The Momentum 

One of the most overrated term in corporate finance is growth while the most undervalued & ignored concept is that of the momentum.

Momentum in physics means the quantity of motion of a moving body, measured as “mass x velocity”.  Important attribute of momentum is its seemingly self-propelling energy that keeps a system moving without any further external stimulus. Physicist call it the conservation of the momentum.

Momentum in context of any human endeavor results from “a pattern of decisions made over time, each decision influencing subsequent decisions” (Haseeb Qureshi says in his book quoted in one of my earlier blogs). 

For an entrepreneur or an investor, it means the combination of (a)  continued evolution and innovation (as opposed to the stagnation)  – signifying the velocity of the business, and (b) critical presence (as opposed to being an ‘also ran’ market participant) in marketplace  – signifying its masimg_2788s. Achieving deep and broad market presence for its products & services is great. But, investors don’t value such an enterprise much, unless the market presence is combined with incessant pursuit of new product opportunities or process innovations.

Tracking momentum is way more important than paying obsessive attention to the growth achieved in past quarters by a corporation. In fact, there can be no consistent growth without momentum! Significance of the momentum cannot be better explained than by comparing the stock performance of Apple and Amazon (see chart). Clearly, the difference in the momentum these two companies have and its impact is stark! It is the momentum that determines how valuable a business is.  Yet, B-Schools that drill profitability, liquidity, and  leverage analysis in their student’s brains, do not talk of momentum. Is it because it is too abstract a concept to put a value to it? I think not. Here are some of the data-points that can be tracked to measure the momentum:

Revenue from new products/ services/ markets ÷ the total revenue: revenue from the new launches in, say,  previous 2 years – historic & forecast; Year-over-Year growth/ decline in revenue-weighted market share: by product or service category/ by region; Benefit from new initiatives ÷ EBITDA: not just launches but any initiative such as product/ service promotions, process improvements, etc.

Whether you are an investor or a corporate executive, you can find your own way to track the momentum of the businesses you are involved in. But there is no denying the fact that momentum is the single most important driver of the corporate valuation!

Corporate Venture Capitalism!

BMW recently increased the size of its venture capital fund, BMW i Ventures, to 500 million euros ($530 million) from 100 million and also decided to move its location to Silicon Valley from New York. Given that the car industry, which was technologically more or less stagnant for several decades, is now buzzing with innovation with AI  integration, It is not surprising to see BMW put additional emphasis on exploration.

Large corporations often struggle to keep up with their constantly innovating and evolving Eco-system. That is a result of an inadvertent flaw that creeps in as building regorous internal checks & controls slows down their response time and kills the enthusiasm for innovation. 

A few years back, I supported a program in a large cap US-based defense contractor to encourage  innovation. I got an opportunity to work with a few of their brightest engineering brains. These engineers were encouraged to leverage some of the company’s cutting edge defense-oriented technology to create innovative “civilian” business models. It was my client’s hope that such an innovation-driven approach can build a hedge against its revenue dependence of Government’s defense budget. Indeed, most of the large corporations sit on idle Intellectual Property assets worth billions of dollars. Encouraging innovation around these IP assets through an internal venture capital program was almost a no-brainer.

There is another reason for large corporations to piggyback on “portfolio” businesses funded through a venture capital fund to explore innovative business ideas. Game theory teaches us that a resourceful leader (like a winner of a 10,000 meters race) does not have to lead from the gate go. Ideally, a market leader can closely follow the “interim leaders” and sprint to catch up and win at an opportune time. Following a venture capital route can help leaders to closely follow the innovative ideas without creating an undue dent to their profitability or reputation in case these innovations fail.

The key question relating to success or failure of any of these program revolves around the culture of the corporate venture capital leaders and their ability to recognize that their risk-averse bureaucracy-driven board room strategies do not work well in innovative ventures’ war rooms!

Business Model Innovation

Here is an interesting article:
The Three Most Innovative Companies of 2013 logo1
“Business model innovation is the ticket to explosive growth”

In a world where 1,000 new patents are granted every day in US alone, I see gross over-emphasis on the physical aspect of innovation  with scant regard to the business model innovation. Indeed, Intellectual Property Rights are viewed as a key to the riches by investors, executives, and entrepreneurs alike. However, in the ever-shifting (and rapidly shifting) sands of  technology, the state-of-art quickly becomes “irrelevant” unless accompanied by business model innovation. This applies to businesses irrespective of their size or age. Look around and you would see plenty of examples of extinction due to lack of business model innovation – Polaroid, Blockbuster, Kodak, Blackberry, Nokia, Yahoo, Dell and many more!

Challenge to innovate business model is equally pertinent to new and established ventures. Technology companies need to be alert and agile in inspecting their proposed business model on the basis of market feedback. In fact, one needs to proactively seek critic of the business plan in order to search for cracks that may develop due to shifts in underlying assumptions.

In case of a start-up, source of its power to disrupt industries dominated by large players lies in the ability to be quick on its feet. But many lose this power due to adamant attachment to a predetermined business model. In case of a corporate entrepreneur, this rigidity can come from organizational inertia – especially when the corporate objectives are to do same things better than doing better things!

Is your business model in need if a Business Model Innovation?