Providing Certainty is Not the Job
Grant a CEO one wish about what they would love to have for their growth strategy, and most would probably say certainty. Decisions about allocating scarce resources to a new product line, an acquisition beyond the core, even hiring an executive with unique skills or experience, depend on a set of assumptions about future external market conditions. Wouldn’t it be great to have a lot of certainty about how these assumptions will turn out?
Well, not really. Certainty requires time, which works against growth strategy for several reasons I’ll talk about below. It also avoids the real tough part of the job, which is to identify and communicate uncertainty. Today’s post will tackle why waiting to be certain is the wrong move. Tomorrow I’ll talk about the need to center on uncertainty.
Part 1: The Case Against Certainty
Companies get better over time in their core markets. They have relationships with suppliers and customers, historical data, and manufacturing know-how and efficiencies that give proprietary advantages that translate into profit. It also makes it harder to innovate, since the anticipated return must compete against putting that same money to work in the core business, where knowledge and margins are much higher. In the end this hurdle rate makes excellent companies more risk averse. Often, they look to futurists to provide that extra bit of certainty to make decisions about innovations. But that level of certainty means waiting. Even scenario planning doesn’t necessarily get these leaders to act, instead they wait for more clues about which way the future will go while investing conservatively in incremental innovations that work across all scenarios.
The job of Futurist in a growth setting is not about providing certainty. If companies wait for certainty, they run into all sorts of problems in growth strategy.
By the time there is more certainty, the high growth phase is about to slow down. Many companies watch new industries or product/service categories develop with baited breath, envying the high revenue growth (if not the low margins) players in new categories get to enjoy. But in their need for certainty and lower risk they wait until they are sure about the long-term viability of the market. By the time they decide to enter, the era of high growth is about to end. Roger Martin rightly says that high growth eras in industries are transient and usually in their early stages. After that they settle into slower growth as the market saturates users at each stage of adoption.
It’s hard to build a unique position in the ecosystem when you arrive late. So why participate in high growth new industries if the profits come later when things slow down anyway? Getting in early allows you to shape the ecosystem, build functional partnerships and create a distinct value proposition that players that come in later cannot match. By the time the market slows, the company can translate that position into higher market share and profits. If you wait until the market is more certain and out of its chaotic early conditions, it’s much harder to match the advantages early players have. Companies end up “buying their way in” through acquisitions or discount pricing, essentially wiping out the money they saved by not getting in early.
Everyone Else is Already There or About to Be. Do you think you’ll be the only company seeking the revenues in a higher growth industry? I’ve had several clients say all they want is to find an opportunity that will grow to a billion dollars within 5 years…that no one else knows about. That is fantasy. Any market with that potential to grow that big that fast has a lot of eyes on it. All your competitors with any brand permission to be in the new growth space that certain are already there or about to be, making competitive pressures very high and profit opportunities correspondingly low.
Acquiring Your Way In Almost Never Works. Clayton Christenson has said that 70-90% of acquisitions do not live up to their metrics for success. While I have a longer takedown of acquisitions for growth strategy, the short answer is that the same reasons companies choose not to get into uncertain growth markets early keep them from acquiring growth companies until it’s too late. The growth has started to slow, and the needed synergies never materialize because the acquired company has spent its whole existence crafting its business model, relationships, capital investments, and people in pursuit of being successful in a specific growth ecosystem. Expecting them to conform or use the acquisition infrastructure, people, or channels rarely works.
Companies seeking certainty will almost never achieve high growth in new product/service arenas, markets, or industries. A futurist’s job is to figure out how to get leaders comfortable with acting in uncertainty and help them realize that the comfort of certainty in their core products is a dangerous illusion. I’ll be talking about that tomorrow…
Addendum: The Real Reasons Acquisitions and Internal VC’s Fail
Many large companies choose to wait out the risk of early markets, until a clear winner emerges and the size of the burgeoning market is confirmed, then buy their way in. On the face this seems like a great solution – let someone else take the risk and then enter when success is assured. Except most acquisitions fail to live up to the financial analysis that justifies the investment.
Much is made of acquisitions not being able to capture the synergies of an acquisition. There are two types of synergies:
Assuming cost savings by targeting duplicative efforts and capital by combining hard assets and people capabilities
Assuming growth synergies by introducing the acquired company onto the large existing channels and customer base of the acquiring company.
But there are two problems with this. First, the acquired company in a growth market is successful because it has precisely configured its assets and capabilities to create a unique competitive advantage in that market. To think that these can be duplicated on the existing company’s infrastructure is not practical, and it ends up being more expensive to retool. Leaving them alone doesn’t reduce the cost and the synergy disappears.
Second, existing channels and customer bases have different needs, incentives, and agreements. Simply porting the acquired company’s offering onto this platform creates all sorts of conflicts in capturing value, payment systems, branding, and sales. The size of the bump is rarely worth the effort.
But the ongoing mistakes of over-estimating synergies often covers up the biggest error of the acquire growth strategy: the acquisitions are almost always too late. By the time the ink dries on the acquisition contracts, the high growth phase of the market is already slowing down. The excitement of buying into a 20% CAGR growth arena with an idea that the company can lower costs and squeeze profits up to the corporate rate the shareholders demand hardly ever works out. This is because the risk avoidance that the company practices by not entering markets themselves with innovation, also infects the ability to buy companies while the uncertainty is high enough that the price paid is low enough. Instead, companies wait for a sure thing, and overpay right when the market starts to mature.
No Exit: The Problem with Internal VCs
Of course, companies have instituted new ways of investing earlier in markets that allows for lower-cost entry later. These include internal VC funds and open innovation platforms. If you are ever asked to run or be a part of a large company’s internal VC fund, I’d suggest running the other way unless very specific definitions of success are agreed upon. The problem boils down to metrics and exit strategies. Try as they might, the C-Suite and the shareholders never get their minds around the fact that 80% of the investments will be failures, even if the amount of the investment is small. And for the other 20% that do succeed in the marketplace, that does not translate to being successful in the company.
Independent VC firms have specific exit strategies for the small number of successful startups they fund. They can sell them to anyone in the market or take them public (a few may decide to buy them out and run them themselves, but that is really the private equity market and not a VC firm’s main ambition). These exit strategies create the outsized profits to cover for the large majority of failed investments.
But internal VC funds have much more limited exit strategies. For the small number of companies they invest in that flat out succeed in the market, to capture full value they have to be either spun in or spun out. Bringing a startup into the company’s infrastructure has all the problems of bringing in an acquisition. And taking it public or selling it to another company is generally very rare, since the new entity will be a competitor.
So, an internal VC fund will rarely accomplish the goal of creating significant revenue or profit growth for the parent company. It will most likely lose money. Internal VC funds still have a role to play in learning about new technologies, markets and customer segments, but those investments should be categorized as research.