Valley Nordic
Valley Nordic
Valley Nordic Episode 30: Growth at a Big Company & The Magnet Strategy
How does a company keep growing when it is big? There is a growth framework used by big corporations. The framework has seven growth strategies and most of them are pursued in parallel. We discuss pros and cons of each. Furthermore, we talk about he Magnet Strategy which is used by tech companies to get into non-tech businesses.
Useful links:
1. The Magnet Strategy
Hello everyone. Welcome back. This is Chander in Palo Alto,
Arne Tonning:hello. This is Aruna in Oslo.
Chander Chawla:I think Oslo is rubbing off in Palo Alto, it's not sunny today and it's expected to rain,
Arne Tonning:yeah. And in Oslo, it's the most sustained period of rain I've ever seen in my whole life, that probably means I'm old and can't remember, but it's been bad, and I took a rest bite and went to Finland, to Helsinki, where they promised slush, and I got dry streets. Slush was a great tech conference, so I recommend it for everyone for next year.
Chander Chawla:So you want to share any highlights briefly on what you learned or saw. There
Arne Tonning:were a bunch of topics, but I guess two very high on the agenda was anything to do with sustainability. It's a big topic anywhere in the world, but it's particularly big in Nordics for the time being, and I think that will sustain and the other one is sort of European perspective on tech, that the US investors are coming. So that's sort of a trend that's been going for a year, and it relates to the fact that it's very competitive to land the best deals in the US market. So investors are looking outside, and also the valuations have gone up a lot, which are more readily available info in Europe. As well as that, there's a tech pool that hasn't been employed into the big companies already. So that's kind of like two of the main topics that I kind of found interesting
Chander Chawla:good that's good news for the Nordics, absolutely. Yeah. So today we are going to talk about growth in bigger companies. So as a startup, whatever you're doing now, eventually the growth will stop, and what do you do then? So we have a list of things, or list of strategies that companies follow when they're bigger and they want to continue the growth, and in many of them, I have worked firsthand since I've worked at bigger companies, and I saw the pros and cons of these different strategies, so we'll share them, and then we'll share when you are bigger than big that's very big, like Apple or Google above 100 billion dollar range, Apple is actually more than two 50 billion. Then there's another strategy you can follow called, which I call the magnet strategy, where you can go into the non tech industries and become a conglomerate 2.0 so that's the agenda, or the plan for today, and I'm highlighting that based on one of our audience's feedback, that we should say what the outline is. So here it is. So let's start with you know, Arne, your experience in the startup world, like are in whatever the startup is doing the product. After you find a product market fit, you scale, and eventually the cost of customer acquisition becomes really high. Or if you want to go to a new market, you have to adapt the product. So I call all that in as incremental and adjacent product improvements. That's number one. So when you know you want to go to a new market, you have to adjust, you know the product to that market. And then lot of the companies you see Apple, you know the car companies, every year they come out with a new product. So the idea is, it's incremental improvement. Every year it's better than the last one. And then you launch adjacent products like apple. Can launch Apple Music, Apple news, etc, etc. They are adjacent to what they do already. So what have you seen Arne like? Is there a conscious decision that people, when the startups get big enough, when they have to go, you know, adopt a different strategy for growth, for growth, how how thought out process. Is that, or they just do lot of experimentation and see just what works?
Arne Tonning:Well, I guess I should say that, that this is not my sweet, sweet spot. So I guess my experience is somewhat limited. I normally offer. It around the stage of product market fit, and then scaling based on that product market fit, which tends to be like a one product or one offering type of scaling. And if you pick the right deal, that that scaling can go really far. But of course, you don't really see any massive companies with only a single product, so at some point you get there, and I think what I've seen mostly is as that people tend to tend to expand on that product, which tends to be adjacent product opportunities, or expand geo geographically, that's sort of the main, main sort of angle where I've seen, I think, I think it's important to do that Job structurally and sort of very selectively. And I've seen both opportunistic things just falling into people's lap. I've seen it being sort of very opportunistically around people you know, or markets you know, or a very structured, structured analysis approach to it. I think you know, at least a minimum level of analysis should be in place. And I think you know, ideally you'd like to piggyback on the growing market forever and and sometimes that turns out to be iPhone, but that's what a million and even that saturates, but, but, but, but, I think that's sort of where you start out, and I think then I think where you need to choose between is expanding product offering or expanding market geographically, or your growth strategy turns into more the traditional industry, one where it's a game of market share, but that's always the hardest one, I would say.
Chander Chawla:So today we can give you a framework that you can, you know, apply to see what is the best route to continue growth. So, you know, one strategy we just discussed is incremental and adjacent product improvements, which can happen by going to new markets, switching the product, not switching, but adapting the product, etc. So that's one second is more r&d, that's where you develop new technologies to find growth in new areas, or maybe serve the existing customers with new products that don't exist yet. So the prime example of that is Google X, where you see they do a lot of research on new technologies, and once they meet the technology validation, they spin them out as separate companies. Waymo is one example. Verily is one example. And in terms of newer startups, we see two different tracks in Uber and Lyft. Uber is doing R D in self driving cars. In, you know, the the flying cars, there are multiple projects going on, so they're doing R D. Lyft is not as much reliant on R D for growth. So these are the, you know, some, it's funny. Now we call Google as old company versus new company examples. So R D is another way of growing, which all the tech companies, you know, I've worked for, bigger ones, they they're heavily reliant on R and D, and lot of the R and D actually goes into incremental and adjacent products, but some of it goes into developing new things. And the challenge I've seen in R and D is it becomes hard to measure the effectiveness, because by definition, it's research, so you don't know what will come out, and so how they start measuring themselves is by filing patents. Who is filing more patents in terms of, you know, how they compare themselves to competition? So that becomes a, you know, like a false proxy, or who's doing better. So that's the challenge I see with with that approach. And sometimes, you know, you need billion in R and D, and you only invest, you know, half a half a billion, so then you don't reach the threshold to make that into product. So these are some of the challenges with r&d. Approach, yeah, yeah.
Arne Tonning:Quick comment on that. I think actually, if we look at this, you know, in the context of sustaining growth and growth here being at a reasonably high pace, I think the R and the D are quite different, because the r tends to be so far out that it doesn't give you an impact on growth in short to medium term realistically, whereas thoughtful D development can become product expansions or adjacent products that can give effects in, you know, the one year time frame if execute correctly into a growth strategy. Yeah, that's
Chander Chawla:good point. So you have to think of the time horizons that depends on, you know, the product life cycle or the sales life cycle. So for example, in the network where, like, I worked at Siemens, which was in telecom business, the sales cycle was around 18 months to sell. You know, get the book The revenue. So in that case, the D had to be, you know, was 18 months. R was it depended, you know, the parts of R which nobody knew when it'll bear anything. But generally, the idea is it's more than 18 months. So you're not just thinking short term or the next sales cycle. You're thinking three sales cycle out. So that will be like five years or so,
Arne Tonning:yeah, so just just to exemplify the X. Example for Google and the self driving car for Uber is the R. These are years out, at least for substantial contribution to revenue, whereas in Uber's case, you know One example is Uber Eats, which is a product development with growth impact in short term,
Chander Chawla:but that I won't say it's R and D, that's more just incremental and adjacent product. So I would say Uber Eats is adjacent product, not R much R is required. Maybe research of market is required, and
Arne Tonning:then nobody definitely has D.
Chander Chawla:Yeah, all product groups have D so they're doing development. So there's always a split between what the R and D group does and what the product group does in big companies. So generally, these type of things like Uber and Uber Eats come from the product side. They may seek help on optimization, refinement, on the R D group, but the, you know, there isn't much new, newness or technological depth there for it to be fall in, let's say the R D bucket, the Uber eat, the autonomous car, yes. But none of this is hard and fast. It all depends on how the companies are gonna, you know, structured, yeah, okay. Third is m, a, so that's another way companies grow, and also it varies by the company how much they rely on that. So again, here, Google has bought 230 companies since 2000 won. So in 18 years until now, they're about 230 companies. So that's kind of, this is my personal view. Most corporate people don't see that way to me. MNA is kind of outsourced. R and D. You see, other people have done research. It's working. Their market has been validated, or or technology, or both have been validated, and then you pay high price to pull that in. The challenge with that is, you know, the m&a group always have to justify their existence, so they're always coming up with new ideas, fancy PowerPoint presentations, and most of them don't make sense. But you know, you learn by exploring just thinking outside the box. And they're always eager to close something, buy something, because that's how they justify their existence. So you work in m&a, and you didn't, you know, close anything for two years, you start worrying about your job, or you feel you're not contributing. So I found generally MNA people are eager to close things. Okay, your turn? Arne,
Arne Tonning:yeah, I think MNA is a very interesting tool. It. A pretty blunt instrument or sharp tool, or whatever you'd like to say in terms of creating growth if it's executed aggressively so. MMA, you know, growth stems from acquiring new products, acquiring companies that have access to new markets or customers, and that's how you can great gain growth from it. But it can also be a tool, and that increased profitability by taking out synergies and consolidation and that sort of thing. But it executed well. It can be a very, very effective tool, and quite frankly, this is a tool that American companies use much more often and much more aggressively than companies in Europe and the rest of the world. And I've been quite successful in doing so. And at the same time, it's fair to say that m&a fails and at a higher rate, very high rate, for for a number of reasons, and oftentimes that has to do with post merger, integration, culture clash, resources leading. So there's a bunch of pitfalls around m&a, but the best growth companies execute it well,
Chander Chawla:yeah, what I have seen, that's actually good point in the research. Or if you look at the aggregate numbers, half of more than half of m&a deals, fail by fail meaning the expectation they had about why they're buying it, you know, increasing synergies, like reduction in cost or increased revenue, whatever the expectation was, they don't meet that expectation. And in so I used to work for National Semiconductor, which was bought by Texas Instruments, so that I would say was very successful merger, because they basically took the existing product from national and put them in their sales channel, which was 10 times bigger than nationals, so automatically the revenue goes multiple x of What national was making by being available in 10 times more places. Okay, next one is corp dev, which is close to arne's job. So these corp dev people are kind of VCs inside the big companies. So there the idea is, you know, strategic investments, kind of like this technology may work, so let's invest in them. Or some companies may have just cash sitting around and they want to invest and learn and make that cash pile bigger. So it's, it's kind of a VC inside a big company, but their scope is much more limited, and they also they don't have as many investments as an outside VC would have. And if I remember correctly, Intel pioneered this model, and they spent like $5 billion over X number of years, and not much came out of it, and then spawned lot of study of this space. And the latest is still, I don't know what the latest is, but it's kind of they were more popular until 10 years ago. Now I see they're getting less budgets, less people, a lot of people who were in corp dev or doing something else. So it's the growing companies still have that. So like Facebook, Google, Twitter, etc, the companies which are still growing, they're still looking to invest in startups, and some of them eventually buy them. A lot of times they don't.
Arne Tonning:I can say that like I come from the venture capital background, and we look up ourselves as financial VCs, what you call corporate corporate development here. That's a slightly broader term than the VC insiders call it. We typically call it the way that you describe it. We call them corporate venture capital. And I'd actually say that there's been a quite big growth over the last few years in this this category, and statistics even show that, what? What if you looked at corporate venture capital over the last 30 or four years, or however it's been along, what? What it turns out is that it's. It's incredibly cyclical, and it increases a lot towards the peak of the market. But it's also the market that contracts fastest in in in a contracting market, in a downturn, because budgets are slashed in corporates so so that's why they're rather cyclical. I think, I think it's a blunt or instrument for a corporate in terms of growth, which is the framework we're talking about here. Whether it's a good strategic tool is a different question. I think it depends on, the on the on strategy of the corporate VC and the corporate behind it. But in terms of growth, it's a much blunt instrument, simply because it generally not as much money is put into it. And secondarily, it's not immediately, it's generally minority investments, so so it's not consolidated into revenues, and it more has a long term financial effect, or a learning effect. The Learning effect takes longer to to gain benefit out of
Chander Chawla:Yeah, so that's the name of the groups here in the valley. These are carp Dev and generally M and A people are combined with corp dev people. But what you're talking about corporate venture. That's the new groups. Mainly I see them outside Silicon Valley. So they combine corporate venture and innovation, so innovation and mentor, development, etc. So now you have new titles, like Chief Innovation Officer, Chief venture officer. So that's a relatively new phenomena, but I don't see it in the valley. I see it more outside the valley.
Arne Tonning:Is this the point where we get in an argument
Chander Chawla:again? I like arguments go ahead.
Arne Tonning:I think you see them everywhere and in as you point out, I think one of the biggest and most traditional corporate VCs is Intel that they been around forever, still around, and they're a big, big venture investor, Google, sGv, that's the corporate venture arm of Google, although they also have two other venture initiatives. And I, you know, a lot of the the financial institutions, I would say it's, it's both Silicon Valley phenomenon and one outside,
Chander Chawla:yeah, so Google, mean, it's a separate entity, Google Ventures, so when they're part of the venture and innovation side of things, but it's not part of corp dev. So you're right. We have some of them in the valley, like, I'm sure Facebook has it. I don't know the name, but Google Ventures invest a lot of money. Intel, I'm sure, is still investing money. Qualcomm, maybe still, like all of them are doing some type of external investments. So the point is ice, the whole like outside the valley, I see more companies have this Chief Innovation Officer, Chief venture officer, these orgs and titles, which I don't see here in the valley,
Arne Tonning:yeah, possibly, if you look at it from a perspective, yeah,
Chander Chawla:okay, but the we were talking about the growth using corp dev, so the the pros here are, you can learn more and you can take less risk. You know, M and A is bigger risk. But here you observe them, you know, you generally get a board seat. You're right. Microsoft also has now a venture, new venture on m1, two, anyway, so you have so you learn more. So it's basically experimenting outside without maybe not getting the direct benefit. But it may be related to just propagating a new technology or ecosystem you want to propagate, like, if I am Amazon in early days, I will invest in lot of startups that use Cloud, because that helps me eventually. The problem here I see becomes, you know, a lot of the venture capital, this you may not like, is spray and pray, meaning, you know, you invest in lot of them and pray. You. One or two of them succeed, but their spray is not as broad, with a few exceptions. You know, Google probably is an exception, but generally the spray is not as broad. So that's why you don't see huge successes out of these investments, either. So yeah, yep, next is number five. That's incubation. So here the idea is, you kind of incubate the startup inside your organization. So for example, I worked at T Mobile, where they were incubating the Wi Fi business. I was part of the team. It was kind of like considered too risky for T Mobile to try. Can you make money out of free air, which is Wi Fi. You know, all wireless operators, their core asset or competitive advantage is the the spectrum they purchase from the government. So that's why it's difficult for anybody to become an operator, but Wi Fi is free, so is it possible to make money out of free Wi Fi? So that was the incubation unit they created, and we grew from zero, not zero. They bought a startup, mobile star, which was bankrupt, so bought their assets. They had 2 million in revenue, and we bought them. So it went from 2 million to 100 million in three years. So I saw this very fast growth, and all we used from T Mobile was their name, like we had a separate building. Everything was completely separate, so there was no dependency on the bigger business to for us to grow. And I think that's what made it succeed. Then, after three years when we were 100 million, then they merges back into the bigger company. But then they tried the same model for the product lines, the incubation of new ideas outside the product line. That didn't work, because for the that idea to succeed, you had to go and sell it to the product line, which have the road maps. And, you know, the people they hired from outside the industry didn't get the language, so eventually they shut it down. So that didn't work. So incubation works if you're working, in my experience, if you're not reliant on the bigger company to execute on the idea, if you are, then it's more difficult to work.
Arne Tonning:And just Just a clarification here, Chander, when you talk about incubation, you set up a wholly owned company by the parent. In this context, it's not an external startup that you you invest in or anything like that.
Chander Chawla:Yeah, it's totally your own. It's wholly owned subsidiary, or maybe they don't do a legal structure, but it's self contained unit within the company.
Arne Tonning:Yeah, and I think, I think that's important for that model, because I've seen, you know, the incubation model work and fail and and one of the issues when it fails is that it's not sufficiently separated. So it's kind of like just a brand, but it's sometimes, you know, shared budget shame, shared management resources and shared resources, and then the main business tends to capitalize the baby, simply because it always becomes the priority between urgent issues in the big business and management resources, whereas if you get to work independently, you can be agile and focus on your own thing and sort of be protected and fully sponsored by top management, but without being distracted. So I think that's a very important principle for that that model to to work even when you do it right in terms of going after the right opportunities.
Chander Chawla:Yeah, that's exactly what I was saying. You shouldn't be reliant on the bigger company to execute. If you can be self contained, then it may work or it may not work, because you're trying something new, but your chances are working are, yeah, exactly, yeah. So that's strategy number five, and then strategy number six is. Is called spin in which was mainly pioneered by Cisco. So it was tricky. And this, I think now, is being debated, or, I don't know if it's still happening, but this was very successful strategy Cisco used for over a decade. Basically, the idea is, Cisco funds a new startup started by its employees, and they are the sole investor, and if they meet some predetermined milestones, then Cisco buys them back, buys that startup, as you know, at predetermined prices. So it's basically they can do much product development much faster, and, you know, do both technology and market validation. Once that's done, Cisco buys it back. So they did that multiple times. I think there were three engineers who did, like, more than 10 of them, they made a lot of money because they bought them at higher, you know, the market rate generally. So the employees who owned the equity made lot of money doing that. And Cisco made money because, you know, they have this now new product. They can use their sales channel to sell it, you know, 10 times, or whatever, times more than the startup good. The problem or challenges with that are the resentment, resentment employees had who were not chosen to be part of this new thing, and when the they march back, then there again. You know, integration issues your co worker is now, you know, has 10 million and you're still making $100,000 so there were issues with that, but that's another strategy when you're big you can doubt.
Arne Tonning:So I can just say, so I don't doubt that this has worked for instances, but I would just say that common venture capitalist view on this model would be very suspicious. And the reason for that is that common venture capitalist view is to build a successful company, you need the smartest entrepreneurs with a big vision and big incentives to succeed, and by having a predetermined route To acquire a venture capitalist will believe that you cannot attract the best founders and incentives are not right to build something big invaluable. And the same model has been seen where it's not as clear that it's spun out and spun in, but it's sort of an investment model that some corporates have done, where they put money on a completely external startup, but with a buyout option and and generally it doesn't work very well. And particularly financial VCs look at a big at this with big suspicion that the best entrepreneurs will go after something like this.
Chander Chawla:Yeah, I mean, especially from Cisco's point of view, I see the importance of the strategy these, you know, people can go out and do do their own startups, then Cisco doesn't get anything out of them. Now, if they, you know, they are going out and doing their startup, if they succeed, they have, you know, they make money, and Cisco makes money. So from that point of view, it works. But I don't know the success rate or how many, but it they made. One of the stats I read, 10 billion in revenue from products that came out of this spin ends. Okay, the next seventh model is partnerships, where, without having the whole incubation is all in the corp dev MNA, these are all in so partnership is like casual dating. You decide you do something together and see if it's beneficial to both of you, and then if it is, you continue doing it. So that's another model for growth, and there was a term that became popular a few years ago called competition. So you're sometimes partnering with your competition, because that helps both parties. Yes, you can say, you know, Google was partnering with hardware vendors initially the Nexus fonts, because they wanted to learn how to create the best hardware software experience, and the Nexus vendor chosen could get in the market a few months earlier than the others. So it helped both sides and lot of the successes in the past we have seen like Intel Windows and Intel, that was a great partnership that has resulted, you know, in multi billion dollars for both companies. So that's another way of continuing growth once you have achieved saturation in your market. It's about partnerships.
Arne Tonning:And I think there are lots of examples where that worked out really well. I think one of the most common pitfalls in this one is, is making sure, you know, alignment, and that can be very tricky, yeah,
Chander Chawla:yeah. It's, you know. Lot of it is trust, what? And that comes with time. It's how the cultures are, how you behave, and what does the partnership create that's unique,
Arne Tonning:yes, but also, also alignment around objectives and incentives and all these sorts of things that sort of practically can get out in a way if they're not in place.
Chander Chawla:Yeah, you're right. I mean, you can have the right product and the incentives are not aligned. It doesn't work. Okay? So those are the seven strategies, so let me repeat them before we move to magnet strategy, so incremental and adjacent product improvements. Number one, number 2r, d. Number three, MNA, that's mergers and acquisitions. Number four, carp Dev and I was going to list that corporate venture and innovation separately, but let's include that in corp dev. So in number four, number five, incubation, number six, spin, in number seven, partnerships. Okay, now we move to the magnet strategy, which Arna calls it by a different name. So magnet strategy is something a name I came up with because of the size of the company. When it's so big, it just attracts other businesses in different industries. So for example, Apple is now doing, you know, two 60 billion in revenue, and they are into payments. They're into credit cards, they're into healthcare. So these are examples of, you know, them executing back their strategy because of their size, they can get into these new industries and either provide a better user experience or take lower margins and pass them on to the consumers or make The value chain more efficient. So if Apple does Apple Music or Apple TV or Apple news, air pods, Apple Watch, they're not magnet strategy because they're playing within their domain. So magnet strategies when they're going to a non tech industry because of their size and getting market share from incumbents. And it it's become possible recently because of digitization, which is, you know, digitizing all the data, changing the value chains. And if you are big, you don't have to make as much money as the incumbents. Do the incumbents, you know, if they lower the price, they have to go and answer to shareholders. The income goes down. The earnings goes down. It's hard for them to compete when a company like Apple or Google enters your domain, and they're just happy to live with lower margins than you, and they provide better user experience. But what's powering the magnet strategy is digitization. That's what making it possible. Okay? Arne, you want to add to that?
Arne Tonning:I. Ahead. Yeah, I think it's I think we have very similar ideas, and yet I tend to frame this in a slightly different way. The very common idea here is that there's some sort of field force in the field, essentially sucking value out of other industries and capturing that on behalf of these big platform companies. The way that I've thought about it is that that the big tech platform companies build Death Stars, and by Death Stars, it's this massive things that has some components and core assets inside of them. And the way that I look at the core assets of these companies are like leading technology, lots of data to smart people and existing relationships with customers and distribution. And in addition to that, they have brand cash and network events, and they use this mass of core assets to generate a field of gravity on to these other industries around them. So say you want to, and this is also very similar to to chander's idea here, and because of that digital relationship with the customers they have access to, to influence the customers in these industries and thus also capture value out of it, whether they build the product themselves or they partner with other companies that has to use their infrastructure to get to these customers.
Chander Chawla:Yeah, that star sounds negative, but I think what that star is negative, but what I see Apple doing and Google as well, it's positive for the consumers, although they're big and getting bigger, but Apple card is much better for consumer. Apple Pay is much more convenient. Healthcare will see they've signed up, you know, 100 plus hospitals or institutions to use the Apple Health app. So we'll see what comes out of that. But so far, what I'm seeing is it's positive for consumers.
Arne Tonning:Absolutely, that's how they gain traction. Consumers simply by building a better user experience and using their assets to to do that, of course. So, so what's what's good for consumers is not necessarily good for these companies competitors in these markets, because they lose market share. Yeah, they,
Chander Chawla:you know, they just have to move fast. Lesson for startups or other companies is, you know, think in terms of building barriers or digitize fast enough that you know the other the compare the big companies with the magnet cannot attract your business.
Arne Tonning:Yeah, and I think this is the, this is the challenge, right? Because you know, whether you're a startup or a a large corporate, you have challenges with this. I actually give the startups more of a chance, simply because, you know they can be very agile and fast and can be very narrowly focused, and thus can have like armor piercing capability or magnet piercing capability, whereas, if you're if you're launch corporate, generally, everything is slower because you have to involve more people, it's Hard to prioritize relative to existing business that you already explained Chander. And you also have a big disadvantage in that, typically, these, these large tech companies have, you know, a massive talent pool, and startups are also able to attract very smart people because of the freedom to operate in the big incentives and so forth, whereas I think large corporates that are sort of more traditional have the hardest time to attract, you know, very scarce population or very talented tech people, whether They're coders or data scientists or AI people, because of sort of freedom, reputation, incentives and so forth. So I think it's and also a large corporate tend to be more profit oriented, whereas startups and these tech companies have like. Growth at the core of their business and the way that the leadership thinks so, I think it's really challenging, particularly for large, large corporates. This, this, this situation. Yeah,
Chander Chawla:so I want to clarify something. When you say large corporate, you mean large non tech corporate, Apple or Google,
Arne Tonning:yeah, not the Death Stars. I mean, they're, you know, the Death Stars are young compared to the traditional planets there,
Chander Chawla:yeah, yeah, okay. I think that's all we have for today. It's a very different topic today. How do you keep growing after you have grown a lot? So hopefully what we gave you gives you a framework and different ways to think about growth after you have reached market saturation. And I hope that some of you get to execute the magnet strategy. You're so big that you can attract other businesses to your business. Okay, thanks, Arna, thank you. Thanks everybody. See you next week. Bye, bye.