Response to Capital Study on Corporate Innovation in 2020

by | Aug 07, 2020 | Digital Transformation

7 min read

As the leading independent corporate venture builder in DACH, Stryber is at the forefront of driving the latest thinking on corporate innovation in Europe. We appreciate contributions that shape that thinking from all sides and were happy to see Capital magazine publish its latest study on the topic titled “Konzerne auf den Spuren von Startups 2020” together with Infront Consulting. We applaud many of their findings but could not help but find that parts of the study are still pushing some of the old myths that have made many corporate innovation efforts unsuccessful in the past. In the following article, we wanted to share our thoughts on what the Capital study got right and what it got wrong.

What the Capital Study got right

No 1:

CAPITAL STUDY SAYS*: “Across all sectors, the German economy still needs much more digital innovation of business models, products and services. The discovery of video conferencing and collaboration tools for remote working is not enough.”

STRYBER SAYS: Even before the current COVID crisis, lifespans of established businesses were decreasing at an ever-faster rate. The introduction of Google Hangouts, Zoom or Slack into the daily life of a large organization will do nothing to slow down that trend. Proper innovation focused on growth through new business models is required. For some organizations, the current pandemic will prompt a greater willingness to invest in more meaningful innovation. Other organizations will pat themselves on the back for introducing Google Hangouts and think that is enough to turn them into an innovative company ready to face the future. Stryber’s Digitization Framework 2020 can provide a good overview of how to think about innovation in a structured way.

No 2:

CAPITAL STUDY SAYS“Despite all the creativity across corporate digital labs, we come to one central piece of advice: successful scaling of innovation requires a disciplined marathon rather than hectic sprints”

STRYBER SAYS: At the heart of every successful digital transformation journey lies one key challenge: how to bridge the difference between the short-term focus of the existing business with the much longer time horizon required for successful digital innovation. Too many innovation projects have fallen victim to unrealistic expectations on timelines. Honest expectation management, transparent communication, support from top management, a clear set of strategic goals and the right governance model underpin the long journey to successful digital innovation. Such a journey always has its setbacks and teams will fail repeatedly. That is to be expected and has to be accepted. Patience and stamina are required to make digital transformation a success.

No 3:

CAPITAL STUDY SAYS“When it comes to the process of selecting ideas, there is much more to it than an initial evaluation of how promising an idea might be. The process determines how the portfolio of innovative ventures is managed over time. That includes the early elimination of ideas, the determination to push ahead with successful approaches and the pivoting of projects that require a change of direction” 

STRYBER SAYS: Avoiding mistakes is key for many large organizations. This way of thinking is important to gain efficiency when it comes to running the core business of an established corporate. But caution is also counterproductive when it comes to innovation. Innovation needs failures, innovation needs trial and error. Failure is an accepted part of life for every venture capital fund. VC funds often write off 90% of their investments and are happy to do so because the remaining 10% more than compensate for those losses. Established organizations that want to drive innovation need to get into that same mindset: try out new ideas but pivot aggressively or pull the plug as soon as it becomes apparent that there will not be much success in that particular venture. Take pride in your organization’s capability to identify and accept failure in the shortest possible time. Take the hard decisions that follow quickly and communicate openly. Expect much of what you do to fail, recognize failures as early as possible, move on, and focus on successful ventures.

What the Capital Study got wrong

No1:

CAPITAL STUDY SAYS“We of course know that digital innovation units deliver a substantial qualitative result with regards to the transformation of the parent company besides the quantifiable results of innovation.” 

STRYBER SAYS: We believe that this statement is at the heart of what is wrong with corporate innovation today. Firstly, we believe that if you cannot quantify your impact, stop doing what you are doing. The first step to any digital transformation effort needs to be alignment on quantifiable goals. Without knowing what you are aiming for, how can you decide on what course of action to follow? Only if you know how much additional revenue or EBITDA you are aiming for will you be able to decide how much investment is required. Any non-quantifiable “impact” of corporate innovation is just innovation theatre. Secondly, digital transformation does not need to change everything about an organization. On the contrary, many established businesses are successful businesses because they are incredibly good at running their core businesses efficiently. Corporate innovation needs ring-fencing and a smart corporate governance setup for just that reason: the core business and the innovative side of the business must use opposite approaches to their work, one focusing on efficiency and the other one focussed on exploration. The “substantial qualitative results” mentioned in the study are dubious.

No 2:

CAPITAL STUDY SAYS“Thankfully the hocus pocus of innovation theatre is behind us. The winners of tomorrow are well-versed in the full range of innovation vehicles” [Note: the study then lays out 9 different types of innovation vehicles]

STRYBER SAYS: Innovation theatre is still out there. Many corporate innovation consultancies keep pushing the myth that established organizations should invest in all kinds of innovation vehicles. But the majority of those vehicles do not yield any significant results. How can an accelerator program really impact the bottom line of a large corporate? A small stake will not drive significant financial returns and all the operational upside could well be leveraged by becoming a customer of the startup you would otherwise invest in. Corporate venture capital often has similar drawbacks, especially when you consider that most serious startups will not want a corporate on their cap table. So no, investing in every corporate innovation vehicle is not the right approach. Focus on the ones that actually have an operational and financial impact: M&A and corporate venture building. 

No 3:

CAPITAL STUDY SAYS: To all the startup labs: the standard corporate accelerator is not enough anymore – use the assets of the core organization to leverage unfair advantages against competing investors and ventures!”

STRYBER SAYS: The “standard corporate accelerator” is not only insufficient: it is obsolete. As it always has been. From a startup’s perspective, corporate accelerators do not have a positive impact on outcomes. A study recently published by Stryber shows that going through a corporate accelerator program has a negative impact on the success rates of startups. From the corporate’s perspective, accelerators lack the strategic and operational impact: if corporate assets are to be leveraged, business models and ventures that go through an accelerator program need to be tailored to the corporate’s strategic goals and its available and accessible (!) assets, which is rarely the case. And if an investment through acceleration is to have an operational impact, a majority stake in the startup is essential for the corporate. Now please show me the founder who is willing to give away >50% of equity to an accelerator.

Summary

In summary, we agree that more must be done to drive corporate innovation across business in Germany and beyond. A long-term view is needed and established organizations need to adopt a venture capital and startup mindset to drive innovation. Where we disagree is that we believe that the impact of digital transformation absolutely needs to be measurable and that innovation theatre will only stop when established organizations start to focus on innovation vehicles that can and will have an impact. Amongst these, venture building and M&A have clear advantages. We believe the Capital study is a step in the right direction with many interesting insights but much is yet to be learned. 

*Quotes from Capital study are translated from the German original

Written by Julian Ritter (Associate Partner)

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