Innovation can be viewed as a process involving a series of discrete break-through inventions followed by incremental improvements which eventually leverage the full potential of the initial invention. It goes like this: Entrepreneurial start-ups experiment with their energy, time and capital, they take risks until they’ve cracked the profit code. Once the entrepreneur has done the risky innovative work, the industrial model muscles in to take over, normally in the form of an acquisition or copying the idea; whichever is cheapest. The innovation is then either squashed through mismanagement, or because it threatens to disrupt and cannibalise existing profits. Those innovations that survive then run the gauntlet of being stripped of costs – jobs losses etc. – risks removed and efficiencies improved.
Innovation-through-acquisition has become the preferred industrialist model for discovering new areas for revenue and profit growth and, while this model has served well in the past, two emerging trends suggest that this approach will not work for much longer in the 21st century.
The first trend is the emergence of a new breed of Generation Y entrepreneurs and innovators who do not want to be bought-out by an older, more established business. Facebook, a relative corporate newcomer, but an old hat in terms of social media, discovered exactly this when they attempted to gobble up Snapchat for a sizeable sum of $3billion. Founding partners Evan Spiegel and Bobby Murphy rejected Mark Zuckerberg’s offer outright. “There are very few people in the world who get to build a business like this,” Spiegel told Forbes in 2014:
“I think trading that for some short-term gain isn’t very interesting.”
Money doesn’t motivate Millennials; making a meaningful difference does.
The second trend is an outcome of technological convergence resulting in three incredible developments: The first is our unprecedented access to affordable, mobile disruptive and breakthrough technology. The second is the power of social media at the fingertip of billions of people. The third is the democratisation of knowledge and immensely cheap storage costs in the cloud. Combined, these three consequences of our digital age mean that start-ups can reach a global audience for the fraction of the investment it used to take, and they can reach critical mass and become the market leaders very quickly.
Imagine you are Brian Chesky, the founder and CEO of Airbnb, when he approached venture capitalists for a first round of funding. Chesky was looking for $150,000 for a ten per cent stake in his business. Of the seven venture capitalists he approached, five rejected the opportunity as crazy and two never even had the decency to respond with an answer. But then let’s be fair to these venture capitalists, who in their right mind would invest in a business model that, as legendary investor Fred Wilson now remorsefully says, “We couldn’t wrap our heads around air mattresses on the living room floors as the next hotel room and did not chase the deal.” Today a disheartened Wilson − his team passed on Airbnb’s early financing round – knows that the ten per cent that was on offer is valued at $3 billion. Airbnb have rocketed to the position of largest hospitality company in the world, with over 1.5 million listings in over 34,000 cities in 192 countries, in only eight years.
No hospitality company can buy Airbnb now and, even if they could, why would Brian Chesky want to sell? We are seeing this time and time again: Uber, Snapchat, Google, Facebook, Amazon and a number of Unicorn businesses became, or have so much potential to become, market leaders, that no established business could seriously entertain acquiring them. The ability of start-ups to become market leaders seemingly overnight is not an aberration, it is now the new normal.
As attractive as the innovation-through-acquisition model may seem to C-Suite executives, its impact on company culture means that it is now its Achilles Heel. Teresa Amabile, professor of entrepreneurial management at Harvard Business School, points out that this approach to innovation now means that: “Creativity gets killed much more often than it gets supported. For the most part, this isn’t because managers have a vendetta against creativity. On the contrary, most believe in the value of new and useful ideas. However, 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.”
The dilemma for the C-Suite at the helm is this: Seek out promising new space to escape ever crowded markets, or face ever tighter margins and get replaced. But new is unproven and numerous experiments can bleed cash for years. Running risky projects is an unaffordable luxury when operating on a quarter-to-quarter income statement basis. CEOs have learnt, many the hard way, that in a short-term shareholder-driven world, there is little real incentive to pursue true innovation, or even risk innovation through acquisition. Executives know this – it makes no sense to risk career and reputation when there is an easier route.
Part 2 to follow on the 5 July.