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Corporate Innovation Trends

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The life of an S&P 500 company is rapidly declining and increasingly, the risks to these companies comes from an armada of startups and not a giant incumbent competitor. We dig into how corporations can use startups to innovate faster and how to make the important build, buy or partner decision.


Do we think we'll see more investment from international corporates like Alibaba?


Yeah, absolutely. I think it's already stepped up significantly. I would say that the corporates who are the most aggressive are either...I'm generalizing, but the data, I think, will prove this out, are the U.S. and Asia corporations. We find the European corporations are not doing as much, but Asia definitely, Asian corporates are doing a lot. On the investment side, they are buying as well as building and partnering. So incredibly aggressive there. A lot of the mega-rounds that you see in the press in Asia are often…almost always have some corporate involvement.

 

Do you think it's important for corporates to invest in their own verticals?


Yeah. I think there are a handful of...if we're talking about investment from a venture perspective, there are a handful of corporate venture firms that really act like traditional VCs. There's not many of them; I'd say Intel Capital, Google Ventures, Qualcomm maybe to an extent. But I'd say the ones that...but those are unique, and I don't think that's a model that is going to work. At least initially for everybody else. So I think investing in things that are at least adjacent to what you do is important. It'll, I think, help with...what we see is it helps with getting alignment and interest from the business.

 

That doesn't mean just incremental innovation, though. There was a presentation we had given last week to insurance executives, and I think what we were finding was that insurance companies were increasingly investing in startups. But they were really investing in things that made their core business more efficient, and not in things that might actually totally disrupt their core business. So if you're an auto insurance company, that could be investing in platforms that help with pricing of auto insurance. That could be great from a distribution perspective. It's not to say you shouldn't do that. But what they weren't doing was necessarily looking at pay per mileage; it's a completely different underwriting and risk models related to insurance. So investing in your own vertical is good. Investing maybe in areas that might be a little further afield could be good as well.

 

Do you think corporates should invest for strategy or profits?


I guess the glib answer is "All of the above." I think if you're going to consistently lose money when the economy turns, that's going to be one of the first business units that's going to be restructured or have an organizational realignment. I think you want to at least consider the idea that there's going to be...I don't know if "profits" is the right word, but there should be some direct, hopeful measurability of what the effort has done. So whether that's a business unit that has cut costs or has become more efficient or has distributed more product as a result, you should get credit for that in some ways. But I think there does need to be some bottom line impact, especially in the beginning. I think over time after you've had some success, you have a bit more latitude.

 

Are there corporations and specific verticals that are at most risk in the near term?


I think there's a lot of verticals. I think some of them, probably folks expect...so I think within financial services, kind of across...and financial services is a very broad umbrella. But insurance is an area that we're seeing an incredible amount of innovation happening in now. Payments still has a long way to go. Traditional banking, wealth management. So kind of the whole umbrella of financial services, there's a lot of room to grow, and there's a lot of risk, I guess, or opportunity. Again, this just depends on your perspective.

 

Auto is the other big one. I think if you want to figure out if an industry is at risk, I think there's a few things that you can look at. I don't want to rattle off a bunch of industries, but I think you can look at are there unusual suspects entering that space? In payments, for instance...when I was at AmEx, it was a while ago, so we used to think of Visa and MasterCard, and Discover to some extent as competitors, and Citi and BofA, and we'd think about them. But we didn't really think about the tech players. We sometimes thought of PayPal. But now, I bet you everybody's talking about Google and the telcos who are getting involved in payments. So I think you want to look for a messy landscape in terms of the types of organizations entering. And then you want to look at where the pace of innovation has accelerated. Have there been notable exits? Are there some emerging companies that are getting traction? So those two things combined are often a good way to see if...a messy landscape, fast-moving, are the ones that are most at risk because often the incumbents there can be blindsided by...they understand it maybe theoretically or in an academic sense, but don't do anything about it.


What corporation role governs the biggest roadblock to building a truly innovative corporate culture?


It's a loaded question. I think the big thing is that I think corporations are really good at knowing. So they know what's happening often. They have a pretty good sense for what might be happening in the market, and what, often, the roadblock is actually doing. So "Hey, we have used CB Insights, and we figured out what we need to do, and we've got action. We've got momentum." And then, it's really like, "Well, now, what do we do?"

 

So I think you have to start with the knowing part, so it's not to say that that's not important. But the ultimate roadblock is you have to take some bets, and you have to realize that many of them aren't going to work. You're not going to bet 1,000 on these. So I think that's one of the big things to...that's probably the biggest impediment, is just analysis paralysis.

 

I'd say the other thing is death by committee, so I'm giving you two. It's innovation efforts, not a democracy. So not everybody on the executive team should have a vote. People's feelings might get hurt as a result. But you don't need everybody to chime in. You want the people who are informed and whose maybe businesses are impacted to chime in. But not everybody needs to.

 

I'd say one of the things we did at AmEx, which was not good, was we had a sort of one veto could kill an idea. Absolutely don't do that. I think that was clearly badly structured on our part when we were going through things.

 

I think one of the other things now that I've kind of gotten started, folks will set up their innovation efforts, and they've gotten capital, they've gotten some resources, and we're working with them. And what is the reality is they didn't put an A player in charge of the innovation effort. So they put somebody who plateaued at the organization, who's been there a while, and it's their special project. And that just doesn't send the right message to the rest of the organization. It says, "Hey, innovation where we're doing it in name and not in practice." And so, I think that becomes another important thing.

 

If you're building a corporate accelerator that actually worked, how would you go about it?


That's a really good question. I think I'd spend a lot of time upfront building your brand up in the startup ecosystem. Because I think what happens with corporate accelerators today is that they get Tier 3 deal flow. They get the companies that don't get into the Tier 1 and even Tier 2 accelerators. And so, that's not what you want. You want the best entrepreneurs and the best ideas. And so, part of that is being part of the ecosystem and building up your brand, and being viewed as somebody who is not just doing it for theater purposes. I'd say before you start that, it's really building relationships in the ecosystem. It's getting to know companies. It's maybe offering value to companies in exchange for nothing beyond maybe the value your business gets back from maybe efficiencies or benefits that that startup gives you.

 

But I think like, if you look at venture investors who have done very well, they play the long game. And looking at, "Hey, six months, what's our track record a year out?" is tough, and that's an inherent conflict in large organizations because you have...I remember having quarterly and annual goals, and budgets got set every year. There is a conflict there. But I think before you get to accelerator, it's really kind of understand the ecosystem, create some credibility in it, and then maybe think about an accelerator at some point.


What role do employee incentives play?


They play a big role. People do what you pay them to do. And I'd say one of the employee incentives, or one of the structural impediments that we see is around IP. Often, it's, "Hey, if you propose an idea as part of our innovation effort, the company now owns it." I've seen this now at many clients, I've seen it at AmEx. There are entrepreneurs in your organization, without a doubt. But really, the true entrepreneurs are probably thinking about leaving to pursue some of those ideas. And so, there's no way they're going to give you those ideas if they know that down the road it's going to buy them a lot of heartache and grief if the company decides to come after them.

 

So I think beyond incentives, some of the things are just structural. And then I think ultimately, it's about the reward. So if you get past that IP impediment and you say, "Okay, hey, the IP is free and clear," whatever you determine, that makes sense for you to foster that, what's the reward? If we build this business...and it takes many years, right? So that business isn't going to be a $100 million or a $1 billion business in a year. But over time, if that becomes a big business, what's my reward, right? Sure, a title might be interesting, but am I going to see...is there some potential for meaningful economics from that back to the team that built it? If it's just, "Hey, instead of the 5% raise, you're going to get an 8% raise this year, and your bonus is going to be 12k instead of 8k," that's not going to get people excited. I think people want to know that if they make an impact, they're going to have...that they'll be personally impacted.

 

And this is hard. I think venture units at corporations have a bunch of different ways they try to do this, but carried interest and things is not necessarily easy in venture. And then from an innovation effort perspective, it becomes even more intangible. But yeah, I think incentives play an important role, but you do have to start trying stuff. And then you can do these things in parallel. You can start trying experiments and then at the same time, start to get the organization ready from an IP and other incentives perspective as you also are experimenting.


Which company or sector do you think is doing this right, and has had success in the last five years?


So, first of all, I don't think there's any sector doing this right. Innovation tends to be company specific. It's very rarely that an entire sector is innovative. So, in terms of companies, the obvious ones are Google and Amazon. They're kind of outliers. It's hard to replicate what they do. I think part of it is very cultural, it's in the DNA. Having founders involved, I think, also does really fundamentally change the game.


Although still early, I'd throw Facebook into the mix. They've shown a desire and willingness. And, again, I think with the leadership of Mark Zuckerberg over there, and being founder-led, a willingness to invest in and really acquire technologies and platforms that they believe could be big one day. So you see their Instagram acquisition, which was at the time, people wondered, “A billion dollars?” And, now, it looks like a very prescient and very smart bet. WhatsApp, Oculus -- on the virtual reality side of things.


Beyond the kind of obvious big boys of tech, you have Intel and Qualcomm. I think, via their venture arms, have also been quite good and consistent at investing in and accessing innovation over time. Interestingly, both are under what can be considered new management. So it'll be interesting to see how their thesis and approach to investing changes over time, or if it stays the same.


A lot of the other folks are in the early days. So, I think, these are really more folks we would keep an eye out on. We think there's some interesting facets to what they're doing. On the financial services side, there's USAA and Mass Mutual Ventures, we think are doing some interesting things. Salesforce within tech, has also been making some pretty prescient bets within the venture side. Target, on the retail side. Again, these are ones that are early days, we think are, however, doing some interesting things, and worth watching.


On average, how often do big companies try and fail to build a startup project within their company before seeing the light, and doing it the right way? How many times must they bang their heads against the wall?


So, the honest answer is that there's no way to really know this because there's no compelling reason or disclosure of big public companies, to discuss these failed projects. So, we really only tend to hear about the successes and the occasional really big headline-grabbing failure. 


I think, what we've seen in talking to clients is that there are different types of startup projects that corporations do. And some, they're actually good at. So corporations are good at delivering flavor or incremental innovations. So if you make cookies and decide that you're going to issue a new version of the cookie dipped in chocolate, corporations are pretty good at that. That's the epitome of flavor innovation. 


 It's the discontinuous, disruptive innovation…and, I apologize for using that overused word. But, that corporations have not shown with the exception, again, of your Google, Amazon, Facebook's of the world, that they're not good at. And so, if we look at the number of big companies who’ve developed truly disruptive new businesses, technologies, business models, etc., the number is pretty low. And so, as a result, I suspect that it's really less about trying and failing. Than big companies just generally don't try these things. 


There's so many reasons that corporations don't try these sort of disruptive things. One is…and we'll talk about these. Because, I think, some of the other questions revolve around this. But, the bottleneck may be that they just don't have tolerance or the talent to develop these ideas. 


What exactly do you mean with, “Put skin in the game,” when dealing and partnering with startups? 


So on the webinar, one of the things we talked about was the amount of time that big corporations waste of startups with esoteric nebulous claims of building joint value, or the creation of joint value. And what we advised was that this is all a waste of time. It doesn't do anything to build your brand, you're sort of window shopping and wasting the time of a startup. 


So, when we talk about “skin in the game,” we mean money. Are you willing to put dollars behind this initiative, this startup is working on with you? I don't mean free pilots. I do not mean free advise on a product. I do not mean council. That stuff's all pretty cheap. You might be bored in your job, and it's fun to talk to startups, but that's not useful to startups, usually. 


So I would say, if it's not a pain point you're willing to put even a modest amount of money behind to solve. It's one, an indication that it's not a big enough deal for you to internally get a champion for, or even for you to become a champion for. And, two, that you don't think highly enough of the startup to solve it. So you're wasting your time and the startup's time. So, again, “skin in the game” comes down to money. 


Are the big professional services firms, big foreign large consultancies in the venture capital game?


Yeah, they are. The big four. And, I think, even some of the other larger consulting ecosystems all starting to invest in venture and startups. Most are pretty young so it's hard to tell success. I think, what we have seen sort of in the early days, again, where it's hard to declare this as the final trend. We'll know in a few years, assuming they all stick with it. They seem mostly to be investing in the incremental flavor innovation. So, things that might help them sell, or services, or products that they feel like they might be able to sell in existing engagements. It's not trying to think about reinventing consulting. So as you know, they're sort of the robo-consultant, that's not something that we see them doing. But, again, that may change as they invest more. 


Is there in inflection point when the signals tell you that your company is vulnerable to disruption? So, basically, how do you know when you're vulnerable, I guess, is the question. 


The honest answer is every company is vulnerable to disruptions. So if you've seen the slide deck from the corporate innovation webinar, just look at the declining tenure of companies in the SMP 500. And it's pretty clear that it's harder than ever to stay on top of that. You have this death by a thousand cuts. So it's become increasingly cheaper for startups to be created. Again, the end state of most startups is failure. But it's really those few that succeed that you need to be worried about. 


In terms of signals that we do look for, I think, one of them is look at what the smart money VC's are doing. So look at the industries, and spaces, and problems that the folks that have a history of seeing around corners are investing in. So, think of Sequoia, or Greylock, or Union Square Ventures. What are they investing in? 


Their specific investments aren't necessarily the ones that are going to win. Although, given their investment, they have a probably a better than average shot than about any other startup. But the fact that they're investing in your space means you should probably watch out. I think, two, look at the over all startup funding activity to your space, and the types of companies being funded. And, really, whether the funding is going past seed and series A. Because, what that then indicates is that there's companies that are meaningfully moving through the pipeline and that are demonstrating enough commercial traction, customer traction, to warrant sort of bigger dollars. And so, that is an indication that something's going on that seems to be working, at least at the early days, or in the early stages. And so, if they're in your space another reason to be worried about or thing to look for. 


And then, the final thing is look for unusual suspects. Unusual suspects who are larger sort of corporations. So, if you see Telco's getting into your space, and they weren't typically in your space. Or Google or Apple doing things, whether it's investments, acquisitions, filing patents, partnering, that may be another sign that folks have honed in on your space being right for disruption. 


And so, you'll see that in spaces like payments. When I used to work at American Express, I think we used to think of Visa/MasterCard, and maybe some of the issuers, the Capital One’s, the Citibank’s of the world as competitors. I imagine if you’re at a payments company, today, you're looking at what Google's doing. You're thinking about PayPal. You're thinking about the Telco’s. So these sort of things are much messier. And so, obviously, other folks have woken up to the oppportunity. Not to mention all of the startups -- the Stripes, the Braintrees of the world. Braintree, of course, has been acquired. Automobiles is another big space where we're seeing these sort of trends, these sort of characteristics exhibiting themselves. Insurance…but, again, I don't think there's any company that’s immune from this. If you feel you are, you're probably in a bad place, in terms of sort of complacency and just hubris. 


What role within a large corporation should lead relationships with entrepreneurs? What should their individual profile be?


So, this is one of those kind of one-size-fits-all type of questions. And so, the answer is that there's no perfect profile. We've seen a few things work. If you can recruit externally and find someone who's had some entrepreneurial success or has perhaps worked in venture with some success, that can work. It doesn't necessarily mean that that's a guarantee. We see a lot of folks who hire someone out of Google or Apple because they feel like just having that name on their resume somehow makes them equipped to run an innovation effort or help with sort of creating a more entrepreneurial culture and taking some risks. That's just logo chasing, at its finest. 


I think, with somebody who's had entrepreneurial success, it's make sure that they're not some blowhard who’s interested in regaling you with stories of their past successes. You want someone who will, especially if you're looking to build relationships with entrepreneurs, is someone who’s going to listen to entrepreneurs. Who is going to be empathetic. Who's going to be able to help them. You also need somebody who's not a cowboy and who's going to be able to build relationships within the larger motherships. That's important for somebody, especially externally, to be able to do. These are big organizations. Having the savvy to navigate them is important, as much as we might hope that there aren't silos and things of that sort. 


The other type of person, if not external, is somebody that is a well known rising star or known star, within the organization. So, somebody who has access to leadership and decision makers, and who's viewed very favorably. So, not somebody who is in the twilight of their career and innovation is now their special project because it's sort of a fun thing for them to do. Everybody in the organization knows they're in the twilight of their career. They won't have the pull to get things done, or maybe they have the drive. 


The other things I think we've seen is running innovation efforts out of the CFO's office generally is a bad idea. I think the finance function tends to be more motivated by what we think of as FOGS than FOMO. And so, FOGS is an acronym for Fear of Getting Screwed. And FOMO is, Fear of Missing Out. 


And so, you want someone who is competitive and is looking for the next opportunity. Who’s motivated by FOMO. And the finance function tends to be more worried about getting screwed. And, hence, the FOGS/kind of fear of getting screwed tends to be their primary driver. And so, it's not, personality wise, is often not the right fit just because they're attuned to preventing surprises. And, innovation is about creating surprises. 


So, CB Insight’s Mosaic versus understanding the business model and estimating growth based on public statements?


So a little bit of a cryptic question so let me try to unpack this. I think the question really is, “If you're trying to understand the set of startups, how can you do that?” And so, I guess it's, do you understand the business model and look at public statements of the company? Or do you use an algorithm? And so, CB Insights has a private company health scoring algorithm called Mosaic. 


I think you can use all of these. I think it's when you use them. So, I think to understand private startups, the challenge is really how do you quickly make sense of the world. 


Last year, we tracked almost 11,000 tech companies that received fundings. And if you're trying to understand a particular market. Let’s say it’s block chain, or payments, or wearables, or IT, there's a lot going on. So going one by one to understand the business models of those companies is painful. So, what we see our clients doing is taking an industry, creating a market landscape. And then, using Mosaic to whittle it down to those companies that have traction. Looking at their momentum, looking at their money, looking at the markets that they're in. And then, from there, once they've identified some of the best ones, that's when they maybe go in and do a more in-depth assessment of a handful of companies and understand their business model and the like. 


In terms of relying on public statements by startups I'd say don't do that. Startups tend to be founders. And I can say it as a founder myself, we tend to be hopelessly optimistic. What you need to be when you're a startup founder. So, obviously, their statements to the media often tend to be flowery, to put it mildly. So, that optimistic guidance is good. But, I think there's much better signals that you can discern about companies using data, than listening to what they’re saying. Unless you're willing to just haircut everything they say by a significant amount. 


Do you think corporate ventures should choose a GP to invest with?


So, again, this question could go in two ways. I'm going to answer both of them. I think if it's going to, “Should a corporate venture syndicate with a traditional VC, and co-invest with them?” I think this is fine. What we're seeing today is that, as the climate turns, we're seeing some of the traditional venture GPs who have dogs in their portfolio, coming to corporates to try to get some of that proverbial “dumb money.” And so, I think that's one thing you want to be careful about as a corporate. Is that, make sure that they're not bringing you the laggards in their portfolio, and that they're also investing, and that you've done your diligence on the business and don't just rely on the GPs. But, venture, if you're doing investment, is obviously…syndication of deals is really important. And so, building relationships up with the GP, or many GPs is very important. 


If the question is: Can we access innovation by investing in a GP? So an LP relationship with a VC fund, this is, in our view and based on what we've seen, a pretty terrible idea. It just doesn't make sense to try to access innovation by investing in a single GP when you can invest alongside any number of VCs down the road. So, why bet on one horse when you can bet on, really, the whole group of VCs that might be making relevant bets. So, I'm not sure as an LP, to access innovation it makes sense. If you want to invest as an LP, because you believe there's financial returns, and that's interesting to the company, it's a different story. But as an access to innovation it doesn't seem to make a lot of sense. 


With the strengthening of the dollar, will we see more interest from U.S. corporates in European startups?


So, we're talking about accessing innovations. So if currency and exchange rates are driving your innovation efforts, I think you're doing it wrong. When we look at the markets for startups and things, Europe is kind of clearly the bronze medalist for corporations. North America and Asia are far ahead of Europe. North America, being the hub with Silicon Valley, and then New York, and Massachusetts. Followed by even, I think, Canada now increasingly has a pretty active and thriving scene, is a big market where really a lot of the innovation does begin. Asia, given its size and relative nascency when it comes to some business models, and technologies, and other things, and it being a bigger green field opportunity is another big area. 


 But, Europe, there just doesn't seem to be as much interest from corporates in Europe. And the European corporations themselves tend to be kind of hopelessly conservative. We don't see any impetus for investing in Europe by corporations, to be very honest. It does happen. It’s just, I think as far as markets go, it's just North America and Asia that are going to be the lion's share.


How do large corporations balance the needs of capital markets, i.e., delivering quarterly and yearly results, shorter term ROI horizons, against investing in innovation, experimenting, allowing for failure, and things that require a longer term to deliver ROI?


So this is the million dollar question that billionaire, the trillion dollar question. This balance is incredibly hard and most corporations suck at it. That's the honest reality. It's why startups exist. If big corporations were these nimble entrepreneurial organizations that could come up with these ideas and actually execute upon them then there'd be really no reason for startups. But they don't, and they can’t. So that's why startups exist. 


It's hard to balance because innovation is long-term focused, and the public markets are terribly short-term focused. And, unless you are like Bezos and Amazon have told people, “Don't expect anything in the short-term.” And gotten them trained on it. It's hard to do. But once you've trained them on quarterly results, it's hard to reorient the street to thinking even to a yearly level. And the reality is, that if you're an executive at some publicly traded company that has these short-term horizons. You are gold and your job is dependent upon delivering short-term results. And if you don't do that you're not going to be around for the long-term. So, investing becomes difficult. 


Second thing is incentives. So the nightmare that has become delivering shareholder value. Executives, in the rank and file are compensated, generally, on short-term metrics. And this disruptive discontinuous innovation takes years -- three, five, seven, 10 years. 


And then, I think the third factor is that, to be very frank, most corporations don't have the right people to do this stuff, right? You need to attract and retain really bright, entrepreneurial people to come up with these ideas and execute upon them. And so, innovation, which is let's say one part good ideas and two parts great execution, are hard to pull of because the talent at big companies is not well suited to this. Whether the ideas are really good or just incremental is the first challenge. And then, whether the organization is set up to actually help those people to succeed is the other problem. So, even if you have the great idea, which is often in short supply, is the organization set up to help you succeed? And, if you fail, is it career limiting or is there a place where you can actually go and not be in purgatory? And, if you succeed, is the upside an extra 2K in your bonus, or 5K in your bonus, or is it meaningful compensation and reward for building something big? And most corporations haven't figured that out.  


So with undervalued currencies in Latin American countries, which are at a discount, startup in VC is also on the rise. Do you do any market analysis for countries like Brazil, or Mexico, Colombia, Argentina, Chile?


So, we collect data on LatAm. Again, I'll just restate the earlier point. Undervalued currencies are not the reason that folks are going to look at LatAM for innovation. Innovation does not come by trying to time currency and exchange rates. So, again, there's a big opportunity there. And that currency tumult is probably though, not going to be the driver of somebody investing in innovation in Latin America, as far as we've seen. 


The biggest roadblocks to building truly innovative corporate culture?


So, I think we've talked a lot about this in some of the other questions so I won't belabor it. I think it's the ability to look at a time horizon that's sufficiently long and put resources behind it, and commit those resources, and not pull back at the first market correction. Having the right people who can come up with the ideas, and who can actually execute upon them, and having the organizational structure to do it. And then, the incentives, which, again, people do what you pay them to do. And so, if those incentives aren't right, it's going to be hard to get the sort of innovation to be culturally accepted. 


If you had to kick start a corporate accelerator that actually worked, how would you do it?


I would avoid building a corporate accelerator. But that doesn't answer the question. Here's the things that I would do before I start the accelerator. I think people start the accelerator. They get the announcement in Tech Crunch and then they feel like they've done something and they've actually done jack. So, I think there's a few things. 


One, I’d say have a tight thesis around what you're interested in, in your first class before you start. We see lots of corporate accelerators go out and have these very vague, “We're interested in insurance tech, or retail tech.” And so, I think being specific in the beginning will help you get companies that are interesting to you. And, also, companies that are interesting to the people that are internal, right? And, so I think you can always expand the scope down the road. But I think being specific about what you want is important. Spending some time developing that idea is important. 


Two, before starting the accelerator, go out and identify…you can do it on CB Insights. Or you can do it with lots of Google searches if you want to waste time. Is, develop relationships. Identify, and then ultimately develop relationships with the seed and series A investors. So, these are the folks that are going to be ultimately funding the companies that are coming out of your accelerator. And that's going to be how you build up your brand, right? So, you want companies that come out of your accelerator to have access to investors, and ultimately close that funding. And so, I think, identify every single investor in the spaces that you're interested in at the early stage. Find out what they look for and build that relationship. This will help get your companies funded. And, later on, that will be a metric of success you can point back to.


And then the third thing, again, doing this all before you launch the accelerator. Is, find entrepreneurs in your space and help them out. So reach out to startups. You have no equity stake in them. You have no accelerator at this point. But just reach out to startups who are relevant and meaningfully help…pick a number: three, five, 10 of them. Become a customer, i.e., pay them money. Help them if they're early. Get in front of prospective clients and understand your needs more. And the idea, after you've done that, is to go back to them and ask them if you were actually meaningfully helpful to them. 


The reason for this is twofold. One, you will understand how to be helpful when you launch your accelerator. And, two, you will build some references that you can actually use with future accelerator classes. You want to attract not the third tier companies. And so part of attracting the best companies, and the best founders who probably have options, is by helping them to understand that you're going to actually be valuable, and not a waste of time for them. 


Are you seeing more CVCs co-investing together?


Yep. Absolutely. So CVCs, even from competitive industries. So people who might be competitors are increasingly co-investing with each other. If it's good for the startup? I think the smart VCs now know that they should do it, and shouldn't try to box out competitive VCs in those situations. That's not the kind of reputation you want to build in the entrepreneurial community. 


Proprietary deal flow no longer exists, but what are the most efficient ways to build the best deal flow?


So, let me self promote here. You should be using CB Insights. I think finding the deals is not the hard part anymore. The hard part is becoming the investor that the best entrepreneurs want to work with. So, you can spend a lot of your time running around going to demo days and all of that good stuff. Or, you can spend time, like in the prior accelerator example, building relationships and helping entrepreneurs out. And then, as a result, becoming the investor that entrepreneurs believe, through their participation, changes the odds of success of their startup in a meaningful way, right? 


So if you're able to do that, you will win deals that other people may have a difficult time winning. And so, this is what your storied firms in the venture world do. They may have some proprietary deal flow, the really elite firms. But I suspect now, it's less about proprietary deal flow, because all the deals are out there. And more about the fact that entrepreneurs want to work with some of these firms more. And that's the sort of reputation I think you want to build. Versus, trying to chase this illusive and basically nonexistent idea of proprietary deal flow.


What have you seen in terms of successful organizations/leadership models for corporate innovation?


Again I'm going to bang on sort of the same drum. Successful models have the right talent, the right incentives, and the right outlook from a timeframe perspective. So, on talent, they tend to hire from the outside or put a star in place, as I mentioned earlier. They tend not to put them on the normal corporate salary incentive scheme. 


Often, I would say generally, they don't put the CFO in charge of it. They don't hire some big consulting, or advisory, or strategy consulting firm to lead their innovation efforts. That one always baffles me. Why hire a firm that is not viewed as being terribly innovative themselves? But people still, sometimes, do that, surprisingly. I think when you do that it's also incredibly demotivating to folks internally, to have some talking head come in and regurgitate what they've likely already been saying. So, I think those are things not to do. 


Again, not putting somebody who's plateaued within the organization, in charge of the innovation efforts as some sort of strategic project. Again, a quick sign that, when we see that, that we know the effort is likely not to yield the results that folks are after. Or, it's just paying lip service. It's doing the innovation theater thing that we see quite a bit. 


And I think the other thing is that successful models commit resources up front. They have carved out relatively explicitly, and of course, managing quarterly and annual earnings if this stuff does change. But they have committed three to five years from the start. So it's not a, “Hey, we're going to evaluate this on a yearly basis.” Of course, you're evaluating it to make sure that stuff's actually happening, and not blindly trusting it. But you're also not expecting that some disruptive discontinuous innovation, or product, or business model gets built in year-one. You want to see meaningful traction and progress towards something. But, again, not evaluate it on an annual basis.   



So then, you have that list. Then it really turns to build, buy, or partner. Again, there's no universal truth here. It depends on appetite for risk. It depends on your own, what works for you. On the build side, there's things that corporations, we found, are very good at, and that is what we call flavor innovation. Kind of an example of the pumpkin spice Oreo as one. What's hard is...and so, what you can do is copy emerging strategies that have traction. Schwab launched a robo advisor, Sephora got into the subscription box business, Gillette, which I had mentioned previously, got into the Shaving Club game and launched their own.

 

But what we see is that the disruptive moonshots tend to be harder. Google and Amazon are very remarkably good at it, but they're also really in a category of two. And maybe again, I can add three more to that to be generous. But most organizations just don't have the capacity or the desire to take on these moonshots. So building may be harder for the disruptive innovation.

 

Partner, really, the question here is are you really accessing innovation, or is it just good PR? And so, this idea of joint value creation. So we get inquiries from big corporations sometimes who say, "Hey, we don't really have money, but we'd like to do something that will deliver 'joint value creation.'" This is generally shorthand to be a big waste of time. So I think as a corporation, if you're going to partner, make sure you have skin in the game, that means money.

 

Partnering in exchange for equity, we did this at American Express when I was in the venture group. I think it has mixed results. You take the example of Starbucks and Square. It was a $25 million investment by Starbucks, but it ultimately resulted in a much larger loss to Square. So if you're going to invest and try to pile on with warrants and other things, or do a partnership and try to usurp value in some other way, maybe take a look at whether it makes sense to partner. I think you should partner on the merits of what that startup has, and not on the basis of some financial return that you might get just because for most large organizations, the return that they're going to get from some startup partnership is going to be small from a financial perspective. From an innovation perspective, the dividends could be large.

 

Of course, there are people who do it well, so I think Nordstrom is a great example, and you can see a case study we did on them. So just looking at how they've partnered, whether it's partnering, investment, etc., but they seem to have gotten a good recipe down for identifying, as well as ultimately executing upon partnerships.

 

Walk before you run, so don't make it complicated. I think step one is, "Hey, does this partnership make sense? Can we make the startup more valuable, and will the startup help us do something better?" Before you try to make it crazy, complicated with exclusivity and all sorts of things, I think that becomes something to wait on.

 

And then finally, you have your "Buy" option. So do you take a nibble which is an investment, or a full bite? Corporate VC is obviously booming, so it's in every sector, tech to healthcare, to finance, to energy, to media, and so, you see tech, you see healthcare, you see finance, energy, insurance, media, it's really across the board; telecom, even your larger industrial concerns are also getting involved and have been involved, many of them for many years; Siemens as an example. Again, this is not a tech thing. This is really all over the place in terms of where corporations are trying to get involved.

 

Corporate VC, as you may know, is on track for record highs in terms of deals and activity. Corporations are sitting on lots of cash now, and that's one of their competitive advantages from an investment perspective, is that they can help organizations, startups out, because they have just more resources than venture investors do. They participate now in an increasing number of VC deals, and the number of active, corporate venture units is actually increasing. And this is actually understated because we've been very precise here in terms of only separately delineated corporate VC units. If we were to include corporations that make minority investments off their balance sheet but that don't have a separately organized venture team, this number is actually much, much larger. So they're really stepping up their game. And [audio skips] unicorns; nothing that we do at CB Insights is complete without at least one mention of unicorns. So corporate venture arms actually have had quite a bit of success getting into and backing some of the unicorns.

 

That's on the buy side of things. Investment or acquisition. Acquisition, I didn't touch upon it too much. We just released something last week about acquihires. For those of you not familiar with the term, this was larger incumbent organizations buying a startup for its talent. That activity has dipped off quite a bit, and we'll send that out to everybody so you can see that. But I think part of the reason for that is that maybe evaluations have gotten a little bit out of whack, and I think the second thing is that the reality of an entrepreneur or an entrepreneurial team wanting to see its product get shut down and just go work in a large corporation is maybe just antithetical to what an entrepreneur wants. So we've seen a drop-off in acquihires which were really popular a few years ago. M&A has also tended to be at the smaller end of the spectrum as of late. Again, it might be due to valuations. But some interesting things to keep in mind from a buy perspective as well.

 

That's kind of the four parts of the process. Market assessment, market mapping, identifying the winners, and then your build, buy, partner decisions and some ideas around that. I think the one other thing, and it was on the initial visual, was network ecosystem development. And so, I think this is where a lot of organizations don't spend as much time. So they do the press release, but they don't really spend a lot of time building out their network. You'll see a link at the bottom of this slide where it says "Full lesson here." There's a whole lesson we have on how to build your network out using data. But the idea here being that you really have to actively engage.

 

And so, this old idea, and we hear this from corporations a lot, is, "Well, we have access to deal flow." You don't. Outside of 10 elite firms, proprietary deal flow is a thing of a bygone era. You really have to focus on finding and getting access to deals and smart people. And so, you can do that in a few ways. You can look at who's in the ecosystem and areas of interest. So again, if I just go back to payments, which is my roots, who's investing in payments actively? Going and targeting those folks from an ecosystem development perspective, I think that's a really smart strategy. Targeting who is working with your competitors. If I was still at AmEx, I'd be looking at who's investing with Visa and building relationships up with them. And this shares a syndicate view of investment. Who invested in companies before Visa? Again, those might be folks that I want to talk to because obviously, they have the ear of a competitor here. This is a whole separate webinar on ecosystem development, but there's a lot you can do there.


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This is, again, where we think using data on startups. There's no SEC filings, unfortunately. There's no 10-K and 10-Q quarterly releases that you can use. So how do you look at startups given they're opaque? And so, we've built some models, again, with NSF funding to look at momentum and market, health and the money, kind of the burn rate of companies. And so, you get a sense for what that looks like. And so, as a result, you can look at hiring activity across companies very quickly. And then you can just filter by mosaic. And so, I did a filter on that 525 and said, "Show me the top 5% who'd raised less than $20 million." And I'm now left with 23 results. So now you have a really long list, and you have a much shorter white list of companies that could be interesting to you. Now, whether you're thinking about partnering or building or buying, that's sort of the next step. But at least you now know who is breaking out within that list.

 

So then, you have that list. Then it really turns to build, buy, or partner. Again, there's no universal truth here. It depends on appetite for risk. It depends on your own, what works for you. On the build side, there's things that corporations, we found, are very good at, and that is what we call flavor innovation. Kind of an example of the pumpkin spice Oreo as one. What's hard is...and so, what you can do is copy emerging strategies that have traction. Schwab launched a robo advisor, Sephora got into the subscription box business, Gillette, which I had mentioned previously, got into the Shaving Club game and launched their own.

 

But what we see is that the disruptive moonshots tend to be harder. Google and Amazon are very remarkably good at it, but they're also really in a category of two. And maybe again, I can add three more to that to be generous. But most organizations just don't have the capacity or the desire to take on these moonshots. So building may be harder for the disruptive innovation.

 

Partner, really, the question here is are you really accessing innovation, or is it just good PR? And so, this idea of joint value creation. So we get inquiries from big corporations sometimes who say, "Hey, we don't really have money, but we'd like to do something that will deliver 'joint value creation.'" This is generally shorthand to be a big waste of time. So I think as a corporation, if you're going to partner, make sure you have skin in the game, that means money.

 

Partnering in exchange for equity, we did this at American Express when I was in the venture group. I think it has mixed results. You take the example of Starbucks and Square. It was a $25 million investment by Starbucks, but it ultimately resulted in a much larger loss to Square. So if you're going to invest and try to pile on with warrants and other things, or do a partnership and try to usurp value in some other way, maybe take a look at whether it makes sense to partner. I think you should partner on the merits of what that startup has, and not on the basis of some financial return that you might get just because for most large organizations, the return that they're going to get from some startup partnership is going to be small from a financial perspective. From an innovation perspective, the dividends could be large.

 

Of course, there are people who do it well, so I think Nordstrom is a great example, and you can see a case study we did on them. So just looking at how they've partnered, whether it's partnering, investment, etc., but they seem to have gotten a good recipe down for identifying, as well as ultimately executing upon partnerships.

 

Walk before you run, so don't make it complicated. I think step one is, "Hey, does this partnership make sense? Can we make the startup more valuable, and will the startup help us do something better?" Before you try to make it crazy, complicated with exclusivity and all sorts of things, I think that becomes something to wait on.

 

And then finally, you have your "Buy" option. So do you take a nibble which is an investment, or a full bite? Corporate VC is obviously booming, so it's in every sector, tech to healthcare, to finance, to energy, to media, and so, you see tech, you see healthcare, you see finance, energy, insurance, media, it's really across the board; telecom, even your larger industrial concerns are also getting involved and have been involved, many of them for many years; Siemens as an example. Again, this is not a tech thing. This is really all over the place in terms of where corporations are trying to get involved.

 

Corporate VC, as you may know, is on track for record highs in terms of deals and activity. Corporations are sitting on lots of cash now, and that's one of their competitive advantages from an investment perspective, is that they can help organizations, startups out, because they have just more resources than venture investors do. They participate now in an increasing number of VC deals, and the number of active, corporate venture units is actually increasing. And this is actually understated because we've been very precise here in terms of only separately delineated corporate VC units. If we were to include corporations that make minority investments off their balance sheet but that don't have a separately organized venture team, this number is actually much, much larger. So they're really stepping up their game. And [audio skips] unicorns; nothing that we do at CB Insights is complete without at least one mention of unicorns. So corporate venture arms actually have had quite a bit of success getting into and backing some of the unicorns.

 

That's on the buy side of things. Investment or acquisition. Acquisition, I didn't touch upon it too much. We just released something last week about acquihires. For those of you not familiar with the term, this was larger incumbent organizations buying a startup for its talent. That activity has dipped off quite a bit, and we'll send that out to everybody so you can see that. But I think part of the reason for that is that maybe evaluations have gotten a little bit out of whack, and I think the second thing is that the reality of an entrepreneur or an entrepreneurial team wanting to see its product get shut down and just go work in a large corporation is maybe just antithetical to what an entrepreneur wants. So we've seen a drop-off in acquihires which were really popular a few years ago. M&A has also tended to be at the smaller end of the spectrum as of late. Again, it might be due to valuations. But some interesting things to keep in mind from a buy perspective as well.



The third of four steps is identifying the winners. So which startups are breaking out? You created your market map, you identified hundreds of startups, but you want to identify the winners. Because it's their products, their technologies, how they're marketing that you should analyze. And they're either your threats or your opportunities depending on your perspective. 

 

So let's take that list that you created using Google searches and try to identify the winners. And so, you Googled, I'm just going to cheat here. So I used CBI to figure out how many payment startups there were in the last year, there were 525. Let's say you found all of them through your work using Google, which there is zero chance of. A lot of companies go back to the three Gs. They go back to, "Well, how am I going to assess the 525?" Gut, Google and consultants.

 

So let's take one example. Let's just try to analyze one company, so we're going to analyze Stripe, and so we're going to look at its web traffic. I'm going to pick a few measures that are sort of intuitive. I'm going to go see are they hiring? Maybe it gives me a sense for momentum, and are they hiring in sales or certain key roles that indicate their scaling up? You can try to do that using a site like Simply Hired. You'll have to strip out, obviously, irrelevant results, as you can see here. Try to get a sense for people talking about them maybe on social media, is there sentiment? So you can look at some tools here. You try to track news volume, so you go to Google News. And then, you just have to repeat that 524 more times. That's the process to whittle that list down.


MARKET MAPPING


This is our most popular graphic, the Periodic Table. So again, it really doesn't matter how you illustrate it, I think. But coming up with some visual way, I think, is important to illustrate a market. It's much easier for somebody to respond to this. 


BUILD, BUY OR PARTNER?


We've had a lot of success with clients who are in the defensive posture. When they see the unbundling graphic and they show that to senior execs, that has a very immediate reaction from them. An Excel spreadsheet and a, "Hey, there's 333 startups in our space that have raised $2 billion" might make the case. But again, seeing it, I think, in a visual format has helped quite a bit.


The market mapping exercise isn't hard, but here's where organizations waste a lot of time and talent on data janitor work. Part of the reason we started CBI, John and myself, was really doing exactly this in our old group, and it was our team that was doing it, it was going to Google. "Hey, what's the list of payment startups?" So my boss would come in, say, "Hey, Anand, can we figure out who's doing what?" I'd tell one of the analysts on my team, and this is basically what they'd do. They'd go to Google, they'd try to piece this together, and then the next step was this miserable Excel spreadsheet. So they'd be filling in this Excel spreadsheet. It basically meant staying at the office late with the implicit understanding this was going to be outdated tomorrow. And your title was "Analyst," but you were actually spending only 10% of your time doing actual analysis. So there's nobody ever in the world who's liked this job. This is the data janitor work that we try to get rid of, but I think this is part of the problem with market mapping, is that we spend too much time on the janitor effort, and too little time on the analysis.

 


So there's lots of different ways to illustrate this. We have our ways that we like at CB Insights, but we've seen clients do it differently. You have this market map, so this is one of the payment maps and this is breaking it up by use case, so you see point of sale, and you see Bitcoin, and you see all sorts of different use cases here.

 


So let me jump to process now. So how do you use startups to innovate? How you use them is really a function of your organizational personality. We talked to lots of organizations. They kind of fall into just loosely or roughly two buckets. There's those that are focused on defense, and those that are focused on offense. And so, the discussion when we're talking to a defense-oriented organization is often they're trying to get buy-in within the organization and some momentum around doing something that addresses the challenges that they see down the pipeline or in the future. It's about identifying disruptive threats, analyzing markets to identify opportunities, and understanding competitor activity. A lot of organizations start on the defense side and they make the case internally. You have to syndicate these things often up the chain. And then they move to the offense side.

 

And so, the discussion when we're talking to companies that are offense-minded tends to be, they've realized the world has changed. They're thinking about technology or they're thinking about startups in a way that is really underpinned by the idea of, "How do we gain share? How do we win customers, find new markets? How do we move faster?" Often, they do talk about disrupting the core business. And then ultimately, these are going to lead to actions, right? Build by our partners. So offense is a little bit more action-oriented externally, I'd say, but defense is often where things start because you need to build that case, you need to get people in the business units who are running the day to day excited about and understand and on board with why it makes sense to pursue this effort.

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From there, you've identified maybe a handful of markets. Then it comes into market mapping. So within a particular market that you think is promising, what are the different business models, technologies, solutions that have come up in sort of understanding that world? Finally, it's identifying winners. And so, you can identify winners...companies that are startups, for instance, that have momentum, that are going in the right direction. And that may then ultimately lead to some action. So you might choose to copy them and build it. You might choose to buy or invest in them, or you may just choose to partner with them. But again, trying to figure out which of those companies and models are gaining traction, and then ultimately, making a decision based on that. So I'm going to break down each of these steps in the next bit.

 

Again, just to reiterate, I think for most corporations, innovation is sort of random. At its worst, it's a buzzword. Often, there's no process. A term we like to use internally is that there's a lot of reliance on what we call "data janitor work" and "anecdata." So it's a lot of gut instinct Google searches and guys with MBAs. And I say that tongue in cheek; I'm a Wharton alum, so nobody with an MBA please take offense.

 

Market assessment, we'll start with this. This Wayne Gretzky quote says it the best. "You don't want to skate to where the puck is. You want to skate to where the puck is going to be." So how do you do that? The method today is, if I take the guys with MBAs approach is pundit-driven market assessments which are notoriously bad. So the phrase of "Economists have predicted 10 of the last 3 recessions" comes to mind. So here, we're looking at a variety of predictions about the drone and virtual reality markets. And we see virtual reality at $150 billion by 2020, we have it at $5.2 billion by 2018, $4 billion...it's just really all over the place. Is this really the best way to do it?

 

We think the best way to assess markets is using data and not decibels. So there's a few ways you can do that. You can stalk the competition. You can use data to identify industries with momentum, or you can just follow the money. And so, I've showed you some high-level examples of how you do that.

 

POSSIBILITIES, NOT PROBLEMS

This is stalking the competition. I had, when I was at American Express, written a book about resource allocation. And the idea being that the best way to understand strategy is to just look where you put your resources. So if I'm talking to you and I'm interested in what your hobbies are and what your interests are, you could either tell me, or if I could see your calendar and what you do on the weekend, I'd have a pretty good idea of what your interests really are. There's what people say and what they do. And so, it's the same thing for corporations. 


We're going to cover a lot today; I have almost 100 slides to go through in the next 40 minutes, so we're going to go pretty quick. First, we're going to cover the faster pace of disruption, kind of just talk about why things are different now in terms of the pace of disruption and innovation. Two, kind of tongue in cheek, talk a little bit about what we see sometimes when big corporations try to innovate, and it is innovation in theory or in Innovation Theater, as we call it. 


Third is a little bit philosophical in terms of your approach to talking and thinking about startups. We'll think a little bit about that and talk a little bit about this "Yes and" approach which we'll make a bit more sense when we get to it. Step four, part four, we’ll really talk about the process of trying to create a net to catch startup innovation, and then finally conclude with some statistics around whether you should build, buy, or partner, and what has worked and what doesn't work for organizations.


You can listen to their quarterly earnings releases and the talking points, and all of the very scripted points that they want to make, or you just look at what they're doing. So look at what they're investing in, who they're acquiring, who they're partnering with, and you get a really interesting view on their strategy, and so, what markets they're thinking of.

 

So this is an example of a variety of insurance companies, and so, you see USAA, Travelers, etc., and the different sort of buckets that they're investing in. And when you peel this back a little bit, you kind of see USAA and where it's been making moves in various areas of price comparison, or lending, or wealth management. And when you compare it to somebody, let's say, like AXA, where it's price comparison and thinking about dynamic pricing, again, so you get a sense for the markets and the areas that a competitor or an incumbent is interested in. That's one way to understand where there might be opportunity.

 

The other way is looking at a variety of nontraditional signals that you take together to determine which markets are growing or declining. So we've built something and you can see a link at the bottom called Mosaic. So we pull in news and social media chatter and sentiment. We look at hiring activity, look at, of course, financing and exit volume. And so, when you smash those things together, you get this what we call a mosaic score that looks at how healthy an industry is. And you can think of it, if you're in the States and you're familiar with a FICO score, it's kind of a FICO score for an industry. So it's a really quick way, a shorthand of seeing what's trending up and what's trending down, and it's real time, and it's purely data-driven, so it's not pundit-driven at all.

 

The importance of the "Yes, and..." approach in innovation. 

The other way is to follow the money, right? So this is, again, taking a look at insurance tech, just as an example, industry. How robust was the investment ecosystem in 2010, which is that little network map you see to the left. And then over to the right, you see how the investment ecosystem has expanded. You could see that, okay, there's money rushing into that market. That's a great way to just see that there's activity in a particular space.

 


You can also just look at financing and exit trends. So this is cyber-security. You see the funding trend. We often say that not all investors are created equal. So maybe you want to look at, "Well, what's the smart money doing?" And so, this is an example of Andreessen Horowitz, and this is this heat map that we've built that looks at what were they investing in historically, let's say, in the 2010 to 2012 time frame? And as you fast forward to today, what do you see them investing in? 


Just to give you a little bit of an understanding of what these heat maps are illustrating, the darkness of the blue here is the amount of funding, the size of the number of deals, and so, you see cyber security in the upper right on the lower heap map shows that they're doing lots of deals there. Cyber-security is booming, but then smart money like Andreessen is also getting involved, which is an indication from a market assessment perspective that there might be something here. Of course, you want to peel that back further, and we'll walk through how to do that in the next bit.

 

So there's probably less than five organizations, and I'm probably being generous by a couple there, that are large and equipped to experiment at the volume required to innovate. So a lot of the reasons for the inability for big companies to innovate comes down to a few things: there's process impediments, they don't really have a structure to identify and develop experiments. You can't really focus group your way to innovation. That's just not the way it's going to work. Focus groups may be great for incremental innovation, but disruptive discontinuous innovation is going to be tough to get from focus groups.


Culturally, there's impediments, so the experiments are...their end state tends to be failure, and that's not often easy to do in large organizations. Resources become a problem. To do the level of experimentation that might be required requires significant money, and if you're especially a public company that has the joys of quarterly earnings releases, that may be difficult. And then ideas is another issue. So some of the best ideas don't always come from within large organizations. These organizations aren't always well-suited to develop them. So some of the impediments that the big companies have.

 

I think one of the other big ones they have is that large organizations tend to worry about other large organizations, kind of to unhealthy levels. So if you think of yourself as Godzilla, it is likely that King Kong is not going to kill you. It is actually a death by a thousand cuts, or this army of emerging players that are going to attack legacy players, and we see attacking legacy players at an individual product and service level. 


And so, one of the things that we've become known for, these un-bundling graphics. And so, this is an example, one of our first ones of Wells Fargo looking at each of their products and services and which startups are attacking each of them. So it is, again, just to reiterate this idea of death by a thousand cuts.

 

It's not just the U.S. thing; we looked at HSBC. There are plenty of internationally-based startups in Europe or Asia that are also attacking these companies. So I think a lot of folks think that innovation is a U.S. Silicon Valley-led thing, but it's become pretty distributed at this point. You have Apple iOS, folks going after each of their offerings, you have FedEx, Starwood. We sort of, tongue in cheek, put out a disrupting walking infographic that looked at just personal transport devices. So even things like that. The automobile obviously is a big area for this type of disruption, B2B services, payroll services. Honeywell, so looking at everything from the smart home to other industrial applications that are happening. Procter & Gamble, as we discussed earlier, Craigslist, the list goes on. So I think the main point there is really that this is not a tech-only thing. That sort of adage, I think coined by Marc Andreessen of "Software is Eating the World" is quite appropriate.

 

What's a corporation not to do?


So what's a corporation not to do? Let's talk a little bit about Innovation Theater. For those of you who are fortunate to be in the U.S. and go to the airport occasionally and see our TSA, Transportation Safety Authority I believe, you'll see some of the measures that they've put into place, which is sort of security theater. And so, this was a great sign at an airport about snow globes now posing a significant risk to our safety. From an innovation perspective, folks do similar things. So optics that tend to make you feel innovative, hire a chef, make up interesting, crazy titles; "Innovation Sherpa" or "Digital Prophet" are two of our favorites. The open floor plan is a big one, having an Xbox. Talking incessantly about embracing innovation, visiting Silicon Valley, doing the pilgrimage there. And this is Dilbert always captures the sentiment better than anybody, as you can see here.

CORPORATES AND THE FASTER PACE OF DISRUPTION


Launching an accelerator has become the new flavor of the year, I suppose. We're going to launch an accelerator, we're going to get an article in TechCrunch, and then, we're going to declare "Mission accomplished." Pretty difficult. Launching an accelerator is not a bad idea, but there's a significant investment of ecosystem development, brand development that you need to do. Otherwise, you're just attracting Tier 3 startups, really. The good, old casual dress code. "We don't wear suits, we wear khakis. That will somehow make us innovative." And then hiring somebody who leveled out at Google or Apple and bringing them in to head up your innovation efforts, as if just having that on your resume makes you qualified to lead innovation at a large organization. 

CREATING A NET TO CATCH STARTUP INNOVATION

So these are the things to avoid. We're obviously being a little bit tongue in cheek here, but these are all rooted in truth. There are companies that do these things pretty regularly, and these are the things to avoid. 

 


So next, talking a little bit just philosophical or culturally. With startups, I think it's really about seeing possibilities and not problems. And so, we're going to talk a little bit about the "Yes, and" approach.

 

So there's this head-in-sand dismissive approach to thinking about startups. Brian Moynihan, CEO of America's largest second bank, basically dismissed robo-advisors by saying that their clients aren't rich enough for the banks. And this is maybe true today, but again, if you think about disruptive innovation and that trajectory I showed you earlier, the "not rich enough" of today will be the "plenty rich" tomorrow, and so not worrying about them today is probably not the best strategy.

 

Below is a transcript of our Webinar, Startups & Accelerating Corporate Innovation, led by CB Insights CEO Anand Sanwal.


But the reality is most startups fail, so this is the startup funnel. And so, a bunch of companies get seeded and very few come out the other end as being successful. It's not an unsafe statement to say that when you see a startup that it will likely fail, because it probably will. But that sort of misses the point, because tons of startups that might impact your industry will fail, and so these are a bunch of big names from the dotcom boom in the eCommerce space that all flamed out. The reality, though, it's not these guys that you need to worry about, it's the two or three that survive. And so, the next page shows you Amazon and eBay, that really kind of...even though there were tons of casualties in eCommerce, these are the two that have become really disruptive when you think about, if you are a traditional retailer, Amazon is clearly a problem for you today. 


This is a topic that's pretty near and dear to my heart. I ran American Express' Innovation Fund prior to starting CB Insights, so have seen this from both sides, one as a practitioner and now working with lots of our clients and subscribers to CB Insights helping them enable this. It's something I think I know a little bit about and hopefully have made some mistakes and done some things right, and will be able to share those with you today.



So the process of innovation, kind of really high level. And for those of you on the phone, you're going to all be at probably different stages of this, so I'm going to start as if you are at ground zero, but you may be further along. 


So the first thing is market assessment. What's going on? Which markets are hot? How should we be organizing the world? 


What got you here won't get you there. 

But you'd have seen this many years ago and maybe done things differently if you'd looked at Amazon as being a threat, and not just a fun, silly experiment.

 

I think one of the things we see increasingly is that incumbents tend to focus on why they're better. And this is true; most of them are. They are real companies with real revenue that are massive, with massive market caps. And so, they tend to focus on why they're better, and why startups will fail, and they'll say things like, "What you see on this page...hey, regulatory burdens are too high. Startups won't understand that. We have client trust. A client won't trust a startup. We have certain advantages." So this is all fine and well, but again, it misses the point. Dismissing startups is intellectually lazy. They are, again, a vast majority are going to fail. So really, what you have to do here is talk about "Yes, and." Think about the possibilities.

 

So I think this approach of "Yes, and" is really important. I had, many years ago, taken an improv class, and this was sort of...one of the fundamental tenets of improv was you could never say no to a scene. So if somebody set something up, you always had to go with the flow. You couldn't say, "Oh, that's not a good idea. Let's start over." You had to just say, "Yes, and," and kind of expand on it.

 

Again, in the vein of it not just being a "tech industry" thing, here we see Hellmann's, which is a brand owned by Unilever, suing a startup with the brand under Just Mayo. Gillette, which is owned by P&G, went after Dollar Shave Club. So again, just to highlight that this is not just a tech phenomena, it is tech encroaching on lots of different areas pretty quickly. Unfortunately, the reality is that within most large organizations, the antibodies to innovation are pretty strong. 



We see it happening within business models. This is a great example of Charles Schwab versus Wealthfront; Wealthfront being one of the robo advisors as they're known, getting to $1 billion in one-third the time of Charles Schwab. Betterment bested Wealthfront and got to $3 billion in assets very quickly. So it's technology, it's business models that work really, really fast today. Even amongst fast-growing companies, the speed is increasing, so here, we're looking at WhatsApp versus companies like Facebook and Gmail and Twitter, which grew incredibly quickly. Even there, the pace amongst the elite is even reaching pretty phenomenal levels.

 

One of the things that I think we hear sometimes is, "Well, this is interesting, but this is a tech phenomena." That's really not true. When you look at Airbnb, it's sort of tech-enabled, but ultimately, what they are going after is a traditional industry in terms of lodging and hotels. So here, we're looking at valuations over time. And whether you argue about Airbnb's valuation being justified or not, the reality is that it is clearly changing how people think about travel and how they think about where they're going to stay when they are traveling. And that is a direct threat to incumbent organizations like Marriott and Starwood and others.


The next image shows just why it's so important that organizations think very proactively about innovation. What we see here is the average lifespan of an S&P 500 company over time. And it's pretty clear that the lifespan is declining. And so, it is, again, just harder to stay on top once you're there. Part of the reason for that is that the threats to incumbent organizations are multiplying. So in 2000 during the first dotcom boom, kind of the cost to launch a startup was almost $5 million. I worked at a startup at the time called kozmo.com, which is one of the more famous flame-outs in New York City. 


We're going to start with the faster pace of disruption. Really, the idea here being that what got you here won't get you there. So I guess it's worth defining since we're talking about startups as a way to innovate faster, defining first, what is a startup. And luckily, there's some very smart people who have done a nice job doing that. We have Steve Blank and Eric Ries. And so, I'll let you read these definitions. I think the main key takeaways here are that this idea of them being temporary or working in extreme uncertainty is really important. So when you boil these definitions down, startups are really just ultimately experiments. 

 

And so for you as a corporation, they are outsourced R&D. So you have this Petri dish of different startups that are trying things, different business models, different demographic segmentations of clients they are going after, different marketing tactics. And so, you get to get a bird's eye view into what's happening. So in the last five years, there have been almost 38,000 early stage experiments that have happened, and we're just talking about seed in Series A, Series B stage companies. So there's a lot of experiments that are happening and so as a corporation, these are that outsourced R&D that you can look to for ideas and inspiration.



We raised hundreds of millions of dollars, and a lot of that was going to servers and infrastructure and routers and other things, and switches. Today, a lot of that has been extracted and now, because of AWS and Microsoft and Google and cloud services, it's incredibly cheap to start a company. And so, this was some great data put together by our friends at Upfront Ventures that kind of highlighted this.  And what we're seeing also in addition to the costs coming down, the adoption curves when it comes to technology are quicker than ever.

 


And what we're seeing also in addition to the costs coming down, the adoption curves when it comes to technology are quicker than ever. And so, this is a great chart that was in The New York Times that looked at technology and its level of adoption over time. And so, take something like the telephone. If you look at this chart starting at 1900, the telephone took almost 100 years to get to 90% adoption, so you just follow that dashed orange line. And then you look at things like the cell phone or Internet in 1990 and later, and you see how quickly they've become ubiquitous within the U.S. population. These trends are global in nature.



The next piece is market mapping. So you've assessed the markets. You've found maybe a few that look promising. Now, what you want to do is build a market map. And so, a market map, just to define it, is this illustrative display of the positioning of a product or service in the market, and you can break that down by technology, customer, or business model, with the aim of identifying and implicitly suggesting areas of market penetration, and then for corporations, untapped areas for expansion. 

 

This is another way to display the market, the unbundling graphic that I mentioned earlier, so this is FedEx. 


The reason these startups are so important is because these emerging business models and startups ultimately become tomorrow's problems. This is Clay Christensen's famous disruptive innovation framework. What you see here is products and services that are at the low quality use end of the spectrum in the beginning move up over time, and increase performance, and eventually become able to handle a lot more demanding use cases. So people will point to eBay as an example, eBay started off, I think, as Beanie Babies as it was well documented and then ultimately moved up into cars and art. So what was a trivial, fringe use case eventually became much larger, and a lot of technology companies start in a similar fashion

 

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