No Risk, No Reward

That they could afford to do that points to another, more practical aspect to Caltech's approach. Other universities typically require entrepreneurs to pay up-front application and licensing fees for the use of technology patents. But Caltech believes that such payments stifle entrepreneurship, since young companies usually have little cash to spare. Instead, the school typically takes equity stakes in startups, and it defers collection of patent payments until fledgling companies are financially secure.

For Caltech, it's a long-term bet. "The reality is that universities rely far more on their endowments than they could on any fees to be collected from the initial licensing process," Wolfe says. "So we seek a bite of the apple -- and we hope that if one of these entrepreneurs founds the next Intel, he'll not only share the equity but also bestow a gift on the university in remembrance that we took care of him when he was just getting started."

Cummings and Lines may be in a position to do just that. Fulcrum has won about $20 million in venture funding amid the toughest venture market in recent history. Its founders have hired a credible CEO, Bob Nunn, who formerly ran Vitesse's telecom division, and hired 24 top students from their alma mater. And they've garnered rave reviews of their chip design from technology journals.

One thing that Cummings and Lines haven't done yet: finished their degrees. Officially, both are now "on leave." They may not be back.
-- Alison Overholt

VIII. Past Company: The greatest business risk ever taken

Imagine you're running a large, global company. You can stick with the strategy that has worked for decades and face the gradual erosion of your market share. Or you can bet a sum that is more than twice your annual revenue on a new product that will wipe out everything you've sold before.

That was the bet that Thomas Watson Jr. made on April 7, 1964, when IBM unveiled its new System/360. "The most important product announcement in the company's history," Watson proclaimed. He was dead-on: The IBM System/360 was an enormous departure, a bold gamble that would change everything -- not just at IBM itself, but throughout the computer industry -- for decades to come.

IBM had invested $750 million in R&D to create the system and another $4.5 billion on factories, equipment, and inventory. (A project of comparable scale would cost IBM $210 billion today.) The resulting product line eventually made nearly all of IBM's vacuum-based machines obsolete. "If we messed up, we were left with nothing," says Fred Brooks, project manager for the 360 and now a professor at the University of North Carolina at Chapel Hill.

In hindsight, we know that Watson's bet proved outrageously fortunate. Orders flooded in for the 360, the first family of computers ever to be expandable and internally compatible. Within three years, IBM's revenues had more than tripled to $7 billion -- and Big Blue quickly outdistanced its rivals. (Remember Burroughs? RCA? Sperry?)

But the lesson here isn't that brass-balled risk taking is the essence of leadership. "A lot of us think that success is about the boldness of the gamble," says Nancy Koehn, a professor of business history at Harvard Business School. "Success is more complex. It's about understanding what's bold about the boldness, about knowing how to keep the risk from coming back to bite you, and about knowing what your organization will get from taking such a big step." The System/360, in other words, paid off not because it was an extraordinary risk, but because IBM managed the risk extraordinarily well.

IBM hedged its gamble in several ways. First, Koehn notes, it had remarkable market intelligence. Watson also instituted what we would now call an internal SWAT team to spearhead development and to spread the 360 gospel. IBM managed its cash flow effectively (though at one point, it made a hasty stock offering). And it applied capabilities that fit the nature of the risk. "IBM knew R&D, and it knew how to commercialize products," Koehn says. It was that cultural intuition and self-knowledge that allowed IBM to break with its past -- and, in turn, to forge its future.

IX. Playing It Safe, Part 3: "It's like a big chess game."

"What I do for 12 hours a day," says Mitchell Moore, "is talk about the weather." Moore is safety director at Stevens Transport, a refrigerated-truck company based in Dallas. It's his job to know the weather wherever any of Stevens's 1,700 drivers are headed -- and to do something about it.

"Right now, I'm looking at 41 drivers in the Northeast, where there's some ice on the roads. We know what's going to happen, so we have options. We can maneuver around the storm or drive through it. It's like a big chess game."