investiledysfunction

Not hearing much talk about corporate innovation these days, eh? Most of the talk is about retrenchment and fortifying and strengthening the core given our economic malaise. Interestingly, when times are good, corporations often assume that the good times will continue so let’s keep doing what we’ve been doing that got us here - essentially fortifying and strengthening the core. Innovation is a bit more talked about in the good times because there is money to spend on it, but it often is just talk.

This focus on fortifying and strengthening the core in the good AND bad times is the Innovation Paradox. Essentially, innovation is often caught in a weird Bermuda Triangle perennially under-appreciated (despite the talk) and under-invested in.

Without going into the appropriate way to structure an innovation effort (the subject of many other potential blog posts), let’s take a look at what finance can do to help.

Finance sits at the nexus of a great deal of information (operating and financial data) within the company. Depending on the nature of your industry, finance can and should provide an understanding into how much of the company’s revenues and profits are coming from products & services launched in the last 1, 3, 5, etc years. Note that the duration will change based on your industry’s dynamics (product life cycles, time to launch, etc) but essentially, the idea is to see how much of your organization’s revenue and profit is coming from innovation. If a heavy majority of the company’s revenue is coming from products & services not launched in the last X years, this is direct evidence of underinvestment in innovation. Remember that what got you here will not get you there.

Please note that there is no ideal percentage for the amount of revenue/profit that is coming from new products & services in a particular year. There is no magic 20% or 40% or other number. It varies. If someone tells you there is, they’re substituting an expedient answer in lieu of the right one.

But with this knowledge, finance can do what it needs to do which is shine the light on the truth. But shining the light on the truth may not be enough as there are often people too busy or too disinterested in seeing these facts. This means, finance should shine the light on the truth and then go and tell everyone about it in the venues they have at their disposal. Make sure people understand that only “2% of our revenue and profit comes from products & services launched in the last 3 years.” They should reinforce this message on a continuous ongoing basis because larger organizations are rarely epiphany driven. They will require a steady stream of facts that hammer on the truth over time. And eventually, someone will say “Ok I get it. This is a problem.”

In doing this, finance should also make clear what is a new product. Tweaking a product’s attributes is not innovation - it is good business. Finance should take a hard line on what is and what is not innovation in arriving at their data and conclusions.

Beyond internal data, finance should also look at what is going on in the external marketplace with startups and the venture capitalists that back them. An industry where large players are not innovating represents a great opportunity for entrepreneurs to step in and solve for inefficiencies and product offering gaps that they see. And these startups do not have millions or billions of dollars in market cap to lose and so they’ll innovate at a more rapid pace and also be able to change directions more nimbly. Access to this information which previously could cost tens of thousands of dollars is available for free now via sources/platforms like ChubbyBrain which is a free database that contains information on 13,000+ startups and over 1000 investors (VCs, angel investors, etc). It will let you understand what is going on in your particular industry in the startup world which can often tangibly demonstrate activities that new entrants are undertaking to disrupt your business. (note: ChubbyBrain is a spin-off from our advisory firm, Brilliont)

This startup activity is a good way to supplement your internal data with what is going on in the external marketplace. Keeping informed on these fronts is also helpful for other groups internally, e.g., business development or corporate development who may be interested in partnering with or even acquiring these upstarts. This is a great way for finance to add value amongst these other groups as well and build relationships in other parts of the organization.

While innovation and the finance function don’t necessarily get associated with one another, the ability of finance to provide dispassionate views into internal and external information is very helpful in creating awareness about innovation (or the lack thereof) that is occurring. And with these efforts, finance can help to play a key role in minimizing the innovation paradox that we so often see organizations trapped in.

I’d previously co-authored an article (along with Sandeep Arora) that appeared in Business Finance Magazine titled “The House of Rolling Heads” in which we decried mindless cost cutting in favor of a more thoughtful approach which segmented expenses into strategic and non-strategic.

It seems Tom Peters, author of In Search of Excellence, agrees with us.  In the December 2008 issue of Inc Magazine, he comments,

“Instant, mindless cutting of R&D or training or salesforce travel in the face of a downturn is often counterproductive - or, rather, downright stupid.  Tough times are in fact golden opportunities to get the dro, and the longterm drop at that, on those who respond to bad news by panicky across-the-board slash and burn tactics and moves that de-motivate and alienate the workforce at exactly the wrong moment.”

I’d previously written and complimented Domino’s Pizza Tracker in a post entitled “Innovative Pizza Technology“.  While skeptical at first, I did find the Pizza Tracker to be a pretty useful little technology.

For the exact opposite in pizza technology, we have Papa John’s Order Online Widget which they’ve created for Facebook.  This technology marvel has 34 users so far.  As Caroline Waxler points out in her Nov 2008 Fast Company article entitled Social Misfits, the widget “lets customer place their order upto 21 days in advance of their preferred delivery date or pickup date and time.”  She goes onto to appropriately state this functionality is great if you just sit back and “Remember that time you got a pizza craving for two weeks from next Tuesday @ 7pm and couldn’t act on it?”

Building a Facebook, iPhone app or using Twitter doesn’t make you current or cool if you’re not doing anything to actually help you enhance your brand and ultimately sell more stuff.  These attempts are just as misguided as the me too social networks which were cropping up regularly but which the current market malaise seems to have squashed a bit.  Technology for technology’s sake, no matter how cool, is a bad investment.  These gizmos must help people actually do something they want to or might be interested in doing and ideally help them do it better.

Here’s the Papa John’s widget.  I’m going to get going now and order a pizza for Nov 23rd now.

The November 3, 2008 issue of Newsweek contained a letter from Mayor Michael Bloomberg to the President-Elect (and now Barack Obama).  This blog is strictly non-political and will remain that way, but Mr. Bloomberg offers a great commercial for portfolio management applied at the public sector level.

In his letter to the president, Bloomberg writes,

“In exchange for legislation creating an infrastructure bank that funds projects based strictly on merit, agree to invest more money on the infrastructure our country needs most.  And you should also demand more from the states and cities that get federal money: hold them accountable for building on time and on budget.  Call it a “New New Deal”: investing more, more wisely and getting bigger returns.”

I’m not sure there has been a better encapsulation of what portfolio management is all about.  I am pretty sure that government and citizens ultimately would benefit significantly from the approach Mayor Bloomberg is advocating.  Competition for funding and holding people accountable for results always yields good results.

The best definition I’ve heard of a business case is that “It’s the lie people tell to get funding.”  And that is the truth.  Growth is high and expenses are low leading to unreasonable expectations in the majority of business cases.  So what is the key to reducing the lies that people present in business cases.

It comes down to tracking what they deliver, e.g., benefits realization, tracking actuals, etc.  Roger Goodell, NFL Commissioner, has a good suggestion on this.  When talking about the New England Patriots videotaping opponents’ signals, he stated,

“The most important thing is to take decisive action.  We discovered that they were taping the signals of visiting coaches, which is against our rules, and we made very clear it was not going to be permitted. [Patriots coach Bill Belichick was fined $500k and the team was fined $250k and denied a draft pick].  Sending a message that you’re going to enforce the rules is the best way to deal with integrity and make sure that our fans understand that games are going to be played by the rules.”

When it comes to investments in projects and initiativess, companies rarely hold folks accountable ensuring the cycle of lies and rosy projections continue.  Instead, they should take a page from Roger Goodell and reward those who deliver and ‘punish’ those who don’t.  The punishment can take the form of reduced funding going forward, greater oversight or even diminished responsibilities or dismissal.  Only by doing this will you ensure that people come with their best ideas and are incentivized to put forward their best ideas and deliver per their business case.

As anyone who reads this blog knows, I’m addicted to CNBC in the morning.  It’s an unhealthy habit, but I find the talking heads on CNBC hilarious because of their extreme short-term’ism.  If you watched earlier this week, you got to see tons of folks predicting the bottom based on one day’s good performance.  Where were all these smart people to tell us about the bloody October we were going to have?  Oh wait, these guys are mostly Monday morning quarterbacks.  In any case, it’s a channel for those with A.D.D.  Insights are infrequent but for me, entertainment value is high esp with folks like Joe Kernan and the morning crew who seem to be in on the joke.

In any case, I was watching Donny Deutsch tonite (The Big Idea is one of the best shows on TV so check it out)  and he had Jim Cramer on.  Cramer is a massive personality and for me personally, his picks have done well for me.  On The Big Idea, he was talking about the economy, the market, etc, and it was pessimism to another level.

Per Cramer, those with entrepreneurial ambitions should put them on hold for the next few years.  While a good stock picker, I think this type of generic device is wrong.  What I think Cramer should have said is “Those with entrepreneurial ambitions that are half- or partially-baked should put them on hold forever.”

Per my earlier post on the downturn resulting in smarter startups, having a good idea that solves a real problem will always be in demand.  And being contrarian, e.g., when there is blood in the water, can be exactly the right time to start a business as talent may be cheaper, there may be cheap office space and computers available and you may be competing against a lot less fluff to get attention from partners, the press, etc.

As Warren Buffet says, “Be fearful when others are greedy and be greedy when others are fearful.”

I’m a big fan of P2P lending as my prior post on the topic will demonstrate and so I keep abreast of developments in this arena especially as I believe that this business has some very disruptive possibilities.  The last couple of weeks have seen some interesting developments, notably:

1. The entry of newcomer, Loanio, to the space.  Their pitch doesn’t all that different than Prosper, but I haven’t done much diligence on them so may be I’ll get around to that.  Their website is clean, but browsing a couple of posts, they seem to have a handful of loan requests but not a ton of bidders to this point willing to fund those initiatives.
2. The bigger news of the week is the departure of Zopa from the US market to focus on the UK, Japan and Italy.  While my first instinct was that they chose to avoid the crazy credit markets of the US, it seems they ran into regulatory roadblocks that prevented them from ever getting started.  This is surprising given they seem to have a much more seasoned team and more money than Prosper and Loanio, but I guess stuff happens.

If regulatory reasons were the impediment to them getting started in the USA, it is a shame.  With credit markets tighter now, there may have been an interesting opportunity for players like Prosper, Loanio, Zopa and LendingClub to step up and fill a void as many consumers and small businesses may be finding it difficult to get credit given tightening conditions.

If Zopa is leaving because they couldn’t take the heat in the US “credit kitchen” as some have suggested, this indicates the company has little faith in its risk modeling capabilities.  If you’re only willing to play in a market when you perceive times to be good, that is not much of a business.

Let’s hope it was just regulatory issues.  I hope the rest of the guys will make some inroads during this time and begin to put P2P lending on the map.

I’ve been reading about how Silicon Valley is adjusting to the downturn as it’s a popular topic in many blogs.  Many prominent VCs have issued memos to the CEOs of their portfolio companies telling them to raise more money, control expenses and focus on profitability because things are going to be rough for the foreseeable future.  This is all pretty good advice.  Of course, the sinister, conspiracy theorists amongst those I’ve read feel this is an easy way to instill fear and get better valuations for VCs.  I’m not so skeptical so as to believe this.

But the outcome from this recession/downturn from an entrepreneurship and innovation perspective is going to be positive in my view for 2 reasons:

Reason 1 - As I mentioned in my Part 1 post, there are going to be a lot of unemployed or disillusioned people who say “I’m going to invest in myself instead of getting a job or investing in the stock market”.  These people will pursue new ideas, develop new technologies and will start new companies.  Out of this might emerge a few great companies and many more which will employ people and inspire even more entrepreneurs.

Reason 2 - This shakeout is going to get rid of a lot of crap ideas and companies.  There is no other way to say this.  Many of the “me too”  social networks or “iPhone/Facebook app” developers hoping to generate a userbase that they’d one day magically figure out how to ‘monetize’ may not make it.  They won’t make it not because they don’t have a cool idea that is fun and even potentially useful, but because many of these businesses were “built to flip” as a friend of mine at a prominent Sand Hill Road VC once commented.  And so they were never predicated on a real business model that could bring in more revenue than the dollars they spend.  This is a risky proposition and unfortunately, and such businesses don’t allow you to make it up in volume.

And while some of these ideas were marginally useful or fun as I mentioned, I also don’t know if they were solving real problems, e.g., building stuff that people really needed or finding a better way to do something that enough people cared about.

So what we’ll see in my estimation is the bar will get raised and better ideas will emerge and a new crop of more well-conceived startups will come forward.  With VC funding tightening up, entrepreneurs will need to do this.  Things that solve really big problems and that are built with an eye towards becoming sustainable businesses which are lean, mean and profitable are what will come into vogue.  A dollar and a dream may not be enough but a dollar, a dream and some serious discipline will be required.

In essence, for every Facebook, there will be many others that don’t have the backing to make it through the next several years.  And honestly, even if they did, being the social network for ex-convicts was never going to be that big (sorry guys).  I do think that many of these smart people who don’t make it out of this cycle will come back with better, tighter, more refined ideas the next time around, and this type of cycle is healthy.  Of course, this all only holds until the next bubble.

I had dinner with a good friend who works at a hedge fund this past week, and after we discussed the markets and our views on where things are going (sorry we didn’t come up with an answer), he made an interesting comment that struck me.  He felt that this downturn may be a good thing for the US economy for the long-term.  His logic was pretty simple.

• A lot of very smart people over the last many many years moved into careers in finance because it was lucrative and was seen as a path to quick riches.
• Back in the day, there was a similar belief about becoming a doctor for instance but it was not a “quick path” but one that existed for the best and brightest after many years of hard work.
• With this being a potentially protracted downturn, some of the current and many more from the next generation of smart people may go back to pursuing careers which in his words “are not just about trading paper”.  This means more innovation, entrepreneurship, etc from smart people trying to solve real problems.

I found this perspective quite interesting coming from someone in the hedge fund world - especially someone who is successful at it.  I also agree with him. Finance companies (banks, hedge funds, etc) have had a voracious appetite for PhDs and smart people in general who’ve helped them build complex derivatives and the like.  This downturn/recession may mean less of these people are inclined to go into or stay in finance and if this happens, they may look elsewhere, e.g., in science and math disciplines either with employers or in research organizations (mainly universities).  This is a good thing as it can lead to ideas and innovations that drive the next great wave.

I’ve seen this migration to finance firsthand.  I graduated from the Jerome Fisher Program in Management & Technology (M&T) at the University of Pennsylvania which is a dual degree program between Wharton and Penn’s Engineering school.  As I’ve met alumni from the program over the years, it has become apparent that fewer and fewer of us went down the engineering route in our careers (I’m guilty on this count).  The early graduates of the program were more likely to have worked in engineering fields for at least some time while with the more recent grads, most have sought to go down the business (especially finance) with a belief that their training from engineering would always be valuable.

It’s obvious that these types of attitudinal and structural shifts don’t happen overnight, but if some small segment of the smart people who previously pursued careers in the world of finance move towards entrepreneurship and innovation, this is a good thing for us in America as well as globally.

This doesn’t mean the finance types go away nor should they.  Someone will have to extend credit and funding to these entrepreneurs, right?