So why do companies mistakenly believe the path to success lies in emulating them?
By Michael E. Raynor
When it comes to innovation in established companies, the rage has long been to try to emulate the behaviors of entrepreneurs and the swashbuckling investors who back them. The explicit belief is that what works in Silicon Valley can be replicated inside companies with similarly efflorescent results.
The defining characteristics of this approach is the “variation, selection, retention” model of evolution through natural selection. Life in all its forms has manifested relentless innovation thanks to the nearly endless variety of life on the planet and the merciless selection pressures that weed out those who can’t keep up. This process preserves what works until something that works better comes along.
Similarly with start-ups and venture capitalists. First comes variation: An endless succession of would-be world-beaters pitch their concepts—often accompanied by working prototypes—and investors select from that smörgåsbord what they see to be the most promising opportunities and construct a fairly broad portfolio of investments.
Most venture funds impose selection pressures almost immediately, apportioning their investment dollars based on whether a venture is able to hit defined milestones within specified periods of time. New businesses are almost always kept hungry, spurred on by the promise of riches if they reach commercial success. And woe to any start-up that should miss interim targets by too wide a mark or simply fail to rise to the top of the heap. The funding requirements of the more successful ventures in the brood provide a compelling reason to free up capital and feed the strong by culling the weak without mercy or regret.
Finally, retention takes the form of the “liquidity event”: selling most or all of the equity to the public markets, which releases the cash required to begin the cycle anew.
Surely, such a system has the bona fides required to warrant the starry-eyed envy it so often provokes. After all, it was not Digital Equipment Corp.’s internally developed AltaVista that would eventually dominate the search-engine space but the venture-backed Google.
Hoping to replicate such an outcome, many corporations try to create and commercialize innovative ideas using a similar variation-selection-retention model, but they are perforce compelled to use different mechanisms at each stage. They pursue variation typically via large-scale “innovation tournaments,” usually setting up some form of Web-based infrastructure to solicit ideas as broadly as possible. The explicit belief is that you never know where the next great idea will come from, and so the indispensible first step is (at the risk of mixing metaphors) to turn over every rock in the hope of uncovering a diamond in the rough.
This approach suffers from a critical and often-overlooked difference from the VC approach. Venture-capital investment boards get to see reasonably well-developed concepts, typically without having to spend a dime on them. Entrepreneurs develop ideas, fund prototypes, and even secure customers at the cost of nights and weekends sacrificed, vacations forgone, and second mortgages assumed. This serves to keep the investors’ expenses down, but it is also a material early-stage selection pressure, ensuring that only those ideas that have fired the imaginations and earned the full-blooded support of their creators ever come up for consideration.
In contrast, when an established company seeks to liberate the nascent blockbuster ideas that allegedly lay fallow in their fields of cubicles, it must pay for all that sweat equity in either official on-the-clock time or diverted discretionary effort.
Realizing this, even if only implicitly, many corporate innovation tournaments solicit only the most bare-boned expressions of ideas. This keeps costs down, but with crippling consequences. First, there is no mechanism to test the passion and commitment of those advocating a concept in any meaningful way. As a result, it is not uncommon for the ideas that show up to be of questionable merit, and those submitting them have little skin in the game. Instead, ideas can often take the form of “wouldn’t it be neat if . . .” conjectures that are seen by those who propose them as low-cost lottery tickets providing a quick ascent up the corporate ladder if successful, with no career downside if they are overlooked.
Often overwhelmed by the high number of low-quality submissions, innovation tournaments can have trouble turning up anything terribly innovative. Worse, they can end up making most participants feel ignored or shunned—after all, American Idol shatters far more dreams than it fulfills. And so what started out as a way to build enthusiasm for innovation and drive long-term corporate growth can end up alienating most of the participants and convincing the innovation skeptics that they were right all along.
Attempts to formalize the next phase—“selection”—often take the form of a “stage gate” process. The idea is to fund a relatively large number of initiatives at a low level and make subsequent funding contingent upon meeting ever-more exigent criteria for technological development or marketplace acceptance. The standard metaphor is a funnel with a wide mouth and a steadily narrowing stem out of which emerges a small number of large successes.
Now, in the VC world, the primary measure of success is financial, and cutting one’s losses just makes good sense. For the entrepreneur, failure is hardly a good thing, but it rarely disqualifies an innovator from subsequent attempts. Indeed, entrepreneurs who eventually make it frequently attribute the insights that led to eventual victory to the lessons learned from previous bitter defeats.
Much has been written about the need for corporations to “fail fast” and create a culture of learning rather than punishment, but the inevitable reality is that organizations are political and social organisms, not purely economic systems. When they function well, they can generate and share tacit knowledge based on relationships built on trust. But their pathologies are also well-known and, unfortunately, seemingly unavoidable: the long memories, the jockeying for position, decision-making by consensus, and a host of other ills that result in precisely the kind of risk aversion and incrementalism that leave companies vulnerable to the start-ups they allegedly seek to imitate.
The result? The funnel becomes a tunnel, in which the only projects that ever get fed into the stage-gate process are those that are all but guaranteed to make it out the other end. After all, it is not enough merely to survive in the marketplace; one must also survive the politics of the journey.
Finally, the VC world’s liquidity event has no meaningful analog for corporations. VC funds are designed not to build material and reliable revenue growth with solid cash flow. They are designed to build a business that can be sold, something corporations often see as a sign of failure. Yet retaining a successful new business within an existing corporate fold is a double-edged sword: The growth and profitability are terrific, but who isn’t keenly aware of the dangers associated with the increased complexity born of diversity?
Corporations need to accept that they cannot replicate or even meaningfully imitate the venture-capital approach. Variation is too expensive, selection is too politically fraught, and retention too managerially complex.
An alternative model is emerging, also with three stages, but each is very nearly the polar opposite of its analog in the VC paradigm. Instead of variation, there is focus, an identification of specific opportunity areas that are strategically important to the company. Instead of selection, there is shaping, the crafting of a solution over time through an iterative learning process of small experiments. And instead of retention there is persistence, the commitment of an organization to a given market, making both success and failure a collective enterprise.
The need for an alternative approach is clearer when we consider another evolutionary analogy, for the range of solutions available to an organism is defined by its past choices. Once you abandon the seas for the land, going back (the provenance of most aquatic mammals) means that, since you cannot create your gills, you must instead learn how to hold your breath. Similarly, for established corporations seeking to innovate, the mechanisms of innovation that will most effectively secure their futures will most likely have to be very different from those from which they sprang.