How CFOs can adopt a VC mindset: Staircase Ventures’ Janet Bannister

October 27, 2023

October 27, 2023 | Interview published in McKinsey & Company’s “Our Insights”.

By John C. Kelleher and Tim Koller

A high-tech pioneer describes how technology has continually disrupted business, why generative AI is accelerating today’s disruption, and what leaders can do to stay ahead.

It’s probably no coincidence that Janet Bannister was a competitive long-distance runner and a Canadian National Triathlon champion: she’s focused on winning over the long term. Decades ago, Bannister spent four years at eBay, where she helped transform the company from a collectibles site to a mainstream marketplace. In 2004, she launched the online classifieds business Kijiji and grew it to become one of Canada’s most visited websites. Her firsthand experience in the disruptive power of new technologies has been critical to her success in venture capital (VC) — she’s the founder and managing partner of Staircase Ventures—and she’s bullish about generative AI (gen AI). In a series of conversations with McKinsey’s John Kelleher and Tim Koller, excerpted here, Bannister discusses how executives can adapt a VC mindset, the threats and opportunities of gen AI and technology more generally, and the human and organizational challenges of focusing on the long term.

McKinsey: What does it mean to have a ‘VC mindset’?

Janet Bannister: My portfolio companies and I spend our working hours figuring out how we can disrupt the incumbents, take away their most valuable customers, and nullify their competitive advantage. When you have a VC mindset, you’re focused on the long term, you’re willing to take bets, and you are relentless about winning. When I meet with legacy companies, often the absence of a growth focus is striking. They are more focused on maintaining what they have than on growing. At a young technology company, you expect year-over-year growth of 100 percent at a minimum. I remember working at eBay in its early days, and one of my direct reports stood up and made a presentation to Meg Whitman [former president and CEO of eBay] about how great a particular opportunity was and how the business unit’s revenue was going to grow three times every year over the next few years. Meg’s comment was, “You’ve just spent the first half hour convincing me how great this opportunity is. Why is it only growing three times year over year?” Granted, it is easier to have that level of growth when you are starting from a small base, but that aggressiveness, that mindset of constantly seeking new ways to grow, and to grow as quickly as possible, is critical.

In venture capital, it’s the long-term results that count. My approach when working with my portfolio companies reflects this focus. If a company misses a quarter’s revenue, that in and of itself is typically not a problem. What I care about is why they missed their number. Is this an indication of a larger problem, or is it because they are setting themselves up for long-term success? Provided the company is building a long-term, high-growth, profitable, and sustainable business, they are on the right track. Obviously, this approach is much more difficult when leading a public company that is judged on a quarterly basis, but the mindset of focusing on the long term is critical.

In venture capital, it’s the long-term results that count. My approach when working with my portfolio companies reflects this focus. If a company misses a quarter’s revenue, that in and of itself is typically not a problem. What I care about is why they missed their number. Is this an indication of a larger problem, or is it because they are setting themselves up for long-term success?

This long-term focus is particularly important now as technology disruption is accelerating. The average life span of a company listed on the S&P 500 was 61 years in 1958. Today, it is less than 18 years. Technology is the driver of this change. In 1980, technology stocks accounted for 6 percent of the S&P 500; today it is close to 30 percent. Technology is disrupting every industry, and companies need to disrupt or be disrupted. Yet, as the pace of innovation is accelerating, most large companies’ ability to innovate is stagnating.

McKinsey: In your experience, what stops incumbents from disrupting themselves? Is it that they don’t see the disruption coming, or that they are incapable of making the right strategic choices, hiring the right people, and executing well?

Janet Bannister: It varies. One way to think about it is on a skill versus will matrix. In some cases, the incumbents lack the will because they do not believe that a major tech disruption will impact their industry. Over the last 25 years, I have watched industry after industry say, “We’re different; technology is not going to dramatically change our industry.” People who have worked in an industry with little change for 30 or more years often cannot conceive of the idea that their industry’s dynamics could be radically and rapidly reshaped.

The other aspect—the skill dimension—is the ability to disrupt oneself. Even if a company wants to change, it may not have the capabilities to rethink and remake its core business. Often the biggest challenge is attracting the right types of people who will drive innovation, and then ensuring that the rest of the organization enables—rather than inhibits—their progress.

McKinsey: And one of the things about venture capital is that you’re always looking down the road when you make an investment. You’re taking a risk, and you accept that the companies you invest in are going to have volatile P&Ls [profit and loss statements] in the beginning. It’s an approach that many big companies don’t seem to be very comfortable with.

Janet Bannister: Right. But there are a couple of changes that enterprises can consider to be more comfortable with investing in disruptive business ideas. The first is to change leadership compensation. Often, except for the most senior executives, compensation is primarily based on short-term results. In venture capital, all upside compensation is based on long-term results.

Venture capital companies can take a relatively high level of risk with each investment because they have a portfolio of investments. Similarly, companies can make a portfolio of “bets” into disruptive business ideas, each with a series of “investment gates,” whereby each initiative gets more funding if it is on track to reach its long-term goals.

Companies should also think through the build, buy, or partner options when adopting innovative technology. If a company is going to acquire another business in order to innovate or disrupt itself, it may not want to buy at the earliest stage; it may want to wait until it can be sure that the fit is right and that the acquired company will be one of the winners in the space. If a company is not going to build in-house, partnering is often a good place to start. But ultimately, the right strategy for any specific company is dependent upon their situation; what works in one context may be wrong in another.

McKinsey: Definitely, too many companies seek a “silver bullet.” Large companies in particular can get so big and complex that they can’t see the nuances. I’m always surprised, for example, when a company says: “Every department needs to cut expenses by 10 percent.”

Janet Bannister: That kind of “peanut butter approach”—equal cuts across the board—is taking the easy road, and it’s a common problem. To draw a parallel, most venture capital firms have money for initial investments and money reserved for follow-on investments in their existing portfolio. How do they decide how much money each of the portfolio companies should get in follow-on investment? Some firms have simple rules such as: “At the company’s next funding round, we invest $1 for every initial $1 we put into the company.” Sure, it makes life easy; you don’t have to do deep analytical work nor have hard discussions with your founders. But doing the in-depth company analysis, making difficult decisions, and having tough conversations is what you’re paid to do in VC and in large enterprises. CEOs or CFOs who take the approach of “We’re reducing every department by the same percentage” don’t have to have uncomfortable discussions with executives whose departments are being disproportionately negatively affected. Often though, the right call is to cut one department more than another. Developing well-informed conclusions and having hard conversations is a key part of any executive’s job.

McKinsey: Speaking of well-informed conclusions, what effect do you think generative AI—and AI in general—will have?

Janet Bannister: AI, particularly generative AI, is transformational. It is critical that all business leaders, in every industry, understand the threats and the opportunities posed by AI. It will change virtually every aspect of every business over the next several years. If an executive has not spent time playing with it, using it, and thinking about how it could help or hinder their business, they have work to do. For those reading this who have not yet tested the capabilities of generative AI, don’t go to bed tonight until you do.

[Generative AI] will change virtually every aspect of every business over the next several years. If an executive has not spent time playing with it, using it, and thinking about how it could help or hinder their business, they have work to do. For those reading this who have not yet tested the capabilities of generative AI, don’t go to bed tonight until you do.

I believe that generative AI will usher in the next wave of rapidly growing tech disruptors. As a parallel, the rise of cloud computing enabled the growth of thousands of tech companies; suddenly, entrepreneurs could relatively easily and cheaply launch and scale a software business, as they could access computing power at a low cost and sell software online with a SaaS [software-as-a-service] business model. I think we’re going to see a similar dynamic with generative AI. We are already seeing some tech start-ups scaling more quickly and with fewer people (and therefore at a lower cost) by leveraging generative AI to write software, conduct analysis, and optimize their operations.

McKinsey: The world has seen plenty of disruptions over the years. Is AI really any different, compared to what has gone on for a long time, perhaps even as far back as Schumpeter’s theory of creative destruction?

Janet Bannister: AI is an accelerant; disruption from technology invariably comes, and now it’s coming faster. I have long been fascinated by how different industries have responded to the disruptive power of technology. When I moved to Silicon Valley in early 2000 and joined eBay, it was primarily a collectibles trading site. My mission was to expand it to be a broader marketplace, including clothing, home items, jewelry, and sporting goods. This was in the early days of e-commerce. For perspective, at that time, Amazon was solely a bookseller. Retailers spoke of how consumers would never shop extensively online, as consumers wanted to flip through books before purchasing them, try on clothes in a store, and touch and hold items before making a buying decision. “Online shopping only works for a very small subset of the population and for very few items; it will never get above 1 percent or 2 percent of all consumer commerce,” they said. In 2004, I launched Kijiji, an online classifieds site that went on to virtually eliminate the classifieds section of newspapers, which had accounted for up to 25 percent of their profits. When I launched Kijiji, I tried to partner with newspapers to reach consumers, but most would not even take my call, as they were convinced that online classifieds would never achieve wide-scale adoption. Later in my career, I consulted for a broadcast television company and explained to them that their viewership was vulnerable to Netflix, YouTube, and other innovative platforms. “No one will ever stop watching television,” the industry insiders said. “It is engrained in the American way of life.” I have seen this scenario play out over and over: people say that their industry is different, and then time proves that it’s not. If you look at the most valuable companies in the world, they are now almost all technology companies. Go back 15 or 20 years and that was not the case.

McKinsey: But can AI and technology in general really change all industries? Take a mining company, for example. Someone’s got to dig the ore out of the ground. That won’t be a technology company, right?

Janet Bannister: I think about technology in terms of challengers and enablers. Challengers are companies that directly compete with the incumbents; enablers sell technology to incumbents to enable them to win versus other incumbents. Will mining companies disappear? Probably not. But if you’re in the mining industry, you need to be thinking about how technology can enable you to win versus your competitors. If you don’t use it, one of your competitors is going to adopt the technology and establish an edge over you.

Consider the construction and agriculture industries. I don’t think you’ll see technology companies buying dump trucks, cranes, or farms. But today’s large companies that adopt technology faster and better will separate themselves from the competition. In construction, technology has enabled companies to dramatically increase their efficiency, reduce errors, communicate across the value chain more quickly and transparently, and complete projects more quickly. I see the same potential in agricultural businesses.

In other industries though, technology companies are more than enablers; they are challengers, seeking to win at the expense of the legacy companies. The financial services industry is an example where we see a lot of challenger companies, from payments, including Square, Stripe, and Venmo, to bank accounts—for example, Revolut and Chime—to wealth management, such as Betterment and Wealthfront. Financial services is particularly attractive to challenger companies because incumbents find it difficult to innovate, and the reward for successful challengers is great. Specifically, large legacy players spend, by some estimates, 70 percent of their technology budget to keep their current systems running. In addition, many lack a culture of innovation, and they are working in a cumbersome regulatory environment. Add to that the massive size and profitability of financial services markets, and it is a very attractive market for challengers.

McKinsey: On a granular level, how do VC funds decide which specific early-stage companies to invest in, especially when an early-stage business has minimal revenue and market traction?

Janet Bannister: Venture investors seek at least a ten times return on each investment. So VC investors approach an opportunity with the question, “If I invest today at, say, a $20 million valuation, do I believe that this company is going to be worth more than $200 million in the foreseeable future?” To answer that, venture investors will dig into questions including: What is the size of the market? How is the market evolving? Who are the competitors, and how will they respond? How will this company win long term? How strong is the team? What gross and net profit margins can we expect from this company? And of course, investors would also look at the company’s cash projections, determine if and when the company will need to raise more money, and understand where that next round of financing could come from, among other things.

All upside compensation for venture investors is based on the long-term outcome, which may be eight to ten years after we make an initial investment. Therefore, VC investors spend a lot of time thinking about where technology is going, how industries and market dynamics will evolve, and how existing players will react. Technology will dramatically impact every industry, transform the competitive dynamics, create new winners, and lead to the deterioration of many incumbents. If executives are not thinking seriously about technology, particularly now at the dawn of generative AI, they may be just rearranging deck chairs on the Titanic.

About the author(s)

Janet Bannister is the founder and managing partner of Staircase Ventures. John Kelleher is a senior partner in McKinsey’s Toronto office, and Tim Koller is a partner in the Denver office.

Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsement.

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