The 5 stages of venture capital denial

Comments

I attended the recent EMC World, which is one of the best events for press and analysts because it tailors its program for us and our specific needs. There was a nice balance of group sessions and one-on-ones. One of the sessions I found fascinating was given by Scott Darling from EMC Ventures about EMC's venture funding efforts.

Not long ago I attended an event in San Jose where Intel's investment group leader gave a similar talk, so it was interesting to contrast the two groups. Intel is focused on investing in young companies that consume Intel's products, EMC is interested in investing in young companies that could grow up to replace all or part of them. These are two very different strategies.

EMC's Darling spoke to the '5 stages of venture capital denial' that he regularly deals with because of his group's approach and focus.

Why innovation dies in large companies

Most folks in my business have long realized that innovation doesn't come from large companies, but from small companies that haven't been told they can't do something. We believe that large companies are where creative ideas go to die. The reasons behind this could be a book in and of itself, but in short form, the larger the firm the bigger the focus on policies that assure compliance and the more organizations exist who have carved out areas they think of as their own. In other words, the larger the firm the less tolerance there is for disruption or someone outside of a group doing something creative that affects it.

Innovation is a disruptive event and often crosses organizations so the very processes that allow the company to work at scale by being highly consistent with sharp command and control hierarchies work against innovation from inside a company.

This is why Skunk Works groups are formed, these are groups that are separate from the firm and work with little oversight, to solve problems that seem unsolvable. The intention is to have a group not involved with company policies that might kill innovation and also to prevent an executive, who feels his turf has been violated, from prematurely killing the effort.

Now you'd think Skunk Works programs would be common, but they aren't. They aren't always successful, often because they are staffed with people who bring the corrupting influence of the firm's policies with them. That can be massively disruptive, which makes it hard to get the funding needed to properly resource them.

A funding program like the one EMC has created fulfills a similar purpose. EMC's Venture Group looks for small firms that address existing and coming problems potentially better than EMC does and they help fund them largely so EMC not only isn't blindsided by any success that might result, but might instead benefit from it. A group like this inside of Sony would likely have funded Apple, and one inside of Microsoft would likely have tried to fund Google. (It should be noted that Yahoo did fund Google but instead of partnering with the company they tried to compete with it, showcasing why breaking the following process is dangerous).

All of this brings us to the five stages of denial EMC's investment group has developed and has to defend.

Stage 1: Denial

When executives first hear of the investment the reaction is denial that it is a wise investment. The argument is that if the technology was viable then it would have been adopted by the company and the fact the company didn't go in that direction is proof the concept isn't going anyplace. (What is interesting is this is an attempt to ruse company policy to kill an external effort).

Stage 2: Anger

The technology is successful and begins to bleed sales from the company and the line executive express anger that their firm's funds were used to create a competitive entity that is stealing customers. (What is interesting is that this is an attempt to use turf to kill an external effort, showcasing in this and the prior stage why the technology in question couldn't be born inside the company).

Stage 3: Curiosity

The technology continues successfully moving in the market and is solving problems for customers that no one else seems to be able to solve. The company's executives ask the Venture group to set up meetings so they can understand the technology better and understand why customers think it is better. (It is interesting to note that this is where a Skunk Works project typically makes itself known in order to make sure it isn't prematurely killed by hostile executive action).

Stage 4: Collaboration

The executives, after meeting with the firm, now understand why the approach is better and want to set up a deeper technology exchange and/or joint sales effort. They want to be able to use and resell this technology that they now believe is both real and compelling. (A Skunk Works project typically skips this step and the following one moving to integration, if successful, because it is already part of the firm).

Stage 5: Acquisition

Finally, after successfully partnering and co-selling the company moves to acquire the firm that has proven to be so successful. The acquisition goes particularly well because, by this time, there are deep connections into the company from engineering, sales, and finance limiting the disruption and speeding dramatically the benefits, which have largely already been realized back in stage 4.

Policies that try to make companies immortal

Ever since working at IBM, I've been fascinated with policies that are focused on making a company immortal. Both EMC's and Intel's VC programs are designed for that ultimate goal. Intel is focused on assuring there are new companies coming up that will use Intel's technology in new and creative ways, and EMC's group is focused on firms that could make all or parts of EMC obsolete to ensure that outcome never happens. In the latter case it also provides a list of companies that EMC can easily and successfully acquire because the firms are very well known and are already tied to EMC in a number of critical ways when the acquisition strategy is reached.

These two approaches aren't mutually exclusive, though each would likely require very different investing teams. In any case, if either Intel or EMC are around this time next century it will likely be because of these efforts which are surprisingly unique in the industry given how few companies even make it to their 20th birthday.