investiledysfunction

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?

When working with clients and helping them set up their innovation efforts, there is invariably a checkpoint with the in-house counsel (lawyers) especially in the largest firms.  And when the innovation efforts involve, as they should, getting ideas from around the organization, the legal teams often put together legalese which effectively says that anything that people within the organization come up with (ideas, prototypes, etc) is the intellectual property of the firm - no ifs, ands or buts.  Most of the times, people might not even read these terms & conditions before submitting so the company may think it’s not a big deal, but people who really have good ideas will read these because they’re smart.

And so while we sympathize with and understand the need for protecting oneself, the simple fact is that this legalese often goes too far and so becomes counterproductive to fostering innovation.  I’ll explain first what we’ve seen and then share examples of how Cisco and P&G handle this and the results.

The logic for not putting these legal shackles on idea generators is pretty simple.  In its worst form, people with really good ideas will not submit them.  Or another troubling consequence is they’ll be demotivated after they do.  Or perhaps they’ll leave.

In one instance at a client, we knew a very smart mid-level executive with a great idea (and awesome potential) who didn’t submit his idea.  His response when asked why:

“Why would I?  The odds are that the company is not going to select it, but because the intellectual property is owned by the company, I can’t do anything with it down the road.  And even if they do and make a lot of money off of it, I won’t get credit because I may not get to work on it or some senior person will own it.  And I’m not giving a multi-million dollar idea for a pathetic extra $10k in my bonus.”

This sentence may make someone in the General Counsel’s office smile.  For those who are corporate drones, you may also feel that this person is being selfish and not doing what is in the best interest of the organization.  But for managers and executives living in reality and seeking innovation, this should make you cringe.  Why?

• You lost out on a potentially good idea
• The organization’s ability to select good ideas is being questioned
• You’ll likely lose this entrepreneur (intrapreneur as we’ve heard them called) at some point because they’re demotivated
• You’re rewards (recognition and financial in this case) are not aligned with self-interest of individuals submitting ideas

None of the above is good.  Sure you may have lots of other ideas that did get submitted, but you’re not interested in the volume of ideas.  You’re interested in the “goodness” of a few ideas in most cases.

So how do you try to solve this innovation trap?  It requires being open first and foremost.  With all the talk these days of open innovation and collaboration, this type of legal heavy-handedness is counter to such efforts.  It also requires you to consider what will make your best people develop and submit their best ideas.  This comes down to “enlightened self-interest”.  Your best innovators want something in return.  There is NOTHING wrong with this.  You scratch my back and I’ll scratch yours is what this is about.  Anyone who is just doing things out of the kindness of their hearts is not someone capable of coming up with good ideas - they’re just fools most likely.  The best people are interested in recognition, money, status, power, flexibility, freedom, access or any combination of these - and sometimes they want all of them.

So how do you appeal to people’s enlightened self-interest?  Let’s explore how three very innovative companies have done this - P&G, Cisco and Google.  Interestingly, they all do this in different ways.

P&G lets idea submitters take ownership in the ideas they submit.  This means they not only can work on the ideas but if the idea does very well, they can be rewarded for it as owners.  This lets you be an entrepreneur within a large company setting.  This is something that people with the entrepreneurial itch find difficult in large organizations but P&G’s program helps foster this.

Cisco lets some of its best people get absurdly rich to keep them by developing “spin-ins”.  To keep his star salespeople and engineers after some mass layoffs, John Chambers, CEO, did the following according to Forbes Magazine.  “Soon after the mass layoffs a few star Cisco players, who might otherwise have left, were given $84 million to start a data storage firm called Andiamo.  The company grew to about 300 employees in a year, at which point Cisco, its only customer, agreed to buy the company for $750 million.”

They did this again in August 2006 when they backed Nuova with $50 million and then bought them in April ‘08 for $678 million.

This isn’t to say spin-ins are without their perils as former Cisco employee Jayshree Ullal alludes to. “Spin-ins are a creative model to accelerate innovation and bring in engineers you couldn’t normally recruit - and financial gains go to entrepreneurs, not venture capitalists.  It’s a nightmare when the guy in the next cubicle is a multimillionaire and you aren’t, because you weren’t chosen.”  (quote from Forbes)

Like any effort in the corporate world, not everyone will be happy.  But if such efforts can foster innovation and push the company in new growth areas they weren’t in before, these hurt feelings may just be a natural and required consequence to achieve an end-goal.

Yet another way to foster entrepreneurship within an organization is Google’s Founders Awards.  Per the New York Times, “The first two Founders’ Awards consisted of restricted stock that was worth $12 million stock when it was awarded last November to two teams of a dozen or so employees each.”

So even when there may not be as much upside in Google’s stock, employees can get paid handsomely for making innovation and entrepreneurship happen.

Moral of the story:  Control your lawyers and ensure you’re appealing to your employees enlightened self-interests.

David Hasselhoff has started a social network.  I will let those words sink in for a bit before I move on….

Okay here goes.

He talks about it on his website.  In Brilliont’s Top 10 Un-Commandments of Innovation, we talk about things corporations should not do as they go after innovation.  Without the authority to do so, I’m adding an 11th.

11th Un-Commandment of Innovation - If David Hasselhoff is doing it, it’s time to think of something else.

When growing up, I was a fan of Knight Rider, but is this is a sign that this whole social networking thing is going just a bit too far?  On his website, Hasselhoff (herein referred to as The Hoff) writes about Hoffspace as follows.  I’m unable to detect irony in any of the below so I assume he is serious.

In my travels round the world I have always been surprised that no matter where I go people recognize and know me, from Europe, Australia and India to the Philippines and the Zulu Nation in South Africa. This got me thinking… I realized that while two people from two entirely different countries and backgrounds may seem to have nothing in common, the only thing they might have in common is me… So I decided to start a network where people from across the world might come together and get a conversation started over me. Where it will lead, I don’t know but the world would be a better place if everyone talked a little more to each other…

So here is HoffSpace. There are videos and photos of the adventures of my life (THAT NO ONE ELSE GETS TO SEE) and also from the lives of other members. Read the discussions or start a forum on a topic that interests you. Check out Hoff TV, where I go live often. Chat with other members from around the world and make friends. Design your own home page. Add music and share your lives with others. Send me the weird, wonderful and wacky things that are happening in your life. Tell me the stories of how you are making a difference in your life and, if you need my help, ask… One man or woman CAN make a difference…

That not crazy enough for you?  Well, as of today, there are 14,217 members of Hoffspace.  Facebook, MySpace and LinkedIn needn’t worry.  That is 14,216 more than I would have expected, but who knew?

In all seriousness, perhaps the craziest part of all this is that The Hoff’s social network will likely do better than many of the new half-brained ones being launched today dubbing themselves the next Facebook, LinkedIn, MySpace.  (Read my colleague’s post on one such perpetrator, TalkBizNow by clicking here).  That said, the verdict is out on whether even these big boys of social networking really have a business.

While it won’t be valued at billions of dollars, HoffSpace will allow rabid fans of The Hoff to follow him in his exploits and let him sell more t-shirts, shot glasses, autographed pics and other assorted items to his fanbase.  The Hoff has this base and has actually figured out a way to tap into it.  Other social networks which are emerging don’t have this base and because of the network effects required for a social network, they will likely crash and burn quicker than you can say Baywatch.

For corporations, what does The Hoff’s emergence on the social networking scene really mean?  The one thing I’d take away from this is that before some innovation consultant tells you to start a social network for your customers or employees, ensure your customers or employees are engaged and care enough about you to join your social network.   In essence, does your company pass The Hoff test which is “Could you realistically get 14,217 people to your company’s social network interacting on a regular basis and doing something meaningful which strengthens your relationship with them?”  If you’re not sure or the answer is no, move on to another, better idea and leave the social networking to Facebook, LinkedIn and The Hoff.

My wife and I just ordered Dominos for the first time in a long time.  Blame it on laziness and a desire to eat empty unhealthy calories occasionally.  In true New Yorker fashion, we’ve also chosen to have our pizza delivered even though it would only take 5 minutes to walk and get it.

To take things even easier, Dominos now lets you order online.  This removes the need to call and wait on the phone.  It also lets me basically continue to work as the process is pretty easy.

After ordering, the pizza technology and innovation go a bit crazy with Dominos Pizza Tracker.  As the name implies, this lets you track your pizza.  When I first saw this, I thought, this is ridiculous.  But the Tracker is strangely compelling.  I like to know that Lorenzo started making my pizza at 859pm and when it goes out the door so I know when it is likely reach me.  This lets me plan my time better (I can do errands, make some phone calls, etc).  The pizza tracker just made delivery a bit more convenient if that was even possible.  Nice job Dominos on the innovation front and your use of technology to make your customers lives easier.

One note of caution - please don’t start a social network for pizza lovers and screw things up now.

A brief history:  Based on my iPhone rant, I received a link to a site that offered “Pwnage option for Windows Users“.  Does that mean anything to you?  Yeah me neither until very recently.

And so upon reading this bit of gibberish, I forwarded it to one of our super talented interns in the hopes that she’d decipher this bit of lexicon for me.  And she did.  She explained that for computer geeks and gamers, and in my view, in some altered reality, PWN (pronounced “pone” like ‘own’ with a p before it) means “own”.  So when playing videogames, if one player says to another “I pwn you”, they’re saying “I own you” which translates to “I own you.” (translation not necessary)

From my perspective, this new language is utterly ridiculous, but that is besides the point.  This whole exhange underscores the need to involve everyone in your innovation efforts.  There is no monopoly on perspective or ideas.  The right or most useful ideas and perspectives are not resident with just a handful of the most senior people or even just with the creative genius you’ve anointed as your head of innovation.

These perspectives are around you in the people in your organization and often at varying levels.  We often find a dichotomy exists between the impression of senior leaders and junior staff when it comes to innovation.  The senior team thinks the company makes decisions quickly and is innovating in the right places but when you ask the same question to junior staffers, the answer is often diametrically opposite.  The truth is probably somewhere in the middle. The main things this underscores are:

1. The need to develop communication paths between all levels of people within the organization so different perspectives and experiences are captured and considered when thinking through or developing an idea.  This will help you generate better ideas.
2. The development of these communication pathways also is great for motivation.  When people understand the direction of or why decisions are being made about certain projects and are involved in these decisions, they become invested, and this serves to enhance the process and output of innovation.

Nobody PWNs all the good ideas in the organization so it’s good business to get everyone involved.  If you’re a N00b to this language called l33t, learn more at Urban Dictionary.

Innovation is a good thing.  Usually.

In the case of the LZR swimsuit made by Speedo, we’re seeing great innovation that needs to be reigned in.  For those unfamiliar with the LZR, it is for lack of a better description “spandex on crack”.  Swimmers wear it and it contours their body and does all sort of other crazy things that ultimately makes swimmers more aerodynamic and faster.  Here’s a picture for the curious.

Since the LZR’s release, 41 world records have been set and 37 of the swimmers setting them were wearing the LZR.  Hmmm…I think me sees a trend.

So first of all, I must tip my hat to Speedo who I always thought of as the makers of ill-fitting banana hammocks for coming up with this technological marvel.  I must also say that I think the Olympics organizers should ban the LZR from the Olympics (I know they don’t care what I have to say but I’ll put it out there anyways)

As Italian swim coach Albert Castagnetti has commented, the LZR is basically “technological doping” and he is right.  The Olympics are about human skill, talent, perseverance, etc.  With the LZR, two swimmers of the same exact caliber (impossible I know but indulge me) would have different times because one has the LZR.  The LZR is not cheap and so those who can afford it are advantaged.  Ultimately, the LZR is a performance enhancing swimsuit so like doping, it shouldn’t be allowed.

Enough on that topic.

But while on the Olympics and performance enhancement, lets talk about the prosthetic wearing runner who was disqualified from running.  Per the Engadget blog from earlier this year,

“Oscar Pistorius, a double-amputee sprinter, has been denied a shot at the Olympics… for being too fast. The runner — who uses carbon-fiber, prosthetic feet — was reviewed by the International Association of Athletics Federations (or IAAF), a review which found the combination of man and machine to be too much for its purely human competitors. According to the IAAF report, the “mechanical advantage of the blade in relation to the healthy ankle joint of an able bodied athlete is higher than 30-percent.” Additionally, Pistorius uses 25-percent less energy than average runners due to the artificial limbs, therefore giving him an unfair advantage on the track… or so they say.”

We’re on a slippery slope with the Olympics.  Here are some enhancements I expect to see by the 2020 Summer Games.

• Javelins with engines
• High jumpers with jet packs
• A USA basketball squad that plays like a team

OK.  Well, I never thought Speedos and proshetic limbs would make it into my Brilliont blog, but there is a first for everything.  I’m off for a swim.

We do lots of work around innovation and one of the things we do is keep on top of what is going on out in the marketplace especially amongst new, innovative startup companies.  To this end, we have created a database of 6000+  innovative companies to ensure we’re on top of the latest & greatest technologies, business models and ideas.  The database grows basically daily and our knowledge of what is going on out there grows with it.

Oftentimes, our understanding of these innovative companies leads us to venture capitalists who provide the fuel (aka money) for these young companies to take shape and grow.  In recent work on green companies, I came across an article on Vinod Khosla of Kleiner Perkins fame and now on his own with Khosla Ventures and his outlook on the green movement.

Khosla has created a presentation entitled “Mostly Convenient Truths From a Technology Optimist” and in this, he states that global warming is “a technology crisis, not a resource crisis” and that solutions to large problems require “a dash of greed.”

While we may not wish to admit it, Khosla is entirely right when we think about what will make green efforts successful.  Except for a notable and loud contingent of folks, many people are not going to go green unless their greed is satiated.  By greed, I don’t mean necessarily mean monetary greed although if going green will help people earn more or save money, that will help in adoption.  It could also be greed for their time (make things simpler so I save time or save effort).

Ultimately, Mr. Khosla hits on a very human sentiment which is “what is in it for me?”  He is using this to drive his own investments forward in various green tech areas.  Overall, efforts that are grounded in this idea of enlightened self-interest will do the best.  Whether it is for VCs like Khosla or for companies who wish to be more green or for individuals aiming to go green, self-interest will save the day.  For companies, being green in a way that impacts and benefits your bottom line will be much more sustainable and impactful than much of the public relations efforts tagged as green that we are seeing these days.

Emerson Electric is a darn big company.  It has 140,000 employees and $22.5 billion in annual sales coming from 60 business units.  They had a goal for these units that a third of sales should come from products released in the last 5 years, but according to BusinessWeek, there going a step further by segmenting their new product sales a bit more into the following 4 categories:

• Minor improvements
• Major improvements
• Products that are new lines for the business
• Products that are new to the world

There is nothing very revolutionary about Emerson’s approach except that they’ve actually done it.  Many organizations talk about disruptive vs incremental innovation and will say they don’t do enough disruptive ’stuff’.  What is great about Emerson is that they’ve put a metric around innovation which their business units must aspire to - 1/3 of revenue from products in the last five years.

Their added detail around how they’ll categorize this innovation allows them to manage their innovation efforts as a portfolio.  For example, we’re doing lots in the minor improvements category but not spending enough on bigger risk, higher reward new to the world products.  By doing this, they can adapt their resource allocation decisions in a way that provides a balance amongst their innovation efforts and provides a more thoughtful way to achieve their 1/3 of revenue from new products goal.

Even without this nuanced look at innovation, Emerson’s willingness to put a hard metric against innovation in their unit goals is commendable.

One of the 7.5 Sins of Portfolio Management is that your portfolio management effort cannot be a tunnel but must be a funnel. By that, we mean that projects must get killed as part of your portfolio management effort to give it some teeth. This could mean killing projects at the proposal stage or shedding underperforming projects along the way. If you don’t do this, you’ve just created bureaucracy (checklists, business cases, etc) but you are really not changing investment and project selection processes and the behavior that goes along with them. If you really want to create useless work in your organization, there are probably other ways to do this. If, on the other hand, you genuinely think that there is no project in your organization that should be stopped or that should not have been started in the first place, then we should talk as I have some real estate in Florida which is expected to go up 100% this year which I’d like to sell you.

Given this sin, it’s nice to see a company living by this mantra especially in the area of R&D. One notable example is HP Labs where Prith Banerjee, the new labs director, is planning to unveil a list of 20-30 major projects down from the 150 or so currently being pursued.

According to Business Week, “The labs’ $150 million annual budget will remain the same, but he’ll group the most promising related projects while dropping those with little shot at a profitable payoff.”

Banerjee himself asserts that “Just because it’s scientifically interesting won’t do it. We need to create whole new business opportunities for HP.” He is also forcing researchers to compete for money by pitching projects and writing business plans and then having those goto a central review board that will approve ideas and track progress.

It sounds like HP Labs’ is avoiding many of the 7.5 deadly sins namely:

1. They’re making it a funnel by killing projects whose proposals are not good or that are not performing
2. They’re reducing the decibels in the decision making process by requiring more intensive business cases/plans
3. They are tracking results

It sounds like HP Labs is onto the right path. There will inevitably be culture change and resistance that emerges from such an overhaul, but if they can work through these impediments (not easy), HP will go a long way in making each R&D dollar go further.