Venture Capitalists may not be so good at stopping failing projects after all

My colleague, Isin Guler, has just published a fascinating study in one of our more erudite management journals.  In an exhaustive look at investments made by venture capital companies, she finds that as funding rounds proceed, expected returns to the investment decline.  You would think that a hard-nosed VC would just shut the loser down, wouldn’t you?  Turns out, not so.  In fact, the likelihood of a venture being terminated as a result of poor performance actually declines as more rounds of financing are completed.  Isin (a professor at the University of North Carolina at Chapel Hill) suggests that political agendas, the desire to look good before one’s colleagues, a reluctance to admit defeat and giving too much weight to sunk costs all come into play. 

It’s a sobering bit of research for those of us (myself among them) who have said that ruthlessly shutting down uncertain projects that don’t meet their goals is key to containing risk in uncertain investments.  You also have to wonder - since VC’s are investment professionals, one might expect companies, in which far greater interference from the forces for escalation are likely to be prevalent - to be far worse at making the tough calls. 

For those of you interested in the academic paper, the citation is:
Guler, I. 2007. Throwing good money after bad?  Political and institutional influences on sequential decision making in the venture capital industry. Admin. Sci. Quart. 52(2) 248-285.

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• Posted Rita McGrath on October 15, 2007

Corporate Venturing - Stop being so fickle!

Enthusiasm for corporate venturing (efforts by firms to create new businesses from within) come and go over time.  Firms set up venture groups, get disillusioned with them, fold them back into the core business only to discover a few years later that they need some place for new ideas and the people who have them to go, and the whole cycle starts up again.  A key reason companies find organic growth so difficult to achieve is this on-again, off again, haphazard way of managing it.  Perhaps this is why my colleague Julian Birkinshaw some years ago noted that:  “less than 5 percent of corporate venturing units created new businesses that were taken up by the parent company.”  (source:  Birkinshaw, J., A. Campbell. 2004. Know the limits of corporate venturing:  Almost all units set up to create new opportunities for a company fail to develop any significant new businesses, but that isn ot to say that the techniques are useless - they can be harnessed for other purposes Financial Times, London (UK), 11). 

But it doesn’t have to be that way.  My colleague Thomas Keil and I have just finished a research project that finds that corporate venturing can play a huge role in business development for firms, but here is the rub:  For the most part, ventures are not going to be the home for the commercial use of the innovations they generate.  These, instead, come when innovations in terms of technologies, capabilities and so forth move to either a strategic new business thrust (such as Nokia’s move into multi-media) or to another venture which has the potential to gain critical mass.  Our insistence that ventures stand alone is an outdated idea.  Once we accept that new ventures are incubators of sorts and perhaps that their main role is as temporary capsules for new capabilities, we would manage them far more adroitly than we do.

For more on this idea, see also Bob Burgelman’s excellent article:  Burgelman, R., L. Valikangas. 2005. Managing internal corporate venturing cycles. Sloan Management Rev. 46(4) 26-34.

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• Posted Rita McGrath on October 13, 2007

How one industry was nearly undermind by its own success - Cycling

Imagine, if you will, that your industry received global attention for many years, had a popular and charismatic heroic character for people to look up to, and sparked waves of interest and enthusiasm among all observers.  Wouldn’t you think that would be a wonderful thing?

Turns out, not so for U. S. based manufacturers of bicycles.  The industry has been in flat growth or in slow decline mode for decades, but was enjoying a false sense of security after Lance Armstrong’s incredible 7-string winning streak in the Tour de France.  Then, interest in the Tour and in performance biking led to sales for high-end, sportsmanlike bikes to spike upward.  But who got left behind?  The 161 million of us who don’t ride, don’t look good in Spandex and wouldn’t know how to operate a performance bike if someone handed us one.  Designer Shimano’s response (working with design firm Ideo) was to develop the Coasting line of bicycles.  They’re built for comfort, not for speed, with automatic shifting instead of gears that have to be changed, a comfy seat and easy to maneuver brakes and so on.  We’ll see how they are received in the market, but it certainly has the potential to revive biking “for the rest of us…”

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• Posted Rita McGrath on October 08, 2007

Observations on educational institutions

Two books which challenge the current way educational institutions organize themselves are now out, and they are both a fascinating read.  Rakesh Khurana’s book From Higher Aims to Hired Hands traces the evolution and development of business schools and observes that they have more or less abandoned the professionalization of managers as a goal.  He questions the long run viability of the current model.  The other fascinating read is by Anthony T. Kronman, and is called Education’s End:  Why our colleges and universities have given up on the meaning of life.  While his focus is on liberal arts schools, not business schools, there are eerie parallels between his argument and Khurana’s.  In both cases, they observe that the adoption of the German University model for faculties, in which research and scholarly publication are key to promotion and tenure of professors, has diverted university faculty from important social and community goals. 

How to change the trajectory of our educational institutions?  I’ll be making some suggestions in the upcoming December issue of the Academy of Management Review.  Khurana recommends reviving a goal of producing professional managers (though is a tad skeptical of how this might be done).  Kronman anticipates a revival of traditional humanism.  Weigh in on the debate!

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• Posted Rita McGrath on October 06, 2007

Of curtains and cup holders

Today I was teaching in Columbia Business School’s “Emerging Leader Development Program,” which as the name suggests is an executive education program focused on developing the leadership skills of younger, high-potential managers.  We were chatting about the interesting fact that the lowly cup-holder, introduced into the States by Honda in 1988, has by now become what I call a ‘non negotiable’ attribute in cars designed for the American market.  One of the participants in class, a woman from a foundation in the Middle East, said that cup holders were not particularly important or popular there.  But, she noted, what is important?  Curtains!  It seems that drivers (particularly women) appreciate the privacy that curtains afford.  Among other benefits, it means that they can take off some of the head gear that hides them from view and relax in the car.

I wouldn’t have thought of that in a million years.  Amazing. 

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• Posted Rita McGrath on October 02, 2007

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