In "Making the Venture Capitalists Play by the Parent's Rules," the wonderfully Sorkinesque "Dealbook" reports:
When Invesco Private Capital managing partner Parag Saxena steps down later this month, the company will have lost, in three months, four of the six senior partners who have invested hundreds of millions of dollars in start-ups.
The departures stem from a conflict between the subsidiary, Invesco Private Capital, and its parent Invesco. The subsidiary is run by venture capitalists, the parent by corporate executives and their lawyers and accountants and Mr. Saxena’s departure highlights what can happen when members of two exclusive clubs with different rules are forced to share the same dinner table. Crabcakes and dinner rolls fly.
Venture capitalists see themselves as maverick, fast-moving entrepreneurs with a need for relatively loose hiring rules and marketing needs. The big public company has rigid standards, compliance issues and little patience for making exceptions for a relatively small subsidiary.
This quip reminded me of a concept introduced in a strange place, later taught formally in business school and that actually translates to something like useful knowledge in private equity. The important distinction between innovative corporate cultures and operational corporate cultures.
The basic concept, that the skills and talents required for successful innovation are at odds with the drab, detail oriented, even bureaucratic bent that is required to keep the mechanism of corporate industry humming, require dramatically different management approaches. Permitting these to co-exist under the umbrella of the same organization means that a very distinct bifurcation of the functions of innovation and operation is required. I'm not usually a fan of business school cases but in this instance Harvard has a pretty good one on the topic ("Innovation at 3M Corp").
This dovetails nicely with the Boston Consulting Group's "BGC Box," framework for corporate portfolio management which, crudely put, dictates that the lower growth endeavors of the firm should be used to fund expansion in the high-growth entities.
When I was much, much younger, a friend of mine introduced me to the multi-hour consuming computer game "Spaceward Ho!," an already several years old, but terminally cute, galactic conquest game I still enjoy as a guilty pleasure sometimes. Spaceward Ho! required you to compete with the computer, or other players, to develop your technology and explore (read: exploit) the universe via colonization and strip mining of the various planets you discovered. It was a wonderfully capitalist game. Keeping general pace in "Ho!" required a great deal of patience and orderly management of your resources (planets) and capital, which you could deploy in a variety of research projects.
One of the categories you could spend capital on was your "radical researchers." The graphic for them still makes me crack a smile. Big craniumed scientist with googly eyes dressed in a white lab coat who's head is exploding with radical ideas. You could just see the senior management of the Galactic Conquest Corporation going out of their way to park their new BMWs as far away as possible from the radical researcher facility, from which evil cackling laughter, strange sulfur like smells, purple smoke and the occasional violent explosion emanated.
While your other internal projects would show slow, incremental gains consistently turn after turn, your radical researchers would return nothing for 5-10 turns at a time. Often you began to wonder if they were doing anything at all. (Today, I can easily see some middle manager doing a IRR calculation on them after 3 years of nothing and sacking the entire division). But then, out of nowhere, when you had almost given up, they would announce a radical discovery. Perhaps 15 turns worth of progress in "terraforming" or something. You never knew what they would find, but you knew it would take a while and be very interesting.
It strikes me that the Investco has failed to grasp the "radical researcher" concept. Venture capitalists are the crazy lab coat types. Try to rein them in and saddle them with paperwork and corporate policy and they will not only flee, but thereafter they might work tirelessly on inventing a deadly anti-Investco device as well. Just for spite.
(Spaceward Ho! by Delta Tao Software. Full Guilty Geek Pleasure Disclosure: I'm a Ho! addict).