Commentary

Culture As An Investment Strategy

by dave.b , Max Kalehoff , July 17, 2009

I worked at one of the largest marketing communications agencies at the beginning of my career. After three years, I was recruited to startup life by one of my clients, and I never looked back. While the startup pace is more intense and unpredictable, there are many things about it that appeal to me, especially: team vision, pride in building something big, accountability and speed. These cultural dynamics result in a pace of innovation not often achieved at big companies.

That's why I find interesting a new venture-capital firm launched by Marc Andreesen (Netscape founder) and Ben Horowitz. At the New York Times Bits blog, Claire Cain Miller wrote about their secret investment strategy: to watch which startups get acquired by big companies -- and then finance ones that are doing what those acquired startups would have done if they had remained independent. In other words, they're betting on strong industry peers who aren't hampered by the deadly forces of bigness and ownership.

Miller quoted Andreesen: "When these things have big opportunities, in general the right thing to do is to keep it independent. Silicon Valley would have more franchises otherwise. There could be more Oracles and Ciscos...When companies are acquired quickly, innovation slows down. YouTube, if it had a gun to its head to make money, might have come up with a path to profitability faster than it will as part of Google."

I've seen firsthand what Andreesen describes. On the other hand, I've seen startups lose their innovation because they adopted, on their own, big-company mindsets and cultures -- in greater proportion to the size and complexities of their organizations.

Regardless, Andreesen and Horowitz have an investment strategy based on culture. Their thesis is that bigness kills cultures of innovation, while independence doesn't. What matters more than first-mover innovation is sustained innovation.

I think this strategy makes a lot of sense. But it takes a leap of faith because culture is not easily quantified, often a prerequisite of investment decisions. Indeed, their proxy for sustained innovation is independence, which is relatively black and white.

How does size and independence impact culture and innovation at your firm?

commentary, vc

5 comments about "Culture As An Investment Strategy ".

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Joshua Dreller from Signal, July 17, 2009 at 10:40 a.m.
Size does matter!
Being a mid-sized firm, sometimes I fantasize about the big budgets my huge holding company counterparts get to play with. However, when I talk to those folks, they constantly complain about the slowness and inflexibility they deal with and are enamored with the nimbleness in which I'm able execute innovative ideas.
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Jody Ordioni from BRANDEMiX, July 17, 2009 at 10:45 a.m.

It's said that Culture eats Strategy for Lunch. True culture is comprised of people and people make the difference.

Thomas Kurz from EFP, July 17, 2009 at 11:04 a.m.

Culture absolutely matters...but it's a coefficient in an algebraic equation where other unknown factors influence its overall value.

Size also matters. Think about the 800 lb gorilla. The company that is so large that they control the market place whether it is through distribution, marketing or pricing. For many small companies, the battle isn't one of ideas or quality product. It is about the battle of little big horn...it's about generating success with minimal resources knowing that established players will be less than interested in seeing their market share under attack.

Bill Kaplan from FreshAddress, Inc., July 17, 2009 at 11:16 a.m.

Excellent points, Max. From my experience as the founder and leader of the MIT Blackjack Team (of "21" fame) to the terrific growth we've enjoyed at FreshAddress, a critical component of any long-term successful company is the building of a team culture right from the start.

Our MIT BJ Team was structured from the beginning such that everyone (General Partner, limited partners/investors, players, etc.) was compensated solely on the basis of the team's profits. This helped ensure that the focus of everyone involved was to do everything possible to maximize the team's winnings.

At FreshAddress, our compensation model is structured in a similar fashion - every employee in the company (from the office manager to the marketing manager to our client services and list processing teams) receives a substantial portion of their compensation based on our company's Net Revenues each month. This culture again recognizes that every person on the team plays a critical role in our success and, accordingly, incentivizes them to return projects on time and without error, assist clients in every way possible to help them solve their problems and maximize their returns, and always be on the lookout for additional ways to innovate and improve/expand our offerings.

Being able to sustain this culture as a company grows is probably one of the toughest tasks faced by management. Thanks for raising such an important issue at a time when companies most need to keep company culture in mind!

Richard Monihan, July 17, 2009 at 3:54 p.m.

There are a few ways to look at this. Andreesen hasn't exactly lit the world on fire since his original "big hit". He's no slouch, but he hasn't exactly come up with the next big thing, either.
Nor should we expect him to. After all if your first hit in the majors is a grand slam, the rest is denouement.

But the concept of investing in "fast followers" of this nature is actually very smart and has potentially large rewards. There are no companies who were the first to enter a field which grew dramatically who remained on top. Microsoft didn't invent the OS, DELL didn't invent the PC, and whoever sells the most TVs today didn't invent that, either....

Point is, the BEST way to do business, always and everywhere, is to let someone else blaze the trail and follow in their footsteps. This is how Microsoft stays on top, they enter new fields by paying attention to who is doing what and then deploying massive amounts of manpower to the new field. Eventually, the overtake the competition.

Google didn't invent the search engine, nor did they start any of the new fields that have grown out of it - but they have perfected what they do to a very large degree. I would bet against Google when they try to enter new and untried fields on their own. The odds wouldn't favor them, the hubris of size would eventually mean they would deploy ever larger sums of money and manpower to achieve their goals...and probably fail (lessons for those who think bigger is better and think the government can solve everything...).

Point is, Andreesen has seen what it takes to succeed and it isn't betting on the trailblazers. While he was part of the first group to make the first commercially viable browser...he didn't make the first browser....