Short Thinking

Om Malik recently wrote a piece where he asked Clayton Christensen about increasing rhetoric about a decrease in innovation & long-term thinking.

In that discussion, Christensen cited that the problem isn’t with a lack of learning or creativity.  It’s a finance problem.

Financial institutions have encouraged a way of thinking that’s poison for innovation, he says.  That thinking centers around internal rate of return or IRR.  Because of it, he says, angel and venture investors look to put in money to work fast – real fast – and then take it out as fast as possible.

This behavior, Christensen says, has infiltrated the mind of entrepreneurs.  Where it has in the past taken companies seven or so years to get to the finish line to generate a solid return for all shareholders, now, with incremental product, companies can be flipped quickly.  And that gives a big boost to IRR. 

OK.  A rush to action.  Provocative thought.

But there are other big parts moving around the tech innovation universe contributing to quick exits. Among them:

  • Consumer Internet is in a state of insane froth.  In a great market opportunity, a great product can quickly build incredible user growth & engagement results.  Exceptional social, web marketing and technical talent and is very short supply.  Valuations are irrational. And where and when have we seen that before?
  • Lean Start-up philosophies are incredibly powerful.  It’s possible to build great product and prove great potential businesses using a fraction of the capital in a fraction of the time.  Less time-to-validation means a shorter track to value.  And less around-the-bend risk.
  • Some founders may be Savants.  At the top of their game & their industry in several dimensions, they may not be well-rounded enough – or mentored effectively enough – to develop into great CEOs for the long-run.  But they are incredibly talented and valuable to acquirers.
  • Some investors may not always be motivated to Go Long.  Keeping investors and their agendas on the same side of the table has always been a challenge for management & investors alike.  Add a mix of individual angels, small seed funds and venture firms the table and it can get complicated.
  • For SaaS, sales distribution remains the Long Pole in the Tent of Ubiquity.  For every DropBox, Skype, Lookout & LogMeIn — who’ve each quickly amassed tens or hundreds of millions of both users and revenue on the backs of incredibly-effective freemium models — there are the majority of SaaS companies. The most successful of these have incorporated high velocity sales & marketing models, which enable revenue to be scaled and new segments to be penetrated, with lower operating burdens.  That’s good. At the same time, very few have built themselves to be on track to be $150M+ revenue businesses.  For many, leveraging a platform acquirer’s channel holds the key to  another door of growth.
  • Acquirers have trained themselves to Buy on the Come. Even for strategic acquirers who recognize strategic value, money is made on the buy side.
  • It Cold Out There.  Has anyone taken a look at what the IPO climate – and the world – might look like next year, much less after that?   Quality floats – as it will likely always will.  Companies with leadership positions, with truly unique advantage, with great business and revenue models, with solid profitability – and with scale – should always do well in the public markets.  Achieving that last part — scale —  is where the great companies pull away from the really good ones.

Venture Capitalists, Christensen says,  are focused on short-term innovation.  And that is just nuts, he added. “I keep saying, don’t be distracted by the siren song of synthetic message of IRR,” he said. “It is dollars and not IRR percentage that matters.”

That’s true.  At the same time, it’s about a lot more than investment theory.  Besides recognizing great ideas, recognizing timing & risk are qualities all successful entrepreneurs & investors share.

Patience & perseverence too.


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