Silicon Valley is in trouble — again. There have been fewer venture-backed companies sold in the past 18 months than any similar period in the past 10 years.
The stall in start-up financing is no mystery. For as long as the Valley has been financing new ventures, there has always been a premium on innovation and entrepreneurial energy – along with a high tolerance for business failure. But in an economy that has little patience, the enthusiasm for placing bets on companies that could easily fail has dimmed dramatically.
The environment ought to prompt Valley financiers to ask tough questions: Why is failure so common despite all the smart entrepreneurs, their talented management teams and experienced VCs?
The bitter truth is that the most innovative companies have a poor record when it comes to executing business plans. There are a lot of smart ideas that run out of execution prowess long before they run out of money.
Larry Bossidy, the former head of Honeywell, made this unfashionable point several years ago. In his best selling book, “Execution,” he wrote: “Unless you translate big thoughts into concrete steps for action, they’re pointless. Without execution, breakthrough thinking breaks down, learning adds no value, people don’t meet their stretch goals and the revolution stops dead in its tracks.”
In the second half of 2008, the number of US VC-backed companies that were acquired decreased by 28 percent from the previous year. The collapse was even starker on a quarterly basis: More than 70 acquisitions took place in each of the first three quarters of 2008, but only 37 occurred in the fourth quarter. IPOs of Silicon Valley firms shrunk to single digits.
The implications of Bossidy’s observation are obvious: Valley entrepreneurs need to do more than build, scale, innovate and disrupt. They need to prove themselves, month after month, by delivering results, meeting goals and driving performance over a longer period of time. Because M&A and IPO markets are tougher and more risk averse, fledging companies that want to attract attention need to rely much more heavily on true multiples of earnings as the forcing factor for valuations.
Of course, the typical profile of a Silicon Valley entrepreneur rarely includes deep operations experience. Many, in fact, have an outdated view of what execution rigor requires.
The truth is that “process improvement” has come a long way since its original days at GE. Increasingly, managers in every type of industry – manufacturing, retail, technology, services and even law firms – are discovering that “strategic process management” is one of the best ways to understand what a business wants to achieve and what internal bottlenecks prevent it from achieving its goals.
Strategic process management (SPM) is an approach to process improvement that blends proven methodologies, such as Lean and Six Sigma, into a model that aligns process improvement work with corporate strategy. It can achieve benefits fast – in as little as 60-90 days. SPM efforts start by helping companies map out their value streams and identify the largest areas of opportunity. We’ve seen businesses that try to improve execution through SPM boost their operating efficiency by 30-40 percent and achieve an ROI of 5-10X.
Can such an approach work with an entrepreneurial company that is more focused on service and innovation rather than manufacturing? The evidence suggests it can.
Over the last year, a venture backed start-up insurance services company in Silicon Valley was on a great growth trajectory. Using powerful data-driven techniques and processes, the company matched consumers with the best health care plans based on their health care needs. The company’s concept had attracted attention and praise from veterans of the healthcare market.
Operationally, though, this company struggled with customer acquisition and service. Its customer satisfaction rates were frighteningly low, primarily because during peak healthcare enrollment periods, clients could wait for hours to talk to a representative. The company projected it was losing millions in sales due to customers abandoning calls and going elsewhere to find coverage.
After much persuasion, the company decided to address its execution woes through strategic process management. Within two months, the company uncovered more than 100 opportunities across their value chain, prioritized them and began executing a cluster of improvement projects, ranging from agent training to call queuing and forecasting.
The company now projects regaining $5 million of excessive waste while delivering happier customers – and is embracing process improvement with entrepreneurial passion.
Expect to see more of this. For the foreseeable future, the Valley needs to put a premium on more established business virtues such as efficiency and profitable growth. By embracing some of the newest approaches to process management, fledging firms will be in the best position to not only survive the downturn, but come out much more attractive at the other end.
Image by sacks08 via Flickr.