Corporations are desperate to overhaul their culture and the perception that they are giant, bureaucratic dinosaurs too slow to react in a rapidly changing business landscape. Many are trying to be more innovative and agile, like a startup. One easy way to achieve this goal is through partnering with or acquiring a startup. Corporate venture capital (CVC) now makes up 25 percent ($18 billion) of all venture capital dollars in North America.
The Startup Gold Mine reveals how the world’s largest and most prestigious brands make innovation decisions, including new product launches, vendor-startup partnerships, and even billion-dollar acquisitions. The book also details the ways startups can leverage corporate strengths and weaknesses for mutual benefit. You will learn:
- Why the “innovator’s dilemma” is leading large companies to seek out partnerships with startups
- How to close a deal with a large company, from first connection to getting paid
- Strategies to troubleshoot common land mines that startups encounter when working with large companies
- Ways to navigate the convoluted corporate landscape without spending a fortune on conferences and consultants.
Author Neil Soni draws on his experience as an entrepreneur and as an external innovator with premier brands like Estée Lauder, MAC, and Smashbox to reveal large companies’ inner workings, as well as how startup founders and employees can use this knowledge to close the biggest deals of their lives.
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WHAT IS CORPORATE INNOVATION, AND WHY SHOULD I CARE?
You're probably wondering what in the world "corporate innovation" means. On the face of it, corporate innovation sounds like a buzzword big companies use to sound like they are taking risks and developing next-generation technologies, all while pushing the same old products with new marketing. That is only half right.
Although it's true that much of what happens in innovation groups at large companies would qualify as innovation theater, corporate innovators serve a useful purpose: to identify areas of overlooked opportunity and to find solutions for potential existential threats to the company's current business model. Let's focus on the existential-business-model threat for a minute.
At its core, a business exists to serve a specific customer need, whether that need is coffee, tires, flights, or anything else. That need is backed up by insights into consumer behavior and preferences — which, over time, become ingrained as assumptions. As these underlying assumptions change — whether because of technological shifts, regulatory changes, or even something as seemingly trivial as fashion trends — businesses have to adapt their offerings to continue serving their customers. Usually these assumptions change incrementally, and normal business structures and processes can handle the necessary adjustments. Sometimes, though, there are major shifts, things like the rise of the Internet or the proliferation of mobile devices, that dramatically alter underlying assumptions and qualify as existential threats. When these major shifts occur, previously successful companies can topple practically overnight. The larger business community and media often ignore this dark side of business history, but it needs to be studied in order to understand the purpose and necessity of corporate innovation.
Companies wisely pay a lot of attention to their competition, but the truth of the matter is that established companies such as Coca-Cola and Pepsi will never put each other out of business. The same goes for MillerCoors and Anheuser-Busch, and The Estée Lauder Companies and L'Oréal. The reason goes back to those underlying assumptions. These businesses are all built to respond to the same set of consumer behavior and preferences. Yes, competitors may incrementally shift their core strategies and take percentage points of market share from each other, but they are solving the same problems with very similar methodologies.
For this same reason, when there are major shifts in the underlying assumptions, entire industries can be equally unprepared to adapt to the new conditions on the ground. To illustrate this point, let's look at the favorite corporate innovation case study of Blockbuster. Back in the 1990s and 2000s, Blockbuster was the most popular way for someone to rent a movie and watch it at home (the consumer need). To capitalize on this consumer need and serve as many customers as possible, Blockbuster built more and more locations around the world and started selling ancillary products like candy and snacks. Along the way, other video-rental companies popped up to capitalize on the same consumer need and compete with Blockbuster. The largest of these many competitors was a company called Hollywood Video. As these companies competed with each other, they used tactics like pricing, movie selection, and location convenience to try to take market share from each other. But at the end of the day, they were locked into a sort of dynamic stalemate.
Then in 1998, a guy named Reed Hastings decided to cut the bricks-and-mortar element out of video rental and created something called Netflix, a direct-to-consumer method for renting movies. The underlying shift that allowed this to happen? The Internet. Consumers could go to the Netflix website, select which movies they wanted to rent, and have those movies show up in their mailbox a few days later. When they were done, they sent the movies back to Netflix and received the next set of movies on their list. By offering a rental service through the Internet, Netflix was able to cut out many of the expenses in the Blockbuster/Hollywood video business model, such as retail employees and rent.
You already know how this movie ends. Unable to adapt to changing consumer preferences, Hollywood Video and Blockbuster both went out of business — Hollywood Video in 2010 and Blockbuster in 2013. But let's rewind the tape and see how these "incumbents" responded when Netflix had clearly started to make a dent in their market share.
In 2007, Blockbuster started its own digital distribution service to directly compete with Netflix. Let that sink in for a minute. Netflix was around for nine years before Blockbuster launched a similar service of its own. While some of that delay can be tied to corporate inefficiency, it can mostly be attributed to the fact that Blockbuster was not built to be a mail-order or digital business. Its DNA, so to speak, was in renting movies to people at retail locations. When Blockbuster hired new corporate employees, it did so on the basis of how well that person could support their retail business. Blockbuster's knowledge base simply wasn't built to support a direct-to-consumer or Internet-based business model.
So, did Blockbuster eventually realize that they needed to shift business models in order to stay relevant? Quite simply, no. As late as 2007, the company was still staking its future on retail. It didn't know how to do anything else. At the time, Blockbuster CEO John Antioco was asked about the Netflix threat, and he said, "We have everything that Netflix has, plus the immediate gratification of never having to wait for a movie."
What Blockbuster had entirely missed was the underlying assumption shift. As consumers became more comfortable with the idea of buying things online and having them show up at their door, they correspondingly became less inclined to visit retailers. If you could rent Fight Club online and have it show up in two days, why would you get in your car, go to Blockbuster, find Fight Club on the shelf (no easy task), stand in line, and then drive home? This growing shift in how people wanted to buy their products and services was in direct opposition to Blockbuster's DNA as a retailer, and therefore a true existential threat to its organization. Traditional business units, such as marketing or accounting, aren't equipped (or incentivized) to look for and solve existential threats. This is precisely where a corporate innovation group might have come in handy for Blockbuster.
Netflix's online movie- and TV-streaming service was the final nail in the coffin for Blockbuster. Once streaming started, people didn't even have to wait two days to get their movie in the mail. They could get the immediate gratification that Blockbuster (and similar businesses) previously had a monopoly on, with the added convenience of never having to leave home.
How did Blockbuster and their competitors not see this coming? In hindsight, it all looks so clear. In the moment, though, these things were far from obvious for many reasons, not the least of which was technical infrastructure. Remember, there was a time when the vast majority of us connected to the Internet via a dial-up connection. Downloading one song used to take fifteen minutes. Imagine trying to stream a movie on that type of connection.
Although none of us has the power to predict the future with 100 percent accuracy, one of the main purposes of a corporate innovation group is to help prepare the organization for situations where the underlying assumptions change and the entire business needs to adjust. This preparation can take a number of forms — from collaboration with — or investments in — outside startups, to internal startup-esque teams, and a whole lot more. Corporate innovation's track record is spotty at best, but there are instances where it has paid off big-time. We also need to be cognizant of the unheralded corporate innovators who prevent their companies from being disrupted by timely recognition and prevention of existential threats. While we pay special attention to the companies who failed to see major changes coming and collapsed, as well as the companies who spotted the changes and became major successes, we ignore the companies who manage to adapt just enough to maintain their status-quo position. They don't turn into major successes, but they aren't disrupted either. To use a war analogy: people celebrate the general who wins the war and denounce the general who loses the war, but nobody recognizes the general who prevents a war from happening in the first place.
New, disruptive startups are only one part of the corporate-innovation enigma. Large companies invest billions of dollars every year in research and development, in the hope of developing the next game-changing innovation. These R&D departments are staffed by some of the world's best scientists, who work with state-of-the-art equipment to study and create scientific breakthroughs that will power their company's next billion-dollar brand. Obviously, coming up with a novel scientific insight isn't simple, but let's assume that an R&D group succeeds in developing a breakthrough innovation. Great, right?
Unfortunately, this is where a concept known as the innovator's dilemma decides to rain on the parade. By virtue of their size, large companies focus their efforts on major opportunities that can add significantly to their bottom line. To put it in context, a billion-dollar company isn't going to spend much effort on a project that's bringing in $25,000 per year. Like most potentially destructive things, this is a good policy in moderation. Employee bandwidth is limited, so priorities need to be set, and large companies logically prioritize the biggest opportunities in front of them. But this policy can become fatal in instances where an opportunity is misjudged and overlooked as "too small" but turns out to be a disruptive innovation. Disruptive ideas tend to create new markets (as opposed to taking advantage of existing ones) so any judgment of opportunity size is bound to be incorrect. This misjudgment is what leads great companies into the trap of ignoring a major, game-changing innovation that disrupts their entire industry. Going even further, sometimes companies invent a new technology that's so disruptive to their existing business model that they can't get themselves to launch it, even though they would have a monopoly. The innovator's dilemma can be seen in action by examining Kodak's troubled history with the digital camera.
In 1975, Steven Sasson, an engineer at Kodak, presented a hacked-together version of a digital camera. To be clear, this was the first digital camera ever created. And it was invented by Kodak. According to the New York Times:
The final result was a Rube Goldberg device with a lens scavenged from a used Super-8 movie camera; a portable digital cassette recorder; 16 nickel cadmium batteries; an analog/digital converter; and several dozen circuits — all wired together on half a dozen circuit boards. ...
"It only took 50 milliseconds to capture the image, but it took 23 seconds to record it to the tape," Mr. Sasson said. "I'd pop the cassette tape out, hand it to my assistant and he put it in our playback unit. About 30 seconds later, up popped the 100 pixel by 100 pixel black and white image."
This is the quintessential hacked-together prototype. Sasson used the parts he had available, the budget he had access to, and his own technical knowledge to answer a feasibility question: Is it possible to take and store a photo digitally? Sasson had shown without a doubt that the answer was yes. Sasson's digital camera admittedly was clunky, not user-friendly, and clearly not ready for prime time. But the point of a prototype is to show technical feasibility, not to create a finished product ready for consumers.
Showing technical feasibility turned out to be the easy part. As Sasson explained to the New York Times, although Kodak's R&D team allowed him to keep working on the project, they invested minimal resources in the technology because of their beliefs that "no one was complaining about prints" and "no one would ever want to look at their pictures on a television set." In spite of this uphill battle, in 1989 Sasson and Robert Hills, a colleague at Kodak, created the first digital single-lens reflex (DSLR) camera — not a prototype, but one that you and I would recognize. It even used a memory card to store the photos.
You know the rest of this story. Kodak used their technical superiority and first-to-market advantage to develop an unassailable digital camera business that became the envy of the world. Kodak's case study in successful corporate innovation became an example that was studied by innovators in business schools and corporations everywhere.
If only. Here's what actually happened: Kodak's marketing department decided that they couldn't take the digital camera to market.
This decision only makes sense when you know that, in 1989, Kodak made money on every part of the picture-taking and -viewing process: the camera, the film that stored pictures, the picture-development process ... everything. In fact, the bulk of Kodak's profit came from the steps after the picture was taken. People only bought their camera once, but they bought film and had to get it developed on a regular basis. The digital-camera invention would completely disrupt this business, and Kodak decided that was unacceptable to them.
The one (temporary) saving grace for Kodak was their decision to patent their digital-camera invention. Thanks to this patent, they could cash in to the tune of billions of dollars, which staved off the final day of reckoning for the once-great company. Unfortunately, Kodak's digital-camera patents expired in 2007, and they filed for bankruptcy a quick five years later, in 2012. While we can certainly argue that the Kodak outcome could have been worse if they hadn't had the patent, the truth of the matter is that it only delayed the inevitable. Once they opened Pandora's Box (the digital-camera invention), their old business model was finished.
Over the years, these examples of once-great companies like Blockbuster and Kodak have terrified Fortune 500 executives. Nobody wants to be the next behemoth added to the infamous Blockbuster category of failed companies. At the same time, the adoption cycle for new technologies and products seems to be speeding up, which means companies will have even less time to react to new threats than Kodak or Blockbuster did.
In response, companies have built corporate innovation functions, usually with some or all of the following mandates:
1. Identify and get ahead of any game-changing trends or assumption shifts.
2. Build new businesses in adjacent industries.
3. Find ways to invest in and partner with the best startups in their own industry, instead of being destroyed by them.
The corporate innovation function can be set up in a variety of ways. Some companies choose to create stand-alone corporate innovation departments, while others embed corporate innovation functions within existing business units. Each company sets this up slightly differently, according to their own industry, culture, management team, and need set.
Contrary to what it might look like, the decision by large companies to encourage corporate innovation is one of the best things to happen to the startup industry. Large companies with a clear commitment to corporate innovation have built structures that allow their employees to work directly with startups. And when I say "structures," you should know that I mean they usually have money set aside specifically to work with startups. To paraphrase Wu-Tang Clan's "C.R.E.A.M.": cash rules everything for startups.(Continues…)
Excerpted from "The Startup Gold Mine"
Copyright © 2018 Neil Soni.
Excerpted by permission of HarperCollins Publishers.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
1 What Is Corporate Innovation, and Why Should I Care? 5
Part 1 Understanding the Machine-How Big Companies Work 17
People, Risk, and Incentives: How Decisions Are Made in the Corporate World 19
3 Internal Corporate Absurdities: Day-to-Day Life in Corporate, and Why Stratups Must Understand This to Succeed 37
4 The Innovator's Dilemma in Action 61
Part 2 Working with Corporate Innovators to Drive Growth for Your Startup 77
5 How to Get a Deal Done: The Complete Guide 79
6 Major Mistakes Startups Make When Trying to Work with Corporate (And How to Avoid Them) 109
7 Corporate Venture Capital: Golden Ticket, or Deal with the Devil? 123
Part 3 Creating a Better Corporate Innovation Ecosystem for Everyone 137
8 The Best and Worst of Startup-Corporate Interactions 139
9 What to Do When Corporate Innovators Screw Up (And How to Avoid These Mistakes) 151
10 Conferences, Hackathons, Consultants: Oh, My! 165
11 Empathy: The Final Ingredient to Productive Startup-Corporate Interactions 177
Appendix 1 Full Interview Transcripts 199
Appendix 2 Corporate Innovation Scorecard Example 231