We Need to Innovate Corporate Innovation

Mark Kaiser is a serial entrepreneur, innovator and advisor to over 40 Fortune 500 companies on innovation and corporate venturing.  Mark has the CEO of companies with corporate investors and/or partners. Two grew to $1 billion in revenue in 5 years or less.

Like so many words in use in the corporate world, “innovation” has virtually lost all meaning. It’s important for corporations not to get bogged down in defining the innovation processes or even trying to define innovation itself.

There has been a wasteful three-year cycle that I have observed time and time again where a new head of innovation gets hired by a company, he/she spends their first year defining and mapping out the innovation process. The second year the innovation group gets a budget and is staffed up and in the third year the CEO  asks “What have you delivered in the way of tangible results these past two years and what has been the ROI on the cost of the innovation team?”  The answer almost always ends up with the disbanding of the innovation team.   

With the air cover of COVID-19, corporations should take action now to kill the innovation efforts that are not working (don’t wait another two years) and focus on what does work.  To be clear, I am not advocating stopping doing new things.  I am advocating stopping the things that will not deliver results and focus on things that can have impact in the timeframe required by public company CEO’s.

First on my list would be disbanding all the innovation centers and hubs that have been popular over the past few years.  Most haven’t generated the results wanted and, worse, most have not generated any return on investment.   There are exceptions to any general comments. If you are a pharmaceutical company or chemical company or other tech company that can benefit from the development of new molecules or technologies, there is a role for funding and encouraging very early stage development.   However, for the majority of companies, it just takes too long to get from idea to a scale that is meaningful to warrant playing around with startups.

The dynamic of time is rarely talked about.  Everyone knows that public companies focus on the next few quarters.  In addition, the average tenure of a public company CEO in the U.S. has been a consistently around 4 years.  These two dynamics require that things happen at most companies in the next 2-36 months.  Contrast that with the data that shows that it takes most startups close to 10 years to get a startup business to scale. Even companies that seem like overnight sensations are much older companies than anyone realizes. Beyond Meat was founded in 2009, Rivian was founded in 2009, Zoom was founded in 2011, vRoom was founded in 2013.  You get the point.  Few public companies have the fortitude to invest in something and wait 7-10 years to get a meaningful return.  

So why have so many companies created Corporate Venture Capital (CVC) funds and are investing in startups? First, there is a group of companies that create CVCs primarily as an investor relations play.  These companies tout that they have created a “$100 million fund” (because their core business is in steep decline and they don’t have any meaningful new products coming from their internal R&D efforts).   Second, a group of companies are frankly naïve.  They see others starting funds or joining incubators or setting up CVCs and think they should too.  They don’t understand the time it takes to start and grow a business to scale and nor should they.  They understand how to run a highly-optimized business at scale.  That is a very different management skill and set of dynamics.  

I recommend that most companies disband their CVC if they are following the institutional VC playbook.  Getting a 10X return on a small amount of invested capital will illicit a yawn from shareholders of any Fortune 500 company (and it doesn’t contribute anything towards growing EPS).  Deploy that capital to grow emerging brands/businesses to big brands/businesses.

The last thing corporations should stop doing is trying to knock off an idea that a entrepreneur has developed.  So many large companies look at successful startups and think they can copy what the startup has done.  I remember one of my clients who liked the snack box company, Graze.  They thought they could create their own version.  They didn’t take time to understand the nuances that Graze understood about the market or the technology and business process required for efficient operation. They also contracted out every component of operations (as they did not have the skills and capabilities in house) so their cost structure was bloated. A few short months after product launch when their too expensive, inferior (to Graze) offering showed lack luster sales and poor consumer reviews, they shut down the effort and declared it a failure while Graze, Amazon, NatureBox, NakedWines and over 150 more startups grew to valuable businesses and were acquired companies like Unilever and others.

So what should corporations do?  First, they should act more like private equity growth funds and look for businesses that are well past “proof of concept” and need to demonstrate “proof of scale”.  Fortune 500 sized companies are great at operating businesses at global scale. So partner with companies that need to scale and help them scale.  It’s that simple. My first client as a consultant was The Coca-Cola Company.  In the early years of Coca-Cola’s Venturing and Emerging Brands (VEB) group, they didn’t fool around.  They boldly acquired vitaminwater® and successfully made it a billion-dollar brand by pumping it through the core business distribution channels.  Next, they invested in Honest Tea buying a 40% stake for $43 million in 2008, helped Honest grow and expand and bought the rest of the company in 2011. 

I know this is a simple game plan but don’t be fooled by its elegance.  Too many corporates find a million reasons not to move forward. Most often they focus on the valuation being too high (or a higher multiple than their existing business) or believe they can go it alone.  Other times the idea is just too early.   Whether it’s electric transportation, plant-based protein or any number of “hot” topics today, entrepreneurs have been working in these spaces for decades and were dismissed by most large corporations.   Other times the plan doesn’t fit the innovation or corporate venturing process.  One of my clients about five years ago was a Fortune 100 food company that wanted to focus on plant-based and other “alternative” (alternative to animals) protein.  When there was the opportunity to buy (acquire) not one but four of the leading brands and take a bold leadership position, the “Corporate Venturing” team was met with the “well, we said we were going to invest first and then acquire…” reason to not make a bold move.  Every entrepreneur and investor knows you can’t time the market.  When an opportunity to act presents itself, the successful people and companies take action. As a result, three of the four alternative protein companies with any market traction were acquired by their competitors and the fourth did a very successful IPO.  My client was left in the dust because they focused on process vs. opportunity.

All corporations need growth quickly.  Some more than ever today.  Don’t be left in the dust by a singular focus on defending your leading positions or be lulled into complacency by their own dominance.  Being disrupted and displaced doesn’t just happen to other companies.  A recent McKinsey study projects that 75% of the companies currently quoted on the S&P 500 will have disappeared by 2027.  You don’t want your company to be one of them.

The fastest route to that growth is to invest and acquire new products, services and business models.  The strategy is solid. The timing has never been better due to the impact of the pandemic. For those who have failed in the past at making strategic acquisitions or partnership, I am nearly 100% certain execution was the issue.  Simply put you did it wrong. Act like an entrepreneur and learn from the experience and do it right this time. Many high-quality innovative companies have been damaged by the economic downturn and access to capital is more difficult for them.  Now is a great time for large companies to be the “friendly hero” that comes to the rescue of companies that can be scaled by partnering or being acquired now. 

The race has already begun. Apple has acquired, by early April, half the number of companies it acquired in all of 2019. And, three of those acquisitions happened in the same week and they have had continued momentum.  Kroger partnered with Frayt Technologies, Inc. to add same day delivery capabilities. Franklin Templeton scooped up AdvisorEngine. Intel bought urban mobility platform Moovit. Deutsche Bank invested in Zeitgold a company that uses artificial intelligence to automate small business bookkeeping. Allianz backed challenger bank N26 to help N26 expand in the US.  These are only a few examples from the past few weeks where forward-thinking companies are taking action and embracing external innovations.  The winners will be much better off two years from now than they were in January.  The rest will still be trying to claw their way back to 2019.