Contributed by Daylon Soh
Corporations want to be more agile like technology startups and try to hire people who used to work in startups or used to run startups to explore ideas and launch new products and services. However, over recent years we’ve seen several of them open with fanfare but close its operations with very little results to justify its financial investments.
Why do corporations fail to innovate as effectively as startups? Is there a lack of entrepreneurial talent in corporations or do they run out of money?
According to CB Insights, startups commonly fail because their team implodes or they out of cash. Paul Graham, co-founder of Y-Combinator, lists 18 mistakes that kill startups which is worth reading.
Corporate Innovation Labs fail for different reasons. The root cause of failure is foundation, not talent or money.
Getting Fired/Replaced vs Dying
Corporations incentivise employees with bonuses while startups incentivise employees with ownership.
Peter Thiel, co-founder of PayPal, said, “Equity is critically important because it is the thing that everybody has in common. Since everyone benefits from an increased share price, everyone tries to increase the share price.”
Employees in corporations are incentivised to keep their well-paying jobs and avoid problems rather than fix them. However, a company where every employee owns equity makes every employee an owner of the company and thus incentivses them to fix problems as soon as they surface.
Bonuses are given on a discretionary in most companies and are either too arbitrary or insignificant for the majority of employees. Equity value, on the other hand, could potentially be worth a lot and it’s not uncommon to hear early startup employees financially gaining millions when the team exits.
In a corporation, there is always enough money somewhere to save a dying project due to sunk costs. Startups aren’t free from the sunk cost fallacy, they just need to do whatever it takes to survive and make it to the next round of financing. Having a limited runway (necessity and constraints) forces one to enforce financial discipline and creative thinking.
Working culture assimilates from the top. I wouldn’t invest in a company whose CEO flies First Class and says they want the company to be more agile like a startup.
Inertia vs Velocity
Corporations come with its own baggage in legacy technologies and communication overheads while all startups begin from a clean slate and work reiteratively.
Corporation innovation labs that bloat themselves with hires are setting themselves up for failure.
We know that throwing more people at a problem does little to fix the problem but what we don’t account for is factor increase of communication overheads. According to Brook’s Law the equation ([n * (n-1)]/2), where n is the number of people in the team, calculates the number of communication pathways. A team of 12 people has 66 communication pathways.
The obvious question to ask is how can our teams reduce inertia and increase velocity? The less obvious question to ask is, as a CEO of a corporation, should you give your innovation lab and new business units a clean slate? The answer is always yes if speed to market is critical for your strategy. You can find ways to increase velocity but you never reduce inertia to zero unless you start from a clean slate.
Derivative Thinking vs Visionary Thinking
Corporations are given the mandate to innovate while startups are imagining the future and working backward.
“I think it is important to reason from first principles rather than by analogy. The normal way we conduct our lives is we reason by analogy. We are doing this because it’s like something else that was done or it is like what other people are doing… it’s like slight iterations on a theme,” said Elon Musk, CEO of Tesla Motors and SpaceX.
A clear mandate to innovate is often insufficient and leads to derivative thinking and safe bets within a company. We are taught in business schools to evaluate projects based on projected financial returns (e.g. using NPV and DCF), the approach itself isn’t perfect and creates a lot of tension around the validity and assumptions made on numbers.
Instead, teams working on new products and services should be imagining the future where exponential improvements have already been realised and then work backward to engineer the fundamental building blocks and experience.
Why do some of the best technology CEOs challenge their own teams to break what makes them successful?
Reed Hastings, CEO of Netflix, said, “Our hit ratio is way too high right now. So, we’ve canceled very few shows… I’m always pushing the content team: We have to take more risk; you have to try more crazy things. Because we should have a higher cancel rate overall.”
Jeff Bezos, CEO of Amazon, said, “One of my jobs is to encourage people to be bold. It’s incredibly hard. Experiments are, by their very nature, prone to failure. A few big successes compensate for dozens and dozens of things that didn’t work.”
Power Law (or Pareto Principle) dictates that if you’re hitting success almost all the time, you’re either not trying hard enough or not trying often enough. In both cases, you’re not optimising your innovation potential or unlocking the entrepreneurial energy within your organisation.
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About Daylon Soh
Daylon works in the intersection between digital marketing, digital product design and digital product management helping startups and corporations build new digital products and ventures. He uses a mix of research methods, Agile practices and communication strategies to facilitate the innovation process with teams. He currently works for Unilever as a Digital Marketing Strategist and was most recently part of the Digital Product Design team of Aviva Digital Garage working as a SCRUM Product Owner. Daylon is also an Agile Certified Practitioner (PMI-ACP)® & PRINCE2® Certified Practitioner in Project Management and instructs adult learners at General Assembly.
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