By: Chuck Frey
One of the recurring themes in Gary Hamel’s excellent new book, The Future of Management, is the idea that companies tend to overinvest in the past at the expense of the future. Often, promising new ideas are starved for funding, or are unfairly held to the same metrics as well-established billion-dollar business units. Isn’t there some way to set resources free within larger organizations, Hamel asks?
One of the recurring themes in Gary Hamel’s excellent new book, The Future of Management, is the idea that companies tend to overinvest in the past at the expense of the future. Often, promising new ideas are starved for funding, or are unfairly held to the same metrics as well-established billion-dollar business units. Isn’t there some way to set resources free within larger organizations, Hamel asks?
One model that seems to be particularly efficient at allocating resources is Silicon Valley, the hotbed of technology startup companies and venture capital firms south of San Francisco. What lessons can we learn from this innovation ecosystem? Hamel suggests several principles that could be adapted to funding new business opportunities in big companies:
First, one of the reasons that Silicon Valley appears to be successful is the diversity of funding sources. A growing number of companies have experimented with incubators and CEO slush funds to funnel investment into new projects, but these forms of single-point sourcing are probably too prone to internal politics and the vagaries of the marketplace. In Silicon Valley, if a venture capitalist demands too large of an equity share, an entrepreneur can seek financing elsewhere. Competition breeds efficiency.
Secondly, according to Hamel, “More investment options means more funding conversations and, therefore, more opportunities for the entrepreneur to adjust and refine a still nascent business model.”
Third, because the entrepreneur has access to a diversity of funding options, this increases the odds that he or she can link up with an “angel” who can also provide expertise and counsel to the fledgling venture.
How can this very successful model be replicated within a large corporation?
Hamel suggests the following: “Depending on the size of your organization, there are somewhere between a few dozen and a few thousand individuals who control discretionary budgets of more than $100,000 per year. Within some constraints, these folks can choose whether to use these funds to hire additional staff, race promotional spending, acquire capital equipment, or add to the year-end bonus pool. Imagine now that all these budget holders were given permission to invest up to 2% of those funds in any idea, across the company, that they found attractive. Investments could be made in cash, or in increments of staff time. Now you have the beginnings of a corporate wide network of angel investors.”
In this proposed model, innovators would need to develop a prospectus and have it vetted by a peer review panel. Any ideas that passed this initial screen would then be eligible to solicit funding from the company’s internal angel investors. Ideas could be posted to internal web site along with “elevator pitch” videos. Innovators could pitch their ideas to angel investors through monthly internal “beauty contests.” To make time to work on these promising new projects, innovators would be allowed to use the funds they raise to buy themselves out of their current responsibilities or hire other people from across the company on short-term assignments. Investors who backed successful projects would get more to invest in the future.
Hamel doesn’t think this idea is as far-fetched as it may sound. Many companies, he points out, invest 5% to 10% of their revenue in R&D. Why not set aside a small share of discretionary funding for ideas that don’t pop up at the right time or in the right place to make it into the normal budgeting process? The bigger point he raises is this: a larger community of investors, as a whole, should make wiser investment decisions than a handful of people in a new ventures unit.
“In such a system, no shortsighted executive, no manager worried about cannibalization, and no risk-averse boss would be able to sink a good idea,” Hamel reasons.
I think Gary Hamel is on to something here. The trick would be convincing corporate leaders to change policies to make these discretionary funds available, and mid-level managers, who tend to hoard resources, to open up to funding ideas elsewhere in the organization. Still, it sounds very promising!