How does a self-funded startup disrupt a multi-billion-dollar incumbent? Companies spend nearly a trillion dollars per year on R&D and internal innovation yet struggle to keep pace with entrepreneurs funded by credit cards and family. If it is a David and Goliath tale, what kind of slingshot do these founders have, and why can't the incumbents react fast enough to the threats?
One of the great advantages of entrepreneurs is "blue-flame" focus. A flame burns blue at its brightest as a result of intense focus. Founders have the ability to focus on one challenge. Their focus is stoked by a fiery enthusiasm that is impossible to re-create. As a two-time founder and lifelong entrepreneur, I can attest to the deep obsession of a founder. I think about my business when I wake up, when I go to sleep, in the middle of the night, at family dinner, when my baby son coos, when I take out the trash, at the gym and when I watch TV. It's obsessive. I'm not sure how healthy it is, but I am unable to turn it off.
Similarly, I meet with dozens of founders weekly who all have what can only be described as a delusional obsession that their idea, company or technology is going to change the world. It oozes from them. It's captivating, exciting and often ill-placed. But it is undeniable. Many founders have quit their jobs to pursue their focus. They don't just have skin in the game, they have their entire livelihood in the game. They are literally all in.
Compare that with an innovation group at an established corporation. The incumbents can't possibly focus on one thing because they are surrounded by legacy processes, existing products and infrastructure, company politics, KPIs, promotions, 401(k), health insurance, procurement, legal and a host of other distractions that a founder doesn't have to wrestle with (for better or worse). Even a standalone skunkworks can never be completely untethered from the mothership and always know where the paycheck is coming from. It is impossible to re-create having their entire livelihood in the game, because if they did, they would never share the upside with an employer. The employer mitigates the risks and mitigates the rewards, which opens the aperture and makes blue-flame thinking impossible to sustain. Corporate innovators can get "mostly in," but it doesn't consume their entire being the way it does for a founder.
This doesn't mean that corporations should pack it in. Nor should they stick with the status quo and just wait with bags of coin ready for acquisitions. Beyond disruption, there is potential for collaboration between incumbents and founders to accelerate mutual growth. In fact, founders need incumbents to achieve their dreams, and incumbents can greatly benefit from partnering with founders. No matter how bright the blue flame, it can't thrive without oxygen (cash) or grow without places for it to expand (markets, customers). Incumbents have much wisdom to share. The very things that slow their ability to innovate are the parameters and processes that enable a founder to go from an idea to a movement.
One of the easiest ways for founders and established companies to drive mutual growth is through pilot programs. Certainly, M&A or corporate VC are splashier engagements, but the success rates are abysmal and require a tremendous amount of capital expenditure and time investment to build. Pilots allow established companies to rapidly iterate on existing business problems and seek out competitive advantages. Pilots infuse the incumbent with agile and lean thinking to problem-solving, as well as the enthusiasm of a startup. Additionally, they provide disruption insurance and customer learnings that no focus group could ever deliver.
Here are three tips for a corporation to run a successful startup pilot:
- Define a crystal-clear business outcome for the pilot.
- Identify the right stage startup for the desired outcome. Make sure the startup has the scale and product-market fit necessary.
- Cut through the normal procurement and payment terms. A startup getting paid in 120 days and reviewing a 50-page contract asking for $5 million of insurance coverage will sidetrack your partnership.
On the flip side, founders get the oxygen they need to scale their business from case studies that demonstrate impact to hard-won revenue. Founders get to absorb best practices of the incumbents and identify new pain points that their products can solve to open new growth opportunities. Pilots mitigate risks for both parties and exist on a tight timeline so as not to derail either on their marches to greatness.
Here are three tips for a startup to run a successful pilot with a corporation:
- Outline what success looks like and what happens if you are successful (e.g., second program, scale, etc.).
- Capture video, pictures and testimonials throughout the process; this is your future marketing material as well as proof of success.
- Overcome whatever corporate spaghetti is thrown at you — process, procurement, legal. You will get through this and you are learning a lot along the way.
Some have insinuated that VCs use blue-flame thinking as a code term to refer to young people with no kids and lots of energy, who are willing to do nothing but work. But in our daily dealings with VCs, I have never heard this term used disparagingly. The energy and the intense focus of attention are attributes of every founder, regardless of age. The magic in these pilots and partnerships is when the startup can leverage its blue-flame focus combined with the processes and scalability of the incumbents to tackle larger opportunities and drive growth for all involved.
To learn more about how to build an External Innovation practice, contact info@venturefuel.net
