Steve Liguori @StephenLigouri
Can Big Companies Innovate Like Startups?
Mike Dauber @Dauber
NO
Steve Liguori @StephenLigouri
Well actually they can get very close to startup success if they are willing to break the old rules and adopt new ones
Mike Dauber @Dauber
That can be an awfully big IF. Even in that case, it’s hard to replicate the urgency/people you find at a startup
Steve Liguori @StephenLigouri
Mike, great point. I have found that large firms need to get that urgency AND change the old rules that no longer work
Twitter exchange between Steve Liguori and VC firm Partner Mike Dauber, December 2015
As the friendly exchange on Twitter between me and Bay Area venture capital firm Amplify Partners General Partner Mike Dauber illustrates, there are two opposing perspectives on – and answers to – the perennially burning question of whether big companies can ever hope to innovate like start-ups.
Big companies can learn how to innovate from startups and venture capital firms.
The perspective offered by Dauber, broadly illustrative of the venture capital industry consensus, is an emphatic “No!” Period. Or rather exclamation point. End of story. Game over.
Really?
Not so fast, jack. There is a countervailing perspective, an admittedly minority view, exemplified by … well, I occasionally think a club of one, composed solely of yours truly. Fortunately for many of us who don’t work for startups and don’t even aspire to, this other alternative perspective is rooted in a different reality from Silicon Valley’s.
Based on my experience as an innovation leader at GE, on top of more than a year spent consulting with big companies and big company leaders in an ongoing quest to find practical answers to the above question, I can just as emphatically state (and write) that the obituaries on big company innovation currently being blithely written in Silicon Valley are, let’s just say, premature.
Curious? Read on.
Now, don’t get me wrong. I’m not saying it isn’t difficult, occasionally frustrating or that some days it seems like a career suicide mission. What I am saying is that there are ways. Let’s take a brief look at a few.
1.) Facing Reality
A recent piece in The Economist summarized the big company predicament succinctly:
“Competition is becoming ever more ferocious: if Google or Apple aren’t plotting your downfall, a startup surely is.” [1]
As a leader working inside a big company who has actually faced up to this harsh reality – no doubt because you’re living it day in and day out, and often at night too – you’ve truly and fully absorbed the 21st century business leader’s imperative: “Innovate or die!” [2]
Okay, so what? What are you going to do next?
2.) Cooking from A Different Recipe
A mission-critical next step is starting to cook from a new management and leadership recipe, one primarily composed of a medley of fresh ingredients drawn from the best organic local sources. You need to take the best traits drawn from the DNA soup of three dramatically different kinds of organizations.
Each of which has elements of the recipe you’ll desperately need to survive, and each of which will offer some ingredients you’ll need to protect and preserve, while others – even with the greatest difficulty – you’ll just have to discard as you might a piece of old fruit, in the trash.
The three different kinds of organizations I am referring to are:
- Big companies
- Start-ups
- Venture capital firms.
3.) Keeping What Works and Discarding the Rest
The most important lesson you’ll need to take away from this column – not to mention more columns to come – is that you need to create a process for determining which elements of your current organizational operating system you need to keep and which ones you absolutely, imperatively need to discard. Trust me. You’ll need to keep some and discard some from all.
The book, even the bible, on facing up to this challenge was written some decades ago by the late great Austrian School economist Joseph Alois Schumpeter (1883-1950), the patron secular saint of entrepreneurs. Schumpeter’s enduring contribution to our latest thinking about how businesses and markets work in a free enterprise-based economy is through a disorderly and often painful process he memorably referred to as “the gales of creative destruction.” In 1938, Schumpeter published his most famous dictum:
The process of Creative Destruction is the essential fact about capitalism. It incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.
It was Schumpeter who, even in the depths of the Great Depression, had the foresight to forecast how even a capitalism system prone to booms and busts constantly reinvents itself by incubating new entrants to new markets – “startups” – a very few successful examples of which will “creatively destroy” incumbent companies, and even topple them from what had formerly seemed like impregnable perches.
A quick historical look at the history of the S&P 500 makes this point perfectly. Of the 500 companies that made up the first S&P 500 list in 1957, only 74 were still on the list just 20 years later, in 1997. [3]
The “Gales of Creative Destruction,” in short, are the simultaneously destructive and constructive forces – the new ways of doing things – constantly supplanting the old. And they are the very same forces that tend to keep justifiably paranoid business leaders (in short, the ones worth their salt) up at night. While there may be prolonged periods of apparent tranquility in the markets, history teaches us that they tend to be short-lived, few and comparatively few and far between.
The most common conditions of capitalism are totally Darwinian: eat or be eaten; only the fittest survive. And if you are an established incumbent company and you want not just to survive but to thrive, you need to bring those “Gales of Creative Destruction” inside your own firm.
You need to destroy and discard precisely those elements inside your own ecosystem that are keeping innovation and renewal at bay, while – and this is equally critical – taking the utmost advantage of the resources you do have to work with, which if properly exploited, may well save the day for you, your firm and your shareholders and stakeholders.
4.) Destroy and Discard the Outmoded Components of Your Old System
What I’ve learned and frequently tell clients is that one of the greatest obstacles to doing Creative Destruction inside a big company is the mandate for development projects (and project developers) to rigidly adhere to fixed and regular budget and development cycles.
The problem is that while you may work that way inside your own organization, the market out there most assuredly doesn’t. New entrants, new products and new threats don’t wait for a new fiscal year to come looming up on the horizon, threatening to eat you and yours for breakfast, not to mention lunch, dinner and an afternoon snack.
5.) Keep What Makes Your System Work
One of the most valuable structural components that big established organizations do have at their disposal (or perhaps I should say, lack of disposal) is all too often taken for granted. That would be their ability to pay people on a regularly scheduled basis and also offer them a decent benefits package.
It will be no great surprise to you when I note that few startups can do that. As a big company, you need to take advantage of the fact that while markets may not operate according to regularly defined and scheduled cycles, individual lives often do. For example, very few people past a certain age (let’s say 25) don’t need to pay rent by the month, make mortgage or car payments by the month, or pay property and school taxes on an annual basis.
What that means in practice is a huge opportunity for big companies that will enable you to nurture and incubate your own corporate entrepreneurs – A TERM TO REMEMBER. Those are precisely the talented, motivated, even brilliant people who number in the millions yet really can’t afford to quit their day jobs and go work for fragile, unstable startups.
This pool of ready, eager and willing talent is your ultimate resource. Unfortunately, too many big companies tend not to productively draw on that pool of talent, for one reason and one reason alone: bureaucracy and its partners in crime, corporate structure and culture.
6.) Take the Best of the VC Model and Make It Work Inside Your Own Company
The greatest single impediment to corporate entrepreneurship isn’t a lack of talent, skill, knowledge of the market or willingness to test and validate new ideas. It’s the fact that too many of the key people holding tight to the purse strings tend to be terrified of risking what feels like “too much” on any one untried and untested idea.
Yet paradoxically, we also know that the company as a whole will not survive, let alone thrive, unless it learns how to do precisely that more productively than it has in the past.
What’s most curious about this strange situation is that when I talk to business leaders about adapting the advantages of the VC model to their own organizations, the most typical answer I get is: “Oh, we’re doing all that already. We have a fully-funded VC arm. We’ve just opened an outpost in Silicon Valley.”
That when I get to say: that’s not what I’m talking about at all. Yes, many big company leaders are perfectly comfortable with the idea of taking a pot of money and creating an independent venture capital arm which, according to time-honored VC tradition, places a number of bets on a number of promising ventures, and then sits back to see which one pans out.
But what makes corporate leaders distinctly uncomfortable, by contrast, almost entirely due to the imperative to keep to strict budget and development cycles, is the idea of placing similarly diversified bets on development groups within their own company.
That one, for some reason, tends to really give them the woolies.
At one of the client companies I’ve worked with over the past year, I made a brief presentation – more of a post-mortem, really – to the senior exec about the variety of flaws in their innovation operating system, as exemplified by a project that his or her senior managers had backed to the hilt and devoted serious resources to.
It’s an all too familiar story in my circle. The product had been developed by a dedicated team that had developed a particularly nasty case of “featuritis,” which if you’re not familiar with the term is an all-too-common industrial and commercial malady suffered by product developers who fall in love with the panoply of technical features they and their teams manage to figure out – typically at staggering cost – how to build into a particular product. The reason it’s a disease and not a blessing is that the bells and whistles and features engineers tend to fall in love with – and love to play with – aren’t always or necessarily the same features and bells and whistles that customers may actually need or want.
The result, as was the case with the product and large company in question, is that you get leaders who have been continuously kept out of the loop for far too long to be able to do anything about it nodding and shaking their heads in dismay and disgust. Saying over and over to an ominously silent room of senior managers and leaders,
“Why wasn’t this product tested? Where was the research? Where were the customer sessions?”
VCs have developed a very clever way of rarely, if ever, having that scenario play out. They have developed elaborate regimes for placing multiple small bets, ranging from angel investing to multiple funding rounds to diversification across multiple markets, industries, firms, inventors, you name it.
What those regimes are really about is providing the VCs with the ability to kill off and cull their losing bets before they get too large to overwhelm or even embarrass them.
By contrast, your typical large firm, embarking on funding development and innovation projects, has a system of “toll-gate procedures” that superficially resembles the multiple rounds of VC funding in that it operates according to a step model; except for one crucial difference: the metrics used to pass the toll gate tend to be entirely insular.
So, for example, have the project developers gone over budget or under? Has a set series of boxes been checked that validate strict adherence to the development plan? What’s missing from these tollgate exercises is any contact with or connection to the outside world or the market. Validation and funding decisions are made according to internal metrics. The missing link in the decision chain is a set of obvious questions:
- Does anyone really want this thing?
- Does anyone really need it?
- Even if the answers to the two questions above are yes, how much might they be willing to pay for it?
So the key questions VCs tend to pepper their partners with don’t mean much inside your big company world.
7.) Value the Cool Ideas Your People Who Know Your Customers Have
There are plenty of people inside your organization who know your clients and customers and may well have cool ideas you can work with them to bring to market.
That’s the Corporate Entrepreneurship Model.
It’s a model oriented around a single question: “How do I get comfortable being uncomfortable?”
You actually need to learn how to do that, by continuing to experiment, learn, test and validate. Not with the senior managers holding the purse strings but with the people who matter most.
That’s everyone “out there” who might be tempted to buy the output of your project.
And hey, you never know: that person might even be you.
[1] “The speed of business: Hyperactive, yet passive: Worries about corporate myopia miss the point. Even in America, business is not dynamic enough.” The Economist, Dec. 5, 2015
[2] A phrase popularized but not originated by former McKinsey consultant and business guru Tom Peters.
[3] Creative Destruction by Richard Foster and Sarah N. Kaplan, Doubleday Currency, 2001