Corporate Innovation Blind Spots

Watch out for what’s right behind you

Nearly seven years ago, Marc Andreessen penned an essay in the Wall Street Journal titled “Software is Eating the World.” Both marveling at and foretelling software’s growth path, Andreessen — intentionally or not — fired a warning shot to large corporations that software’s capabilities would continue consuming product lines, human capital, manufacturing processes, and even entire businesses.

Legacy firms have interpreted Andreessen’s prophecy two ways. In the literal sense, firms’ global share of capex spent on software has increased significantly relative to other sources of spending. CEOs have been pressured to undertake digital transformations, with software playing a starring role. Simultaneously, incumbents have interpreted Andreessen’s message preemptively — if software is today’s existential threat, what is tomorrow’s? AI? Drones? VR? Blockchain? Corporations juggling these medium and long-term apprehensions along with immediate concerns — such as beating quarterly earnings numbers or responding to a competitor’s price drop — are analogous to a driver on the freeway, watching the dashboard while storm clouds gather ahead.

Seemingly logical, these reactions ignore Andreessen’s real lesson. Extending the car analogy, corporations have been responding to the threat of software and disruption as though the storm were solely on the horizon, far away.

But software has been around for decades. Lotus 1–2–3 and Microsoft Excel — once called “something of a grand experiment in the software industry” — famously transformed work productivity in the 1980s. Windows and Java were ubiquitous standards during the 1990s and early 2000s. Software’s evolution from on-premise deployment to subscription sales over the internet (commonly called “SaaS”) began in earnest with the launch of Salesforce in 1999. While software’s mode of delivery and pricing models have changed, software’s underlying utility has remained the same. Corporations were already familiar with it. Software was not an ominous new storm; it was an overlooked figure in corporations’ rearview mirrors.

This stresses the need for corporations to look not only ahead, but also behind — like checking mirrors for blind spots. More specifically, corporations should monitor emerging technological developments or market trends that are entering or accelerating along their industry’s current road, eager to speed by. High potential and trendy technologies such as AI and blockchain may represent the future of software or digital information storage, yet their significance will require maturation. These are horizon threats. In contrast, more “obvious” trends — from continued innovation in cloud computing to increased enterprise adoption of the Internet of Things (“IoT”), to the proliferation of online marketplaces — are creating impact today. All three trends (cloud, IoT, marketplaces) have been in motion for over half a decade, representing possible “blind spot” threats if they had been heretofore ignored. The challenge is summed up by Benchmark’s Sarah Tavel: it is “not about predicting the future but seeing the present clearly…to invest in the use cases that [exist] in the present.”

Indeed, neglecting to check blind spots can be catastrophic. Blockbuster famously ignored Netflix, with CEO Jim Keyes commenting in 2008, “I’ve been frankly confused by this fascination that everybody has with Netflix…Netflix doesn’t really have or do anything that we can’t or don’t already do ourselves.” Blockbuster subsequently filed for Chapter 11 bankruptcy in September 2010. Similarly, Canadian firm Research in Motion (RIM), owner of the BlackBerry smartphone, dismissed Apple’s January 2007 announcement of the iPhone as “one more entrant into an already very busy space.” Doubling down on his statement, RIM co-CEO Jim Balsillie commented that the iPhone did not represent a “sea-change” for BlackBerry, since the Canadian firm would continue serving business and government customers while Apple pursued a mass audience. Over the next 10 years, RIM’s market share dropped from an industry-leading 19.8% to 0.0%.

There’s a good method for checking blind spots: meeting hundreds of early-stage technology startups every year. Early-stage companies often create new technologies, distribution methods, form factors, or entirely new markets at rapid rates. Ignoring industry canons, startups can take novel business approaches, discovering or developing insights from which incumbent corporations can benefit through early contact. Listening to these startups with an open mind can alert industry leaders to the trends that may be overtaking them soon.

There are many ways to meet startups in volume. Each has strengths and weaknesses:

Industry Conferences: Some tech-focused conferences like CES, SXSW, or IAB attract thousands of attendees annually, from startups to journalists to Fortune 500 executives. Bigger conferences can be high volume — roughly 4,000 exhibitors had a booth at CES in 2018. The main drawbacks include mixed quality (any self-proclaimed entrepreneur can attend) and non-proprietary deal flow (a corporation’s competitor may be at the same conference trying to set up the same meeting with the same targeted startup).

Grant Challenges: Many corporations, such as Johnson & Johnson, Verizon, and Stanley, offer grant challenges to spur activity in a specific sector or area of interest. Benefits include channeling external resources to a particular issue and exposure to early or seed stage companies. However, these opportunities address only a “known unknown” and may be difficult to track over time. Because the internal team set the challenge, this approach may also be prone to selection bias.

Cold Outreach: This simple method requires a research team, the Internet, and a phone. Shortcomings include selection bias (by definition, only companies that have been seen or identified internally are contacted), variable response rates, and generally lower quality engagements (companies seeking to disrupt an industry may avoid engaging with incumbents).

Trusted Network Referrals: Like cold outreach, referrals are simple and inexpensive, often arriving by email or phone. Referrals from trusted sources can often be high quality, as well, since your network may have the best idea of what is actually relevant to your business. A trusted network takes time to build however, potentially decades. Network relationships also require real work in the form of development, nurturing, and mutual benefit.

Corporate Venture Capital: Corporate venture capital (“CVC”) includes all the methods mentioned above and can provide high volume, high-quality engagements, reduced selection bias (well-crafted investment strategies frequently cast stage-agnostic, industry-wide nets), and equity investments to align startup and corporate incentives. As is true in traditional venture capital, CVC is one of the riskiest investment asset classes and requires commitment, training, and expertise.

None of the engagement methods above eliminates blind spots completely. So corporations can implement additional practices to interact with startups effectively and widen blind spot coverage. Three such practices include 1) engendering a diverse culture, 2) using a tracking database, and 3) in the case of CVC, leveraging internal business units.

1) A culture of collaboration and debate can be achieved through diversity. To obtain multiple perspectives if your team isn’t diverse, try appointing a devil’s advocate to minimize groupthink. For example, in venture capital, investors typically diligence market, technology, people, and financing risks. If everyone on your team loves an opportunity, reflect and ask, “why could we be wrong?” Corporations can leverage this approach by, for instance, including employees from various departments to debate proposed KPIs for a startup grant challenge. Diversity and open debate are more likely to surface blind spot threats that might otherwise remain unnoticed.

2) A database that tracks startups over time improves institutional knowledge and helps keep useful insights from falling through the cracks. Many firms have sophisticated software tools, but even a simple database to track growth rates and market activity can be sufficient. It’s key to track opportunities over time to spot trends, because conferences and cold outreach create “point-in-time” pictures of a startup. Database tools are only as good as your team’s follow up.

On this note, CVC often establishes regular checkpoints, from funding cycles to portfolio reporting to pre-investment commercial partnerships, as my colleague Eric Budin details here.

3) CVCs have a bonus “mirror” for blind spots: the corporation’s internal business units. Business units can can provide market validation through industry and customer relationships, recognizing impending threats. If your company is “dogfooding,” that sends a positive signal that your company’s experience might represent the startup’s broader target customer base, and executives at your company may be more open to recognizing relevant trends. Conversely, if business units see little commercial traction, the startup might not have found product-market fit. But if a startup is growing quickly with other customers in your industry, and your internal team still rejects the opportunity, you might have identified a dangerous blind spot.

No single startup engagement method or even combination of methods is a panacea for blind spots. Nor should corporations ignore visible threats on the horizon. However, a deliberate approach to blind spots can help adjust a corporation’s metaphorical mirrors to spot nearby trends, rapidly accelerating.

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Jack Taylor is a Senior Associate at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help leading corporations launch and manage their investment programs.

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