We’ve all heard the story of how Blockbuster turned down a Netflix partnership, so much so that “getting Netflix’ed” is practically a verb. As startups continue to prove that they pose existential threats to corporates, enterprises are attempting to alter their models for innovation.
But can they disrupt themselves fast enough? Investing in “traditional” R&D doesn’t cut it any more! Here are 4 ways that corporates are investing to out-innovate the competition:
1. Internal Investment, Internal Team
Typically known as “R&D,” this is the most common method of corporate innovation, which invariably receives the vast majority of investment dollars. (I mean, if YOU can’t create competitive advantage for yourself by creating new products and services, who will?)
Even if it is the best-known form of innovation, it doesn’t always mean it is well-executed. It is important that corporate take a “portfolio approach” to R&D — investing in projects that are “now, next, & new”.
- Now: Approximately 70% of R&D investments should go to creating the next generation of current product lines in current markets with near-term technologies and by enhancing the customer experience.
- Next: 20% of R&D investments should be used to develop the next generation of technology, user interfaces, markets, and revenue streams. These may manifest as: new technologies to be integrated into existing product lines, market-specific versions of existing products made for new markets, new products that are adjacent to existing product lines, or new revenue streams applied to existing product lines.
- New: The final 10% of R&D investments should be dedicated to expanding your business, products, markets, or technology beyond the adjacent. These long-term investments may mature over the course of a decade (depending on your development cycle), but learnings from working methods, technology developments, and customer insights can contribute to the organization throughout the entire course of development, which is why it pays to make these investments, even if their end result is different than expected. Some examples include developing a brand new technology, developing a new product on an emerging platform (e.g. blockchain), creating a new business model or line-of-business, or accessing a new market with a new product line.
Because the desired outcomes of each of these investment types are different, the people, processes, and decision-making are different for each of these types of investments. This seems obvious, but many R&D’s spend equal amounts of money on a “now” & “new” projects, task the same people with these projects, and stage-gate their development similarly. (I’ll take a separate blog post to talk about how High Alpha builds & develops ideas in stage-appropriate ways.)
2. Internal Investment, External Team
When attempting to expand beyond what a company knows, it is not uncommon to employ external firms. While gaining an external perspective or augmenting the skills and knowledge of a team can be valuable, it’s important to consider the desired outcome of the engagement in order to select the right type of firm:
- Management consultancies develop business strategies and perspectives on how to enter new markets or how to gain competitive advantage with a new product or technology.
- Market research firms develop trend insights based on “top-down” analyses of the characteristics, spending habits, location, and needs of a market or industry.
- Design Research consultancies develop customer insights based on “bottom-up” analyses of individuals’ behaviors and articulate unmet needs.
3. External Investment, External Team
The most interesting models for corporate innovation to me are the final two, which get significantly less attention, but are increasingly being applied by corporations who are seeing outsized returns.
While traditional versions of external/external innovation include M&A, there is an increasing trend for corporates to invest in external companies, seeking venture-size returns, as well as acquisition opportunities and new technology, known as Corporate Venture Capital.
Corporates considering starting a CVC should be aware that there is an extremely long-horizon before knowing if the investments were a success — on the order of 7–10 years. As a result, interest in CVC has ebbed and flowed over time. Some of the longest operating CVCs, however, have employed specific structural and organizational designs to ensure longevity through these cycles. In response to this increased interest in — but limited technical knowledge of—CVC, several models for “externally managed” funds have also emerged.
4. External Investment, Internal Team
Some of the most progressive corporations are reconsidering how to spin up innovative products & lines of business. One method is a “skunkworks”.
Lockheed Martin was an early pioneer of the skunkworks model, which birthed radical innovations in incredibly short periods of time through a combination of top innovators at an offsite location unencumbered by corporate processes. Xerox followed with PARC, known for commercializing the mouse and laser printers. The last decade has seen the rise of many “corporate incubators,” as companies seek to stay ahead of startups who threaten to disrupt their business models. And with good reason: only 12% of the Fortune 500 were on that list 50 years ago.
High Alpha as an Accelerator of Innovation
At High Alpha we believe that new ideas thrive outside of the confinement of corporate process. If an idea is big enough that it addresses pain for more than one company and is not core to business strategy, we believe that it has the highest chance of success if it is “spun out” of the business. We believe this because:
- There is someone who wakes up every day with the sole priority of making that business grow.
- It’s impossible to judge nascent businesses against the same standards as existing businesses — that’s not to say we don’t measure them, we just use different metrics.
- Processes kill nascent businesses — eventually the business will need processes to scale, but even then processes will have to be remade every 6 months if the business is scaling at the right speed.
Our Venture Studio partners with businesses to “spin out” great ideas and help them survive in the wild. We bring the operational expertise of company-builders and we respect the history, brand, and subject-matter expertise that our corporate partners provide. For more information on our model, check out our Partnerships page or contact Ryan Larcom, Director of Operations.
The framework for this article was influenced from a fabulous 2017 post in TechCrunch, “Analyzing the spectrum of corporate innovation from R&D to VC”.
High Alpha is a venture studio pioneering a new model for entrepreneurship that unites company building and venture capital. As Director of Operations, Ryan works with High Alpha’s Leadership Team to provide world-class support for early-stage startups birthed out of the venture studio.