Why CEOs, VCs, your office-mates make judgement errors and misread threats ... plus fixes

Fortune 1,000 CEO's ignore threats that result in corporate-death ... why? Think Borders and Blockbuster ...

Company cultures are dismissive of disruptive technologies ... how come? Think Kodak ...

VCs fail to see $1 billion winners and 7 of 10 of their investments "go bust" ... what's wrong?

This post (end) shows tangible fixes to many of these problems ...

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Imagine being able to buy 1% of Amazon for $50,000 in 1995. 1% = $3.9 billion today. Why did most investors reject Amazon at a $5 million valuation?

Imagine rejecting a chance to buy 10% of AirBnB (ABB) for $100,000 in 2008. ABB is worth $24 billion today. Rejection happened ... multiple times. Read one of their rejection letters, below. (ABB founders = Brian, Joe, and Nathan.)

Today, 8 years later:

Read more ABB rejection letters here.

Imagine calling Elon Musk an "illusory promoter" in 2010. He was ridiculed for SpaceX, Tesla, and Solar City. In response to the question (below) about Tesla living until 2015 or 2018, this critique was written six years ago by a well-known VC:

Just like investors rejected AirBnB and ridiculed Musk, a majority rejected Amazon's Bezos, too. In 1995 (21 years ago), Bezos met 60 investors. Two-thirds of the "smart people" ... "accredited investors" ... gave the thumbs down to Amazon which was selling stock at about a $5 million valuation. These investors were offered to own about 1% of Amazon, a $500 billion company today, for $50,000.  

In this short 60 Minutes video, Bezos describes his first money-raise. He says that Amazon's first year was scariest, riskiest time period.

eBags.com -- which I co-founded in 1998 -- was also a reject. We got 200 "no's" before the first investor commitment. It was disheartening. BUT ... fast forward a few (hard) years and we've sold 27,000,000 bags (worth about $1.5 billion), and it's growing 25% year-on-year!

Not bad for a "hair-brained idea" that grew from our houses in 1998 ... this team picture of Frank, Andy, Eliot, Peter and mewas taken in Peter Cobb's family room (our HQ).

Our culture was nimble, experimental, adaptable, creative, and driven by a combination of passion and fear-of-failure (fear of losing our homes due to our personal investments in eBags). That's why we survived the 2000 to 2002 dot-bomb (becoming profitable). Today Mike Edwards (Staples CMO, Borders CEO, Lucy CEO) is leading the charge and he has maintained -- even extended -- that driven, experimental culture.

Meet Larry. Meet Sergey. What a mess, eh?

It's hard for investors to see a company that has a messy "office" -- junk scattered everywhere -- and think it is going to become a game-changer. This is Larry Page and Sergey Brin -- founders of Google -- pre-office -- before they built the GooglePlex.

Amazon's early websites -- from the mid-1990's -- didn't inspire much confidence either. Did it? Here is an early homepage ...

Bottom line: getting support for a new idea is just really, really hard. The starts are usually sloppy. They can be "ugly" too. New ideas live at the edge. "The Edge" is hard to understand. And most people are predisposed to question innovation -- including VC's ...

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PROFESSIONAL INVESTORS -- VENTURE CAPITALISTS -- MAKE MISTAKES 

Typically, VC's have low batting averages. Even after large-scale $100 million funding events, many of their investments tank. It's in the plan.

For every 10 VC investments, one is hopefully a winner. Two are okay. The final seven are abandon-able ... time-wasters.

This is at odds with the entrepreneur who has all his or her eggs in one basket. The entrepreneur wants a 1.000 batting average, not a 0.100 or 0.300. Due to fund dynamics, many VC's are not interested in an outcome that might turn into an (excellent) sub-billion dollar business. It's just that most venture funds need $1 billion wins to return their funds. Here's the math and an excellent explanation. For more fascinating insights into venture capital, read Six Myths about Venture Capital (Harvard Business Review article written by a Senior Fellow at the Ewing Marion Kauffman Foundation).

This graphic is a good representation of how VC picks work out. Each "person" represents a startup. The "black icons" represent $1 billion exits, the "red icons" represent $500 million exits, etc. Read about this graphic on GlassBreakers:

Case in point: be careful about what a Venture Capitalist is telling you. They are people who make mistakes just like you and me. And so are CEO's ...

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CEO's MAKE DISASTROUS JUDGEMENT MISTAKES, TOO

CEO's misread threats, just like investors overlook opportunities. Ouch -->

Misread Threats: This is Blockbuster's CEO. He passed up an opportunity to acquire Netflix for $50 million. Three times! He and Blockbuster's board determined that Netflix was a "very small niche business," and they ended negotiations with Netflix. At the time, Netflix was mailing DVDs to consumers. (Source: Business Insider)

• CNET account: "Blockbuster laughed at Netflix"
• Business Insider account
• Forbes account

Misread Threats: This is Borders' CEO, Greg Josefowicz, and Amazon's CEO, Jeff Bezos, shaking hands on April 11, 2001, after announcing that Amazon.com will take over Borders' online bookselling operations as part of a new partnership. This is the handshake which solidified the demise of Borders and the jobs of 17,000 employees. Yet, some "smart" analysts loved the deal. "It's not a shocker at all," Morningstar.com analyst David Kathman told the E-Commerce Times. "Both companies need this." Kathman added that he believes Amazon will continue to cut deals with brick-and-mortar partners, because real-world alliances are what the company needs "for its long-term survival." (Story: MySanAntonio.com; photo Kathy Willensap)

Misread Threat: Kodak failed to act on employee instincts:

Kodak feared internal cannibalization. Kodak owned most digital photo patents, but did not commercialize them as Kodak feared harming its core film business. Kodak let the fox raid their hen house .... Source: When Digital Disruption Strikes, How Can Incumbents Respond , by Capgemini Consulting

Misread Opportunities, too: The CEO's of Yahoo, Facebook and Twitter might have missed this one. Yahoo allowed Brian Acton to leave ... then Facebook and Twitter both failed to hire him. His rejection tweets were memorialized by Hustle.com (see below). Brian sold his startup (WhatsApp) to Facebook for $19 billion a few years later.

WhatsApp, which sold to Facebook in February 2014, raised a lot of money. But the team lived on almost nothing -- $250,000 -- for the first 2-3 years.

This measly existence is "normal" for most startup founders."Starting up" is a rough road ... which provides an "opening" for large companies (ones with patience and tolerance for failures and pivots) to embrace early stage startups.

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Most Successful Startups are Ignored in the Early Days

Many of the "best" startups NEVER raise professional money. Or, they raise money late ... after traction is achieved. Investors, who are NOT the innovators, often wait for real proof. Investors often follow the consumer or other people's money. When looking at startups, "capital raised" is just one data point. Lightly funded Startups can be terrific discoveries, although their backers need to be "visionary" believers. 76% of acquired startups never raised professional money (2012):

And the vast majority of startup acquisitions (67%) happen pre-Series B, as CB Insights reports. Just one more testament to "the overlooked idea".

Google is an example of this. Google buys a lot of companies. Some are big ... those are the ones that capture the attention of journalists. But many of the Google acquisitions over the years smallish. Many haven't had significant investors as you see below:

More recently (2016), "Select Investors" are more likely to show up, even though 35% seem to have raised no capital at all. When money is raised, it's often from angel groups and accelerators. Even an Andreessen Horowitz investment could be a small one ($100,000 to $300,000) as they test the waters with their seed fund.

Google's scan of the Startup ecosystem is far reaching like my company does on our platform: Iterate.ai. Obviously, Google doesn't just go visit the top 10 Venture Firms (which are trying to make $1 billion per investment ... to overcome their failed investments). From Google's 2016 group above, API.ai raised $8.6 million and Urban Engines raised an undisclosed amount ... while Launchkit raised $0 and Orbitera had just raised $2 million in seed capital.

The point is that "money raised" doesn't predict success. Companies like Google and Amazon look at the Startup community as an extension to their Innovation Labs. Sometimes they buy bigger startups (companies); sometimes they buy small startups that have built unique point solutions. This will become MORE and MORE the case.

Before looking at ways to reduce failure rates, let's look at ....

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WHAT HAPPENS WHEN YOU FAIL TO INNOVATE ... AND WHY CORPORATE CULTURES (along with failed leadership) STALL PROGRESS

Kodak is a great example of non-progressive leadership. Spectrum wrote:

In January 2012, Kodak filed for Chapter 11 bankruptcy protection, having succumbed to a digital revolution in photography that it had helped to start. But the company’s managers still hoped to escape from bankruptcy and have another shot at greatness by selling part of a portfolio of patents that experts valued  as high as US $4.5 billion.

Eleven months later, those roughly 1700 patents (together with 655 patent applications) sold for just $94 million—less than the licensing fees Kodak had collected in its worst-ever year in recent history. What’s more, the company licensed its remaining 20 000 patents to a dozen leading technology companies for only $433 million, severely restricting future earnings from them.

Kodak owned the IP. They had the talent. Yet, their culture got in the way of commercializing it. And, this is the result:

This inability to read threats is a much more serious problem today than in the past because threats grow much faster than ever before -- like Uber, WhatsApp, and AirBnB. Researchers and analysts call this the Shark Tooth or Big Bang disruption.

AI -- neural networks -- deep learning ... these disruptive base-technologies are likely to speed up disruption (again) ... across multiple industries. And this should be forcing all traditional organizations to rethink their approach to strategy, marketing and innovation (as Accenture suggests here):

Unfortunately, older traditional Company Cultures formed hierarchies and rules years ago ... when cumbersome spreadsheets drove decisions and experiments were difficult to execute ... because progress usually involved the deployment of loads of capital (buildings, equipment, machines, huge CAPEX outlays). This is in sharp contrast to the digital enterprises born after 1994 like WhatsApp, Amazon, Netflix, eBags, Shutterfly, Google, and Facebook.

People born in different eras behave differently. Baby Boomers worked at one company until being laid off, then found another job; Millennials sell stuff on Craigslist, rent out AirBnB rooms ... and job-hop. They dress differently, they build companies differently.

Amazon was birthed by "nerdy leaders" who loved watching StarTrek and playing Pong as kids.

It was probably "just natural" that Amazon built Innovation Labs seven (7) years before any other retailer.

As a dorm room hacker in 2003, Mark Zuckerberg was also used to trying, failing, getting reprimanded by his University, and trying again. His attitude became the Facebook culture. His attitude also became memorialized by the street that circles Facebook HQ: Hacker Way. It's also permanently etched into one of the Facebook "patios" at their Silicon Valley headquarters:

This is why Facebook loves to Fail Fast (with stable infrastructure). Mark Zuckerberg espouses it.

And it's promoted in their offices:

This is why Amazon still require's its prospective employees to ...

And this is also why Amazon and other Millennial-Age companies are dangerous. They are fundamentally DIFFERENT ... to the core of their cultures.

If large companies don't rethink their approaches, we will see more and more Blockbusters, Kodaks, and Borders. And failure IS on the rise:

... 4X More Failure

Compared to 1965, 4 times more public companies fail each year. What Leaders Can Do About The Shrinking Life Expectancies of Corporations , BCG

Here is a graphic showing that the time a company spends on the S&P 500 has dropped from 90 years when our grandparents lived ... to just over a decade today:

... 33% Chance of Delisting in 5 Years

Public companies have a 1 in 3 chance of being delisted in the next 5 years. Harvard Business Review: The Biology of Corporate Survival

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COMPANY CULTURE CAUSES "INCUMBENTS" TO RESPOND SLOWLY?

My feeling is that the #1 reason for failure is COMPANY CULTURE (fueled -- or not fueled -- by the leadership of that culture). Gartner agrees:

Companies respond slowly due to the law of averages!

Inside companies, the law of averages and social statistics kick into gear. The Innovators Bell Curve helps explain why.

If you work in a large organization, just due to the law of averages, only about 2.5% of your employees are innovators. Only 13.5% more are supportive of the innovator.

This is one reason why the intrapreneurs have high failure rates. Imagine trying to convince "the other 83%" that an idea is worthy of a trial. How do you build consensus in a large company, when 83% are naturally predisposed to disagree with you?

Old-fashioned culture and internal politics lead to ...

... Decisions happening 20% slower versus 2010

The average time it takes to deliver an "office IT project" has slowed down from 8.5 months in 2010 to 10 months in 2015. This slow down has happened as the speed of technology change has increased. Read Fortune Magazine: If this is truly the age of disruption, why has decision making slowed down?

... Companies responding 2 to 4 years late

~74% of companies respond to digital disruptions after the 2nd year of their occurrence. Research says that firms are complacent due to management inertia -- failure to sense the need to change. Read: When Digital Disruption Strikes, How Can Incumbents Respond, page 3, by Capgemini Consulting

... Decision cycles lagging technology cycles

Decision cycles lag technology cycles. Successes cause complacency. Fear of disrupting oneself gets in the way. Resources are misaligned to respond. New margin structures prevent progress. All are issues. Read: When Digital Disruption Strikes, How Can Incumbents Respond by Capgemini Consulting

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HOW TO FUTURE-PROOF

Don't assume what's worked for you 15 years ago will work for you today.

Innovation is getting more difficult to predict. It doesn't matter how smart you are. Or how experienced you Board is. It doesn't matter who your VP of marketing is. It doesn't matter what the VC's tell you to do. Threats are difficult to read, and smart people make BIG MISTAKES.

To create more predictable innovation, you need to embed new practices inside your culture. You need to build a culture of based on modularity and experimentation, supported by the proper Boardroom and C-Suite makeup. 

Obviously, companies are forced to make choices and unpopular ideas are less likely to get support. Time, energy, attention -- all have limited capacities. That said ... companies DO need to find ways to make more bets. 

Here are some ways I think you can configure for success ... using resources INSIDE your organization and OUTSIDE ...

Inside Your Company

• Reconfigure Your Boardroom: Is your Board aligned with your customer? Are your current Board Members in touch with IoT, Facebook, Snapchat, Deep Learning, Neural Networks, LiDar readers, and chatbots. And/or ... are they open-minded or are they lodged in the successes they had in the 1990's? If your board construct is full of non-digital-natives, you might want to build new "listening devices" and "inputs" into your boardroom. Consumer behavior is changing and your culture needs to be responsive to the changing world.

"Out of touch ... out of mind."

2019 is approaching fast, and un-adaptive cultures could be in for a wake-up call:

• Redesign Your C-Suite Inputs: If you sit in the C-Suite, find new sources of inputs. Find new data gathering techniques ... pay attention to what's happening in places like Iterate.ai (155,000 startups). Be comfortable being uncomfortable because you can't know everything and digital companies are booming. Digital companies are the safe bets for a lot of Wall Street investors these days:

• Pay Attention to the Invisible. Know that what you feel -- not what you write and see -- IS your culture.

• Dumb Down. This relates to the unseen part of corporate culture. Assume you are the dumbest person in the room. You probably aren't ... but start there. Think Blockbuster. Think Kodak.
• Think Ecosystem. The most powerful companies in the future may be Ecosystems ... not companies as we've traditionally witnessed. Amazon might be the best example of a budding ecosystem, today. Emerging technologies like IoT and AI are enabling this new breed of company which will challenge the silo'd approach that traditional companies take.
• Listen to your employees. Be open-minded. Give permission to your most valuable assets -- your employees. Most new ideas -- good ones -- will go against the tide. They can come from anywhere. Remember that your naysayers will outnumber the idea-makers by 84% to 16%.
• Build a Safe Place. Find a place for your most creative employees to bring concepts to life or you are likely to lose them:

• Be Nimble. Create an environment that can try ideas fast. Find the cheapest way to experiment. Experiment fast -- again, my company (Iterate.ai) -- can literally bring some digital experiments to life in under an hour -- in large-scale environments.
• Don't Be Dismissive. Ideas morph. Conditions change. One small change can turn a bad idea into a good one. Remember the Shark Fin Innovation Curve. Be ready to change your mind. Twitter might have benefited by staying in touch with Brian Afton (WhatsApp founder).
• Fail. Don't pay lip service to failure. Do it. Fail. Limit your exposure by gradually increasing investments in each experiment, but invest. The graphic below provides a prime example of the new type of power-company that's emerged:

 

• Modularity. Build modularity into your business. Modularity equals adaptability. Plug-and-play business architectures will become key to future survival.
• Experiment ... to Win. Retool. Just prove or disprove points by doing rapid-fire, low-cost experiments. eBags is a great example. And, obviously, Amazon's an excellent example ... they did 1,976 experiments in 2013 using their Weblab (see graphic).

• Experiment ... to "Millennialize" your Culture. Your CULTURE should encourage doing experiments over building spreadsheets (when large capital expenditures aren't required to test ideas). This is an action-orientation versus a consulting-oriented mindset. Make a concerted effort (not lip service). This is the best way to service your inventors without alienating the important late majority employee-base inside a Large Company. To better understand this mindset -- the impact of CULTURE -- read this excerpt from Amazon's 2016 shareholder letter (read the whole letter here):    

Executives also need to engage with OUTSIDERS in new ways.

When evaluating a person's or company's ability to innovate (make progress), connectivity is proven to be a predictive attribute. eBags, which is growing 25% year over year (organically), uses Iterate as one way to connect.

Outside Your Company

• Listen to outsiders. Be open-minded. Amazon acquires bunches of startups. So do Google, Apple and Facebook. The "not-invented-here" syndrome can NOT exist. After rejecting WhatsApp founder as a potential employee, Facebook acquired WhatsApp a few years later. The people you'd consider unfit to have an opinion -- the misfits (like Brian Acton) -- might be the most disruptive or advantageous force you face. Bezos didn't come from the book business. Reed Hastings -- the Netflix founder -- didn't come from Warner Bros. AirBnB founders were a bunch of broke kids ... with little business experience. Google and Facebook were both born on college campuses ... not in well-funded innovation labs.

• Connect with Entrepreneurs ... as advisors, as partners, as disruptive thought leaders. Cast a wide net. Don't discriminate by age, geography, or gender. Again -- connect and listen. Your ability to "connect" is predictive of your ability to innovate.
• Define a New Culture of Collaboration. Remove the barriers it takes to work with Startups.

• Fix Your Engagement Processes ... your legal department, your procurement process ... these can be barriers to you working with Entrepreneurs. The large companies that fix these processes are most likely to attract the entrepreneurs and benefit. My company, Iterate.ai (Iterate Studio), has spent three years working on improving these issues.
• Become an exponential organization. Leverage what is being produced outside your company. You'll innovate faster and be more aware of what's being created outside your walls.

In the end, remember that great opportunities are overlooked more than they are embraced. AirBnB, Facebook, Netflix are all great memories to keep in the back of your mind as you critique new ideas.

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Thanks for reading. Feel free to email me at [email protected] or connect on LinkedIn.