The story of the year in the technology industry has to be HP’s claims that it was deceived by Autonomy in the $11 billion purchase of the software company. The questions of who knew what, and who did (or didn’t) do what, will be discussed and debated for years. And as many business and technology pundits have written, there is much blame both internally and externally with numerous parties including HP and Autonomy management (past and present), and numerous auditors, investment bankers, and advisors.
But what is being lost in all this noise is the fundamental root cause of this and other questionable (if only debatable) acquisitions in the technology industry over the past decade. Why is it that HP and other companies who defined the technology market and were the epitome of innovation find that they have to acquire companies at such astronomical values? Why is it that these new companies get started by bright people with great ideas, rather easily raise $10M-$40M in capital (or even less) and then sell the company for multi-billions to one of the big guys? That’s the issue that management, boards, and investors should be focused on investigating, rather than—or maybe in addition to—the millions of dollars in legal fees and time that they will spend on litigating a so-called “acquisition gone bad.”
As an executive in the technology industry for over 25 years, including stints at those large companies involved in new product innovation—as well as being on the other side in leading startups, raising capital, and numerous IPO and M&A exits—there are two fundamental factors blocking what I will call “intrapreneurial innovation” at America’s largest companies.
1. The first is external and is the result of the nature and structure of the financial markets.
2. The second is internal and the result of management behaviors, incentives, and practices which have evolved over the past decades.
Let’s start with the first. A technology startup with a good idea can go on for years (often 5-10 years) raising much capital with little or no concern for profitability, and in some cases even forgiveness on the revenue side of the equation. Yes, the rules are tough and the bar is high with very detailed scrutinizing from smart venture capitalist and private equity partners. But as long as progress is being made on developing the technology, the markets, etc., the company continues to evolve.
But if you are a large company, and let’s say you have 5 new startups internally defining your future in total adding up to perhaps hundreds of millions, it becomes much more difficult. A delay of a year, which is very common with new technology, can have a material impact on the bottom line, leading to management shake-ups and loss of jobs even at the CEO level. Unless you are an Ellison or a Gates with a strong track record of focusing on building for the long term even if it impacts the short term bottom line, it is often suicide to take the long-term view. It’s much easier to wait it out for the “winners to emerge and then buy them,” as one senior executive put it to me, than to invest. But the price you pay at that time is high. There is a reason race tracks don’t allow you to place a bet after the race is run, or a casino after the roulette wheel stops.
What can be done? If we want to create a long-term future in America for innovation, both with established as well as new companies, Wall St. and the financial sector needs to step up. It’s not acceptable to just