Innovation or Litigation?
The story of the year in the technology industry has to be HP’s claims that it was deceived by Autonomy in the $11 billion purchase of the software company. The questions of who knew what, and who did (or didn’t) do what, will be discussed and debated for years. And as many business and technology pundits have written, there is much blame both internally and externally with numerous parties including HP and Autonomy management (past and present), and numerous auditors, investment bankers, and advisors.
But what is being lost in all this noise is the fundamental root cause of this and other questionable (if only debatable) acquisitions in the technology industry over the past decade. Why is it that HP and other companies who defined the technology market and were the epitome of innovation find that they have to acquire companies at such astronomical values? Why is it that these new companies get started by bright people with great ideas, rather easily raise $10M-$40M in capital (or even less) and then sell the company for multi-billions to one of the big guys? That’s the issue that management, boards, and investors should be focused on investigating, rather than—or maybe in addition to—the millions of dollars in legal fees and time that they will spend on litigating a so-called “acquisition gone bad.”
As an executive in the technology industry for over 25 years, including stints at those large companies involved in new product innovation—as well as being on the other side in leading startups, raising capital, and numerous IPO and M&A exits—there are two fundamental factors blocking what I will call “intrapreneurial innovation” at America’s largest companies.
1. The first is external and is the result of the nature and structure of the financial markets.
2. The second is internal and the result of management behaviors, incentives, and practices which have evolved over the past decades.
Let’s start with the first. A technology startup with a good idea can go on for years (often 5-10 years) raising much capital with little or no concern for profitability, and in some cases even forgiveness on the revenue side of the equation. Yes, the rules are tough and the bar is high with very detailed scrutinizing from smart venture capitalist and private equity partners. But as long as progress is being made on developing the technology, the markets, etc., the company continues to evolve.
But if you are a large company, and let’s say you have 5 new startups internally defining your future in total adding up to perhaps hundreds of millions, it becomes much more difficult. A delay of a year, which is very common with new technology, can have a material impact on the bottom line, leading to management shake-ups and loss of jobs even at the CEO level. Unless you are an Ellison or a Gates with a strong track record of focusing on building for the long term even if it impacts the short term bottom line, it is often suicide to take the long-term view. It’s much easier to wait it out for the “winners to emerge and then buy them,” as one senior executive put it to me, than to invest. But the price you pay at that time is high. There is a reason race tracks don’t allow you to place a bet after the race is run, or a casino after the roulette wheel stops.
What can be done? If we want to create a long-term future in America for innovation, both with established as well as new companies, Wall St. and the financial sector needs to step up. It’s not acceptable to just measure the simple obvious metrics such as CAGR and EPS. What we need is some innovation metric that gets reported and measured and rewards companies for investing in and funding new initiatives for the long term, even if it impacts some of the short-term metrics. I have no doubt that if we refocused some of the genius quants on Wall St. from inventing dangerous derivatives, they could do this to the benefit of all.
Like taxes and other macroeconomic policies, maybe large companies have to live with the vagaries of the public markets over which they have little control. But the same cannot be said for the second factor, internal behavior.
This is an area that I believe large companies have done a very poor job and should be held accountable to a higher standard. Over the years I have heard many reasons why startups generate far more new technology ideas than established companies. Many of them are just not true and border on the absurd, while others are core to the problem. Let’s take a look at a few of them.
Reason 1: The best and brightest will always strive to move to a new company to create and build new things than within a large established company. Not true if the large company’s management takes the time to give individual freedom to innovate. Only time will tell if Google and some of the newer technology companies who have pioneered this approach will thrive in the very long term.
Reason 2: Large companies are best at executing with businesses at scale and don’t know how to incubate new ideas. This is true, but there are structural ways to do this without impacting the core business.
Reason 3: The measurement and incentive systems of the core business can hold you back. How can you reward an engineer with a package that competes with the potential of becoming a Google or Facebook millionaire (or billionaire)? Well, clearly you can’t with some of the outliers, but in most cases companies can structure internal incentives such as restricted or phantom stock as well as numerous other financial (cash bonuses) and non-financial (rewards and acknowledgement) incentives. Other steps large companies can take is to recruit and retain executives who have a demonstrated track record in managing innovation in smaller companies and team them with executives at the large company to create an “intrapreneurial” culture.
Finally, large companies must be astute to even the smallest details of style and behavior if they truly want to create this new culture. For example, remove from the language anything that focuses on “can’t”—“we can’t do that” or “we can’t measure it that way” or “we can’t change our HR policy and hire somebody at that level or cost” or “that’s the way we do it here.” Just as there are CFOs and internal audit departments who measure, slice, and analyze everything, there need to be Chief Innovation Officers, with audits and measurements of key innovation metrics both for internal as well as external reporting. Certainly, acquisitions will continue to be important for the strategic growth objectives of larger companies. But rather than rely too heavily on acquisitions for growth, HP and others can create an “intrapreneurial” culture that will create a new wave of “in-house” startups as well.