Public companies are not set up for innovation

Last Friday my colleague Cedric Latessa sent me the following email:

General Electric is the only company remaining from the Dow Jones index of 1896. It has had fewer leaders since then (eight) than the Vatican has had popes.
Fortune

At first I was tempted to post it for the amusement value alone, but over the weekend I got to thinking that there was more to it that that.  This GE story is remarkable because the average tenure for a large public company CEO is somewhere around three years, and three years is too short a period to think about innovation.

The average venture backed company is probably 1-2 years old when it takes it’s first VC investment and that investor will be planning on holding the investment for 3-5 years before exiting.  It is only at the exit point that the company has demonstrated enough success to be significant for its acquirer meaning that from inception of the idea to being really significant the time period is 4-7 years.  If the average tenure of a large company CEO is 3 years then it is easy to see why investment in speculative innovation isn’t top of her priority list.

There are also a host of other reasons why innovation is happening more and more in small companies, of which the increasing pace of change is probably the most important and the stock market focus on quarterly results springs to mind given the central theme of this post.

Companies like Cisco, Microsoft, and IBM have been outsourcing R&D to the startup and venture communities for a long time and more recently Google, Yahoo, and AOL have picked up on the habit.  Going forward I expect we will see more of this, not less.

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