Weigh the Risks of Innovation
Large companies may be reluctant to take on the risk of innovation projects, they allocate resources inefficiently and are slow to kill innovation projects that are not working. We looked at Manifold Group’s article, “What corporate innovation can learn from venture capital,” to see just why these mistakes are often made, including:
- Comfortable with big swings: Large organizations are used to taking big swings. After all, it’s much more efficient to put your muscle behind a few key initiatives than focus on lots of small ones.
- Misunderstanding the risk curve: They tend to choose a very small number of innovation initiatives they think are good bets and put significant resources behind them. But that logic breaks down in the context of innovation, where failure is the norm, and only a small set of projects actually work out.
- Throttling effects of risk mitigation systems: Most companies end up with a long list of checklists and approvals required for any new initiative. That friction greatly reduces the number of initiatives that can realistically launch in any given time period.
- Maladapted resource allocation models: Resource allocation models at large organizations naturally evolve to accommodate evolutionary change, but tend to break down for more innovative projects. Finance teams employ repeatable tests for ROI (e.g., hurdle rates) to ensure capital is being allocated efficiently. But real innovation involves significant uncertainty—after all, by definition you’re doing something new.
Partner Up to Fuel Innovation
All Things Innovation’s “The Partnership Playbook: Opening Internal & External Innovation,” looks further at the world of innovation partnerships. Developing innovation can be a challenging task on many fronts for corporate enterprises. Innovation might not be embedded into the culture or leadership of an organization, making it difficult to move projects forward, for example. Innovation management systems and methodologies can help streamline the process. The role of balancing both internal and external innovation systems and partnerships can also help maximize successful innovation initiatives.
In “Creating the Right Innovation Partnership,” we also explored startup partnerships. Corporations often face many challenges when it comes to developing innovation in a fast, evolving market. They can face barriers such as inertia, the silo mentality, a large bureaucracy, and even risk aversion can permeate the company culture. That’s where partnerships with startups can come into play, as these firms tend to be smaller and more flexible, creative, agile and disruptive. The partnership between an established corporation and startup can benefit both parties, as they leverage shared resources and a singular vision, whether it be rolling out an innovation or expanding into new markets.
Become an Investor in Innovation
Corporations often aim for disruptive innovation by using startups as a model for the way to innovate. But Manifold points out that it’s common to forget about the benefits of the venture capital put into the system, which often goes hand-in-hand with startups and entrepreneurs. “By injecting the concepts of venture capital into the mix, large organizations can begin to realize the extraordinary potential offered by innovation,” says Manifold.
Indeed, suggests Manifold, startups exist “in symbiosis with venture capitalists who assess, fund, and guide them towards maximum value creation.” Executives often fail to understand the distinction between being a boss and being an investor. Playing a key role in the startup ecosystem, venture investing is in essence different from traditional investing, meaning that applying a traditional portfolio approach often fails in the context of disruptive innovation. Venture capital is more than just investing, as Manifold notes, it is also a way to approach asset allocation, portfolio management and optimizing value.
For corporate innovation executives to act more like venture capitalists, Manifold advises:
- Volume beats volatility: Corporate executives, like entrepreneurs, tend to have a few active areas of focus at any given time. Venture capitalists, by contrast, seek to have a lot of active portfolio companies at any given time. They know it’s very hard to predict outcomes and resource needs, so they smooth out the volatility with a large portfolio.
- Don’t act like a boss: Corporate executives participate in execution—hence the name. They run teams and are by their very nature bosses. Venture capitalists know better than to try to operate their portfolio companies. That’s why good VCs act like board members instead of bosses. They engage periodically with their startup teams for updates and to provide guidance, but they don’t try to manage them.
- Your product is the portfolio: Corporate executives are accustomed to modeling each project, and justifying each individually to external parties (typically finance). Venture capitalists know that they make money from the overall success of their portfolio, and act accordingly. Act like a VC and raise a large pool of capital from your organization designed to be allocated over an extended period of time, and without having to go back each time to explain your needs to the finance department. Justify it based on a portfolio of returns instead of trying to prove that any particular initiative is likely to be successful.
- Focus on resource allocation, not individual outcomes: Corporate innovation executives tend to focus on ensuring that each project performs well. When an initiative struggles, it’s very tempting for people with an operator mindset to jump in and try to fix it. But that’s a great way to waste a bunch of time and resources on something that’s destined to fail, and meanwhile starve more deserving projects. Investors know that some of their investments are going to fail. Instead of focusing on fixing troubled projects, they focus on doing a good job of allocating resources.
- Milestones and stage-gate processes: Corporate innovators tend to focus on the viability of each individual initiative, using normative models derived from their corporate parent. Venture capitalists use carefully considered—and startup appropriate—milestones and stage-gate processes to understand the risk, potential, and value of each of their portfolio companies. They use these assessments to efficiently allocate their capital resources. This is perhaps the most challenging aspect of applying venture paradigms to corporate innovation, because it involves very different skills and approaches than are typically used in corporate environments.
- Treat the portfolio like a division: Tight organization and integration are the norm, with clear reporting structures and aligned strategies. But it’s really hard to act like a venture capitalist if you’re being managed like an executive. Venture capital partners are called “General Partners” and their investors are called “Limited Partners.” The “Limited” part refers to the limited control and oversight investors have over the day-to-day operations of the general partners. By keeping innovation teams and systems separate, you can avoid some systemic and procedural limitations that might otherwise constrain innovation efforts.
- Founders are the key: Corporate executives understand how important people are to success. Venture capitalists know that the most important ingredient for startup success is the founding team. Even the best idea with a mediocre team is very likely to fail. VCs also understand that the inherent complexity of innovation means it’s more about learning than execution, at least until the company finds product-market fit and begins sustainably scaling. Small teams are more effective in the early phases requiring adaptability and learning.
Organize Like a Venture Capitalist
All of these venture initiatives, of course, take time. A venture capitalist mindset, notes Manifold, focuses more on the long-term success of the startup as opposed to short-term gains. That has implications for resource allocation, team organization, and management.
Innovation tends to be a risky bet. But taking some of these lessons learned from the venture capital industry could create best practices for the corporate innovator. “From a high level, this means taking a portfolio approach to innovation, and acting as an investor (resource allocator) instead of an operator,” says Manifold. “This has the benefit of enabling a significantly higher volume of innovation projects, which increases expected ROI. It also enables organizational behavior that is much more conducive to success for each initiative.”
Video courtesy of INSEAD
