Headshot of Stephen Rapoport

By Stephen Rapoport

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.

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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!

The Four Freedoms

  1. Aligned incentives

    The founding team has real skin in the game, and no one gets rich until everyone gets rich.

    Startup: All founders have taken a significant pay cut — often 100% — and abandon the concept of a “career path” in return for the possibility of private-island wealth if the business succeeds.

    Corporate: High base salary, performance bonus based on “in-year performance”, career development based on repeated in-year performance.

    Impact: The lack of safety net and massive upside will motivate the startup founder to run through walls for 12+ hours a day. They will eat the corporate founder for breakfast.

    Possible solution: Give the founder a paycut and suspend annual bonuses in return for retirement-level wealth if they succeed. Success = you would fight to acquire it as an independent business

  2. Operational freedom

    Build what customers need, optimising for pace of learning and adaptability.

    Startup: Investors back a founding team. The founding team can choose their team, ways of working, supply chain, target market, business targets based on the best solution for today and change these as required.

    Corporate: Investors back a specific idea. Founders are encouraged to use existing talent, supply chain, procurement, shared services and approved vendors to deliver the idea, and discouraged from competing with the existing portfolio.

    Impact: Corporate “intrapreneurs” are reliant on a toolkit that was designed for Engine 1. This is slow, expensive and distracting to both the startup and the corporation.

    Possible solution: Ask your CEO to give the founder a “Letter From The Leader” that explains why the project is important, why the team needn’t follow the rules, and asks that colleagues are supportive if needed and absent if not.

  3. Long-term financial commitment

    Whilst there are a handful of outliers, it typically takes 7–10 years for disruption innovation to deliver a return.

    Startup: Angels and VCs invest with the expectation to lose money for a long time, and likely invest increasing amounts each round. Investment rounds (quantum and timeframe) fit the unique situation. Investors understand the KPIs that describe success in early-stage, loss-making startups.

    Corporate: ‘Investors’ make annual investment decisions, with the ability to reduce budget mid-year. If funded from P&L, the startup will have to compete with projects that will deliver a guaranteed return in a short timeframe. Disruptive innovation will likely take longer to realise value than the investors, sponsors or other stakeholders remain in their role.

    Impact: The disruptive project takes longer to create value than the original sponsor and other key stakeholders areis likely to stay in their role. And there is no scope for career development for the ‘founders’ during that time, who likely care about job security and progression as much as their corporate colleagues; running the project becomes career kryptonite.

    Possible solution: Fund disruption from the balance sheet, not your P&L. Appoint founders with a typical ‘founder’ profile, recruiting fresh talent if necessary.

  4. Effective, aligned governance

    You buy decision-making rights with significant skin in the game, not grey hair.

    Startup: Everyone at the board table has aligned their incentives with the project (see above).

    Corporate: Decisions are influenced by countless senior stakeholders who are personally incentivised by the wider business P&L performance.

    Impact: Founders are encouraged to pursue profit before scale or product-market fit. Unprofitable projects are massively under-funded vs competitors ‘in the wild’ and are shut down in years 2-5.

    Possible solution: A 3-5 person steering committee, including an independent expert, all of whom have aligned incentives (see above).

What next?

So, am I saying that all you have to do is put the Four Freedoms in place and then sit back and count your money!? No. There is a whole host of execution risks that could continue to frustrate your ability to disrupt.

A well-managed portfolio of competing projects, full-time founders, experienced teams, clear strategic goals, and an innovation strategy that compliments your core will all massively increase the odds for success. But, in the absence of any one of the four freedoms, not even these measures will lead to market-winning success.

 

Stephen Rapoport founded Crashpadder.com and PactCoffee.com and is former Vice President, Disruptive Innovation at Unilever. Stephen is currently helping a number of corporations develop disruption strategies whilst planning his next venture.