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To date, technologists/scientists and marketing/sales mavens have been pushing the edges of innovation in their domains. So why do new products and new ventures fail 80% of the time to reach their stakeholder's goals? Answer - the business experts on the team fail with their primary responsibility - high level corporate strategy making ("Core Strategy").
Next time you hear venture capitalists blame management execution for poor portfolio performance, rest assured the real culprit is not management's "execution," but management's Core Strategy. After all, how can a management team that was vetted 24 month's ago as "first class" all of a sudden turn into "second class" managers?
SuperLab has invented the solution for both the design and assessment of a new venture's Core Strategy. Our Core Strategy Assessor System and the design methodology enabled by our Core Strategy rules models have been under development and testing for eight years. In mid-2009, the Core Strategy Assessment module of our platform was validated in a rigorous blind back-dated stress test conducted and monitored by three prestigious national firms. The lead challenger was the law firm of Wilson Sonsini Goodrich & Rosati (WSGR), Palo Alto and San Diego offices. WSGR, according to Venture One, represents more companies that receive venture financing than any other law firm in the country. Hitachi Consulting (Orange County office) and the Financial Services and Exchange (FSX) investment banking association (Orange County office) rounded out the challengers. SuperLab assessed the original business plans for ten venture-backed companies launched between 2000-2003. These redacted business plans were provided from the archives of WSGR and FSX. SuperLab was not allowed access to any information from anyone or anywhere past the date of a business plan.
The steering committee's evaluation criterion was simple - Will the assessed company generate within seven years any kind of high ROI liquidity event (sale or IPO) for its investors? The steering committee wanted a full report on each company. These reports had to explain the reasons behind the assessment system scores. Our firm's only requirement was that every business we assessed had to be venture capital/angel backed through each company's start-up, A-round, or B-round financing. The reason for this condition was simple - we did not want any company to justify any possible failure on lack of financing. We wanted companies to face their markets and succeed or fail on the basis of their technology, product, and competitor positioning. The steering committee provided ten companies that raised collectively over $430 million during their first seven years of operations. There were eight high-tech companies in diverse industries, one consumer product company, and one medical therapy company.
The Results - A Perfect Score
The steering committee concluded that our firm's Core Assessor System accurately forecasted the seven-year business and investment performance for ten out of the ten companies assessed. For seven of the companies, our system forecasted that four companies would go out of business and three would be sold. Of the three sold, our system predicted one company would be sold for an acceptable profit and two companies would generate little ROI, if any, from their sale. Three companies remained in business as forecasted by our system and, as predicted did not generate a liquidity event or come close to meeting revenue projections in the seven-year time frame. The steering committee judges acknowledged not only the pinpoint accuracy of our system's assessments, but the keen insights that buttressed assessment conclusions. The steering committee acknowledged the profound implication of this validation test is straightforward.
First, $350 million of venture capital could have been saved if our Core Assessor System had been available in 2000-2003.
Second, even if these heavily financed start-ups had the best management teams executing their strategy, nine were doomed from the get-go, as our system predicted, because they had the wrong Core Strategy for the circumstances they were in when they launched.
For a complete summary, click here.
Five Process Laws Prove Core Strategy's Importance
If Core Strategy is designed correctly at the start of a venture, then the following five universal process laws promise that instead of new products/new ventures failing 80% of the time they will succeed 80% of the time:
The Law of Problem Solving. In the hierarchy of problem solving, decisions about corporate theory (Core Strategy) control and direct the other levels of decision making; namely (in descending order of importance), corporate culture decisions, corporate policy decisions, production/product strategy decisions, production/product tactic decisions, production/product logistic decisions and production/product task decisions. Source - Albert Einstein
Most recently (2008), the risk mitigation community acknowledged the pre-eminence of corporate strategy.
"Corporate strategy determines more than any other factor resource allocation, product and operational performance."
STANDARD AND POOR'S NEWEST SARBANES-OXLEY COMPLIANCE STANDARDS (2008)
The 90-10 Process Law. The first 10% of any process (like the process of new venture innovation and investment) accounts for 90% of the success of the total process. So if during the first 10% of developing a new venture the Core Strategy is designed right, and since Core Strategy is one of the three cornerstones of a new venture (science/technology and marketing/sales being the other two), then logic and this 90-10 process law guarantees that 90% of the success of the new venture will be achieved. Source - W. Edwards Deming
The 90% Right = 0% Law. Even if a strategy is 90% right the project will still probably fail. Source - Adrian Slywotzky, author Profit Patterns
The Fast and Smart Decision Making Law. It is the interaction of accuracy and acceleration that determines if a decision (design) is going to be right. A fast decision depends on a team sharing the same goals ("what we want") and sharing the same theory ("how to get it"). A smart decision means it has predictive value and this depends on the reliability of starting models and frameworks. Source - Clayton Christensen, author The Innovators Dilemma
The Irreversible Course of Action Law. Core Strategy sets a new venture on an irreversible course of direction for 3-5 years. Once a high growth investor-backed venture settles on its Core Strategy and secures its A Round of financing, everyone is committed 100% to the production/product systems' strategies, tactics, logistics, and tasks called out by the Core Strategy. This natural act of commitment from breakthrough-minded entrepreneurs and investors is as much a compliment to their courage as it is a curse. The curse is the fact that when resources, processes, and values are allocated without reservation (the meaning of true breakthrough commitment), this kind of commitment clashes with the uncertainty so inherent in launching the high-growth new venture. The bottom line is this - Core Strategy is the most important lever for new venture success - Core Strategy has to be right - it's just that simple and just that scary. Source - Michael Raynor, author The Strategy Paradox
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