Innovation at Scale, #2: Five Types of Corporate Innovation

In last week's edition, I introduced this newsletter by starting to define the differences between a company and a startup, what innovation is, and the challenges of making innovation works in large organizations.

This week, let's start by identifying the 5 key ways that corporates try to innovate, and the benefits of each.

There are 5 main types of responses to the need for corporate innovation: 

- M&A 

- Corporate Venture Capital 

- Accelerators & Partnerships 

- Internal Innovation Teams

- "Innovation Everywhere" 

The boundaries between each type can be fluid, and pursuing one model can enable another model as a next step.

Let's define these 5 types, and the subtypes within each.

M&A, in practice, means acquiring a startup for it's Product or its technology. 

M&A has 3 subtypes, each with different goals: 

1. Acquire a company and continue to run it as standalone product 

Goal: Expand Product Portfolio

2. Acquire and integrate product/tech into existing product(s) 

Goal: Improve existing Product with new features

3. Acquire talent to deploy internally 

Goal: Add proven talent with specific expertise

The lines between these subtypes are extremely fluid. 

Most standalone operations will be integrated eventually as the parent company seeks efficiencies and improvements to their existing products. The hardest part of using M&A as an innovation strategy is managing the integration process.

M&A is effective when it allows large organizations to buy the best-in-class products and technologies that they wish they had developed in house, and when they can preserve the benefits of the innovative ways of working - and not just the Products - that have been built outside the acquirer's walls.

The surface-level goal of Corporate Venture Capital (CVC) is to see the value of the equity stake rise, but the real value is in the optionality of moving toward other innovation types. 

CVC's primary benefits come from gaining two key currencies about the startup: information and trust. 

These two currencies can allow an investor to move to acquire the startup, or enable an easier customer-supplier relationship between the two parties.

These two currencies can help the corporate understand whether they should make an acquisition offer, and at what price. They can also simplify the diligence process, which can allow them to build a commercial relationship with the startup. 

I've seen 2 main types of Accelerators & Partnerships: The corporate can either Run an Accelerator (usually with an external partner), or Build a Partner Program to vet startups as potential suppliers and set up pilot projects. 

Like CVC, the real value of the Accelerator is in generating optionality for future relationships. An equity stake is a bonus; the primary goal is to gain access to information and trust about external startups, and use that to move toward strategic investment, acquisition, or future collaboration as a customer.

A Partner Program focuses primarily on gaining trust between the corporate and their targeted startups. It may include a streamlined diligence process, or a commitment to develop pilot projects together. This can be included as part of an Accelerator, or live as a standalone startup outreach program from the corporate. 

Either an Accelerator or a Partnership can grow into a strategic investment, an acquisition, or future commercial deals between the startup and the corporate.

Internal Innovation Teams is a centralized approach for developing new Value Propositions in-house. This model uses standalone innovation teams that are largely separated from the core business. This innovation division might report to a Head of Innovation or Chief Innovation Officer. This model can also work within business units, where managers might carve out resources for dedicated innovation teams that report in to the core business hierarchy. 

The siloed innovation team is a double edged sword. On the one hand, they can build different skills, and make decisions based on the right metrics for early-stage ventures (I’ll cover “Innovation accounting” in greater depth in a later issue). On the other, innovation teams are sometimes too distant from other business units to understand their needs and strategies, and often those business units treat the products of innovations teams with suspicion. There are ways to overcome both challenges, but this will need a deeper examination in future. 

"Innovation Everywhere" is a more decentralized approach which assumes that managers will carve out space for their teams to work on innovation projects as part of their day-to-day responsibilities. This approach appeals to many CEOs, but is only capable of delivering incremental improvements, and still often requires significant organizational changes, incentive redesign, and shifts in both mindset and skill set of employees. As such, it is usually a component of a larger Digital Transformation. The most effective approaches to “Innovation Everywhere” are those that include elements of the Internal Innovation Teams model into a hybrid system, where ideas are generated from the business, and quickly become the remit of an innovation team that includes the people closest to the original idea. 

I'll do a lot more to explain the best practices and pitfalls of Internal Innovation Teams and “Innovation Everywhere in future issues. For now, it's worth saying that these efforts are best pointed at a specific type of aspiration: the need to develop new products in-house to drive forward a single goal: increased revenue, increased profit, or increased efficiency.

Reading List

Each week, I'll include links to articles, books, or podcasts related to corporate innovation, that can help you accelerate the knowledge and progress of your teams. 

• Since we’re still just getting started in this newsletter, I can use this space to recommend some canonical books to help you on your innovation journey. This week I’d like to highlight Eric Ries’ The Lean Startup, which offers some *extremely* useful tools for how to think about what you launch to customers, and how to define the right short term measures of success for new ventures. In the future, I'll talk more about a lot of concepts from this book: the Minimum Viable Product, Build-Measure-Learn feedback loops, how to Pivot, and many others. This book is the foundation for a lot of the further thinking we’ll be exploring. 

• That’s it for this week! By not recommending any podcasts or articles, I’ve saved you enough time to read the first chapter :)