My critical observations about management teams and startups all relate to the understanding on how some become successful or why some expand to some new business enterprise and fail. To me, failure is not an option. However, success is never a guarantee. Yet, one can measure with some idea of certainty, greater than 75% probability, if you add the right ingredients – such as expertise of the management team, leadership skills, understanding of the team’s limitations, and a strong resolve to success. Upon reading Google’s recently published woes with its Robotic division and, now, Verily, I see that to quote a Clint Eastwood film, “A man must know his limitations.”
Early in life, I learned that some people have the right skill sets, and others do not. Once, I asked my father, who led a major NYC photography agency, what makes a great photographer? He replied, in the era of 36 frame rolls of film, that any individual can pick up a camera and shoot several rolls of film. And, maybe, he might just have one great photograph. In contrast, a great photographer can take several in one roll. As example, Robert Capa, a War photographer, took highly memorable picture in a few rolls of film in the Normandy landing of World War II.
And to make a living, photographers are given assignments to shoot a story or an ad campaign, limited both in time and geography, in which to produce great pictures. Great business executives have similar mandates by shareholders. And only a small population, as the photography example shows, is capable of having the right skill sets. And some have been lucky at hitting a single home run. However, one home run does not make a Babe Ruth.
Origins of Google are rather simple – everyone will search for information on the Internet. People are not willing to pay for access for this information. But in seeking information, one can garner data on the user to provide enough data to generate marketing profiles for each user. Grow this company aggressively since Internet companies are easy to create and be the leader in this space. That strategy worked but can that skill set be transferred to other industries? Google has expanded itself into photonics by rolling out a fiber optic network in a small town in Kansas; into satellite technologies by floating Mylar balloons over Singapore to broadcast Internet protocol; into robotics, by having acquired a Massachusetts robotic firm; and into life sciences, a Science Fiction development of medical technologies involving miniature robots and extending longevity.
Now Google recently hired a CFO whose NYC financial experience should reveal what investors look for. Under her leadership, she separated every project into separate divisions; hence, the name Alphabet, to monitor and gauge the financial performance of each group. Now we are witnessing the fruits of this restructured organization – the lemons are no longer being hidden in the shade.
Now every investment is compared to the time value of money. Every investor looks to see what his return will be in a specific time frame. More often than not, it is measured in less than a year. In some cases, several years.
Now the Google CFO is finding out that the so-called various projects are not capable of meeting those investor’s milestones. In the case of Verily, its life science division, I question that this division will survive longer under the Google umbrella -http://www.statnews.com/2016/03/28/google-life-sciences-exodus/. Over 200 expensive employees developing projects with questionable returns will be too much a burden for the Google holding company.
The closest one to the chopping block is the Robotics division. The rumors were that the division managers were asked when they’d thought they would be cash positive and couldn’t come up the numbers. http://www.fool.com/investing/general/2016/03/26/googles-selling-boston-dynamics-but-whos-buying.aspx. Maybe because this company survived earlier under the generous SBIR grants. But few, if any, SBIR grantees can survive in the private sector. The fact that they have been requested to provide a private sector business model and failed confirms that industry wide assumption.
Another potential chopped liver candidate will be the photonics division. Yes, it did build a high speed fiber optic network in a small town in Kansas. But at what costs? Verizon, a highly capable telecommunications company with substantial network development capability, slowed down its FiOS rollouts. In its FiOS development in Quantico, Virginia, it spent thousands of dollars per home to deliver fiber to the home (“FTTH”). If the average family is only willing to spend about $100 per month for fast fiber access, Verizon’s payback would extend to 10 years or more. Now would Google’s deployment be any cheaper? I doubt that. Any carrier still has to dig up streets, hire thousands of laborers, purchase expensive optical switching equipment. Verizon has over 200,000 employees; Google, about 50,000. So instead, Verizon’s CFO saw the profitability in its wireless division and focused on a more profitable model. I doubt that Google will go about building fiber optic networks in every major city and small towns in America. Google does have capital but not that much. And it cannot in good conscious continue to roll out fiber optic networks with very long paybacks, if any.
Another questionable investment is the Mylar satellite business. http://arstechnica.com/information-technology/2013/06/google-flies-internet-balloons-in-stratosphere-for-a-network-in-the-sky/. To float Mylar balloons in the stratosphere where winds blow over 100 miles an hour cannot be a reliable system. Geostationary satellites in outer space also have minor movements that need to be tracked by a beacon so that the satellite dishes can receive strong and consistent signals. How would Mylar balloons remain stationary when be pushed around by headwinds?
We can go on, but this discussion proves that certain management teams are more capable than others in directing a company through new ventures and strategies. And, if a specific group hit a home run once, I would not bet that the team will be successful in other deals. Fred Wilson of Union Square Ventures once related to me that he would invest in another company an entrepreneur founded, who underwent an earlier, successful exit. And, more often than not, that new investment would turn into a lemon. So, as my father related to me, some photographers or entrepreneurs are better than others in having consistency in their production of new companies. Others might just take a great — but lucky — picture.