Technology and

bio-medical
companies create
success cycles
by the way they
perform four
critical business
processes.
Peter S. Cohan
and Barry Unger
reveal the
implications.

V
enture backed public companies – such as
Google, Yahoo, Microsoft, Cisco Systems, and
Genentech – are recognised for their ability
to create jobs, revenues, and high investment
returns, and their importance to national economic
development in the United States, and increasingly
in other countries as well. Specifically, according to
the National Venture Capital Association, venture
backed companies spawned 10.1 million jobs and
$1.8 trillion in revenues between 1970 and ¡
 ¡ 2003. And during the two decades ending in
September 2004, venture capital funds returned
15.8 per cent per year to investors, compared to the
S&P 500’s 12.4 per cent return.
We have previously studied the drivers of growth
and stock price appreciation in technology-based
public companies and the behaviours and priorities
of entrepreneurs in high growth early stage
companies. We are now seeking to better
understand and formally categorise what factors and
Best practice
processes create successful outcomes for
technology and bio-medical (aka life science)
venture backed companies during their “private”
stage while they are being selected and nurtured by
venture capital and institutional investors.
Our immediate effort in this arena is to extend
and amplify – via a series of interviews with partners
of technology and bio-medically focused venture
At the core of this superior performance was a
common approach to organisational learning and
resource allocation.
capital firms – earlier work which identified four
consistent processes in publicly held technology
leaders that enabled them to repeatedly achieve
positive outcomes (growth in revenues and profits)
that then created the capital, confidence, and
market insights to achieve new growth.
Further efforts will focus on how venture
capitalists facilitate entrepreneurial success cycles
in their investments through screening, selection
and structuring procedures, investment “styles”,
and monitoring and control systems.
Technology leaders
Some of our earlier consulting and research focused
on how leading American technology companies
manage innovation and balance this with the
demands of an unforgiving stock market, including
such questions as:
G How do they attract people with a strong grasp of
technology and business and motivate them to
create new products?
G How do they get new products to market quickly
that customers are eager to buy?
G How do they maximise the value of the
intellectual property?
G How do they decide which development projects
to fund and which to kill?
In research reported in The Technology Leaders:
How America’s Most Profitable High-Tech
Companies Innovate Their Way to Success, 1,306
companies were screened based on three criteria
(high R&D/revenue ratios, leading five year average
10 Business Strategy Review Spring 2006 © 2006 The Author | Journal compilation © 2006 London Business School
return on equity relative to their competitors, and a
reputation for innovative products and services) and
20 companies selected which were leaders in their
industries. Not all these 20 companies are still
around and some of the ones that were prominent
10 years ago have faded.
We have interviewed successful venture
capitalists and looked to see whether the factors
that led to the success of these 20 companies have
any relevance today to the success of private stage
venture backed technology and life science
companies. We found that the answer is yes.
Success cycles
The analysis of the 20 companies revealed that
companies that satisfied the three criteria
outperformed their industry on measures that matter
to investors. These 20 companies were more
profitable, grew faster, and had better stock market
performance than their peers. Specifically, between
1990 and 1995, compared to their peers these 20
companies earned five-year average returns on
equity that were 2.4 times higher, their stock prices
grew 4.5 times faster, their profits per employee
were 4.1 times greater, and their revenues grew 5.7
times more rapidly.
At the core of this superior performance was a
common approach to organisational learning and
resource allocation – dubbed success cycles.
Rather than viewing a company’s initial product
success as a license to build an expensive office
complex and buy a corporate jet while ignoring new
technology, upstart competitors, and changing
customer needs; technology leaders did not rest on
their laurels.
But of equal importance, they spread insight –
about new technology, upstart competitors, evolving
customer needs, and their own strengths and
improvement opportunities – throughout their
organisation in order to raise their ability to
compete in the next round.
The four sources framework
Technology leaders create success cycles by the way
they perform four critical business processes –
labeled the four sources of advantage. These
processes enable technology leaders to generate
higher rates of return on innovation – the present
value of the cash generated by investments in
innovation – than their peers.
Entrepreneurial leadership means creating a work
environment that attracts people with a great feel
for technology and markets who can build new lines
of business. Note that while all processes are
important, entrepreneurial leadership must be seen
as the important fundamental as it allows the other
processes to occur.
Andy Bechtolsheim co-founded Sun
Microsystems, leaving after nine years with $50
million worth of Sun stock. He later founded a chip
company, Granite Systems, which he sold to Cisco
in 1996 for $220 million. Despite a net worth in
excess of $100 million, Bechtolsheim worked as a
vice president at Cisco seven days a week, 16 hours
a day. Bechtolsheim did this because he has a
personal compulsion to introduce the best product
ahead of competitors when a new technology
market emerges. At Sun it would take six months
of internal selling to change a product feature,
whereas at Cisco, such a change could be made in
a week. Thus Cisco was the best environment he
had found to fulfill his personal compulsion.
Open technology means beating competitors at
satisfying customer needs with technology from the
fastest and most effective source – internal
development, licensing, or acquisition.
Closed technology companies believe that the
only good technology is one invented internally.
For example, Wang Computer led the word
processing industry in the early 1980s before
Apple and IBM introduced PCs with word
processing software. Since Wang had not invented
PCs, Wang could not see how PCs offered
customers better value. As a result, Wang’s sales
dropped and it went bankrupt.
Open technology means beating competitors at satisfying
customer needs with technology from the fastest and most
effective source.
By contrast, Cisco Systems believes in open
technology, pursuing acquisitions to get the
technology that its customers want so competitors
can’t take its customers. Chairman John Morgridge
– who worked for Honeywell early in his career –
started Cisco’s acquisition strategy. Morgridge found
that technology salespeople were loyal to the
commissions flowing from their territories, e.g., the
New England banking industry. As long as
Honeywell made products that customers in their
territories wanted to buy, the sales people stayed
with Honeywell. But when a Honeywell competitor
introduced a product popular in that territory, the
sales people migrated to that competitor.
When Morgridge landed at Cisco, he decided that
Cisco should never let this happen to its sales
organisation. By acquiring such upstart competitors,
Cisco would get the technology that customers
wanted to buy into the hands of Cisco’s sales force
© 2006 The Author | Journal compilation © 2006 London Business School
in order to align the interests of the customers, the
sales staff, and Cisco’s shareholders. Unlike at
closed technology companies such as Wang, Cisco
did not care whether the technology was developed
by its own engineers. John Chambers, Cisco’s
current CEO, had lived through Wang’s collapse, an
experience he vowed not to repeat.
It is now clear that this is just as true for private
stage venture backed companies. For example,
Courtroom Connect, a venture funded technology
Best practice
start-up in Washington, DC, recently acquired
another specialised company, VideoTelecon, in order
to most quickly provide products its law firm
customers were asking for rather than developing
this product itself.
Boundaryless product development means
building quick prototypes and getting fast feedback
from early adopter customers through the work of
cross-functional teams.
Traditional technology companies pursue a relay
race approach. Here engineering throws a blueprint
over the transom to manufacturing which builds a
product that salespeople cannot sell because it does
not meet a customer need.
The boundaryless approach starts with a
cross-functional team consisting of engineering,
sales, manufacturing, purchasing, finance and
early adopter customers. The result is rapid
prototyping of products that meet customer needs
which can be built cost-effectively to meet
burgeoning demand.
Hewlett-Packard built a profitable multibillion
dollar inkjet printer business by adopting this
boundaryless approach to product development. In
1979, an HP researcher heated up a piece of metal
in a converted janitor’s closet and found that the
metal splattered in an unusual pattern. Former HP
executive Richard Hackborne turned this discovery
into a big business by focusing inkjet technology on
consumer printers, rather than the business-focused
laser printer market. This decision, in turn, led HP
to involve consumer marketers and manufacturing
engineers in the development of new products – a
first at HP which traditionally crowned its design
engineers kings.
Thus HP positioned its inkjet printer as a higher
quality, less expensive and sturdier alternative to
the mediocre quality Japanese dot-matrix printer. By
involving consumer marketers in product design, HP
developed products that drew consumers into retail
stores. And HP’s admission of manufacturing
engineers into the process led to a far sturdier ¡
Business Strategy Review Spring 2006 11
 ¡ and cheaper to build machine that could
profitably withstand price wars.
Disciplined resource allocation means cutting
projects that are unlikely to succeed as quickly as
possible so that resources can be shifted to more
promising opportunities.
Traditional companies invest in projects that
interest a powerful executive or director without
subjecting their suggestions to disciplined analysis.
As a result, traditional companies often invest in
Best practice
new initiatives that do not generate positive returns
– thereby wasting scarce corporate resources.
Technology leaders do a better job of balancing
the interests of powerful individuals with the
needs of shareholders – through disciplined
investment analysis such as stage-gate processes –
thus generating higher shareholder returns than
their peers.
Indeed, one venture capitalist referred to such
leaders and their companies as “depression era
babies” – ventures that were funded on a shoestring
in the post-internet bubble financial drought – and
consequently had to develop quite disciplined
resource allocation processes.
Happy, healthy and rich
These four sources of advantage are not a relic of
the 1990s, they are a vital part of the success of the
$3 trillion bio-medical industry’s top performing
company. According to a June 2005 Peter S. Cohan
& Associates analysis, biotechnology was the top-
performing of eight health care industry strategic
groups with an 1,186 per cent increase stock market
value for the decade ending that month. And the
biotechnology company whose prospects the stock
market valued most was Genentech whose stock
price/sales ratio – 1,829 per cent – led the group.
Perhaps no statistic testifies more eloquently to
this than Genentech’s June 2005 $83 billion stock
Technology leaders do a better job of balancing the
interests of powerful individuals with the needs of
shareholders.
market value – which exceeded Merck’s by $12
billion – a company with five times Genentech’s
revenues. Genentech’s stock was up 12-fold in the
decade ending June 2005; in the last five years its
revenues have climbed an annual average of 21 per
cent and in the 12 months ending June 2005 it
earned a 21 per cent net profit margin on $4.2
billion in revenues.
Genetech exemplifies how entrepreneurial
leadership supports open technology, boundaryless
product development, and disciplined resource
allocation – all leading to very happy results for
management and investors.
12 Business Strategy Review Spring 2006 © 2006 The Author | Journal compilation © 2006 London Business School
1. Entrepreneurial leadership
Hiring top scientists. Genentech’s CEO, Arthur
Levinson, studied with Nobel Prize winning
scientists and could have had a successful
academic career. Levinson created a university-like
environment that attracted top scientists including
Marc Tessier-Levigne, a former neurologist at
Stanford University, and Andy Chan, a former
immunologist at the University of Washington.
Driving scientific initiative through self-selected
projects. Genentech encourages its researchers to
spend 25 per cent of their time on projects of their
choosing (compared to an industry average of 10
per cent). In 1988, a Genentech scientist,
Napoleone Ferrara, became interested in anti-
angiogenesis, a process for choking off the blood
supply to cancer tumors. His research led to Avastin
which was approved as a colorectal cancer
treatment in 2004 and is expected to reach $3
billion in peak sales.
Using peer recognition to motivate innovation.
Levinson believes peer recognition motivates
researchers, and he gives them the opportunity to
build a reputation for themselves. Genentech,
unlike pharmaceutical companies, encourages
employees to publish in-house research work in
scientific journals. Pharmaceutical companies want
to keep proprietary their findings until they’ve got a
patent. According to Levinson, by that time the
work is no longer ground-breaking; no one cares
about it any more.
Tapping into scientists’ desire to make the world
better. Genentech creates a culture in which
people believe they can make a big difference.
There are 300,000 people who have been treated
by Rituxan, a treatment for non-Hodgkin’s
lymphoma. When someone comes up to a
Genentech employee and says “you helped save
my dad’s life” it creates a sense that Genentech
has a higher purpose which further motivates
Genentech scientists.
We noted that while all processes are important,
entrepreneurial leadership must be seen as the
important fundamental as it allows the other
processes to occur. This is dramatically seen in the
case of Genentech which is well known for its
powerful culture put in place in the late seventies
by its founder the legendary late Robert Swanson, a
chemist, venture capitalist, and societal leader, who
understood how entrepreneurial success in the then
new field of “recombinant DNA” could benefit all of
the above “stakeholders.” ¡
 Creating a process for success
CEOs seeking to accelerate their company’s
growth have an opportunity to adopt the
principles that let Genentech prevail.
The first step is to assess how much a
company must change in order to adopt them.
The 14 questions that follow can help with this
self-assessment. If your organisation gets 14
As, it may already be where it needs to be. If it
gets 14 Bs, it has a long way to go. For each
of the questions, answer whether your company
does the following:
Entrepreneurial leadership
1. Hiring
A. Hires engineers with strong technical skills
and keen business sense; or
B. Hires engineers with strong technical skills
and limited business sense.
2. Self-driven research
A. Gives engineers, say 10 per cent to 20 per
cent, of their time to work on projects they
choose; or
B. Requires engineers to work exclusively on
manager-directed projects.
3. Publishing
A. Allows engineers to publish current research
in peer reviewed publications after appropriate
patent disclosures have been made; or
B. Requires engineers to keep their research
company confidential.
4. Peer recognition
A. Holds annual celebrations for engineers who
develop innovative products; or
B. “Rewards” engineers who innovate by letting
them keep their jobs.
5. Culture
A. Uses culture and supporting measurement
and reward systems to emphasise how society
benefits from its products; or
B. Uses culture and supporting measurement
and reward systems to focus on enhancing
shareholder value.
Open technology
6. Speed to market
A. Acquires companies or licenses technology to
obtain rapid access to products its customers
want to buy; or
B. Uses only internally developed technology to
develop new products.
© 2006 The Author | Journal compilation © 2006 London Business School
7. Customer perspective
A. Builds technologies that create customer
value; or
B. Builds technologies that satisfy executive
requirements.
Boundaryless product development
Best practice
8. Cross-functional teams
A. Uses cross-functional teams of, say, engineering,
manufacturing, sales, marketing, finance, and early
adopter customers, to design new products; or
B. Uses its engineering department to design
new products.
9. Prototypes
A. Uses cross-functional team input to build new
product prototypes; or
B. Manufactures product based solely on
engineering blueprints.
10. Fast feedback
A. Redesigns prototypes using feedback from
early adopter customers, manufacturing, and
other functions; or
B. Redesigns products only after they’re out in
the market.
Disciplined resource allocation
11. Timing discipline
A. Creates strong incentives to meet project
milestones; or
B. Lets product development deadlines slide.
12. Expected value discipline
A. Validates development projects’ expected
value (EV) via continuously updated market
research and kills them if their EV goes
negative; or
B. Once their budget has been set, sticks with
development projects.
13. Learning discipline
A. Allocates resources and shares learning
through control systems that measure
competitive performance; or
B. Rewards those who tell the CEO what the
CEO wants to hear and fires those who contradict
the CEO.
14. Renewal discipline
A. Develops a deep bench of management
talent; or
B. Dismisses ambitious managers to protect
the CEO.
Business Strategy Review Spring 2006 13
 ¡ 2. Open technology
Partnering to obtain technologies customers want.
Genentech has forged 100 partnerships in which it
licenses technologies for significant revenue-
generating products. For example, Genentech
worked with Idec Pharmaceuticals, before Idec’s
2003 merger with Biogen, to develop Rituxan – a
$1.6 billion (2004 sales) product.
3. Boundaryless product development
Using genomics to re-engineer drug discovery.
Best practice
CEO in 1995, he applied this insight – choosing
cancer as Genentech’s therapeutic focus.
Setting tight deadlines and beating them. In early
2005, Genentech raced Novartis to complete
Phase III trials for using Avastin to treat non-small
cell lung cancer. Genentech worked so quickly
that Avastin achieved its goals for the Phase III
trials by March 2005 – effectively eliminating
competition from the slower-moving Novartis which
ultimately found that its product merely matched

Genentech created the Secreted Protein Discovery
Initiative – that generated five exciting product
leads, including a surprising antiviral molecule,
and could spawn 20 more within two years.
The project – called Speedy – re-engineered
Genentech’s traditional approach to research, in
which scientists worked alone or in tiny teams.
Under the assembly-line-like Speedy process, 80
scientists – a quarter of the Genetech’s research
staff – search gene-data warehouses.
Traditionally, scientists chased drug leads – known
proteins like insulin and growth hormone – by
synthesising them into marketable products. Today,
researchers use computers to find drug prospects
within the human genome. With Speedy, Genentech
streamlined lead discovery by focusing on the 10 per
cent of proteins that travel outside the cell, blocking
or spreading disease. High-tech screens called signal
sequence traps (SSTs) identify those 10,000
proteins and then test their therapeutic benefit.
4. Disciplined resource allocation
Focusing on areas of therapeutic expertise.
Levinson analysed drug companies and concluded
that those with a therapeutic focus earned the
highest shareholder returns. After Levinson became
chemotherapy’s effectiveness.
Genentech uses financial incentives to encourage
workers to meet deadlines. For example, in 1998,
Levinson promised employees “Genenchecks” of
$3,000 if they beat an FDA marketing application
deadline for Herceptin, a breast cancer drug.
Killing development projects which lack tight
scientific justification. Levinson kills projects with
limited potential. His presence at Genentech’s
weekly science meetings is as much feared as
appreciated, because he asks tough questions.
Since they cost between $30 million and $100
million Genentech only moves compounds into
clinical trials if scientific arguments for pursuing
the drug can withstand Levinson’s intense scrutiny.
And unlike some competitors, Genentech designs
drug trials to prove that its therapies extend the
lives of patients, a costly standard whose offsetting
benefit is that it convinces even sceptics when the
results are positive.
For CEOs and private investors looking to
accelerate their company’s growth, doing a self
evaluation around how much their companies
emphasise the four key processes inherent in the
entrepreneurial success cycle is one place to start.
Why not start today? I

Peter S. Cohan (peter@petercohan.com) is president of Peter S. Cohan & Associates (http://petercohan.com),

a management consulting and venture-capital firm in Marlborough, Massachusetts. He is the author of
seven books, including Value Leadership (Jossey-Bass, 2003) and The Technology Leaders (Jossey-Bass,
1997). Cohan is also an executive-in-residence at Babson College.

Barry Unger (unger@bu.edu) is Associate Professor, Innovation and Technology, at Boston University
where he specialises in new product development and business commercialisation strategies for
technology-based and life science companies, and also serves on the boards of several early stage
companies. He was earlier a co-founder and officer of numerous successful companies, including Xerox
Imaging Systems, in a variety of scientific fields, as well as Senior Advisor on Science and Technology in
the Carter Administration.

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14 Business Strategy Review Spring 2006 © 2006 The Author | Journal compilation © 2006 London Business School