5 Lessons on Innovation: Don’t put all your eggs in one basket (Episode #4)

Dear Innovators,

I’ll start this newsletter with a scoop: A previously unpublished quote by Sir Richard Branson. It's unpublished because I wrote down personally during an on-stage interview that he gave at a TechCrunch conference, so I'm pretty sure I have that quote exclusively. ?? He said:

"Having many companies is a hell lot better than having just one company. If you’ve got just one company and anything goes wrong,?you have no company. If you’ve got 250 companies and something goes wrong, you’ve still got 249 companies."

- Sir Richard Branson

Actually, he was downplaying a bit: His Virgin Group controls over 400 (sic!) companies today.

This week, I want to talk to you about this seemingly simple but particularly tough nut to crack in Corporate innovation: Spread your bets early on, or; "Don’t put all your eggs in one basket”.

It sounds like a simple truth that everyone knows and gets intuitively, right?

Well, everyone, except managers.

Spread your bets

Richard Branson certainly got that lesson, but he's not a manager: He is an entrepreneur who always did what he knew was the right thing to do. Strangely, this doesn't seem to be so obvious to managers.

For managers, it is in fact terribly difficult to spread their bets - as they should.

Check out my video below to get some colour on this ??

The video is the appetizer. This newsletter is the main dish: I will try to give you a bit more "flesh to the chickenbone" now, to stick with the video's analogy.

We talked about why diversification matters in lesson 2 and how to actually diversify by 'making or buying' in lesson 3 (and why all the other strategies have no evidence of actually achieving anything that matters beyond PR and HR).

Failure is a huge part of innovation

The thing is: In order for these strategies to achieve substantial returns, failing is absolutely crucial.

Why?

Because 89% of startups fail. Yes, the old rule of thumb is roughly correct: Only 1 out in 10 startups is a success (success defined as: made it to scale; see our study on startup failure rates).

Before you're asking: For corporate startups, I can't tell you the empirical failure rate. That is simply because there is no data available to crunch, as a vast majority of companies still prefers to simply bury their failures and never talk about them again (while internally dealing with the problem by shaming or a maybe firing a couple of people). I’ll bet that the ratio is even worse in a corporate context.

But look at the following breakdown: Startups out in the wild fail to achieve scale in 89% of cases. For the aforementioned lack of data, let's just assume with some goodwill that corporate startups are just as good.

To that, you have to add all the projects lost pre-launch. Here I refer to data that we have collected on over 300 ideas that we validated with our corporate partners. We lost around 70% of those bets in pre-launch stage. Nota bene: Those were all ideas that sounded great, such as coming from strong startup signals from benchmark analyses or the outcomes of design thinking workshops. Yet, we had to drop 70% already early on. This is where "fail fast" actually applies, as you don't want to throw good money after bad bets.

It's like the first betting round in a poker tournament: You pay the big blind in order to see the outcome of the flop, but then fold if you see that your hand is crappier than what you hoped for given additional information.

If you add up the two, you end up with a staggering 97% failure rate to scale!

So in conclusion: Failure is the biggest part of the road to success.

Those figures provide the quantitative reasoning for why you have indeed to spread your bets, the earlier, the more. Also, they should make you very humble when it comes to your own ideas and predictive powers. At least, that's what this reality achieved with me. Of course, in my case, those stats add to the personal experience of indeed having seen many of the ideas that I initially loved going down the drain.

The purpose of (business model) innovation is to create scale, not PR

I have been challenged on the above definition of failure as "not achieving scale". It has been proposed that e.g. "still being around" or "being profitable" would also be reasonably successful. But the hard truth is: Anything else than achieving scale doesn’t matter if you are a large organization. Think back, why to do innovation in the first place: It's to diversify your business portfolio. That will simply not be the case with some marginally successful cases on the fringes. So SCALE itself is the only viable measure of success for a corporate startup.

I have always said that a new business should aim to achieve around 10% of the legacy business "in the foreseeable future". I put that timeline to 5-7 years, which is both average time to exit for a successful startup as well as a feasible tenure for a corporate manager. I was thrilled to read confirmation by my rule of thumb by Geoffrey Moore, the famous author of Crossing the Chasm and an innovation thought leader, who is applying the same success benchmark for corporate ventures. He argues, that anything in the single digits just doesn't matter to an executive board. And right he is. So you should really think about the goal of innovation in terms of creating the next division for your company, not the next PR project to put into the annual report.

In conclusion, you have to be able to go the journey all the way until you've achieved the few bets that succeeded at getting to scale. So building a portfolio is not optional, it's compulsory!

Managers don't like to spread bets, for good reasons

So we've established that the goal of a new business initiative must be scale, and that many bets will fail on the way there hence the requirements

But why then is it so difficult for managers to spread their bets, if it is so clear that they should?

Overconfidence

Firstly, because we are talking about bets on new business options, whose outcome will only materialize in the future. Therefore, it is highly uncertain whether they will actually be successful. Unfortunately, nobody has a magic crystal ball, although a surprising number of managers act as if they had one. The reason is that managers do so good in their day-to-day management of their core business, that they acquired overconfidence in their judgement and they don’t recognize their intuition failing in an even slightly different context. And I'm not even speaking of material diversification topics such as technology startups, where they should bury their core business intuition altogether. But as a result, managers like to do “big bets” and “bold moves”. They don’t like to explore and deal with uncertainty.

Home bias

Secondly, managers (as every other human being) suffer from insider blindness manifesting as a “home bias” in the actions that they take, so they always prefer to place their big bets on things that they know, rather than to invest into things that they don’t. This is very rational behaviour. No one actually should invest into things that they don’t understand (yes, I’m speaking to you, Crypto crowd). That would be gambling, which no manager should engage in outside a trip to Las Vegas.

Mis-alignment of goals

Thirdly, although pretty much every company on the planet now likes to talk about becoming more “agile”, most of the management cultures are not agile, at all. Failure in most companies is not an option. In a study by McKinsey (published in this book), middle managers preferred bets that were 90+% “safe”, because they know that if they fail, that may well cost them their career. So playing it safe, too, is entirely rational from an individual’s point of view. And truth be told: In any other setting than innovation, failure is indeed not an option. So it’s really expected too much from most managers to take unfamiliar types of risks. They really should be focussing on not failing in their day-to-day jobs.

The bottom line

That is why it is all the more important to spread your bets, the earlier, the more. And that is why is all the more difficult, the more successful and established an organization is.

But that leaves the elephant still in the room: Management will not do that for the reasons outlined. So who in an organization, which is specialized in optimizing what they already do, is qualified to take such calls? And who is executing on them if everyone is busy doing their jobs of managing the business?

I will disappoint you with an answer on this for now, as I’ll come to that in the next newsletter. But luckily, there are indeed ways how to deal with these issues. A sneak preview: The solution lies in governance and to keep the new business in just the right distance away from the old.

I'm curious to hear what you think about this episode. Let me know in a comment below the newsletter. ??

Stay tuned.

Yours,

Jan

Co-Founder of Stryber

P.S. You can also find the previously released episodes here

P.P.S In "5 Lessons on Innovation" I try to really sum up the core lessons from my long experience around corporate innovation (and I was already sitting at many sides of the table, being a manager at a big corporate, a startup founder, a strategist, and now solving diversification for large organizations). Solving these problems with large organizations is all I do these days. If you are facing some of the issues that I discuss, my team and I are here to help. Just get in touch via DM.