What accounting tells us about innovation
Marco Moreira
Sometimes numbers give us a clearer perspective on the culture of organizations and how people are impacted by it than any one individual story. Let's look at some examples:
3G capital is one of the world's most successful private equity firms. If you recently bought something from brands such as Burger King and Heinz, then you've contributed to their success. One of the keys to their performance is a management philosophy they dubbed "zero-based budgeting". It basically means that, every year, the entire company looks at literally every single expense item in the budget and tries to cut it. This process is as spartan as it sounds and it inevitably produces some Dilbert-like stories when folks take it to the extreme.
Nevertheless, growth through fiscal discipline is 3G Capital’s model and it has worked reliably over the years.
Tech giants such as Google, Amazon and Facebook do not issue dividends to shareholders, which is a common practice in other tech companies as well. Why is that? There are many reasons, but among them is the belief that everyone would benefit more if management takes certain risks with that cash in order to achieve outsized returns by inventing truly world-changing products. This disruption-centered attitude is behind the original products that led these companies to stratospheric valuations to begin with. Since most of the founders are still running these businesses, that culture lives on.
Jeff Bezos summarizes this spirit best:
“Given a 10% chance of a 100-times payout, you should take that bet every time. Failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment.”
Growth through high-risk/even-higher-reward innovation, even when you're losing money 90% of the time, is Silicon Valley’s model and it has worked over the years.
As the Cold War ramped up and space became a theater of war, NASA’s budget surged to almost 5% of the US federal budget. At its peak, the space program employed an astounding four hundred thousand people directly and indirectly. For comparison, that’s roughly 50% more money than we spent on education and about 20% the size of the total US federal government workforce at the time. We “won” the space race with the moon landings and humanity took one step closer towards a world order influenced by American values.
So much technological progress was created in the endeavor to land a man on the moon within a decade that economists still struggle to quantify the return on investment of the space program. We do know it was a whole lot since modern society is basically built on top of the information age ushered in by that effort.
Growth through a nationwide mission where failure is not an option, costs be damned, was NASA’s model in its glory days and it worked.
In business, as in life, there’s often no right or wrong answers, only choices to be made that result in certain outcomes. As such, none of these growth models is inherently right or wrong, but as an employee/investor/consumer, it’s important to understand what you’re signing up for when you commit to a company. The emotional aspects and lifestyle differences between these models could not be any more different. How many of us can withstand failing 90% of the time and remain optimistic about hitting it big or handle the pressure of feeling like the future of the nation rests on your shoulders? On the other hand, how much change can you really create in the world when the bar for success is some marginal financial improvement over last year’s numbers?
What’s interesting is that often companies advertise the opposite message of what their accounting tells us about their innovation philosophies. I find that there’s an inverse relationship between how much companies advertise how “innovative” their culture is and how much it actually is. That’s why you’ve never seen a Tesla ad claiming to make "the most innovative car ever”. I hope looking at organizations through this lens will help you discern those who are "talking the talk” from the ones "walking the walk” on living up to the aspirations of their stated missions.