Increasingly, Startups are disrupting established companies that are wealthy with resources and most importantly with customers. On February 2019, two founders of modern entrepreneurship — Steve Blank, creator of the Lean Startup movement and Alex Osterwalder, inventor of the Business Model Canvas and co-founder of Strategyzer — discussed what it takes for big corporations to innovate better than Startups.
The insightful hour of conversation is available on the Strategyzer youtube channel.
Here is the transcript of some extract of the interview.
Today startups are pure competitors
Alex Osterwalder: What makes startups more inclined to innovation and to disrupt industries?
Steve Blank: It is worth visualizing startups, companies and government agencies and the percentage of these organizations focused on innovation: 100% for startups, between 0 and 10% focused on innovation for companies and the rest on execution and that’s normal because they already found the product/market fit, close to 0% for government agencies.
The whole idea of Lean Startup started when we realized that startups are not smaller versions of big companies. Vice versa, a large company is not a larger version of a startup because it’s bound by different constraints than early-stage ventures.
In the 20th century, startups were bound by capital, they had a couple of million dollars, today startups have more capital in large rounds than corporations have for their entire yearly budget.
Startups were seen as incubators for large corporations and today they are pure competitors.
What big corporations can do to respond to startups
Alex Osterwalder: A lot of things are working against large corporations. Startups are focused on creating a new growth engine and often it is disrupting the established players and they are extremely well funded now so they go faster.
Is there anything that large corporations can do? or is it like a life cycle? Is the fall inevitable?
Steve Blank: You’ve implied there is a natural life cycle to a company. In the 20th century, Deloitte and McKinsey have looked at this and said the average life cycle is about 50 years. Nowadays it’s closer to 15 for a public company. This means something is happening to them, not that CEOs have gone stupider, it’s just that the environment has changed. Yet companies don’t have the tools, methodologies and skill sets to respond. However, there is a cookbook :
- Companies can actually figure out how to incentivize external resources to focus on disruption. For example, Apple on the app store or the Nasa gave money to Space X.
- They can acquire external innovators. For example, Google buying Android. Beware of the risk of mismatched cultures, processes, and incentives. Companies almost always strangle the newly acquired innovation culture unless they are really careful at how they manage disruptive acquisition.
- The third way is to rapidly copy your innovators but use your business model to dominate. For example, Microsoft copied Netscape web browsers, Google didn’t come up with pay-per-click, it copied Overture’s to sell ads. The risk for large companies is that if you copy without understanding deeply the customer problem, you could end up with solutions that miss the point and might be a failure.
- The fourth way: innovate better than existing disruptors. It is extremely difficult for companies because it’s more about a culture process problem than a tech problem. Startups are born betting it all but large companies are executing and protecting legacies.
Disrupters with off the shelf components!
Alex Osterwalder: Big corporations say they can collaborate with startups. Can something come out of that? What are the guidelines to make something work?
Steve Blank: It goes back to culture and leadership in large corporations. I remind people that large companies have handbooks of processes, financial metrics, culture, all built in and focused on execution. They recognized that the bills are being paid by people who are just turning the crank.
But companies need to become ambidextrous: chew gum and walk at the same time! They need to be able to execute and have an innovation culture in parallel. In the 20th century, it was a “nice to have”, in the 21st century it is a requirement. However, the problems still remain.
Companies are almost always run by horizon 1 executors. CEOs who are great at playing golf, understanding sales, numbers, managing process and all. The innovation stuff they know the words but never came up with that culture.
Now they are dealing with disruptors who in the old days would have required years to come up with some tech disruption. Now disruptors can get off the shelf components and commodity components and come up with the disruption of business models, that’s what’s scary.
Get disruption out of execution organizations
Alex Osterwalder: In terms of metrics, ambidextrous organizations, cultural space, innovation, what can large organizations learn from startups that they don’t have today?
Steve Blank: If you wanna do something disruptive, it cannot sit inside an operating division of a functional organization. It is important to distinguish between incremental innovation and adjacent innovation (level 2).
If you truly want the disruptive stuff, it cannot start inside. Why? Because we’ve seen this all the time: no budget, not possible to hire the best assets, resource allocation doesn’t allow it. If you’re not committed, don’t do this.
If we just put these people in an internal incubator or accelerator, we’re also going to fail. We have created an innovation theatre and not an innovation pipeline (an end to end process). That is the ambidextrous part.
What’s the equivalent to a process driven, stage gate driven engineering process that takes a year to get a product out versus a fast track operated speed emergency and deliver MVPs that are just good enough process that actually gets things out of the door?
Right now we seem to confuse innovation with what needs a demo, like a startup but forget we need to connect it to delivery. How does this get to a customer? Typically innovation teams don’t want to have those political battles on day one. However, if you’re not having those conversations about what an end-to-end pipeline looks like for innovation delivery then welcome to t-shirts and cool coffee cups but you’re ain’t going to deliver anything.
Failure in large corporations is not the same thing as in startups
Alex Osterwalder: Organisations often copy the part of startups that is the least impactful. How to copy the attitude to failure embraced by the startup world?
Steve Blank: Another reason why you want to pull innovation groups out of execution groups is that in a large corporation, we have job specifications and descriptions. Title on a business line, detailed job specs. In a large corporation, it comes from HR. This job has been done before, we know what the requirements are, what you need to do day-to-day and we know how to measure you. Failure in a large corporation for the execution part is a real failure.
In a startup, there is no job specification. On day one, we’re just guessing, that’s why failure is not a failure in a startup. Failure is actually learning and discovery, we’re doing hypothesis testing. We’re taking every part of the business model canvas that we built and say let’s run experiments here and we’re gonna get data, derive some insights and invalidate our hypothesis based on the data.
It is not the same mindset compared to execution.
You need a different set of measurement tools and a different culture. One group is doing execution of the business model and the other one is searching for a business model.
The incubator is part of the innovation pipeline but if you don’t have the connecting tissues from sourcing innovation to delivering the product, you haven’t build anything productive.
Don’t confuse motion with action. The goal is not for you to demo cool stuff. A chunk of big corporations are having fun incorporating what they think is innovation. The actual goal is to deliver on time stuff with speed emergency that people need.
Entrepreneurship is a calling
Alex Osterwalder: Many of the entrepreneurs who succeed don’t succeed on the first time. They understand the innovation pipeline because they’ve done it from end to end several times. Can entrepreneurship be learned? Is it a profession that can be learned over time?
Steve Blank: I was a practitioner and now I’m an educator. For founders, entrepreneurship and startups are a calling, not a job. If you’re not called, you shouldn’t be anywhere near a startup. Entrepreneurship is a miserable job. It’s much like being an artist. Most of the time, it’s not fun, you’re doing it because this a calling, passion, you’re driven to do this. We’re having fun because we are engaged with our passion, not by a job specification.
We should separate the early stage team from the later stage team. Almost every successful startup has at least two people, that’s the entrepreneur paired with the innovator. It’s very rarely embodied in a single person. The innovator might be the Steve Wozniak who came up with the Apple 2 but there would not have an Apple without the entrepreneur who is Steve Job who could create a reality distortion field and remove money from people’s wallet before he had anything and convince investors he was going to change the world.
Or Bill Gates versus Paul Allen. Paul Allen innovated and Bill Gates was the business strategist, he built the distribution channel and was the one to turn Microsoft into the company it became. Elon Musk doesn’t build rockets engines or cars, it’s JB Straubel who you never hear about who came up with the entire battery architecture used in Tesla cars. For every startup, you see that pairing almost from the beginning.
Why an Innovation pipeline?
Steve Blank: In a large corporation, the entrepreneur is someone who knows how to push products unto the finish line. But in the past, we kept telling these stories of heroic innovation without realizing that maybe we should build a repeatable process internal to companies rather than making those stories a one-off. That’s why we came up with an innovation pipeline which says let’s start with sourcing and get a whole lot of internal and external ideas into the company and then let’s do problem curation (figuring out the solution sourced match any problem that potential customers might have), then let’s prioritize the things we have in our pipeline either by product line or by horizon 1, 2 and 3 and then let’s do hypotheses testing and solution interviews. Finally, some of it might actually require integration.
The last part about pipeline which most people ignore (and that’s why the stuff die) is how we integrate this into our existing channels or engineering organizations or functional units to get it out of the door or if it’s unique enough we get internal funding to stand it up as unique division or sales channel. That’s a good internal process.
The Innovator versus the Entrepreneur
Steve Blank: You must be passionately committed to get stuff out of the building and see your idea turn into something used by thousands of people, then you are at the right place.
I’ve seen people get confused because entrepreneurship is trendy and is the thing to do.
To me, an innovator is someone who has an insight about creating something that never existed before or making something that exists much better. In Silicon Valley, we tend to think of technology innovation but it could be an innovation about a channel opportunity or pricing or something that is unique. Most innovators are not the same people who would go out and raise a million dollar for that idea or even, within a company, figure out how to convince your sales channel to do something different or convince your CEO or your board to invest in a new factory. It takes a different character. Those are entrepreneurs, people who know how to make something happen against all odds. It’s not the same as an innovator. The combination is very rare.
Using internal resources to pivot to an adjacent market
Alex Osterwalder: Is it imaginable to have inside companies corporate entrepreneurs on a salary that get the same kind of results that entrepreneurs get? Take action on venture money or on a salary is very different. Can those two exist or can it only happen outside of the corporate world?
Steve Blank: It can happen in large companies but in a different way. Companies are at a huge advantage when they figure out how to embrace innovation in both strategy and tactical operations getting an innovation pipeline.
For example, Spotify decided that they’ve been looking at the world incorrectly, they shouldn’t just aggregate music, their additional business model should be monetizing podcasts. Both of them are audio and nowadays people listen to music as much as they do podcasts on their mobile devices. It’s just bits. Except that one doesn’t have a gatekeeper (like the music industry). Spotify said why don’t we try to become the dominant player in monetizing podcasts and use the same tools and technology to do that. That’s an amazing example of a company using its internal resources to pivot to an adjacent market and say “we already own 10 of millions of users who are paying us for music, why don’t we just get them over to podcasts”. Just like Apple turned to phones from computers. It was a major pivot for a company but they used what they had: massive brand loyalty, manufacturing resources, supply chain resources.
I see a lot of large companies having a lot of resources but they need to take advantage of these resources. This goes back to leadership. If leadership is just interested in fending off investors, spending money buying their shares back, they don’t give enough time to pivoting.”
An innovator, an entrepreneur, a delivering process?
Alex Osterwalder: How realistic is it to create the role of the entrepreneur inside of a large company to boost innovation culture?
Steve Blank: The difference between giving labels and creating teams. Almost every great product or service begins with this question: Step 1, is there an innovator? Step 2, is there an entrepreneur paired with this innovator who wants to take that idea and expose it to the world? Step 3, is there a process built end to end that helps this team deliver that product or service?
What we need to do first is to develop this process and have a pipeline. If you don’t agree with what the process is, starting with job titles and specifications seems backward. You just want the most passionate people into this.
Companies whose culture is already innovative
Alex Osterwalder: Do you think that the large companies, historic companies of the past never really laid down this process to be adaptable?
Some of the most innovative companies are still being led by their founders: SpaceX, Apple when Jobs was alive, Netflix, Tesla, Amazon.
You must build innovation in your culture and then the process flows down. Life cycles in most industries are compressing.
Large corporations have natural corporate innovators. Do they know where they are?
Alex Osterwalder: What I observe is that it’s not a people problem. Do you think that companies have to work more on their talent recruitment?
Steve Blank: There are more innovators and entrepreneurs in large companies than in the startup world, They just made different career choices but they are there. What they lack is a process that allows them to innovate and execute at the same time. Companies beat out of these people the experimentation and risk-taking mindset.
Where do these creative people go inside your company to pull this off? What’s their goal for delivering stuff and how is it resourced? If you can’t find a space for them in your company, you are going to have a bunch of frustrated people in your company who might leave or might not be contributing up to their potential.
For innovations to emerge
Alex Osterwalder: So it leads us back to these ambidextrous organization. We need to create this physical space, mental space, and incentive program so that entrepreneurs can emerge.
That’s when the horizon model can arise. How does this horizon model H1, H2, H3 from McKinsey apply? Can you elaborate on that because it is very much related to this topic of disruption?
Steve Blank: There are still disruptive ideas which require years to build. A lot of physics and construction experts say it is going to take a couple of years. A lot of things require time but the key idea is that startups and you have realized you could build disruptive ideas with existing components of just reconfiguring the business model. Uber did not require a ton of new technology. They realized they had internet, drivers, here you have a new business model. Airbnb certainly did not require a new set of inventions. They needed software to manage their service but it was a business model innovation. Those type of H3 innovations looked like minimum viable products to large companies, they start the business without all the features… but it’s very disruptive. Or the scooters out there are now billion dollars market cap opportunities. Good enough and disruptive is very different from “I’ve got a 100 000 customers I can’t ship this thing, it didn’t pass the QA and the policy meeting and the strategy committee”. Meanwhile, other people are throwing stuff out and refactoring it and working on their product/market fit in the field. It makes companies incredibly nervous.
The problem is the people who are implementing those disruptive strategies building disruption out of H1 existing tools are not the incumbent, they’re the attackers. They have nothing to lose, no legacy to support, no infrastructure to support and no customers and brand to worry about.
The minute where you hear your legal team who says “you can’t do that” you realize you don’t have the fast track innovation pipeline where the focus is speed, emergency, and product delivery.
From business model writing class to experiential class
Alex Osterwalder: What are the most important things we need to teach entrepreneurs or corporate entrepreneurs?
Steve Blank: The capstone class in big universities often was “how to write a business model with a 5-year forecast” but we know that no business model survives first contact with customers. That’s not how the world worked. Of course, you need an operating plan. There is no way that sitting in your office you could pre-compute customer needs and desires. So I came up with this line “there are no facts in the building so get outside!” and that became the heart of customer discovery and customer development. The classes have now been adapted. They are team-based, they are experiential, students go talking to customers, and built around hypotheses testing of your business model canvas. You think that’s your customers, run tests and find out. You think that’s the 10 features they’re gonna want? Let’s build an MVP. In the classes I teach, these teams talked to 150 clients in 10 weeks and build an MVP every week!
I figured if students could do that, this could be the core of what could be the innovation pipeline inside a company. Surround that with innovation sourcing, prioritization, problem curation and then figuring how you can integrate this stuff with the rest of your organization, you’ve got a plan.
Investing in skills training to transform an organization
Alex Osterwalder: Experiential is important. When we work with teams, we train them and then they go back to the execution engine and we get a new team so they don’t accumulate enough experience with this process to really stick to it and they go back to the execution process.
Steve Blank: Seniors don’t realize how much you must invest on corporate entrepreneurs/innovators for them to really become professional.
We want to build successful entrepreneurs and innovators inside companies that are not afraid to experiment and learn and discover. This goes back to this culture of failure. In Silicon Valley, if you have an honest failure, we call that experience.
Make sure that you have a culture that supports successful innovation and entrepreneurship, not just that you deliver something at speed emergency, it’s about that “did you rapidly gather enough insights to kill your project”?
I see a lot of Zombie projects that never die. Because there are no internal metrics and there are no kudos to be able to shut down your own project because you’re afraid you’ll never get another chance at it. With ambidextrous organizations where the culture and pipeline process are very different from a stage gate and execution process, you will get ahead.
This pipeline I describe for Horizon 3 companies can also be implemented inside Horizon 1 and Horizon 2 organizations. It just has a very different focus inside those organizations. In those organizations, these pipelines become very tactical and focused on incremental revenue gains for quarterly stuff but it’s the same process, it just has a different focus and culture.
A startup is a matter of survival — Large corp can never get there
Do entrepreneurs move from startups to large companies or are they not the same people?
Steve Blank: In a large company if you think you are doing a startup, you are wrong. You’re innovating but you are still in a place where the lights won’t go out if you don’t succeed. You are still going to pay your mortgage and put your kids to school if your idea fails.
A startup is a year and half of terror. If you don’t find product/market fit or you don’t raise enough at the next round, you’re out of business. In a company, that sword over your head doesn’t exist so it changes the nature and motivation and the amount of risk you’re willing to take.
I’m not suggesting that one is better than the other, but as much as you try to emulate a startup in a company, you just can’t get there exactly.
And for small-size companies?
Alex Osterwalder: How can small and medium-sized companies deal with this topic?
Steve Blank: Whether you are large or small, you still have to think about your customers, the product-market fit and should be running these exercises continually. Lean Startup is an invaluable toolset whatever your scale. However, you must be wary of what you read. When you get venture capital that allows different scales compared to small capital. If you are a small business, be careful not to compare apples and oranges.
If you want to learn more about how to think and move like a startup, contact me on Tango.