5 lessons I learned from Américo Amorim

Some lessons I learned by working with Américo Amorim:

1. Never rely on anyone. You should not depend on a single supplier, bank, or person. If you offer someone the chance to influence your actions, you are effectively exposing yourself and this will become a source of weakness sooner or later. We live and work in a market economy, you should only depend on the system. Use the system to your own advantage;
2. Walk the talk. Working in a company (or a bank) is a choice and a lifestyle. Some chose to become an artist, a politician or a civil servant – you made your own choice. You will meet people from all walks of life: understand what they expect from you and walk the talk;
3. It is often physical. No-one ever seriously developed a business just by sitting in an office. If you work in an industrial company, you need to talk with people on the shop floor. If you sell a service, you need to meet your clients. Travel if you need to. Spreadsheets are good, being on the ground is absolutely fundamental;
4. Keep your promises, and ask others to keep their own. While some people are good at delivering on what they promised, most are not. Remember what you were promised and demand it. Conversely, you should make a real effort to honour your promises;
5. Talk with everyone – including politicians. While you may have your own political views, you cannot afford to alienate a group of people based on their political views, as you may need their support further down the road. This is more tricky to carry out than you might think, since you should make yourself scarce at the same time. Find that balance.

An obvious disruptive innovation case: razor blades [hack]

If I am not mistaken, Gillette razor blades just increased in price again. A pack of 6 blades now costs around 14 euros. Aside from the obvious implication (switched to supermarket brands long ago) I now believe that Gillette razor blades are now one of the most obvious case of disruptive innovation waiting to happen.

Anyone looking at a pack of Gillette razor blades reaches a quick conclusion: 6 blades are not worth that price. There is the patent and the R&D that went into the design. Mach 3 blades are better than the competition – but that does not mean that people will be willing to pay the premium.

Gillette was acquired by Procter & Gamble for $57 billion about 7 years ago. Their marketing budgets must be substantial and feature football and tennis stars. Meanwhile, DollarShaveClub.com in the US will post blades to your door for as low as $1 per month. How can they achieve such low prices? Blades are manufactured in Asia and sold online.

Supermarkets (at least here in Portugal) have launched their own brands, including LIDL, the German discount chain. I use the LIDL system (as well as other “white brand” alternatives) and my conclusion is that, while not offering the same quality, the result is acceptable (at least to my standards!)

Here is my forecast: supermarkets will continue to push lower-priced blades as they have in the past and will gradually improve their systems to match Gillette’s quality. While the marketing budgets will allow P&G to defend Gillette’s market share for some time, the position will become unsustainable. Razor blades are another product where the combination of economic crisis and disruptive innovation will dislodge the incumbent. I am curious to find out how long P&G can hold their ground.

More generally, every management team should consider whether their product is, in fact, the next Gillette.

[Updated Apr ’12 by Hugo Mendes Domingos]

Venture Capital investment during downturns [hack]

I this post, I analyse some of the reasons why both Corporate Venture Capital and private Venture Capital investment continues to make sense during a downturn.

I was in San Diego back in 2009 to visit a start-up IT company called HealthFusion. The CEO told me about a new tablet that was being developed by Apple and how it would change the technology and healthcare world. His aim was to develop healthcare software for the iPad, his major priority at the time. Are you sure, I asked… Tablets have been around for years. He was sure, and he was right. Most importantly, he was right before everybody else. This was a company backed by Corporate Venture Capital and a privately-run VC fund.

What is behind California’s entrepreneurial spirit? What leads a large number of people on the West Coast to invest their time and energy in start-up companies? Some argue that Hollywood’s influence, that of a highly competitive, creative and innovative industry, has created a positive spill-over effect in California. Others point to Californian universities, that create a large pool of talent. Whatever the causes, the combination of venture capital funds and technology firms in California have created a number of clusters which produce recurring growth and profitability. Which takes us to the subject Corporate Venture Capital and privately run VC funds.

What can we learn from the venture capital funds behind successful technology companies? What makes these funds so resilient?

Why do those venture capital guys keep getting it right?!?

For years, venture capital funds have studied and sponsored disruptive innovation, with good results: after emerging in the middle of the twentieth century, venture capital investing has grown to the stage where venture-backed companies correspond to over 20% of US GDP today.

Larger firms have tried to emulate this success by organising their own Corporate Venture Capital funds. While this appears to make good sense, if we recall the mad times before the dot.com bubble burst in 2000, Corporate VC investments start to lose their appeal. In the late ’90s, Corporate Venture Capital was all the rage. Yet nearly one-third of the companies investing corporate funds in start-ups in September 2000 has stopped making such investments 12 months later. It is unclear, at least to me, whether a similar decline in Corporate Venture Capital activity has happened after the 2008 crisis. There is however evidence that Corporate Venture Capital continues to play a major role in the healthcare industry, at least in the US. The chart below (which was taken from a Forbes article) illustrates the substantial funds that can be deployed at present, by the main corporates investing in healthcare start-ups – north of US$2.5 billion:

Corporate Venture Capital continues to play a major role in healthcare

In any case, it also appears that venture capital investment run by private funds continues to make sense during downturns and may actually be a less volatile and ultimately safer form of investment. Why are privately run venture capital funds better positioned to handle change and adversity than most organisations?

Private venture capital funds are typically small places. This gives them an advantage over larger corporations: the ability to take risks and move quickly. While consensus and alignment can be difficult to reach in large firms, privately run venture capital firms benefit from being flat and nimble, with the ability to deploy capital fast. Even the largest VCs only have a few dozen investment professionals. What determines the VC’s profitability is the ability of these people to spot disruptive investment opportunities.By contrast, Corporate Venture Capital organisations still need to run their investment decisions past internal and sometimes external stakeholders. This could result in a comparative disadvantage in situations when a target company is growing fast and needs capital to carry out a decisive strategic move.

Investment professionals working in a private venture capital fund are usually involved in the management of portfolio companies. The fund’s strategy is tied to the strategy and success of its portfolio companies. This also means that investment professionals usually have the sufficient authority to make decisions, which may not always be the case in larger organisations.

For larger firms, investing in new technology and developing internal competencies makes sense even during a downturn. Yet, due to the internal dynamics of larger organisations, new investments are often seen as too risky in tough times. This is a dangerous path, as any company that closes the door to innovation may find out too late that it lacks the competencies to achieve profitable growth further down the road. The more optimistic companies that continue to invest in Corporate Venture Capital even in difficult times may be better positioned for future growth than their more risk averse competitors.

[Updated Apr 2012 by Hugo Mendes Domingos]

Patent trolls and Apple’s acquisition of Nortel’s patent portfolio [hack]

There is much to be said about Apple’s acquisition of Nortel‘s patent portfolio. The deal size is impressive, keeping in mind that these are intangible assets.

This deal is proof that a company that fails to bring the results of its R&D activity to market  will face difficulties. Nortel filed for bankruptcy while sitting on a huge and valuable portfolio of patents. Innovation is about bringing new products and services to market and not (only) about filing patents.

Seen from the outside, this looks like a defensive move from Apple. Defensive action knowing that patent trolls were participating in the auction. The term “patent troll” designates acquisition funds and companies that focus on acquiring patents and then suing other companies that use those patents without paying royalties.

Are patent trolls a barrier to innovation or an incentive? There’s plenty of debate on this issue. It appears that Apple could not afford to see these patents fall into the “wrong hands”. There were two patent trolls in the auction according to the press, among them Intellectual Ventures.

This deal also shows the importance of access to competitors’ assets (in this case, intangible assets) developed by other companies. This is especially the case for technology companies. Innovation is not about a lone genius coming up with an idea but more like a collective effort, that involves various companies and experts working together to deliver a novel product or service.

The acquisition illustrates the central role that patents play in a technology company’s development as well as their enduring value.

Why Portugal needs a more effective innovation policy [hack]

There have been many accusations during the electoral campaign, focusing on the current Government’s mismanagement of the economy. Rather than pointing out what has gone wrong in the last years (and a lot has in fact gone wrong) it’s interesting to consider what would be some options available to the next Government to promote innovation and foster economic growth.

As far as Government-owned companies are concerned, the first and more basic means of promoting innovation would be to halt systematic losses and the accumulation of debt on balance sheets. Any company which turns in a loss year after year will almost certainly not embrace innovation. This is particularly the case for loss-making Government-owned companies. Management is usually too busy managing interest payments and running day-to-day activities to even think about improvements.

Aside from avoiding systematic losses in Government-owned companies, what else could be done? PSD, which is leading in the polls, wants to attract private equity investment, provide fiscal advantages to innovative companies and improve the links between universities and companies.

PS’s manifesto also mentions the link between universities and companies as one of the ways it will seek to promote innovation. But it does not seem to show a link between finance and innovation – rather the link appears to be between science and innovation.

One of the main reasons for the lack of innovation in the Portuguese economy is the low-level of education. This should be tackled however any improvements will not be felt for a long time. Which mechanisms could be used to achieve results more quickly?

One of the most promising areas of development is related to capital goods and it could result in fast improvements. Countries such as Germany have developed a proven ability in capital goods. This has various economic benefits: not only do capital goods producers innovate by themselves, but the machines produced are then used by clients to boost productivity, creating yet another layer of innovation. The development of  the capital goods industry would certainly bring benefits to the economy. This view has been supported by the Innovation Agency (AdI).
Another option would be to reconsider business models to meet the needs of emerging markets – which is a different subject, to be developed in another post.

Why Portugal needs an effective innovation policy [hack]

Any Government would be in favour of improving a country’s productivity. Improving productivity is the key to economic growth and development. But productivity itself a result, not something that you can act on. Sadly, Portugal’s new Government will not be able to push a button and improve productivity.
The country may blame its politicians, the IMF or the EU for the current crisis but the real cause seems to lie elsewhere. Innovation, technology and entrepreneurship are the real factors behind productivity improvements.

Innovation is not a theoretical concept. It’s about responding to novel customer needs, using new technology to improve a product line – it’s also common practice in many companies globally. The progressive decadence of some (or most) companies in Europe is related to their lack of innovation. Portugal is part of a trend, not an outlier.Technology-based businesses are rare in Portugal. Most companies are SMEs which offer low added value services or commodity products.

From my experience, I believe (although I have no quantitative data to back it up) that Portuguese companies are good at controlling costs. Cost cutting is a good principle in itself but will only get you that far when you are trying to enter into new markets or facing new customer needs. A company that thrives only be cutting costs will face a difficulty sooner or later when its markets change or when emerging economies start producing the same products at an even lower cost.

There are of course alternatives and solutions to foster innovation and increase productivity.

One of the first practical reforms which the new Government could undertake would be to restructure InovCapital, the state-owned venture capital fund. InovCapital has invested over 130 million Euros in the past years. The fund takes minority positions and has over 150 companies in its portfolio – there could be more as the exact number is not known.

One of the first odd facts about InovCapital is its investment policy in terms of sectors. A number of its investments are in industries such as textiles and the production of footwear. These are in general low added value industries which are under pressure from emerging markets competitors. Innovation takes many forms and there are innovative companies in mature industries. However, should textiles and footwear constitute investment priorities?

Seen from the outside, InovCapital’s structure hardly seems appropriate to its mission. It has about a dozen “analysts” and a five-man Board. That’s more than 15 companies per analyst. In fact, none of the analysts seem to be involved in the management of portfolio companies. Can anyone even understand and control 15 businesses without any support? I would say that InovCapital’s contribution to the development of its portfolio companies is probably limited.

So we have a Government-sponsored fund making equity investments into a large number of companies and then making limited contributions to their development… That sounds like subsidies. It would seem that InovCapital “invests” about 1 million Euros per company. This is a small amount in terms of supporting any company in its development.

One of the fund’s priorities should be to improve its investment policy: it should be more focused in terms of sectors, which would develop its own internal competencies and sector knowledge.

InovCapital should also consider making fewer bets of a larger size. This would improve the chances of the portfolio companies and would enable the fund to bring some value to the table and take part in portfolio company development.

InovCapital does not release any real information to the press about its investments. This opacity extends to its financial statements and the returns from its investments. Some of InovCapital’s projects are in fact innovative, for instance its investment into Principal Power and Vestas’ offshore test wind turbine off the coast of Portugal. However, no-one knows about the investments as the details are rarely disclosed.
In fact, one can question whether a Government-sponsored venture capital fund should exist at all.

Is it naïve to think that companies invest in breakthrough products? It would seem that, in the majority of cases, companies spend R&D money to enhance their product line. Most breakthrough products are developed by stand-alone entrepreneurs, as part of University research programmes or using funding from non-profit organisations. Clayton Christensen has the full explanation in his book “The Innovator’s Dilemma“.

From this perspective, Government should be funding Universities and non-profit organisations to foster innovation. This could be more productive than throwing disguised subsidies at companies that operate in traditional sectors with a history of low productivity.