Recently, I’ve been speaking to an increasing number of companies thinking about creating or redefining their innovation strategy. For those discussions, I outlined the following strategies in escalating order of three dimensions:
- level of resource commitment
- visibility & access to new technology
- potential for impact (whether development of transformative technology, new revenue streams or financial investment returns)
Internal Product Management
Product management team works in tandem with business lines to improve products in response to customer feedback. This strategy aligns perfectly with existing incentives, requires low resource commitment and controls intellectual property. However if business lines operate in declining or commoditized markets, this approach will be unlikely to drive change or develop transformative technology. This strategy provides no visibility or access to new technology being developed outside the company.
Internal Incubation / R&D
R&D group develops technology independent of existing products while leveraging expertise of core business. Depending on the R&D group, this strategy could result in transformative technology and new revenue opportunities. Internal conflict could arise if R&D group initiatives show potential to cannibalize sales from other departments. This strategy requires a low resource commitment and controls intellectual property. Results can be limited by the size and talent of the R&D group, undefined deliverables and potential for internal conflict. This strategy provides no visibility or access to new technology being developed outside the company.
External Representation
Innovation representatives participate in entrepreneurial ecosystem as a strategic advisor with no capital commitments. Designated representatives act as mentors to various accelerator programs, attend demo days & corporate venture conferences, sponsor events, meet-ups or hackathons, and provide strategic advice to relevant start-ups. This strategy provides visibility and access to a some new technology with no resource commitments but will not directly result in driving change within the company. Furthermore, start-ups, accelerators and universities may have concerns about competition and withhold access.
Corporate Accelerator
Company sponsors an accelerator program run by a management company (i.e. Techstars, DreamIt, etc). Accelerator managers screen applications and select a class of 10–20 start-ups working on technology relevant to the company. Each start-up receives a direct investment ($50k — $150k) from the company in return for an equity stake (5–10%). Throughout the accelerator program of 3–6 months, the company provides start-ups access to mentors with industry expertise. This strategy gives company (through the accelerator) visibility and access to most new, relevant technology and the ability to absorb (through further investment, partnership or acquisition) the most successful technologies. Launching a corporate accelerator entails a high commitment of resources and capital. In some cases, the top start-ups may not apply given access to traditional venture capital or concerns about competition from the company.
Indirect Investment
Company invests into venture capital fund with a relevant investment strategy (IOT, industrial, etc.). Company gains complete visibility of new technology through venture fund reviewing the entire population of relevant start-ups. This requires a long capital commitment (7+ years) with a low time commitment. In some cases, company could be indirectly funding start-ups working on competitive technology and the venture fund will be restricted from sharing information with the company. This strategy will not directly result in driving change within the company but will diversify technology risk through indirect ownership. Oftentimes, the company is well positioned to acquire start-ups outright.
Direct Investment
Company allocates capital and forms a corporate venture fund to invest directly into start-ups. A corporate fund can leverage internal resources when qualifying investments and connect portfolio companies to industry network. This strategy will give the corporate fund visibility and access to most new, relevant technology with the exception of start-ups with competition concerns. Building a corporate venture fund is a large capital & resource commitment that, depending on whether the capital is on-balance sheet or off-balance sheet, can last more than 7 years. Corporate venture funds have struggled to operate under a, sometimes conflicting, dual mandate of financial returns and strategic value. This strategy will not directly result in driving change within the company but will diversify technology risk through direct ownership. Oftentimes, the company is well positioned to acquire start-ups outright.
Choosing the Right Strategy
While every market, company and opportunity is unique, companies selling into declining or slow growth markets need innovation the most. Examine whether the value proposition of your product or service will become more or less valuable as technology and markets evolve. If the market is growing but the need for your product is not, incremental product development or tangential M&A may be the right path. If both your market and your product are in decline, a completely new product line or revenue stream could provide long term growth.
To ensure the success of whichever strategy is a good fit for the company, it’s important to:
- assign clear deliverables and deadlines
- empower the innovation group to enact change within the business
- make a long-term commitment to the strategy given the extended timeline necessary to measure results
- structure the group with a combination of outsiders (i.e. former entrepreneurs) and experienced employees