Multi-generational Technology Sectors

I was perusing the online New York Times this weekend and came across an interesting article of the problems of large physics projects. It focused not so much on the large costs and uncertainties associated with doing something that has never been done before, but rather on the belief structure that is necessary to see such a project through to completion.

"All of these multigenerational projects are based upon a strong and ongoing belief system in how the world works,” Dr. Leventhal said. As long as that system stays intact, he said, “construction continues and is slightly modified within each generation to fit the current time.” If not, all bets are off.

The above quote is in reference to the Large Hadron Collider and the Standard Model of particle physics, but can just as easily be applied to other human endeavours such as the great cathedrals of Europe which could each take over 100 years to build. The belief system in that case was religion. Or even countries such as Canada and its belief in a democratic model of representative government which is at least as strong now as when the country was born.

I want to do something a little bit odd, by extending the application of the multigenerational model to growth-oriented technology companies. There should be a fit since all businesses are human endeavours that are often larger than any of the individuals within them.

Founders believe in the technologies and products they want to commercialize, or at least they ought to. If the belief is strong enough they will attract investors and a team that will also believe. While their particular interests may only partially overlap, the belief must be strong enough to hold it all together for several years or longer. The founders may be driven by money, but more likely they will have a belief in changing the world, if only by a tiny amount, or to achieve some measure of success and recognition. Employees will be strongly motivated if the belief radiated by the founders is strong enough, and investors will believe if the technology and business sectors the company operates within are ones that are widely believed in by the market at large. The belief should be supported with some rigourous analysis, and a strong business plan and management team, but belief is the foundation on which everything is built.

Unlike building cathedrals or the LHC, the life of technology companies is not measured in decades or centuries; there are other, more applicable measures of multigenerationality. For one, is the belief strong enough that it can survive hand-off from the founders to another management team? Will the investors and management be able to communicate that belief well enough to bring in additional investment, including an IPO or M&A, hopefully at ever increasing valuation? The belief must be of a quality where these are possible or the company will fail. For example, if the founders can't convince others to get involved in their venture, either the belief is false or their pitch is wanting. It doesn't matter which since either is fatal.

Certainly there was a loss of belief preceding the failure of Natural Convergence, which I wrote about last week. The founders were long gone, as were the original investors. Belief in their business and technology diminished over the years, in particular when the founders and original investors were out of the picture. The original spark, and belief, gradually dissipated. For a variety of reasons, the idea of VoIP-oriented business services and servers has faded in the market at large, and that market is now dominated by other companies. No belief could survive these developments. Technology changes rapidly so the belief must be fulfilled reasonably quickly or things begin to unravel.

The unravelling can be slower for established companies, unlike the rapid unravelling that startups may experience. Consider Nortel and its long unravelling. It can be considered to have begun in the late 1990s when the management team led by John Roth realized that their old belief structure was losing its validity: that large telecommunications carriers around the world would continue to dominate, often supported by governments fiscally or through regulations, and would only accept high-quality and high-priced equipment from equally-large vendors with whom they have had a long relationship. The unravelling began with the rise of the internet and packet communications, and then accelerated as deregulation, beginning in the US, swept the globe.

Nortel tried to come up with a new belief system and then change their product mix and operational behaviour to match the emerging belief system: best effort service, everything IP, rapid product introduction, and lower price and cost structure. Momentum of the existing products and businesses, and customer relationships, for a time hid their failure to achieve the needed change, but failure did come in the end. Nortel never did make a successful transition, although they did have a few successes such as in select VoIP products. The old beliefs were never truly excised from the company: they continued to be slow and high-cost, and when they did move quickly to acquire needed technologies, they made poor choices and spent exorbitantly on those acquisitions.

Today, there are new beliefs prevalent in the technology sector. These include social networking, smart phones and wireless data, location-based services, media and entertainment shifting to the internet, SaaS, and cloud computing. We cannot know how long these beliefs will last, so it is important that anyone eager to start a company centred on one of them should plan a growth arc that is sufficiently steep that, if successfully executed, will reach one or more key milestones before the belief falters in the broader market. Belief in the company and its business must of course be sustained, but if the belief in the sector fails, the company is also bound to fail, regardless of any initial commercial success.

I admit that this is a blatantly short-term and opportunistic way to view the world, yet I claim that it is absolutely necessary. To a founder, especially if young and full of energy, today's beliefs may seem eternal. They aren't any more than those long past, and will likely be even shorter lived.

Even Cisco, an extraordinarily successful company that has eclipsed Nortel in many of the areas it used to dominate, is showing signs of faltering. The now old belief of IP everywhere has been largely fulfilled (even if VoIP is still spreading at a maddeningly-slow pace) and they are largely absent from new belief areas that are more user-visible rather than in the "piping" of the internet. The pipes are becoming commodities, and are no longer a key growth sector.

No company is immune to shifting beliefs. How many generations will your company have to survive to achieve success, before there is a loss of belief?