At InterWest, I recently had the pleasure of hosting an executive team from a 100 year old insurance company. They were visiting Silicon Valley in order to meet with various “innovative” companies in order to learn how they might themselves become more innovative.
The format of the meeting was a discussion between myself and eight executives. They wanted to know how we, InterWest, identified innovative ideas and/or sponsored innovation inside our portfolio companies.
It was easy to answer the latter — we don’t. We are investors in ideas we believe are innovative but we are not the creators of that innovation — at least not typically. It is the entrepreneur and the team that are the innovators.
The first part of the question was how we identify innovation. The answer to that is actually fairly straightforward; we see a lot of different technology and business models. As a result, after a little due diligence, we can usually determine if something is unique or different.
The more difficult question we, as a firm that makes early stage investments, have to address is “so what?”. The fact it is innovative isn’t sufficient for us to make an investment. We need to convince ourselves that the innovation is relevant – will companies or people use it —and is there a large and addressable market for it.
The next question I was asked was how I thought innovation occurs in existing companies? I responded by saying I felt most innovation in large companies occurs at the “intersection of fear of status quo, opportunity and talent.”
Opportunity = a person or a team of people identifies something they believe a business or consumer needs.
Talent = the person or team has experience, expertise, drive, etc. to pursue the opportunity because they want to make money and/or make a difference.
Fear of Status Quo = the person or team is fearful that they will lose something if they don’t change what they are doing.
When these three elements come together, innovation can occur.
The first two elements can exist in abundance in large organizations. However, what is typically missing is “fear of status quo”. The lack of fear of status quo— are we going to survive if we fail to change- is fundamentally why I believe large organizations typically have a challenging time with innovation.
In fact, it is typically the “fear of doing something new and making a mistake” that paralyzes most large companies from making significant changes.
Big changes inside existing companies and organizations can lead to loss of power, loss of jobs, loss of financial stability. For these reasons, I believe as companies get larger, more and more infrastructure is built to support the status quo v tearing it down; large companies that were once incredibly innovative become less and less innovative from within and begin to look externally to acquire “proven” innovation.
So, I said to the group of insurance executives in front of me, if you really want to inspire innovation, I believe the best thing you could do is as follows:
- Create a separate entity and capitalize it
- If you are worried about carrying the company on your books due to upfront losses, use outside capital to minimize ownership
- Create a call option with a first right of refusal to purchase that enables you to buy the company at some point in time at some multiple of revenue, EBITDA, etc.
- Take a few people with talent and drive who have suggested some creative ideas and/products and place them into the new entity and give them equity incentives.
- Let fear of failure and the promise of reward motivate the new entity’s executive team.
- Let the new entity run unencumbered by any of the policies, politics, or structure of the larger company.
We finished the meeting and I thought to myself, while I really believe in what I said, I didn’t have a lot of confidence this team of executives — nor any team of executives from a successful company – would really take action against it.
From my experience, the power of “the status quo” is simply far too great. Even when a company is under duress, seldom will it do something that may jeopardize the status quo. When a company is doing well or even just skimming along, it is virtually impossible to introduce significant changes even if it is to the benefit of the company in the mid-long term.
So, this is one of the reasons why I continue to have tremendous confidence in start ups. Even when large companies have the capability of creating innovation that could challenge a start up, they seldom do because of status quo. And, if you combine that technical innovation with business model innovation, an incumbent company has little chance of competing with it.
So-here’s praise for the “status quo”-it will continue to be the kryptonite of large incumbents and the defensible shield of start ups which is what we as venture capitalists count on when we invest.