innovation and growth strategies
On our way to closing Fund II, we talked to >300 bigco's and midco's about their innovation and growth strategies. While there was a lot that was unique to each company, there were many common factors. We learned a lot, and many things that are counterintuitive to our initial way of thinking. We also took away many best practices that we’ve built into our own corporate innovation process.
Innovation is sexy but often only runs skin deep. Lack of true innovation is almost always due to culture and incentives. For the majority of corporations, individuals in charge of running the business are not incentivized to take risk or to innovate. There may be a few members of an organization in charge of innovation, but unless those responsible for the individual business units are incentivized to test new technologies and bring in new solutions, there is often only talk of innovation, but true innovation is lost. Everyone has a day job and those day jobs quickly take over when we get back to our desks, leaving innovation back in the meeting room or at the conference to be picked up when there is time…which there never is. Corporations must recognized the need to go beyond for incentives throughout the organization that go beyond driving core business outcomes in order to stimulate true innovation, which leads to...
“Lack of true innovation is almost always due to culture and incentives. For the majority of corporations, individuals in charge of running the business are not incentivized to take risk or to innovate.”
Innovation goals and milestones must be delivered by the CEO to be effective. They must affect everyone. In our case and with almost every LP, the CEO is the direct decision maker around investments in the Syndicate Fund due to the size of the commitment. We’ve seen several cases where Executive Order around innovation objectives is effective. For instance, one CEO we work with directed his team to conduct 25 pilots that year (going from 2 pilots total the previous year). When doing this, he realigned incentives and created budget, which is incredibly important. He conveyed a master vision for the goal of these new pilots and guess what happened? They executed 25 pilots that year, 3 of which resulted in full roll-outs affecting both top line revenue as well as expense reduction. The directive has to be clear, be concise, and resonate with the company culture.
Many larger corporations don’t know how to and aren’t set up to work with startups. Working with startups is a learned skill for corporations. One of my colleagues rightly refers to this as “developing a muscle." So many corporate teams aren’t set up to work with startups and therefore just don’t do it, or, if they try to work with startups, they do it so poorly that they can’t be good partners. Their growth and innovation strategies rely on firms like Cisco or SAP or consulting firms like Accenture or McKinsey. If they have a gap to fill, they reach out to this audience to help them fill it instead of doing some deeper work and testing a few new companies. Empathetically, sometimes startups are very difficult to fit into the corporate stack, either due to security risks, scale limitations, or potential for poorly timed pivots. It can be time consuming to get a startup pilot executed through legal and troubleshooting. Corporations generally know when they are not being good partners, but often it is a difficult challenge to overcome because entrenched processes are difficult to manipulate. It is helpful to have partners that can facilitate parts or all of this to smooth out the wrinkles along the way.
"Innovation infrastructure" is always changing. One of the strongest common denominators among corporations we spoke with was the changing nature of innovation teams. Going from centralized to decentralized back to centralized; providing budget, providing investment capital, or creating shoestring momentum. Inevitably, they were always hiring or waiting for a new innovation hire to start. This created a lot of “wait and see” or “its not the right time” decisions around investing in the fund. Unfortunately, given the constant state of transition some of these innovation programs are in, it may never be the right time to make big decisions. However, big decisions are at the heart of true innovation and corporations need to build muscle around big, fast decision making even in times of change (…and its always a time of change…).
Pro-active innovation is rare, but much more effective. The sense of urgency to “innovate” typically becomes clear and present on the heels of a competitor making a major move. Corporations pay attention when a billion dollar acquisition happens or big new product launches take place or big, new corporate funds are launched. Then they naturally feel like they need to counter with their own big launch. We’ve been at the other end of many of these market shifting activities and have seen this in retail, consumer, insurance, and medical. The reactionary urgency around innovation usually results in a more “me too” attitude rather than an original approach to creating disruption and solving customer pain points. In cases of pro-active innovation, there is much more original thought put in to solving problems instead of just trying to keep up with your neighbors. This is an important concept: true innovation happens when corporations can move to the offense instead of always playing defense. You don’t score when you play defense.
You don’t score when you play defense.
One of the reasons corporates get stuck in defensive mode, I believe, is the near constant presence of "My competitor is doing it better” syndrome. So many of the corporations we talked to felt that their competitor really had it figured out and were having a lot of success around innovation. This was surprising, as there are very few corporations that are really succeeding around innovation, and these corporations have typically invested significantly to achieve those successes. However, the marketing engines at many of these corporations are incredibly talented and the external facing spin creates a very utopian picture, further exacerbating the sense of FOMO that may corporations have and exacerbating the defensive nature of innovation.
Making the investment
The more budget corporations allocate to innovation, the better the outcomes (this is likely up to a point of diminishing returns). Innovation is inherently fraught with failure, errors, and learnings. Investment along the way is sometimes used to test technology that may not work, is not applicable, or makes a sharp pivot prior to implementations. However, these “at bats” are important to focus and streamline internal decision making and execution pathways. They also continue to create more internal capabilities by flexing corporate muscle around different initiatives. For corporations that are willing to make the investment, they see many more fruits to their efforts than corporations that are trying to run their innovation programs on a shoestring budget.
Corporations are aware that they need to innovate or they will die, but their decision making is typically distributed and lengthy, lending to the vicious cycle of bureaucracy. For most corporations we spoke to, they were quite knowledgeable about the traction and attractiveness of upcoming startups with competitive offerings. They had an urgent sense that they needed to remain competitive by creating new products and services or they would die. They were very aware of the startups in their orbit and why those startups were winning market share. However, many corporations can’t make decisions fast enough despite of themselves. There are so many decision makers involved that everyone can’t agree on a single path forward…thus little ends up getting done at the end of the day. We see this from the outside and from conversations we have had on the road with corporations we work with. At the end of the day, many hard decisions around growth and innovation are just hard to make. Thus, without fast decision making, corporations continue to lose market share and lose ground to newer, more nimble startups.
“At the end of the day, many hard decisions around growth and innovation are just hard to make. Thus, without fast decision making, corporations continue to lose market share and lose ground to newer, more nimble startups.”
The “ecosystem approach” or portfolio model to innovation has the most sustainable impact. For those who seemed to be the most sophisticated around their growth strategies, they typically had several tentacles stretched into innovation plays. This could take the form of an investment in Plug N’ Play or working with Techstars or another corporate accelerator, it could be a CVC or an office in Palo Alto, it could be a venture lab, or individual fund partnerships to gain exposure to ovation. In great cases, it was all of the above, and we were happy to be a part of such a strong innovation family. Having exposure to multiple innovation partners and resources is important. The technologies they surface are different, their processes are different, the talent is different, and the resources they bring to the table are different. For many corporations, these trials are an important part of finding new solutions that work.
Finding the “yes’s”
Multiple independent minds need to have decision-making authority around innovation risk. This is similar to the ecosystem approach, but as relates to people. Having many perspectives able to pull the trigger on pilots, newco development, and innovation is critical to generating the right use cases within larger organizations. Centralized decision making around innovation creates single point sourcing, curation, and execution of new technologies and pilots. With a single perspective trying to innovate for an entire organization, the network effects to find new talent and new use cases can’t take hold and there tends to be more “no’s” than “yes’s” along the way, stifling potentially significant projects.