Corporations are burning cash trying to build disruptive business models. Unless they have taken the time to install four key strategic enablers, they will fail. I call these enablers ‘The Four Freedoms’.
The drive to disrupt
“Disruptive Innovation” is a hot topic; there are daily announcements from FTSE250 companies about open innovation ecosystems, startup partnerships, CVC funds, incubators, accelerators and fostering ‘intrapreneurship’.
Incumbents are right to be worried. Although market share erodes imperceptibly at first, disruptive models that stick can grow exponentially. At that stage even piles of cash can’t always help a corporation catch up because replicating successful startups is time-consuming and risky, and successful disruptors attract huge valuations that can make them unattractive to acquire. Just ask senior executives from Kodak, Xerox or Blockbuster. As the old adage says “The best time to plant a forest is 20 years ago, the second-best time is today.” FFS don’t wait until you need the timber.
Incumbents are also right to want to invest in disruption; markets see much more value in firms with a proven ability to disrupt at an industrial scale. Just think about the PE ratios of two of the world’s largest retailers, Amazon (130) and Walmart (25). Or hardware manufacturers Apple (28.4) and Dell (8.4)
Baked-in failure
But the majority of corporate disruption projects and strategies that I see are a waste of time and money, with failure baked in on day one. Most result in a huge amount of cash and calories being burned, but fail to deliver real value.
Disruptive projects, which often begin with rational commercial objectives, will slowly devolve over time into sideshows with soft, poorly articulated goals such as “learnings”. An unwillingness to kill the project then results in hoards of ‘walking dead’, which limp along with no real chance of success.
When I’m asked to advise on corporate startups, my recommendation is usually: “kill it as humanely and as possible”.
This stems from the fact that most corporate cultures and operating models have been meticulously designed to deliver highly predictable growth over the next 12 months. As a result, most corporate environments are extremely hostile towards risk, failure and contrarianism, yet this is exactly where ill-fated ‘speedboat teams’ are asked to build startups.
As a result, the cash and calories invested will at best deliver nil return. Far more likely, however, is that these projects carry a significant opportunity cost; cash could be spent on proven growth tactics and brilliant minds can be focussed on strengthening the core business that they understand so well, focussing on winnable challenges.
That’s why, when I’m asked to advise teams or sponsors of corporate startups, my recommendation is usually “kill it as humanely and as possible.”
A model for success
If a company does want to pursue disruptive innovation at a meaningful scale, they should start by learning how the VC industry works.
VCs have spent 40 years refining a model to develop disruptive new businesses, profitably and at enormous global scale. I’m unaware of any others that come close (PLEASE educate me via the comments section).
The GP/LP structure that VCs are built around offers entrepreneurs four strategic enablers for success. Without all four enablers, even an entrepreneur who achieves early success will be highly uncompetitive vs a venture-backed competitor in the wild and therefore will ultimately fail.
My strong recommendation to any leaders charged with building profitable disruptive innovation at an industrial scale, is to focus all your resources on putting the following enablers in place, creating a competitive environment for disruption to flourish. In other words, make the ground fertile before planting seeds!
