If Schumpeter could talk to Larry Page ...

FORTUNE has a great interview with google co-founder Larry Page in the recent "best advice" issue. Lots of good stuff in there, but I appreciate his distinction between invention and entrepreneurship:

You don't want to be Tesla. He was one of the greatest inventors, but it's a sad, sad story. He couldn't commercialize anything, he could barely fund his own research. You'd want to be more like Edison. If you invent something, that doesn't necessarily help anybody. You've got to actually get it into the world; you've got to produce, make money doing it so you can fund it.

It's exciting to see smart guys like Larry make it big because I tend to believe they will use their fortune to great effect, i.e. huge positive externalities. Larry's fascination with automated cars is a case in point if you are, like he is, bothered by the 40,000+ car crash deaths annually in the U.S.

If Schumpeter had lived to see the development of the IT revolution, the Internet, and google, what would he have thought? He probably would be incredibly encouraged to see the acceleration of innovation and the constant re-spawning of innovative small firms. This is the start-up culture, and my sense is that it is the one big idea Schumpeter missed. It goes without saying that Karl Marx missed it. But the painful thing about creative destruction is that even a great company like google cannot help but face talent defection.

Again, FORTUNE has the story on the brain drain at Larry & Sergey's huge, young corporation. This has long been happening to Microsoft. And for all the blather about strategic plans and mis-steps made by these new gaints, the real story might simply be that there is only so much equity to go around. Best line:

Google was like that too, about eight years and 18,000 employees ago.

The story is somewhat anecdotal, but it raises an interesting challenge. What can a company do to keep innovative employees from leaving? The dominant model decades ago was for a major industrial firm to establish a corporate R&D lab - At&T and Xerox come to mind. This is the model Schumpeter expected to dominate the future on the theory that future innovations require integration of more and more knowledge, requiring larger and larger teams of researchers to push the envelope. History proved him wrong. (And history was named Noyce). The updated model has big firms shedding internal R&D in favor of M&A. They buy innovation and revenue growth through acquisistions - Cisco comes to mind. But the new model that google is wrestling with is to allow almost all their employees to be entrepreneurial.

I don't think any one of these models is always right or always wrong, because they are all contextual. Too often, commodity organizations buy into faddish management theories and try to empower all their workers. Nice in theory, but sometimes you just need the architect to draw and the sales team to sell. Regardeless, we can be confident the corporation is not done evolving. Companies face brain drains, and the question is how to stop them - or more properly - take advantage of them.

The smart companies will do what universities aren't doing very well yet - offer maximum flexibility to their innovative employees while retaining a minority stake in the offshoots. If google really wants to keep talent in-house, it might need more than google stock options and free food. It might need to create a new turn-key subsidiary framework - a kind of reverse M&A where employees can apply to start internal divsions using company capital in exchange for partial ownership of the future revenue stream.

What does this mean? Labor is more than labor. Modern labor is human capital, and it wants more than a paycheck, a pension, profit sharing, and, even more poignantly, aggregated risk capital returns. I think human capital wants a balance of individualized risk returns and security. Sorting out that balance is the true search function of modern capitalism.

Thoughts?

Comments

[Remo]

Reverse M&A - a company being a venture capitalist for its employees who don't want to be tied to the corporation, who want to explore new technologies or businesses. Then the corporation gets the payback (potentially), and it also acts like a VC, making connections and business ties to make the new "company" (their own offshoot) succeed. And in the process the mother company gets more exposure to other start-ups, expanded insight into the market. Mother company reaps some of the rewards of success. If there's a failure (80% failure rate is the normal assumption) then mother can re-integrate the people back into the company, probably gets the technology and know-how, and may be able to apply that later.
I like it.

[Devin]

I agree with both the post's and first comment's line of reasoning. This is something that Sprint Nextel were to a certain extent attempting with their innovation department. However in that case I feel "in house start up" employees (founders?) did not have future equity in any spin-out promised to them. This of course is the carrot to spur on internal innovation, and the component that would shift the landscape of any in house department.

Examined purely as a driver for innovation and employee satisfaction (staying put), the approach is great.

The secret sauce I feel is in managing the ownership of the IP/Technology/Idea's between the two stakeholders, in house founder and parent company, along with of course maximizing the benefits of being in house and negating the potential negative effects.

So as to, in simple terms - convince the really smart guys to stay with you rather than being "free". Because if being free is natural - read Paul Graham's excellent essay "You Weren't meant to have a boss" over at:
http://www.paulgraham.com/boss.html

[Carl Lumma]

Lucent tried letting all their employees be entrepreneurial, and it drained them like a goat at a chupacabra convention. R&D labs seldom produce value for their owners, but they do deprive the competition of it. Google in this sense is like one big R&D lab. They have droves of PhDs sitting around twiddling their thumbs. It was probably a wise expenditure of their IPO take, but it's also a huge waste.

If corporations were serious about keeping their best talent engaged they could try paying them higher salaries (not options or bonuses; salaries). But even that only works until the employees have saved enough to feel comfortable with the risk of launching their own enterprises.

So probably the acquisition model is the only long-term hope for companies as they grow. Microsoft probably takes the crown here, but Google is no slouch either. It's certainly become the norm in the pharmaceutical business.

-Carl

[Michael F. Martin]

Fewer large corporations vertically integrate R&D now because Bayh-Dole gave universities a comparative cost advantage, and university cultures are more attractive to many scientists and engineers anyway.

But universities and industry now face a prisoners' dilemma whenever they have to negotiate tech-transfer: both have strong incentives to defect in the short term although cooperation would be to mutual benefit over the long term. Weak patent rights have paradoxically exacerbated the problem, although many universities are simply filing lawsuits anyway.

What is needed is a trusted intermediary that understands both cultures, and is willing to take a patient, value-oriented approach to private technology transfer.

http://brokensymmetry.typepad.com/broken_symmetry/2008/05/stranded-rd.html