1. We have been searching for a winning formula — one that we could apply to venture building — across all industries. This is our story.
2. For the last 20 years, we invested in startups and we built startups from scratch — a few times in fact — right here in the Valley.
3. Statistics tell us that garage startups face long odds trying to win by going it alone. It makes sense to seek a corporate partner. One that is well established and has the right supporting structure.
4. To see perspectives from a corporate partner's point of view, we need a framework of thinking. Carlota Perez — a British-Venezuelan economist — provides what we need. She observes a functional separation between production capital and financial capital, each pursuing profits by different means. Production capital pursues incremental innovations — the purview of big companies. Financial capital chases potentially disruptive innovations — what startups do. They operate at different phases of the technology growth curve. More importantly, they complement each other.
5. Let's take a closer look at the dynamics of interaction. Technical change occurs by clusters of radical innovations — for example, power system and locomotive. These could be steam engine and train from the industrial revolution; or internal combustion engine and automobile from the age of mass production.
6. Technologies form successive and distinct revolutions that modernize the whole productive structure. Just look at communications: installation of dark fibers from yesteryear led to the deployment of mobile devices today — modernizing our communications infrastructure along the way.
7. We see a constellation of technologies co-evolve over time — across alternating periods of installation and deployment. The introduction of new electric cars coincide — after some delay — with the construction of new Gigafactories to make car batteries. That's one example of how two closely related technologies co-evolve.
8. Success tomorrow depends on partnerships made today — on timing the market right — with the right partners. When to deploy financial capital to explore; when to deploy production capital to exploit. Few companies get this right — no matter small or big. This is particularly challenging in times of rapid technological change — during transitions from one phase of the technology S-curve to another.
9. Big company executives often don't know where to start. They either miscalculate the risk or they fail to grasp the true nature of their business when the landscape is changing. So they end up making the wrong call — whether to build or buy or buddy. To make matter worse, first-time founders do not understand M&A's — except for acqui-hires straight out the gate. As a result, many value creating M&A's did not happen. This loss of opportunity translates to a loss of unrealized value — for everyone.
10. It gets worse for the CEO of a Fortune 500 company under siege. See how the citadel is all walled in — the moat disappears — a white flag raised in front of the castle gate? That's what disruption must feel like.
11. Personally disrupted — these four CEOs got axed after failing to navigate disruption. They paid the price for their innovation failures. Careers do not have to end like this.
12. That's why Warren Buffet — a big company guy — only enters the game after halftime. He has a contrarian strategy that nicely adapts to the situation — and it'd worked for him beautifully — as an investor — over many decades. But not everyone can be a Warren Buffet.
13. For the CEO of a Fortune 500 company under siege — by none other than this illustrious panel of fearsome activist investors — what choices are there?
14. This one calls for bravery.
15. This other one demands sacrifice.
16. There is a third option — one much harder to imagine...
17. That calls for adapting to changing times.
18. Through harnessing the power of innovation. Even today, deliberate practice of innovation still entail climbing a "ladder of risks" — especially if one were to boldly venture beyond what others would call "industry best practices".
19. Unless we're talking about Spider-Man. He can climb walls — and climb ladders, too. Startups fail for a number of reasons — here are the top 20 reasons that 101 startups failed. We know how to remove 10 of the top 20 reasons — by simply asking why that happened in the first place.
20. We can do this from inside a venture studio — where new ventures are given "safe passage" as they climb a metaphorical "fish ladder" along the upstream leg of their journey...
21. So the bears don't get to them on their way up!
22. A venture studio does partnerships right — see our "invisible hands" at work? Our operating partners play the role of co-founders. We can close the "timing gap" with big companies — by ensuring smooth transitions anywhere along a new venture's life cycle. We can do better than "straight-out-of-the-gate" type acqui-hires.
23. We shift the "ladder of risks" to outside the castle — in a manner of speaking — so big companies do not have to deal with them within the four walls. We know how to shorten a "20-rung ladder of risks" to half that — for starters — and that's more than a few other venture studios would know to do. See how we just changed the white flag in front of the castle gate to a "victory sign"?
24. For everything there is a season, and a time for every matter under heaven: a time to be born, and a time to die; a time to break down, and a time to build up.
25. We are venture builders who understand the importance of time — from timing of innovation to timing of M&A. When it comes time to dance, we help elephants do Macarena!
26. We have sketched here a map of our innovation model — where all parties in the corporate innovation ecosystem are represented — and connect together via causal pathways. Let's explore this model.
You can trace a closed loop — the green highlighted path around the lake — that's where we ply our trade — as two-bit venture builders. The remainder of this presentation takes you on a walk along the lakefront — areas that we have not yet explored earlier.
27. How are we doing on time?
28. Recall the "ladder of risks" and top 20 reasons why startups fail?
29. We know how to remove 10 of the top 20 reasons — by simply asking why that happened in the first place. That's 55% of startup risks — now gone because of us.
30. A startup that somehow manages to survive the high mortality of early years lands on an IPO. On the left is Blockbuster Video circa 1999. To the right is the Netflix of China — iQiyi — on IPO day. Less risky alternatives to IPO's exist.
31. We believe there's a repeatable MODEL. One that works consistently for corporate development of the Fortune 500 companies. Clayton Christensen has developed a robust theory — as a practical guide to M&As. We think it is especially suited for "spin-ins" — a special category of startup M&As that drives corporate innovation where technology plays a role.
32. The networking giant Cisco has honed its practice of "spinning in" startups to near perfection over two decades. Let's take a look at 3 examples. The first example is Andiamo — meaning "let's go" — a maker of Storage Attached Network or SAN.
33. The second example is Nuova — a new maker of Unified Computing System or UCS.
34. The third example is Insieme — meaning "together" — a maker of Software Defined Networking or SDN. This one got acquired in record time — almost as soon as the startup was announced.
35. We know history does not repeat itself.
36. But we also know that it rhymes — some things never change. Except for colors and color choices.
37. And people — they stay the same. The MPLS team — supported by Cisco CEO John Chambers — are the people behind all three Cisco spin-ins. So we know it is a repeatable process. We like to view this through the lens of "long-term people playing long-term games" — let's go make something new then get back together. Andiamo, Nuova, Insieme — the 3 words capture the very essence of spin-in.
38. Total deal value? $2.3 billions. All made billions for Cisco. All 3 new ventures were brought back into Cisco's fold after the products have been developed and proven to work in the market. That's how new product risks were shifted out of Cisco — borne by the new ventures in a nicely choreographed dance number.
39. We think we can make this repeatable — for the rest of the Fortune 500 companies. Nobody has done anything like this — using a repeatable model. So we think a venture studio that embraces the idea of "spin-ins for the rest of the Fortune 500" is something worth building.
40. Here you are looking at a diamond — the rarest of gems — surrounded by coal everywhere. Diamond is the exception that proves the rule. Most deals aren't worth much. So how hard would it be, say, to grow cheaper diamonds in a lab? The marvels of material science today makes that possible. We like to grow new ventures in a lab, too!
41. So we are curious — are there really no one else that does anything similar? So we Googled — and found a reference to "spin-along" — a term coined by Deutsche Telekom Labs.
42. We uncovered an academic paper from a few years ago with 4 case studies of corporate innovation — all multi-nationals, 3 German and 1 Dutch — using what the authors characterize as a "spin-along" approach. The results in all 4 cases studied — sadly — were nothing to write home about. We wonder why that is.
43. Perhaps this can be explained by a simple truth — that internal teams at big companies don't act like startups because there is no upside, no downside, no flexibility — but most importantly — no founders mentality — simply because there are no founders. No. Real. Founders.
44. Our idea of venture studio is a metaphorical "startup foundry" that spins silicon from sand — by providing just the right amount of doping. Our operating partners participate as co-founders — and do the heavy-lifting alongside everyone else. The raw materials are there already — in abundance — but to spin gold, how exactly?
45. We draw inspiration from Stanford's "Open Loop University" concept, where students are lifelong learners looping in and out of Stanford — for years after graduation. We are not talking about the fact that Stanford alum parents sitting in the same classroom as their kids — getting help on homework. What we see is how Stanford gets to efficiently grow its alumni network looping in both parents and their offspring. This "Open Loop" concept has a lot of "stickiness" to it. So we decide to explore a singular idea of equal potency — "dual-track spin-in".
46. The life-cycle of retrovirus offers an illustrative metaphor. As they spread from cell to cell — retrovirus find a novel way of integrating into the host cell genome going the other direction — from RNA to DNA — the retroviral equivalent of "spin-in". Now, imagine a new DNA strand that magically got blended into the retrovirus along their life-cycle. This opens up alternate paths to M&A — a choice not available to single-track spin-ins. So "dual track" leads to alternate outcomes — and more than double the odds of success for any new venture, while also placing it at a less vulnerable position with any one potential acquirer. Because there are now two of them — to balance the scale. Life finds its way — efficiently. The business of startups is to search and explore alternate business models. We've found our gem — imitating the life of none other than a retrovirus, with a twist. But let's just stick to the Stanford story.
47. Where might we find talent — who wants to leave and go forward — only to return later? Mircorsoft employees say leaving the company and returning later is one way to get a "raise". For example, a Level 62 employee after 2 years at Microsoft gets paid nearly twice as much as another same-level employee who has been at Microsoft for 9 1/2 years. So mid-career executives or engineers heading into their 10th year anniversary at a Fortune 500 company are ripe for recruitment — by way of secondment. It pays to play the game right. Everyone wins.
48. The unique circumstances under which spin-ins flourish at Cisco — in a manner that allows for repeated observations using only public sources — help us distill key ingredients of the process. We thought we could improve upon it — to strive for greater external validity for "the rest of the Fortune 500 companies" — in ways that have not been attempted before.
49. The invention of a new rule — an exceptional one — requires a key insight. John Kelly's insight is in recognizing that reward is not always proportionate to risks undertaken — so one should only bet one's belief — not more, not less. The Kelly Criterion is widely used in card counting, sports betting, and portfolio management.
Our insight is in seeing how a path could be traced in the maze of corporate innovation — by first sketching an innovation model and then closely attending to its pragmatics at every turn. Ours is the way of the middle — like that of Goldilocks. The marvels of being able to simply count.
50. A great team is part of the winning formula. A winning formula requires a winning team — or better yet — two winning teams! The people you don't recognize are members of the MIT Black Jack Team — who inspire the movie "21" — played by the award-winning actors and actresses that you might recognize — because you already saw the movie!
51. "21" is a favorite movie of ours. It shows how expertise can be pooled together — not just for three-to-five-fold improvement in payoffs — but also how much more fun it could be to do something fun together. Human beings are wired to be co-operative. We find ways to turn a solitary game into a multi-player game — and make it interesting. Cooperative game is in our DNA. So let's design this thing right — from the start — so it's fun for everyone working together.
52. We love zebras more — they are capital efficient and quicker to exit. Each zebra takes no more than four million dollars to build — be ready in less than two years. A portfolio of zebras occupy a "four-by-two" design space somewhere in the lower left quadrant. We plan to raise a dazzle of zebras for the corporate "spin-in" segment and become a new player in the startup M&A market.
53. We believe that by targeting deals priced in the $5M to $25M range — raising a dazzle of zebras over a 5-year horizon — we can offer them at fair market price to potential acquirers who had expressed interest from Day One. On top of that, if we could safely manage a "ladder of risks" that is half as tall — while capping the per-zebra capital cost to under $4M — two-bit venture building begins to look like a viable new business — with a healthy margin that we think is sustainable over the next 5 years.
54. We are evolving a playbook for how to make deals that people want. This is what we know: more than half of the tech M&A's are for deals priced below $50 million. And in industry after industry that we've surveyed — except for maybe power and utilities — the highest volume deals are in the under-fifty million dollar category. So that's where we'll focus. On top of that, we want to give people better deals, too — 20 fabulous deals in all.
55. Unicorns are rare — and getting expensive, too. Historical statistics from 500 Startups covering a period of 8 years indicate that less than one in 200 startups are unicorns. That means the chances of finding one whole unicorn in 20 startups — statistically speaking — is close to zero. That's why it's better for us to focus on raising zebras instead — the odds for zebras are much better. We believe we can even make it 20 out of 20.
56. In our view, M&A is more a "matching market" — where prices don't do all the work — than simply a "commodity market". So we take special care to ensure unique DNA characteristics of each Zebra are engineered with precision from Day One — matched to both potential acquirers — via a "mix-in" process of blended secondment — also known as "shukko" for Japanese firms, meaning "leave and go forward". We leave no zebra behind — so we make sure these zebras can do more than pivot — even as the market changes over time.
57. Consulting is the canonical example of work that doesn't scale. Consultants are paid by the hour. One person-hour dedicated to one client cannot be reused for another — consultant hours are thus "rival goods" — so each client pays full freight. But what if we can pool similar clients together? In the simplest case, suppose for each client already paying full freight we somehow manage to find a second client to shadow the first. For example, the case of a "two-fish pool" — the richer $2 fish pays full freight while the poorer dollar fish — who shadows the $2 fish — gets a discount. For this scheme to work, one needs to do more than just consult — one must also implement.
58. This is so that we can make semi-rival goods for sale. Because of shadowing, two-bit ventures share half their components — so each venture can be priced at less than the sum of its parts — if need be — and still leave room for profit. Let's say a school of penny fish worth 132 cents is on offer at 25% discount — so that's a 99 cents deal — which attracts a dollar fish. Now, the dollar fish is 33 cents richer after the deal — and so are we — because that semi-rival school of 132 penny fish only costs us 66 cents to make. Ours is the way of the middle — and everyone goes home happy.
59. Putting it all together, we now arrive at this two-bit formula. Take a peek through the keyhole — see what fortune lies ahead that this formula can unlock?
60. We run A/B test to improve our game. We want to be the world's best two-bit venture builders, bar none. Deliberate practice over 20 ventures — two at a time — is how we will get there.
61. Now to win at this game, we need the rest of "The A/B Team" on board. That's the reason we are having this conversation.
62. The market does not wait. It's tough to be the top dog. Tougher still is staying top dog — Cisco has managed well. Exxon Mobil, on the other hand, has just dropped out of the top 10 in S&P 500 — it's now 12th on the list.
63. But the market continues to dance to its own rhythm. Since the 1960's, average company lifespan on S&P 500 has been getting shorter and shorter — counting by the decades. The market is unforgiving — even for big companies. Tick, tock — hear that clock ticking?
64. We set our design goal at "20/20" — that means 20 exits from 20 ventures in 5 years — chosen from across 20 industries. Any questions? So who do you think we should invite to the dance?
65. "Software is eating the world". The pace may not all be the same — but is there any industry that may have been left out of this current technological revolution? We'll be needing partners to cover for up to 20 industries. Some industries may be less amenable to venture building. But what do we know?
66. It's about time we go find some treasure — hidden in plain sight. Now — are you seeing what I am seeing?