Innovation Scouting: Silicon Valley Trends
Tech scouting is 30 years old. It still works.
I was recently invited to speak at Open Italy, an open innovation conference and program organized by the ELIS consortium. ELIS is a 50-year old organization that counts among its members some of the largest and most influential Italian global corporations.
The organizers asked me to talk about Silicon Valley trends that are shaping open innovation strategies in traditional industry sectors. Among the multitude of approaches to open innovation, proactive scouting tends to generate the best return on investment overall, so I focused my talk on it.
Four technology scouting trends are having a major impact in how companies strategize and execute their outward-oriented programs. These are trends that are being embraced by large global corporations in and around Silicon Valley in a variety of sectors, but they are inherently global. Not only that, these trends are also starting to inform the way mid-market, Mittelstand-like, smaller companies explore technology procurement, investment and M&A.
Less hackathons, more scouting.
Corporations have built open innovation “front-end” organizations. However, the open innovation push is still largely driven by the innovation ecosystem, not by corporations themselves. Open innovation brokers, consultants, investors and accelerators act both as promoters and filters, pushing in front of corporations the startups and technologies they have invested in, in the hope to get companies to fund or buy them.
This approach has limitations. It tends to focus on startups, it suffers from “horse-in-the-race” bias, it limits access to a small subset of the spectrum of innovation and technology sources.
We believe that, as companies become more disciplined in measuring the returns on their open innovation investments, they will look to drive the process more directly and to seek a better alignment with their overall business strategy. To do that, they will equip themselves with innovation scouting capabilities and resources, as their primary channel for inbound open innovation sourcing.
Outcomes before technology.
The realignment of open innovation from a reactive stance to a proactive one creates an obvious need to prioritize strategic scouting goals more deliberately. We are seeing the pursuit of strategic outcomes becoming the critical driver of scouting initiatives. In the past, innovation scouting may have been relegated to servicing R&D or IT, now it is also being used to envision solutions to questions of business model reinvention or industry disruption.
At FireMatter, we strongly believe in this approach. Rather than aligning our methodology along technology or innovation domains, we start from the business and functional process and its desired outcomes. Only then do we explore specific application domains and search for the right technology vendors and partners. Strategic outcomes should inform technology scouting and not the other way around.
Data is changing all industries. Data is powering advances in machine learning, informing insights into every function’s performance, creating new business models. It should be no surprise that even traditional, high-touch, consultative industries like venture capital are being affected.
New funds are being established that are designed to take investment decisions autonomously, without a single meeting between founders and investors taking place.
Business information services are now able to infer performance metrics of privately-held companies, by using aggregate credit card purchase data or location data. Technology intelligence databases can now predict future technology developments and innovation trajectories by aggregating data on research grants and patent filings worldwide.
An ecosystem of data-driven tools and methods is emerging that will allow us to leverage data to an unprecedented degree to investigate innovation and startups.
Digital M&A is growing fast.
So called “Digital M&A” happens when a traditional industrial, CPG or service-oriented corporation acquires a (typically much smaller) digital company, with the goal of integrating digital technology in its offering or launching digital-enabled business models.
According to McKinsey, 1 in 20 M&A transactions today are of the “digital” variety, but we should expect that share to grow to 1 in 4 in a short few years.
We should expect this trend to continue, as more and more large corporations edge their bets against disruption through M&A. We also believe that digital M&A will not remain the domain of large corporations, but it will become more prevalent among mid-market multinational companies, especially those in highly competitive and rapidly commoditizing industries.
However, digital M&A requires approaches that are fundamentally different from those required to manage more traditional transactions.
“Three out of four U.S. executives (81 percent) agree or strongly agree that companies cannot rely on their current M&A capabilities for digital deals.” — Accenture Strategy Research Survey, 2017
From finding the right targets, to valuation, to structuring of the business case, to integration, digital M&A requires skills and competencies that are a combination of technology expertise, scouting discipline and financial modeling.