The Venture Capitalists

When Norman Macrae died at the age of 89 in 2010, the world lost a visionary. Although The Economist journalist was hardly a household name, he was oracle to some of the most sweeping trends of the last century. It was Macrae who predicted the collapse of the Soviet Union when Westerners feared the growing superpower, who prophesied the rise of Japan as an industrial powerhouse when others dismissed it as a purveyor of tchotchkes, and who imagined a world of “terminals” connecting users to giant databases (a primitive foretelling of what would become the Internet). And, long before today's progressive technology darlings entered the scene, it was Macrae who envisaged a world in which innovation, not bureaucratic management, would become the primary driver of sustained growth.²

In 1976, big business was in fashion. Spurred by the boom of the manufacturing age, companies relied on increasing layers of management to extract as much productivity from line workers as possible. Hence, when Macrae published his seminal article, “The Coming Entrepreneurial Revolution,” it was undoubtedly met with a fair degree of skepticism and resistance among large company bureaucrats. In it, Macrae outlined the two fundamental problems with the hierarchically managed companies in vogue at the time:

In a radical departure from conventional thinking of the time, Macrae offered his prescription to the looming challenges, rebuking the popularity of monolithic hierarchies in favor of greater employee freedom. He imagined a future in which employees harmonize work style with lifestyle and companies thrive off internal competition by harnessing the talents and energy of individuals “who are part-entrepreneurial sub-contractors and part-salaried staff but wholly neither.” With a stroke of the pen from arguably one of the brightest futurists of the time, intrapreneurship was defined as Macrae predicted: a coming marketplace in which big corporations devolved into “confederations of entrepreneurs.”⁴

It took a few years for businesses to catch on to Macrae's vision, but, by 1985, intrapreneurship was in. A New York Times article of the time captured the sentiment in its headline, “Now ‘Intrapreneurship’ is Hot,” and trumpeted the arrival of intrapreneuring as evidenced by its appearance in the Sloan Management Review and Harvard Business Review, its inclusion in a government report on industrial competitiveness, and a best-selling book of the same name.⁵ Yet, just over a year later, enthusiasm had chilled for the radical managerial concept, with a few too many companies bearing witness to failed attempts. A 1986 New York Times article dubbed the new attitude with its headline, “‘Intrapreneurship’ Raising Doubts.” The unfettered enthusiasm had waned, and the accolades behind intrapreneurship along with it, because the Harvard Business Review was now scattered with foreboding tales of intrapreneurship gone haywire. According to Hollister B. Sykes, former Exxon executive quoted by the scholarly journal at the time, “It is impossible to preserve completely an independent entrepreneurial environment within a large, multiproduct corporate setting.”⁶ Disillusionment crept into the social narrative, as analysts joined Sykes' way of thinking, positing that large enterprises were simply ill equipped to offer the reward structure, personal autonomy, or risk-taking culture necessary to stimulate and channel the entrepreneurial spirit of employees. Even among the success stories of the time, doubts lingered. During a conference that paraded the best examples of intrapreneurship in action, one such poster child was asked how his company tolerated the failure of an entrepreneurial idea generated by one of its employees. In response, he sheepishly admitted, “That is a very good question. I must confess that we have not yet developed a way to deal with that situation. It does seem clear however, that once a manager's project has failed, it will be difficult to promote him in the future.”⁷

But for all of its challenges, intrapreneurship was simply too alluring for some companies to resist. Macrae offered an alternative to big-business bureaucracy and hope to struggling companies seeking to tap an innovation faucet of fresh moneymaking ideas right from their own reservoir. It is this potential that has given intrapreneurship many spurts in the hallways of businesses for the better part of four decades—each striving to catch lightning in a bottle with that one creative spark. It was intrapreneurial spirit, not bureaucratic dogma, that led to the creation of 3M's wildly successful Post-It note. An intrapreneur, not an executive, conceived the Sony Playstation. It was a Sun employee, not a manager, who ignited a rallying cry that ultimately led to the development of the Java programming language and shifted the course of the company.⁸

Innovation begets growth—an elusive goal as investors reluctantly celebrate the one-year anniversary of the most tumultuous market period since the depths of the financial crisis.⁹ At the same time, austere times call for intense budget scrutiny, forcing companies to become more resourceful. In addition, although a near-double-digit unemployment rate may paralyze many employed from considering alternatives, the risk-taking attitude of entrepreneurial employees will not be tamed, leaving many businesses struggling with how to retain restless innovators. Intrapreneurship is again making headlines as companies seek to grow in a tough economy by harnessing the ideas of the most creative and entrepreneurial geniuses from within their organizational charts.

Yet, many are loath to repeat the mistakes of their predecessors. The road is littered with the carnage of intrapreneurial ventures suffocated under the weight of traditional bureaucracies lacking the measurement or reward systems necessary for idea germination. Enter the Chief Financial Officer. The CFO is second only to the CEO in appropriating how resources are allocated in a company (in fact, roughly 30% of Fortune 500 CEOs spent the first few years of their careers developing a strong foundation in finance).¹⁰ CFOs have a reputation for being the bean counters of an organization, a pejorative that undermines a far more important strategic contribution they bring to their firms. If intrapreneurs are the budding whiz kids within a company's ranks, CFOs are the enterprising venture capitalists doling out the resources for the projects they believe most worthy.

It's a role that CFOs accept, if not covet. In a gathering of big-company CFOs at a Wall Street Journal conference in 2012, attendees longed to drive innovation through incentives or funding. However, because organizational hierarchy runs counter to entrepreneurial risk-taking, a CFO's priority of protecting cash during challenging times opposes a desire to invest, leading skeptics to question if venture capitalism is a mindset that CFOs can afford to embrace. At the Wall Street Journal event, Martin Sorrell, CEO of WPP Group PLC and a former CFO himself, challenged the attendees' ability to grow their companies' revenues and expand their function in a cash-constrained economy, acknowledging the innovative desire within CFOs but doubting “whether they are allowed in the straitjacket that we operate in.”¹¹

The dilemma is not lost upon CFOs. According to a 2012 Deloitte study, CFOs acknowledge that cost-cutting efforts, while important, are yielding diminishing returns, making growth strategies all the more imperative. Given capital constraints, organic growth remains in favor with these cost-conscious leaders, with the focus overwhelmingly on generating scale and efficiencies. And, beyond worrying about the right growth strategies to pursue, CFOs keep a critical eye on delivery, with 85 percent worried about their company's ability to execute.¹² Increasingly, these executives are turning to technology as yet another resource in their coffers to address such issues. Indeed, according to Gartner, roughly half of CFOs play a major role in authorizing IT investment, with nearly the same number indicating that their influence has increased over the past year.¹³ In addition, in terms of where technology investment can be of most use to these internal venture capitalists, CFOs align their top three priorities around creating an environment conducive to information sharing, facilitating analysis and decision making, and improving the quality of data used for business information¹⁴—all of which can relate to a framework that more accurately measures risk against potential rewards and unlocks the potential of intrapreneurship as Macrae envisioned.

To get CFOs one step closer to an information-sharing environment conducive to intrapreneurial pursuits, hierarchical structures must be greased. Collaboration has already been discussed as a means of reducing hierarchical friction in an enterprise and collapsing vertical or functional silos. However, according to a global study by MIT Sloan Management Review and Deloitte, pragmatic CFOs need more convincing when it comes to internal social media technologies, with just 14 percent of them seeing these tools as important (compared with more than half of all corporate leaders).¹⁵ The finding is not altogether surprising assuming that CFOs conflate social media with frivolous conversation or otherwise squishy employee networking benefits. Perhaps a more utilitarian use of social media tools is in order to convince a function bent on maximizing efficiencies and improving decision making. In an ironic twist, CFOs are perhaps the most attuned function in the enterprise that understands the power of collective wisdom—a potential benefit of collaboration-based tools so undervalued by these very executives. After all, the stock market itself is an output of the collective wisdom of millions of shareholders buying and selling options based on their best prediction of a company's future performance. Using internal collaboration tools in the same way can place the CFO in comfortable territory while increasing the accuracy of decision making for these venture capitalists.

Google was among the first notable companies to use one such internal prediction market. The company is no stranger to harnessing the wisdom of crowds as its algorithm quickly made it an online juggernaut by prioritizing the most popular pages in search results. It has also been on Macrae's intrapreneuring bandwagon from the start, allowing engineers to spend as much as 20 percent of their time on projects of interest to the company that are not directly related to their jobs. In 2005, the company launched its Google Prediction Markets, an application conceived and developed by a group of Google employees during their 20 percent intrapreneuring time. The GPM, as it was internally termed, provided a virtual stock market of ideas whereby Google employees could place their bets on which outcomes they believed had the greatest probability. Although employees used fictitious “Goobles” as a currency to trade on the ideas or decisions with the greatest merit, there was very real prize money at stake for those employees who participated—up to $1,000 per winner. In its first quarter of operation, the GPM offered employees 24 markets (questions) and 95 total securities (answers) upon which to trade Goobles. A total of 7,685 trades were made, and 436,843 shares changed hands among employees from all walks of life. Analysis revealed that, even as much as 10 weeks away from the closing date of a market, the outcome with the highest valuation was the one most likely to actually occur, demonstrating the ability of employees to predict likely results with speed and accuracy. Google was able to tap into this collective wisdom with prize money amounting to $10,000 per quarter¹⁶—an easily justifiable ROI for even the most conservative CFO.

With GPM, Google was able to leverage its existing resources to accelerate and improve decision making. Although a large company in its own right, it proved skeptics wrong by overcoming hierarchical or functional constraints with an open tool backed by a rewards structure to motivate employee participation. And, if such a tool were not sufficiently valuable in predicting the accuracy of decisions, perhaps CFOs may appreciate the role that collaboration can play in solving problems. As discussed in an earlier chapter, heterogeneous teams are more successful than homogeneous ones. The finding is perhaps truer when tackling a difficult problem. CFOs relying exclusively on engineering teams for research and development may find themselves missing the opportunity for exponential growth breakthroughs, as history has shown. Case in point: When the British government offered a prize of £20,000 to the person who found a way to accurately determine a ship's longitude, the legendary Isaac Newton had predicted the answer would come from astronomy. Imagine the surprise when it came from a clockmaker instead.¹⁷ Solutions to problems may not rest with the obvious group, hence the reason Google's GPM and others like it are successful—they organize the chaos of multiple viewpoints into informed opinions and coordinated actions, thereby appealing to CFOs focused on execution.

It's this very diversity of opinion that is leading the most innovative companies to move beyond intrapreneurship and seek ideas from external partners in co-creation and open innovation ventures. Harvard Business School studied hundreds of scientific problems posted on InnoCentive, a virtual marketplace where problems are displayed and ideas are for sale. The problems in the Harvard study were those that the laboratories of science-driven companies had mostly failed to solve. The InnoCentive network of crowds solved nearly 30 percent of them. According to the researchers, the more diverse the interest base of solvers, the more likely the problem was to be solved. In fact, having expertise in the field of the problem actually hurt the solver's chances. According to the authors, “The further the problem from the solver's expertise, the more likely they are to solve it.” In fact, when the problem fell completely outside of the solver's area of expertise, the chance of success increased by 10 percent.¹⁸

Such findings are causing CFOs to rethink their company's approach to research, development, and growth—one where diversity trumps expertise and future solutions beat past achievements. To this latter point, McKinsey reports that, before 1991, 97 percent of prize money offered rewarded past achievements (such as the Nobel Prize). Since then, 78 percent of new prize money has been dedicated to the future solution of problems, backed by governments, nonprofit groups, and even capital-constrained corporations.¹⁹

Yet, as CFOs yearn to tap into more innovative sources for growth both internally and externally, that pesky straitjacket tightens its grip. Beyond bearing the responsibility of preserving cash and using resources efficiently, CFOs often carry the burden of ensuring compliance with a host of regulations. As such, technology trends take on new meaning. For the CFO, the cloud is as much about jurisdiction as it is security, lest the company wants to find itself out of compliance in its next audit, because where data is physically stored in the cloud has a bearing on which local laws and regulations apply. Beyond jurisdiction, some industries go so far as to mandate data preservation for a minimum length of time, a particularly tricky requirement in a digital era when a file can be erased with the simple click of a mouse. In many cases, the financial punishments are sufficient to make cash-conscious CFOs swoon. Piper Jaffray was fined $700,000 by the Financial Industry Regulatory Authority (FINRA) for failing to retain approximately 4.3 million e-mails from November 2002 through December 2008. The fine was the result of an investigation triggered by a single e-mail—one that FINRA investigators had already been provided in hard copy but that the investment bank was unable to produce in soft copy after the investigation commenced.²⁰

There's the rub for today's CFO. Although she may aspire to unleash her inner venture capitalist and spend more time in the innovation cycle, she cannot escape the financial and regulatory requirements that bind her. Technology is both contributor and ameliorator to these issues, depending on if the CFO is able to harness it effectively. There is no panacea, although there are a few actions that CFOs can take to bridge the divide between venture capitalist and compliance officer:

• Align rewards; monitor innovation—A primary reason for early intrapreneurial failings was the lack of a reward structure conducive to fostering creative talents. At the same time, although an internal employee may not suffer a lack of imagination, he may not be able to say the same when it comes to sound financial judgment. CFOs are in a unique position to align reward structures with business metrics to increase the chances that innovation yields commercialization. Consider prediction markets as an example. When the wrong reward structures are applied, collective folly ensues—something political analysts have learned the hard way. Before prediction markets were embraced by innovative companies, they were the domain of politics. The Iowa Electronic Markets launched in 1988 as a means of predicting races and, through the years, has been found to be more accurate than traditional polling at least 75 percent of the time. But, in January 2008, prediction markets took a credibility hit when they gave Barack Obama a 91 percent chance of beating Hilary Clinton in the New Hampshire primary election. Clinton won. New York Times columnist Paul Krugman opined in his blog, “Nobody Knows Anything,” the next day: “But to be more specific, the prediction markets—which you see, again and again, touted as having some mystical power to aggregate information—know no more than the conventional wisdom.”²¹

  As it turns out, the reason for the blatant miss had a whole lot to do with the reward structure in place. When the stakes are low, participants can recklessly gamble on wild guesses, spurring a type of groupthink if others begin to mimic the voting behavior of the crowd. The Google intrapreneurs knew that the proper reward structure would be paramount to the accuracy of their prediction market. Although the Goobles exchanged were fictitious, they wanted to incentivize participation with tangible rewards. Yet, if they simply distributed cash prizes to the most successful traders at the end of the quarter, they feared some employees might attempt to game the system and behave counterproductively. For example, they could bet big on a low-probability outcome in the hopes of it materializing (the equivalent of playing against the odds in a high-stakes game). To prevent such reckless gambling from poisoning the accuracy of the market, Google established a lottery system, whereby employees earned tickets based on their final Gooble balance at the close of the market. To increase the chances of winning the lottery, employees relied on the accuracy of their predictions. The reward structure was aligned to the needs of Google in establishing a prediction market in the first place.

  Beyond aligning rewards, CFOs can establish dashboards to measure the effectiveness of innovation pursuits. Of course, CFOs are familiar with ROI as the gold standard in measuring the value of an investment. However, relying exclusively on ROI undervalues the process needed to stimulate and nurture growth ideas. CFOs can (and should) still use estimated ROI when determining which projects are most worthy of funding and resource. However, they should also demand a new set of metrics within their companies to monitor the health of the enterprise's innovation practice. Measurements like the number of ideas developed, the number contributed from staff versus those of outside partners, and the number of concepts that make it through to launch (or not) are useful leading indicators to monitor the performance of the innovation cycle. Just as CFOs monitor the sales funnel process to identify the status of opportunities through all stages of the buying cycle, an innovation funnel can do the same to monitor the success of the company in accelerating ideas to market.

• Raise the ratio of innovators—It is not sufficient for CFOs simply to allow innovation in their companies. They must radically champion the freeing of innovators, using internal and external sources, if they hope to discover the next growth engine in a stagnating economy. Beyond tapping their internal source of intrapreneurs, there are a host of external options available to CFOs, each with varying degrees of potential risk and reward. Forbes demystifies the potential sources of open innovation available to CFOs anxious for the next growth curve:²²
  • They may take a page from Threadless, a company that asks designers to design t-shirts they would buy, gets opinions about which designs are the best, and then manufactures the t-shirts and sells them to the community that developed them. In this innovative model, the company harnesses the innovation and talents of its own prospect base to reduce development risk.
  • Those CFOs with a greater appetite for complexity may consider leveraging their own ecosystem for development. Although certainly more challenging, the potential rewards are commensurate. This is the playbook espoused by innovators like Apple and Google, companies that build a platform surrounding their products and create new value chains of developers and advertisers eager for their piece of the pie.
  • If ecosystems are too unwieldy, CFOs can always turn to co-development partners and short-term non-equity alliances. In this model, companies collaborate on a joint project with most of the risk being in the coordination of people, processes, and ideas from two or more often bureaucratic enterprises.
  • CFOs can turn to innovation contests and tournaments and award prizes for the most viable concept. As mentioned earlier, InnoCentive and other crowdsourcing pioneers allow companies to tap into large groups of customers, partners, and other thinkers around the globe to tackle the knottiest of problems.

  The key in using any or all of these concepts is to raise the ratio of innovators available to the company to increase the chance of a breakthrough dramatically. In addition, some of these breakthroughs can come cheap. Linux was developed by an army of volunteers that contributed more than 30 million lines of code, representing roughly 8,000 person-years of development time. Had a conventional software company attempted to invest in a more traditional way by paying its own engineers for the same, the cost would have come to roughly $1 billion.²³

• Leverage data analytics for compliance—As discussed in an earlier chapter, unstructured data is on the rise, making it all the more difficult to those charged with monitoring compliance at their company. At the same time, forensic data reviews preceding and during investigations can be costly. Piper Jaffray certainly experienced this firsthand. According to Kon Leong, CEO of ZL Technologies, “The Securities and Exchange Commission, healthcare regulations, [and] the Federal Rules on Civil Procedure that weigh digital evidence equally with physical evidence are all requiring that everything be kept forever.”²⁴

  Yet, some are using the digital wasteland of data to their advantage. Carter Malone, Vice President of Compliance at investment bank Crews & Associates, uses trigger words to alert him to potential compliance issues.

  For me, a [bad] keyword is guarantee. I don't want to see that word. I can't have a salesperson, a stock broker, use guarantee in a communication. The other big bad word is complaint. If we receive a complaint from a customer, the salesperson is not supposed to communicate with that customer. The rule says the complaint has to go to the salesperson's supervisor and escalate to the compliance department.²⁵

  Therefore, Malone uses specialized software from ZL Technologies proactively to find these keywords in e-mail communication at his firm. Beyond simple keyword searching, the software performs concept searching—looking for patterns that could signal fraudulent intent, such as the misspellings spammers use to confound spam filters. With data analytics on his side, Malone is able to review 8,000 e-mails per day, monitoring around 80 percent of his company's communications, far greater than the 20 percent requirement set by FINRA.²⁶ If burdened with the mandate of preserving data, CFOs can at least use analytics proactively to inspect their own digital landfills.

Since Macrae published his vision of confederations of entrepreneurs, businesses have certainly experimented with the concept with varying degrees of success. Many simply got it wrong—either attempting to shoehorn entrepreneurial spirit within a bureaucratic structure or misaligning reward structures behind counterproductive behaviors. All the while, CFOs sat in an unenviable position of measuring company performance and ensuring compliance while watching growth prospects slip away as markets constricted. But a new day is dawning for these leaders. The most progressive of them recognize their indispensible value in appropriating resources behind growth prospects. They also realize that continued cost cutting is increasingly less sustainable. Traditional models of discovering growth prospects are giving way to more progressive alternatives made possible in a connected workplace and marketplace. CFOs have the opportunity to harness internal and external resources more efficiently, thereby sweating the assets already within their control. However, if they attempt to overregulate the innovation process by exclusively holding to traditional financial metrics, they will fare no better than the many firms that failed to find Macrae's destination on their outdated roadmaps. Although CFOs may still be burdened by the reality of a “straitjacket” confining them, these new sources of innovation can at least free the inner venture capitalist. And, that may just be sufficient to unlock the next major growth market, making the CFO a major player in plotting his or her company's destiny, not just success.