Elliott Parker of High Alpha Innovation on unlocking new opportunities and designing new businesses that didn’t exist before!

November 16, 2020
By Stu Willson

“You’ve got to innovate. It’s the key to long-term survival. It’s important to society. This is what we need our scaled enterprises and large institutions to do. We depend on the collective learning and wisdom of these large organizations… We need these institutions to continually learn and adapt and grow and innovate. The problem is, they’re not designed to do that.”

Elliott Parker is the CEO of High Alpha Innovation (HAI), a venture studio that works with large companies to create startups designed to solve specific problems and foster innovation. High Alpha Innovation launched in early 2020 as a spinoff from High Alpha, the Indianapolis-based venture studio founded in 2015.

Helping scaled enterprises find ways to innovate through the strategic deployment of startups is at the center of HAI’s mission. Elliott started out as an entrepreneur and then spent close to a decade working as a consultant at Innosight with Clay Christensen, who brought the idea of disruptive innovation to the forefront of American business. Elliott’s work at HAI brings together the ability of startups to drive change quickly with the power and expertise of a large company.

In our conversation, we cover:

• Why the venture studio is not a silver bullet but is the best thing Elliott’s seen so far
• How low return R&D and expensive M&A have made innovation so crucial
• When outsourcing innovation makes sense
• How HAI is trying to solve the incentive structure issue with innovation
• Focusing on the customer foremost
• What Elliott learned from working with Clay Christensen
• Why big company innovation is so important

Hi Elliott. Can you introduce yourself and High Alpha Innovation?

I’m Elliott Parker, I’m the CEO of High Alpha Innovation. We’re a venture studio, which is a combination of a build function plus a source of capital. It’s different from a venture fund, which is just capital, or from a startup studio, which is primarily just the build function. A venture studio is a combination of the two. High Alpha has a team of people who build companies, and a venture fund that we invest into those companies, as well as other existing startups. Over the last five years we’ve launched 27 companies out of the studio, and we’ve invested in another 30 or so existing startups, with a focus on enterprise SaaS. We’re now able to launch a new company every four to five weeks. Even in the midst of COVID, by the end of the year we will have launched 10–12 companies during 2020.

Earlier this year we spun High Alpha Innovation out of High Alpha to answer the question, “What would need to be true for us to launch 200 companies in a year?” High Alpha Innovation is how we make the venture studio model accessible to corporations and partners. We team up with scaled enterprises to drive innovation through the systematic launch of external startups. We have a team of designers, strategists, innovation experts, and entrepreneurs who are very, very good at working with scaled enterprises, going to the boardroom, working with C-suite executives, designing new startups and getting those companies launched.

We’ve worked with about 20 different Fortune 500 companies. At the moment, we’ve got about a half-dozen startups that we’re working on getting launched and out the door. We also sometimes team up with partners to build wholly new venture studios modeled after the High Alpha approach.

We’re solving a pretty hard problem. Ever since Clay Christensen wrote “The Innovator’s Dilemma” 20-plus years ago, a lot of us have been trying to figure out how to solve the problem of innovation in big organizations. This challenge of transformative innovation in scaled organizations is really critical. I think it’s actually one of the most, if not the most challenging question of our time. We need our institutions and scaled enterprises to be effective, to be good at what they do, and we need to be able to trust them. Right now they don’t feel as effective as they once were. They’re not trustworthy, in many cases.

There are certain things that we can’t do as individuals, that we have to do through cooperation. These laptops we’re talking through right now, they’re built by corporations, by collaboration of individuals in a corporation. A big part of what we do is trying to determine how to enable these corporations to thrive and be effective in a world where competition is getting harder, and innovation is getting more expensive and harder to execute than it’s ever been before. What most companies have been trying for the last 20 years just isn’t working very well.

The venture studio model is not a silver bullet by any means. It doesn’t solve all the issues around innovation in scaled enterprises. But in many ways, it’s the best thing I’ve seen so far.

How does what you do differ from what else is out in the market? There are innovation consultancies, there are co-creation studios. How does the High Alpha Innovation approach differ?

Our model is structured around this idea that success is measured by what we build and put out into the world. Our goal is to launch new companies — that is our number one priority — so that is what we are incentivized to do. We’re not incentivized to go earn recurring consulting fees.

The other thing that’s different is we are focused almost exclusively on building external new startups, with skin in the game. I say almost, because we will generate ideas that should be developed inside of big companies and help them do that.

Finally, we approach innovation from the lens of venture capitalists and entrepreneurs. We are not a consulting business that’s now shifting into corporate innovation. We come from the other direction. We started out as pure company builders, and have over time, partnered more and more with scaled enterprises to do that.

What is innovation? And why is it so important to big companies?

A former colleague of mine, Scott Anthony, has a very good definition for innovation, which is really simple: he says innovation is something new that has impact. And I like that. I like its simplicity. You can get into the details of different types of innovation, but fundamentally, it is something new that didn’t exist before. And it only matters if it has impact in the world.

And why is it so important for companies today?

It’s key to long term survival. Companies can’t survive if they don’t continually innovate. Some former colleagues put together a study a few years ago, where they looked at the lifespan of companies on the S&P 500 — that lifespan is shrinking.

Competition is much fiercer than it used to be. So you’ve got to innovate. It’s the key to long-term survival. It’s important to society. This is what we need our scaled enterprises and large institutions to do. We depend on the collective learning and wisdom of these large organizations, the way that we collaborate as large groups of people. We need these institutions to continually learn and adapt and grow and innovate.

The problem is, they’re not designed to do that. And so the challenge is: how do you simultaneously run these scaled enterprises in a way that is effective, that keeps them doing what they do and doing it well, while at the same time preparing for what’s going to come next, and building what’s new? Doing those two things simultaneously is probably the biggest and most important challenge that corporate executives face right now.

Let’s talk about the challenge of incentives. From the perspective of someone starting a company outside of a large organization who owns 100% of it, they can then raise capital to de-risk it and scale it. But when it comes to corporate co-creations or incubations, there are a lot more players involved. So how do you solve that dilemma?

Incentives matter a lot. One of the things we see often in internal incubation teams is that you look at the outside world, you look at startups and the way that they function and say we need to replicate that but we can’t replicate it exactly inside our company. We can’t have somebody make more than the CEO does! At the same time, if what you’re working on doesn’t work out, you’ll still have a job.

So you end up capping both the ceiling and the floor for the individuals leading these efforts. And that doesn’t motivate. It doesn’t work the same way as it does out in the wild, when you have an entrepreneur who’s got a very binary set of outcomes — I could become fabulously wealthy through this and never have to work again, or I might go bankrupt. Both of those factors are very motivating and very hard to replicate inside a big company.

Another problem inside of large organizations is that they are incentivized broadly for driving capital efficiency, for removing variability and risk from the organization. Jack Welch famously said, “variation is evil,” and set in place this idea within GE, and across industry, that with Six Sigma, operational variation is eradicated. In my opinion, there is a place for that mindset, but it’s been horrifically overdone. It is a huge mistake for most companies to eradicate variability from the organization altogether.

Over the last 50 years, the way that we measure the success of companies is in terms of ROIC — return on invested capital. As a result, companies are working hard to improve their ROIC. We’ve seen the amount of capital on company balance sheets increase dramatically over the last few decades. You’ve got a huge increase at the same time in share buybacks, which in some instances can be a very useful tool. But the extent we’re seeing them is a likely sign that these large companies don’t know what to do with the capital, so they’re handing it back to investors saying, “We think you can get a better return on this capital than we can.” It’s raising the white flag, saying “We’ve become very, very efficient, but we no longer know how to innovate and do something new.”

There’s a fundamental problem in the way that we manage our scaled enterprises around this capital efficiency issue. A lot of the innovation inside of big companies is done for the purpose of driving capital efficiency, short-term supply chain optimization, or incremental improvements to product. That does not create resilient companies in the long run. It’s a fundamental problem of incentives inside of companies: they’re not willing to sacrifice capital efficiency in the near term to go do the learning that they need to do.

If you look at the way that companies have been set up to innovate over the past 20 years, the typical recommendation is to set up an innovation team, wall them off from the organization to some extent, enable them to go find some new opportunity areas in which to pursue innovation, and give them the funding they need to go execute. That sounds good in principle, and it is good for pursuing incremental innovation. But the incentives aren’t there to go out and do the transformative stuff. As a result there’s not a single example of a company that I can think of that has fundamentally transformed their business model by setting up an innovation team and saying, “Go find some new stuff for us to do.” There’s not a single example of it. And yet, that’s what everybody does. We’ve got to rethink the incentives and rethink the way that we are managing those incentives to pursue innovation.

How do you solve that? How do you create the incentive structures that give both the large company and the entrepreneur comfort, as well as the market comfort to invest in the business with a capital structure that is set up to scale?

It’s a tough problem to solve. Scaled enterprises have established systems of governance, processes, talent pools, and incentives designed to drive capital efficiency, to coordinate vast resources and assets. That set of tools is not designed to go out and learn new things. It’s designed to execute, not to learn. And these are two fundamentally different sets of activities.

What we do in the venture studio model is a workaround in some ways. We have in place a set of governance, processes, access to talent, and incentives that is designed to drive startup creation, that is designed to propel learning. We say, “look, we’ve got this set of tools that we can use that’s been proven to launch startups and to do it systematically and consistently. Let’s pull that off the shelf and deploy it in your context.” If we can do this with partners from the outside, or other investors, it’s much more likely to go quickly and to get to scale faster than it would if we’re deploying the incentives, governance, processes, and talent of your scaled enterprise.

Now there’s still an issue around making sure the incentives work for the scaled enterprise, for the entrepreneur, and for other investors. One of the challenges of venture studios broadly is determining the cap table at the time of launch. Some venture investors out there will happily invest in startups coming out of venture studios because they see the value of those studios, the support that they give to the entrepreneur, the increased probability that that company is going to succeed.

Other venture investors argue the opposite side: they wouldn’t invest in a company coming out of a venture studio because the venture studio takes too big an equity stake in these businesses. When you do this with a corporation it introduces even more variability. There are some investors who are comfortable with that, and some who aren’t as familiar with it, or knowledgeable of it, and don’t see the value yet, but I think they will. I think we’re at the start of a big shift.

Why should companies outsource part of their innovation strategy? And which parts?

Over the last several decades, even the past hundred years, corporations have innovated primarily through two approaches. One is R&D, technical innovation done internally inside a company. A good example of this is Bell Labs. The other one is through M&A. Until the ’70s and ’80s, R&D was a big driver of transformation. Then financial innovation happened and M&A became a much more typical vehicle for driving corporate transformation.

Now the problem is that R&D has become much more expensive and difficult to execute than it used to be, but so has M&A. The average price of an acquisition by a publicly traded company in the last 10 years has doubled. This means that good deals are harder to find, so companies are left wondering how to innovate in an environment where R&D and M&A just don’t work like they used to.

We’re living in a world right now where innovation is much more distributed and decentralized than it used to be. Cheaper processing cost is a big driver of that and impacts every industry. Through ready access to information, people are able to tap into expertise, and to learn quickly. In the last 20 years, we’ve had financial innovation that has made capital much more accessible to the individual entrepreneur.. In the past, only scaled enterprises or governments had access to the kind of capital that small teams can now tap through venture capital and other means. So innovation has become much more decentralized and harder to do inside of scaled enterprises. To that end, they should actively be looking for ways to outsource innovation.

Nonetheless, there are certain types of innovation that are done particularly well inside a scaled enterprise. Any type of innovation that drives capital efficiency can be done quite well inside a scaled enterprise, because that is what the system is designed to do. We can make modest product improvements or improve our assembly line efficiency, for example. Those are all forms of innovation that are done really well inside the enterprise.

When there is a lot of learning required, when the path to a solution is ambiguous, when the solution is likely to compete, or conflict with the core business in some way, that type of innovation is much better done with outside partners, and often through the vehicle of a startup that is designed to learn, to move quickly, and to get to scale fast.

Often you see large organizations run one or two incubations. If one fails, they shut it down. How do you create a system that allows for a portfolio of incubations?

The short answer is you’ve got to minimize the cost of taking those shots. We tell our corporate partners all the time that the best way to maximize return and minimize risk in an environment of uncertainty, like we’re in right now, is to run as many experiments as you can at the cheapest possible cost per experiment.

Building external startups is a form of cheap experiment in business, relative to what it would cost to develop something internally in terms of the time, people, and resources deployed. Startups are fantastic learning vehicles; they’re designed to do just that.

At this point, when we team up with a corporate partner, we can launch a startup, in less time, and for less money, than these scaled enterprises would deploy to go build a proof of concept with an existing startup. You’ve got the scaled enterprise that’s got a point of view, you’ve got an existing startup that has a point of view, and they spend a lot of time reconciling that to go develop their proof of concept and align. We start with the needs or the problem that the scaled enterprise is facing or their customers are facing, and we can go build a company in 90 days with a team and product, for less money than it would take to invest in a proof of concept.

We also advocate for setting a fairly low bar in terms of making a launch decision. Coming at this from a venture lens, if the idea and the team look plausible, favor launching it because the new business is going to be part of a portfolio. It’s hard to know in the beginning which part of the portfolio is going to work — part of the goal of doing this is to build optionality, and that happens by taking a lot of shots on goal.

Should companies focus more on their customers or capabilities? And does it depend on what type of company we’re talking about?

Both — but if I had to choose, the focus should be more on customers. Strategy is how you leverage your resources to overcome obstacles and achieve an objective. Capabilities are fungible, meaning to the extent they’re unique, you should leverage them absolutely. But capabilities can also be borrowed, acquired, learned, or adapted. The thing that matters most is organizing around those jobs to be done with the customer. You can go out and get the capabilities you need if you’re if you’re creative and entrepreneurial enough as an organization.

Can you talk a little bit about your experiences with Innosight and Clay Christensen?

I spent close to seven years working at Innosight, which is the strategy and innovation firm Clay Christensen founded about 20 years ago. I am not a consultant by nature. I am an entrepreneur, both before Innosight and after But I was a long-time fan of Clay Christensen and thought, if I ever had a chance to work in his orbit, I would drop everything and do it. The chance came up and I went to Innosight in Boston. I learned a ton, working with more than three dozen companies in 16 countries. It was a fantastic learning laboratory trying to help these companies overcome the innovator’s dilemma.

We apply a lot of what I learned there at High Alpha Innovation — the theories of disruptive innovation, jobs to be done, modularity. There’s a way of thinking, some things that Clay was really, really good at, and that I admire. He did two things that we try to do at High Alpha Innovation: first, he would go through the theories and figure out which might be applicable, and what we could learn from them. Second, when Clay felt like he was getting stuck in solving a problem, he would often consider it to be an issue of categorization more than anything.

This sounds simple on its face, but it’s actually a pretty deep insight. When we’re trying to design new businesses and think about solving problems, people are often stuck because of the way that they’re categorizing things. And you can unlock new opportunities, design new businesses that didn’t exist before, and spot things that other people haven’t spotted by redefining the categories you apply to a situation.

Can you give me an example?

One example is a project where we were trying to figure out how to reinvent the business models around vertical lift — helicopters. We were working with a large defense manufacturer that sold military-grade helicopters to governments around the world. There had not been any major technical innovation in helicopters for 50 years, and they brought us in and, in the course of six weeks, expected us to come up with some great new insight about how to reinvent the business of helicopters.

I went to Clay for advice. He helped me rethink the categorization and to redefine the performance dimensions that mattered. Rethinking access to access to helicopters led us to come up with some new business models that hadn’t been imagined before, fractional ownership and things like this in the space, that I think were pretty creative. So often, recategorization can help unlock opportunity.

Outside of Amazon, Facebook, Google, Netflix, and Microsoft, what are the most innovative big companies you’ve seen? And why?

The challenge is that innovation success is a lagging indicator. The results we see in companies in terms of innovation right now are from seeds that were planted five to ten years ago. So five to ten years from now, we’ll look at companies and say, “Oh, yeah, they’re, they’re amazing.” But right now, the results may not be obvious.

With that said, Silicon Valley Bank is trying very hard to reimagine the way that it innovates and pulls in its ecosystem to drive that innovation. Procter and Gamble is another example of a company at scale that is deploying a full suite of innovation tools, everything from corporate venture capital, internal incubation, outside construction of startups. I think that’s going to drive some good results, to the extent they can stick with it.

Any last thoughts?

Building new things is critical. And it’s very hard to do. This problem of making our scaled enterprises more effective, and trustworthy, and capable, is probably the most important problem that we collectively face right now. For those who are fighting the good fight inside of corporations, or government, or universities trying to make these institutions more effective, what you’re doing is really, really important. I wish you the best of luck. It will drive our success as a society and civilization for decades. It sounds like I’m overstating it, but I don’t think I am.

And how can people reach you?

You find me on Twitter @erparker or through High Alpha Innovation’s website, highalphainno.com.
-

Radicle’s Debrief framework helps you understand and validate a new market in 30 days — Learn more.