Some of the world’s most successful tech companies famously started in garages. But can that same sort of innovation happen in boardrooms, or at least in the multi-level office towers they sit on top of?
A growing number of big companies in New Zealand and around the world are investing in sidelines, startups and spinoffs. So why do they do it, and is it working?
Regular readers will already have concluded that this is a question best answered by a Moxie Sessions discussion, and that’s exactly what happened recently at Auckland startup space GridAKL. Leading the conversation were James Hurman of innovation consultancy Previously Unavailable, Louise Webster from the New Zealand Innovation Council, Datacom’s Kerry Topp and Spark Ventures CEO Ed Hyde.
James Hurman has made something of a study of innovation in New Zealand recently, and the news isn’t good. His report, Big I, little i, surveyed 44 CEOs of big companies and successful startups and found almost universal commitment at executive and board level to innovation and R&D. The only problem is that, according to the Productivity Commission, our innovation outputs nationally are going backwards.
One solution, for larger companies at least, might lie in the approach taken by Coca Cola. James describes a programme where the company briefs its toughest problems to the entrepreneur community, then invests in companies that come up with solutions. When Coke’s traditional distribution system wasn’t keeping up with small retailer out-of-stocks (and costing the company $1 billion annually in lost sales), they found a solution in a startup called Wonolo. Instead of relying on trucks and warehouses, the platform pays students to collect stock from retailers with a surplus and deliver it to others who’ve run out.
Louise Webster of the New Zealand Innovation Council has seen both sides of the picture; both as someone working in a small startup, and now (since the Council was sold to KPMG) working inside a large company. Louise sees opportunities in big companies taking the acquisition path, but there are downsides.
On the plus side, there is no shortage of businesses to buy. New Zealand has more than 368,000 small to medium enterprises, with 84% of those turning over less than $5 million. Many of those, Louise says, provide a ready-made product and service innovation pipeline.
The big gotcha she says, is not innovation but culture. Successful acquisitions rely on a good match between the way the companies think and operate, and a willingness on the part of the buyer to adapt and change. If this doesn’t happen, Louise says, the bigger company’s “immune system” springs into action… working in subtle and not-so-subtle ways to reject the foreign organism.
By day, Kerry Topp works at IT services company Datacom. By night (well, by day as well) he chairs the Wynyard Innovation Neighbourhood – seven companies based near where we’re sitting tonight, all looking to collaborate and find opportunities for innovation. The Neighbourhood works by fostering “over the fence” (two companies) and “barbecue” (several companies) conversations between members. An unexpected challenge it faces, Kerry says, is finding quests – big problems that everyone can work together to solve, and ideally take the solution offshore.
One company with no shortage of big challenges is Spark, and part of its response has been to set up in-house innovation arm Spark Ventures. Recently-appointed CEO Ed Hyde says that like all telco businesses, the last 5-10 years have seen key markets stagnate or decline. Optimising legacy products will help address that, but will only go so far. Spark Ventures has created or invested in 10 businesses, and learned a few things along the way. The biggest successes, Ed says, have come where Spark Ventures has delivered similar products to its core business but in different ways, such as mobile brand Skinny and ISP Bigpipe. What hasn’t worked, he says, is holding onto an idea past its kill-by date. Market expectations mean it can be almost as hard to shut something down in a big company as it is to start something up.
As the discussion continues, it’s that gap between corporate expectations and startup culture that keeps coming up. On the one hand, the big end of town is under attack from disruptive technologies and looking for ways to move beyond legacy products and services. And on the other, they’re battling their own culture as they try to innovate.
- Accept a high kill rate: don’t expect every venture to fly, and be prepared to kill the ones that don’t.
- Don’t measure innovation with a corporate ruler: that internal startup might not be profitable this year (or ever!). That’s just how this stuff works.
- Be prepared for antibodies: some parts of your company will welcome the new arrival and some parts won’t… rejection of the transplanted culture is a real risk.
- Outsource problems and back winners: Coca-Cola’s approach presents a practical and effective alternative to the traditional “pitch circus” and could be a great model for larger New Zealand businesses.
- Look for adjacencies: some of the most successful acquisitions and internal startups come from businesses close to your existing one… even if it’s tempting to go completely left field.
Footnote: since our session, Coca-Cola has pulled the pin on its startup incubator but continues to “imbed (sic) innovation across its functions and throughout its global Business Units.”
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