The Venture Mindset | NACD

Speaker A: Um, just to set the table for the discussion today, we're going to talk about what makes venture capitalists unique, what we can learn from them, and how we apply that, uh, to the boardroom to keep innovation alive. Um, venture capitalists are known for their extraordinary ability to spot opportunities and they know how to identify emerging trends, how to bring new industries into being, when to hold them and when to fold them. And their unique mindset has made them the force behind world changing companies as we know, um, Amazon, Google, Moderna, SpaceX and Zoom. And along the way they've displaced many incumbents that were not able to keep up with the changing world. And that really is the backdrop for this awesome panel that we've assembled today for you all. Uh, and I'm so proud to have Professor Ilya Strebulov, uh, of Stanford's Graduate School of Business. Um, until recently, Ilya was, I thought, one of, uh, Silicon Valley's best kept secrets. And uh, now he's just published a book called the Venture Mindset, which we've borrowed for the title of today's webinar. He's a really respected expert in the innovation ecosystem and his research has powered the data that forms the hypotheses for many significant publications. But the secret's out. And, uh, the book is, uh, available I think on May 21. And Ilya is going to correct me if I got that wrong. Uh, together with his co author Alex Dang, uh, they talk about how to make smarter bets and achieve extraordinary growth. And they draw from extensive academic research on venture capital of all stages, all flavors, uh, corporate innovation, and from his own experience as a board member as well as an advisor and consultant to many corporate leaders. And so we're really glad to have Ilya today. Uh, and of course Claudia Van Muntz, uh, the chair of NACD in Northern California and one of Silicon Valley's most sought after independent directors. When Claudia is not teaching a course on entrepreneurship or governance or venture capital at Stanford, uh, where she was recently invited to join the faculty, if she's not hosting an NACD event, if she's not coaching one of NEA's portfolio companies where she serves as an advisor, Claudia sits on the board of Best Buy bmo, uh, which is now a systemically important bank in North America, and Arteros IP and many more that are just too many to name. But, um, Claudia is also well known for her leadership in corporate venture and that's in part because she spent 15 years leading, uh, and driving innovation at IBM Ventures. She ran a Venture team that invested in startups and venture funds globally. Um, she was the founding managing director of the Global Corporate Venture Institute. Uh, she was a board member of the National Venture Capital Association, LAVKA Parity, AH.org and many more. And I've got to stop. And um, uh, before we kick off the discussion about the um, venture mindset though, I wanted to ask Ilya how he came to Silicon Valley. And Ilya, can you share just two takeaways from the book that you hope our audience will come away with from the podcast today? Ilya, thank you.

Speaker B: Thank you, Louis. Thanks so much for the invitation. It's great to be here. Um, I've been at Stanford Graduate School of business now for 20 years and I founded and I'm directing the Venture Capital Initiative which is really with my team. We are focusing on all aspects of venture capital, including corporate innovation and corporate venture capital. And in fact Claudia and I go back for quite a few years. In fact, Claudia was really one of those, the most important people who introduced me to the world of corporate venture capital when I think it was much less important than it is today. I'm also teaching a venture capital class that is now the most popular class at the GSB. Uh, last year we had 240 people MBA students just on the wait list for this class. And it is not because of me, it is really because venture is such an amazing topic. We have both founders. I have more than 400 students who are graduated from my class and became founders and more than 200 students who graduated and became venture capitalists, corporate venture capitalists, private equity fund managers. This is such a topic that is central to what's happening at the business school in Silicon Valley but more and more throughout the world. And the reason I wrote the book the Venture Mindset, um, is because I think that it's really important for everybody and specifically for corporate directors. And I'll touch on this later on to understand that the world of innovation and the world of discussions about innovations and actions that people take changing dramatically. And so what I used to teach for now more than 10 years at Stanford, I really would like to bring to everybody and specifically so to corporate decision makers. So what is the venture mindset now? The way I think about the venture mindset is that uh, it's a new mental model for uh, leaders to make decisions in today's innovation driven world. And specifically I think types of innovation where there's a lot of disruption happening. Okay, so, um, why it is particularly important for corporate board members, um, I also served As a board member of a 10 billion-plus NASDAQ traded company. And one of the reasons I was asked to become a board member is exactly to bring the Silicon Valley venture mindset to the board discussions and to the senior management. And I saw first place how to apply all those principles that I, um, researched, developed, taught my students to the, to the, to the boardroom. Now Lou, you asked me to share a couple of takeaways.

Speaker A: Two.

Speaker B: Two. Okay. Uh, well, professors tend to violate the rules. Maybe I'll share three. Okay. But promise no more than three at this point. Um, first of all, the venture mindset is organized as nine distinct principles. And let me share three of them very very briefly. And for each of them I'll try also to provide some kind of little story. Um, the first one is, and the one that I think is critically important for especially non executive board members is think long and support this with metrics. Um, so let me right now go and unpack the first principle. When I observe the life of public companies, senior management, for obvious reasons tend to concentrate on short term focus, quarterly earnings calls, quarterly or annual, 10ks and so on.

Speaker A: Okay.

Speaker B: If we go to the world of venture, venture capitalists think in fact on the opposite. They don't really care about quarterly revenue. Well, many startups don't have quarterly revenue to start with. It doesn't matter though. It doesn't mean though that they don't care about short term metrics, it's just that their metrics are different. But they do care about long term vision. In fact, and I think that is a very interesting and cool fact. One of the most famous venture capital firms in Silicon Valley, Sequoia. The reason why it is named Sequoia, uh, by the founder Don Valentine, many, many years ago is because Sequoia of course is a California tree that first tends uh, to be really, really, really long term. It ages very slowly, matures and blossoms. But second, it takes many years to mature to start blossoming. And that was the reason behind Don Valentine's naming venture capital from Sequoia. So I think the idea that non executive board members can naturally m better suit more, better position to focus on long term, I think that's really important. I uh, realized this myself when I was a board member. Now um, let me try to think about what kind of metrics. Whether you are in the company, whatever industry, whether it's B2B, B2C healthcare, the metrics that you need to focus on are not just profitability metrics or revenue metrics and they are what I call backward looking and backward looking metrics tend to be short term metrics. Instead, focus and ask all the questions on forward looking metrics. Forward looking metrics tend to think, tend to project, to predict the future. Um, one metric that is really important to focus on is L ltv, which is the customer lifetime value. Again, it doesn't matter the nature of the customer, but whoever your customer is in your company, ask yourself and ask other board members and ask senior managers, what is ltv? Okay. And amazingly enough I'm consulting, uh, a lot of, uh, a lot of boards and very often they don't consider LTV at all before I come in. And uh, we'll try to think um, about those long term metrics. Okay, so this is the first principle and I'll be happy to talk more about this and answer questions in the chat about this. The second principle, which is very important is what I call in the book the principle Bet on the jockey, not only the horse. What I find out when I do research on large companies, they tend to think first about products, about business models, about projections. And I'm pretty sure that you all experience this as board members. Okay, don't get satisfied with this. If you talk about innovation, about new business lines, about some, um, industries you're trying to enter in, it's more often more important about who is going to lead this initiative, the jockey, as opposed to just what it is about. One of the important reasons is the word that is very popular in Silicon Valley and I have to say very often misused pivot. When you enter, uh, a new territory, very often your expectations about the course, business model, product markets and so on change unexpectedly. There are a lot of unknown unknowns. And as you learn, all this shifts and if you just have your business plans, business projections, but you don't have an ability to pivot, well then likely this attempt is not going to be successful. So the jockeys, who are amazing, and this is what I've learned a lot from venture capitalists, they tend to assess who is going to execute. So they're asking the questions about, uh, what is the team to product fit, founder, uh, to market fit, what is your, as the founder, ah, or corporate entrepreneur, in this case corporate leader, so to say unfair advantage. So always demand as a board member who is going to lead this initiative. Okay. And Louis, uh, I'll do one more principle and then I will stop. And this is, I think very important principle. Um, and it's easy to remember, um, what the venture capitalists really care about is the following home Runs matter, strikeouts don't. First of all, statistics. And uh, I have, at the Venture Capital initiative at Stanford, we have data on every single startup that ever raised institutional money, um, from in the United States. So I have, I know statistics. Between 60 and 80% of startups fail. Just think about this, okay? So if you have a typical portfolio of 20 deals of an early stage venture capital fund, 15, 16 out of 20 deals will fail and maybe 2 to 3 will bring some decent returns, but not spectacular. And then there's going to be maybe one home run, one investment that will return 100x,000x, sometimes 5000x that will change the entire game. And at this point I'm often asked, is it luck? And it is not luck. So my research suggests, in fact that it is not luck. And um, here is the easy way to remember this. If you buy a lottery ticket and win a jackpot. Jackpot, it's luck. If, um, you buy another lottery ticket next week and again win a jackpot, it's a skill. It's no longer luck. So that's what's happening with successful venture capitalists who follow the venture minded principles. They're getting home run again and again and again. And one of the, I, uh, think challenges in the corporate boardrooms and the senior management is exactly the actions, the decision making processes that lead you to catch home runs are different from the process that lead you to catch just normal return projects. Okay, Normal roi. And this is what I devote actually a lot of time when I teach students. In the book, when I, um, talk to senior leaders is about how to, how to catch, um, home runs. Lou?

Speaker A: Um, one more question, Ilia, before we pivot off. How did you come from, wherever you came from to Stanford?

Speaker B: That is a, that's a great question. So I was born in the Soviet Union, that country that no longer exists. Um, and I think in many ways I had to become venture minded just to survive in the interesting socialistic society. But I wanted to be an academic early on. And um, after graduating from Moscow State in the degree of math and economics, I went to London. I did my PhD in Finance at the London Business School and then I came to Stanford straight away. And what is really interesting, and that's a cool fact, when I came TO STANFORD Exactly 20 years ago in 2004, I was a young, uh, naive assistant professor of finance. I did not know what venture capital was at all. It was not taught in any PhD program, Louis, in any, uh, because nobody cared about venture capital and academic finance. I came to Stanford. It was the best. It still is the best finance department in the world. Not a single finance professor knew or cared about venture capital. And also, I didn't know anything about it. And then I, um, from very early days, my difference was I cared about my students. And so I talked a lot to my students outside the classroom. And then I followed them and I kept in touch with them. And I realized many of them become founders and many of them become venture capitalists. And they don't make decisions the way we teach them in our finance classes. Like they violate basic finance rules. And so I became intrigued by that and I started studying how bench cappers make decisions. That was my entry point, so to say, into the world of venture capital. And then I realized they make decisions very differently. And so I started studying, um, this, and then I moved to the world of corporate innovation and corporate venture.

Speaker A: So Ilya, um, I think you have an, uh, upcoming publication coming out on unicorns. And what percentage of unicorns are born outside the United States versus inside?

Speaker B: I do have, um, in fact, if you just, I think if you, um, Google unicorn report, Venture mindset, the first link is going to be that report. Um, so we, first of all, we track every single unicorn that, uh, became a unicorn, um, in the United States. And in fact now, Louie, we have expanded to global unicorns. So very soon I will have data about every single unicorn around the globe.

Speaker A: And U.S. unicorns, percentage of foreign founders,

Speaker B: um, it's, uh, about 35%. Well, a little bit. A little bit more than a third.

Speaker A: Well, we have the unicorn professor and we have, uh, the unicorn director, Claudia Fan Muntz with us today. And Claudia, your background is, is just as fascinating as Ilya's. Tell us about your journey to Silicon Valley via Taipei and Sao Paulo. You're one of the most interesting people with the most interesting backgrounds I know. And, and tell us one thing about Ilya's book. Agree with. And then I really want you to try and tell me one thing that you think one thing Ilya got wrong. And, and how. How do strikeouts not matter? I mean, uh, that's the first thing I want to argue about. But I'll leave that to you, Claudia.

Speaker C: Absolutely. Oh, thank you. I mean, first of all, Ilya is super modest. I mean, none of us get 200, uh, wait list for our classes. His is absolutely the exception, not the, nor even amongst all the entrepreneur and venture capital classes at gsb. And um, just this incredible passion that he has about the topic. Draw all the students to take his class as a must take, um, I um, actually came here, uh, like many people in this valley, uh, you get to come here for graduate school because you are admired the university in the United States, so from Brazil, from Taiwan where I was born, I grew up in Brazil. And um, after college I was here and um, with a, two suitcases thinking that I was going to get my degree and go home. Of course that is uh, 40 some years ago, um, and worked for IBM for 30 years. And the interesting thing about my 30 year career with IBM is I was always on the sort of a front, front end innovation part of IBM. I was you know in the R D when I first joined the company. I was a computer scientist working the research lab. I was then you know uh, the head of the commercialization licensing for IBM research lab. I moved on to be vice ah, president of the corporate strategy and managing director of the corporate uh, venture and then you know, vice president of corporate development M and A. So in some way you know, my interesting um, career year, even though it's, it's kind of all liar these days, especially to the student to say you spend 30 years with one company, they think you're totally, you know, totally not marketable if you have to stick around that long. But the true other factor is it is a very exciting place to be to try to help a large corporation innovate. At the same time it's very challenging. As um, as you can imagine the process, the culture is not really you know, enabling the large corporation to a lot of uh, things that uh, Ilya talks about in his book. So you. I actually subscribe to all the principles that he put forward. As a matter of fact one thing that really draw me to Ilya, when um, when I was um, invited to the board of the National Venture Capital association as the very first corporate investor, I realized that they don't understand what venture means to large corporation. We're not there to get the financial return there. You know, I was a part of a $100 billion revenue a year company. Whatever return I get will be rounding arrow on the, on the, on the balance book. But um, so I actually reach out to Lee. I heard this professor at GSB that was very data driven, you know, thinking has the data behind it. Of course as an engineer that was a very important aspect for me because I don't need people pontificating about every subject as people often do. So that's actually how our relationship started and that's how he became such a uh, authority on not just the venture capital but also how corporation operate as Part of this venture ecosystem today as you know corporate venture now contribute to almost 50% of all the capital in the venture globally and annually. So it's a very significant force. As uh, then when Leah and I were, you know it was like a 2012 back then we were still sort of an outlier, you know, hiding the corner of the room that nobody want to talk to. Um, today we're truly a force and a lot of it is driven by how do we innovate. Right. The pace of innovation only got more faster and only got more drastic. Four or five things are shifting all at once. You no longer have the era of Internet, the era of IoT, the era of Wi Fi, no longer. One can focus on one thing at the time. Um, so it is very very important for a large corporation that has um, some way to tap into the innovation from, you know, rather is through build versus buy, decision, partnership, all aspect of innovations that will help the company adapt themselves. So if you look at his book, I will say one thing he truly downplay and he's easier said than done when I read it is this whole thing about the different incentive structure, right? I mean a uh, corporation operating at the scale can afford to have that kind of nimble incentive structure that allow people to really tie their work and their innovation very directly to the way that they are compensated. So that's one thing he and I argue about because I know many corporate venture want to be compensated as a venture capitalist and the company obviously have a hard time trying to keep that as part of the overall, you know, compensation structure. That corporation tend to have a very rigid framework. But all the other things that he talked about, you know, you said why, why the strikeout? You know, doesn't matter. The true or the factor is, you know, if you can keep them, if you can keep this dry out at the fairly early stage, you're not pouring. The problem about corporation is unlike venture, we start big and then we're stuck with it. We don't know how to get out of it. We have to study it to death. But if you look at venture, they start small and you take an average of seven round of financing for them to become real. So there is a lot of learning from how the venture operates. This fast iteration I always call it is innovation by fast iteration. Our people are not any less talented than uh, the people in the VC firm or the entrepreneur. We just don't have that rapid iterative process of innovation that allow us to fail early and fail fast. So we can capture those home rounds with more accuracy and with more repetitiveness.

Speaker A: So if I, if I heard you, you, you resonate and agree with home runs matter, strikeouts don't, um, but you don't necessarily agree with Ilya's comments about incentives.

Speaker C: Yes, I think is, uh, is a, is, is a, a huge obstacle for all the processes.

Speaker A: I love it. Well Claudia, I know that you know that most of the folks on today's call are independent directors. So not only are they not management, uh, but they're not representing uh, the significant investor on the board, um, for the greatest, to the greatest extent on this call. And so what advice would you have for independent directors to think about this, this um, and bring this mindset, how to bring this mindset to the board, um, about home runs mattering and strikeouts? Don't.

Speaker C: I think, I think just, you know, this book really give us a lot of language. I mean our job is really to ask questions, be able to bring up, you know, dissenting views and be able to really activate all those different views. But we also want to do, in the ways that uh, independent director, you know, are, are asked to do. We're not to impose any framework but you know, look at his book more as a way that the language of it to, to ask question about, you know, where, what, what is our future, you know, forward looking metrics. I mean that is a very innovative um, nomenclature even for me. Even though I, I am very often seeing as many of the Silicon Valley directors are this kind of geeky, you know, geeky person in the boardrooms that everything when it comes to cyber digital, the whole board, you know, move to me and say, what do you think? So we really need to gain the language to ask the question about the process of innovation, not just these uh, uh, underlying disruption. So question to ask, you know, what was the last thing we fail? What were the lessons that we have learned? Are we really standing on the sideline or are we actually doing something that are going to allow us to respond to the shifts that are going on in our industry? I think a lot of these are very valid question for a director to ask in a very pragmatic way and especially coming from Silicon Valley. You're almost, you're unique, you know, qualify to ask this question because most of us has one foot on the venture, you know, and one foot on the large corporate serving as a director. Um, so these are really, um, like I said, the reason I think this book is such an important book is a lot of us know about this, we know how to think about this because of our unique profile, but give us the language to really utilize it to ask the question, like I said, um, you know, like the forward looking metric, you know, what, what is our strikeout rate? You know, how much have we uh, invested and, and what are we learning from those investments? All the things that you would ask if you're a venture investor, um, as,

Speaker A: as outside counsel, I, I have a number of clients that, that have corporate venture programs. And it always surprises me how different boards look at these programs differently. And I, I feel like with some of the companies I work with it's viewed as a distraction and why are we talking about this? And others might spend an inordinate amount of time on it. Which brings me to the question of what is a home run? And of course for a venture capitalist, the financial kind, the one that uh, grew up on Sand Hill Road, we know what that looks like. It's viewed in dollars, it's measured in terms of internal rate of return, which is an annual number. And we know, as Ilya just told us, that there'll be 20 investments and only one home run will return the entire fund. Um, so 15 will fail, two to four will just return capital and there will be one, uh, that will really return the fund several times. And if it takes 10 years, that means it's got to return at 10x just to get, uh, to break even. And it's got to do more, uh, in fact than 10x to get to that 20%, uh, or 28% rate of return that really, um, everybody's looking for, for that to be successful. And I think that's what's often surprising when you break down the math into individual years and the life of a fund. What is the definition of success? And it's really one giant, not even a home run. It's gotta be a grand slam. Um, but how is that different in the corporate context? Claudia and I know this is something that you've spent a lot of time, uh, with over the last few uh, years. Let's say, um, what, what is a strategic success?

Speaker C: Certainly, you know, all corporation as, as we move forward has gap and wide spaces. And uh, the success can be, you know, first and foremost, just the information, right? Are we making decision based on valid information? As Ilya talked about? Are we looking outside of our four walls, right? Are we looking at the spectrum of um, innovations that are happening in the venture, in the university? I mean, are we making informed decision, you know, rather than just putting the blinders on and sticking with our own portfolio of products, services until we are disrupted by somebody else that will take over. As a matter of fact, you know, some of the stats that you will see, and I know this by heart because IBM celebrated 100 year, um, just before not I retire, uh, IBM celebrated 100 year of IBM. And so there was a lot of statistics that came out at that Point said only 0.5% of the companies that were there with us when the company was founded are still operational today as a business. Um, so you know it's really, really make you realize that wow, it is not an easy thing to just survive. I mean just like is insolvency for a venture backed company. You know, extinction is real for a corporation as well. So are you, you know, as we talk about FOMO and all these uh, things, uh, as a corporation, but a home run is a corporation that are making informed decision. Strategic return is a much m. Broader uh, justification of a return than pure financial home run for a venture investor that has to pay off the portfolio. W. Right. Are you adapting? Is your portfolio adapting? Are you serving your customer with what they need? All those are strategic measurements that uh, the corporation has in order to continue to grow and sustain the business and serving the customer. So you know, for us, that is, you know, when I, when, when I was with IBM, um, you know, the board doesn't want to know about the financial aspect of the corporate venture. They want to know how many companies have we deployed their technology so our integrated stack can be innovative, can have the latest technology, incorporated. They want to know how many acquisitions we have done so we can be on the leading edge of the solution we deliver to our client. So that is the difference between a corporate are looking for innovation and a venture capitalists are looking for innovation. Innovation.

Speaker A: Ilya, you were looking to jump in?

Speaker B: Yes. Well, first of all, thank you Louis. First of all, let me comment on something that is very important that Claudia said about incentives. So I think Claude and I fully agree on the importance of incentives. In fact, one of the principles in the venture mindset is make the pie bigger or the importance of incentives. Let me just give you a couple of examples about how incentives are important. They're not about corporate or maybe venture capital, but I think they're very telling. One story that I really love is that in uh, the beginning of the 20th century, the French colonial administrators in Hanoi now, ah, Vietnam had um, an epidemic, an epidemic of uh, of rats. There were a lot of rats. So their solution was very simple. They would pay one penny for each tail that was brought to them. Each red tail will get one penny. So what happened was that in 12 months, the number of rats multiplied. In fact, I believe increased 20 times.

Speaker A: Why?

Speaker B: Because they provide incentives. So, in fact, uh, it turns out to be that in about 20 miles outside Hanoi, there were rat farms where rats were bred. And of course their tails were cut off. Okay. But rats were not killed. So if you provide incentives, drive behavior, if you provide wrong incentives, you will get wrong results. Uh, getting closer to our times, there's one research that I absolutely love and I actually think every single corporate board member and every single cinema manager senior executive should know about. It's an Italian research project where two or three Italian professors looked at 1800 Italian managers in, uh, medium size and large size Italian trade and service firms. Okay, it, it was about, uh, 15 years ago. And, um, they offered those managers two types of incentives. One was a fixed salary. Another one was some, um, powerful incentives to try new things. Powerful incentives means that if you try a new thing, it's going to work out. You will get a fraction of future value, fraction of future profits. So I believe it was about 10 or 15% of the future profits. And it turned out, and that is really an important result, is that incentives drive behavior. Those managers who are by nature more risk averse, as confirmed by research, chose to work for a fixed salary. Those who are more risk tolerant, more creative, they gravitated to firms that, uh, offered those incentives. So what happens was what we call in the academia self selection. I think self selection is very powerful. If you offer wrong incentives, you either will get bad results or you will get different type of people. Now, where I think Claudia and I have a different view is that I'm somewhat more optimistic maybe than Claudia, is that I believe that even though it is very difficult to structure incentives right in a large corporation, when it comes to gets to especially disruptive innovation, it is still possible. And in fact, in the book, we provide a number of things that I believe large companies can do, okay? Um, to, to provide the right incentives. But I think as a board member, you have to ask yourself whether without the right incentives that you provide, especially your senior executives, and especially those who are in charge of trying out new things, whether you will get the right people or, uh, you will get the right results. Okay? So I think that is very important. And Louis, let me, um, make another observation. So both Claudia and I, and you and everybody else were using the word innovation. And I think that we have to be careful with this because the word innovation means different things. Uh, innovation means first, what I call Incremental innovation, step by step innovation and marginal innovation. And typically large corporations are pretty good at this type of innovations. So examples would be, so I use Gillette blade to shave myself and Gillette blades. Every single year Gillette is going to make a new blade, making sure that I would buy a new blade. Uh, that is innovation, but that's incremental innovation. It doesn't mean by the way that it's uh, that it's costless. Uh, by the way Procter and Gamble, the owner uh, of Gillette, they employ, this is one of my favorite statistics, they employ more PhDs than Stanford, MIT and Harvard combined. So this, this innovation of course requires a lot of resource as well. Or uh, even intel, uh, when intel builds a new fab, uh, it might spend $40 billion. It's actually incremental innovation in, in many ways because it is the same business model, it is the same customer and it is the same relationship with your customer. And then we have disruptive innovation. And disruptive innovation does not need to be technological. Um, even though more often than not it is, it does not need to be. It's either a different business model of the industry, it's a different customer, or it's a different relationship with the customer or all three. Um, an example of a non technological disruptive innovation is Starbucks. You know before Starbucks came about there were no coffee chains. So we may agree or disagree on uh, the quality of Starbucks coffee relative to the coffee uh, around the corner. But Starbucks was the first to implement a nationwide coffee chain with a completely different business model with a completely different relation with the customer. That is an example of disruptive innovation. I think you as board members have to think a, uh, lot about what is good for incremental innovation and what is good for the disruptive innovation or how to ask questions about disruptive innovation. Talking about corporate venture, for example, and I hope Claudia will agree with me, is that when corporate venture strategy or corporate venture mandate is about what I call adjacent so that helping the existing business lines, um, that is more incremental innovation and then the goals are very different. But if the mandate, strategic mandate is about find that disruption, find that startup that might kill our business, or find a completely new line of business where we can be very good, then it is disruptive innovation and the approach should be completely different. What uh, I very often see and I looked at my team and I went and looked into hundreds of corporate venture units, how they're designed, very often I see that there's one strategic mandate and the design is is the one that does not fit. There is really a bad fit. And as a result of that, many corporate venture units that otherwise would have a chance to be very successful, they're not very successful.

Speaker A: Ilya, when would you recommend that a venture, a corporate venture and innovation group be inside the company versus outside the company?

Speaker B: That is a great question. And um, one way to think about this is go back to my previous question, which is what is the strategic mandate? And I feel that if the strategic mandate is really to help the existing business units, then it is okay for corporate venture often to be inside. One exception being is that when the industry is undergoing dramatic changes, um, an example right now would be automobile industry, mobility industry more generally. You know, um, if you're a, um, a board member of a mobility, um, kind of industry company and you have a corporate venture, more likely than not corporate venture will be in Silicon Valley, not in, wherever you have your factories, uh, but in other industries it's okay to have corporate venture inside. But whenever you're talking about anything disruptive, then I think it is the right strategy to position the corporate venture unit outside. And ah, when I say outside, I don't really mean by this just legal structure or just compensation. I mean give this unit more autonomy to make decisions. Specific example is that um, when we started corporate venture units, for every single one of them, we identified how actually they make decisions. So how their investment committee is structured. And most of them have investment committees that are filled with corporate executives, cfo, cto, president of business units, and so on. And again, if the goal is to help your businesses, that's okay. But if the goal is to find something new, something that is potentially exciting but also dangerous, then having the investment committee in your headquarters that has much more money at stake right now thinking about whether to invest or um, not to invest three or five million dollars in a specific startup 3,000 miles away is not a good idea. Is not a good idea. So I think that would be the summary of my approach.

Speaker A: Um, I'm going to switch back to Claudia. And Claudia, as you know, often independent directors are viewed in Silicon Valley as the tech nerds or the geeks on the board. And they already risk being put in a silo for any kind of discussions on digital or AI or cyber that the rest of the board doesn't want to spend time on. Um, but the geeks also have a strong voice to lead the discussion on innovation, technology and business models. And I wanted to get your, get you to share some advice with the directors here on this call. About how, and how to help drive the process of innovation. And Ilya, I'd like to know if any of your academic research talks about the process of innovation. But Claudia, do you want to take that one?

Speaker C: Uh, sure. I mean it is definitely a sort of a burden to be sort of a boxing that category. But uh, just like you said, it also give us a unique position, the credibility to really ask the this type of question, right? Because I mean I, I don't know if many of the director on, on the session gets it. Remember when you incorporate a Zephyr, you have this media clipping service that some, you know, a bunch of people wake up in the morning and clip all the major newspaper media and all the competitive, um, I asked the question, you know, you know, are we clipping on any kind of young, innovative, you know, startup that get the next funding or has reached the next milestone or M and A. And usually none of that is part of. So it's very much of a not looking forward type of mentality. So I think, you know, as you move forward, you know, do they even know a lot of the questions that I get asked if they just take a look at some of the CB, Insight, PitchBook, all these database that we all use, the answer is there. How many companies, at what stages are they being invested in the type of uh, innovation that matters to that corporation? I asked the company, I'm, um, on the board, do you leverage that? Do you know how many bets are being placed in adjacent market that we care about and how mature are those bets? Who are betting? You know, who are the ones putting the money behind those bad? Are these, you know, the dumb monies or are they, are these really valid people that, you know, like you said earlier, that really know how to pick, right? So you gotta make, make that information available to the company as they define their own growth strategy as they make their buy versus build, um, versus buy decision. And I think that the director can ask those question. Do you know, do we know what momentum is behind AI for education, right? For online training, for, you know, hiring, you know, are we leveraging any of that for engineering development? I have a very, very, very many directors here are engineers like me. You know, the AI has transformed the efficiency of uh, engineering and software development. So the question is, you know, do you even aware of what is going on? What kind of new platform is available to us? So my thing is, as the unique position we have to start asking those type of questions will help the company to start thinking about incorporating those type of information. Just like the clipping service that has every, you know, competitor move and every market macro, economist statements on whatever the industry you're part of, that needs to be part of your, you know, information base to make your, uh, decisions.

Speaker A: And building on that, Ilya, in your book, you talk about asking management for a heat map of those adjacent. Tell us what that is.

Speaker B: Yes, thank you, Louis. Uh, I think, first of all, I agree with Claudia about, I would say even further more than it's really responsibilities of corporate board members to drive this, because you have an advantage that you're an outsider. You know a lot about the company, but you're an outsider. And I think the outsider perspective. And also you are typically not an expert, uh, in this specific industry niche very often. So I think you have this perspective that is very important, especially when we are talking about the disruptive innovation heat maps. And then, Louis, there are so many questions in the chat. Uh, we won't be able to answer most of them, I guess, because of time, but I would love to answer a couple of them very briefly, if I may.

Speaker A: Yeah, yeah.

Speaker B: So. So one of the. So let me tell you my own example. So when I became a board member, um, um, so I came to my first board meeting, I listened quietly, and then I was asked, so, what would you recommend? And I said, you know what? The very first thing I think we. We're discussing all this quarterly results, earnings call. This is all amazing. But what I would love to see is for every single BU to come out and say, what are their major risks for the next three to five years? And that is an example of a heat map. Now, one of my favorite things that, as I did when I was a board member and I led this discussion, and now when I'm doing this for many of the boards, is the example, um, and Claudia knows this too well. It's called pre mortem exercise.

Speaker A: Pre. Not post. Not post.

Speaker B: Post is a bit too late, Louis. Okay, pre. So if you have not heard about pre mortem exercise, this is, like, really important. What is pre mortem? And it's connected to heat maps. Just a specific example of heat maps, which is the following. Ask yourself. Think about this. Think about an exercise I'm doing with boards and C suites, okay? So we divide them into teams. And imagine, um, that you choose the years three, five years down the road, your business unit or your company is no longer successful. So you impose the condition of a bad outcome and then come back and say why this has happened so effectively. Pre mortem, meaning try to identify now the reasons that you will not be successful and then you send them away for one hour and by the way, they always ask for the second hour, always. And then this leads to one of the most illuminating discussions and specific, very often at least to very specific budget reallocation decisions right away what in fact we would like to concentrate on. So that's just an example of heat maps. Couple of questions if I may. Louis. So, um, SoFL here is asking about a memorable case about a counterintuitive strategy that led to success in venture capital. So one of the principles in the book that I find, ah, many, many, many executives find very counterintuitive because some of this stuff is intuitive, um, is just difficult to implement. So specific actions are helpful. One principle that people find most counterintuitive is the principle I call agree to disagree, which is in the boardroom is typically everything is driven by consensus or by the big boss. But um, when I went into many successful venture capital firms, they make decisions differently. Again they're trying to catch that outlier, that home run. And what they really came to understand, most of them is that very often, um, true outliers are very difficult to predict, very difficult to understand and there will be difference of opinions. And so if Claudio thinks it's a great potential startup, likely I will think it's really a dumb stupid idea and vice versa. And if Lou is another partner and we will insist that we will invest only and only in startups that our little three person investment committee will all agree on, we actually will miss the most remarkable successes. Um, I can tell you recently, M. Um, recently I actually worked with a very large venture capital firm in the Valley. I will not reveal the name, but that firm was very successful in the past. As a result of that, it now has 10 times more people and it has 10 times, actually more than 10 times more. Asked under management and suddenly the managing partners realized we're not actually going to be as successful as before. And they came to me and so the very first thing I asked them about is what kind of data you have? Can we look at your anti portfolio? Now anti portfolio is a very useful thing, um, which is effectively startups you had access to or projects that you had access to that you reviewed but decided not to invest or maybe could not invest. Luckily they had, but they never looked at it. So they look together. It turns out that in fact their anti portfolio behaved better, performed better return wise than their portfolio. Yep. Then the next question which is very important is at what stage they lost those deals? It turns out that they had access to every single deal. Think about this. It's a famous venture capital firm in their niche. Every single founder would like to talk to them. What happened was, is that the firm grew, but they used the same decision making principle at the investment committee that no longer works with a larger team. And so because the majority of investors no longer believe that those, um, firms are great and they require the majority, they do not make those investments in the most successful companies. So the most counterintuitive strategy that is really helpful and I don't have time, but in the book we actually give specific actions. Some of them are really easy to implement in the boardroom in any investment committee, how to bring this agree to disagree principle. Because actually it's not easy. Um, it's not, it's not, it's counterintuitive how you're going to bring it about. Okay, so that's kind of one. And then another one is, um, actually also by sofa. Can you discuss a challenging decision you made in your career? So let me give you an example, uh, of me as a professor. I can't. And that I will relate this to you. Um, and I'm sure Claudia will relate right away to, to her life as a venture capitalist. The single most challenging decision for me as a professor is always this is the same killing research projects. Like I started research for a new research project I typically started with my PhD student. Okay. I'm kind of in charge. I'm responsible for that PhD student or those PhD students. I'm excited about a project and then, you know, six months later, a year later, the project is going nowhere.

Speaker C: Okay.

Speaker B: What I used to do, what I used to do is what I call double down, which means that I provide more resources. Maybe, uh, getting another research assistant, maybe spending 25,000 more dollars on another data set. You know, maybe spending more time on. Maybe I'm going to spend more time, not just the PhD students. It typically doesn't work out. So I think the most challenging decision is to find the right time to quit. And it's challenging because, like I feel responsible for this. PhD students, for example, in the long term it's better for them because six months later I will tell Claudia, if Claudia is my PhD and Claudia is not going to work out and we're spending another year on this. Actually, you know what? Go, let's try to find another project. It's tough, but I think it's better decision.

Speaker C: Yeah, I think it's such an important concept because that's how corporations work. Right? And so Many questions about, you know, we don't know when to quit, we don't know when to fold, we don't know when to hold. We sort of have a lot of these zombie projects walking around, uh, because we don't know how to kill. Um, I think one thing that for me is very valuable is to look at them as iteration rather than failure because that's how as you know, startup look at them, right? They will pivot from wherever they are to get to the product market uh, fit, uh, without looking at these stages as potential failure. And I think how you describe is exactly, you know, what we need to um, encourage the director to introduce to look at these. If you're not playing the game and you're standing on the sideline, you're not learning to get to that product market fit ever, right? So you got to play the game. You got to look at those failure as an iteration stage rather than a failure stage because you need to pivot from there, um, to get to where you need to be with the additional information learning that you have acquired. I think that really is an important point that you make in your book. I'm conscientious of time. I know there's. We have ah, committed to the ending Time to be a couple of minutes. I'll hand it back to you.

Speaker A: Ah, Louis, um, we have many questions in the chat so I'm just going to pick uh, one or two and ask you to be rapid fire. Give me the answers, not the reason. Top, uh, 10 corporate venture capital initiatives. Claudia.

Speaker C: Oh, you should um, you should um, look at cb. I actually have that Bill. Um, you know, it has a lot of the, the, you know, who is making a better investment. The, the, the companies are reaching a uh, later stage that has a corporate money in there. You know, believe it or not, people like Workday Salesforce, you know, these sort of a new venture, corporate venture arm are actually doing really well as well as Intel Capital, uh, and few of the more well established one. But yeah, there, there, there's a whole slew of analysis built that I saw both from global corporate venture only and Pitchbooks. That would be very helpful.

Speaker A: Ilya, your answer? Top top corporate venture programs.

Speaker B: It's actually easier to answer uh, because many, so many of them are unsuccessful, then there are not so many left once you kind of take out all those that are unsuccessful. Um, now I can give you the name of about maybe 20 corporate venture initiatives that are successful. However, Bill's also asking whether we can rank them. I think ranking is more challenging and that is because there is different combinations of strategic and financial mandate. And by the way, so my research shows if a corporate venture has just financial mandate, then it's better not to do it. It's better to give your money to somebody else, such as Bill to manage your money.

Speaker C: Okay, give it to a real VC that know how to eat pure financial returns.

Speaker B: But also. And um, I know that Claudia might have a different view. My research also shows that if you have just strategic mandate, uh, like I talked to a couple of CVCs, and um, they told me, oh, our CFO told us that they wrote off our investments right away, like even before looking at that, that's not a good idea as well because at the end of the day, your CVC is going to be successful if you are bet on those home runs. And so it's really this combination of strategic and financial. And so the rankings will depend on the weight. But I have, I have the list of, um, the initiatives that I believe successful. There is something that I though I have to tell you, Louis, and that's a very sad fact, is that often. And that's because of incentives. Very often the most successful corporate bench initiatives are not the ones that survive the change of the CEO. And very often it's because. For incentives reasons.

Speaker C: Yeah, back to incentive. Right. But you know, Louis, I mean, for, for the conversation, um, we really think this, um, director that we have are the ones that can really change the culture of how corporations deal with innovation by leading this kind of a conversation in the boardroom using the language that we provide. If you look at, you know, a lot of questions that came in, um, you know, if you look at the culture, obviously the huge inhibitor, you know, compensation, everything else. If you look at the blue ribbon, uh, report, right, that was led by Oscar, we have, uh, Lori and Sunita, our member of that committee. You know, the high performing board is supposed to activate all the dissenting views in the boardroom. Right. And I think it's up to us to really bring the view of, um, you know, the Silicon Valley, the rapid iteration, the venture mindset. Those are really, uh, um, the views that we are uniquely qualified to activate.

Speaker A: Perfect ending. Perfect ending right there. Claudia, you hit it. Thank you so much, Claudia and Ilya, I have written up a detailed list of these takeaways which I will circulate on a blog post. But it started with thinking long to metrics, to incentives, um, agreeing to disagree. Um, just great stuff. And I couldn't recommend the book more. I unfortunately. Well, unlike most people, I have an advanced copy of it. Thank you. Ilya. Um, uh, you told your assistant to

Speaker B: buy 100 copies to give to everybody.

Speaker A: Exactly. Thank you so much. Lisa, back to you.

Speaker C: Thank you, everybody. Thank you so much. We really appreciate everybody being here today and look forward to seeing you at a program very soon.