First a little “personal ad”:  I will be in Stockholm this week and welcome anyone to come to Sturehof (one of their bars) at 18:00 - 21:00 on Wednesday June 21.  It would nice to network and catch up.

I have decided to ask Scott Lipsitz from Rainmaker Capital write a contribution to this issue of IOW, just like he did in January on ‘unlocking value in Ericsson’.  Since then Scott, I and some others at Ericsson have been pondering over the issue of how to involve a larger number of Ericsson employees in the market value creation process within our company.  I asked Scott to write about this with a view to propose something concrete. What if Ericsson employees would form a venture fund?  (thanks to Adam Holt at ETL for the idea.)

I will keep a lower profile during the summer and the next IOW will probably appear in late July, right after my attending The Internet Summit 2000 of The Industry Standard Magazine.

Best regards

Tapio Anttila

ERICSSON EMPLOYEES AS STAKEHOLDERS IN OUR SUCCESS

By Scott Lipsitz, Partner, Rainmaker Capital

Dear Tapio,

As you are well aware, I am a major proponent of “strategic portfolio building through partnering”.  At the June 1^st Ericsson/Telia workshop in San Francisco (which I thought was a great event — by the way) my session was dedicated to this very subject.  The basic premise is that companies with powerful brand and asset depth add great value to those early stage companies in which they choose to partner AND that for adding such value they can and should participate on an equity basis regardless of direct equity investment.

Why Partner ? …Well there are plenty of good reasons…

·        First look advantage

·        Market intelligence

·        Reduced R&D expense

·        Access to cutting edge technology

·        Access to new business models and visionary/”out of the box” thinking

·        Participation in the capital formation process

·        Return on investment

How to make it pay….

And of course there are many ways to partner, each with very clear approaches to monetization. Examples of this might include:  commercial licensing deals, branding and distribution deals, technical development deals, consulting services, of course direct investment and any mix and match of the above.  All of these scenarios would be deserving of fees and/or warrant coverage. Bear in mind that any company which believes it can develop a successful partnership with Ericsson will gladly allocate resources, both cash and stock, toward that objective.  Period.

So what is the secret sauce… How to be successful:

Obviously, in order to be successful, you need the right deals.  This is to say that you want highly filtered opportunities.  In the case of Ericsson, deal flow is a non-issue.  Ericsson has tremendous internal deal flow and, if it so desires, can create immediate external deal flow… all from very good sources (i.e. I-banks, venture funds, professional service organizations, incubators, etc…).  Another extremely important component of success is a formal and efficient opportunity management process. You must be able to quickly evaluate and respond to the many opportunities that you see. Finally, once engaged you must be sure that the internal mechanisms are in place to manage the strategic portfolio companies you have selected. This boils down to account management, expectation management and some general level of accountability.

The Problem with Ericsson today…

As far as I can determine, Ericsson’s problems reside in three inter-related areas:  1) Ericsson is afraid to fail, 2) Ericsson presently has no formal processes for managing deal flow – all opportunity management is ad hoc at best and 3) Ericsson has not created the appropriate incentivization tools to make Ericsson employees opportunity stakeholders .

In short, many companies engage Ericsson in discussions and end up lost in the Ericsson abyss. Because there is no formal partnering/investment process, due diligence begins but does not end. Managers may take an interest in a potential opportunity but ultimately are not clear on how to proceed once initial comfort levels have been achieved. Of course, it is always easier to say “no” or nothing than to say “yes”.  Without clear guidelines, the ad hoc process comes to a grinding halt. This results in the suffocation, alienation and demoralization of companies that could have been great opportunities.  Needless to say, the resounding message in the market place is that Ericsson is a big slow dinosaur-of- a -company and  impossible to do business with.  Clearly not the desired message.

How do you deal with this?  Make Everyone a Stakeholder…

While creating  schema or process maps for managing internal and external deal flow for Ericsson is not terribly complicated, galvanizing every business unit under a shared vision and creating enough stakeholder interest to develop and manage the process proves to be a more difficult task.  The bottom line is that every employee in Ericsson’s internal value chain must be given a reason to care. While pure monetary upside may seem a lowly hollow objective, the world is sadly driven by fear and greed. As far as I can tell, there is only one way to create stakeholder interest, simply put…more equity, more options, more upside.

In the May, 2000 issue of Red Herring in an article titled, ‘Who wants to be a Venture Capitalist’, Tom Stein describes in great detail how many large corporations are creating there own venture capital funds.  In fact today nearly 20% of all Fortune 1000 Corporations have some type of venture fund compared with 1% two years ago according to research firm Asset Alternatives.

The primary goal of many of these companies is simply to make more money. However, many large Companies, like Cisco Systems and Intel, also view venture investment as a great alternative to in-house research and development  - the hope is that they are able to acquire the “best of breed” technologies in which they have funded.  In some cases, and directly applicable to this discussion, some corporations are using their venture funds as a recruiting and retention tools by offering employees direct participation by allowing them to invest some percentage of their salaries directly into the funds. 

What if ?

What if Ericsson created an employee venture fund? What if the fund was seeded by Ericsson Corporate and Ericsson employees were given a 10% carrying interest?  What if in addition to the 10% carry, Ericsson employees were able to participate directly in the fund and what if Ericsson Corporate was willing to match dollar for dollar proceeds invested by employees (e.g. $1 invested equals $2 of value)?  Perhaps business unit managers would receive a higher percentage of the carry due to increased responsibility. Would such a vehicle create the internal incentive to develop and manage opportunities around a shared vision? Would Ericsson employees appreciate such a direct participation vehicle?  Would this type of direct involvement provide some level of incentive to flesh out a clear strategic vision in which any opportunity could be placed? Would such a vehicle incentivize Ericsson employees to be certain that effective deal flow processes where in place? Would a direct stakeholder interest raise the level of awareness and ultimately alter the Corporate culture in a fundamentally positive way?

In the end, this is really a discussion about cultural orientation. Whether or not Ericsson would be willing to set up such a vehicle is not ultimately important. What is important, however, is that Ericsson develop a culture that rewards those who are willing to be accountable, reward those who have the vision to seek out and foster strategic opportunities in which Ericsson’s powerful asset depth can be leveraged, — opportunities that generate ROI, opportunities that drive the right type of media attention, and opportunities that keep Ericsson forever on the cutting edge.

Just food for thought….