Published at Innovation Excellence, November 15, 2015. http://www.innovationexcellence.com/blog/2015/11/15/separate-innovation-from-entrepreneurship/
Startups disrupt markets
In The Innovator’s Dilemma, Clayton Christensen claimed that only startup companies can disrupt new markets and produce radical innovation. Sure enough, 57% of the participants in my 2008-2010 creativity in organizations study (see http://www.innovationexcellence.com/blog/latest-articles/2015/09/29/from-startup-to-maturity-how-to-un-kill-creativity/?Itemid=88) experienced higher degrees of creativity in startup companies, and only 10% felt more creative in established, mature companies. Startup companies don’t really have a choice but to be radically innovative, as they typically don’t stand a chance of survival (or even initial investment) unless they do something substantially different and very innovative.
Innovation = Entrepreneurship?
As a result, the words innovation and entrepreneurship became synonymous in our language, and the place we see this the most is in universities and business schools. The University of Texas at Dallas has an Institute for Innovation and Entrepreneurship. Stanford University’s center for professional development has an innovation and entrepreneurship certificate program. The Harvard University Innovation Lab (i-Lab) deals mainly with–entrepreneurship. Many universities have a business accelerator associated with their innovation program, aimed at launching new businesses. The model is simple–we teach you how to innovate, we conduct a business plan competition, we may help you raise initial funding, and as a result–you launch your startup.
Established companies kill creativity
But why are we linking these two words? Why is being an innovator means I have to launch a startup company? Can’t I be an innovator in a mature company? There is a very simple reason for that, and both Harvard Professors Clayton Christensen and Teresa Amabile pointed it out. Christensen defined the innovator’s dilemma as the fact that “the logical, competent decisions of [established company’s] management that are critical to the success of their companies are also the reasons why they lose their positions of leadership,” and Amabile wrote that “…creativity gets killed [in established companies] much more often than it gets supported… …creativity is undermined unintentionally every day in work environments that were established–for entirely good reasons–to maximize business imperatives such as coordination, productivity, and control.”
It is clear–we link innovation with entrepreneurship because established, mature companies “kill” creativity, and lose their markets in favor of startup companies that have no “baggage” and no respect to the “rules of the game” by which companies, established in their markets, play. This should not be a surprise, as the Austrian-American economist Joseph Schumpeter described Creative Destruction in 1934, which “…strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”
When startup companies raise funds, even at the very early stages, they define their exit strategy. Their potential investors insist on it. Investopedia defined exit strategy as “The method by which a venture capitalist or business owner intends to get out of an investment that he or she has made in the past. In other words, the exit strategy is a way of ‘cashing out’ an investment. Examples include an initial public offering (IPO) or being bought out by a larger player in the industry. Also referred to as a ‘harvest strategy’ or ‘liquidity event’.”
With increased stock market regulations, an IPO became almost impossible to achieve for a startup. Very few startups consider it anymore. With a shortened investor “attention span,” it seems as if the only viable exit strategy is now an acquisition by a larger player, and those continue to happen. In 1997, the Israeli technology company Mirabilis (creator of the first instant messenger, ICQ) was acquired for $407 million by America Online. Google bought Waze (another Israeli startup) for $1.1 billion in 2013, and Facebook acquired WhatsApp for $21.8 billion in 2014. The surprising common thing for all those acquisitions? None of them generated any revenue whatsoever, and showed no clear path to profitability. No doubt–the acquisition path remains a very viable exit strategy to startups with innovative, game-changing ideas.
Does the startup’s exit strategy work for the acquirer, too?
No doubt that if you spend the last five years building a startup, received $60 million investment, and made more than $20 billion when selling the company–this exit strategy worked well for you and your investors. But was the acquisition as attractive to the acquiring company as it is to the acquired startup? Will it really give them the innovative edge they may have lost? Christensen wrote in a 2011 Harvard Business Review article that “companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.” Not so great for the acquiring established companies. In 2009, Cisco acquired Pure Digital, the company that made the Flip camera, for $590 million, and two years later shut it down as a failed acquisition. There are too many examples like that. But even if the acquisition was successful, at best the acquiring company gains one more innovative product, rather than turn into a consistently innovative company.
Creativity in established companies
There is an opportunity here. While established companies celebrate innovation without really innovating, this can change. The innovation spark can be ignited again. Mature companies can innovate. Although 57% of the participants in my own study felt more creative in startup companies–10% felt more creative in mature companies. Startup companies start with the idea. Mature companies are really startups that had one great initial idea, but lost their ability to do that on a regular basis. Companies such as Apple and 3M show us that innovation can be a sustainable organizational characteristic. To create an “innovation engine” within an established company, attention must be given at three levels: organizational climate, team dynamics, and individual context (see http://www.innovationexcellence.com/blog/2015/08/13/who-is-responsible-for-innovation-in-my-company/). The organization must create a climate that is conducive to the creativity of the core design team. Teams must foster such dynamics that will allow members to build on each other’s ideas, and individuals must practice what will increase their flow of ideas through improving fluency, originality, flexibility, and elaboration. Those are brain functions that can be exercised like any other muscle in our body. Established companies should go through three phases: assessment of the current state at all three levels, intervention to correct what needs improvement, and finally–ideation to produce new, radically innovative ideas. After all, 3,000 ideas are required to achieve one market success.
The return on investment is guaranteed to be higher than with the 10-30% probability of success with a multi-billion dollar acquisition. Consistently innovative companies gain 3 times the market share, 6 times the revenue, and 3 times the profit compared to their less-innovative peers.
Include innovation in university executive programs!
I’m not advocating for universities to abandon teaching innovation in undergraduate and graduate programs with the intention of launching new startups.
However, they should complement this with teaching innovation to executives of established companies. Integrate innovation in executive education programs. Focus on providing executives of mature companies with tools to assess, intervene, and ideate in their companies. This could make all the difference.
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