Motorola’s New Enterprises
Strategy and Process Assessment
S
h
a
r
e
h
o
l
d
e
r
Arena “C”
“ L-E-N-S ”
Arena “B”
Arena “A”
V
a
l
u
e
0
Incubation
5
Harvesting
10
Time (in years)
James Cook
1
October 2, 1989
STRATEGIC RENEWAL
is a:
Leveraged
Builds on proprietary World Class know-how
May have significant synergistic potential
May merge with or establish new Core Business in 10-20 years
Not entirely alien to existing Xtronics Operations
Entrepreneurial
Focused on customer needs and satisfactions
Committed to high growth with low investment
Expectation of high upside for contributors
Champions' and key people's spirit is critical
Strong cultures with free association and styles allowed
Nurturing
Risks and failures are accepted, but never indulged
Insulated from Bureaucratic mentality and reporting
Has high level mentor (CEO, COO, CFO, CSO,...)
Encouraged to mix with Core Business people
Strategy
Commitment is long term (i.e., 10-20 years)
Belief market will be huge someday
Any existing market forecasts vary widely
Technology pieces exist (in labs, at least) today
Successful applications seem imminent
"Strategic RenewaI is different than Tactical Renewal!"
James Cook
2
October 2, 1989
TABLE OF CONTENTS
I.
Executive Summary
A.
B.
C.
D.
E.
F.
II.
7
9
10
Support Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Venture Staffing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incentives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
15
17
Portfolio
A.
B.
C.
V.
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arenas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Enterprises
A.
B.
C.
IV.
4
4
4
4
5
6
Strategic Value Added
A.
B.
C.
III.
Study Origins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Major Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Study Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interview Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinuous Renewal Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Venture Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Venture Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Venture Harvesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
20
21
Deal Flow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
24
Deals
A.
B.
James Cook
3
October 2, 1989
I.
EXECUTIVE SUMMARY
A.
Study Origins
Motorola's New Enterprises engaged Pugh-Roberts Associates to undertake an assessment of its operation and make
recommendations to improve its performance. The Division in various incarnations has been led by a succession of
general managers starting with Stephen Levy (1972-1975), then Robert Salatka (1975-1977), and Keith Bane (1977c.1980), and then the current Division was organized under Levy Katzir (1982-1988). New Enterprises is committed
to a fresh look at Motorola's efforts to institutionalize discontinuous renewal.
B.
Study Process
The Pugh-Roberts team took the perspective, right from the start, that it was important to extract what works and is
valuable in what exists and what has been learned and to go forward with a semblance of continuity. We resolved to
avoid the temptation to "start all over" but rather ventured going forward given what has been done and is in place.
We began by interviewing venture personnel and Motorola corporate officers. We got a sampling from Motorola
operations. In all, we conducted 29 interviews, plus 5 interviews of New Enterprises' personnel. The interview
schedule is presented on the next page. We then presented our findings to the New Enterprises' staff. With the
benefit of their feedback as well as the benefit of our involvement in and ability to benchmark with other corporate
venture organizations, we wrote this report.
C.
Major Recommendations
The major recommendations are the following: 1) Since discontinuous renewal is an imperative of all multi-century
corporations, the initiative should be continued, 2) New Enterprises must urgently set about developing a strategy
and management process, and be prepared to sustain their strategic thrust, 3) A realistic process of estimating
shareholder value based on completed milestones would be invaluable in managing the portfolio, determining
funding, energizing urgency and demonstrating value, 4) Have arenas managed by a Partner/Gatekeeper, but have
ventures report to their boards (control by milestones), 5) Put more effort and focus on the end-game, be it spinning
into Motorola as a business unit within an existing sector or establishing a new business group or sector, or being
sold or going public. Although it is outside the scope of this consulting engagement, we do strongly recommend that
the investments made by New Enterprises (or New Enterprises itself) be capitalized under an investment holding
company so that investments don’t become treated as Motorola losses.
D.
Study Team
The project leader was Jim Cook, with significant participation and contributions by Ben Sykes and Carl Kaminski.
Alan Fusfeld was the Overseer of the project. Jim Cook started two high technology companies, took one public,
was on the board of several high technology companies, was corporate staff Vice President of Technology of
Computervision and is now Deputy Director of the Technology Management Group of Pugh-Roberts Associates.
Ben Sykes managed Exxon Enterprises ventures, was responsible for 37 ventures (12 of which were worth over $200
million publicly), and has Senior Associate status with both New York University's Center of Entrepreneurial Studies
and Pugh-Roberts Associates. Carl Kaminski was Director of Planning and Business Development for a McGrawEdison Division. Alan Fusfeld is a Senior Vice President of Pugh-Roberts and the director of the Technology
Management Group.
James Cook
4
October 2, 1989
Note about Organization: The remainder of this report is organized by the subject of focus: a) Strategic Value
Added, b) New Enterprises, c) Portfolio, and d) Deals. In turn, each of these sections is broken into its three most
vital constituents, and each constituent is reviewed from three perspectives: a) Observations and Implications, b)
Discussion and Best (or Worst) Practices, and c) Recommendations.
Note about Notation: We have ranked the criticality of "Recommendations" by the following legend: a) C for
Critical, b) E for Essential, and c) W for Worthwhile. We have employed a * on "Recommendations" where we,
Pugh-Roberts Associates, could bring to bear special expertise. Throughout this report we have used: a) M to mean
Motorola, the company, b) Mops to mean Motorola's operating divisions, and c) Mne to mean Motorola's New
Enterprises Division.
E.
Interview Schedule
New Enterprises &
Motorola Interviewees
Pugh-Roberts
Interviewers
Ben
Ventures
4+
John Jones, Pres
3+ Elliott Philofsky, Pres
2+ Charles Loew, Pres
2+
John Brimm, Pres
Aaron Benaiah, Pres
Corporate
Bob Galvin, CofB
George Fisher, Pres
Gary Tooker, COO
Peter Lawson, CVP Legal
Chris Galvin, CSO
Keith Bane, SVP Strategy
Jack Beaver, HR
Levy Katzir, SVP
Don Jones, CFO
Operations
Ed Staiano, EVP
Tommy George, SVP/AGM
Mort Topfer, SVP/AGM
External
Larry Doherty, VC
Bob Richardson, GM
Alan Kirson
TOTALS
James Cook
Carl
Logistics
Jim
Time
6/20
6/5
Fl.
Tel. #
Fax #
8-3
9-5
5/31
6/2
6/9
6/13
6/15
8:30-1:00
1:30-2:30
6
6/16
6/16
6/16
6/9
6/15
6/9
10-11
2-3
2-3
10-11
3-4
1:30-2
3-4
11-12:30
8-9
12
12
12
11
12
7
2
6
11
6/1
6/15
8-9:30
3:30-5:00
2
6/12
3-5
6
3-4:30
6
6/15
6/15
6/15
6/15
Unavailable
6/15
6/12
6/23
6/15
14
3
18
30 Interviews Conducted
5
October 2, 1989
F.
Discontinuous Renewal Synopsis
Purpose:
Find a repeatable method to achieve discontinuous renewal at Motorola.
Apparatus:
A dedicated organizational subunit (Mne), a charter, a plan, staff and
budget, access to capital, a portfolio of ventures, and a means to generate
deal flow.
Set-up:
The subunit (Mne) must be substantially autonomous of the sponsor (Mcorp). The
subunit's charter must be endorsed by all parties on which the subunit relies.
Procedure:
Make prudent, promising investments in the portfolio ventures and deal flow as
prescribed by the Charter. Monitor and offer direction and assistance to portfolio
ventures. Divest interests in the ventures when they no longer offer promise, when they
become commercially successful, or when it becomes mutually beneficial to be run as or
under a new M group or sector.
Hypothesis:
The current processes will yield gains in shareholders' value in excess of other risk- adjusted
alternatives consistent with the sponsor's constraints (line of business, policies, absolute risk
threshold, ethics, and national societal and humanistic concerns).
Findings:
The shareholders' value is unmeasured, but is not in excess of alternatives, as qualified above. In
some instances, the shareholders' value has appreciated commensurately (Tegal and Emtek). The
strategy and management process are missing.
Assessment:
Discontinuous renewal is the only way to have a multi-century corporation (note: Berretta in
manufacturing, Corning in joint ventures, Coca-Cola in merchandising, AT&T in technology).
The seeds of repeatability must be in the successes. The management process of the procedure
has been lax.
Next Steps:
Create a strategy and adopt a management process based on the wisdom of experience and the
insight of perceptions. Devise a measurement basis related to shareholders' value. Employ time
frames consistent with the phenomena being measured.
Expectations:
Successes should become more repeatable as good method (discipline and some rigor) is applied
to good process. A good measurement method for risk-adjusted shareholders' value should reduce
the time needed to see results (perhaps from 5 to 7 years down to 2 to 3 years).
================== End of Chapter I - Executive Summary ===================
James Cook
6
October 2, 1989
II.
STRATEGIC VALUE ADDED
A.
Strategy
1.
Observations and Implications
The 1988 Annual Report says, "The New Enterprises organizations' charter is to enter completely new businesses in
emerging high growth, high technology arenas." The appearance of this statement in the Annual Report dramatizes
the importance of a charter but, by no means, signifies the strategic intent. We could not find a comprehensive
strategy, and so, we assumed that none exists. Without a clear strategy, Mne's direction, legitimacy, and viability can
always be called into question, both inside and outside of M.
Strategic Renewal is a need widely recognized by the senior management of M and forcefully fostered by Bob
Galvin.
REDACTED
M has clearly embraced the view that "Strategic Renewal is different than Tactical Renewal." Furthermore, Strategic
Renewal has the support of Mcorp and an unusually high degree of support from Mops. This has sustained Mne
through some tenuous times, but REDACTED.
2.
Discussion and Best (and Worst) Practices
New venture arms in large corporations are created as separate entities to provide: a) a center of responsibility
focused on growth by venturing, b) appropriate organizational climate and structure to foster emerging businesses,
and c) insulation from the dominant values, concerns, norms and bureaucracy of the maturer businesses.
The root cause for separating large corporations' main line businesses from corporate venturing is "administrative
asymmetry." That is, the differences between emerging ventures and established divisions are so stark with respect
to predictability, planning, funding, evaluation, objectives, time frames, structure, administration, and culture as to
cry out for them to be managed separately until the "emerging" becomes "established."
A chemical company's venture arm established a venture strategy in the absence of an overall corporate strategy and
got tacit approval and recurring vacillation. The activity was then viewed as out in left field and later as an elitist
clandestine operation. When the parent company's president retired, the venture arm was disbanded.
DuPont changed its strategy from diversification to consolidation around 1970. The corporate venturing did not
change its strategy (it could have begun investing in start-ups exploiting advanced technology in its main line
markets, for example) which is why it lost support and was nearly disbanded. Unrealistically short time spans and
large sales expectations also undermined support for DuPont's corporate venturing.
"After we painfully learned that ventures might take 15 years to pay off, we adopted the practice of making ventures
self-supporting early on. Furthermore, we withhold making large investments until both market acceptance and
financial return have been demonstrated," according to the Development Controller of DuPont.
Ralston Purina adopted a realistic charter which set forth: a) scope, b) objectives, c) the venture process, d) structure,
e) conflict resolution, and f) end game. The executed plan, which resulted in a major new division of the company,
helped Ralston be recognized by Dun's Review as one of the five best managed companies in America. (A very
worthwhile case study.)
James Cook
7
October 2, 1989
3.
Recommendations
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
B.
a)
Develop, adopt, promote and sell a clear, concise, and consistent strategy which addresses: i)
purpose and rationale, ii) achievable objectives, iii) basis of performance, iv) arenas, v) time
horizons, vi) conflict avoidance and resolution, and vii) sustained support and collaboration. (C)*
b)
Resolve under what conditions Mne could make a minority investment. (C)
c)
Propose a plan which emphasizes consistency with Mcorp long term strategy, leverages Mops'
World Class strengths, and proposes operational criteria and measurements which are applied
throughout the venture life cycle (from deal flow, screening and selection, feasibility, commitment, incubation, launch, emergence, and divestiture). It is important to stress the benefits and
rules of engagement for all involved. (C)*
d)
Sell the strategy and the plan to Mcorp and Mops, mindful of and responsive to their feedback.
(E)
e)
Do not take on any new venture investments until Mne has a clear course and management
process. (W)
f)
Develop a realistic operational-shareholder value model (based on likelihood of reaching milestones and the shareholder value of comparable ventures which have reached that milestone). (E)*
g)
Consider incorporating Mne as a wholly owned investment company and capitalize it according to
the shareholder value model and stop expensing it because of the harm it may be doing to M's
earnings. (C)
h)
Assess all current holdings according to the shareholder model and use that as a major input for
determining their disposition (along with strategic fit with Mcorp and Mne). (W)
Relationships
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
Kodak populates each geographic location with a trained "facilitator" who is available to package ideas from within
Kodak's operations for funding by Kodak's New Opportunity Division. Furthermore, on a systematic basis, ideas for
businesses unrelated to existing businesses which are rejected by line divisions are reviewed by the New Opportunity
Division.
James Cook
8
October 2, 1989
One chemical company's corporate venturing operation engendered the following attitudes: a) "another mouth to
feed," i.e., a competitor for capital, b) "hot area," i.e., its limelight generated unrealistic expectations and jealousy, c)
"the brightest young people in the company," i.e., line operations are inferior, and d) not surprisingly, it had very
little grass roots support. Consequently, the corporate venturing arm received no line cooperation which prevented
its ultimate success.
Ralston Purina corporate venturing exploited an extensive network of contacts in the corporate R&D organization.
This effective networking was an outgrowth of previous associations of the corporate venturing leader.
Business cases indicate that a crisis of relationships occurs when the venture arm experiences disappointments
which, in turn, discourages relationships out of concern for being tainted. On the other hand, repeated successes by
the venture arm raises the spectre of a potential, threatening competitor (of the line operations) for talent and
resources, also resulting in a deterioration, and even crisis, in relationships.
Three mechanisms have been cited to improve relations between corporate venturing arms and corporate operations.
They are: a) a prestigious "Resource Board" composed of talented operating personnel, b) reducing the elitist status
associated with corporate venturing, and c) reduction of lavish levels of funding, (e.g., in one instance, from
hundreds of millions per year to tens of millions per year).
Relationships are vital for intelligence gathering regarding deals, talent, competitors, substitutes, technology, and
events. The more key sources you are in touch with, the better your chances of success.
3.
Recommendations
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
C.
a)
Stop the practice of posting Mne investments as M losses. (E)
b)
Get Mcorp okay to do deals with venture capitalists, then draw up a strategy to share in deal flow,
joint investing, technology transfer, and deferred buy-out (of marginal performers who might be
good performers with M know-how). (E)*
c)
Foster interaction with Noble Fellows and other "Idea Magnets" within M. (W)*
d)
Communicate Mne benefits to Mops such as funding of pivotal technology development and/or
transfer, participation on Mne ventures' board, or "spin-in" of Mne ventures to Mops unit. (W)
e)
Publicize and reward M who help Mne ventures. (W)
f)
Adopt higher M profile so that Mne does not become detached and alienated, but avoid
“consensus" style for Mne venture decisions. (W)
g)
Create Technology Advisory board consisting of international luminaries (and be prepared to treat
them handsomely) drawn from academia, the trade press, industry and within M to create (talent,
research, and investment) leads, vision, informed screening, and excitement. (W)*
Arenas
James Cook
9
October 2, 1989
The arena (or cluster) concept for corporate venturing proposes that a group of ventures be started or acquired, each
of which is in a field related to one or more of the others. The relationship could be based upon complementary
technologies or markets. Because of the relationship, each venture can benefit from the complementary capabilities
of the others through cooperation on technical and/or marketing issues.
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
The "arena" concept is almost universally applied by all venture capital firms. Applied to the venture’s funding
organization it has conspicuous benefits. For example, the management supervising the overall venture program can
build a background of knowledge about a selected business arena thereby improving their awareness of new
opportunities and their judgment about competitive developments and trends. Given time and patience, it also allows
the testing and development of new managers, and the maturation of ventures, one of which may in the future
become the core around which to form an integrated, consolidated new business division.
However, applied outside the funding organization, that is, between ventures within an arena, and the theoretical
synergies get overridden by the empirical realities. Those empirical realities were experienced when Exxon
Enterprises tried to merge several of its ventures within an arena. The resulting experience has been categorized as
being caused by "technology mis-match" and "rampant individualism."
Technology mis-match can occur for two reasons. The technology development stage of venture "A" may not match
the needs of the proposed user, venture "B", or A's technology may not be optimum for B compared to a competitive
technology available from a competitor to A. Forcing B to use A's technology can delay B's product introduction, or,
worse, cause it to be non-competitive. Meanwhile A is under a lot of pressure to meet B's needs, which may not be
the optimum market for A to initially target. Consequently, both ventures suffer.
Rampant individualism is a more complex problem to diagnose and deal with. It results in a venture's management
putting their venture first versus the over-all good of the arena. This behavior is fostered by the entrepreneurial
environment most venture programs try to create, namely, autonomy and all-out effort to make the venture successful
by the most expeditious means available. Cooperation and subordination to the needs of the whole is a corporate
behavior. The only cooperation of interest to the entrepreneur is a relationship that will move the venture faster and
surer to its goal. The odds are that the optimum relationship for the venture will be with an outsider who has exactly
what it needs when it needs it.
M has had success with informal corporate venturing which resulted into its semi-conductor and cellular phone
successes. One was technology driven, the other was market driven. Both were based on outside technology (from
Bell Labs), both had long gestation periods (10 to 20 years), and both took over 10 years (after gestation) to become
$1 billion businesses. Finally, both were related to the Mobile Radio business and had the personal support of the
Galvins.
3.
Recommendations
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
a)
Study previous M strategic renewal successes and failures for the underlying critical factors, some
of which are bound to be unique to M. (W)*
b)
Unify Mne arenas under a single, sustaining theme (such as, ready communications for a better
James Cook
10
October 2, 1989
quality of life) and shed any venture which doesn't fit (because it will take up management mind
space). (W)*
c)
Organize for arenas (specific overall organization recommendation is in Chapter III Section A.3)
by hiring expertise in each arena suitable to be a Partner/Gatekeeper. (E)*
d)
Inquire of the ventures within an arena what relationships they would like Mne to foster, and
inquire among all the key people of a function (such as manufacturing) how Mne might foster
relationships they want among themselves, Mops, customers, vendors, academia, etc. (W)
=================== End of Chapter II - Strategic Value Added ===================
James Cook
11
October 2, 1989
III.
NEW ENTERPRISE OPERATIONS
A.
Mne Support Staff
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
Kodak's venture arm (New Opportunity Division) has two kinds of portfolio managers: seed managers and venture
managers. Seed managers are recruited from Kodak's technical and marketing ranks and are selected for their
business acumen, business experience and their ability to put a venture together. Venture managers are selected for
their experience managing in a start-up or small business environment.
A DuPont New Business Opportunity manager describes his job as, "identify the resources that are needed for a
venture, determine if DuPont has enough of these resources to be successful, then pull them together and try to
manage them. You do better when the business you're aiming at is close to what you already know." (This can be
called into question as being excessively proactive and pre-empting the entrepreneurs from entrepreneuring.)
At DuPont, most of the individuals had technical backgrounds and many worked in the Development Department
(DuPont's corporate research arm) during the prior decade. A typical individual was described as, "someone with
commercial savvy and a background with different departments within DuPont." DuPont later hired newly minted
MBA's directly into the Development Department as a way to give them a quick overview of DuPont.
Venture Capitalists and, more recently, IBM have realized that building high technology ventures is a complex art
which is hampered, not helped, by unwelcomed support. Rather, they attach a partner to nurture, mentor, network
and manage a portfolio of investments.
3.
Recommendations
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
a)
b)
James Cook
REDACTED
Mne adopt the following organizational structure: (E)*
12
October 2, 1989
c)
The General Manager should have overall responsibility, but delegate some discretionary
investing authority to the Partner/Gatekeeper. The General Manager must be mature and
have had line experience in marketing and technology or finance. (E)
d)
The Human Resources manager should assist ventures (and Mne itself) in managerial and
General
Manager
Human
Resources
Finance
Partner/ ...
Gatekeeper
Partner/ ...
Gatekeeper
Partner/ ...
Gatekeeper
Partner/ ...
Gatekeeper
Board
Board
executive assessment, recruitment, rotation, and termination. This Human Resources
manager must be sensitive to and knowledgeable about the impact of cultural differences.
The Human Resource manager must have had several years of entrepreneurial exposure
plus some large operating company experience. (E)*
e)
The Finance manager should help package, evaluate, and assess investment situations as
well as help ventures with forecasting, planning, and systems implementation. The
Finance manager must have entrepreneurial experience plus large corporation experience. (E)
f)
The Partner/Gatekeeper should have the following Partner functions: i) be a mentor to
and a source of support for the ventures for which he or she is responsible ii) maintain
awareness of new technology or market trends that may affect current ventures iii)
maintain an inventory of potential "world class" venture manager candidates for critical
venture positions that may need to be filled iv) identify and nurture mutually beneficial
interactions between ventures and Mops v) help reassess the potential of current arena
James Cook
13
October 2, 1989
and venture strategies and vi) help spin-outs of commercially viable ventures no longer of
strategic interest to M (venture capital funds can be of assistance here). (E)*
B.
g)
The Partner/Gatekeeper should have the following Gatekeeper functions: i) developing a
network of contacts and experts in the areas of interest, both inside and outside the
company ii) identifying new opportunities for investment iii) liaison with venture capital
funds operating in his or her arena. To adequately fill both the Partner and Gatekeeper
role, the Partner/Gatekeeper should be a multi-functional (i.e., marketing and either
technology, or, if appropriate, finance), active networker who is a well informed, highly
placed promoter of people coupling. (E)*
h)
The maximum span of responsibility recommended for a Partner would be 3 to 5 active
ventures and one arena since she or he is also carrying out the Gatekeeper responsibilities
for the arena. Each Partner/Gatekeeper should probably have an administrative assistant
(a person who is or could be studying for an MBA) who can take much of the
administrative burden off the Partner/Gatekeeper. The Partner/Gatekeeper must be well
networked, intellectually respected, personable, and experienced in the high growth
paradigm, be it from ventures or skunk works inside large corporations. (E)*
i)
Between "rounds" of financing, the Mne role vis-a-vis the ventures should be as a
mentor, and supporter. Rather than manage the ventures, the Mne function should be to
see that the ventures have the necessary management in place to manage themselves.
Beyond that, Mne should serve as mentor and help support the venture by arranging
assistance from within or outside M. (E)
Venture Staffing
This section addresses generic staffing issues. Specific staffing situations and what to do about them are outside the
scope of this consulting engagement and report.
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
Boards of Directors are effective vehicles for bringing together Mops supporters, outside luminaries, the venture's
leadership, and Mne's Partner/Gatekeeper. This is rosy until the venture gets into difficulty (as IBM found out).
However, the antidote is to be sure the Board has some "on the spot" wherewithal (read discretionary investment) to
affect the challenges facing the venture.
Venture Boards (at Kodak) have been chartered to: a) facilitate the movement of people, b) smooth the transition of
the venture into an existing operation, c) provide actual expertise or linkages to expertise vital to the venture, and d)
challenge the venture from an external perspective.
James Cook
14
October 2, 1989
When the ventures need decisions, you need a Board to make a decision and not have to go through several levels of
review. One of the things that IBM does is put on the Board at least one person who has the authority to say, "yes,
spend the money." The only thing that this Board has to do outside of that is inform the corporation if they're
changing strategy.
GE, 3M, and Kodak among others have come around to an opinion that the best thing that they can do is to leverage
other corporate capabilities, knowledge, people and skills. The further that you are from your existing business, the
fewer opportunities there are to capitalize on the leverage.
One of the best ways to have a uniform culture and to solve the communication problem is to staff your own
organization, as IBM and 3M has done. It does not work if you are going into new areas where you need to reach
outside for that experience.
The best measurement of management quality is track record [ed. I will take credit for this as a major blunder of
mine as the data doesn’t support it – Jim Cook], a measure the venture capitalist uses to decide whether to financially
back a venture. Track record is primarily an experience factor. There are two important aspects to experience:
general managerial experience and experience with a specific market or technology. The venture capitalist wants a
management team that has demonstrated capability to manage a high growth, high potential venture. Equally
important, the venture capitalist looks for expertise in the markets and technologies in which the venture intends to
compete.
C.
Incentives
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
Incentive compensation is only one part of the total issue of motivation. There are two forms: psychic and cash.
Psychic forms have proven to be the strongest and most lasting. They include individual and team achievement,
recognition for the achievement, and increased power (as in promotion to greater responsibility). The opportunity to
have significant autonomy and independence in making decisions and implementing a plan that the individual
participated in developing is the essence of the entrepreneurial environment. 3M has a scheme where the magnitude
of the commercial success determines the career advancement of the participants.
Cash awards vary from straight salary, through bonuses to equity type participation. As a rule of thumb, the more
highly related the business is to the parent company business, the closer the form of cash compensation should be to
the base business forms of compensation. This makes it easier to transfer employees to and from the ventures as
needed, and reduces the problems of "fairness" when the Mne staff personnel or other M employees provide
significant contributions to the venture's success.
A bonus/milestone type of compensation makes it easier for the corporation to impose changes in strategy on the
venture without renegotiating the incentive plan each time. Such changes can be made at each milestone completion.
If the venture is and will remain totally independent from the parent company, relying almost entirely on outside
personnel for management, then an equity form of compensation may be appropriate. The key issue then is what it
takes to be competitive. If the venture is competing with the venture capitalist for "world-class" personnel, then
some form of equity may be required to attract the best personnel.
Venture capital firms typically employ one general partner and one-half to one professional assistant for every $10 to
$20 million of investment in early stage ventures. The typical, annual management fee runs 2.5 to 3.0% of the
James Cook
15
October 2, 1989
capital managed. This excludes the formation costs and legal expenses associated with sale of assets (such as when a
venture goes public). The operating costs for seed capital firms run much higher, as much as 10% of capital
managed, because of the high ratio of effort to initial dollars invested. Seed capital firms typically collect part of
these expenses by direct charges against the ventures rather than the Partnership.
3.
Recommendations
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
a)
Revamp Mne's compensation for venture managers and key people to include salary, bonus,
recognition, career advancement, personal fulfillment and/or milestone achievement (if you adopt
the process) and/or the cash out of the end game. (C)*
b)
Consider a performance-based option and/or bonus for Mne Partner/Gatekeepers modeled after
classical venture capital practices or tied into the above plan as though the Partner/Gatekeeper
were a vice president of the ventures in his or her arena portfolio. (E)*
c)
Establish perks for M personnel who help ventures as well as for outside luminaries. (W)
d)
Resolve not to unilaterally change the prospects, time horizons, or direction of ventures without
making a corresponding adjustment in the compensation arrangement. (E)
================= End of Chapter III - New Enterprise Operations =================
James Cook
16
October 2, 1989
IV.
PORTFOLIO
A
Venture Planning
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
At Kodak, the typical business planning process requires an assessment of the industry structure and dynamics, and
of the would-be venture’s competitive advantage this is followed by the development of alternative strategies and
preparation of a staged operating plan. During the business development phase, a "strategic sponsor" for the new
business (at the company officer level) must be found in order to provide assurance that the new business will be of
strategic corporate interest, should it succeed. The business development phase extends to the point where a
management team is in place, a complete business plan is in hand, and targeted customers have shown a willingness
to buy the venture's products) on the basis of having evaluated a working prototype. Of the 30-40% of the seeds that
have survived this phase, about 85% were commercialized (or otherwise adopted) by an existing Kodak
organization, with the remainder going to the Venture Board for approval.
In virtually all venture capital situations, the venture is expected to produce its own business plans including market
research, financial projections, development milestones and contingencies. To have a plan professionally made,
even in part, by someone outside the key people seriously impairs the venture's credibility.
Exxon Enterprises achieved excellent returns on its minority held positions ($218 million on $12 million invested
over 10 years) and dismal returns on its internal ventures which were cursed with the burdens of both worlds:
funding justification based on milestone reviews (as with venture capital) and budgetary reviews on an annual basis
(for Exxon's corporate planning).
The level of planning should actually change as the venture progresses. In the beginning it must be thoroughly
researched, later the assumptions of the plan are diligently monitored and the venture adapts to its environment
fluidly (not necessarily according to the letter of the business plan). In later stages (launch and ramp-up), planning
and control should be attended to diligently. Excessive planning defeats the flexibility necessary for entrepreneurial
success, too little planning wastes resources and opportunity. The degree of planning (as with control) varies
according to the stage of the venture.
3.
Recommendations
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
a)
Have the ventures' business plans developed by the ventures' entrepreneurs themselves and key it
to funding (and review) milestones. (C)
b)
Audit all Mne ventures to be sure the strategic intent is shared and believed throughout each
venture. (W)*
c)
Adjust Mne's imposition of planning and control requirements to the stage (or milestone) of
James Cook
17
October 2, 1989
funding. (E)*
B.
Venture Control
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
The venture capitalists expect venture managers to develop the business plan and make all operational decisions.
They exercise control through voting changes in the management and through the withholding of financing. Usually
they finance by milestones, not on a calendar basis. The venture's final milestone is the initial public offering.
The driving force for ventures, even for a corporation sponsored ventures, should be to achieve early commercial
viability through proof that there is a market for the product, that the market has enough growth potential to justify
the venture effort, and that the profit margins will provide acceptable return on investment over the long haul. The
venture should not be forced to grow at a preset target rate.
Start-up ventures should be measured by the achievement of tactical milestones. Typical milestones are: A)
completion of prototype accompanied by assessment of manufacturing cost b) fabrication of pre-production samples
for market test accompanied by market acceptance evaluation and pricing assumptions c) first sale to lead
customer(s), etc. The business plan and the overall strategy must be reassessed after each critical milestone, quite
possibly resulting in a change of direction. The focus is on learning from and responding to the feed-back from the
segment of activity leading to a milestone. The plan is revised to fit what was learned, not to force achievement of
what was originally projected (e.g., by increasing R&D expenditures or doubling the number of sales people).
Obviously, tactical venture milestones do not often coincide with the corporate budget cycle due dates. Although the
corporation needs budget forecasts on a periodic basis for financial planning purposes, these dates should not be
used for stewardship of individual ventures. Milestones also afford an opportunity to assess the performance of
venture personnel and anchor incentive compensation awards. Managers can be changed or added to meet the needs
of the next development phase. Bonuses can be given to those who contributed to the milestone achievement. New
bonus awards can be formulated for the next milestone, rather than for a four to five year business development span.
A new venture may move from high technical challenge, through engineering and manufacturing challenges and then
on to marketing and administrative challenges within such a time span.
3.
Recommendations
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
a)
At the venture level, primary focus should be on having the venture management team establish
milestones and provide specifics on how they plan to proceed to achieve the milestone, when it
will be achieved and what resources are required. Milestones should be determined by the needs
and pace of the venture, not the annual budgetary cycle of M. (C)
b)
At the Mne level, effort should be dedicated to adopting a comprehensive venture planning,
controlling, funding and evaluating process so that the management of individual ventures can be
rationalized and related on a portfolio basis.(E)*
James Cook
18
October 2, 1989
C.
Venture Harvesting
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
Sometimes called the "end-game," the ultimate transition of a venture from the protection of Mne can be viewed as
"harvesting" the crop that was seeded and nurtured by Mne. The venture can be left alone as a stand-alone new
business or integrated into the base business. That will depend on how closely related it is to the base business and
the degree of leverage the base business can give, and vice versa.
If the venture no longer appears to be of strategic interest to the corporation it can be spun-off. This can take a
number of forms, depending on the financial viability of the venture. M could retain an equity interest for its
ownership value and let the venture seek ongoing financing from the outside, or M could sell the venture outright.
Joint venture is also an alternative. The appropriate course is highly dependent on the specific circumstances.
The timing of a transition from Mne is equally dependent on circumstances. If leverage from the base business
could be of significant value early on, then the transfer should be made earlier. Acceptance by the "home" division
should be cultivated well in advance, as for example, by putting a key manager from the existing function on the
Board of the venture.
Another possible transition would be to subordinate a weakly managed venture to stronger venture in a related arena
(e.g., semiconductor equipment).
3.
Recommendations
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
a)
On a venture by venture basis, the existing Mne portfolio must be assessed very soon against the
Mne charter and strategy and evaluated in terms of present, potential and realizable (by various
end-games) shareholder value. (C)*
b)
The above should be done at each milestone as part of the financial review. (E)
c)
At the ventures, the management should focus on prescribing how to get to the next milestone as
quickly as possible. (W)
d)
The Mne objective should be to, as rapidly as possible (consistent with preserving the strategic
potential), achieve a solid, lucrative, end-game option. Mne should manage the end-game to be
sure the value isn't lost in transition. (E)*
======================= End of Chapter IV - Portfolio =======================
James Cook
19
October 2, 1989
V.
DEAL FLOW AND SELECTION
A.
Deal Flow
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
Best deal flow results can be traced to having a mix of approaches. An optimum mix includes: a) co-investment with
venture capital firms, b) sponsoring of university research, c) underwriting an internal innovation program, d) top
management listening and enabling, and e) involvement with customers and/or suppliers. The primary objective is to
develop a rich, informed and expeditious network of sources for deals (and selection).
By co-investing with venture capitalists in classical high technology ventures, corporations can have the opportunity
to gain a working knowledge of those emerging technologies and markets that are expected to achieve commercial
success within five to seven years. These corporations should resist the inclination to acquire and/or control the
ventures, but rather should cultivate ways of working together in mutually beneficial ways. Acquisition should be an
option to be executed only at such a time as it becomes mutually beneficial (which might just be a matter of price or
time or both).
Corporations go about co-investing with venture capitalists in two ways: a) direct investment on a deal by deal basis,
or b) by making a blanket investment in the venture capital limited partnership (VCLP). It is common to do both
VCLP's range from broad based partnerships which invest in several arenas and have several corporate limited
partners to those which focus on one arena and have only one corporate limited partner. The participation requires
would be $2-3 million for each broad based partnership, and $10-30 million in the highly focused partnerships.
The best practice for an Internal Innovation Program is the bottoms-up program created by Bob Rosenfeld while at
Kodak. At each technical and/or marketing location, a trained "facilitator" is available to help Kodak people
develop and package product or business ideas into presentations to funding sources inside Kodak. Ideas related to
existing business are presented to the line operating divisions. Unrelated ideas and rejected related ideas are
reviewed by the New Opportunity Division (similar to M's New Enterprises).
Top Down Listening and Enabling is best done by Corporate management who are in a position to set major new
strategic directions. Often middle management will suggest these new directions, but nothing happens unless there is
a willingness to invest corporate resource in pursuing the idea. Such an idea was suggested at IBM and resulted in
top management giving the go-ahead and management resource to create the Entry Systems Division. M's semiconductor business evolved in a similar fashion.
M has itself been a Best Practice in customer and/or supplier involvement as a source of ideas for new products and
businesses (AT&T for cellular, IBM for mobile computer communicator, and the US Government for encryption).
Except from venture capital sources or ''finders'', most deals will not come to Mne fully formed. The sources we
have suggested provide the network of contacts for putting together potential deals, and then with Mne and M legal
support as investments. The best deals will be those created, for example by finding and then encouraging a team of
market knowledgeable entrepreneurs to form a venture.
3.
James Cook
Recommendations
20
October 2, 1989
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
B.
a)
REDACTED
b)
REDACTED
c)
REDACTED
d)
To harvest good opportunity flow from M customers and vendors, Mne should imitate a
proactive solicitation of potential product and/or business ideas. (W)
e)
To stimulate good deal flow from within Mops, Mne should publicize an innovation program
modeled after Kodak's successful program. This requires additional staffing beyond that outlined
earlier. (W)
f)
Mne should have the Partner/Gatekeepers co-fund university research and become involved in
their respective arenas. (W)
g)
Having outside luminaries on Venture Boards will stimulate deal flow in addition to the benefits
cited earlier where it is being more strongly recommended. (W)
Selection
1.
Observations and Implications
REDACTED
2.
Discussion and Best (and Worst) Practices
Any selection process which does not incorporate or leverage the distinctive competencies of the sponsor (i.e., M)
misses the differentiating opportunity for adding value.
The first requirement of ventures is financial viability which should be based on the track record of the management,
the margin potential of the product, the market share prospects, and the viability of the proposed marketing channels
for distribution and service.
3.
Recommendations
( C = Critical, E=Essential, W=Worthwhile; *=Pugh-Roberts can help )
a)
Adopt a criteria for selection which assesses: i) near term feasibility, ii) long term potential,
iii) fit with charter and M standards. (C)
b)
Under near term feasibility include factors such as: i) early proof of potential (e.g., no
technology breakthrough required, customer requirements understood, identified customers for
James Cook
21
October 2, 1989
early sales), ii) low capital exposure (e.g., low development costs, low market launch costs, low
scale-up of production and service costs). (E)
c)
Under long term feasibility consider: i) market potential, (e.g., open ended, significant or not,
step out into related markets), ii) leverage available (e.g., internal exploitation of key strengths,
external opportunity to develop new relationships, positioning, alliances, etc.), iii) within
resources limitations for talent, cash, exposure, and management mind space, and iv) proprietary
protection (e.g., entry barrier, patent protection, know-how). (W)
================== End of Chapter V - Deal Flow & Selection ==================
END
James Cook
22
October 2, 1989