October 30, 2014

Can Large Companies Disrupt The Start-Up Ecosystem?

Can Large Companies Disrupt The Start-Up Ecosystem?

Disruption is something we often associate with start-ups these days.

We think of nimble companies like AirBnB disrupting hotels, UBER disrupting taxis, Netflix disrupting video distribution, Tesla (potentially) disrupting automotive, iTunes and later Spotify disrupting the music industry and Amazon disrupting almost anything it sets its eyes on.

Sure, many of these companies have grown from tech startups to listed behemoths with multi-billion dollar market capitalizations, but they are all reflective of today’s disruptive innovations and when it comes to disruption, we expect that the start-ups that aren’t tied down by prohibitive process, investorshort-termism and unrealistic growth targets like their corporate equivalents, will come out on top in a battle against their slower moving corporate adversaries.

But… what happens when corporates learn to innovate?

What happens when corporate companies heed Clayton Christensen’s Innovator’s Solution and set up an environment that is conducive to developing disruptive innovations? What if they set up small teams independent to the organization and give them the time, financial resources as well as access to networks and strategic partners that can accelerate their learnings, development efforts, time to market and achievement of traction?

Early stage start-ups often lack financial and physical resources, networks and strategic partnerships and can take several years to go from idea to profitable. The lean start-up was born out of the need to be diligent with expenditures and develop ideas based on validated hypotheses and market learnings, ultimately resulting in a much higher chance of success. But it was also born out a start-up’s nature of being cash-strapped and tied to its runway. A start-up’s runway is its life. If you only have 12 months to live based on your burn rate, will you not look for ways to turn that into 24 months or increase your chances for success in those 12 months?

Customer discovery methodologies and The Lean Startup helped give companies with little to no cash the best chance of success through the application of validating and iterative learnings. This is just one of the main reasons why it is so easy to start a business these days.

So with enablers such as cash and networks already in place at an established, well connected company, one might conclude that ‘corporate start-ups’, those spun out of established large companies, could innovate, commercialize and scale much quicker than your stereotypical garage dwelling, ramen noodle eating (excuse the stereotype!), tech start-up entrepreneurs.

Is it possible that ‘corporate start-ups’ can disrupt the start-up ecosystem as we know it?

Different Purposes

First, established companies and start-ups serve different purposes. The corporate machine has been set up to support the operations of a validated, scalable and winning business model, not to discover new ones.

Corporate systems, people and finances support operations, and at most, sustaining innovations. They do not support disruption.

Growth targets and key performance indicators (KPIs) are a perfect example this, according to Professor Clayton Christensen. Growth targets at large companies tend to be based on the overall revenue of the company so if I’m a large company with $1B in revenues, in order to reach 5% growth targets, we’d need to generate an additional $50m next year on top of the $1B we expect to generate again. How many tech start-ups do you know that generated $50m, or $5m or $500,000 in their first year of operations?

AirBnB had revenues of $200 per week for its first year, eBay did $400,000 in its first five years while it took Google more than three years from inception to become profitable.

Start-ups are like a plant. They need lots of sunshine, fertilizer and water (money, networks, time, systems and support) to grow before they will bare fruit. Don’t expect to be picking off juicy apples or oranges from day one.

It can take years for disruptive ideas to scale and get to a point where the revenues they generate are attractive to a large company and as a result, winning ideas are unlikely to get the time and support they need to satisfy executive management and shareholders, both of which tend to be guilty of short-termism in today’s business environment.

AirBnB is a great example of disruptive ideas taking considerable time to scale.

As such, even where established companies set up new initiatives to develop innovative products, they are often scrapped in favour of other areas where the immediate rewards are much higher and the existing customers and shareholders can be appeased. Such is the nature of a resource dependent environment, particularly when the going gets tough, and especially where corporate bonuses are tied to short-term revenues.

Add to that human resources whose job it is to sustain existing business models, tend to be specialists in one area and not generalists, like those involved in early stage start-ups. If you’re in HR, Finance or IT, that’s usually all you are and your position description will no doubt centered around supporting operations and making improvements to existing innovations (or sustaining innovations).

You will likely report to equally process-oriented managers and as such, should you have any grand ideas, they probably won’t make it past the first sounding board. Entrepreneurs tend not to be attracted to corporate companies who starve them of their creativity and need to operate in fast moving environments where they can wear any number of hats, implement at will and see the fruits (or lack thereof) of their labor in days or even hours.

We’re not done yet. Waterfall development methods, commonly used at large companies, can take years to commercialize a product and are not akin to start-up development or nurturing entrepreneurial minds.

Idea incubation and knowledge sharing is hampered by functional organizations who tend not to share knowledge (SONY could have released the iPod but their record label and portable music device departments operated in silos and competed with each other).

As such, it is with no surprise that large companies find it incredibly difficult to innovate because the corporate machine has not been built in a way that is conducive to innovation.

So what are large companies doing to battle their inherent disability?

Large companies are learning The Lean Startup. A fantastic example of this in action can be found at none other than General Electric, the forth-largest company in the world. The company has launched an initiative dubbed Fastworks, in collaboration with Eric Ries, author of The Lean Startup.

Essentially, the company trained almost 80 executives in the methodology underpinning The Lean Startup, set up growth boards to approve or reject potential projects pitched by employees (not dissimilar to entrepreneurs pitching to a panel of VCs or angel investors) and formed independent teams with the mandate to develop products unobstructed by the growth targets of the parent or subsidiary GE company in which they operate.

Other companies such as Procter & Gamble (P&G), Nestle, Ericsson and 3M are also now no stranger to the lean start-up as well as Alexander Osterwalder and Yves Pigneur’s Business Model Generation approach.

At GE, the initiative has already spawned successes such as a high-output 7HA gas turbine, developed 40 percent cheaper and two years faster than it would have been via traditional means, a light bulb with a built-in wireless dimming chip and an oil well flow meter, being developed in collaboration with Chevron.

Entrepreneurship is a Calling, Not a Job

Sure you can teach techniques and methodologies, but can you teach vision?Is there a syllabus for ‘how to spot opportunities for disruptive innovation’?

Can you teach people to see something that’s not there?

By now, you’re probably beginning to see my point (at least I hope you are).

These questions all point to the same thing and serial entrepreneur, academic and father of the lean start-up, Steve Blank, puts it best in his view thatentrepreneurship is a calling, not a job.

Ramming this point home, entrepreneurship has also been found to besurprisingly genetic in a study carried out by Scott Shane, an entrepreneurial professor at Case Western. Such genetics impact:

1. People’s likelihood to start a business2. The ability to identify new business opportunities3. Ability to gain self-employment income4. Entrepreneurial extroversion

So how do you teach someone to see industry changing products like the iPod, iPhone or iPad? Can the vision that drove the late Steve Jobs be taught?

Probably not…

…most definitely not.

You can't teach this

.

Only 1% of over 200 American entrepreneurs surveyed believed that higher education played a role in their entrepreneurialism and almost two thirds credited their inherent drive. Successful entrepreneurs are said to be ‘hypomanic’ which is defined by John Gartner as a genetically based form of mild mania that endows entrepreneurs with energy, creativity, enthusiasm, and a propensity for taking risks.

They are said to be brimming with infectious energy, irrational confidence, and really big ideas. They think, talk, move, and make decisions quickly. Anyone who slows them down with questions “just doesn’t get it.”

Despite your view on whether or not entrepreneurs are born or made, the real question here is can corporates attract and/or retain entrepreneurial talent.

Entrepreneurs are anti-conventional and anti-authoritarian by their nature. They generally want to own a majority share in what they’re working in. They want to be in control of creative and strategic direction. They want to be able to make decisions quickly and implement almost as quickly. They value time and flexibility and loathe innovation-stifling policy and procedure and the time-bound, desk-bound performance reviews common at many large companies.

As such, in the rare event that large companies are successful in attracting entrepreneurial talent, they may struggle to retain them.

Nonetheless, large companies can put into place an environment that facilitates the acquisition of entrepreneurial talent, and what of those entrepreneurs who never ‘got a chance’?

It’s no secret that people who are single and lack dependents lead a much more entrepreneurship prone lifestyle than someone with 2.3 kids and a mortgage. The risk for the latter is often much higher than that for a single person.

As such, many entrepreneurial minded people who got married young or had children young are likely to find themselves taking home a steady paycheck via the comforts of a large company, but, does this make their mindset or their innate abilities any less entpreneurial? Probably not.

Companies should look to seek out entrepreneurs, or intrapreneurs, in their organizations, and empower them with the opportunity to identify and bring opportunities and ideas to fruition.

Creating an environment that supports intrapreneurialism will help to not only attract talent but retain talent and get the most out of existing employees who have the power to create, but don’t necessarily want to forego the comforts of the regular corporate paycheck.

A great example of this is PwC Digital. The firm is best known as one of the ‘big four’ accounting firms globally, but these days it generates almosta third of its revenues from advisory and consulting services. PwC Digital brings together great minds with backgrounds in lean startup and customer discovery, design innovation, product management, front and back-end web development and user experience design.

Granted, while not all in this space may bring innate entrepreneurial flare to their roles, they are laying the foundations and providing the tools necessary to promote innovation and agile product development, not only within firms like PwC but at many of their Fortune 500 clients.

The state of play

It is still far too early to tell whether corporates could in any way, shape or form disrupt the start-up ecosystem. Chances are, it won’t. At best, we may see a lot more innovations and faster time to market at large companies in the future and a growing desire from entrepreneurial and creative types to work at such companies, but ground up is ground up.

Natural born entrepreneurs want to build their own things. They want to be in control and are happy to take the blame (and the lessons) when they fail and collect the accolades when they succeed. They would rather cash out big by getting in on the ground floor. They want to leave a legacy. And some want to change the world.

It is arguable how many of this they can achieve working for a large company, albeit within a ‘corporate start-up’.

The trend of corporates and large companies acquiring web and tech start-ups continues to grow and this may be the best way for large companies to cash in and mitigate the risk of disruptive innovations, while giving aspiring entrepreneurs and interested investors viable exit strategies and the incentives to drive the next wave of innovation. This approach also de-risks investments for large companies, despite taking a lean startup approach, and allows them to focus on what they do best, being large companies.

It is incredibly difficult to imagine that the start-up ecosystem as we know it will ever die. Given social change, it is far more likely to grow as subsequent generations embrace the freedoms that come with a rapidly shrinking world where businesses can be started virtually overnight and children are raised in an environment where they aspire to be the next Steve Jobs as opposed to the next Donald Trump.

Healthy competition can bring the best out in people and businesses, so regardless of whether or not large companies actually go on to become more innovative, the ultimate benefactor stands to be us, the consumer, and that is something I think we can all vouch for.

Innovate or die.

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