I came across an interesting post on this topic, and I have to say, that I really agree with what the author, Kareem wrote. In it he mentions three key reasons for the general failure of large companies to innovate:
- They must protect their current business
- Too much bureaucracy or too many stakeholders in the process
- They don’t provide the proper financial incentives for innovation.
I’m sure most of us who have worked in larger companies have experienced the first two. I’ve also seen a lot written about the first two points related to big company culture, management practices etc. People today cite Apple as a great example of a company that has figured out how to deal with those two points.
I want to spend the rest of this post talking about point 3, which I think is critically important and of which I have not seen as much writing.
In any general cross-section of employees, there will be a small subset who can be deemed as truly entrepreneurial and innovative. A lot of them probably come from the Product Management and Engineering teams! And most of those people are smart enough to understand the value they can bring to a company as well as to themselves if they can deliver a successful product to market.
The problem is, in a typical large company, the ROI proposition for bringing an idea to market is completely skewed in favour of the company. Kareem says it really well in his article:
People are incredibly quick to learn which behavior is rewarded in any system. If you want to innovate, there are two options: remain in a system that pays out an annual salary and a relatively meager bonus for your awesome product. Or, strike out on your own, and build a product that might have a significant pay off, while living off savings or investment.
Now imagine a large technology company that has set aside a large pool of money for acquisitions. That number could be in the hundreds of millions of dollars or even higher. The company wants to make acquisitions that help bolster it’s current market position as well as take it into new (likely adjacent) markets.
There are probably lots of innovative startups out there, working on new products that are potential acquisition targets. Now as the company is out there evaluating the market and potential targets, and then spending big bucks to acquire those companies (likely making the founders of those companies wealthy), what are the innovators inside that company thinking?
They are thinking:
“Hey, how do I get me some of that?”
Now imagine if the company took, say, 5%-10% of that acquisition pool and used it to create a fund that would invest AND if successful reward new innovative products by employees. The structure of how this would be done would have to be worked out carefully so as to ensure transparency in the process of who got funded, and clarity in how success was measured and rewarded, but in theory it is possible.
I can think of at least one model, where an quasi-independent group would review the ideas and decide how to provide an internal equivalent to angel/seed funding to get the project to a stage where it could be evaluated in detail. This model would be no different than what one would face if they took their idea to an Angel or VC for funding.
Regardless of how it is done, there could be significant advantages for the parent company by doing this.
- It sends a very clear message that existing employees can see significant upside if they are major contributors to success in the company
- It significantly reduces the potential for “brain-drain” in the company, by stopping some of the best innovators from leaving to form new companies outside
- It provides a lower cost option for the company to “acquire” new innovative products than going out to market and paying a premium for “hot” acquisitions.
The return for the employees who go this route would be lower than what they might get if they were to strike out on their own, but then again, the risks they would face would also be lower. They could leverage many of the large company’s resources as well as the large customer base of the company. While some hardcore innovators may not like this situation, I’m pretty sure many others would.
Imagine an incubator, funded by the large company (and possibly by other external investors as well) that would provide the environment for these ventures to develop, grow and ideally graduate and become successful. If the venture is one that the large company wants to acquire, they can do so relatively easily given their stake in the company. If they don’t want to acquire the company, the market can decide the value of the company and like any other VC, they can regain their investment (and much more) by some kind of liquidity event.
What do you think of this? Is it possible for large companies to develop incubators for their own employee’s to create innovative products and companies? Or are there other issues and complexities that would make this concept more likely to fail than succeed?