Wang, for example, were experiencing slow or declining growth. More than a few early-stage ventures were following a different direction, creating new offerings that were designed to meet the unmet, unserved customer needs of emerging markets. Sun Microsystems, Dell Computer, Gateway, Oracle, and Microsoft, all of which embraced disruptive technologies, were not simply fast growers. They were the creators of new billion-dollar businesses in a radically changing industry. In the view of Mike Moritz of Sequoia Capital Partners, "Silicon Valley wouldn't exist if big companies could identify technology and market opportunities and move with speed to capitalize on them."

Lew Platt knew that HP had to ramp up-and continue to ramp up-its growth, and he set the process in motion. Now that he has retired from HP, taking on the chairmanship of the Kendall-Jackson wine company, the task falls to Carly Fiorina, HP's new chairman, president, and CEO. Upon taking the post, her first challenge was to find ways to return the company to its roots, to the Sand Hill Road garage where Dave Packard and Bill Hewlett developed the test-and-measurement products that launched HP. "Invent," she challenged the current HP engineers. "Invent new products and services to fuel our growth." As it turns out, HP's leadership has run into problems, finding that new business creation is not easily compatible with the imperative to achieve short-term results.

Lew Platt's frustration immediately resonated with me. In the United States and Europe, for about a dozen years, companies had been flattening organizations, reengineering processes, and creating extremely efficient, productive businesses. But efficiency, by itself, cannot be allowed to rule strategy. Chief executives of large global companies were left with little space in which to innovate and create new $100 million-plus businesses. Each year's corporate goal was to deliver the plan and quarterly results that had been promised to Wall Street analysts.

General Robert Wood Johnson, chairman of Johnson & Johnson from 1938 through 1963, once said, "If you are not failing, you won't succeed. If you can't succeed, you can't grow." Ralph S. Larsen, chairman and CEO of today's J&J, also rates growth as his number-one business priority. "We are convinced," he told me not long ago, "that healthy top-line growth is the foundation upon which to build a strong company."

Larsen speaks from experience: In one ten-year period, from 1989 through 1999, J&J's annual revenues climbed from $11 billion to nearly $29 billion, and Larsen is determined to sustain his company's growth rate. As any company gets larger, of course, top line growth becomes increasingly difficult to achieve. But for a performance-driven leader, it becomes no less of an objective.

I am confident that in ventures, large and midsized companies can discover a source of growth. To achieve this growth, many of these companies will need to change their mindset, redefine their concept of organization, alter their need for control, expand their capacity for speed, broaden their tolerance for mistakes, modify their risk profile, and shift some of their investment capital from incremental internal research-and-development projects to internal and external ventures.

During 2000 the technology sector experienced volatile growth and decline. Individual and institutional investors alike inflated the stock prices of publicly traded companies whose business models defined no sources of revenue beyond banner advertising. Consequently, many of these overcapitalized companies had no realistic expectation of profitability. When, after sober reconsideration, investors withdrew their exuberant support for those companies, the effects were felt throughout the financial markets.

The Internet companies that failed did so because they had flawed business models. Other technology companies suffered setbacks as a result of a reduction in demand for their products and services. Cisco and Corning, for example, had been enjoying annual growth rates of 40 percent. Their growth was predicated on the financial health of such customers as AT&T, WorldCom, and other common carriers, and on the ability of those customers to carry out their flawed plans to implement new fiber-optic networks.

Because they continue to support vibrant product development, Cisco and Corning will experience only temporary slowdowns in their growth. They continue to develop and promote new technology solutions to unmet, unserved customer needs in emerging markets, and they can expect to achieve sustainable competitive advantage and earnings.

Ventures as a Source of Growth

I had been working with a number of billion-dollar businesses when I first began to see the potential of ventures as sources of growth. I realized that I wanted to understand those companies that had made ventures critical components of their strategic and operating success. I contacted the company leaders-primarily CEOs, but also other executives-who had pioneered their organizations' venture strategy. I also sought out venture capitalists and entrepreneurs who had experience in developing and operating successful ventures.

It was during this process that I discovered that Intel, GE, and J&J had invested billions of dollars through their dedicated corporate venture funds, and that Nortel had established deep and special relationships with leading venture capitalists. I learned that Thermo Electron had developed and taken twenty-three spinouts public, and that Corning, a Fortune 50 company, had a long heritage of inventing new technologies and creating new businesses. Across the "pond," British Telecom had launched a major initiative to exploit its fourteen thousand patents and the entrepreneurial talent in Adastral Park. British Technology Group, which holds the licenses on magnetic resonance imaging and five thousand other technologies, had started shifting from a license-based to a venture-based strategy. I learned about the value of Procter & Gamble's coinvestment with Redpoint Ventures and the success of Sperry Marine's technology within XL Vision's "enterprise factory." My firm, Oyster International, started its own technology spinout business that works to meld the technology and ideas of large global corporations with the skills and specific industry expertise of early-stage venture management, including business model development, entrepreneurial leadership, and venture management capital formation. In the course of those early conversations, I also learned to appreciate the power of Cisco's acquisition-and-integration strategy. General partners in the venture capital community and CEOs of large global corporations who were seeking high-growth ventures willingly shared their unique perspectives with me. Over the course of the past ten years, most large global corporations had focused on efficiency and productivity to produce earnings that would fuel stock market growth. To increase top-line growth, they had gone global, extended product lines, and acquired "synergistic" companies.

Most industry segments had grown crowded and hypercompetitive. The next challenge was to search for ideas and new ventures that addressed an important part of that growth-"white space" opportunities, the new-business creations that would meet the unmet, unserved needs of customers in emerging markets. For example, in the PC market, there is little room for new product features, and geographically competitors in this industry have saturated markets around the world.

It turned out that successful corporations were those that were investing in both internal and external ventures, as well as exploiting the potential for doing it "ourselves" and with partners. Many were supplementing their product and business portfolios through the acquisition and integration of ventures. When I speak of ventures, I am referring specifically to new business enterprises that entail a certain amount of risk. As a result of my investigations, I developed a framework that serves as a lens for examining the various ways in which successful companies achieve sustained growth through ventures. This framework accommodates the acquisition and integration of ventures as a way to enter and dominate emerging markets rapidly.

Managers within large global corporations have wide-ranging experiences and perceptions of venture activities. The language that many of them use to describe and guide their organizations is very different from the language of entrepreneurs and venture capitalists. It became clear to me that it would be useful to benchmark successful companies and develop a framework that can explain and define corporate venture activities and their potential to corporate management, venture capitalists, entrepreneurs, and the financial community. On the basis of my consulting and venture-investing experience, research, and interviews, I see that there are five paths that companies follow to build the great businesses of tomorrow. To achieve venture success, the company builders of the future will embrace one or more of the following venture routes to growth.

1. Invent the next great business. By "next great business" I am referring to new-business creation within the corporation. Corporate approaches range from informal and underfunded "pet projects" within a business unit to disciplined innovation processes that are well funded and managed by enlightened CEOs committed to venture growth. The venture is born and grows under the corporate roof. The two companies I have selected to illustrate this path are Thermo Electron and Corning.

2. Invest in the next great business. An increasing number of companies are establishing corporate venture groups and committing money and other resources to entrepreneurial ventures. A corporate venture group comprises company employees who work together as strategic investors, simultaneously competing with and investing with traditional venture capitalists. To illustrate this path, I detail the results of my investigations into Intel Capital and GE Equity.

3. Venture the next great business. Following this path, companies form powerful and synergistic alliances with venture capital firms. Through a venture collaboration involving Nortel, a highly successful telecommunications company, and a group of venture capitalists, Nortel was able to establish a strong presence in the data transmission and optical-networking space. Another example is Advent International. This Boston-based venture capital firm manages dedicated corporate-venture funds that offer corporate investors a window on technology and emerging markets they would otherwise miss.

4. Partner the next great business. Independent (and often distinctly different) companies establish partnerships that result in the creation of new businesses. Sperry Marine's collaboration with XL Vision, and Procter & Gamble's with Redpoint Ventures, combined big-company technology and intellectual property with business domain expertise and business-building experience.

5. Acquire and integrate the next great business. Acquiring and integrating capabilities, know-how, and technologies can be an alternative to traditional research and product development, as well as a bridge to important, emerging markets. Acquisition and integration of ventures is a method for supplementing a product and business portfolio with the best available technology, with speed. Cisco has used this approach with remarkable success.

Analysis of the five paths and the organizations that have chosen to follow them reveals that most successful venture catalysts experiment with or follow two or more directions simultaneously. What is a venture catalyst? Dictionaries define a venture as a risky undertaking, and a catalyst as a substance that speeds up a chemical reaction. When I combined these terms to provide the title for this book, my intent was to represent the energy that is created when a venture meets speed. For our purposes, the venture catalyst is the individual or group that takes responsibility for seeing the potential of a business idea, mobilizing the team, and making a venture happen with speed. Throughout the process, the venture catalyst is aware of being-along with the business-exposed to danger, the possibility of failure, and financial loss. If, however, the venture catalyst and the business succeed, they increase market capitalization and create significant shareholder wealth.

Increasingly enlightened CEOs and executive teams are crafting venture strategies as part of their corporate strategy. For some this involves highly integrated plans that incorporate individual business units. Others manage their ventures as separate, stand-alone entities.

All five methods eventually become components of a whole. To demonstrate this, I've provided an illustrative framework, which appears throughout this volume as a visual aid to understanding individual parts and the whole (see Figure 1.3). I hope that while you are exploring the various venture-business models and how they actually work, my diagram will help you develop an understanding of the overall strategic potential.