The great myths of corporate innovation
Recently, I have written about ‘why’ your company should invest heavily in innovation, even in recession times. Now, the obvious next question is ‘how’. Let’s start with some lessons learned on ‘how not to’. In my career, I have seen some very persistent myths of corporate innovation over and over again and it is time to bring them to an end. Even though there is a little truth in every myth, they are generally wrong to pursue as the odds are against you.
Myth # 1: We can wait and see. Once a startup gets traction in the market, we still can buy it.
The recent history of unicorn startups popping up on your corporate innovation radar should teach you the opposite. If you are in the small/mid cap segment, a five year old startup can easily have a higher valuation than your corporate’s enterprise value. But also by looking at the current market cap of a large players like Daimler and comparing it to its challengers Uber and Tesla, it becomes clear: any deal between them is rather a merger of equals than anything else. More often than not, incumbents wait too long to make a decisive deal and even if they intend to move early, they are not ready to pay the strategic premium that is required (a positive example here is Facebook taking over Instagram very early for USD 1 bn while Instagram actually had only a handful of employees).
Myth # 2: We don’t need to be first movers. We can be followers and because we are big, we will still make it.
Given that the corporate finds a way to use a beneficial parenting advantage for a growth hack, this basically could be a valid strategy. A recent surprising example is Microsoft Teams that has overtaken Slack in number of users in July this year. The hack was to bundle it into its Office 365 offering, which has a broad adoption. Whether or not Teams can beat Slack in user engagement (the more important KPI) remains to be seen. However, most corporates often lack the necessary boldness in execution to make it actually happen, especially when it threatens their core business. Just imagine a bank rolling out an ETF-based robo advisor when it actually has actively managed funds in its product portfolio. We all know this is not going to happen until it’s probably too late.
Myth # 3: We can do it from inside the organization. If an innovation is interesting enough, it will happen naturally.
The reason why real innovation does not work out lies often in why corporate innovation cannot be driven from inside. When it comes to trade-off decisions on resources, budget and attention, innovation is always at a disadvantage. Corporates can manage incremental innovation, e.g. improving their customer service app or adding another product to its existing product suite. But what they cannot do is bring forth new business models. Real innovations (let’s call them ‘ventures’) take a lot of effort to bring them off the ground: typically, you do not have the right team in place, no clear product vision, no paying customers yet, and hence, no revenues. It is utterly difficult to get the necessary resources for your endeavor. Even more so, if the innovation is actually disruptive to existing product lines. An organization which is geared towards minimizing risks and where power is distributed by share of revenue is a pretty hostile environment for fragile innovations.
Myth # 4: We own the customer relationship — startups don’t.
While incumbents own ‘legacy’ customer relationships with some lock-in, smart startups typically focus on a specific line of attack. For instance, a specific use case that is important to their target group and is just not in the focus of the incumbent. Let’s take an example: if you look at the App Store ratings of incumbent banking apps, you will typically find 1–3 star ratings, while challenger banks, such as N26, are typically in the 5 stars. If the respective superior use case (e.g. sharing money, best FX capabilities, etc.) attracts the banks’ best customers, it will soon be a sizable problem for the bank, even though they still have more customers in absolute numbers.
Myth # 5: We have a valid business model because our self-perception implies that we are the best owner.
My favorite myth: corporates often get wrong what their real unique value proposition is. This leads to statements like: “We are good in XYZ, we always have been. That’s our DNA. That’s why can move into the market late with a knock-off product and we will win against the unicorn startup.” A classic example is Deutsche Telekom’s Immmr (launched as late as 2016) going against WhatsApp. As if she wanted to support my point, the responsible Deutsche Telekom manager justified Immmr’s existence in a startup blog interview by the EUR 40 bn lost in annual SMS revenues worldwide due to Whatsapp. Well, that’s problem-focused but definitely not user-centric. Deutsche Post, the German postal service, launched a Whatsapp competitor in 2014, SIMSme, claiming that it has been in the messaging business for over 100 years. Well, neither one of these services still exist and rather large budgets have been wasted.
Myth # 6: We only do things that have 9-digit revenue potential within 5 years after launch (or are profitable within 2 years).
Corporates are used to focusing their attention on big businesses, see # 3. Reality is: innovation takes some time. Our research suggests that startups need 3.5 years to become profitable and 6.4 years to mature from seed financing to exit (both median). Venture Capital funds are typically set up for 10–15 years in order to yield a return. What makes corporates think that they can be any faster than that? Corporates have no experience in starting startups. They are experience in launching new product lines or rearranging some product lines in order to create new business units. Applying similar expectations to startups is hardly a fair comparison.
Myth # 7: We can start something with no extra budget and we’ll take it from there; at the end, that’s real entrepreneurial thinking.
Let those crazy sneaker guys open office in a Berlin co-working space and see what happens, right? Right, nothing happens! There is no free lunch, especially when it comes to innovation. Launching a website is like opening a supermarket in the middle of the Gobi desert: nobody knows about it, nothing will happen there. You will need some budget to proof that it might work and then you will need even more budget to make it work. Crunchbase has analyzed that the average successful startup raised USD 41 m in venture capital until exit (trade sale or IPO). Again, why should success come to corporates any cheaper? Surely, corporates can use assets such as distribution channels, supply chains, etc. However, these come at an opportunity cost. Good news is that these startups have exited for USD 243 m on average. So, there is some decent shareholder value to be created for the corporates’ shareholders despite all cost considerations. But bear in mind: not every startup (corporate or not) will be successful. If you take this data, a corporate will have to make sure that the default rate is lower than 83%, which brings me to the next — and by far the most important — point.
Myth # 8: We have to focus on one lighthouse project, which actually must not fail.
Corporate executives often tend to focus on a few very important corporate initiatives. Initiatives that are too important to fail. Hence the focus. In a corporate’s daily business, this makes absolute sense. The core business will continue to run nevertheless. However, in innovation this is completely wrong. Have you seen a single venture capital fund that puts all its money into one asset? Probably not. And there is a good reason: you have to spread the risk in your portfolio. Many startups fail, that’s just the ugly truth. If corporates want to achieve any return, they will have to build a) a pipeline and b) a portfolio of ventures.
If you have heard anything of this in your boardroom discussion before, you are not alone 😉
Co-Founder & Partner