Reduced-Risk Innovation for CEOs
13 July 2006 David G Rose
Are lone entrepreneurs and small companies really the only ones willing to risk radical innovation? Does a company become more risk-averse the larger it gets? David G Rose, CEO of DCXWorld.com believes he has the answers.
An article in the March 9, 2006 edition of The Economist quotes Frederick Scherer, professor emeritus at Harvard, as saying that a rare few innovations represent original breakthroughs, such as the incandescent lamp, alternating electric current or the jet engine.
All of the above, according to Scherer, were introduced not by the regimented R&D of established corporations but by scrappy new firms, twin-born with the invention itself.
The article, Searching for the Invisible Man, focused on the role of entrepreneurs and innovators in the wider economy. It ventures that most breakthroughs come from them - the offspring of independent minds, not incumbent companies.
Two explanations are offered for this. First - radical innovation is the only kind lone entrepreneurs can do and second - they are the only ones who want to do it.
BALANCING RISK AND REWARD
The latter reason can be easily expanded upon. The CEO of any established company has to balance the risk of taking a product from concept to prototype against the risk-averse instincts of his shareholders. There is probably a law somewhere stating that the larger a company becomes, the more risk-averse it gets.
Any larger publishing house will tell you that it prefers to identify 'kitchen table' titles to acquire, rather than risk its own money on new title launches. They let the publishing entrepreneur take the initial risk, and are happy to reward him through acquisition when the title can make a positive contribution to their balance sheet.
A law that applies to every CEO is 'information is king'. The hackneyed analogy is that being without information is like being a ship without a compass and, by and large, no one can disagree with it.
But there is another law that has something to do with the size of the ship. And the law is that the larger the tonnage the more difficulty it has avoiding obstacles in its path. The Titanic comes to mind.
Nowadays of course, icebergs do not take down ships because those ships have radar. Even the tiniest obstacles show up miles ahead and can easily be avoided. But can the same be said for most large companies?
CEOs acquire their information through the mass media along with Reuters, Bloomberg, AP, trade publications and any number of other sources that the company may care to subscribe to.
Invariably, the information provided is broad-based and focused exclusively on major corporate activity, with those innovators on the periphery consistently overlooked.
This is quite simply because it is easier for those in the media to process information from the PR industry and press departments of major corporates, because the infrastructure is now immovably established and inflexible.
Consequently the same information is presented to you in many processed, regurgitated forms. In short, you get the same information that everybody else gets, and what's the point of that?
FINGER ON THE PULSE
IBM was badly holed in the 1980s, taking almost a decade to refloat and set off on a different course. Marconi has become a navigation hazard and Cable & Wireless is now a few tramp steamers compared to the global bulk carrier fleet it once was.
We can blame their CEO's, the non-execs, the shareholders or anyone else we care to think of. But the reality is that in every instance these examples, and many more besides, succumbed to technologies of which they were sublimely ignorant, or did not appreciate the full potential of.
Those technologies did not come from other major corporates (otherwise they would have known about them) but from small companies innovating away at the grass roots of their markets.
But, in the UK alone, there are 1.8 million private companies, from any one of which could come the next 'big thing'. How do you identify the ones that could affect your responsibilities to your company, employees and shareholders?
Fortunately, there is one common trait amongst innovators which works in favour of corporations who want to stay ahead of the game, or take a slice of up-coming action. They are always under-capitalised with current assets committed to the hilt against debt funding. They are invariably capital-starved.
BRIDGING THE INFORMATION GAP
However, more and more of these innovators are turning to the Development Capital Exchange (DCX) in order to find early-stage or growth equity funding.
DCX provides the information bridge between fund-seeking enterprises and innovators, quality controlled by DCX Associates (corporate finance boutiques and other professional advisors) and their prospective investors.
These are predominantly individuals who are directors and CEOs of their own successful and established companies who wish to seek out further wealth-creating opportunities. However, many of the deals struck involve as much business assets such as marketing, R&D, financial control and production, as actual capital.
Indeed, the innovators themselves prefer to develop their product or service through a strategic alliance, which the CEO can view as corporate venturing, because it allows them to keep hold of much more of their 'sweat equity'.
Where the transaction is purely capital based they invariably, and reluctantly, have to give up more equity than they wish which leads to relationship problems down the road, no matter how tight the agreement.
Since HM Treasury introduced amendments to the Financial Services and Markets Act 2000, the UK early-stage investment market has seen a rapid surge in activity, with participants from further afield including China, the USA and Australia now taking notice.
DCX itself is merely the information medium, described by BBC Breakfast News as 'the Reuters or Bloomberg for entrepreneurs'.
The amendments effectively mean that if an investor can self-certify as a 'high net worth individual' or 'sophisticated investor', the latter of which would apply to most CEOs or directors of larger corporates, they can now have open access to early-stage investment and innovation opportunities.
Over the past year investor numbers have leapt from a few hundred to over 3,000, mostly successful entrepreneurs who are now CEOs of their own established companies.
The database of opportunities, posted by more than 100 DCX Associates, has grown to over 1,000. Investors receive an emailed alert the instant an opportunity matching their preferences is posted on the Exchange. They then respond directly to the DCX Associate who posted the opportunity with no further involvement from DCX.
CHOICE OF INVESTMENTS
The size and diversity of opportunities are also growing. A company seeking £200,000 wants to exploit marketing opportunities for a GPS-based personal safety system, for which there is particular demand in high-risk regions around the world.
An online community service with global potential needs £175,000 to develop its established subscriber base, and has already hired key people from 'Friends Reunited' to help groom the company for a trade sale within three years.
At the other end of the scale a China-based company with offices in Silicon Valley, along with an established customer base in China and the USA, is looking for a partner with whom they can develop the next generation of Skype-style VOIP global communications systems. They have already developed the core technology and now need a telecoms or IT partner with $15 million to invest with whom they can bring the product to the global market.
KEEPING UP TO DATE
As DCX gathers momentum, more and more business leaders are subscribing to the channel, through which they can keep their finger on the pulse of developments and innovations at the grass roots of their markets.
It is a means through which these innovations can be 'sucked' out of the impoverished environment in which they are invariably conceived, to be nurtured and launched with the resources that only an established corporate can provide.
Happy corporate CEOs creating happy innovators. Are we heading towards the perfect world?