The Threshold Investment Question – Can They Execute?
Recently, I was afforded the opportunity to invest in an early stage company that makes a product I absolutely adore. My natural inclination was to invest simply because I know others will inevitably share the same experience when they try it. On the surface, taking an equity stake was a no brainer. However, having an exceptional product is a terrific start, but it is only the tip of the iceberg in terms of deciding to invest. Offering a wonderful product in a niche market is radically different than producing, selling and distributing the same quality product across the country.
The central question I need to explore is this: Can this company scale while retaining the same level of quality? Answering this requires assessing whether they will be able to hire and manage an expanding team, build and finance the production capabilities and address the sales and logistical challenges of dramatically expanding their footprint. In other words, the key issue is to ascertain whether or not they can execute. It is this blocking and tackling that requires deep analysis because it will ultimately drive value creation or value destruction from where they are today.
The process of considering one’s execution capabilities also applies for companies that don’t even have a product yet. Sometimes the best investment opportunities lie in those companies that have nothing more than a well-conceived idea. Execution is what brings a great idea to reality. I recently came across an excerpt from a Steve Jobs interview where he described his view of the relationship between a great idea and great execution.
One of the things that really hurt Apple was after I left, John Scully got a very serious disease. And that disease – I’ve seen other people get it too—it’s the disease of thinking that a really great idea is 90% of the work. And that if you just tell all these other people, you know, “Here’s this great idea,” then of course they can go off and make it happen. And the problem with that is, is that there is a just a tremendous amount of craftsmanship in between a great idea and a great product. And as you evolve that great idea, it changes and grows. It never comes out like it starts, because you learn a lot more as you get into the subtleties of it and you also find there is tremendous trade-offs that you have to make.
I have made a number of investments in “solid” and sometimes “great” ideas or products that never really materialized because of execution. This was painful as I frequently watched similar businesses prosper in essentially the same space. What I realized was that the details of starting, building and managing a business were the keys to success, not the idea or an early version of the product. Don’t get me wrong, regardless of how strong the execution capabilities are, I would never invest in a company with what I perceived to be bad idea or marginal product. Rather, I am looking for opportunities where the initial idea or product will serve as a springboard on which to build an incredible business.
We often exult the ‘brilliant’ ideas that turn their average-joe creators into billionaires. Sometimes these ideas literally pop into one’s head and other times they are the result of months debating in front of a white board. Regardless of the source of an idea, paying too much attention to this phase is shortchanging the way that almost all great businesses grow in the real world. While moments of inspiration can generate a spark that leads to great things, the important part is what comes afterwards. Without the hard work and execution, Jobs’ belief holds true — an idea is worth about as much as the paper it’s written on. Without question, many novel ideas have floundered because of poor or misguided execution.
This point was made emphatically in the New York Times by business strategist Carol Roth, in her piece Stop Trying To Protect Your Business Ideas. Roth’s words reinforce the truth that ideas are merely a starting point, and not where significant value is created.
We have all heard versions of what Thomas Edison emphasized centuries ago, “Genius is 1 percent inspiration, and 99 percent perspiration.” Edison’s observation about achieving enduring greatness remains extremely relevant to this day and across all types of business.
There are a few major reasons why great kernels don’t end up becoming great and sizeable businesses. Building a business take a lot of work and thought. Strategic and tactical plans need to be researched, created and then followed with an eye towards both discipline and adaptability.
Regardless of the plan, execution is reliant upon people. As discussed in a related article, people and culture are essential. Attracting and motivating the right team for where the business is today and where it is going is a real challenge. Growing a fledgling business or a raw concept takes perseverance and risk tolerance. There’s often a big difference between the kind of person who can come up with a great idea or prototype product, the one who can grind it out and assume the emotional roller coasters to bring it to scale and ultimately the one who can fit within a large and complex organization.
Finally, for the vast majority of businesses, nothing happens without capital. Raising sufficient capital on acceptable terms is an enormous obstacle that stifles many promising early stage companies. Having the right plans and people and the necessary capital don’t guarantee the greatest fool-proof idea will turn into a successful business. But flawless execution on multiple fronts along with a healthy dose of luck can make the difference between an enormous success and a floundering also-ran.
Some products and services that are ubiquitous today came from old ideas that were never masterfully executed. Sam Walton hardly created the idea of reselling goods. That concept has been around for thousands of years, and yet through incredible execution, he turned one store into a retailing juggernaut now worth over $260 billion.
A well-conceived and thoroughly-considered idea is a critical first step, however, a key part of execution is ensuring the timing is right. Sometimes ideas are simply too early, and the market isn’t ready or developed enough. Much postmortem ink has been spilled over early startups like Webvan and Pets.com who were simply too far ahead of the curve. They could have dominated their respective markets the way FreshDirect and PetSmart have today, but the world just wasn’t yet ready for their high-quality ideas, or the tools necessary to bring the ideas to reality weren’t available. The idea itself simply wasn’t enough to make a great business.
Roth makes the excellent point that these early entrants often serve to educate the public about what is possible, but can see themselves drained by that effort. Subsequently, newer and more efficient companies piggyback off that work and perform the same service in a better way. She uses the example of Facebook continuing down the path beaten by Myspace, whose ubiquitous influence in the mid 2000s has dwindled now to nearly nothing. Facebook, in sum, was the same idea with better execution.
A viable idea or compelling early version of a product is undeniably valuable and a necessary starting point, but it must be considered on a relative basis. In my opinion, no one epitomizes this concept better than Apple and Steve Jobs. They didn’t invent the computer, MP3 player or smartphone, but their relentless focus on refining and executing has made Apple the most valuable company on the planet. Similarly, over the years I have heard many people grumble and lament how they had the idea to sell such and such product over the internet. The idea was worthless, and as Jeff Bezos has shown, it is all about execution.
One of my favorite examples of the relative importance of a great product versus execution is the cautionary tale of the old Betamax I had growing up. Betamax video tapes were a great product, superior to rival VHS in a number of ways, but when it came to meeting the demands of the market, VHS executed better. The comparatively inferior engineering of VHS machines didn’t matter to consumers; what mattered was the opportunity to watch their favorite movies at home. Betamax failed to execute on this point while VHS did. In sum, Betamax failed to execute with a superior idea/product and hence disappeared in short order.
The stories of business failures are littered with great ideas and products that just didn’t live up to their potential or couldn’t be scaled. There are many ways this can happen, but I believe more likely than not is the fact that the execution was poor. As we look to make early stage investments, it is great to have a terrific starting point, but it must be paired with a smart approach, unwavering discipline and unflappable work ethic. That is why we focus much of our due diligence process on identifying these intangibles — they are the difference between an enduring success and just another potentially brilliant but wasted opportunity.