The difficulties of innovating from within

Over the past two years, I’ve had the opportunity of being both an entrepreneur and an intrapreneur. For the former, I launched a mobile payments startup called Elepago(you can read our Eulogy here), and for the latter, I currently work in a financial services company as an Entrepreneur in Residence. My experience highlights two very different approaches to innovation, and I’d like to share those in order to show why it is so hard for a company to innovate, no matter how hard they try.

At Elepago, in less than a year we managed to build both an online payments processor and an integration with various different POS for restaurants. We basically were trying to build both Stripe and TabbedOut at the same time. This was mostly due to the fact that the infrastructure for processing payments online in Mexico is extremely lacking, so we had to improvise. We did all this with a team of less than 5 and released more than 3 different versions of each program.

An interesting aspect of building this technology was that most financial institutions (banks and processors) told us that we were crazy to build this product because regulations surrounding money in Mexico were too strict. I’ll come back to that later, but a big part of why we didn’t care is because, when you’re startup, regulations don’t apply to you. Of course I don’t mean literally, but in practical terms, you are so small that no regulator will bother looking at you, you have a 90% chance of closing shop in less than 2 years anyway.

Fast forward to working at the financial services company, I’ve been here 9 months and I’ve yet to get a single product out the door. Not only that, the amount of people involved in the project is well over 30. There’s operations, compliance, development, maintenance, treasury, to name a few. When I proposed this project, my initial timeline and team were much smaller. So what happened? Regulation.

Let me back up and put some perspective, let’s think about McDonalds and Target. Back when SuperSize me came out, McDonalds became the poster child of all things wrong with our current diets. Granted, fast food is a huge industry, but it’s so easy to target the big ones, and they’re the first ones to get slapped with fines. If a smaller version of McDonalds were selling the same products but only had 5 stores, they wouldn’t even care. No one’s going to look their way. Same thing happens with Target. We hear about the massive (understatement) credit card breach and now Target has to pay USD$10m in settlements. However, most cybercrime gets covered up and we never hear about it. If a startup messes up their encryption and 100 credit card numbers get stolen, they can simply hush it up, fix it, and keep working.

The problem with these fines is that they discourage risk taking, because the cost is too high. As an entrepreneur, these don’t apply. The chances that you’ll ever come in contact with a regulator in your first five years are basically zero. Law is an afterthought, and this allows you to focus on fast iterations of a product, with an extremely quick time to market. Granted, big institutions can adopt some entrepreneurial methodologies, and some like GE claim that it has helped then develop entire new business areas. However, their cost of innovation will always dwarf that of entrepreneurs, if only because of their sheer size.

Granted, these sound like excuses but that’s not the point. The point is that big companies need to be aware of these challenges. Whether they choose to innovate from within or acquire other startups, these same kinds of problems wil keep coming up. Companies need to hire people that inspire change, because unless they can convince any and everyone who works with them that their innovation is worth working work, things wills stay the same.