Startup 119: Why Startup Innovation Kicks Corporate Booty
April 6, 2009 by Joseph Ansanelli
Filed under Execution, Recent, Startups
I recently had coffee with David, a friend from college that was an advisor at Trio Development and an early employee at Connectify. As he now works in the incubation group of a large enterprise software company, he was lamenting about how hard it is for large corporations to innovate. That got me thinking about what it is about startups that leads them to “out-innovate” large corporations.
It ain’t about the technology
To start, I believe innovation is simply about creating significant new value though some combination of unique products, processes, and services. I do not think innovation is solely about creating new products or technology. That is simply invention.
While I am not an innovation scholar, my experiences suggest that innovation happens more easily inside of startup because they tend to have the right combination of:
- People
- Freedom
- Failure
It’s the people, stupid
Startups out innovate first and foremost because they build a complete team of dedicated individuals that eat, sleep and breathe the startups goals, which frequently include a goal to kick a large corporation’s you know what.
A complete team means “customer success oriented” engineers and product managers who spend lots of time working directly with customers; “take no prisoners” marketing people that are all about getting the startups message out and driving customer demand; “meat eating” sales people that make their quota solely on the success of the startups innovation; support and services people that are maniacally focused on making customers successful; human resources teams focused on hiring and engaging the best and brightest; and so on through the rest of the startup. It is also about a culture that is centered on the process of innovation as opposed to the vast majority of people in a corporation that are about the existing status quo.
Unfortunately, it seems that most large product and technology corporations think innovation is about having a team of engineers developing some new cool thing (again, that’s invention). And the thinking goes that once that new cool thing is developed then their hundreds or even thousands of sales people and vast marketing organizations will make it successful. The truth is that this rarely if ever leads to any new high growth businesses.
Corporate CTO’s organizations tend to be very disconnected from customers and only dabble in invention. Core product development teams are focused on improving or worse, fixing, their existing product. Corporate marketing teams love peanut butter too much. Yes, peanut butter. They take their marketing dollars and spread them thinly across lots of projects with little to no strategic thinking or accountability. And sales organizations rarely know how or are incented to sell anything but the company’s best selling products. The list of people challenges to innovation in a large corporation goes on and on. And when it comes to process, the place where lots of value can be created inside of large companies, the challenges are even more immense.
Startups are successful at innovation by first building a completely dedicated, funded and accountable team which takes something all the way from product or service creation through to selling and servicing the customer. And not only is that team focused but they have the freedom to execute in the best way possible to be successful.
Freedom
Teams need freedom to re-evaluate everything about a business from people, to process, to product and services. This freedom is often to do things that are radically different and often times competitive with the status quo of existing people, process, products and services with a corporation.
Salesforce.com is a great example for why giving a team freedom is unique in a startup and and hard to do inside a large company. Salesforce.com was started in 1999 at the height of the “dot com” bubble by a group of former Oracle executives who believed in a new way to deliver software applications. They were not trying to build some new product, but rather they thought that customer relationship management (CRM) software to manage sales process and customers was best provided not as a software application but as a service. (To learn more about software as a service, here’s some info at wikipedia.)
Their whole marketing campaign in the early years was “No Software”. They used that slogan everyone from their website, to advertising, to buttons they handed out at trade shows. And they were wildly successful because the time to value versus installing the market leader at the time, Siebel’s CRM software, was much greater for Salesforce.com.
It is unlikely they would have been successful with this innovation inside of a company like Siebel. Can you imagine one of the top software companies in the world giving a team the freedom to market a new way to deliver its services under the moniker “No Software” when the vast majority of the company’s revenue came from selling software?! No way. It turns out that Siebel did try software as service when they released a competitor sales.com though it ultimately failed and Siebel was eventually acquired by one of the largest software companies, Oracle. (Interestingly, Larry Ellison, Oracle’s CEO, has been an investor in some of the top SaaS companies which compete with Oracle including Salesforce.com and Netsuite)
The inability to give teams complete freedom is one of the reasons that innovation in a large corporation is hard. Once you are successful with an innovation, for example Siebel selling CRM software, it’s hard to put your own business at risk with new innovations such as Salesforce.com selling their solution as a service. Innovation can often not only threaten but require massive change to products, people, or processes.
Startups have the freedom to do things differently and that freedom often leads to innovation. While innovation can lead to massive value creation, more often than not, efforts to innovate actually fail. And failure is another reason why corporations do not innovate well.
Failure
We all know about the successful ones – the startups that go on to create new markets, big business and often times big companies. Some that come to mind are Google, Salesforce.com, VMWare, Amazon.com, and many more. However, the fact is that for every startup that goes on to create a new market, business or company, there were 10 or 20 times as many failed startups. And this failure is needed for innovation, yet it is not something corporations are set up to do. They are not likely to take hundreds of millions of dollars and have the majority of 50 some odd projects fail with the never-ending pressure of meeting the quarterly expectations of Wall Street.
The venture capital model basically is, for example, that out of a group of 50 investments over a 5-10 year period, there will be a few if not even just one big hit that provides for the vast majority of value creation. Think Google, eBay, Salesforce.com, etc. that end up with multi billion dollar market caps. Then there will be a few successful companies that are often acquired by larger corporations for several hundred million dollars. Think VMWave which was acquired by EMC before being spun out years later, Pure Digital, the makers of the Flip video camera acquired by Cisco and even Vontu by Symantec. Then there are basically the remaining 80+% that either simply fail or somehow return some small amount of the initial investment.
You need to invest money in lots of projects and only a few will succeed. Corporations cannot typically afford to do this. Which is why the most common route for successful innovation for large corporations is through acquisition of these companies. It is far less expensive and risky to acquire an ongoing business that has proven itself then to invest in the 50 different ideas to try and find one that works.
David and Goliath
While, there are lots of other needed ingredients for innovation to occur, having the right dedicated people with the freedom to try lots of things including the ability to fail, is a key foundation for startups – and something around which corporations are not organized. This foundation is one of the main reasons startups beat corporations in the innovation game and has been the case for decades. Until corporations figure out how to replicate this, my money is on startups to be the continued source of innovation for years to come.
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Some other interesting posts related to this topic:
It’s the people, stupid and It’s the people, stupid, part II. on the importance of people.
Following the puck can give you a black eye. on competing and innovation.
I fully agree that large companies seems to have trouble innovating. That said, there are many things that large companies have at their disposal which small companies do not. For example:
- Large sales forces with deep customer relationships
- Pre-existing contract with customers
- Solid relationships with the analyst community
- Established marketing outlets
- In-house engineering talent
.. etc.
Provided a large company found a way to leverage these things without killing true innovation, shouldn’t they be in a better position to launch a successful new venture then a bunch of guys in a garage? If done right, shouldn’t a truly innovative and well supported incubation team, housed inside a large company, have a hit rate o well over 20%?
one would think that large companies have an advantage, but in many cases what you listed as strengths are weaknesses. For example, large sales force with deep customer relationships tend to not want to take risks on new and untested products with their customers to protect their “annuity” businesses.
Agreed. Large company’s many times are frozen by fear, or the Innovator’s Dilemma. Only startup have the freedom to reinvent, and create something truly innovative. In fact, I believe the VC community serves an important purpose – funding R&D and Innovation. It is no wonder many of these companies are acquired. They can use VC $$ to create innovation (in product, and business models) that then be careful merged into a successful giant.
The condition that Joseph speaks about that prevents large enterprises from innovation might be better classified as an immutable law of nature. The second I began reading, I was thinking about the inherent resistance to any innovation within an enterprise as a means to “false” survival. If the innovation threatens existing businesses/business models, it will never see the light of day. The only exceptions to the law are 1) acquisition (the Cisco model) or 2) an intrinsic business methodology that might be called ‘additive innovation’. Additive innovation is the model practiced by 3M, where new innovation can come about because it does not threaten existing businesses within. (Even within 3M if a product were to threaten a bread and butter product like sticky notes, I think it too would fail to see the light of day.)
I say “false” survival because in truth the survival of the enterprise is in fact threatened by the innovation it fails to foster. Large companies die too (at least and hopefully forever in this country). If you look at the DJIA (aka the “Dow 30”, a collection of the top 30 largest and most widely held public companies) you will see “change” before your very eyes. In the early days the Dow was dominated by railroads, but no longer. With the exception of GE, there is no constant entity as part of the Dow. Anyone remember U.S. Leather Company?
Perhaps the only immutable reality in all of this is that change is the constant. Recall “Remy” (Disney’s Ratatouille/2007) responding to his father pronouncement “you can’t change nature”, exclaims “change is nature”.
I agree that large corporations have difficulty in fostering startups. However, I think that one of the reasons is the corporation mentality that forces people to be corporate drones in the daily grind of commuting to/from work, spending an 9-5 hour day(facetime) in a small and confined space, and concentrating on the task with no communication with friends or family. How can a person think outside a box when one is in a box?
it is amazing how stifling corporations can be simply from the work environment. it’s because they end up having a facilities organization that is only measured on costs and not at all on business success and employee attrition. it’s the proverbial “butt in seats” approach to offices.
and HR is just as bad in that it’s cookie cutter based on their HR manuals.
you might want to check out a post on people I wrote and the importance of situational leadership. http://www.ansanelli.com/blog/?p=389 thanks for the comments.