Professor Josh Lerner is an academic giant. His 2013 article in HBR on Corporate Venturing is constantly being referenced in conversations as companies explore setting up their own Corporate Venture Capital group. He also has written a number of best selling books, which we reference on today’s episode and talk about the impact for each of you as corporate innovators. I think this week’s conversation will put into context a lot of the work you’re doing, from a real academic thought leader.
- Professor Lerner’s Harvard Business School Faculty Page
- Corporate Venturing, Harvard Business Review
- Patient Capital: The Challenges and Promises of Long-Term Investing (Amazon)
- Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do about It (Amazon)
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Sean Ammirati (00:08): Welcome to Agile Giants, lessons from corporate innovators. I’m Sean Ammirati, your host, Co-Founder and Director of the Carnegie Mellon Corporate Startup Lab, and Partner at the early stage venture capital fund, Birchmere Ventures.
Sean Ammirati (00:22): Each week, I’m going to talk to guests who are experts at creating startups inside large corporations. I believe, fundamentally, a startup within a company is the same as one inside the proverbial garage. A group of entrepreneurs trying to make the world a better place, using new ideas and inventions. However, I also believe some of the techniques and processes are just inherently different. This podcast is going to explore those similarities and differences.
Sean Ammirati (00:56): On this week’s episode of Agile Giants, I’m joined by Professor Josh Lerner, of the Harvard Business School. Josh is the Jacob H. Shift Professor of investment banking at Harvard, and also the unit head of their entrepreneurial management program. Josh has written a ton of books, many of which we talk about in the episode today, and I’ll include a link to his faculty page in the show notes, as well as the books that we referenced. He’s also written a very compelling Harvard Business Review article that many of you have referenced in just email conversations, around corporate venture capital.
Sean Ammirati (01:30): I really think today’s conversation will do a great job putting into context some of the work that you’re doing, from a real academic thought leader. So, without any further delay, I hope you enjoy this week’s conversation with Professor Lerner.
Sean Ammirati (01:49): First of all, Josh, I really appreciate you joining me today. Maybe, if we could start with just a couple context setting questions for us, here. … You wear a lot of different hats, obviously. You’re a professor at the Harvard Business School, you’ve written a bunch of very well known books, as well as academic papers. For people who may not be as familiar with the work you’ve done, how do you think about the big idea or concepts that guide the work that you do?
Josh Lerner (02:16): Well, a lot of my early work was focused on the role of venture capital firms, which I think, anecdotally, were understood to be important, but which hadn’t had a lot of systematic work, looking at how they worked, or what their consequences were.
Josh Lerner (02:37): Many of the papers I wrote in the first 10 years or so of my career really looked at different slices of the venture industry, how it works, what are the changes that firms experience once they get venture financing, and so forth. More recently, I’ve worked on a variety of topics, still in entrepreneurial finance. We focus more intensively, for instance, on angel investing, and understanding how angel investors work. Entrepreneurial public markets, so markets geared towards young companies that might be interested in going public. And, as well as some of the broader changes in innovation landscape, and how entrepreneurial firms are contributing to that process.
Sean Ammirati (03:25): That’s great. Then, I guess, one more context setting question. You also lead the entrepreneurial management unit at HBS, and so on the home page, it talks about the three different lenses that you guys study entrepreneurship through, one of which is the processes.
Sean Ammirati (03:43): You say in that, “We seek to understand the process of entrepreneurial activity in startups and established firms, by examining the anecdotes and consequences of various forms of entrepreneurial opportunity.” I think one thing that’s particularly interesting to this audience, that we spent a lot of time talking to people in the first season of this podcast around, is the similarities and differences between what I would call a “traditional startup”, and then entrepreneurial activities in a large, established firm.
Sean Ammirati (04:11): At a high level, how do you think the processes are similar and different, between startups and established firms?
Josh Lerner (04:17): Well, it’s a very interesting question because, in many senses, for most of the 20th Century, venture capital, or entrepreneurial ventures were the tail of a dog. In other words, the bulk of the funding and activity, and certainly the patenting, took place in large companies, in large integrated research labs, like IBM Central Research, or Bell Labs, and so forth.
Josh Lerner (04:44): Clearly, we’ve seen somewhat of a transformation, over the last couple decades, where simultaneously we’ve seen big companies cutting back on centralized research, and a lot more spending going into entrepreneurial businesses, whether it’s money being raised through venture capitalists or the public markets on the one hand, or through corporations who become major venture investors in their own right. This really suggests some sort of changing of the guard, here, and its very interesting to speculate as to what’s behind it, and where do the differences really lie.
Josh Lerner (05:27): Certainly, one of the fascinating pieces of research that came out last year was a piece by Nick Bloom, Michael Webb, and a few other co-authors, which essentially documented the declining productivity of research and development, that it’s just become a lot harder to fish for ideas, and that this isn’t just true in a few industries, like pharmaceuticals where it’s been pretty well documented, but across a very wide range of technologies one sees the same kind of fewer fish to be caught kind of phenomenon.
Josh Lerner (06:07): As a result, the entrepreneurial process, which seems to be one where it’s much more targeted, one might say opportunistic, seems to become much more appealing to large companies, and figure out ways, whether through alliances, acquisitions, corporate venturing, and the like, to be able to take advantage of some of the efficiency and energy associated with entrepreneurial innovation.
Sean Ammirati (06:33): Yeah, and I want to go right into that … around corporate venture capital specifically. We’ve had some CVCs on the podcast before, and people are reaching out to me all the time for my corporate partners here at CMU about, maybe we should set up a corporate venture capital group, that kind of thing.
Sean Ammirati (06:52): You wrote an HBR article on corporate venturing, that lots and lots of these people refer to, I think, as they’re getting started, as one of those first primers, if you will, on going down this path. That came out about seven years ago. Certainly, traditional venture has evolved a lot over the last seven years. I’m curious, do you think the impact, and the case for corporate venture capital, are there things that have happened in the last seven years that change companies thinking about corporate venture capital, specifically?
Josh Lerner (07:25): Well, I think that, in many respects, corporate venturing has got very attractive aspects, and certainly a lot of it has to do with the fact that, essentially, big companies, when it comes to making decisions, it can be very challenging. Particularly, killing off projects can be very difficult. Creating that arms length relationship, which is often part of corporate venturing, has got some very real pluses to it.
Josh Lerner (07:55): I think that it’s also fair to say that many of the changes in the venture landscape, and particularly not only the increasing scale of the venture landscape, but also the breadth of technologies being considered by venture capitalists, mean that it also creates more opportunities for corporations.
Josh Lerner (08:14): In other words, in many technology areas like autos, 15 years ago, we’re going to set up a corporate venturing program, there might be a very limited number of companies to fund, and today it’s a much broader set. In part, that reflects technological changes, and the influence of software impacting so many industries, but it also reflects the fact that venture capitalists seem to be funding companies in a very broad set of use cases and applications today.
Josh Lerner (08:48): In some sense, you can argue that the environment today is even more conducive today than it was seven years ago, when I did that HBR piece, and wrote the Architecture of Innovation, the book. Things have really evolved for the better, in this regard. On the other hand, we also know that one of the real curses of corporate venturing is that it tends to be an exceedingly cyclical activity, actually much more cyclical than venture capital itself, traditional venture capital, which is a very cyclical business in its own right.
Josh Lerner (09:26): In particular, there’s been numerous waves in the past, where venture capital has boomed, like 1999 and 2000, 1982 and 1983, the late 1960s. In many cases, that boom in venture capital has been mirrored by a boom in corporate venturing, that’s even more dramatic, where people wait until the last possible moment, rush in with a huge influx of funds. Then, when there’s a correction and they feel disappointed, they get out, and move to the next management fad.
Josh Lerner (10:00): I think that awareness of history tempers the enthusiasm, saying that we’re inclined to be worried about a market top. There are certainly a bunch of things that one could point to today, in the venture market, and that might give some degree of hesitancy were you a corporation thinking about initiating a program, just simply because there’s been so much history in the past, of people rushing in at the wrong time. Then, living to regret it, soon after.
Sean Ammirati (10:35): Yeah, you talk about in the article, the average tenure of these is a year. On the other hand, I think when the article came out, it was 2011, and CVC interest was probably stronger than traditional venture at that point. It feels to me like that interest continued. Do you feel like it’s back to this waxing and waning? Or, do you think companies are more committed to these activities today?
Josh Lerner (11:07): Yeah, that’s a big question, and I don’t think one which has a super easy answer to it.
Josh Lerner (11:12): On the one hand, I do feel that there are a lot of indications that business as usual, in terms of how corporations have approached research, has changed pretty fundamentally. As a result, it would not be surprising to see corporate venturing having much less of a faddy aspect to it, and more being a permanent part of a repertoire of corporate venturing tools, and so forth. On the other hand, I’m old enough to remember 1999, where everyone was like, “The world has changed fundamentally,” and then two years later, it didn’t seem like the change had been quite so fundamental.
Josh Lerner (11:54): So, I think we have to be a little cautious in terms of making bold pronouncements of that kind.
Sean Ammirati (12:01): Yes. I guess, where the rubber really meets the road, it certainly seems like the VC market right now is evolving a little bit, and it’d be an easier question to answer in a couple years, when we look at CVC activity over the next couple years, too.
Josh Lerner (12:17): Absolutely. Assuming that we do go into some sort of correction in the market, are we going to see more stick to it-iveness, on the part of the corporate venturing programs.
Sean Ammirati (12:33): Right. If CVC is one way that companies can innovate, partnering with outside startups, there’s the other side of that too, right? Which is going back to the internal, established firm, entrepreneurship as well. Or, what we might call a corporate startup, or an internal activity.
Josh Lerner (12:55): Right.
Sean Ammirati (12:56): Patient Capital is your most recent book, is that correct?
Josh Lerner (12:59): Right.
Sean Ammirati (13:01): You wrote this book, Patient Capital, that’s really outstanding. My day job is a VC, so as someone who pitches a lot of those guys, I thought it was a fantastic book from that perspective.
Sean Ammirati (13:13): But, I think one of the basic tenets of that book is that there’s certain challenges today that are best met through this kind of patient capital, and the tag line is right, “the challenges and promises of longterm investing.” Outside of CVC, you could make an argument that when it comes to these internal startups, companies need to be patient, in terms of how they capitalize those internal startups as well.
Sean Ammirati (13:39): I’m wondering if you have lessons from Patient Capital, or other things you’ve observed running entrepreneurial management, about how companies can be patient about their internal ventures, if you will?
Josh Lerner (13:51): Yeah, it’s a great question, it’s not easy. In the sense that, while I think we can point to many examples where corporations have made huge, long run investments that turned out to be enormously profitable, whether we think about the IBM 360, or the Boeing 747, or choose your example.
Sean Ammirati (14:16): Or Amazon Web Services, right?
Josh Lerner (14:18):Or Amazon Web Services, another great example. There is an aspect where there are a lot of pressures going the other way, particularly for corporations today. We know that particularly once one’s publicly traded, which still remains the way to get a lot of permanent capital, typically, it really puts one under the microscope, and certainly the incentives to make certain slices of the market happy, and to do the right thing seem quite strong.
Josh Lerner (14:51): As much as one may say, “Well, that’s really a refuge of scoundrels,” and that there’s lots of people who are hiding under the guise of longterm investing who are just simply not delivering shareholder value, there still is a very real sense in which it appears to be difficult, in the context of a publicly traded firm, to make large, longterm investments, where the J curve, the time until fruition, is very deep. It still remains a real challenge.
Josh Lerner (15:26): While we would like to say that there are plenty of other alternatives, in terms of getting those projects financed, we know that even the traditional venture model has its very real limitations, in terms of yes, in theory, the fund is eight to 10 years life, with extensions. But, in reality, the pressures to raise the next fund, and so forth, can push you, once again, towards the approach of saying, “Let’s figure out ways to exit sooner, rather than later.”
Sean Ammirati (15:53): Yeah, and I think there’s certain distances that … I sort of have two hats, here, but I think there are certain distances where there’s incumbency advantage, where it makes sense for the company to be able to do that innovation, better an easier than a brand new company with two or three people trying to grow quickly can do.
Sean Ammirati (16:15): So, in the same way that venture is a strong solution for a lot of the world’s problems, there’s probably problems that don’t pattern match well to VC, and do pattern match well to an internal startup, if you will.
Josh Lerner (16:30): Right.
Sean Ammirati (16:31): So, I hear what you’re saying about Wall Street, but the companies who can push back, the famous example referencing the AWS thing would be Jeff Bezos’ first letter to shareholders, a 10% chance of 100X payout, I’m going to take that. It seems like if you can condition the market, it does allow you to eventually have that access to capital.
Sean Ammirati (16:56): Sometimes, I think we mis-categorize it as that’s tech versus non-tech, and I think, theoretically, it could supply the same kind of capital to other kinds of companies, as well. I just don’t know how you convince shareholders to do that. It seems like, given the same shareholders who are pension funds, investing in VC and PE shops are also investing in public equities, it seems like there should be a way to make that argument. But, I’m just curious if you’ve observed things that help, in the work that you led, or also directed?
Josh Lerner (17:32): Yeah, I think it’s a great set of questions. It’s not ones that, by any means, where there’s one formula that seems to work on a sustained period of time. But, I do agree that doing the best to communicate what it is one’s doing, what the nature of the payouts are, and so forth, and probably also not over promising, in terms of the speed of delivery. I think as CEO, you never want to have a conference call where your stock price is dipping during the conference call, so the temptation to make things a little rosy is pretty high.
Sean Ammirati (18:10): I also think, if I think about my day job as a VC, I would never want an LP to evaluate me on one deal. If you’re a CEO, you should be talking about a portfolio of these things, not one of them.
Josh Lerner (18:22): Yeah. Then, there’s an added problem, which is that there certainly seems to be a batch of technologies which may be very important from a social perspective, but which don’t seem to be terribly successful in terms of either corporate or venture investments.
Josh Lerner (18:38): I think clean tech would be exhibit number one, there where, at least if you believe the Sand Hill econometrics numbers, it’s basically returned on a pre-fee basis, over the last 30 years, around 0% returns on the venture side. One doesn’t sense that corporations have exactly had enormous successes in this area, by and large, as well. Yet, clearly the social returns from getting this right would be very substantial, which really suggests the need for … There may be, yet, another class of investor, namely the government, where they just need to step in, in these kinds of situations.
Sean Ammirati (19:19): Yeah. well, I think that would be ideal. I just think there’s an interesting categorization question, on the clean tech thing, for what it’s worth. If you include Solar City and Tesla, your calculation may look different than if you don’t, too, on some of them. There certainly were a lot of go-to zeroes.
Josh Lerner (19:38): Right, exactly. That seems to be part of the challenge.
Sean Ammirati (19:43): Especially one, at the same time. Most of my investments are SaaS and marketplaces, but when the alternative is 200K, it validates a lot of things. That’s a hard case to make.
Josh Lerner (19:55): Absolutely.
Sean Ammirati (19:57): I want to be respectful of your time, Josh, but I do want to pivot to one more thing, if it’s okay, which is going back a little further. You also talked about entrepreneurship as it relates to economic development, and you wrote an early book with the Kaufman Foundation, talking about different public efforts to boost venture capital. Some worked, but some didn’t. I think it was a great playbook for how … I know, here in Pittsburgh, it was well read, and dog eared by a lot of us, in terms of what the right model is there.
Sean Ammirati (20:28): I guess, in this concept of … I mean, both in the case of CVC, and internal corporate ventures, here. Is there a similar set of suggestions you might have for how corporations can boost entrepreneurship, through this lens of economic development?
Josh Lerner (20:43): Well, I think that, certainly, one thing is to very much play … I think it’s going to be very much true for corporations, as well as for governments. There’s a notion of playing to one’s strengths, that just like in the US, we’ve seen practically every state going, chasing after biotech, and saying, “We’ve got some unique comparative advantage, that makes us really well suited for being a biotech hub,” when, in actuality, there are probably half a dozen places that can say that with a straight face. Everyone finds that appealing area.
Josh Lerner (21:21): In the same way, there has been, certainly, when you look at the history of corporate venturing, a bit of an element of wishful thinking in many instances as well, of saying, “Even though we’re an old-lying firm doing this, let’s go and invest in this totally new area, and it’ll be a great thing for us.” The classic example, from the early days of corporate venturing, being Exxon Enterprises going and doing all the IT investments in the ’60s and early ‘70s.
Josh Lerner (22:00): In a way, the idea of saying let’s stick to your knitting, and think about where we have a situation where we’ve got some real comparative advantage, or some real knowledge that gives us some sort of differentiation, some sort of Alpha, in finance speak. Use that as a way to centralize our strategy, I think, is certainly on principle that would carry over to both arenas.
Sean Ammirati (22:28): Yeah, I totally agree with that. What’s your unfair competitive advantage?
Sean Ammirati (22:31): I guess, one other thing I was curious about, though, and Pittsburgh is a good example of this. A lot of what is often called our startup ecosystem is actually large, big companies opening tech centers here, Google Pittsburgh, Facebook, Bosch. In the same way you have good and bad suggestions between startup and public efforts, in this area of corporate innovation, CVC, are there suggestions for corporate public partnerships?
Josh Lerner (23:07): Yeah, I think that’s going to be something that you see almost everywhere. Which is to say, when you think about Israel, startup nation, and say, where is the bulk of the high tech employment? It’s not in the startups, it’s in the Google and Microsoft facilities, which have moved there to be near the startups. Or, even if you think about here, in Cambridge, Massachusetts, and say, “What is the relative employment of biotech companies that are under 10 years of age, versus Novartis’ R&D facility?” Not to mention, all the other R&D facilities. The corporations would definitely be the winners.
Sean Ammirati (23:48): Got it.
Josh Lerner (23:49): On the other hand, those corporations wouldn’t have been there, were it not for the startups, and of course, for the universities, and all the other stuff that’s gone with it.
Sean Ammirati (23:58): I guess the question though is, how much is the university, and how much is the startups, too? It’s an ecosystem.
Josh Lerner (24:03): It really is an ecosystem, but certainly I think that a lot of times, there is this dynamic of saying, “We’re just going to get some startups here, and this is going to solve the problem of our auto plant, or our steel plant, or whatever shutting down.” I think certainly, there can be awareness that even if everything goes right, the jobs at the startup stuff, per se, is going to be probably considerably smaller than whatever it’s replacing. And that the real key to creating that employment and the density, in terms of activity, is likely going to be linked to the attraction of large corporations, but where the startups of a necessary but not sufficient part of the recipe.
Sean Ammirati (24:50): Yeah. Yeah, I think that’s right. It’s interesting to me, it feels like … I’m saying this without a suggestion on what the answer is, but it feels to me like, if you could figure out the right way to unlock Google, and Facebook, and those kinds of jobs here, instead of … A lot of the economic development is see on the big companies is more like move the call center here or whatever, which is jobs, but it doesn’t have this ecosystem effect. I think that there’s some approach to making these regions more appealing to these corporate innovation groups, but I don’t know what that is.
Josh Lerner (25:29): Yeah, I think that even when it comes to our understanding of how these things work, we’re still at relatively early stage. Of course, part of it is just it’s a very hard problem, in the sense that you’ve got a lot of different moving pieces. Certainly, one sees a lot of experiments being tried, certainly a lot of universities investing in tech transfer, as well as national labs, and many others.
Josh Lerner (25:53): Trying to create that formula, to really make it gel and explode, in terms of activity, it certainly is not a single recipe that makes it possible.
Sean Ammirati (26:06): Yeah, absolutely. Okay, last question for you, and I like to ask everybody this. I have a lot of students that listen to these as well, and I always like to ask people for one piece of career advice for that group. It’s interesting to hear the different answers.
Sean Ammirati (26:23): If someone’s coming out of their graduate school now, and trying to figure out what to do next, and they look at your career and think, oh, that’s a cool career path, what advice would you give them?
Josh Lerner (26:34): Well, I guess, if they’re interested in pursuing entrepreneurship, I think the most important thing is to really go a little bit against the grain. Rather than jumping in, as so many students did, into Dotcoms, circa 1999, or some cool social media thing, where you can find which bar your friends are drinking at, circa 2017, that in a way, be willing to be a little bit contrarian and look at where both technologies, market opportunities where the other people aren’t looking, is likely to be a much more profitable in the longterm approach, even if one doesn’t have bragging rights in the short term, among one’s classmates.
Sean Ammirati (27:22): Yeah, excellent. Okay last question, Josh. Where can people find you online, if they want to follow your work, and learn more?
Josh Lerner (27:30): They can just simply do any number of things, from Googling Josh Lerner. I think I still remain the first of many distinguished Josh Lerners that are out there. Or else, they can just go onto the www.HBS.edu, and it’s pretty easy to click through it.
Sean Ammirati (27:46): Okay. We’ll include a link to your HBS page in the show notes, for everybody. I just did know if there was any social channels, or stuff that we’re good to follow you on?
Josh Lerner (27:56): No, I’m a little scared of social media.
Sean Ammirati (27:59): Okay. All right, fair enough.
Sean Ammirati (28:02): Well, I really appreciate you making the time to do this today, Josh. Thanks so much, and hope you stay in touch.
Josh Lerner (28:08): That sounds great, very much enjoyed the conversation.
Sean Ammirati (28:16): I hope you enjoyed this episode of Agile Giants. If so, consider sharing it with a friend, and if you think it’s worth five stars, which I hope you do, please go to iTunes and rate it, so that others can find this content as well.
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