It is hard to open the paper these days without seeing a story presaging the demise of a another industry titan. If you believe the articles, Microsoft, GM, Xerox, Dell and many other bellwethers will face, at best, a slow, uninteresting decline due to their failure to innovate in ways that disrupt the markets in which they compete. Even Google and Facebook have been mentioned as established companies that cannot innovate as quickly or profoundly as they could when they were smaller, had everything to gain, and far less to lose. In The Power of Pull (Basic Books, 2010) John Hagel of Deloitte has calculated that the average life expectancy of companies in the S&P 500 has declined from 75 years in 1937 to a mere 15 years today. So is a descent inevitable for the larger firms?
In a recent Techcrunch interview Clayton Christensen sounded a pessimistic tone and suggested that the only way the largest companies can innovate is to set up an independent business unit, separate in control, culture, and staffing from their traditional businesses. However, even IBM, who established a separate business unit in Boca Raton, Florida for their personal computer business in the 80’s, lost their lead in personal computers when this business unit was pulled back into the larger firm. Thus, Steve Denning of Forbes considers the IBM PC example one where innovation was given a stay of execution, but eventually succumbed to the top-down control of the larger organization.
Are there other sources of inspiration for surmounting the challenges of innovation within large companies? I thought it would be interesting to contrast the in-company innovation model (traditionally, a stage-gate model) with the model commonly practiced by venture capitalists (VCs) and the companies they fund. For many, venture capital is synonymous with innovation; what will we find by comparing the two worlds? My summary of the two models is given in the table below.
Fostering innovation in corporate R&D is quite different from venture capital’s methods.
Classifying R&D projects into Core, Adjacent, and Disruptive categories lays bare
your organization’s real attitude towards risk (black lines are budget targets)
The number of projects under active management is comparable for a VC firm and a corporate R&D business unit. In my discussions with those involved in each world, however, the similarities end there.
Large firms are dedicated to maintaining their existing products and product lines through incremental improvements and maintenance programs. These activities take between 40-90% of the typical R&D budget. No such imperative exists for venture-funded start-ups. This focus on breakthrough innovation gives start-ups and their investors a distinct advantage. Corporate R&D would do well to clearly understand what percentage of their R&D funds are focused on maintenance activities, and ensure that an explicit intention drives that investment allocation. Uncovering maintenance vs. innovative R&D spending splits is often the first task when we engage with a new client.
A venture capitalist on the board of a start-up will talk with the executive team twice a month at a minimum; during critical periods they may be speaking several times per week! Contrast this with a VP or SVP of R&D, who will talk with project teams quarterly or even less frequently. This could be a missed opportunity for guidance and mentoring, or not, depending on the quality of the interactions.
Business plans run 5-50 pages, while a business model canvas is always just one
Documentation of the business concept is very different: On the VC side, companies are kept to a one-page business model, using templates like the business model canvas. A one-page canvas allows all aspects of the business to be considered in combination, and changes to the business model can be agreed upon and noted directly on the canvas, which is often mounted as a poster on the wall. Within corporate R&D, a business plan outlines every detail of the value proposition, market segmentation, and cost structure. For the earliest stages in the development life cycle this might be similar to a canvas, but relatively quickly the requirement expands to a document detailing product definition, market segmentation analyses, and go-to-market plans that can be 50+ pages. I have to ask: Does anyone ever read these documents? I acknowledge that eventually, the details of ramping up the business become important, but a premature focus on scaling up will divert a team’s attention from fundamentals of the business every time.
Criteria for funding uses different screens: most corporate R&D teams use some variant of net present value of cash flows as a proxy for value. Within the VC community, the validated business model itself is the currency of the realm. In many cases, critical assumptions in the business model identified by the board and the executive team are linked to a set of hypotheses, and these hypotheses are tested through customer interviews, prototypes, or market research. Some aspects of the business model may be quantitative, but there is no effort to distill the value of the business down to a single metric.
Following Steve Blank’s model for creating successful start-ups, customer interactions occur very frequently, at least every couple of weeks. Initially these interactions validate the need for a product or service, and later on they garner feedback on the prototype built by the team. Within corporate R&D, there are some organizations where the interaction doesn’t occur at all until beta testing of a product. In others, tools such as voice of the customer and focus groups are employed to gather feedback on needs and prototypes. A venture capitalist would argue that, in markets where the need is not well-articulated, these meetings are too few and far between to ensure complete alignment between the customer and the product under development. My sense is that product teams of all types could only benefit from more frequent customer interactions.
Both corporate R&D and venture capitalists shepherd initiatives through a series of stages. Within the VC world, angels provide the initial funding to explore an idea, and the seed deals that follow depend upon the refinement of the idea within a target rich environment by a smart, qualified team. Series A, B, and C funding rounds expect the validation of a market, a salable prototype, and sales at an increasing scale, respectively. There are similar stages applied within corporate R&D, but the attitude around failure is an important difference.
Within start-ups, every customer interaction has the potential to up-end the apple cart of the business model. This is a good thing: it allows the team to meet the reality of customer feedback head-on and actively explore ways to pivot, thereby aligning the product with the customer. Failures of this type are expected and the board expects the executive team to modify the business model when this occurs, often in deep ways. Hopefully this agility does not digress into a random walk that follows every customer whim; the real skill here is understanding what attributes are critical to general product success and which add unnecessary complexity.
Within corporate R&D, milestone review meetings are the junctures at which critical decisions are made on a project. If the business case no longer looks favorable, it is less likely that the executive sponsors will allow the project to continue, with or without a pivot. In dysfunctional organizations, the project is allowed to limp along without confronting the fundamental disconnect between the customer need and the product. In slightly less dysfunctional organizations, the project is cancelled; they have stemmed the bleeding, but they may also have missed an opportunity.
If you have read this far, you probably can guess my assessment of corporate R&D: Innovation is possible, but there are aspects of the venture model that should be adopted within larger corporations. Many effective behaviors in the start-up world exist not only to embrace risk, but also to mitigate it. No large organization would be open to these ideas until they have established a culture that acknowledges the potential value of risky initiatives, and accepts the need to disrupt one’s established businesses. I do realize that I have oversimplified the situation somewhat: There are large R&D organizations out there employing business models, and there are start-ups out there going to great pains to quantify business value. What do you think?
