So placing a hundred bets may be necessary—but they’re not blind bets, like buying a hundred lottery tickets and hoping for the best. The firm applies a set of very tough, demanding criteria before an idea passes the entrance exam to Kleiner Perkins’s rarefied world of funding. The overall approach is straightforward:
Maximum number of high-quality ideas × Maximum selectivity = Best odds
For example, in evaluating software investments, here are the admissions criteria Kleiner Perkins uses to rate a potential product:
Instant value to customers—solve a problem or create value with the first use
Viral adoption—pull, not push. No direct sales force required
Minimum IT footprint, preferably none. Hosted SaaS [“Software as a Service”] is best.
Simple, intuitive user experience—no training required
Personalized user experience—customizable
Easy configuration based on application or usage templates
Context aware—adjust to location, groups, preferences, devices, etc.
The rigor and clarity of these criteria are a bit reminiscent of the simplicity and power of Warren Buffett’s investment criteria. He looks for a business to invest in (a) that sells a product for a dollar, (b) that costs a penny, (c) for which the demand lasts forever, (d) that has a huge moat surrounding it, and (e) that has a great management team.
Lots of software innovations can meet two, three, or four of Kleiner Perkins’s criteria. Meeting all seven is almost impossible. And that’s the point. Out of a hundred high-quality ideas in an emerging market sector, there may be just one really, really good one. That’s the one that gets the Kleiner Perkins investment—or, if the idea is promising enough, multiple investments. For example, Kleiner Perkins currently has three investments in green auto technologies, three in fuel cells, five in solar photovoltaic systems, and multiple investments behind batteries and biofuels. After all, even if the demand is real (as Kleiner Perkins believes it is), the technology, the management team, or the financing may still fail. Doubling down on the bets that pass the most rigorous scrutiny is another key component of the Kleiner Perkins system.
The final piece of the puzzle may be the most unique. It’s not enough to maximize the ideas and maximize the selectivity. Kleiner Perkins also excels at managing the upside potential of every investment it makes. The firm adds value to its investments through various kinds of “golden interventions.” It may help a company find the right executive—the perfect marketing director, technology officer, financial expert, or CEO to help lift the company’s performance to the next level. It may provide connections to important customers (including, perhaps, other Kleiner Perkins ventures). When an unexpected technical problem arises on the path from concept to market, a Kleiner Perkins partner may be able to suggest experts from other firms who have wrestled similar problems into submission. Kleiner Perkins even invested in the company Visible Path partly because its social networking tools could be used to help Kleiner Perkins’s network of fledgling firms stay connected with one another, and ultimately help them reach full flight potential.
The Kleiner system continues to evolve. If there is a great idea but no company that embodies it, Kleiner partners believe that “our job is to go out and help create one.” And they do. Led by partner Bill Joy, Kleiner Perkins has constructed a “Map of Grand Challenges”—an enormous matrix of some forty squares reflecting major opportunities for future demand growth in areas like energy storage, water, electricity generation, transportation, and others. There are many blank spots on the map, denoting ideas that should be possible and could generate huge positive changes in the market. The map has one purpose: to help Kleiner Perkins partners know what to look for. As John Doerr says, “I don’t think anyone has ever really done venture capital this way.”
That constant pursuit of a different and better way has generated a unique set of results. Collectively, companies in the Kleiner Perkins portfolio have created more than 250,000 jobs, generated more than $100 billion in revenue, and produced $650 billion in market capitalization. That’s an extraordinary record of new demand creation emerging from the financial and creative backing of a single firm with a unique modus operandi.
AS WE’VE SEEN, every portfolio master, from John Lasseter to Roy Vagelos to John Doerr, has developed a unique system for creating demand through successful launch of many products over time. But all these systems have several key dimensions in common.
They all work to maximize the flow of high-quality product ideas, whether by making short experimental films, by searching for promising enzymes to target, or by seeking out rapidly evolving market sectors with high potential for future demand. Then, having created a rich collection of product candidates, they apply an extreme degree of selectivity, as with Pixar’s one-blockbuster-per-year production strategy, Merck’s focus on the top six to eight drug candidates, or Kleiner Perkins’s obsession with “quality” rather than “lottery.”
The lesson for organizations interested in consistent, large-scale demand creation is the need to focus on two simple questions: What’s the overall size and quality of our portfolio of ideas? and, How can we do a better job of choosing the best candidates from our portfolio to invest in?
Notice how radically this mind-set differs from the way most of us think. Living in a world where Goldman’s Law is assumed, most of us deal with unknowability by saying, Success is a lottery, a matter of placing a lot of bets; you have to take high risks to get high returns.
Great demand creators think differently. They think not lottery, but quality. They don’t want to place a bet—they want to make every swing count: each film, each drug, each investment. They play the portfolio process the way Warren Buffett plays the investment process, with his twenty-investment punch card; or the way Ted Williams played baseball, batting .400 by letting the bad pitches go by and swinging only when the ball crossed his sweet spot.
Many organizations could benefit from the emergence of a John Lasseter, a Roy Vagelos, or a John Doerr. But achieving consistent demand isn’t a matter of hoping for the emergence of a lone genius with a “magic touch” for picking or creating winners. Rather, it’s about creating a mind-set and a system. It might begin by applying a customized version of the general methods illustrated by Lasseter, Vagelos, and Doerr. But in the end, each organization needs to develop its own unique set of techniques.
The list of serial demand creators—organizations with ten or more blockbuster successes in a row—is not limited to these three exceptional firms. Disney did it twice, in the 1940s and the 1980s. Pfizer did it in the 1990s, and Toyota and Apple are each halfway there. They all had systems with elements we can emulate.
Others have invented their own techniques to achieve comparable results. TV and film producer Jerry Bruckheimer, whose products have generated a cumulative $13 billion in revenues, worked with Don Simpson, his late coproducer, to create his own system for developing films that audiences would love. One of the most important elements of the system? Watching the audience. Bruckheimer faces away from the movie screen, watching the audience as they laugh, cry, roll their eyes, drift off, or sit on the edge of their seats. You can ask people what they like and don’t like, but their answers rarely provide the full truth; watching them intently can often tell you much more.
“The guts to talk to customers” is important. Bruckheimer goes further—he has the guts to watch customers, too.
Practically every demand creator can benefit from lessons like these—and that includes not just the corporate manager or the technology entrepreneur but the small business owner who dreams of opening not just one or two new stores but a dozen scattered across three counties, the community theater manager who hopes to mount a hit show every season for the next decade, and the app developer who aspires to produce a string of hits.
If they focus on developing a mind-set, culture, and system centered on improving the quality of their portfolio and then rigorously
choosing and supporting the best potential winners, all these aspiring demand creators will have a good shot at defying Goldman’s Law and creating powerful new streams of demand—not just once or twice, but repeatedly, over a period of decades.
9.
The Biggest Spark
Scientific Discovery and the Future of Demand
HAVING LOOKED BACK at many of the great demand-creation achievements of the last two decades, we return to the question with which we started: Where will tomorrow’s demand come from?
We have no crystal ball. But a crucial clue lies in the obvious yet easy-to-overlook fact that hassles come in all sizes.
Some hassles are small-scale, like the hassles of video rental that Reed Hastings fixed through Netflix, or the difficulty of finding a decent lunch in downtown London that spurred Julian Metcalfe to found Pret A Manger.
But other hassles are large-scale—national or global in scope, persistent, and exacting a heavy toll in money, time, energy, even human lives. The dysfunctions of the U.S. health care system that CareMore is striving to remedy and the failure of American schools to properly educate at-risk youth that Teach For America seeks to overcome are two current examples.
Those who fix small hassles climb the foothills of demand. They make life better in modest ways for thousands or millions of people, and often build successful organizations in the process.
But those who fix giant hassles are the demand equivalents of Edmund Hillary and Tenzing Norgay. They conquer the Himalayas of demand, performing seemingly impossible feats that radically improve life for entire societies and often founding industries that drive economic growth for decades.
But are there any unscaled Everests of demand on today’s horizon—or, as some believe, have all the big opportunities for demand creation already been tapped?
One answer comes from a little-known yet highly knowledgeable source.
In 2008, the National Academy of Engineering polled 25,000 engineers to create a list of what they dubbed the Grand Challenges of the twenty-first century. In effect, they were seeking the world’s greatest unsolved scientific and technical problems—the biggest global hassles from which spring countless everyday hassles (money-wasters, time-wasters, risk-increasers, and many more). The top fourteen vote-getters in the academy’s poll:
1. Make solar energy economical
2. Provide energy from fusion
3. Provide access to clean water
4. Reverse-engineer the brain
5. Advance personalized learning
6. Develop carbon sequestration methods
7. Engineer the tools of scientific discovery
8. Restore and improve urban infrastructure
9. Advance health informatics
10. Prevent nuclear terror
11. Engineer better medicines
12. Enhance virtual reality
13. Manage the nitrogen cycle
14. Secure cyberspace
A serious effort to solve any one of these problems would create hundreds or thousands of new scientific and technological concepts. Winnowed down through the pressure of competition and the challenge of prototype development, the best of these ideas could lead to the development of major new industries that would generate both vast new demand and the high-income jobs to pay for it.
Most important, such breakthroughs would help reduce the hassles faced by hundreds of millions of people and entire societies around the world—hassles ranging from the mundane (unstable gas prices, delayed medical diagnoses, identity theft) to the catastrophic (“water wars” driven by climate change, global pandemics, cyber-terrorism).
The fact is that scientific and technological innovation is the foundation of demand creation. Brilliant demand creators need brilliant material to work with. You can’t connect the dots if the dots aren’t there in the first place.
That’s why the greatest surges of demand, those that play out over decades and leave vast new industries and huge explosions of economic activity in their wake, originate in fundamental scientific discoveries and technological breakthroughs.
Which leads to yet another crucial question: How do such discoveries and breakthroughs actually happen? The answers aren’t obvious. But getting them right will be essential if our world is to enjoy the kind of economic growth and improvement in living standards we all want in the decades to come.
A LOT WAS happening in the postwar world on July 1, 1948, as reflected in the headlines from page one of the New York Times. “Last British Unit Leaves Palestine,” announced one story. (The newly proclaimed state of Israel was already engaged in its first war for independence and survival.) “Truman Sets Feb. 1 As ‘Freedom Day,’ ” declared another. (The advent of the Cold War had created demand for new patriotic holidays to promote the benefits of democracy.) “Shift at Midnight” described the first-ever increase in the New York City subway fare—from the traditional nickel all the way to a dime. (By the end of 2010, a ride would cost you $2.50.)
But, in retrospect, the biggest news story of the day was nowhere on the front page. Buried on page 46, at the bottom of a column headed “The News of Radio—Two New Shows on CBS Will Replace ‘Radio Theatre’ During the Summer,” it read:
A device called a transistor, which has several applications in radio where a vacuum tube ordinarily is employed, was demonstrated for the first time yesterday at Bell Telephone Laboratories, 463 West Street.
The device was demonstrated in a radio receiver, which contained none of the conventional tubes. It also was shown in a telephone system and in a television unit controlled by a receiver on a lower floor. In each case the transistor was employed as an amplifier, although it is claimed that it also can be used as an oscillator in that it will create and send radio waves.
The birth announcement was modest, but the infant technology would transform what we as consumers would demand in the next six decades. By the mid-fifties, transistors would be employed to manufacture pocket-sized radios that every teenager craved—first by a Dallas company called Texas Instruments, then by a little-known Japanese firm named Sony. In the 1960s, Sony began building color TV sets using transistors, marking the start of the slow decline of the U.S. electronics industry and the rise of Japan to global economic prominence. Scientists soon learned to pack hundreds, then thousands and millions of transistors onto tiny slivers of silicon called integrated circuits; by 1971, the functions of an entire array of such circuits were combined in the first microprocessors. In the decades that followed, as the powers of these silicon chips multiplied, the size and cost of information technology were steadily reduced, enabling a cascading series of new developments—electronic calculators, personal computers, cellular telephony, the Internet. The “several applications in radio” referred to by the Times turned into millions of applications whose larger impacts—technological, economic, social—are still unfolding.
It’s understandable that the newspaper editors misgauged the significance of their first glimpse of the transistor. The breakthrough emerged not from a massive government program like the Manhattan Project that produced the atomic bomb, but rather from the obscure tinkerings of a handful of scientists and engineers working in a corner of Bell Labs they’d playfully dubbed “Hell’s Bells Laboratory.”
A brilliant young theoretician named William Shockley, assigned the task of building on wartime semiconductor research that had led to the development of radar, had assembled a team that included experimental physicist Walter Brattain and theoretical physicist John Bardeen, recruited from the University of Minnesota. When Shockley’s first attempt to build a “semiconductor amplifier” to replace the bulky and unreliable glass vacuum tubes failed, he assigned Brattain and Bardeen to figure out why.
They spent two years on the project. Working with razor blades, tape, and soldering irons on an ordinary workbench in a small New Jersey lab, they built tiny gadgets using metal plates thinly coated with silicon and cylinders made of various metals; they tried dunking the d
evices in tubs of water to see if moisture would improve the signal amplification. Finally, in December 1947, Bardeen noticed that a crystal layer on the surface of the unit was impeding the flow of electrons. Altering their latest experimental design, he and Brattain built a one-inch device using strips of gold foil on a plastic triangle, connected by copper wires to a battery and pressed down by hand to make contact with a slab of germanium. They called it a “point-contact transistor,” and it succeeded in boosting an electrical signal almost a hundred times.
When Brattain and Bardeen informed Shockley of their breakthrough, he was delighted—and startled to find himself consumed by jealousy. As he later recalled, “I experienced frustration that my personal efforts, started more than eight years before, had not resulted in a significant inventive contribution of my own.”
The ego blow spurred Shockley to a creative response. He holed himself up in a hotel room in Chicago for four weeks with pens and pads of paper, skipping the New Year’s Eve parties his colleagues were attending between sessions of a scientific conference. He emerged with the design for an improved device that was more rugged and easier to manufacture than Brattain and Bardeen’s version. It was this transistor that Bell Labs debuted before a handful of reporters on June 30, 1948, that won a Nobel Prize in physics for all three scientists in 1956, and that laid the foundation for the computer age.
In time, the fathers of the transistor parted ways. Brattain and Bardeen moved on to academia; Bardeen won a second Nobel Prize for his work on superconductivity at the University of Illinois. Shockley left Bell Labs to found Shockley Semiconductor in his hometown of Palo Alto, California—the first electronics firm in a sleepy apricot-growing region that would soon become known as Silicon Valley. Scientists and engineers Shockley hired eventually launched their own firms, including Fairchild Semiconductor and Intel.
Demand_Creating What People Love Before They Know They Want It Page 31