Apple Disrupts Silicon Valley With Another Eye-Catcher: Its New Home

Apple Disrupts Silicon Valley With Another Eye-Catcher: Its New Home

Things change when a spaceship comes to town.

Tourists stroll by, whipping out their iPhones to get a photo. New businesses move in. And real estate prices go up even more.

Apple’s new home in Cupertino — the centerpiece being a $5 billion, four-story, 2.8 million-square-foot ring that can be seen from space and that locals call the spaceship — is still getting some final touches, and employees have just started to trickle in. The full squadron, about 12,000 people, will arrive in several months.

But the development of the headquarters, a 175-acre area officially called Apple Park, has already helped transform the surrounding area.

In Sunnyvale, a town just across the street, 95 development projects are in the planning stages. The city manager, Deanna J. Santana, said she had never seen such action before. In Cupertino, a Main Street Cupertino living and dining complex opened in early 2016. This downtown enclave includes the Lofts, a 120-unit apartment community opening this fall; small shops; and numerous restaurants and cafes.

Other local businesses are also gearing up in anticipation. A Residence Inn at Main Street Cupertino, expected to open in September, has been slightly customized to meet the needs of Apple employees. Guests will have access to Macs and high-speed internet connections, said Mark Lynn, a partner with Sand Hill Hotel Management, which operates the hotel and consulted with Apple about what its employees need at a hotel.

“All the things we have, lined up with what they needed,” Mr. Lynn said. “They will represent a large part of our business.”

The Birdland neighborhood in Sunnyvale, Calif., on the other side of the road from Apple Park. Credit Laura Morton for The New York Times

Tech companies are nothing new for Cupertino. Apple has called the city home for decades, and Hewlett-Packard had a campus in Apple’s new spot, employing 9,000 people. The surrounding towns have been remade as well in the last decade, as giant tech companies have transformed Silicon Valley’s real estate into some of the most expensive in the country.

But city officials and residents say this project is like nothing they’ve seen before. It is even bringing tourists.

Onlookers snap pictures of the spaceship from the streets. TV helicopters circle above. Amateur photographers ask residents if they can stand on driveways to operate their drones, hoping to get a closer look at Apple Park.

“I just say, ‘Hey, go ahead,’” said Ron Nielsen, who lives in Birdland, a Sunnyvale neighborhood across the street from the spaceship. “Why not?”

Drone operators want that coveted aerial shot while pedestrians want to get an eyeful of the curved glass building before the headquarters become hidden by a man-made forest.

Steve Jobs Presents to the Cupertino City Council (6/7/11)
Video by Cupertino City Channel

The campus is one of the last major projects started by Steven P. Jobs, the visionary co-founder of Apple, who died six years ago. Just a few months before his death, he went before the Cupertino City Council and laid out his vision for a futuristic circular house of glass that would foster creativity and collaboration. Two years later, the Council unanimously approved the plans for the campus.

The main center features the spaceship ring, the Steve Jobs Theater, a 100,000-square-foot gym and a visitors center in a woodland setting with two miles of running and walking paths. An orchard, a meadow and a pond are inside the ring.

Sheri and Ron Nielsen outside their home in Sunnyvale. The front of their house faces Apple Park. Credit Laura Morton for The New York Times

The entire project shows off Apple’s obsession with details. The custom windows were made in Germany and are considered the world’s largest panels of curved glass. One pair of glass doors is 92 feet high. The finish on the underground concrete garage, said David Brandt, Cupertino’s city manager, is so shiny it is almost like glass.

“Mind-blowing, mind-blowing, mind-blowing,” the mayor, Savita Vaidhyanathan, said about her visit to the site. “I saw the underground 1,000-seat theater and the carbon-fiber roof. The roof was made in Dubai, and it was transported and assembled here. I love that it’s here and that I can brag about it.”

Many of the public views will soon be going away. Apple Park will eventually have 9,000 trees, filling in much of the big open spaces. The public will instead have access to a visitors center with a cafe, a store and rooftop observation views. 

“It will be a separate glass structure and be set in an old-growth olive tree grove,” said Dan Whisenhunt, Apple’s vice president of real estate and development.

Not all of these changes have thrilled everyone. Residents of Birdland, an 877-home neighborhood, have been particularly vocal. They have complained about early-morning construction rigs that beep and rumble along major streets, unpredictable road closings, unsightly green sheeted barriers and construction potholes that result in punctured tires.

When her car was covered with construction dust, Sheri Nielsen, Mr. Nielsen’s wife, contacted Apple. The company sent carwash certificates.

Mr. Whisenhunt said the company strove to answer every complaint it received, “and if the issue is serious enough, I will personally visit to see what is going on.”

 

Art Maryon, a real estate agent, in the Birdland neighborhood. He said the neighborhood’s one-story ranch-style homes had been selling for $1.6 million to $1.8 million. Credit Laura Morton for The New York Times 

In the design phase, he said, Apple hosted more than 110 community gatherings for feedback. Birdland was addressed in late 2012 and early 2013 and was given information about what would be happening over the next three years of construction. Apple published community mailers five times and sent them to 26,000 households.

Homestead Road, the thoroughfare that separates Apple Park from Birdland, became its own subject of debate. Cupertino officials wanted to construct a tree-lined median to calm traffic. Apple offered to cover the costs.

But homeowners objected. Residents complained that the island would eliminate one lane, backing up the heavy traffic even more. When 20 or so neighbors approached a Sunnyvale town meeting in solidarity, the city ended up siding with the residents.

The price of property in the neighborhood has also become a source of some worry. Sunnyvale and Cupertino, like many other Silicon Valley towns, have had an extended real estate boom, as the tech industry has expanded. Prices in the area really started to rise, real estate agents and residents said, after Apple released its plans.

A three-bedroom, two-bathroom, 1,400-square-foot ranch-style house that cost $750,000 in 2011 has doubled in price. Since Apple said it was moving into the former Hewlett-Packard site, prices have moved up 15 to 20 percent year after year, said Art Maryon, a local real estate agent. Today, bidders usually offer 20 to 25 percent over the asking price.

Birdland is already drawing Apple employees, replacing homeowners who have cashed out to move to quieter regions. Those who remain are realizing that life will not be the same when all 12,000 of the Apple workers go in and come out on a daily basis. People in the neighborhood dread the increased traffic and expect workers to park in front of their homes since there will be fewer available spaces in the company garage.

Apple’s answers to concerned residents will continue, Mr. Whisenhunt said.

“When you tell people what is upcoming, some of the anxiety they have calms down a lot,” he said.

And yet, he acknowledged, “you don’t make everyone happy.”

Apple Disrupts Silicon Valley With Another Eye-Catcher: Its New Home

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The Most Brilliant Business Ideas

The Most Brilliant Business Ideas

Check out some of the most exciting from Entrepreneur’s ‘Brilliant Ideas’ series

 

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Entrepreneurship is about ideas. It is the foundation of everything — an insight into how to improve something, or what consumers want, or what they don’t even know they want. Consider it: A business is an idea come to life; an entrepreneur is an ideas-driven person. And if you want to truly learn from the smartest people around you, and calibrate to their way of thinking, you have to ask, What’s their core idea?

Below are some of the most insightful ideas from Entrepreneur’s “Brilliant Ideas” series in the June issue of the magazine.

Why MailChimp’s Insane Fake Ad Campaign Paid Off

For Entrepreneurs, VC Capital Is Not Always the Best Option

What Gary Vaynerchuk Learned by Experimenting on Himself

Ellevest’s Investing Platform Knows How to Speak to Women

The Website That Is Helping Companies Find Diverse Talent

Why Women-Only Coworking Spaces Are on the Rise

Don’t Be Afraid to Embrace Boring Ideas

How the Rules of Tech Branding Helped Raden Create a Smart Suitcase

9 Science-Backed Insights on Finding Success in Your Business and Personal Life

14 Leaders Share Their Inspirational Advice on Starting a Business

Businesses Disrupting Industries With Their Brilliant Ideas — And What You Can Learn From Them

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The Most Brilliant Business Ideas

World’s Largest Automakers

World’s Largest Automakers

Renault-Nissan Outranks Volkswagen, Could Pass #1 Toyota

World's Largest Automakers

The times, they are a changing: Last year, Volkswagen Group kicked perennial front-runner Toyota from the top spot. A few months later, world domination has fizzled, and Volkswagen finds itself in the number three position. Even more embarrassing for Volkswagen, come-from-behind Renault-Nissan Alliance is the second-largest global automaker, with Toyota firmly back on top.

Four months into the year, Toyota Group is up 7.8% with 3.53 million units produced so far. The Renault-Nissan Alliance is not much behind with 3.47 million units, up 7.4%. 3rd-ranking Volkswagen Group delivered 3.4 million units from January through April, and its sales are down 0.7% compared to the first four months in 2016. All of this according to data released by the respective automakers.

Nearly 200,000 units behind Toyota, for Volkswagen to regain the lead once this year is over would need a miracle — or a catastrophe for the OEMs in front. Surprisingly, Toyota is not so safe at all from being surpassed by the Renault-Nissan Alliance. As the table shows, the two groups are separated only by a slim rounding error, and both are good for some 10.5 million by the end of the year.

World’s Largest Automakers

The 6 Most Profitable Industries of 2017

The 6 Most Profitable Industries of 2017

Most Profitable Industries

If you’re looking to start a new company, you might as well go where the money is! Here are six sectors that research firm IBISWorld says will keep savvy entrepreneurs firmly in the black.

1. Commercial Leasing

Modern business hall lifts

If you haven’t quite grown into your new office space, consider leasing out some of it. More than three-quarters of companies in the commercial leasing space have five or fewer employees. IBISWorld says as of 2016, industry profits averaged 52.7 percent.

2. Emergency Vet Services

Veterinary doctor using stethoscope for kitten

Regulatory changes allowing veterinarians to practice across state lines, as well as the increasing popularity of pet insurance, have combined to make emergency veterinary services an attractive field. Average profitability: 29 percent.

3. Translation Services

Traslation services

Globalization has increased demand for business translation services. At the low end, there are few barriers to entry, though the industry is starting to require postgraduate certifications in multiple languages for advanced translations. Average profit margin: 26.2 percent.

 4. Snowplowing Services

Plowing Snow with Blade Mounted on an ATV

Economic growth has been good for snowplowing– new businesses and storefronts mean more parking lots and walkways that need to be cleared. IBISWorld says snowplowing companies have average profit margins of just over 25 percent.

5. Solar Power

iStock-510867541.jpg

Decreasing equipment costs and state mandates for renewable energy have made the outlook for solar energy quite positive, at least for the next five years. IBISWorld estimates average profits of 30 percent in this industry.

6. Tugboat and Shipping Navigation

Tugboat towing container ship

Increased globalization means more work ensuring the safe passage of ships in and out of harbors. This industry includes docking and piloting of marine vessels, as well as marine salvage. Average profits ring in at 23.3 percent.

 

The 6 Most Profitable Industries of 2017

Causes of the global water crisis and 12 companies trying to solve it

Causes of the global water crisis and 12 companies trying to solve it

It’s World Water Day. Time to wake up and take shorter showers. That is, if we’re fortunate enough to have them. Water scarcity and pollution are persistent global problems. According to End Water Poverty, some 663 million people around the world have absolutely no reliable access to clean, safe water year-round. And two-thirds of the world population faces water scarcity for at least one month every year.

In the wealthy US, we’re facing a different kind of water crisis largely of our own making. In 2016 only 9 states reported safe lead levels in their schools’ water supply. Lead and copper contamination can come from irresponsible industry, aging pipes, ineffectual water treatment plants and too little investment in our public water infrastructure.

Droughts and natural disasters can cut off access to potable and sanitary water anywhere in the world, too. Haiti is known as a “pipeless nation,” still recovering from 2010’s catastrophic earthquake and consequent natural disasters. In Haiti, only one-quarter of residents have access to toilets, according to the World Bank. And it’s hard to believe it, but giant freshwater sources in North America like Lake Mead in Arizona or the Colorado River may not be able to keep pumping to residents’ homes and businesses much longer thanks to drought and pollution.

Our daily consumption of water affects future supply, of course. Right now, according to research by WWF, wasteful irrigation systems on farms consume about 70% of the world’s freshwater, over double that of any other industry. By contrast, municipal water represents a mere 8% of global use. Bad irrigation practices in farming can hurt our water in other ways, washing pollutants into rivers, streams or other freshwater ecosystems.

At TechCrunch, we’re lucky to see the hopeful ways that startups, investors and other organizations are working to solve huge problems plaguing humanity with tech, including the global water crisis. Here are 12 to watch:

1. Water Is Life

The nonprofit Water is Life makes and distributes portable water filters that look like big straws. The components inside the straws are “membranes, iodized crystals and active carbon,” which eliminate harmful bacteria and viruses including typhoid, cholera, E. coli, and reduce other harmful particles so people can drink safely wherever they go. Water is Life also creates educational campaigns, and even a VR game, to teach kids why and how they should clean or filter water before they drink from a potentially unsafe source.

2. charity: water

Charity: water is focused on helping people get access to clean water. Founder Scott Harrison has gotten support from the tech community throughout the years, with entrepreneurs like Sean Parker and Michael Birch involved with the organization.

3. The Human Utility: Detroit Water Project 

Backed by Y Combinator, TeeSpring and the Shuttleworth Foundation, The Human Utility is helping low-income families get help paying for their water bills so their taps won’t be turned off by utilities leaving them thirsty in their own homes.

4. WaterSmart

WaterSmart’s software helps the water industry understand what’s happening to every last drop of H2O. It aggregates and analyzes information from millions of water meters, predicts demand, and helps utilities communicate with customers about everything from leaks at home to service or rate changes. WaterSmart is making moves with a recent $7 million raise at a $21 million pre-money valuation.

5. Valor Water

Backed by Y Combinator, Valor Water helps utilities understand who is wasting and who is conserving water among their customers. With that data, they can target rate hikes at water pigs, and cut conservationists a good deal to incentivize responsible water use. The company previously competed in TechCrunch’s Startup Battlefield in San Francisco.

6. TOTO

TOTO manufactures high-efficiency toilets and has been named a Water Efficiency Leader by the US Environmental Protection Agency, which lauded its sustainable manufacturing and advocacy efforts. The company’s toilets clean themselves with electrolyzed water after every use. TOTO invited TechCrunch to test-drive their latest bidet-and-toilet model at CES this year, but our reporter declined since he was doing the story on camera.

7. Pluto AI

This company, which was one of our favorites from 500 Startups’ 19th class, is developing an application of deep learning for water management. Pluto.ai uses data and machine learning to predict infrastructure failures and to monitor water usage. The company is striving to reduce operating costs at two of the 10 largest water companies in the world who it counts among its partners today.

8. ImagineH20

Imagine H2O is a water-focused accelerator and fund providing water entrepreneurs with “the resources, insight and visibility to launch and scale successful businesses.” The company’s annual water innovation prize rallies entrepreneurs to focus on solving different water-related problems with their technology. This year’s winner, Utilis, uses satellite imagery and big data analytics to find leaks in underground water supplies to large, urban markets so that cities can stop them and save that water for residential use.

9. XPV Water Partners

A Toronto-based venture firm called XPV Water Partners has developed a specialization around startups in the water industry, one of the most regulated sectors in every nation. Its portfolio includes microbial monitoring tech startup LuminUltra, water reclamation and reuse venture Natural Systems Utilities, and Shenandoah Growers, a grower of organic herbs that uses 90% less water than required with traditional farming methods, but no photo-sharing or dating apps.

10Planet Water Foundation

This nonprofit installs water filtration systems in rural communities and at schools around the world so they can have clean, safe drinking water. The systems, called Aqua Towers, trap harmful particles, and kill bacteria and viruses, providing 1,000 people with 10,000 liters of clean water per unit daily.

11. RWL Water 

New York-based RWL Water builds desalination plants and wastewater treatment systems around the world.  The company works to provide a power supply to customers who are in geographically remote areas but need water to power their communities and businesses. Most recently, RWL acquired a water plant in São Paulo, Brazil, a market that has been struggling to keep its residents and businesses in clean water after a two year, El Niño drought.

12. Bill & Melinda Gates Foundation

The Bill & Melinda Gates Foundation is a tour de force supporting tech to solve problems that plague humanity. The foundation’s Water & Sanitation Hygiene Challenge, and Reinvent the Toilet fair award grants to organizations that improve sanitation in the developing world. According to the foundation’s own research, “Better sanitation contributes to economic development, delivering up to $5 in social and economic benefits for every $1 invested through increased productivity, reduced healthcare costs, and prevention of illness, disability, and early death.”

Causes of the global water crisis and 12 companies trying to solve it

Strategy in the Age of Superabundant Capital

Strategy in the Age of Superabundant Capital

For most of the past 50 years, business leaders viewed financial capital as their most precious resource. They worked hard to ensure that every penny went to funding only the most promising projects. A generation of executives was taught to apply hurdle rates that reflected the high capital costs prevalent for most of the 1980s and 1990s. And companies like General Electric and Berkshire Hathaway were lauded for the discipline with which they invested.

Today financial capital is no longer a scarce resource—it is abundant and cheap. Bain’s Macro Trends Group estimates that global financial capital has more than tripled over the past three decades and now stands at roughly 10 times global GDP. As capital has grown more plentiful, its price has plummeted. For many large companies, the after-tax cost of borrowing is close to the rate of inflation, meaning that real borrowing costs hover near zero. Any reasonably profitable large enterprise can readily obtain the capital it needs to buy new equipment, fund new product development, enter new markets, and even acquire new businesses. To be sure, leadership teams still need to manage their money carefully—after all, waste is waste. But the skillful allocation of financial capital is no longer a source of sustained competitive advantage.

The assets that are in short supply at most companies are the skills and capabilities required to translate good growth ideas into successful new products, services, and businesses—and the traditional financially driven approach to strategic investment has only compounded this paucity. Indeed, the standard method for prioritizing strategic investments strives to limit the field of potential projects and encourages companies to invest in a few “sure bets” that clear high hurdle rates. At a time when most companies are desperate for growth, this approach unnecessarily forecloses too many options. And it encourages executives to remain committed to investments long after it’s clear that they’re not paying off. Finally, it leaves companies with piles of cash for which executives often find no better use than to buy back stock.

Strategy in the new age of capital superabundance demands a fundamentally different approach from the traditional models anchored in long-term planning and continual improvement. Companies must lower hurdle rates and relax the other constraints that reflect a bygone era of scarce capital. They should move away from making a few big bets over the course of many years and start making numerous small and varied investments, knowing that not all will pan out. They must learn to quickly spot—and get out of—losing ventures, while aggressively supporting the winners, nurturing them into successful new businesses. This is the path already taken by firms innovating in rapidly evolving markets, but in an era of cheap capital, it will become the dominant model across the business economy. Companies that practice this strategy will have the edge so long as capital remains superabundant—and according to our analysis, that could be the case for the next 20 years or more. In this article, we outline what it takes to produce great results in this new world. We begin by taking a closer look at the data.

A World Awash in Money

Many of today’s business leaders cut their teeth in a period of relative capital scarcity and high borrowing costs. In the early 1980s, double-digit federal-funds rates prevailed, and corporate debt and equity securities traded at high premiums. Although the required rate of return on stocks and bonds returned to more “normal” levels by the end of the decade, capital costs remained high. Our research suggests that for most large public companies, the weighted average cost of capital, or WACC, exceeded 10% for most of the 1980s and 1990s.

But the world changed following the financial collapse in late 2008. Central bank interventions pushed interest rates in many countries to historic lows, where they remain nearly a decade later, owing to tepid economic growth. Many executives believe that the current interest rate environment is temporary and that more-familiar capital market conditions will reassert themselves soon. Our research, however, leads to the opposite conclusion.

Using public data and proprietary economic models, Bain’s Macro Trends Group examined how the quantity and scale of assets on the world balance sheet have evolved over time. We found that global financial assets (which more or less represent the supply of capital invested or available for investment in the real economy) grew at an increasingly rapid pace—from $220 trillion in 1990 (about 6.5 times global GDP) to some $600 trillion in 2010 (9.5 times global GDP). We project that by 2020 the number will have expanded by half again—to about $900 trillion (measured in 2010 prices and exchange rates), or more than 10 times projected global GDP. At this rate, by 2025 global financial assets could easily surpass a quadrillion dollars. We see two factors principally accounting for the continuing trend:

  • Growing financial markets in emerging economies.

    Although prospects for growth in advanced economies are relatively weak, the financial markets in China, India, and other emerging economies have only started to develop. Our analysis indicates that these nations will account for more than 40% of the increase in global financial assets from 2010 to 2020. And the data suggests that emerging economies will continue fueling growth in financial capital well beyond 2020.

  • An expanding number of “peak savers.”

    There are important demographic factors at work that will reinforce the superabundance of financial capital. Specifically, the population of 45- to 59-year-olds is critical in determining the level of savings (versus consumption) in the global economy. People in this age bracket have moved past their prime spending years and make a higher contribution to savings and capital formation than any other age group. These “peak savers” will represent a large and growing percentage of the global population until 2040, when their numbers will slowly begin to decline.

r1702c_mankins_globalbalancesheet-1024x654

The combination of these factors leads us to conclude that through 2030 (at least), markets will continue to grapple with capital superabundance. Too much capital will be chasing too few good investment ideas for many years.

Moreover, as the supply of financial capital has increased, its price has fallen precipitously. In 2008 the cost of borrowing began to decline in response to central bank intervention. Today, facing a dearth of attractive investment opportunities, large banks have been forced to accept riskier projects as investment grade. Even high-yield “junk” bonds are trading at historic lows. All told, the marginal cost of debt for many large companies is now as low as 3%. This means that the after-tax cost of borrowing is at (or below) the rate of inflation—implying that in real terms, debt is essentially free.

Not only are interest rates low across all classes of debt, but the cost of equity is lower as well. Immediately following the global financial crisis, equity risk premiums—that is, the premium relative to risk-free assets, such as government bonds, that investors demand in order to buy stocks—shot up dramatically. We estimate that in 2007, before the crisis really hit, the equity risk premium was around 3% (versus 10-year government bonds). By 2009, following the financial collapse, investors demanded a premium of more than 7% to hold equities. As the economy rebounded, equity risk premiums dropped back to more-normal levels (averaging 4% to 5%). That decline, combined with lower rates of return on risk-free assets, reduced the cost of equity: We estimate that for U.S. corporations, the average cost is currently around 8%, compared with more than 12% during much of the 1980s and 1990s.

The combination of historically low debt and low equity costs (along with the buildup of cash on many balance sheets) has produced very low capital costs for most corporations. We estimate that for the 1,600-plus companies that constitute the Value Line Index, the weighted average cost of capital currently ranges from 5% to 6%. That compares with 10% or more in the 1980s and early 1990s.

r1702c_mankins_costofcapital-1024x718

The New Rules of Strategy

When capital is both plentiful and cheap, many of the unspoken assumptions about what drives business success must be challenged and a new playbook developed. In our work with clients, we have seen a few companies that are already incorporating capital superabundance into the way they think about strategy and organization. The changes they are making—and deriving benefits from—accord with three new rules:

Reduce hurdle rates.

Virtually every large company sets explicit or implicit hurdle rates on new capital investments. A hurdle rate is the minimal projected rate of return that a planned investment must yield. Exceed this rate and the investment is a “go”; fall short and it will be scuttled. Ideally, the hurdle rate should reflect a company’s WACC (adjusted, as needed, for differential risk).

For too many companies, however, hurdle rates remain high relative to actual capital costs. Research by Iwan Meier and Vefa Tarhan pegged average hurdle rates at 14.1% in 2003. Since then, hurdle rates have changed very little. When the Manufacturers Alliance for Productivity and Innovation (MAPI) surveyed members of its CFO and Financial Councils, it found that the average rate was 13.7% in 2011 and 12.5% in 2016. And roughly half the survey respondents noted that hurdle rates at their companies had stayed constant during that five-year period. Research conducted in 2013 by the Federal Reserve found that companies are extremely reluctant to change hurdle rates even when interest rates fluctuate dramatically. This research dovetails with our own experience as consultants: Most companies that engage with us have not adjusted their hurdle rates significantly in the past two decades.

We estimate, on the basis of the MAPI survey data, that the gap between hurdle rates and the actual cost of capital for most companies is 650 to 750 basis points. The result: Too many investment opportunities are being rejected, cash is building up on corporate balance sheets, and more and more companies are choosing to buy back common stock rather than pursue investments in productivity and growth. Reuters studied 3,297 publicly traded U.S. nonfinancial companies in 2016 and found that 60% bought back shares between 2010 and 2015. And for companies with stock repurchase plans, spending on buybacks and dividends exceeded not just investments in research and development but also total capital spending.

For too many companies, hurdle rates are high relative to actual capital costs

It is important to point out that share buybacks create value for the acquirer only if a company’s common stock is significantly undervalued in the market. Under those conditions, share repurchases are akin to “buying low” with the prospect of “selling high” later. However, although executives frequently maintain that their companies’ shares are undervalued, our research suggests otherwise. And even when a buyback makes financial sense, the act of repurchasing shares can signal to investors that management has run out of attractive investment ideas—it’s the economic equivalent of throwing up your hands and asking shareholders to find good investments on their own.

In the new era, leaders should have a strong bias toward reinvesting earnings in new products, technologies, and businesses. It is the only way for the companies that have bought back shares to grow into their new multiples and for all companies to fuel innovation and accelerate profitable growth. With expected equity returns in the single digits, it shouldn’t be difficult for management to identify strategic investments with the potential to generate more-attractive returns for investors. To qualify, opportunities need only be capable of generating a return on equity higher than shareholders’ cost of equity capital, which we estimate is a mere 8% for most large companies.

Focus on growth.

A lingering artifact from the age of capital scarcity is a bias toward tweaking the performance of existing operations, rather than trying to build new businesses and capabilities. When capital was expensive, investments to improve profitability trumped investments to increase growth. Accordingly, over the past several decades, most companies have employed process reengineering, Six Sigma, the “spans and layers” methodology, and other tools to remove waste and increase efficiency. At the same time, however, the rate of innovation has declined, according to research conducted by the OECD, and since 2010, top-line growth has been flat (or negative) for nearly one-third of the nonfinancial companies in the S&P 500.

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Success in the new era demands that leaders focus as much (or more) on identifying new growth opportunities as on optimizing the current business— because when capital costs are as low as they are today, the payoff from increasing growth is much higher than what can be gained by improving profitability. Take a look at the exhibit “Choosing a Strategy: Profitability or Growth?” It shows that the benefits of investing to accelerate growth (rather than improve profitability) depend a lot on the cost of capital. But at today’s WACC of less than 6%, a growth approach clearly trumps an emphasis on profitability (as measured by the average pretax operating margin for the Value Line Index companies). Improving margins by 1% would increase the average company’s value by only 6%. By contrast, increasing the long-term growth rate by 1% would drive up value by 27%—four and a half times as much bang for the buck invested.

Shifting to a growth focus requires reevaluating the organizational model, as the case of WPP, the world’s largest advertising and marketing services company, illustrates. In addition to optimizing its existing business, WPP has looked for growth opportunities by making dozens of investments and acquisitions outside traditional geographic markets and capabilities. As a result, the company’s revenues rose from $16.1 billion in 2011 to $19 billion in 2015, and operating profits rose from $1.9 billion to $2.5 billion.

A significant part of WPP’s success has been an approach to organization that CEO Martin Sorrell calls “horizontality.” In the traditional industry model, single agencies compete for a client’s global business. By contrast, WPP offers clients an internal market in which they can choose from a wide range of marketing services businesses that are under the WPP umbrella. These businesses then work together in dedicated client teams. Currently there are about 50 such teams, which involve some 40,000 people and account for one-third of the company’s revenues. Each team is directed by one of the firm’s client leaders, which puts WPP in a position to coordinate the work. That gives clients the benefits of having a partner with a full picture of the business while also giving them the advantages of choice. This approach has allowed each agency to focus on doing what it does best, whether that’s digital advertising, public relations, marketing analytics, or something else. Top managers at WPP also have room to develop bold strategies to expand in digital markets, fast-growth geographies, and new fields such as data investment management.

Investment in real growth is risky. Executives must learn to accept failure

In addition to setting up formal structures that encourage new business ideas, companies can adopt informal processes to reward continuous expansion. 3M is the classic example. For years it has permitted its 8,000-plus researchers to devote 15% of their time to projects that require no formal approval from supervisors. The company also pursues traditional product development efforts in which business managers and researchers work together to create new offerings and improve existing ones. This multipronged innovation process has enabled 3M to generate countless new products—from industrial adhesives to Post-it notes—and consistent top-line growth, year after year.

Making continual expansion part of a company’s DNA is not easy, and companies have traditionally suffered from losing focus and overdiversifying. But that is not an argument for ducking the challenge. Investment in real growth has always been risky, and executives must learn to accept and even embrace failure. As Bill Harris, the former CEO of Intuit and PayPal once said: “Rewarding success is easy, but we think that rewarding intelligent failure is more important.” Leaders in the new era should judge their team members not just by the home runs they hit but also by the learning that comes out of their failures. This implies the need for new performance-appraisal processes and an effort by senior managers to consider how their organizations are gaining knowledge by exploring new avenues of growth—whether those pan out or not.

Invest in experiments.

When capital was scarce, companies attempted to pick winners. Executives needed to be very sure that a new technology or new product was worthwhile before investing precious capital. The consequences of getting it wrong could be dire for careers as well as for strategy. With superabundant capital, leaders have the opportunity to take more chances, double down on the investments that perform well, and cut their losses on the rest. To put it another way, when the price of keys is low, it pays to unlock a lot of doors before deciding which one to walk through.

To win in the new era, executives need to get over the notion that every investment is a long-term commitment. They have to stop trying to prove to themselves (and their colleagues) that they can predict the future accurately and know how a business will perform five or 10 years out. Instead, executives should focus on whether putting money into something could be valuable as an experiment. If the experiment goes south, they can (and should) adjust. Treating investments as experiments frees companies to place more bets and allows them to move faster than competitors, particularly in rapidly changing markets.

Take Alphabet, the parent company of Google. Since 2005, Alphabet has invested in countless new ventures. Some have been highly publicized, such as YouTube, Nest, Google Glass, Motorola phones, Google Fiber, and self-driving cars. Others are less well-known (grocery delivery, photo sharing, an online car-insurance comparison service). While many of Alphabet’s investments have succeeded, a few have not. But rather than stick with those losers, CEO Larry Page and his team have shed them quickly. This has enabled the company to move on, test other investment ideas, and redouble its efforts in promising new businesses. In the past three years, Alphabet has closed the smart-home company Revolv, shut down Google Compare (the car insurance site), “paused” Google Fiber, and sold Motorola Mobility to Lenovo.

During the same period, the company has increased its stake in cloud services and various new undertakings managed by the company’s X lab group—including electronic contact lenses and a network of stratospheric balloons intended to provide high-speed cellular internet access in rural areas. Not every investment will pay off, but the “noble experiments” mindset has allowed the company to explore many innovative ideas and create new platforms for profitable growth.

To be sure, Alphabet does have more money than most corporations and is operating in the “new economy,” where exciting ideas constantly bubble up. But there is plenty of scope to apply the same approach in traditional sectors. Consumer foods and beverages are a case in point. Every March, aspiring entrepreneurs in the natural and organic foods industry converge on Anaheim, California, for Expo West, a giant trade show. In the past, the kind of small entrepreneur who set up a booth there might have started a business with funding from angel investors or from family and friends. If the company had some success, it might grow large enough to attract venture money or private equity. But large food companies stayed away. They knew the success rate of new products was low, and they funded innovation internally, rather than risk expensive capital on start-ups.

Today those large companies are flocking to Expo West and taking advantage of low-cost capital to form their own investment groups that build portfolios of early-stage food companies. Kellogg has Eighteen94 Capital, General Mills has 301 INC, and Campbell invests through Acre Venture Partners. The companies use these in-house units to fund small start-ups, nurture them, and then cull the flock. When a new product takes off, they buy out the founders and bring the operation in-house. In effect, superabundant capital has made “outsourced innovation” possible for food giants, allowing them to tap into the dynamics of the entrepreneurial economy to solve their biggest strategic issue: growth.

Human Capital: Where the Power Lies

The economist Paul Krugman famously noted, “Productivity isn’t everything, but in the long run it is almost everything.” Today productivity requires working smarter rather than the traditional working harder. Companies increase output by identifying better ways to combine inputs, implementing technological innovations, and adopting new business models.

But all these productivity-enhancing measures require talented people who can bring them to life. In the new era, therefore, human capital—the time, talent, and energy of a company’s people, along with the ideas they generate and execute—is the foundation of superior performance. A single great idea, after all, can put a company on top for many years. Think of Apple’s iPhone, Continental Resources’ introduction of horizontal drilling for oil and natural gas, and IKEA’s reimagination of home goods. Lots of smaller, everyday good ideas can enable a company to pull away from competitors too.

In the new era, human capital is the foundation of superior performance

But great ideas don’t just materialize. They come from individuals and teams with the time to work productively, the skills to make a difference, and creativity and enthusiasm for their jobs. As long as companies continue to focus too much attention on managing financial capital, they will devote far too little to ensuring that the organization’s truly scarce resources—time, talent, and energy—are put to their best use. In fact, most companies lose nearly a quarter of their productive power because they have structures, processes, and practices that waste time and undermine performance. Firms counteract only a small portion of this lost output by making good hires and keeping their workforces engaged.

In other words, human capital has become the fundamental source of competitive advantage, and companies that manage it as carefully and rigorously as financial capital perform far better than the rest. In their book Time, Talent, Energy, Michael Mankins (an author of this article) and Eric Garton find that companies that apply real discipline in their management of human capital are on average 40% more productive than the rest. These companies lose far less to organizational drag. They attract, deploy, and lead talent more effectively—taking full advantage of the unique skills and capabilities their people bring to the workplace. Finally, they unleash far more of their employees’ discretionary energy through inspirational leadership and a mission-led culture. The resulting productivity difference is a huge advantage for the best companies, producing operating margins that are 30% to 50% higher than industry averages. And every year, as this difference is compounded, the gap in value between the best and the rest grows bigger.

CONCLUSION

Most of today’s leaders were taught strategy—either in school or on the job—by the old rules, in a time when capital was scarce and expensive. Not surprisingly, most large companies still treat financial capital as the firm’s most precious resource and seek to carefully control how it is deployed. Those practices are out of step with what is required to win in the new age. The few “old dogs” that have learned the “new tricks” of strategy—and understand that ideas and the people who bring them to life are a company’s most valuable asset—are building an impressive lead. Their peers who don’t learn these lessons may find themselves irrecoverably behind in the years to come.

A version of this article appeared in the March–April 2017 issue (pp.66–75) of Harvard Business Review.

Michael Mankins is a partner in Bain & Company’s San Francisco office and a leader in the firm’s Organization practice. He is a coauthor of Time, Talent, Energy: Overcome Organizational Drag and Unleash Your Team’s Productive Power (Harvard Business Review Press, 2017).

Karen Harris is the managing director of Bain & Company’s Macro Trends Group and is based in New York.


David Harding is an advisory partner in Bain & Company’s Boston office and the former leader of the Global Mergers & Acquisitions practice. He is a coauthor of Mastering the Merger: Four Critical Decisions That Make or Break the Deal (Harvard Business School Press, 2004).

Hiring an Entrepreneurial Leader

Leader

Hiring an Entrepreneurial Leader

How to identify and hire entrepreneurial leader

Entrepreneurs have become the new heroes of the business world. In the same way that Robert McNamara and his fellow Ford Motor Company “Whiz Kids” elevated general managers to star status, figures like Mark Zuckerberg and Steve Jobs have made entrepreneurs the latest business icons. At Harvard Business School, where I advise the career development program, even students who plan to join blue chip firms and have no intention of ever launching start-ups would be insulted if someone told them they weren’t “entrepreneurial.” I understand why: Entrepreneurialism is highly valued in today’s labor market. Companies of all shapes and sizes aspire to be seen as highly innovative, nimble, and agile—all qualities traditionally ascribed to entrepreneurs.

Yet in their recruiting efforts, companies do not have a scientific way of separating true entrepreneurs from other talented candidates. Instead, they fall back…

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9 Revolutionary Companies to Watch

9 Revolutionary Companies to Watch

Nine little-known companies are working hard to bring game-changing tech to market.

This year is off and running with some extraordinary companies starting to make a name for themselves.

I attend countless conferences and meetups. Over the course of my travels I meet with some of the most promising companies in the world. They’ve lead me over the years to discover three billion dollar unicorns before anyone else had written about them. Rather than opting to emulate what’s on the market, here are a few companies that have stood out to me and I believe could be unicorns in the future.

Check out these nine companies to watch this year:

1. My Size

This company has found a way to bring measurement tools for life to your smartphone to make so many tasks easier to handle. It’s not like we carry around physical measuring tools like a tape measure in our handbag or back pocket (unless we happen to be a contractor or seamstress). Rather than having to second-guess, My Size lets you get an accurate reading. For example, their app, MySizeID, gives you, as an online shopper, a way to maintain a profile of your personal measurements to ensure that you get the right size every time you buy clothing or accessories no matter what the brand or size chart specifications. Retailers get the added benefit from such a revolutionary tool because the exact size means fewer returns.

Related: The Highest Paying Jobs in America, According to Glassdoor

2. POC Medical

This medical solutions provider recognizes that today’s healthcare system is missing high-quality, affordable solutions for the early detection of diseases that can make a significant difference in the lives of so many people. POC Medical Systems has created a patented point-of-care testing product known as Pandora CDx that is currently used for early diagnosis of breast cancer. Not only is it easy to use for practitioners, but it also reduces the time between getting a test and results. Making it available to a much larger population is revolutionizing how people receive care and can potentially have a dramatic impact on the number of people who can be treated more effectively so that they might be able to beat cancer and other life-threatening diseases.

3. Delighted

Imagine getting feedback from your audience in minutes rather than the weeks it’s always taken to send and receive surveys and compile the data. Delighted has revolutionized the entire customer feedback process through its use of the Net Promoter System that delivers a highly complex set of data points about what the customer thinks about their experience to an easy-to-read dashboard. Surveys include mobile, SMS, and Web options for further customization. The entire customer feedback platform doesn’t require any technical know-how on how to collect the data and disseminate it. Customers value the convenience and willingly provide critical insights your business needs to enhance the overall customer experience.

Related: 4 Marketing Lessons Entrepreneurs Can Learn From April the Giraffe

4. Brainly

This company is the largest online education P2P platform connecting more than 80 million students from around the world in a Quora-like environment, solely based on connecting students to help each other with their school work, all free of charge. Brainly is combing social media, online education and machine learning to change the way we see schools in general and classrooms specifically.

5. Riskified

With fraud becoming increasingly sophisticated and retail moving to online eCommerce, fraud prevention platform Riskified has developed a solution to protect eCommerce merchants from chargebacks, all the while mitigating the impact of false declines on retailers. Riskified’s solution is based on self-optimizing machine learning that allows merchants to eliminate the need for any manual adjustments. The platform is able to detect fraud attempts in real-time by analyzing data with its machine learning models and sophisticated proxy detection methods.

6. Kiip

This company is set to revolutionize the mobile advertising market, offering a marketing and monetization platform that consumers actually respond to and enjoy. Kiip leverages what is known as “moment targeting” wherein rewards are offered to the mobile user to take advantage of a moment in time where they are more likely to act and redeem that reward. The app uses al types of analytics to create the moment and reward for that particular consumer, including page, screen, context, geolocation, and device. They are already having worldwide interest, including a strategic partnership with companies in China where consumers’ mobile purchases are climbing steadily.

Related: 8 Movies That Increase Your IQ – #5 Will Test How Smart You Are

7. Clarifai

While much of what is going on with artificial intelligence is already revolutionary, this company is raising the bar on making the impossible a reality. Clarifai specializes in visual recognition and uses machine learning to help companies add this feature to their existing programs and solutions in order to build smarter, more intuitive apps that will, in turn, better serve their customers’ needs. Think of it as a learning tool that does the learning for you so you can then reap the benefits of more effective apps that will boost your business much faster than if you left it up to your developers to try and figure it over a longer period of time.

8. AirMap

With the growth in drone usage, including many companies like Amazon testing delivery service routes, this company is capitalizing on the new need for airspace intelligence to ensure that drones can operate safely and efficiently within shared airspace. AirMap is creating a whole new technology solution for navigation and safety control related to this need, helping drone developers and commercial users to propel drone usage forward across numerous applications and industries.

Related: Being an Entrepreneur Means Finding Profit in Your Passion

9. Woo

Woo is looking to change the way companies hire new talent by using machine learning to match possible candidates with potential employees according to expectations like salary, work life balance and possible career growth. This is all done in a 100% anonymous environment, thus helping top tech giants like Uber, Lyft and Microsoft to hire the best talent. This approach helps companies to find “off market” employees that are not actively looking for a new position.Across numerous business niches, technology, innovation, and creativity are delivering incredible new solutions for common inconveniences and longstanding issues as well as addressing new problems that have emerged from technological trends and developments.

These nine companies represent some of the most revolutionary ideas that I’ve seen recently and capitalize on other ideas that are now becoming an integral part of business and life. It will be exciting to continue tracking their progress throughout the year and beyond.

9 Revolutionary Companies to Watch