Microsoft CEO Satya Nadella loves to talk about innovation. But Microsoft will never innovate in Redmond, Wash. For that, it needs to move to San Francisco. In Seattle, the lack of competing opportunity for its talent spurs complacency by employees and management.
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But in San Francisco, rivalry for that talent would be fierce — forcing Microsoft to create an environment that give top talent the chance to build market-share-grabbing products targeting big markets.
If it’s serious about innovation, it must compete with the globe’s best in its home town. Microsoft declined to comment.
I can hear the naysayers screaming already. Here are their cries:
- The world is flat — it doesn’t matter where a company is located because people can use the Internet to work with anyone, anywhere at anytime;
- Silicon Valley hates Microsoft and nobody talented would work for Microsoft even if it did move there; and
- Microsoft’s cost of moving to San Francisco would exceed the benefits.
Let’s start by examining the most oft-admired and least understood terms in business: innovation. What does it mean? And more specifically, what would Microsoft do differently if it really did innovate?
Innovation means creating a product or service that delivers what I called in Hungry Start-up Strategy a quantum value leap (QVL) — a huge increase in what customers value for the price.
But innovation for a startup is easier than it is for a corporate giant with $83 billion in revenue. That’s because if a startup delivers a QVL to a big market, its growth will skyrocket because it’s starting from such a small base.
But for a company like Microsoft, innovation will only produce growth if the QVL is delivered to an enormous market so that its revenues can rapidly reach into the billions of dollars. Otherwise, the innovation will not generate enough of a financial impact to interest investors.
How can Microsoft create this kind of innovation? It needs to hire people who are true innovators and create a culture that motivates them to produce QVL-delivering products targeted at a huge market — as Apple did when it introduced the iPhone into an already-enormous cell phone market.
Microsoft cannot do this if it stays in Redmond. How so? First, it must realize that the world is not flat. There are enormous differences in the conditions — what I call the Startup Common – that produce entrepreneurship across different cities — even in the same state. For example, while Cambridge, Mass. is a hotbed of entrepreneurial activity, Worcester — about 40 miles away — is a startup desert.
While it is well-known that a great Startup Common should have excellent pillar companies, universities, human capital, venture capital, and mentors; one of the less touted factors is a region’s values.
And when you compare different regions based on two values — risk appetite and investment horizon — you begin to see the most important reason that some regions have more entrepreneurship than others.
On those dimensions, Redmond is far less attractive to innovators than San Francisco. That’s because investors and talented people there are highly risk averse and they expect to get a return in a very short time frame.
Seattle’s potential entrepreneurs are afraid to leave Microsoft and its investors fight for majority control of start-ups. As he explained in April 2013, Gary Flake, then-CEO of Clipboard — which Salesforce.com acquired last May – believes “Seattle must overcome two big challenges to realize its full potential: the adversarial relationship among angel investors, venture capitalists, and entrepreneurs and the risk-aversion of Microsoft’s talent that is seeking a steady job with a good pension.”
Flake has seen too many Seattle investors who got burned earlier in their investment career and are taking that out on their current start-ups. According to Flake, “Seattle investors are too quick to structure start-up investments so that the founder gets replaced quickly or must accept harsh terms for a second round financing.”
Seattle’s other limitation is that despite a hardiness born of living in a climate where it rains half the time, many people who work for big companies like Microsoft prefer the chance to have a long, well-paid career and retire with a comfortable pension. In short, Flake says, “It is hard to get talented people to leave that security for the risks of a start-up.”
Today the most fertile ground for entrepreneurship is shifting from Silicon Valley to San Francisco. And that is where Microsoft must move if it hopes to break free of the yearning for a pension that keeps its people from the kind of thinking and action that spurs innovation that could accelerate Microsoft’s revenue growth.
Moving Microsoft’s headquarters to San Francisco would be met with kicking and screaming from local government officials and its roughly 40,000 Seattle area employees who have comfortable lives in the Seattle area.
It would probably cost Microsoft billions of dollars to make such a move — but it has $83 billion in cash. Here are some rough assumptions:
- Moving costs: $900 million. $30,000 each for the 30,000 who choose to move;
- Real estate: $402 million a year. This assumes that Microsoft could lease enough space — six million square feet (2oo square feet for 30,000 employees) and paid Twitter’s $67 a square foot. Microsoft would eventually sell or lease its empty offices in the Seattle area. Assuming that space could not be leased, Microsoft would have to build which would cost billions of dollars.
There would clearly be significant turnover from people who did not want to move. But some of that might open positions for people who are more entrepreneurial.
Attracting and motivating that talent in San Francisco would require Nadella to manage differently. One way to do that might be to identify, say, 20 huge market opportunities and invest in five or 10 startups that would try to develop innovative products to take market share in each of those markets.
Microsoft could divert some of its R&D money to fund these companies and possibly bring venture capital firms in as partners. Most would fail, but some could develop products that would gain market share rapidly. For these winners, Microsoft could help by selling the startup’s product to its big customers.
If it is serious about innovation it needs to move where the innovation is happening so that its new business creators will be in entrepreneurial soil that values betting big on transforming enormous markets instead of playing bureaucratic games to hang on to a comfortable job until retirement.
If moving to San Francisco spurred Microsoft to innovate, its revenue growth could accelerate, and that would boost the value of its stock.
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