Why Unicorns Eat Dinosaurs for Breakfast (Full-Version)
The why and how every established company can engage employees, accelerate innovation and transform culture, to fuel innovation and avoid becoming someone else’s breakfast.
DISRUPTION – Part 1
“75% of the S&P 500 companies will be replaced by 2027” (Innosight). When I first heard this statistic, it captured me for days. If I were not already an entrepreneur, I would most certainly be applying my skills at an S&P 500 or Fortune 500 company, as many of my friends do. And if that were the case, I’d only have a 1 in 4 chance of keeping my job over the next 13 years, regardless of how well I performed or how long I worked there, according to current estimates. I find this a very scary thought.
Let’s say you had a company in 1958 and your company had been listed on the S&P 500. Your company did a great job in meeting a market need and it grew to a considerable size, probably employing thousands of people. In 1958 you could have expected an average life span of 61 years on the index. If you have a company today on the S&P 500, you can only expect a life span of 18 years, down from 25 years in 1980.
A company is normally removed from the list or replaced due to a decline in value or due to being acquired. In 2011 a total of 23 companies were removed from the list and in the last 3 years alone notable companies such as Dell, Motorola, Sears, Sprint Nextel, Advanced Micro Devices, J.C.Penney, Kodak, Office Depot and the New York Times have also lost their spots. The same trend is happening with the Fortune 500 – 50 years ago the life expectancy of a firm in the Fortune 500 was 75 years and today it is less than 15 years (Forbes).
“50 years ago the life expectancy of a firm in the Fortune 500 was 75 years and today it is less than 15 years (Forbes).”
It is clear that established companies are not living for as long as they once did and the rate at which these companies are dying off or becoming insignificant is increasing. This is also known as The Innovator’s Dilemma as described by Christensen Clayton. Just look at the last few years. Blackberry, Nokia, Kodak, Blockbuster, Radio Shack – they were all huge power houses with big brand names and they have suddenly all become insignificant in today’s market. It’s a dinosaur’s graveyard out there! So what’s causing this cancer?
The Cash Cow Cancer Syndrome
In Walter Isaacson’s biography about Steve Jobs, he describes a particularly enlightening moment when Jobs has a theory about “why decline happens” at great companies. In the beginning of a company’s life, Product Engineers and Designers make great products that make the company successful in a certain field. (Let’s call this success a Cash Cow created from a disruptive innovation). After this initial period of success though, Salesmen become valued more and put in charge as they can move the needle on revenues. This causes Product Engineers and Designers to feel demoted and they begin to switch off: their efforts are no longer at the epicenter of the company’s daily life. It’s become easier to milk the cash cow than to try and add new value. The company stops playing offense, preferring defense and starts to die. Jobs quotes Xerox and IBM as examples.
Let’s look at this from another angle and see what determines the overall life span of corporations and not just the cause of its demise as described by Jobs. According to Foster, who wrote Creative Destruction in 2001, the life span of a corporation is determined by balancing 3 management imperatives:
- Running operations effectively
- Creating new business which meet customer needs
- Shedding business that once might have been core but now no longer meet company standards for growth and return
These points make a lot of sense as well and here we can draw a parallel with what Jobs hinted at. Product Engineers and Designers are great at creating new business by engineering new products or services which meet customer needs, but once the new product turns into the cash cow, ‘running the operations effectively’ becomes the new focus i.e. milking the cash cow. The cash cow gets all the attention and the people who were good at creating new ideas, begin to switch off. We cannot ignore the importance of attending to the cash cow – seeking growth in existing markets, R&D expenditure to improve the offering etc. But we must notice these are improvements of an incremental type and if all the creative people are attending to the cash cow and none of them are figuring out how to create an entirely new cash cow, then it can leave the organisation exposed. One day, markets will change drastically (probably technology driven) and the cash cow won’t be able to produce milk anymore!
Furthermore, companies are slow to shed businesses that are not growing any more. You don’t jump from a sinking ship until the lifeboat is in the water and if there is no lifeboat…. well…. you just hang on to the sinking ship! Therefore the life span of a corporation fending off its demise essentially hangs in the balance of two types of innovation:
1) The act of running your company for today and using incremental innovations to improve your offering, whilst…
2) Ensuring your company has disruptive innovations in the pipeline to generate new cash cows.
Not innovating to create new business opportunities is like letting a cancer creep up on you. Nothing seems wrong until it’s too late. But hasn’t this always been the case, today as well as in the past? So why does the Cash Cow Cancer Syndrome seem stronger today than before? Why are established companies at so much more risk? Read part 2 to find out how entrepreneurship is giving rise to Unicorns – Billion Dollar startups, faster than ever before.
Part 2 – ACCELERATED INNOVATION
The recent advancement of technology is enabling disruptions across most industries. As Andreessen stated in the Wall Street Journal in August 2011 “an increasing variety of software and services are being delivered in the form of digital code.” Therefore the barriers to entry for almost any industry are lower than ever before and even for manufactured goods you can now ‘rent the means of production’ describes Eric Ries in a McKinsey interview. Eric highlights that entrepreneurship is becoming truly democratized, which means nobody is safe.
The Rise of the Entrepreneur!
Here are 10 Reasons adapted from a Forbes article published at the end of 2013 stating why entrepreneurship is on the rise.
- Valuations of successful startups has hit an all-time high. Already 25-40 statups have hit the $1 billion valuation mark and the New York Times is expecting 100 startups to have achieved this milestone by the end of 2014. View a more current list here: http://graphics.wsj.com/billion-dollar-club/
- Initial Public Offerings are back as an exit strategy. 156 companies went public in 2013 in the US – 65% more IPOs than in 2012 with the highest proceeds raised since 2000.
- Funding for early-stage startups is more available than ever. As startups see their opportunity so do their backers but make no mistake that it is not easy to raise finance – VCs back 1 in 400 requests and Angels about 1 in 40. However, bootstrapping is still a viable option with 90% of successful startups going it alone…
- Cost of entry for startups is at an all-time low. An e-commerce website used to cost a million dollars and today costs almost nothing. An app can be developed for under USD10,000 so who needs an investor?
- Startup Accelerators and Incubators are popping up everywhere. More low cost work space and mentorship (or even investments) than ever before are on offer to help founders over-come their challenges
- The world is now a single market, both homogeneous and heterogeneous. It is easier now to offer solutions across boarders and via the web starting in one location and adapting them quickly to fit local markets, without needing to physically be in that market.
- Social media is a boon for entrepreneurs and startups. With social media today entrepreneurs can tune a product, build a brand and grow a business with very low cost and high interactivity.
- Large corporations have lost their ability to innovate. They face a tarnished public image due to financial woes and poor management making it even harder for them to retain their best and brightest – especially their most entrepreneurial employees
- Women are a growing force as entrepreneurs. A poll by the Telegraph stated that almost 20% of young women now aspire to run their own business today as entrepreneurs (up from 15% in 2008).
- Baby boomers are joining the fun in record numbers. In every one of the last 15 years, Boomers between the ages of 55 and 64 have had a higher rate of entrepreneurial activity than Gen-Y.
Unicorns – The Billion Dollar Startups
There are more entrepreneurs in the US now than at the time of the DOTCOM bubble. It seems that a tide is turning and today more startups than ever before are finding success and disrupting the cash cows of incumbents. Tesla (founded 2003) has been leading the way in disrupting the automobile market with electric cars and now has a market value exceeding Nissan (founded in 1933). It once took HP 20 years to become a billion dollar company, and Microsoft 10 years. Amazon made it within 4 years and Instagram within 2 years. Recently, Slack achieved a billion dollar valuation within 8 months!
Entrepreneurs are using advances in technology to create products that customers want in record time, allowing them to grow quickly and disrupt established companies. They are establishing new blue oceans and creating new markets or finding ways to disrupt existing red oceans, where existing players struggle to react fast enough and suffer their fate.
Accelerator and Incubators
Accelerators and Incubators are popping up everywhere, as suggested by the Forbes list above. Startup communities with meetup groups, pitching events, university entrepreneurship courses, co-working spaces, networking events etc are forming and picking up speed. Essentially, all of this helps entrepreneurs learn the skills and mindset of entrepreneurship, leveraging from past failures as well as successes. For sure, it does not mean all entrepreneurs will now be successful. But well structured programs with a strong curriculum and great mentors can help minimize the failure rates of new ventures.
Take the Founder Institute as an example (where I am a director). We are the world’s largest entrepreneur training and startup launch program, helping entrepreneurs to develop their ideas at a very early stage, mostly whilst still in employment (www.fi.co). As a result of a part-time 4-month program, 1300 companies have been launched in the past 6 years, across 100 cities, with an average survival rate of 87.5% creating 10,000 jobs.
Incubators like Ycombinator and Techstars have been crucial in helping young startups (yet mostly with traction) develop themselves into high growth companies. Dropbox, Scribd, Reddit, Airbnb, Disqus and Heroku all came through Y Combinator, and Flirtbox (acquired by Jive), SendGrid, Romotive, Thinkfuse (acquired by salesforce) are some examples from Techstars, all with multi-million dollar valuations.
Not only is technological change fuelling innovation from startups, but the growing supply of hands on entrepreneurship education is also speeding up the learning cycles and increasing the success rates of startups who take a risk. I believe that corporate teams can also learn and practice how to accelerate innovation, using methods similar to successful startups, which will be further discussed in part 3.
23% of our current revenue is under threat from startups – and those are just the ones we know about”. Rabobank
Recently Rabobank, which is valued at US$750 billion, stated, “23% of our current revenue is under threat from startups – and those are just the ones we know about”. Rabobank is facing the challenge head on and learning how to innovate in order to protect it-self and fight back. Rabobank is not relying on the old cash cows it has developed, but is looking at it’s innovation processes to increase disruptive innovation in order to create new cash cows, before the milk runs out.
So how can corporates benefit from entrepreneurship and lean innovation? Can these methods really be applied? Read part 3 to find out more.
CORPORATE ENTREPRENEURSHIP – part 3
Part 1 of this post showed us how big established organizations are being disrupted faster than ever before and part 2 highlighted how more and more entrepreneurs are innovating to build startups that become billion dollar organisations in record time. Surely this scenario creates the imperative for established organisations to learn and apply entrepreneurship within their enterprises as a method for innovation?
The Ambidextrous Organisation
In 2013 the term “ambidextrous organisation” was added to Wikipedia. It refers to an organisation’s ability to be efficient in both its management of today’s business as well as its adaptability in coping with tomorrow’s changing world. Ambidexterity requires the organisation to use both search and execute principles to achieve long-term success. Whereas startups are optimized for search, most established companies today are optimized for execution (milking the existing cash cow).
Companies must employ search capabilities and systems that allow for ideas to evolve through the 3 phases of ideation, discovery and incubation. Only During the launch phase, can a gradual hand over of the venture from search to execute begin to take place in order to optimize for sales traction and growth.
The Search for Search
Many companies have indeed recognized the need for incubators to provide the space necessary to work on innovative products. How well these incubators have been set up and managed is however another issue. A key observation I have made when looking at the innovation activities of corporates versus startups is the lack of a “Discovery” phase. Many projects jump from Ideation to Incubation where resources are invested to build a potential solution (or call it a prototype) before the idea has been validated to solve the right problem for the right customer in the right way (known as finding problem-solution fit). Failing to complete a discovery phase gives rise to a number of obstacles:
- Ideas get put forward based on the “Highest Persons Paid Opinion” (HIPPO affect) rather than basing decisions on real customer data gathered through experimentation
- Incubation projects fail because fundamental attributes of the idea are wrong / falsely identified
- Those tasked to innovate become discouraged as they are perceived as failures
Unlike in Startups, corporates have the luxury to fund ideas and start building product and if after launch it doesn’t really work out, it can be swept under the carpet and everyone involved can get on with something else. Everyone still gets paid. In a startup, that approach would mean game over! They simply don’t have the resources to start over, so they try to eliminate risk at every stage and base decisions on real data. This is the approach embodied in Design Thinking, Customer Development and Lean Startup.
A Lean Innovation (corporate entrepreneurship) Journey
The good news is that most entrepreneurs are not born, but made. Successful entrepreneurs do share common personality traits (as recent research from the Founder Institute suggests), but the skills and methods can be learned. Steve Jobs, Elon Musk, Richard Branson and Co were not born as visionaries – they figured stuff out as they went along and persisted.
Today, and especially for the digital world, we have many techniques that can help you de-risk uncertainty and there is no reason why a team of corporate employees can’t learn and apply those methods as well as a team of entrepreneurs do. After all, where do you think all those entrepreneurs come from? They were probably once working in your company!
Founders of Twitter, Pinterest, Instagram, Asana, Cloudera, Foursquare, Ooyala, Docusign, Tumblr, Uber and even Intel and Apple left corporate jobs to start companies.” (The Lean Enterprise)
A lean innovation journey begins by building the capabilities of certain individuals (Intrapreneurs), teams (corporate startup teams) and leaders (corporate startup team leaders). These individuals can come together as a cohort to work on live innovation projects, thinking boldly as entrepreneurs and focusing on key search principles rather than internal processes. To clarify, the key search principles are: a deep understanding of the customer, purpose built experiments, and data informed decision making.
The Lean Innovation Journey, requires you to build capabilities, systems and culture – in that order.
Once cohorts are up and running practicing the capabilities of lean innovation, we can start to build systems that help innovation transcend functional groups and business units. These systems may comprise of: allocating time to run experiments, thinking beyond product, in-house tech for rapid experimentation or in-house innovation catalysts, creating operational guidelines for legal, HR and brand support, as well as a “train the trainer” approach to scale up capabilities and systems.
Over time, an entrepreneurial mindset can spread from “special innovation projects” to “daily work” activities and start to impact the organisation’s culture. Leaders will be able to walk the walk, know how to allocate innovation resources, and be able to find a balance between leading with search objectives, and execute objective.
Now’s the Time to Build An Army of Corporate Entrepreneurs
When I talk about startups to some corporate leaders, I often get a reaction similar to “we are not so interested in creating a million dollar venture, it wont impact our business that much, – we’re working on the next billion dollar market” or “we are focused on growing our core business”. That’s fair enough and probably the right thing to do in a predictable world. But recent history is teaching us that the world in which we operate is not so predictable, largely due to technological change but also due to environmental and legal changes, monetary policies etc. So if the billion dollar big idea doesn’t work out as we were hoping, wouldn’t it be sensible to fall back on 10 different million-dollar ideas that are picking up speed, or 50 or 100 of them? Because some million-dollar ideas turn into billion dollar ideas, it’s worth building the capability and systems that can continuously generate and foster those ideas.
By 2020 almost half of the workforce will be made up by millennials and Entrepreneur recently stated, “71% of millennials at regular jobs would prefer to quit and work for themselves. 60% will likely do so within two years.” I’ve seen first hand crowds of employees leaving well paid and prestigious jobs to start their own startups, often purely out of frustration for not being able to pursue ideas within their company. This trend is likely to continue, unless organizations start offering intrapreneur career paths to certain employees. As more Intrapreneurs are created, the culture will begin to change to foster a more innovative way of working as seen inside Google, Facebook, 3M, Intel, GE, P&G and Intuit etc. The more entrepreneurial spirit a company has, the more innovative it seems to be and hence prospers.
It is only the most innovative companies that are escaping and keeping themselves ahead (which at current churn rates will only be 25% who will avoid dramatic losses as described in part 1). If innovation is the answer to surviving, then we at the Academy for Corporate Entrepreneurship believe that corporate entrepreneurship is a justified answer to innovation. It certainly is another useful tool in the toolbox and probably one of the best investments a company could make.