Venture Funding

Source: Seeing What's Next

Our research suggest that the source of money is not a critical determinant of success for recent disruptive ventures. Storage maker EMC was self-funded from its beginning. Cisco only attracted venture funding after it had developed a profitable business model. Bloomberg launched its disruptive terminal using funding from Michael Bloomberg and Merrill Lynch. Charles Schwab couldn’t find a venture backer for his discount brokerage model in the 1970s.

Consider the creation of the personal digital assistant (PDA) market. Whose money helped create the market and whose money hurt? Corporate money seems not to have been helpful. Apple’s efforts to create the PDA market are a well-studied flop. It invested more that $350 million in creating its Newton product. Apple tried to use a bevy of new technologies to create a miniaturized version of a personal computer, but the product never performed well enough to appeal to customers. Venture capital money didn’t help a whole host of would-be disruptors. Kleiner-Perkins backed a start-up called GO Corporation that spent $75 million and then WENT. All told, these companies and venture capitalists invested more than $1 billion trying to crack the market.

On the other hand, Palm was venture funded. But it was not spending its venture capital money that helped Palm find its foothold. Palm spent less than $3 milliong developing its Palm Pilot. Backed by venture capital funding from Merrill, Pickard, Anderson & Eyre and Sutter Hill Ventures, Palm first created a product called Zoomer PDA, which according to Fast Company “did lots of things, most of them badly.” Like the products launched by Apple and GO, the Zoomer failed. But Palm had stored up enough cash to develop a second generation. It decided to find out what the handful of Zoomer purchasers actually thought of the product. It stumbled onto a surprising revelation: People did not want a replacement for the computer; they wanted a complement that was limited but simple to use. Palm came up with a relatively simple device that was limited applications such as an electronic Rolodex. It forced users to use an intuitive, simple writing style instead of relying on complicated handwriting recognition software. The Palm Pilot seamlessly synchronized with a user’s computer, allowing the consumer to have a consistent repository of data. This was a disruptive innovation – simple, cheap, and limited, but positioned squarely on a job that delighted users.

Armed with its winning idea, Palm sought additional VC financing. But purse strings had tightened after the recent explosion of hype surrounded the handheld market. Finally Palm decided to contact U.S. Robotics, a leading modem manufacturer, who decided to acquire Palm for $44 million in stock.

Palm started the PDA revolution, which created massive amounts of new growth that many believe will ultimately culminate in a product that disrupts leading computer manufacturers. Which funding source should we credit with starting this revolution? Categorizing money as venture capital versus corporate is cutting the world the wrong way. Good money providers are those who help a company spend a little and learn, until it has a viable strategy and business model.

Bflygal's comments:
Extracted this article from "Seeing What's Next" by Clayton M. Christensen for stressor to read haha. This book has a few interesting chapters though I had been too tired to really read the book. But the author has some interesting pointers. I'm also not sure why I typed this extract out.. but just found it interesting that sometimes funding needs not means success.

There was another chapter on healthcare that was interesting too. It was about rabbit test and pregnancy kit haha. Hmm maybe when I'm less tired, I shall read the book again and the author other series.