Venture Capital

What’s The Deal With “Corporate Innovation?”

April 13, 2019

Every CEO harps on “disrupting ourselves” these days.

Ever since reading Clayton Christensen’s “The Innovator’s Dilemma”, I’ve noticed more and more large corporations making attempts at insuring against future competition by trying to either 1) be a lead innovator in their current industry, ensuring that an upstart can’t take them down or 2) moving into adjacent industries that counts as innovation for that company. Some companies, like Google and their Moon Shot laboratory, do this whole “innovation” piece quite well (i.e. with their self-driving car offshoot, Waymo). Other larger, more traditional companies like GM need to innovate and disrupt themselves via an acquisition (see: $1B on Cruise).

Disruptive = innovative

But “innovating” or creating new products or services as a large corporation remains a beast of a problem. It’s easy to spin up “innovation” groups and point internally and to the media and say, “Look! We’re disruptors!” Just having an innovation department clearly doesn’t guarantee the sustainability of your business. Nor does it fend off competitors or adapt to changing markets and consumers. Here’s what I’ve noticed when corporations go to bat on the startup and innovation field.

Too Many Cooks in the Kitchen

Courtesy of Unsplash.com

This should be incredibly clear, but large corporations (and from now on, when I say “corporation” I mean companies with greater than 10,000 people) operate incrementally and with layers of checks and balances. They’re good at what they do, but moving nimbly and coming to clear decisions outside of the normal comfort zone wrecks havoc on internal teams.

If you want to create a new product outside the current product pipeline scope, or want to implement a new technology to better track or learn about your customers, you’ll find yourself debating with the finance team, business leads, tech integration leads, product managers, HR, and the CEO of the company. Everyone has an opinion about the new initiative. It’s almost impossible to get consensus on the next steps without 800 meetings. And oftentimes, the people discussing the new innovation or initiative are just representatives of their broader team. They then have to pitch the idea to their boss or Director or VP, who will have feedback and then (with almost 100% certainty) the working group will have to go back to the drawing board, or other members of the team won’t agree with the higher up feedback.

As you can see, this can be exhausting and demoralizing for a team. Jeff Bezos appars to have cracked the code on this with his pizza rule (you have to be able to feed everyone in a meeting with only two pizzas). The key point Bezos found was that when too many people had an opportunity to weigh in on an important initiative or innovation, they would, and that slowed down the process to the point where the project basically gets killed. It takes a core leadership team with an entirely different mindset and a willingness to delegate and decentralize to actually give a company a fighting chance to truly innovate, take risks, and move away from their core business focuses.N

Expectations and Roadmap

Of course, for every new initiative a company takes (whether or not it’s dubbed innovation), a business case needs to be made. What’s the payback period for our capital? How much revenue will we make and what will it cost? Where will we compete? What does the entire P&L forecast look like? Who will work on it and what are the hiring needs? What’s the risk? How does this fit into the core mission of the current business?

Courtesy of Unsplash.com

That last question (in my opinion) can cause the most issues for corporate “innovation.” The rest of the questions (i.e. the business case) seem and feel like traditional questions any sane early stage VC would ask a startup. The problem for corporations remains: can we make a bet on something that might not relate to our core business for this quarter?

Here’s a wild scenario: you own a multinational surfboard company. You manufacture and distribute surfboards better than anyone else in the world. But unknown risks due to climate change or your supply chain for your materials make you consider trying to “innovate” to get ahead of the curve and protect yourself five years from now. Do you figure out a way to build surfboards out of different materials to reduce costs? Perhaps you figure out a faster last-mile delivery solution. But what if you decide to use your expertise in recreational sports to get into the hiking business? Or even crazier for a corporation: develop an internal team to create a NEW type of water sport, beyond surfing.

Again, your company’s core competency is building and selling surfboards. How does allocating resources to hiking gear or creating something unknown fit within the goals of the company? This takes a forward thinking leadership team to even get these types of projects off the ground. But once off the ground, they face a myriad of hurdles immediately. Remember the business case: you need to know what the payback period will be (and what’s an acceptable time frame) and what the revenues and profits look like.

Early stage startups usually have an idea of how to get their unit economics to work, but the transformational ones require a huge bet. Uber and Lyft remain unprofitable, and Amazon only recently started making money. But a corporation has a low tolerance for a money sinkhole. Traditional projects operate differently than new ones. If their “innovative” project doesn’t deliver a positive profit in x time period, or goes over CAPEX budget, or takes longer to find product market fit than expected, it could be killed or modified before it even has a chance. While corporations churn out profitable projects, rarely are they well equipped to create something that carves out a new category, like an Airbnb or LimeBike. The expectations and current business objectives of the corporation might not align with the realities of a new project timeline.

Summary

This isn’t to say that large companies cannot innovate. They absolutely can, and there are clear examples of corporate innovation successes (i.e. Waymo as a great example again). If companies want to innovate they should first start at 1) Creating teams with enough autonomy to make decisions quickly and change course when new insights come to light and 2) set expectations that this innovation aligns with the company’s future goals, and provide the patience necessary to allow the project or product to get the traction it deserves. Facebook wasn’t built in a day you know!

Leave a Reply

Your email address will not be published. Required fields are marked *