Why Innovative Companies Fail

Last Updated Jan 12, 2010 4:54 PM EST

Why Innovative Companies FailIt's a classic dilemma that entrepreneurs, innovators, and creative folks often face: When do you stop creating, designing, developing, and actually ship the product? How do you know when and where to draw a line in the sand and say this is it?

Good question, but is it really a quagmire? Harvard professor Clayton Christensen certainly thought so when he wrote the seminal work on the decision-making process surrounding disruptive innovation,The Innovator's Dilemma.

Not to diminish Christensen's brilliant work, but in my experience, the issue has as much to do with who is making the decision as how the decision is made. In my opinion, all-too-often companies have the wrong people with the wrong capabilities making critical business decisions.

As a wise VC whose name escapes me once said, "There are entrepreneurs and there are "Entrepreneurs"." Well, even "Entrepreneurs" who are deemed capable of running a company are often incapable of making rational, objective critical business decisions. Two fascinating examples to illustrate the point:
Duke Nukem 3D
In 1997, I was involved in a marketing campaign to use a virtual spokesperson from the gaming world to promote a line of microprocessors. The top names at the time were Duke Nukem, of Duke Nukem 3D by 3D Realms, and Lara Croft, of Tomb Raider by Eidos Interactive. Both games were launched by relatively small companies in 1996. And while Tomb Raider has become a huge media franchise, Duke Nukem is another matter entirely.

Why Innovative Companies FailAfter 12 years and $20 million-plus in development costs, the long awaited sequel, Duke Nukem Forever, is nothing more than vaporware. In fact, 3D Realms recently canned the entire development team and is being sued by the game's distributor, Take-Two Interactive, for failing to deliver the product.

The reason, as described in gory detail in a recent Wired story, is that company cofounder and Duke Nukem creator, George Broussard, just couldn't decide when to let go. With no fixed schedule, plenty of capital lying around, and new game engines, game platforms, and competitive titles launching left and right, Broussard just kept on developing -- for 12 years.

In the early 90s, Rambus - then a Silicon Valley startup - developed the core technology for high-speed memory or DRAM chips. But its technology was too big a leap for a risk-averse industry that preferred incremental change. When confronted with customer pushback against its high cost and high risk, Rambus attempted to push them by charging a higher royalty rate to use a scaled-back version of its technology.

When some companies balked at paying the higher rates but used the technology anyway, Rambus sued for patent infringement. Naïve, ill-prepared, and up against a more experienced legal team, the tables were turned and Rambus was instead found guilty of fraud in a Virginia court. The decision was later overturned, but by then, the die had been cast.

In the case of Rambus, breakthrough technology and talented engineers failed to trump poor business decision-making. More than $100 million in legal fees later, a new management team is still trying to get Rambus' frustrated shareholders their due.

I can cite dozens of similar examples, but they all have one thing in common: people who are too close to the situation, whose views and experiences are too narrow, who lack perspective and objectivity, making critical business decisions. They may even have a CEO title, but that's no consolation to shareholders and employees when the company fails.

Full Disclosure: I'm a former officer and current shareholder of Rambus.

[Images courtesy 3D Realms]