A lesson for founders of breakthrough ventures
never drink your own bathwater
There is an idiomatic phrase, “never drink your own bathwater,” which often comes to mind when I am considering creating or investing in a new venture. It loosely means, “don’t believe your own press clippings. Just because you’ve had a great success before, there is no guarantee it will happen again.” One lesson stands high above all others in that regard. It is from the time I was at Sarnoff Laboratories, and the team which Sarnoff led, called the “Grand Alliance,” had just succeeded in developing the all digital HDTV standard in the United States.
In the process of developing the HDTV standard, our team considered many possible standards, and in order to test them and see and hear what difficulties might arise, we created the Princeton Engine. It was a real time video supercomputer that would simulate the video technologies that were to become the basis of HDTV in the United States.
Having achieved the development of the standard, together with being awarded an Emmy and having received great recognition throughout the world, we decided to form a company, “Sarnoff Real Time Corporation”(SRTC). SRTC would use the Princeton Engine to provide broadcasters with a revolutionary service for its customers: to be a video-on-demand server that would allow viewers to have VCR functionality remotely. Viewers would have the capability to pause, play, rewind, and fast forward the broadcast video.
High on the glory of our HDTV success, we invested many millions of our own dollars into the venture. We had “drunk our own bathwater,” and invested too much of our own money with too little analysis. Other competitive, less expensive approaches were emerging. Broadcasters were not as willing customers as we assumed. The development cycle of the supercomputer was too long. Pricing for the supercomputer was too high.
The lesson was clear. It is not the press clippings that make success… it is not how successful we have been with previous projects… It is not the amount of money we invest … it is putting together all the elements of a breakthrough venture that make a success. We would never make that mistake again.
I moved to SRI in 2001, and we began a strategy that was not based on how much we invested, or how much we believed our own stories. Instead it was based on a deep understanding of the elements necessary to create a breakthrough venture. These elements are described below and are also in my post, “A proven model for creating breakthrough technology ventures”:
Identify an unmet need in a large rapidly growing market, screaming to be solved. The greater the need, the greater the opportunity.
Conceive of a differentiated solution - a breakthrough product or service to address the market opportunity. The solution is a “painkiller” not a “vitamin” for the customer. Seek disruptive solutions, not incremental improvements.
Seek sustainable competitive barriers. Look for the “white space” in the market where competition is not as intense. Develop intellectual property.
Iteratively refine the elevator pitch, the value proposition, venture deck, and business plan. Gain an an in-depth knowledge of the market, the customers, the competitors, the products, the business models.
Seek an effective positioning strategy for introducing the product into the marketplace.
Identify the trigger points that provide a clear and compelling answer to “why now?”
Identify the key elements of risk, and their mitigation.
Identify a founder/CEO and a core co-founder innovation team.
Build a compelling demo that brings to life your solution and allows for a deeper understanding of the power of the idea.
Identify great investors and a board, and raise external funds.
And so our ventures group strategy focused on achieving all these elements. Interestingly, by doing this, we needed far less funds than might be expected to create breakthrough ventures. All ten of these items together contributed overwhelming value.
We were then able to apply our funds specifically to:
Recruiting and providing a stipend for EIRs (entrepreneurs in residence) who might become founders of the company,
Paying our own technology, legal, and financial staff for working on the venture,
Paying advisors and consultants,
Paying for legal, financial, travel, research material, and more.
We had a rule of thumb that an average investment in each venture was $500K (in 2001 dollars), with an expectation that the venture would be launched by us within about 8 - 12 months, and subsequently be entirely externally funded by top tier venture capital investments. If we couldn’t find external investments, we would not launch the venture and instead seek royalty income.
We usually considered about ten venture concepts in a given year, but only about three met all our criteria and were launched. Others that didn’t meet the criteria for a new venture would instead be prime candidates for generating royalty income.
Some ventures would take longer than a year and needed more funds, and some less. But on average we maintained our plan. Remarkably, Siri was one of our least expensive ventures - begun in June 2007 and launched in January 2008. It cost us about $300K. But of course the intellectual property, the people who left SRI to join, and the overall strategy was immensely valuable.
Each time we launched a venture we would take approximately 20% of the company at the Series A round. (In those days, Series A was usually $5M to $10M). The rationale for taking 20% of the company was that with all the value we invested, as described in the ten elements above, we were effectively a co-founder of the company. This worked well with the venture capital investors.
Our model turned out to be remarkably successful. Over more than twenty years we created about 70 ventures with a total market value of over $100B. Four went IPO. We created and founded Siri, and sold it to Apple. Many ventures were acquired for tens or hundreds of $Ms.
The financial return of these startups as well as our royalty income helped SRI continue its overwhelming success in research, innovation, and venture creation. And most importantly, we helped bring great companies and great technology to the world.
My posts are free. Please subscribe and share them with your friends.
Your Venture Coach,
Norman