The entrepreneur in us sees opportunities everywhere we look, but many people see only problems everywhere they look. The entrepreneur in us is more concerned with discriminating between opportunities than he or she is with failing to see the opportunities - Michael Gerber, author, entrepreneur
This year I participated, in an innovative project as we prepared for review by an internal leadership team. As of this writing, the project is not approved, but the financials are very strong and the technology is very low risk. By the time the project is reviewed by the board later this year, my firm will have spent nearly 18 months, hundreds of man-hours, and tens of thousands of dollars. Yet the work product produced is merely a document and an idea. There is no code and no proof of concept.
The procedure is at best a difficult process; at its’ worst an impossible process. There should be little doubt that the net effect of the process is to inhibit growth through innovation. It is, in fact, a barrier to entry for teams with go-to-market ideas.
Industry is full of companies with high profile examples of innovation. Firms like Google, Pixar, GE, and Apple show that a culture of innovation can bring success. This paper describes how any firm can evolve into a venture driven company that empowers employees with an entrepreneurial spirit.
The goal is plain and simple: achieve explosive growth through a culture of innovation.
To foster this culture, I suggest a model based on capital markets for startup companies. There are three aspects to this proposal:
- The corporation acts as a Hedge Fund by allocating funds for investment and measuring aggregate results;
- Senior executives function as Venture Capitalists by soliciting ideas and managing a portfolio of investments; and
- Employees become the Entrepreneurs championing their ideas and finding resources to execute a project.
The critical ingredient is getting off your butt and doing something. It's as simple as that. A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer, not a dreamer - Nolan Bushnell, founder of Atari and Chuck E. Cheese's
The Hedge Fund
A hedge fund is a private investment fund whose managers can make speculative investment and participate in profits from money invested. The company can function much like a hedge fund by structuring projects as a portfolio of investments. The managers of the “hedge fund” are the executives who normally vet within for the company.
The corporation, then, decides how much to invest in the fund. Each year these funds are set aside for innovation and it becomes the responsibility of the hedge fund managers to assure the funds are invested, and that the portfolio achieves an appropriate return.
As the Hedge Fund, the company would:
- Invest in the fund by allocating monies for innovation. An investment to the innovation fund each year;
- Appoint executives to function as the Venture Capitalists;
- Set an ROI threshold for the fund
Taking Risk
I have not failed. I've just found 10,000 ways that won't work - Thomas Edison, inventor and scientist
A great percentage of start-ups fail. Hedge funds that specialize in innovation spread their investments over a wide range of projects with the understanding that a small number of winners will earn a return for the entire portfolio. Risky projects will be an integral part of the firm’s portfolio.
Like true VC hedge funds, the firm can mitigate risk by funding projects that already have some track record of success. This track record could be a successful competitor, a custom built technology, or a joint venture with a client.
Exit Strategies
Unlike the holdings in venture capital hedge funds, the company’s investments generally do not end with a liquidity event (sale of the company or IPO).Instead successful investments will result in product lines or business that generate revenue and profit. Less successful projects are absorbed into existing businesses or closed outright.
It should be noted that there is the possibility of a liquidity event. Although these may be rare, some projects could be spun off as independent companies. In such cases the firm would act as a private equity fund, holding a stake in the company until an appropriate liquidity event occurs.
Venture Capitalists
Since one fails often, address markets that make it worthwhile when one does succeed. Vinod Khosla, co-founder of Sun Microsystems
Executives that normally vet for capital investment will serve as the venture capitalists in this model. As VC, each executive is expected to oversee a portfolio of projects and to assure that their funds are invested. Each VC would have a specialty where they would focus their investments. It would be expected, though, that they would invest outside their area on occasion.
The VC has four primary roles:
- Invest a share of the fund in projects of their choosing;
- Provide oversight of the projects in their portfolio;
- Mentor the entrepreneurs assigned to the projects in their portfolio; and
- Arrange exit strategies for their projects.
Key to the success of the hedge fund is the oversight and mentoring role of the VC. Unlike an “approve-and-forget” capital investment model, VCs of the hedge fund share responsibility for the success of their portfolio. This oversight keeps entrepreneurs accountable to accomplish milestones and meet their financial goals.
VCs solicit, review, and select projects based on the business plan from the entrepreneur. The VCs is empowered and required to invest his share of the fund. VCs will be expected to accomplish the appropriate due diligence, but being empowered will make the decision process move quickly. With empowerment comes accountability, and the VC will be expected to make rational decisions based on standard venture criteria such as, experience of management, amount of existing business, size of the market, first-in status, and the competitive landscape.
Like true VCs, the managers in the firm’s hedge fund will collaborate on some projects. Some of the VCs will assume an “angle investor” role by making small investments in a large set of projects in their early stages. As angle projects progress, the VC may decide to invest additional rounds of financing. Also, several VCs may invest together in a project, thereby sharing the risk, or implementing a large scale innovation.
VCs shall participate is the financial success of their portfolio. A bonus would be paid based on the success of the projects in the portfolio.
I never perfected an invention that I did not think about in terms of the service it might give others... I find out what the world needs, then I proceed to invent -Thomas Edison, inventor and scientist
Intrapreneurs
Some people dream of great accomplishments, while others stay awake and do them – Anonymous
Entrepreneur : one who organizes, manages, and assumes the risks of a business or enterprise.
Intrapreneur : one who organizes, manages, and assumes the risks of an idea within a business or enterprise.
The entrepreneurs are the employees that champion an idea (intrapreneur is a term made up for this white paper). Entrepreneurs are passionate about an idea, and work to see it through to its completion. This includes building prototypes, writing business plans, seeking funding from VCs, and managing the project day-to-day.
Much of the motivation and reward of these employees is intrinsic and non-financial. This includes the excitement of working on a new and innovative idea. In addition, once funding is approved, the employee will have effectively transferred into a new position with the company. Like the VC, however, the entrepreneur will be rewarded based on the financial success of the project or its exit strategy.
The entrepreneur has the following roles:
- Develop a business plan;
- Seek and obtain funding from the company VCs;
- Build prototypes and proof-of-concepts for the project;
- Obtain resources needed to complete the project;
- Manage the project, day-to-day; and
- Report progress and financial results to the VC
It should be expected that projects are present by a team of employees. In these cases, one member of the team shall be designated as the entrepreneur. It is likely that the entrepreneurs are employees that already hold management or leadership positions (but that are not a requirement).
Mitigating Personal Risk
Entrepreneurs assume a great deal of personal risk with regard to the security of their career. Although positions cannot be held open for the entrepreneur pending completion of their project, the corporation should guarantee that a position will be made available regardless of the success or failure of the project. Truly motivated entrepreneurs, however, do not consider failure, and will pursue the idea under the assumption of success.
The Business Plan
Entrepreneurs must submit a business plan to obtain funding for their projects. Business plans should follow common standards for start-up plans. At a minimum, a business plan shall include:
- Description of the Idea;
- Marketing Plan;
- List of existing customers
- List of target customers
- Size of the market
- Pricing
- Competitive Analysis
- List of competitors
- Advantages and Disadvantages
- Operational Plan
- Management Team
- Personnel
- Technology
- Financial Plan
- Start-up Expenses
- 3 Year Pro-Forma
Advantages of the Hedge Fund Model
This approach to funding invention, and building a culture of innovation has distinct advantages over my company’s current model.
- The current procedure in of itself is an expensive and labor intense process. It requires multiple stages of presentation and approval. The current process is self-regulating, scaring away employees that are intimidated by the process regardless of the quality of their idea.
- An innovation provides a method of easily submitting an idea, but except for quick rejections, it routes ideas through the same burdensome approval process.
- The hedge fund model is simple; write a business plan and present it to a VC.
- Our current procedure is slow. It will be very difficult to have first-in status if seeking funding through the current process. Real-time Fraud and Abuse, for example, has been in-process for months.
- The hedge fund model is fast.
- Where our current procedure is focused on preparation and planning during the approval process, hedge fund is focused on execution of the idea.
- Hedge fund rewards entrepreneurs and VCs for taking risk and accomplishing goals.
- Hedge fund provides a tangible portfolio of innovation and R&D.
- Hedge fund is based on tried and true practices of bring an idea to market.
Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover -Mark Twain, author
