Everybody talks about innovation in corporate world. Already a few years back we understood the math — the average lifetime of an S&P 500 company was 61 years back in 1958 and 18 years as of 2012. At this rate, 75% of the current S&P 500 companies will be replaced by 2027¹. We’ve all heard the phrase “companies must reinvent themselves or die”. Now we really see it.
The economy is changing and tech companies pass the $1T in valuation thanks to their innovation. Financial institutions and economists now follow them in new indices, referring to the FANG² more than to the SPX as the former’s market cap recently equated with the latter’s bottom 300 companies all together.
The Call For Digitalization
New industries are now waking up to the digitalization call. If in the past tech innovation was mainly relevant for the tech giants, then the acquisition of Whole Foods by Amazon brought all retailer players to seek how to use technology to better engage and serve their customers, shorten or eliminate lines at the register or create a self-checkout and unify offline and online experience. Consumer Packaged Goods that constantly had to innovate around their core with new features and benefits (the McKinsey H1 or ‘Horizon 1’) were used to a very specific type of innovation process, with R&D teams working with product and marketing teams, now need to understand how technology is playing part in shaping their future, no longer H1 but H2 and H3, or, in other words — how to create new products or benefits for their customers not just new features, or complete new business models not just same old market play.
It is now the turn of traditional industries. Oil and Gas, utilities, production plants, construction and manufacturers. Technology is affecting every industry in different aspects of their business, from saving costs to predictive maintenance, supply chain through to customer engagement to protecting plants from cyber attacks. New industries are now open up for change.
The Missing Link: Executing Innovation Processes
There are great research articles, books and consulting firm blogs discussing digitalization and this article is not intended to replace them. The missing piece of the puzzle is still the execution or the way innovation is being implemented.
Working with more than 300 corporates to understand their pain points and needs in order to match them with technology startups, we see different execution models. There is hardly any one methodology that is common to all (except maybe for the major technology firms). There is no one playbook for a successful innovation process written yet for traditional industries, be it retail, industrials, CPG’s, oil and gas, even banking or insurance. Some do it exceptionally well but writing that one playbook is still a WIP.
So what models do we see? How do corporates practically go through their innovation process? What works and what fails when working with startups?
I’ll divide this article into three, where part 1 will discuss innovation approaches, part 2 and 3 will lay the 10 commandments of do and don’t with startups, starting with the Do’s in part 2, and part 3 will discuss mainly the don’ts.
What general models do we see of corporate innovation?
If we had to divide the innovation process into two main categories, it would be the “bottom up” and the “top down” approaches.
The Bottom-Up Approach
The bottom up approach is where companies start meeting startups ground up. Corporates go on ‘innovation tours’ to Silicon Valley, Israel, Europe, Singapore, to meet startups and ecosystem players. To see ‘what’s out there’ and get excited. This is what I call the bottom-up approach to innovation — figure out what’s out there first and narrow down your options. The major challenge with the bottom-up approach is that this creates startup fatigue. For the past 4 years many Fortune 10k had visited the Valley and Israel, for example, meeting startups to learn about innovation, what’s out there to get the building blocks of the plan and next steps. To meet some startups to get inspiration. What created that fatigue is the fact that the scarcest resource of a startup is CEO time. Driving, parking, presenting, and driving back — took startups long hours of their time, for, in many cases, being an ‘actor in the venture tourism show’. This was not the case with every visit and many were actually successful yielding great commercial business out of it, but it was enough to have several hundreds of the more venture tourism visits in the past few years to create that impression by startups.
Remember the loss aversion of Behavioral economics? That kicked in and left a strong mark. The good startups, the ones that corporates want to work with, are now highly sophisticated. When we invite them to meet corporate executives of Fortune 50 companies, they now first ask — who are the visitors? Do they have experience with startups? Do they have a real intent to collaborate? Will they pay for a POC? They no longer just come to present or extend their network for a distant future potential relationship.
Startup ecosystems are small, especially ones that are so successful (thanks to that condensed environment, among other factors actually) Startups talk, and rumors move fast.
The good startups, the ones that corporates want to work with, are now highly sophisticated.
The bottom up approach is a good way to learn about ecosystems and hear about technologies that otherwise one would have never known that existed. For that method to succeed well, communication with ecosystem players and expectations management should be handled carefully. Corporates should build a strong brand for themselves as partners to startups and so communicating the exact goals prior to the visit and post visit is critical to build that brand.
2. The Top-Down Approach
The other approach is the top down method. Corporates analyze what their internal pain points and issues are, what are the technology or strategic problems at home, where their customers’ journey fails and why, before going out to seek innovation. Whether done with internal or external teams, innovation VP or consulting firms, understanding the exact pain points is critical for corporate innovation to succeed. Working with top management, as well as leaders and heads of business units, to understand the full picture of the business, is essential. Innovation touches upon not only core product and customer engagement, it is also significantly relevant to the CFO and HR, but also to IT such as cloud migration, security, IT, automation, devops and ML ops, data on its entire journey stack from collection to pipeline and insights generation, data science tools and much more.³
The large organization is so siloed that it needs one concentrated team or individual to have a holistic view of the pain points and tie them back together to a true, fundable and championed innovation plan. In many cases there is a Chief Innovation Officer assigned to that task, but corporates should understand that this role is much more important than they have planned for, that without budget, mandate and CEO endorsement, this might be wasting money and hurting the company’s reputation in the eyes of startups.
So, what’s the secret sauce to success and what do startups want?
- Do — Publish a CEO Endorsement and Innovation Statement
Prioritize innovation at the very top
Driving motivation for change should start from the top of the organization. We see the most successful innovation execution when the CEO provides her/his blessing with a clear innovation vision and a clear message as for the next step. On the other hand, we meet teams with wonderful ideas that get almost to the finish line but than fail to implement stuck in bureaucracy or internal politics as the organization is too slow and does not have a clear next step thus people are too afraid to make a change.
Corporates might want to create an ‘innovation credo’- similar to the traditional statement of values and beliefs of the company, with the same goal of guiding decision making only that the innovation credo will be catered towards the goals and next steps of innovation. Innovation spirit should be encouraged and employees should be encouraged to collaborate, perhaps even rewarded (recognition is a reward too), in order to build the team spirit and show a clear direction.
2) Do — Dedicate a Powerful Team with a Real Mandate
Theories are great, but when talking execution, it’s all about the people.
We have seen organizations that declare their march into innovation but are stuck in long processes politics and bureaucracy.
The successfully innovating corporates are the ones we have seen that allocate a dedicated team to the process, but more importantly, equips them with budget and a real mandate with actual KPI’s. Too often there will be innovation teams that are excited about their work, but they are not given the right tools or mandate to succeed. Moving from Horizon 1 to Horizon 2 or 3 requires a holistic, 30 thousand feet high view on how things interconnect and alignment of departments or business units is required to be orchestrated. The demand for more consumer data should involve the CTO or CIO group with enabling infrastructure technologies that support that, but on the other hand the dedicated team should be supportive to everyone and not overload CTO and CIO groups with too many new propositions without their buy-in. Orchestration is a key success factor and alignment could take time thus innovation teams have a major challenge and need support straight from the CEO. It’s all about people and the most successfully innovating corporates that we meet are the ones that found a leader that can connect the dots between technology and strategy but also empathetically connect to executive’s own professional needs within the organization. This is sometimes more art than science and the organization often times behaves like a body that discovered a virus and attacks itself, which leads to a system failure.
The successful traditional companies are the ones that have found the right leader that directly reports to the CEO or has a strong mandate and carefully and smartly brings the whole organization on board.
3) Do — Start with Pain-Points and Define Them Well
Define the problem and execute. Action is key.
Going through digital journey corporates run innovation workshops, strategic sessions, offsite meetings, out-of-the box thinking and agile trainings. All of these are important steps but, as in startup land, there should always be actionable next steps in order to move forward. Defining your pain points well is one of the most critical stepping stones to a practical and successful innovation execution.
Verbalizing company pain points does not have to be a 30 page brief (we’ve seen that too), but a short summary about the problem definition is pretty much sufficient to start working with and finding the right matching startups.
As mentioned earlier Pain points usually come from the core product teams and business units, but to augment and support innovation, one should consider and discuss also with other business units and support group. This will help align the organization.
4)Do — Create Quick Wins and Celebrate Them
Bringing the whole organization on board.
Every POC, partnership or other collaboration with a startup should be celebrated and communicated internally to create that positive feedback loop and emphasize the innovation culture. Fear from something new turns into fear of missing out.
Pick one or two of the lowest hanging fruit in the form of pain points that are relatively faster to solve and thus set a goal of one or two commercial engagements with startups for the first year (using the startup as a solution or a technology provider). Work with funds and ecosystem partners to find these startups and than, very important — celebrate those wins. Communicate them internally as well as externally. Build this into your firm-wide evaluation process and into a reward system to align everyone to think innovation.
5) Don’t — Ask for Just Any ‘AI Startup’ when Scouting
AI is not a pain point nor a solution, it’s an enabling technology
When speaking about innovation the buzz word is now AI. Consulting companies are publishing articles saying that if you are not an early adopter of AI you will loose the game and so large enterprises now have a great fear of missing out. We often get requests from enterprises to find all “AI companies” in a certain geography, and while indeed there is a strong need to implement new technologies and stay ahead of the curve, executives should realize that
AI is not a solution per se: it is an enabling technology. AI runs across solutions and across verticals. AI is a technology that could be powering customer engagement, data analytics, payments, cyber, IT solutions, predictive maintenance, robots and many other solutions. It is a bit like saying — I want an app. Finding the pain points should be the first step, your technological and your strategic issues, your clients thoughts of their customer journey and where these get stuck, than adding artificial intelligence on top of that needed solution is a plus. Startups now use off-the-shelf AI engines or self built AI. It is challenging to distinguish between the two without speaking to the startup and it is more challenging to find the self developed ones. This attests to the strength of the development team and solution but does not necessarily mean this is the right or best answer for your pain.
So, unless you have a major group of developers looking for ML/AI supporting or enhancing tools, you should seek for the topic or pain point always first.
6) Don’t — Disappoint Startups During and Post-Meeting
Assign a loyal point of contact
As mentioned in Part 1, startup CEO’s most scarce resource is his/her time, communication is key with startups and working only bottom up or running ‘innovation tours’ is only hurting corporates’ reputation. We see that the most successfully innovating companies are assigning at least one person that will interface with the startups and be the gate keeper on one hand, for the organization not to be overwhelmed with the many startups knocking on their doors and for the startups on the other hand to feel that you are truly approachable. Good communication with the startups will help you position your company as a partner to startups and to the ecosystem. It is also important to communicate honestly. Startups prefer getting a ‘no’ quickly, and move on rather than receiving very polite or vague answers or not getting back to them. My greatest advice to corporates here is– email them or have a partner email all of them a thank you note after the meeting, and say no when it’s not relevant. They would appreciate that much more than a polite silence. Some corporates ask us to be that buffer and that also works well(4).
7)Don’t — Disappoint Startup Post-POC
Death by POC
Creating quick wins as mentioned in rule number 4 is important but we have seen companies working with tens of startups on POC’s (proof of concepts) with very low or no pay and than (rightfully so from the corporate angle) cutting off a large percent of them as it is not sustainable to keep up with so many options. This might yield the very opposite result. Beware of ‘Death by POC’ as startups talk, and again, your reputation is at risk. It’s a ‘seller’s market’ now (August 2018… this is cyclical, let’s see how economic and geopolitical conditions will affect things in the future) the good startups are now more sophisticated than ever, looking for good partners. Don’t go for a POC just for the sake of having a POC. Go for less, but better matching Proof of Concepts and if there is no real budget or need for the solution, if there is no decision making power to support a post Proof of Concept long term engagement than skip it. The goal is to have a high conversion rate, for internal efficiency but also external in order to position your brand name as a partner to the ecosystem.
8)Don’t — Think That Money Can Buy Everything
We host two Fortune 10k companies every week that come to seek innovation in Israel. Often the question is — what do we do now in order to move forward with our digital strategy. There are many different options to work with startups and investment is not the only solution. There are indeed technology areas that are not well funded and than investment could be the right choice in order to build or support a new ecosystem, but just another CVC does not guarantee successful digital transformation. As mentioned before, the recent years economic drivers have brought an imbalance in available investment supply and demand, and thus sometimes funding, wherever funds are easily available, should not be the only approach. Sometimes just working with startups on commercial contractual arrangements could be a good first step into your digitalization process, and if you do decide to go down the CVC route, think strategically how you tie it back into commercial relationship to add that value to the startup.
*This part will discuss two out-of-the-box Do’s:
9) Do Go Out-of-the-box to connect several startup solutions into one
The term role-up traditionally refers to a practice where Private Equity firms acquire several companies in order to merge them into a full capability solution. Here the intention is not acquisition but the commercial engagement with two or more startups to create a full solution, as often times there will be a gap between what startups offer to what your needs are. The most innovative work with startups I have seen is where corporates took more than one startup and connected their solutions to generate a platform or a comprehensive solution that matches what they were looking for. This requires a new set of capabilities in your team, but is providing a unique position for your digital journey. This is also a call for startups to connect to other startups on their business development, in order to be able to expand their offering and their reach, staying careful though, not to lose focus.
10)Do — go out-of-the-Box and Collaborate with Similar Industry Players
Grow the pie
working with similar corporates to yours seems counter-intuitive when you think about innovation. After all digitalization is a strategic move that is meant to keep you not only alive, but to take market share, stay ahead of the curve, it means beating competition.
From startups point of view, the top down approach is in most cases not the reason for their birth. This means that the way most startups are formed is that there is a technology that is looking for a market. Rare are those startups that start from a very specific corporate pain point, and than building a technology and team around it. After all these are different persona’s mostly, ones that experiences the corporate pain point, and one that starts a new venture.
Also, a solution for very specific problems mean a very small target market, which in turn means a low potential revenue source, and that means startups won’t survive if they have a too narrow solution, let alone in a particular industry.
Thus, when it comes to industry specific pains, it would actually make sense to get together with some of the other players in your field. Most ideal would be similar players that are working in different geographies thus the mutual areas of competition is minimized, but in certain cases even working with competitors would make sense in order to grow the pie.
This way you could truly disrupt the market and make a change, and allow the creation and growth of new non-organic technologies with more than one customer.
Good luck with your digitalization journey.
¹Collective Disruption, Michael Docherty
²FANG / FAANG — Facebook, Apple, Amazon, Netflix, Google/Alphabet
³We have worked with enterprises that had tried to develop some of these IT tools in house, in some cases taking long time and major budgets, while there are strong startups and scaleups that have already managed to crack those technology challenges and offer a reliable, cost-effective solution.