Q. Kaleida opened with great fanfare in 1992, only to close its doors this year -- not long before Taligent, another joint venture of IBM and Apple, went belly-up as well. What's going on here?
A. Not what people think. The problem wasn't that Apple or IBM had stupid or bad people; they have excellent people. The joint-venture model itself was the problem. It's a business structure that simply can't work if your goal is to create something new. In hindsight, the Kaleida and Taligent failures -- and others like them -- were inevitable.
Q. But from an outsider's viewpoint this sort of start-up looks to have a lot going for it -- huge resources, in particular. Wasn't something like $50 million invested over Kaleida Labs' three-and-a-half-year history?
A. There was a lot of money invested, but that begs the question. The real question is why was the company set up in the first place? Was the money IBM and Apple invested meant to build something they needed? Or was it meant to invest in a profitable enterprise? In other words, were the goals strategic or financial? If the goals are strategic -- if the investing partners don't really care if the venture makes money, and all they're after is the engine and the transmission so they can build their cars -- that's how they'll manage it through control of the board.
Q. Were Apple's and IBM's aims strategic or financial?
A. Apple and IBM were continually schizophrenic about that. One day they would be very certain they were investing for financial reasons, the next day for strategic ones. But there's no surprise there. In large corporations, people get moved around, other people take their places, and programs are constantly reevaluated. That schizophrenia creates nightmares for a focused entity that has only one thing on its mind. That situation is one of what I call the starting-gate pitfalls of joint-venture businesses: indecision about the purpose of the business.
Q. What are the other starting-gate pitfalls?
A. The biggest starting-gate pitfall is that the investing companies define the product vision -- in our case, coming up with ScriptX, a multimedia programming language -- but not what constitutes business success. The issue is related to deciding whether the interests are strategic or financial. Is the company successful when it makes a lot of money or when it ships its first product? Is it about generating PR for its owners or is it really about starting a great business? With success not really well defined, it is hard to achieve it.
Another starting-gate pitfall is runaway vision, which Kaleida certainly suffered from. We had a great idea, and pretty soon we were convinced that that idea could take over the world. But the vision gets so embellished -- not through any ill intent -- that it takes on a life of its own and gets out in front of reality. We had shipment dates announced before we had our first employees. That's runaway vision.
Q. Let's say those pitfalls are handled -- and, in theory at least, they seem solvable. What else can make or break a joint-venture company?
A.The three cardinal rules that I've learned about joint venturing are (1) you should joint-venture only if it's the last resort -- if you can't think of any other way to accomplish your objectives; (2) those objectives must be really important to you; and (3) you can't cheat on the venture by letting some internal development group work on something the joint venture is doing -- you have to be dedicated to its financial success. At Kaleida at various times people from the investing companies broke all three of the rules.
Q. As you talk about Kaleida, it sounds as though some of the problems may come down to culture clash -- culture clash between IBM and Apple, but maybe even more between large-corporation thinking and the thinking of those trying to get a start-up off the ground.
A. You're right. Entrepreneurs are all about creating value. Value certainly comes from creating profits, but the two don't always move in lockstep. Frequently there is value before there is even any revenue. The technology-creation world is always about creating that value and then going public. Entrepreneurs and the people who work for them understand that model -- they like that model, and they are motivated by that model.
Now here's the big-company model: scores of executives are measured on whether their current-period profits meet a target that is x percent higher than the same period last year. If you are the big-company manager being asked to invest millions of current dollars in a joint-venture company for no current-period profit, and there is no way you can take credit for the value created in that private company, it's a problem for you. So that's where the models are divergent. The big companies are measuring their people by current profit and loss, and the little companies are trying to create value even before there is profit so that they can use the currency of their stock to acquire other things and build value even faster. And there is no way for a big-company manager to take credit for that. That is the fundamental disconnect.* * *
Q. Do you think it's impossible for large-corporation managers to put the joint venture ahead of their own corporate interests, or just difficult?
A. I think it is impossible to totally empower a corporate executive to become an independent director concerned with the success of the venture. You can say it; you can put it on paper. But the first time that corporate executive's organization changes, the first time his power is questioned by someone in his organization, the first time his budget gets whacked, he is undermined. So he is going along and saying, "Wow, this venture is the smartest thing my company ever invested in, and I am going to try to make it a success." And he is talking like that inside his company -- all that works wonderfully until that executive has a bad quarter, and then suddenly his judgment gets questioned. The venture may be doing nothing different, but if the guy carrying our banner and sitting on our board has a turn of fate, so do we. I'll repeat something I said earlier because I feel this so strongly: for a joint venture to work, the partners need to be primarily interested in that venture's financial success -- unwaveringly.
Q. Are there other ways that clashes of interest hinder the financial success of a joint venture?
A. Pricing can be a problem. Consider this: the joint venture intends to sell a lot of its products to its investors at a profit. The investors say, "We intend to buy lots -- now let's talk price." The joint venture has an opinion of what the price should be, and so do the investors. In our case we faced this attitude: "We have paid for ScriptX. It's our money that paid for its development. Why should we pay again?" We had no outside directors on the board. Who do you think won that debate?
Q. Knowing what you know now, would you have scrapped the joint undertaking to develop ScriptX?
A. No. Kaleida did what a joint-development project would have done. And I think the lesson here is that's what it should have been: it should have been a joint-development project to build the language for its partners to exploit and not an independent company. That's what it should have been from the start, because that's what they really wanted. That is why it is so important to decide at the beginning: what is it that you really want?
Another large company came to me recently and asked if I wanted to build a joint venture for them. I asked the senior executive of the company, "What is it that you are interested in achieving with this company?" and he replied, "Well, we really don't care if this venture makes money. We just need entrepreneurial people to build this product for us." I said, "That's the kiss of death. If you make decisions that are not optimal for the venture to make money, then you're shooting yourself in the foot." Entrepreneurial people want to create wealth and value, but if they see that is unlikely to happen because the people they thought were their allies are suddenly on the other side of the table, they flee, they miss schedules, and the whole venture can go down the drain.* * *
Staff writer Tom Ehrenfeld, who interviewed Braun for this article, can be reached at firstname.lastname@example.org
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