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)

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T

Philosophical Business Models

he previous chapter offered a comprehensive framework for identifying

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.

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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.

Venture Way Visionary Way

Lifestyle Way

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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

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& 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

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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.

Today the American angel and venture capital segments have more clubs and

modern VCs than they do old guard private investors and VC firms. For our

purpose going forward the Venture Way will refer to the policies and practices

of the swelling angel and modern VC market.

The Venture Way

There is no shortage of books and curriculum about how to access angel

and modern venture capital financing. Our task is not to repeat the fine material

on the subject. Our job is to provide a general framework about the unwritten

policies and practices that drive these modern-day investors. Sometimes these

policies and practices are explicitly published by angels and VCs. More often the

following policies and practices are implicit and unpublished. Regardless, these

policies and practices shape the way any new venture launches if its investors

are angels or modern VCs. Figure 34 shows the eight policies and practices

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that make up the philosophy of the Venture Way model.

These eight policies and practices suggest that the Venture Way is very

• Charismatic leaders with great track records1

• Big and fast-moving market2

• Blockbuster first product3

• Growth-stock not value-stock-based companies

• Deliberate execution to plan

• Fast to IPO or sale4

• Replace key executives quickly if benchmarks are missed

• If the idea is not working, kill the company quickly

1 Older or newer VCs expect a technology founder and a business or

marketing founder.

2 Older larger VC firms want market size to be 500 million plus. Newer smaller VC firms accept market size to be 200 million plus.

3 Any VC wants market share to be at least 25%.

4 Older larger VC firms want $100 to $300 million revenue stream within five

years and IPO exit. Newer smaller VC firms accept $60 to $80 million revenue stream within five years and sale or IPO exit.

Figure 34. Modern Venture Capital Policies and Practices

much a project- or one-product-based business-building experience. Venture

Way businesses are short term and have to take advantage of immediate

opportunities. They are deliberate planning and execution-based attempts to

start, finance, and exit quickly after exploiting one idea. Industry transformation

is of little concern to management and the investors. The entire justification for

the business rests on financial success (this is neither right nor wrong—it just is).

Predicting success is largely done by assessing current category circumstances.

Most assumptions about the future have to be verifiable up front. Patience by

investors is in short supply. Jim O’Connor, Director of Motorola’s Intellectual

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Property Incubation and Commercialization since 2003 and former head of

Motorola’s venture fund, describes the philosophy underlying Venture Way

businesses the best: “if an idea is not working, kill it.”

In sharp contrast with the Venture Way framework is our second philosophical

business model—the Visionary Way.

VISIONARY WAY BUSINESSES Visionary Way businesses get their name and traits compliments of the

research undertaken by the following academicians:

Authors Titles

Jerry Porras and Jim Collins Built to Last

Amar Bhidé The Origin and Evolution of New

Businesses

Jim Collins Good to Great

These three studies have the following similarities:

• University centered—Stanford, Harvard, and Colorado

• Led by professors widely respected in business research

• Supported by research staffs

• Took over five years to complete

• Resulted in best-selling business books

• Appeared on the covers of popular business magazines

Two of these studies, Built to Last and Good to Great, examined the success

traits of public companies that have persevered and profited over many years

and through many industry cycles. The third study, The Origin and Evolution of

New Businesses, put 100 of America’s fastest growing private companies under

the microscope, from their launch through their tenth year. Over 50% of these

companies were in the teleco, computer, and medical industries—typical venture

capital sectors. The average company on the Inc. Fast 500 list had revenues of

$15 million, 135 employees, and a five-year sales growth of 1,407% or 281% per

year. The companies researched were not all technology companies. However,

enough of them were.

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Rates of Returns and Other Key Findings

When aggregated as a group, the eleven companies that finally made the

study group in the Good to Great research (starting with 1,435 companies)

achieved a 6.8 times greater annual return than venture capital industry or

general market as a whole during the same time period.

When aggregated as a group, the eighteen companies that became the top

half of the total thirty-six companies studied in the Built to Last research

achieved a fifteen times greater annual return than the venture capital industry

and general market as a whole during the same time period.

Since all 100 companies selected in Harvard’s Inc. Fast 500 study were

private companies, available rates of return on investor equity were not available.

However, these interesting facts were discovered:

• Average sales growth over ten years was 281% per year.

• Only 4% of the 100 companies were venture capital backed.

• Only 3% of the 100 companies were angel backed.

• Only 10% of the 100 companies had a unique first product.

• The founders were not industry luminaries.

• All 100 companies were profitable in the first twelve months.

• Founders were still on board after ten years.

Shattering the Myths

The research suggests that Venture Way and Visionary Way business building

share little in common. Table 9 makes this clear.

The Visionary Way

Unlike the Venture Way’s body of best practices, which is deep and wide,

the Visionary Way is not pervasive—but it is impressive. In 2003, I synthesized

the three research studies and developed the framework for the Visionary Way.

This framework is a set of five disciplines. As such the Visionary Way is in reality

a body of principles and practices that must be studied and mastered to be put

into practice. As Peter Senge notes, “Practicing a ‘discipline’ means to be a

lifelong learner. You spend your life mastering disciplines, you never arrive.”6

As with any discipline, the aim is to develop traits, skills, and competencies

that result in habitual behavior of excellence. The good news about disciplines

is they can be learned and practiced. Collins and Porras from Built to Last

remind us:

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Table 9

The Differences Between Venture Way and Visionary Way Business Building

Venture Way Visionary Way Study

Charismatic leaders with

great track records

Average people with

very little track records

Built to Last

Good to Great

Inc. Fast 500*

Big and fast-moving

market

Big market—not fast

moving but turbulent

Built to Last

Good to Great

Inc. Fast 500*

Blockbuster first product

90% started with

mundane service

Built to Last

Good to Great

Inc. Fast 500*

Growth stocks (5X–10X

returns expected but

rarely attained. Industry

averages about 15%

annual returns.)

Growth stocks

and value stocks

(Companies studied

averaged 6X–15X

greater annual return

than the VC industry

achieves.)

Built to Last

Good to Great

Deliberate execution to

plan

Emergent execution for

discovery and learning

Built to Last

Good to Great

Inc. Fast 500*

Fast to IPO or sale

Slow to IPO and no sale

Built to Last

Good to Great

Inc. Fast 500*

Replace key executives

quickly if benchmarks are

missed.

90% of founders still

with company after ten,

twenty, thirty years.

Built to Last

Good to Great

Inc. Fast 500*

If the idea is not working,

kill the company quickly.

If first idea not working,

try another idea.

Built to Last

Good to Great

Inc. Fast 500*

*67% of the companies started with less than $50,000 in capital.

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The lessons of these visionary companies can be learned and

applied by the vast majority of managers at all levels. Gone

forever—at least in our eyes—is the debilitating perspective that

the trajectory of a company depends on whether it is led by

people ordained with rare and mysterious qualities that cannot

be learned by others. You can learn them. You can apply them.

You can build a visionary company.7

Peter Senge puts it this way:

As with any discipline, from playing the piano to electrical

engineering, some people have an innate “gift,” but anyone can

develop proficiency through practice.8

These five disciplines of the Visionary Way are very personal, yet very

organizational as well. They have to do with how the design team thinks, what

it really wants, and how it wants to interact in its market. These disciplines offer

learning-organization enthusiasts a platform to meet their quest for high-growth

business building. Here is how Peter Senge describes this hope.

Moreover, while accounting is good for “keeping score,” we have

never approached the subtler tasks of building organizations,

of enhancing their capabilities for innovation and creativity, of

creating strategy and designing policy and structure through

assimilating new disciplines. Perhaps this is why, all too often,

great organizations are fleeting, enjoying their moment in the

sun, then passing quietly back to the ranks of the mediocre.9

The five disciplines shown in figure 35 are the heart and soul of what it takes

to become and see as a Visionary Way company. The five disciplines establish

the context for everything an investor wants to know about your company.

These disciplines are a design team’s most sacred and serious promises to its

stakeholders.

Due to length of book concerns, only a summary of each discipline will be

provided. For a detailed explanation of the Visionary Way see www.mysuperlab.

com and download the white paper titled, The Visionary Way.

Discipline 1—Tier 2 Leadership

Arthur Rock, the famous venture investor in Apple Computers, Fairchild

Semiconductor, Intel, and others, is often quoted as follows:

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Figure 36. Level 5 Leadership Model

Philosophical Business Models

Figure 35. Visionary Way Disciplines

Every mistake I have made has been picking the wrong people,

not the wrong idea . . . a great idea in the wrong hands is

doomed.10

Keying off Rock’s advice we can say that the founders, since they are the

new venture’s first leaders, are very important. Several noteworthy scholars

have advanced frameworks for describing the discipline of leadership. For

example Jim Collins in his Good to Great research described a five-level system

(see www.jimcollins.com). The highest level he described as leaders who were

both humble and fearless. These kinds of leaders also possessed the qualities

of the other four levels. His model is summarized in figure 35.

Level 5: Humble and Fearless Leader

Builds enduring greatness through a paradoxical blend of

humility and fearlessness.

Level 4: Effective Leader

Catalyzes commitment to and vigorous pursuit of a clear

and compelling vision, stimulating higher performance

standards.

Level 3: Competent Manager

Organizes people and resources toward the effective and

efficient pursuit of predetermined objectives.

Level 2: Contributing Team Member

Contributes individual capabilities to the achievement of

group objectives and works effectively with others in a

group setting.

Level 1: Highly Capable Individual

Makes productive contributions through talent, knowledge,

skills, and good work habits.

Tier 2 leadership

Authentic core drivers

Build organization first and products second

Hold two opposed ideas at once and remain

functional

Systematically innovate and transform

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Another scholar that has enjoyed enduring success is the late Claire Graves.

In 1957 he originated his now famous levels of psychological existence or values

systems theory.11 His bio-psycho-social-spiritual framework has been adopted

as a platform in many fields, including memetics. Dr. Grave’s work has been

credited as one of perhaps the three major breakthroughs in approaches to

managing complexity—the other two being systems and chaos theory.12 At the

heart of this framework is the idea that an executive’s value system, belief

structure, and mode of adjustment can be classified into seven levels. The top

two levels are called the Tier 2 levels of integral and holistic values (see www.

spiraldynamics.net).

Collins’s framework embraces the notion that a Level 5 leader also possesses

the qualities of the lower levels. Graves’s system does the same. A Tier 2 leader’s

integral and holistic values and skills spiral out of lower-level qualities. Both

Collins and Graves agree on the idea that one does not jump and skip over a

level. Graves’s model is summarized in figure 37. The models created by Collins

and Graves can be integrated very easily, as illustrated in figure 38.

Collins’s research of over 1,400 major public companies did not reveal many

humble and fearless leaders. Likewise, Graves’s research followers continue their

claim that the population has very few Tier 2 type leaders in our midst. This

should be troubling to anyone keeping up with trends and best practices. The

correlation between Tier 2 leadership qualities and the demands of leading a

knowledge/creation-based company in the twenty-first century is unmistakably

high. One solid example is Google. Experts agree that Brinn and Page’s original

vision “encompassed a more holistic approach to delivering high quality search

results than anyone else had conceived of and executed.”13 Holistic-based

products cannot be invented by nonholistic-based minds. Higher-complex

and higher-order artifacts are not invented by lower-complex and less-ordered

inventors.

Discipline 2—Authentic Core Drivers

In the Good to Great study, Collins discovered that the great companies had

the ability to integrate the following three core drivers.

• Understand what the team is passionate about.

• Understand what the team can be best in the world at.

• Understand what the economic engine has to be for one and two to

be in play.

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Leadership Values and Skills %

Population

%

Power

7. Holistic Leader – Tier 2

Intuitive thinking and cooperative actions are to be

expected. Everything connects to everything through

mind and spirit globally.

.01%

1%

6. Integral Leader – Tier 2

Systemic and objective-based thinking. Everything is

networked and hierarchical in a natural flow. Knowledge

competency supersedes rank, power, and status.

Accomplishment is valued over status and wealth.

1%

5%

5. Communitarian Leader – Tier 1

Relative and collaborative thinking. Everything should

be done by consensus.

10%

15%

4. Science/Drive Achievist Leader – Tier 1

Domain subjective-based thinking. Command and

control to get things done. Status and wealth drive

everything.

30%

50%

3. Authoritative Leader – Tier 1

Righteous and instructive thinking. Command and

control and leader sacrifices—patriotism rewarded.

35%

25%

2. Exploitive Leader – Tier 1

Egocentric thinking of self first. Demands respect and

organizes everything for self-fulfillment.

15%

5%

1. Survivalist Leader – Tier 1

Instinctual thinking. Fight to save own skin. 10% 1%

Figure 37. Tier 2 Leadership Model

Figure 38. Tier 2 Leadership

Humble

Holistic

Integral

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New-Venture Teams Understanding Their Passion

Mort Meyerson, former CEO of EDS, believes that “the essence of leadership

today is to make sure that the organization knows itself.” People doing what

they love can be exciting to be with and watch. As Stanley Davis says in his book,

Future Perfect, “They lead organizations from this context of ‘doing what they

love’ and thus, are powerful, because they already have ‘what they want.’ Time

is thus their asset, not their restraint.”14 A riveting example is Dr. Govindappa

Venkataswamy’s Aravind Eye Hospital. This is a hospital Dr. Venkataswamy

started at the age of fifty-seven. Half his clients cannot pay for his services (he

accepts no government grants), and yet Aravind now has five locations and

performs over 200,000 operations each year. Dr. Venkataswamy has said, “we

are not thinking of amassing money as our goal. We always aspired to some

perfection in our lives—of following God.”15

Doing what the design team loves can help ensure that the team sticks

together for the long term. After all, destiny calls for lifetime missions just like

J. Willard Marriott, who passed away on the job; Sam Walton, who opened his

first Wal-Mart twenty years after his first Ben Franklin Five and Dime; David

Packard and Bill Hewlett, who were building HP their entire lives; and Dr.

Robert Beyster of SAIC in San Diego, who at seventy-three was still running

the private company he founded and yet only owned 1.5% of the company’s

stock. Dr. Beyster’s revolutionary employee-first ownership and private-stock

liquidity plans did two things; one, it made a lot of employees rich, and two, it

made himself rich ($23 million estimated value). Dr. Beyster remained CEO

through Tier 2 leadership, not through ownership control. Contrast this with

the built-to-flip leadership culture that generally looks forward to cashing out

in a few years after start up. Visionary companies, on the other hand, never see

an end in sight. Perhaps that is why the CEOs of the visionary companies of

the Built to Last study were at the helm an average of 32.4 years. Ninety-nine

percent of the CEOs of the Harvard Inc. Fast 500 study were still at the helm

ten years and $500 million in sales later.

New-Venture Teams Understanding What They Can Be Best in

the World At

This concept does not say understand what you can be good at in the world.

It says, what you can be best at. Tier 2 leaders are not wrapped up in a selfish

what’s-in-it-for-me package. This drive to be the best is palpable. As Collins

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and Porras described it in their Built to Last study, it is the drive from deep

within. The drive to be the best does not wait for the external world to say, it

is time to change, or it is time to improve, or it is time to invent something

new. No, like the drive inside a great artist or prolific inventor, it is simply there,

pushing outward and onward. You do not create Disneyland, build the 747,

pursue Six Sigma Quality, institute employee stock ownership in the 1980s, or

meet with a store manager on your deathbed because the outside environment

demands it. These things arise out of an inner urge. In a visionary company the

drive to go further, to do better, to create new possibilities needs no external

justification.

This drive is what the Harvard Inc. Fast 500 study determined was the key

differentiation between normal start-ups and exceptional ones. The Harvard

Inc. Fast 500 study found that most entrepreneurs can have a tolerance for

ambiguity when starting a business. However, the same study found that

tolerance for ambiguity was not the same as tolerance for risk, which is necessary

to develop a breakaway business. This is a special and rare quality, and not many

entrepreneurs have it. Boeing, a company in the Built to Last study, has had this

drive to be the best. At least four times in its history, Boeing bet its future and

assets on breakthrough jets. Each time, Boeing defined the commercial aircraft

industry—that’s what the drive to be the best looks like. A passion for being

the best when mixed with the fearlessness of Tier 2 leadership is a stronger

indicator of high growth than a passion for being rich. There are lots of quick

ways to get rich, but few of these lead to great and enduring companies.

New-Venture Teams Understanding Their Economic Engine

Maybe the most significant element of Collins’s Good to Great study is the

fact that great companies do not have to be in strong or fast-moving industries.

Collins discovered that each good-to-great company built a fabulous economic

engine, regardless of the industry. How? Through profound insight into their

economics.

Good-to-great companies had many years to develop their profound insight

into their economic engine. How does the normal start-up with the pressure

of time squeezing in on its limited resources accelerate their understanding?

This is a challenge. Fortunately chapter 4 offers a framework to help us. This

framework is built off production and product system design principles. One

of the principles is called the core-versus-context principle. In a nutshell, the

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s”

principle recognizes that the core components of any production or product

system are those directly responsible for the new venture’s competitive

differentiation and creating customer value. We will defer to chapter 4 for the

full explanation. For now it is enough to know that the new venture has a way

to find the core drivers of its production and product systems—its economic

engine (see figure 39).

Economic Engine

1 2 3

These enable our success provided it’s really us (authentic)

Figure 39. Authentic Core Drivers Model

Discipline 3—Build Organization First and Products

Second

This discipline comes compliments of Jerry Porras and Jim Collins’s Built

to Last study. The essence of this discipline, according to Collins and Porras, is

to “ . . . concentrate primarily on building an organization—building a ticking

clock—rather than on hitting a market just right with a visionary product idea

and riding the growth curve of an attractive product life cycle.” One of the

clearest examples of entrepreneurs practicing this discipline was Bill Hewlett

and Dave Packard, the founders of Hewlett-Packard. Bill Hewlett told Collins

and Porras in an interview, “When I talk to business schools occasionally, the

professor of management is devastated when I say that we did not have any

Company

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plans when we started . . . Here we were, with about $500 in capital, trying

whatever someone thought we might be able to do.”16 Do you think venture

capitalists (traditional or modern) would have found the early Hewlett-Packard

very exciting? I don’t think so. Here is how Collins and Porras describe the

climate:

We had to shift from seeing the company as a vehicle for the

products to seeing the products as a vehicle for the company.

We had to embrace the crucial difference between time telling

and clock building.17

The Inc. Fast 500 Study points out that 90% of the Inc. Fast 500 companies

started without a unique product or idea. Sixty-seven percent started with less

than $50,000 in capital, 21% started with no capital, and only 4% with venture

capital. These companies started in the tradition of Hewlett-Packard by relying

on a fast-to-cash strategy of finding a turbulent niche market where they could

deliver services with a complex-based production system. Nothing exciting,

just good old make-a-buck entrepreneurism.

Discipline 4—Hold Two Opposed Ideas and Remain

Functional

The entrepreneurial generals who launch visionary companies are

schizophrenic. If they’re not, then as Michael Porter, the long regarded king of

competitive strategy, recommends, they need at least to have a working policy

that they’ll try to be schizophrenic. Here is why: Built to Last found that

visionary companies live with seemingly contradictory forces or ideas at the

same time. Here is a list of polarized items that ought to agitate even the most

nimble of entrepreneurs:

• Go slow to go fast

• Short-term profits and long-term high growth

• Competition and cooperation

• Create shareholder wealth and do good for the world

• Idealistic and pragmatic

• Ideological control and operational autonomy

• Adherence to systems and freedom/responsibility

• Incrementalism and breakthroughs

• Careful planning and try lots of stuff

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Here is how Collins and Porras describe the what and how of this discipline:

We’re not talking about mere balance here. Balance implies

going to the midpoint, fifty-fifty, half and half. A visionary

company does not seek balance between short term and long

term. A visionary company does not simply balance between

idealism and profitability; it seeks to be highly idealistic and

highly profitable . . . it does both to an extreme. In short, a

highly visionary company does not want to blend yin and yang;

it aims to be distinctly yin and distinctly yang—both at the same

time, all the time.

Irrational? Rare? Difficult? Absolutely. But, as F. Scott Fitzgerald

pointed out, “The test of a first-rate intelligence is the ability

to hold two opposed ideas in the mind at the same time, and

still retain the ability to function.”18

Visionary Way teams design two scenarios as shown in figure 40.

Figure 40. Two scenarios for Visionary Way

Visionary Way start-ups do not have to play the modern venture capital

game of “how tall is your hockey stick.” Listen to how Geoffrey Moore, one of

high-tech’s favorite consultants, writers, and a venture partner with Mohr

Davidow Ventures, describes this dilemma:

If venture capitalists are the ones with the money, and these

are the rules you follow to get that money, then they (the

entrepreneurs) will be sure to follow the rules. And so

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Philosophical Business Models

entrepreneurs raise capital using “hockey stick” graphs of

revenue attainment. As a form, it is as precise and conventional

as a love sonnet—and just as likely to get one into trouble.

Hockey stick curves are created by spreadsheets; a software

tool that many have argued has driven some of the worst of the

investment decisions of the 1980s. It is so easy to increment a

revenue number by a percentage and just let the software take

it from there.

Revenue numbers, under this methodology, are . . . well,

whatever they have to be. Once that sum is identified, then

market analyst reports are scoured for some appropriate

citations, and any other source of evidence or credibility is

enlisted, to justify what is a fundamentally arbitrary and

unjustifiable projection of revenue growth.19

Fast-to-cash flow has to be the policy of the Visionary Way start-up. Common

sense dictates it and the great companies of Built to Last, Good to Great, and

the Inc. Fast 500 did it. For example, the Inc. Fast 500 study found that 100%

of the companies studied were profitable within twelve months of their start.

Bill O’Brien is an entrepreneur who founded Starlight Communications. This

company became a case study for James F. Moore’s book, The Death of

Competition. He described O’Brien’s use of this fourth Visionary Way discipline

this way:

They started small, because they were eager to get something

up and running quickly (the start-up plan) to get investors

their money back . . . and they believed they had a shot at

establishing a global telephone service company for the wilder

reaches of the planet.20

Discipline 5—Systematically Innovate and Transform

Innovation, transformation, and systemization—now here are three

elephant-size topics. How popular are these topics? If you did not say huge,

you don’t read much. To do any of these topics justice requires a tome all by

itself. What we will do here is just survey these topics within the context of the

Visionary Way. Here are some working definitions, according to Webster:

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• Systematic. Methodical in procedure—marked by thoroughness and

regularity.

• Innovation. To change or make new.

• Transformation. To make deep structure change.

The Systematic Challenge

Everyone has heard the expression “instant success after years of work and

build-up.” The great successes of the companies studied in Good to Great, Built

to Last, and the Inc. Fast 500 were accomplished by a cumulative process. Jim

Collins describes it this way:

A cumulative process—step by step, action by action, decision by

decision, turn by turn of the flywheel—that adds up to sustained

and spectacular results . . . yet, to read media accounts of the

companies, you might draw an entirely different conclusion.

Often, the media does not cover a company until the flywheel

is already turning at a thousand rotations per minute. This

entirely skews our perception of how such transformations

happen, making it seem as if they jumped right to breakthrough

as some sort of an overnight metamorphosis.21

The systematic challenge, then, is to incorporate the flywheel principle into a

way of working that fosters innovation and transformation. Working this systems

way, as Peter Senge, author of the Fifth Discipline, notes, requires a conceptual

framework, a body of knowledge, and tools.

The Innovation Challenge—Cash Flow Now

During the start-up phase of the Visionary Way company, the innovation

challenge is straightforward and simple—find a way to make a buck and fast.

Doing so will be something new for most venture investors—and they will like

it. For emphasis let’s visit venture capitalist Geoffrey Moore again and review

his description of the virtue of the Visionary Way start-up’s innovation agenda

of making a buck fast.

Venture returns come from one and only one source—winning

first place in the Tornado competition—lost in all this rush,

particularly lost on the venture-backed companies was the

wisdom of the old Italian proverb, “Festina lente”—“make

haste slowly”. . . many venture capitalists assume multiple

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Philosophical Business Models

rounds of funding, including some based on successive round

of devaluation, because their funded companies do not make

becoming financially self-sufficient a critical intermediate

milestone. Instead, they make the race for the Tornado the

only milestone. This not only denies them the staging benefits

of a good base camp, it gives them no chance to internalize the

disciplines of profitability, of making their own way in the world

not by magic, but by hard work. When things do go wrong,

when the wheels do come off, as they must in the Tornado,

these firms have little on which to fall back.22

Proving to stakeholders you’re the kind of company that will hit a home run

begins by proving to them you know how to get on first base. You can slap a

single, take a walk, get hit by a pitch, take a third strike and have the catcher

drop the pitch, or hit the ball and have a fielder make an error. The point is

this: the discipline of systematic innovation and transformation begins when

the start-up has the knack for doing whatever it takes to get in a game—for the

business to pay for its own way into the future. Some might call this style of

business “doing it ugly.” This is in the tradition of start-up stories like Bill Gates

holed up in an Albuquerque hotel room pounding out code for Microsoft’s first

client Altair Computers or the start-up story of Sandra Lerner and Len Bosack,

founders of Cisco, using their living room and two bedrooms for several years

to figure out how to tie computers together. Their “doing it ugly” allowed

Cisco Systems to kick off. It is the same story experienced by Ron Gunnel and

Jeff Flamm working out of the trunk of their car in 1985 to get Health Benefits

America started.23 These are entrepreneurs doing what has to be done to make

a buck. This is innovation the Visionary Way. Nothing fancy. It is what the Inc.

Fast 500 study called “playing rapid-fire pinball rather than a strategic game

of chess.” It is improvisation. It is often what happens after start-ups burn

through their first tranche of capital (having a sophisticated looking business

idea) and are left to figure out payroll. It is that terrifying tipping point period

when the Level 5 leader’s humility and fearlessness is tested. It is the night of

the soul when the question, What am I here for? rips through one’s being and

results in agony or ecstasy.

The Transformation Challenge—Industry Transformation

Visionary Way companies are high-growth start-ups that know how to raise

capital from investors right from the start. They know that venture investors

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respond to what Brooks Byers of Kleiner, Perkins, Caufield & Byers calls the

“bold, sweeping, controversial opening statement.” So the Visionary Way

start-up team may work out of the trunk of their car as Ron Gunnel did, but

they have a business plan that has a well-articulated long-range plan of

industry transformation. To say it another way—the new venture has

designed its future high growth using one or more of the core strategies of

part II.

Visionary Way start-ups realize that the rank-and-file angels and

modern venture capital investors do not associate working out of one’s

garage to eke out a living as indicative of a management team’s capacity to

change the world. So Visionary Way start-ups prove right up front their

capacity to think outside the box. Now the venture investor gets the best of

all worlds—people who can get real now to make a buck and people with

capacity for getting unreal to chase the unthinkable.

No-Fun(d) Zone—Don’t Blend the Models

Over the years we have noticed with great regularity the negative

consequences of blending these two philosophical business models. The

blending of these models usually results from entrepreneurs and investors

trading away deep commitment and authenticity for immediate needs. They

end up with a business-building model that gets them neither fun nor funds.

One significant cause of blending is the impact that modern venture capital and

corporate venture capital practices have on new-venture executives (see

introduction, “Venture Capital Is One Size Fits All”). There is just not enough

new-venture money that allows long-term thinking. Consequently, new-

venture executives and their investors end up cramming their favorite core

strategy and business-building model into the wrong marketplace

circumstances with the wrong kinds of people. In short, design chaos. The

result is new-venture plans that have products, strategies, resources,

processes, and values missing the “road ahead” that a real sophisticated

investor can get excited about. New- venture design and finance shifts from

chaos to order as soon as the business experts make it a priority to check on

their design teams’ reason for being in business—their philosophical

business model. Remember we do not do business as much as we are being in

business. Therefore, the lesson should be loud and clear: be an extreme

Venture Way business or an extreme Visionary Way business.

Get clear, get extreme, get your funds, and have some fun.