Innovation Dilemma in Corporations: Innovation Theatre or Real Impact? — Trends, Challenges & Ways to Improve
In this fast-changing technological world we are in today, pouring money into Research and Development (R&D) and innovation isn’t enough to solve the inherent problem of companies lacking an innovative edge. I recently read an article on Forbes about the impact of R&D spent on the overall financial performance of companies, and came across the chart below, validating this idea.
The Dilemma of Innovation Programs
Over the past year, I have been talking to many mid to large-sized enterprises and one of the key roadblocks to working with them was not the budget but rather lack of culture to work with innovative startups. This became apparent when one of the deals I was working on came to temporary halt when a large Canadian company said: “We don’t know how to work with startups”. They were pretty open to learn and get us to educate them but this never came to my mind before when I was talking to these companies. As much as providing the necessary financial support and other resources these companies needed help with respect to aligning their culture to work with a startups.
More and more I’m realizing that companies all around the world are having difficulty integrating innovation into their main business. You can’t just open up a new separate office in Silicon Valley and call it innovation. When talking to key stakeholders in these organizations they were telling me the same.
According to the 500 Startups survey of 100 corporate innovation programs (ranging from pilots and partnerships to direct investments and acquisitions), 81% of those surveyed say that fewer than a quarter of of their startup pilots have resulted in commercial deals. The study blames corporations for being slow, disorganized, and too conservative.
The first time a few brave corporate innovators tried to overlay the Lean tools and techniques that work in early-stage startups in an existing corporation or government agency, the result was chaos, confusion, frustration and ultimately, failure. They ended up with “Innovation Theater” — great projects, wonderful press releases about how innovative the company is — but no real substantive change in product trajectory.
Given all the hype around the innovation and the programs built around it what has led to the ugly picture we are seeing today?
Most initiatives of Fortune 500 corporations attempt in innovation follow a pattern as follows according to the Fortune article:
Current Trends in Corporate Innovation Programs
How does your organization streamline the process for working with startups?
A little over half the companies surveyed by 500 Startups provide a short NDA and a centralized point of contact, and 35% have created a short purchasing agreement.
What should organizations do to be better?
In addition to above trends, there are 5 key factors below that play a critical role in success of these innovation programs proven by companies like Visa, Nestlé, and General Motors.
- The Portfolio approach
500 Startups found that corporations aren’t working with enough startups — only 9% do more than 50 startup pilots a year — which isn’t enough to yield a meaningful number of successful deals. They need a “portfolio” approach. Generally, 50 or more pilots a year are viewed internally as more successful and get more resources to execute more pilots.
The Architecture of Innovation suggests that the solution to shortcomings with private-sector R&D funding may lie in marrying the best of the research lab and VC models. “If you combine the scale and resources of the corporate lab with some of the intensity and urgency associated with the venture capital model, you have something that can be very, very strong,” writes Josh Lerner,author of The Architecture of Innovation: The Economics of Creative Organizations.
For example, as Harvard Business Research outlines:
In 2008, the pharmaceutical giant GlaxoSmithKline “dramatically restructured its traditional slow-paced and bureaucratic system of R&D to emulate the relatively fast pace and entrepreneurial system of biotech companies.” The firm created several specialized research teams to manage the innovation process. In order to be funded, each team is now required to pitch programs to an investment board comprising both insiders (senior GSK executives) and outsiders (including a venture capitalist and a biotech CEO). After a three-month review period, successful teams are awarded three years’ worth of investment funding. Because drug development and subsequent marketing can take years, it’s too soon to determine the results of GSK’s efforts, but preliminary indications are positive, according to Lerner.
Josh Lerner also makes a case for corporate venture capital programs, in which companies fund outside efforts to develop projects that complement their goals. A poster child for this model was the iFund, a 2008 joint effort between Kleiner Perkins and Apple to invest in companies that would develop apps for the iPhone. The result: a critical mass of applications for Apple’s App Store, which today boasts some 700,000 iPhone and iPad applications and 400 million customer accounts.
2 . The speed
Corporations move too slowly — 20% of companies take more than six months to do a deal, which may as well be six decades in startup years. Companies that “fast-track” processes like short NDAs, short purchasing agreements, centralized points of contact, and simple inbound application processes are more successful.
3. Organizational alignment
Corporates that struggle don’t have “organizational alignment” to keep startup engagements on track, get them the right resources, and ensure all parties are moving in the same direction.
The environment as much as the availability of funding will be critical. “Policymakers are paying a lot more attention to innovation right now,” Lerner says. “You see this in Washington, in Europe, and in many developing nations. Their natural instinct is to throw money at innovation. But before they do that, they need to get the environment right. Ultimately, the success and failure of innovation within these firms is probably going to be dependent not so much on more money, but on having a good environment for innovators to work in.”
5. Two-way Partnerships
And finally, corporations need to understand the relationship is not a one way but rather 2-way. As these organizations help these startups as they are working with them they get a reputation of startup friendly corporation which in turn will bring the best in-class startups to them.
“The best companies are not only streamlining internal processes to make it easy for startups to work with them, they are also invested in understanding how startups operate and grow in order to figure out how to add value to the startups they work with. By adding value to your startup partners, your company develops a strong reputation, which then attracts the best startups.” (Mike Sigal — Partner at 500 Startups, Interview)
Here is how the 500 Startup report summarizes it:
It’s clear organizations are grappling with how to implement innovation programs to their benefit. Unfortunately, they can’t afford to lag behind. So what does the way forward look like? Do they step up and make the change? Or pursue the path of Innovation Theatre?
It would be great to hear from you folks on what are your experiences with Innovation Programs today. What are your experiences? What’s next for you? Drop me a note in the comments below or at email@example.com.
Thanks to Andrew Seale, Dennis Chan and Nargiz Mammadova for reading drafts of this piece.
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