Innovation Series: Caveat Investor
Publication date - December 15, 2020
"Caveat emptor" (let the buyer beware) is a well-known proverb in the English language relating to contract law and certain rights of a transaction following the close of a sale. As I considered a title for this piece, I had assumed "Caveat Innovator" as an appropriate heading; a warning to the innovator. I quickly reconsidered. There are obvious and understandable imbalances between the innovator and the investor, and both parties need to tread carefully to manage a successful relationship.
If you have been following my Innovation Series on the hero’s journey of the innovator and the difficult task of identifying true innovation, you will recall that the core of innovation is not always cleaned lines and cleared paths. Innovation is disruption at its core because it is a smack at the status-quo. It is usually awkward, hard to understand, and met with a lot of resistance. It doesn’t look the part we see in the media; it’s not skinny jeans and a scarf, but rather, it’s overalls and dirty work gloves. Investors love the idea of extracting value from ideas that have not come to fruition yet. It’s the core element of all investments. They can buy into a company or idea when it is not fully realized, provide capital to help grow and make market-ready that idea, and collectively reap the benefits. But what happens when the initial plans and timelines don’t follow the initial spreadsheet?
To be sure, mishaps in innovation don’t only occur in the startup phases. The list of failures of once market-leading innovative companies is long and well known. They are all the result of losing their core competencies of innovation for a transfer to business operations, budgets, and spreadsheets. Well-known brands like Xerox, Kodak, Blockbuster, and General Motors are a few examples that litter the landscape.
The most shocking example was in the mobile phone industry, where Nokia and Blackberry collectively accounted for nearly 75% of the global mobile phone industry before the iPhone launch at the end of 2007. Their failures to innovate in basic areas such as core operating systems, SDK’s, and features brought about the unthinkable. In just five years, the combined global market of Nokia and Blackberry fell to about 5%. What should they have been focused on at that time to avert disaster?
I have benefited from working with many companies, in many industries, in many various life-cycle stages that have all struggled with the role of innovation and how to harness it. I have seen failures, and I have seen successes. I believe there are four areas for serious consideration before envisioning success in an intrinsically innovative investment:
1. The language of innovation is very different from the language of investing. Innovation is not merely a reconcilable line item in a budgeting spreadsheet. The investor timelines have schedules that must have a beginning and must have an endpoint. However, the innovator sees no end to the task, only endless iterations that will move the idea further ahead of the pack. The innovator believes that innovation should ultimately, in good time, permeate throughout every financial report like the DNA of the company. The imbalance of expectations here is obvious but not always apparent to the parties involved.
Expectations here lead to fractures in confidence, in and between, both parties that are often impossible to reconcile. Consider a venture capital or private equity firm with obligations and investment horizons to its own limited partnership investors; they cannot kick the ball indefinitely. Often, strategic investors, those with other operations and business lines looking for synergies and new lifeblood, produce better alignment and communication largely due to the environment they can provide. This leads to the next point.
2. Innovation is a product of the environment. I have worked in some of the greatest office spaces ever built, with amenities abound. Beautiful and pedigreed scholars shuffling about in thick-rimmed glasses, if only for effect. The vibe is great, but it is not the type of environment that I'm referring to that really matters. The important environment is one of purposeful exploration and celebration of knowledge, both successes, and failures.
Some organizations do not have the ability to foster effective innovation because it represents a clash of cultures. Innovation is more about inspiration than perspiration. Yes, innovation needs a sense of urgency, but it also needs time, patience, capital, and integrity to the vision. The environment needs to foster new ideas and develop new and improved “what ifs” if the enterprise is to be successful in the long term. Organizations with access to multiple innovative pockets improve the likelihood of success due to the crossbreeding of environments.
Again, strategic investing alternatives, more times than not, can produce environments where innovation can be supported across various business cycles and investment horizons. One last thought on creating an effective environment; instilling fear as a motivator kills every last cell of innovation but often leads to invention.
3. Innovative people are usually uncomfortably odd. - Innovative people rarely show their hand. They don’t stand on the boardroom table and scream “Eureka!” at each passing phase. They don’t pat themselves on the back and exclaim that they’ve just worked a ninety hour week. They don’t seek that type of attention. Socially awkward sometimes and introverted about their creations, innovative people generally cycle the iterations without anyone noticing. They think quietly because it’s difficult to explain “disruptive” ideas that buck the status quo.
Naturally, as an investor, you will want to protect your investment by surrounding the innovator with people like you to help facilitate better understanding. Be careful in this aspect of your strategy. After some time, if your conduit says that they “still don’t get it,” find another. Too often, there is pressure applied for the oddity to conform to the norm. It’s not always important for you to get the oddities, but rather to foster a path to success. After all, you choose to invest in the idea and the innovation's potential, which is the innovator's brainchild.
4. Innovation does not end when you decide. - To be sure, there are many, many poorly executed innovation plays. They are usually the result of a misalignment or imbalance between the innovators and the investors. In both large and small entities, in both start-up and well-established firms, the benefit of continued seeding innovation should never be traded for the harvest. Additionally, if the organization's intrinsic value has been manifested with know-how that could bear strategic rewards elsewhere, be mindful of protecting the true assets.
Remember that innovation is relentless, whether you choose to do it or not. Whether your spreadsheets and capital budgets require a reduction in capital spending in research and development, the market and your competitors do not think that way. Each of the companies mentioned earlier missed the mark because they chose not to continue to innovate in the face of market competition. Each of them had an indisputable market-leading innovation within their organizations. Still, they prioritized the comforts of timely profits and certainty over a longer-term strategy based on continuous innovation.
I hold my experiences very closely in fostering innovation and often keep the details to myself. It is not the sparks of imagination nor the singularity that I choose to protect, but rather it’s the frailty of my ideas that I shield. I sometimes find myself mired in the reality of the missteps in my execution and poorly timed decisions in judgment I’ve experienced in my productive years of innovation. I know that successful innovation does not come to fruition without these inevitable problems, these reasons for iteration.
For those who wish to foster innovation as an investment, it is often more important to identify the posers from the genuine article. It reminds me of the obscenity case that went to the supreme court where Justice Potter Stewart described his threshold for obscenity by using the phrase "I know it when I see it." When you encounter the innovative opportunity, it shouldn't be comfortable, easily understood, and layered with endless cringe-worthy idioms. Oh yeah, and it shouldn't be in skinny jeans and a scarf.