Visionary Way “People at business schools talk about share price. I tell them that I gave sight to 180,000 people last year and that doesn’t mean much to them.” Dr. Govindappa Venkataswamy Founder, Aravind Eye Hospital, India (a for-profit enterprise where more than half the patients don’t pay and the hospital accepts no government assistance) Philosophical Business Models he previous chapter offered a comprehensive framework for identifying T category circumstances. Our next three chapters review core models the design team will use for designing organizational, operational, and offer systems—the internal conditions to match the external circumstances. Chapter 6 will move back to the external circumstances of competitor circumstances and provide easy-to-use models for probing and comparing competitor capabilities. Part II’s core strategies integrate these external and internal models. This chapter presents two philosophical business models. One model is called the Venture Way. This model gets its name and profile from modern venture capital policy and practices. The second model is called the Visionary Way. This philosophical business model gains its inspiration from the research undertaken by Jerry Porras, Jim Collins, and Amar Bhidé. Their findings published in the books Built to Last, Good to Great, and The Origin and Evolution of New Businesses offer new ventures a different approach to business building.1 Before we examine these two models there is a fundamental issue any design team needs to resolve first—should the team even build a business around its new- venture concept? To Build a Business or Not? Recognizing whether a new venture should become a business or not can be challenging. Some ventures should become long-term businesses. Other ventures should never become a business to begin with. Instead these ventures should sell their invention in one big and final transaction—invent to flip. Part II’s core strategies offer a way to resolve the options. If the decision is to build a business, the next determination is what kind of business should be built. Figure 33 shows three options. 2 | P a g e Venture Way Visionary Way Lifestyle Way Figure 33. Three Options for Business Building Over 90% of America’s businesses are Lifestyle Way businesses, also known as mom-and-pop shops.2 Lifestyle Way businesses exist to serve the whims of their founders. Investors seduced into equity positions in these types of businesses usually regret it. The reason is twofold. First, these businesses usually don’t become high growth. Second, any liquidity event for their shareholders is never through a stock exchange listing. Since these types of businesses are often passed along to the founders’ family members, liquidity for shareholders is sometimes generations away, if ever. On the other hand, investors who have taken debt positions or royalty participation interests in products with Lifestyle Way companies have done very well. Part II’s core strategies are applicable to Lifestyle Way businesses. Notwithstanding the value to Lifestyle Way entrepreneurs, this book focuses on the design factors and forces facing Venture Way and Visionary Way businesses because these are the vehicles of high-growth and investor-backed enterprises. Selecting a Model Is Important This chapter presents two philosophical business models. When a new venture chooses one model over another, it answers by default two crucial questions. • What are the founders’ reasons for going into business? • What are the chances of the company adapting to change? Let’s highlight why the first question is important. Why a team goes into business reveals their values. When someone shows what they value, they tip their hand about what they may be prepared to do. Thus selecting one of the two philosophical models goes a long way in revealing what an entrant values. 3 | P a g e Philosophical Business Models This in turn helps the team (and, maybe more important, helps investors) assess its capabilities to meet the brutal realities category and competitor circumstances impose on their aspirations and ultimately the core strategy they select. It is better to do this assessment during NVCD rather than later. Now let’s draw attention to the second question. Category circumstances will change faster than slower. New ventures will never be able to predict with certainty just how fast or how slow. But one thing is certain—the present is always a little different from what we predicted. How the new venture will handle this can be inferred from the philosophical business model it selects. One of the models—the Visionary Way—is a framework better suited for longer-term new ventures. When a team signs up for this way of building a business, they will be practicing five disciplines that promise a better chance that they can adapt to a fluxing environment. Change is part of the DNA of Visionary Way companies. The context for this chapter is straightforward—the choice of philosophical business models is a crucial call and there are two options. Unfortunately most entrepreneurs and investors have operated in only one paradigm—the Venture Way. Spellbound by the modern venture capital culture new-venture design teams are not even aware of any optional business-building, finance, and planning/execution choices. One aim of this book is to break this paradigm paralysis. So let’s begin with Venture Way business building, the philosophical model that most of high-tech is married to. This model has evolved over the last fifty years. To fully understand the nuances of modern venture capitalism it is helpful to understand its roots and how it evolved. VENTURE WAY BUSINESSES Venture Way businesses get their name and traits compliments of the venture capital industry. In 1948, there was only one venture capital firm in America. Then in 1957 the Soviet’s launched Sputnik. In response America began its drive for the technologies that would put the first man on the moon and ushered in what Alvin Toffler, fifteen years later, called the information economy. Information capitalism has been credited as the engine of global economic change ever since. Another significant event took place in 1957. Ken Olson, the Founder of Digital Equipment Corporation, approached American Research 4 | P a g e & Development (ARD) for an investment. General Doriot, the President of ARD, agreed to make an equity play in DEC and did so with $70,000 for an 80% ownership position. Ten years later, this block of stock was worth $400 million.3 In describing Doriot’s activity, someone coined the phrase, venture capital. The match was made—information technology and venture capital. High-tech and venture capital have been married ever since. The early venture pioneers, like Arthur Rock, Don Valentine of Sequoia Capital, and Eugene Kleiner and Tom Perkins of Kleiner, Perkins, Caufield & Byers placed their bets on enabling technologies and sciences in the fields of information and life sciences. Recognizing customer-adoption best practices for radical sciences and enabling technologies, these early venture capitalists went about the gritty and patient job of growth-stock business building—even if it meant over the long term. Traditional venture capital practices continue today, but it’s far and few between. The Big Bang The slowly evolving Internet, which began as a government project in the 1960s, hit a tipping point in 1996, and its big bang erupted in what Fast Company magazine described as the built-to-flip venture culture. Hockey-stick spreadsheets now had their validation. The Internet gold rush of 1996–2000 was an extreme example of new paradigm chasing. The Internet paradigm’s promise of connecting everyone like never before brought about the convergence of the pension-rich venture funds with the new Wall Street venture bankers, all too eager to take public any dot-com. This convergence made the Silicon Valley start-up machine roar like never before. From 1996 through 2000 the capital markets pumped $100 billion or more every year into its invented “New Economy” businesses. Seed investing by venture capitalists jumped from $12 million in 1995 to over $1.3 billion in 2000 with the bulk coming from modern VCs. The number of venture capital firms jumped from a few hundred to over six hundred. Once the birthplace of traditional venture capital best practices, Silicon Valley took the rap as home base for modern venture capital bad practices. Stanford University, coronary artery of Silicon Valley, began pumping 20% of its engineering graduates into executive jobs—up from 5%. This was a “money for nothing and clicks for free” culture. Silicon Valley, a hero for inventing 5 | P a g e Philosophical Business Models hypertext, also put the word hyper into capitalism. For example Yahoo, started by Stanford graduate Jerry Yang, soon reached a market cap five times that of its brick-and-mortar media counterpart Gannett. Silicon Valley’s start-up venture capital broker, Garage.com, best exemplified the zeitgeist of this era. Its Boot Camp for Start-Ups seminar ad in the technology magazine Red Herring barked out the built-to-flip mantra succinctly: “Got an idea—kick butt, cash out.” It was all very intoxicating. So much so that private investors, once serviced by the traditional VCs, emerged once again. This time these private investors called themselves angels and organized themselves into clubs. The Big Hangover Notwithstanding that the built-to-flip bubble burst in 2001, there still remains a cultural hangover. Often called the Silicon Valley model, the angel investors and the modern venture capital culture is responsible for much of what makes America’s new ventureplex tick. Today there are more than 300 angel clubs in America. There are a reported 400,000 active angels, and they invest in approximately 50,000 companies per year pouring over $24 billion in the new-venture field of dreams.4 By comparison the venture capital industry, which has grown to over 1,000 firms, in a typical year accounts for 3,000 fundings and only 800 are start-up rounds.5 Every time a Google, Skype, or YouTube home run hits the headlines the angel and modern venture capital portfolio strategy of two home runs out of ten is justified and reinforced.