Skip Innovation Now, Die Slowly Later

Robert Neivert, Venture Partner, 500 Startups
Robert Neivert, Venture Partner, 500 Startups

Robert Neivert, Venture Partner, 500 Startups

As the pace of innovation increases, companies using a status quo strategy are actually falling behind. (Just ask the taxi industry how much Uber and Lyft have hurt their bottom line). Innovation companies are crushing their “old school” competitors with higher margins and more profitability, creating the bonus advantage of leverage to recruit better people.

So how does a successful, larger company find that radical new idea to compete with their more nimble start-up competitors? The following are some tips I can offer you after many years—and hundreds of investments—answering this question.

First, it is important to understand that large companies have an intrinsic barrier to innovation. The very skills, procedures, and hiring practices that help companies succeed and grow are the same skills that prevent innovation. Large companies want predictable, consistent revenue growth. But innovation is not predictable, it is not consistent, and it often demands the death of precious projects making money. While it may seem like professional suicide to pursue an innovative (read: risky) project that threatens key profit centers of your company, if you want to compete, that is exactly what you do.

 Focus on the problem, find a good partner that complements your strengths, use the Lean Method, and pull in outside expertise as needed  

Where do you start? Focus on a problem that your customers would pay you to solve, which your existing products don’t address even if you improve them. The solution to this problem will be your innovation project. Since there is a high kill rate in this process, I recommend you develop at least 10 different solutions to generate the “winning” project at the end. Hint: Most likely, the problem is actually a great opportunity, but your team may lack the skills or technology to tackle it. Or maybe the project is considered too risky. (Remember, innovation=risk.)

How do you move forward? Find a partner with strengths that cover your weaknesses. As a big company, you enjoy the natural advantage of distribution, customer base, and customer knowledge. So look for a smaller company that has what you lack (and lacks what you have) and is focused on solving the same issue. At this stage, you only know the problem, not the solution. So build an innovation team that it is highly skilled, fast, and flexible. It is critical for the team to learn and adapt quickly as you get customer feedback. You want a great team—the team is actually more important than the product.

With your team in place, now it’s time to get specific. Define what the customer really wants, how much they will pay for it, how they want it delivered, and other key market features. I recommend using the Lean Canvas approach, which gives you a sharp picture of what you need to deliver to win. Focus on speed and test data. Often you can complete this part in just a few weeks and on a very limited budget by asking the right questions, which the Lean approach covers for you. When finished, your options for which innovation projects will drive revenues for your company become clear and easy to choose.

There is one more piece that is critical to your success. You need an experienced team of people who can evaluate start-ups and run Lean projects. Often a third party is hired for this role for the following reasons:

• The project team needs deep industry knowledge to find, evaluate, and select the right partner companies to work with.

• The project team has to make hard decisions that can be very unpopular such as killing a project with a weak product-market fit.

• The project team must be focused on the portfolio of projects not just one, often killing one project to bring more resources to the better project.

• Most internal management teams have conflicting interests with the more conventional aspects of operations.

When you complete the Lean approach, you will have a portfolio of proposed solutions. These are the strongest contenders for driving new profit centers in your organization. Reshuffle your resources to double down on these projects. Remind your innovation team that the ultimate goal is to find the single strongest solution out of the whole portfolio they are developing—not to protect the particular project they are working on. The robustness of the overall portfolio is what will determine the strongest contender for success. This can be a difficult concept to accept, because people often get attached to the projects they are working on, but it is this distinction that separates the winners from the losers in innovation.

In summary, innovation drives profits. Large companies tend to avoid the risks inherent in innovation and often lack the skills to drive it. To overcome these barriers, focus on the problem, find a good partner (start-up) that complements your strengths, use the Lean Method, and pull in outside expertise as needed. As you pursue the projects in the portfolio you develop, remember to aggressively kill losers and double down on winners. With this approach you can enable innovation and reap the rich rewards.

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