4.3. Marrying for Money

“Once you understand that, you can think through whether you have a business that investors will want to invest in. It’s not a given that your company is right for venture capital. Most big VCs are surprisingly risk averse—they won’t invest in startups that can’t prove they’re already on a clear growth trajectory. VCs have been trained by the internet age to expect numbers before they invest: growth rates, sign-up rates, click-through rates, unsubscribe rates, run rates, all the rates. And VCs have bosses to report to—their LPs, the people and organizations who give them money. They need to show that they’re making wise, highly profitable investments with the right management teams.

The Kauffman Foundation study also illustrated that almost 86 percent of companies that succeeded in the long term did not take VC money. Why? Because a company’s interests may not always align with the interests of its backers.

That was a difficult time for me. I love building businesses, not disassembling them. However, we all have an opportunity to learn in everything we do. I came away from this experience with a profound appreciation of the importance of cash in corporate performance—“free cash flow” as the single most important measure of corporate soundness and performance.

Part 1: The oblique world

3. The profit-seeking paradox

George Merck and Robert Johnson created great businesses which, in consequence, made remarkable amounts of money for their shareholders. ICI and Boeing were more successful as profit-making companies when they ‘served customer’s internationally through the responsible application of chemistry’ or ‘ate, breathed and slept the world of aeronautics’ than when they tried to ‘maximise value for our shareholders’ or ‘go into a value based environment’.

Disruptive technologies, Christensen had observed, often grew out of hobbyist communities. They were developed using “bootlegged resources” in which “off-the-shelf components” were redeployed for something other than their intended purpose. They started out wonky but rapidly improved along attributes of performance that established players ignored.

But even once you had absorbed this lesson, it wasn’t easy to implement. Pursuing niche markets cost profits, making investors question your sanity. This, too, Christensen had foretold: “One of the reasons managers at established firms find it difficult to serve emerging markets is that their investors and customers tell them not to.”

That was the real secret of The Innovator’s Dilemma, which readers often missed. It was not a book about how to succeed; it was a book about how not to fail. Christensen’s book wasn’t a how-to for start-ups but a counterinsurgency manual for senior managers at stagnating firms. Thirteen years in, Huang felt that Nvidia was at risk of becoming such a firm, and it was as much paranoia as optimism that led him to pursue the mad-science market.