Get it right: how to help startups succeed

Posted on February 22, 2016 by Eugene Ivanov

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Given the increasingly important role startups and other small businesses play in today’s economy, supporting them should be considered a policy that will have a profound positive effect on the global economy. From this perspective, pinpointing factors casing startups fail is crucial. Equally, if not more, valuable would be identifying factors that help startups succeed.

A number of such factors have been already identified, and here, I’d like to mention three. First, it’s diversity of the founding team. For example, according to a recent study, startup teams with at least one female founder performed 63 percent better than all male teams. The beauty of this factor is that it’s perfectly actionable: you can easily diversify your founding team by inviting people of different gender, age and prior life experience.

Second, it’s providing startups with advice. According to the U.S. Small Business Administration, small businesses receiving mentoring services survive longer than non-mentored entrepreneurs, the fact that points to a potential value of startup accelerators and incubators. A similar conclusion has been reached in a 2014 study conducted in the UK.

Third, it’s the source of funding. It was demonstrated that the corporate venture capital funding (c-VC) is particularly beneficial to startups: startups that had gone public after being funded by at least one c-VC investor outperformed those funded exclusively by traditional VCs (t-VC), as measured by average annual revenue growth, increase in ROA and stock price performance. The reason might be rooted in the fact that the vast majority of c-VC actively work with their portfolio startups providing them with domain expertise and access to proprietary networks. One could argue that the industry-specific expertise delivered by experienced corporate teams would be much more valuable to startups that the one drawn from the “generalists” employed by t-VCs.

New data add granularity to this picture. Researchers from the Wharton’s Mack Institute for Innovation Management tracked the performance of biotech startups funded by both types of VC and found that startups funded by c-VC demonstrated higher innovation output (in terms of the number of patents granted and scientific articles published) than those funded by t-VCs.

This is not a trivial finding. One can easily expect that large pharmaceutical companies could help biotech startups increase their operational performance by sharing knowledge in clinical trial design, regulatory requirements and compliance. Instead, c-VC funding helped startups display increased innovation rates, which, as I pointed out in my previous post, is crucially important in R&D-intense sectors, such as biotech.

Additional studies will hopefully follow to investigate how c-VC funding specifically benefit startups in other industries.

Image credit: http://www.vice.com/en_au/read/art-basel-2015-was-a-sopping-wet-mess-but-it-was-still-pretty-good

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Fashion guru Tim Gunn on crowdsourcing

Posted on January 29, 2016 by Eugene Ivanov

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Tim Gunn is a prominent fashion consultant, TV personality and author. He’s best known as the Emmy Award-winning co-host of the reality show Project Runway; he’s also the author of four bestselling books.

Now, I have to admit that I don’t know what Tim Gunn thinks about crowdsourcing. But just read these lines from his recent book “Tim Gunn: The Natty Professor”:

“Go to a museum! Take every opportunity to discover things you don’t know exist. I encourage rampant googling, too, but when you google, you only find information you search for. When you look around a museum, things find you.”

That’s exactly what crowdsourcing is all about! When you look for a solution to your problem in a traditional way–by reading literature, googling or talking to experts (or “experts”)–you essentially define the borders within which the desired solution can be found. In a sense, you already define this solution in advance.

When you’re crowdsourcing, you don’t have to find solutions. You post your problem on-line, and then solutions find you. Moreover, because of the inherent openness of on-line platforms, these solutions can come from anywhere–even from places “you didn’t know exist”–giving you the diversity of opinions and suggestions you can’t get from any other approach.

Sure, as every tool, crowdsourcing has its application limits. For one, I don’t believe that it will be successful in fashion design; individual creativity shaped by mentoring of bona fide experts like Tim Gunn still matters the most in this business. (Nor do I believe, for that matter, that robots will replace fashion designers any time soon.) But in many other fields of human activity, the ones requiring collective, diverse approaches to complex technical, business or social problems, crowdsourcing is the most effective (and, equally importantly, cost-effective) tool.

Image credit: Tim Gunn signs his book for my wife in Boston (December 2015)

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When it comes to (some) startups, ideas do matter

Posted on January 25, 2016 by Eugene Ivanov

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The rate of startup failure remains depressingly high: 55% of startups close before raising $1M in funding, and almost 70% of them die having raised less than $5M. So the question “Why do startups fail?”–or succeed, if you prefer a positive spin–is far from being purely academic, given the important role small businesses play in the global economy.

The lack of market demand, insufficient funding and incompetent team are routinely mentioned to account for the death of yet another startup project. One the other hand, factors making startups more successful have begun to emerge too. For example, the U.S. Small Business Administration reports that small businesses receiving mentoring services survive longer than non-mentored entrepreneurs, the fact pointing to potential value of startup accelerators and incubators. It was also noticed that startups that were funded by at least one corporate VC investor outperformed those funded exclusively by traditional VCs (here and here).

And then, there is a perennially debated question of the importance of the original idea behind any startup. One can often hear that ideas “are a dime a dozen” and that “startups are all about execution;” but a recent study paints more nuanced picture. The authors of the study took a look at a unique entrepreneurial program, the Massachusetts Institute of Technology’s Venture Mentoring Service (VMS). A peculiar feature of this program is that when an entrepreneur joins the VMS, a select group of advisors reviews a summary of the proposed venture, a document that describes technology, business model, key customers, etc., but provides little information about the founding team. Based on this summary, which is essentially just a “naked” idea behind the venture, VMS advisors decide whether to work with it.

Having analyzed the eventual outcomes of 652 ventures gone through VMS in 2005-2012, the authors of the study showed a positive correlation between the number of advisors who wanted to mentor a given venture–a signal of the quality of the original idea–and the likelihood that the startup would eventually reach the commercialization phase.

But there was a twist. The correlation between the advisor interest and startup success was especially strong for ventures with documented intellectual capital in R&D-intense sectors, such as life sciences and medical devices. No such a correlation was seen for non-R&D-intense sectors, such as consumer web and enterprise software.

The significance of the study is in pointing out that in different industries, there are different factors defining the ultimate success of newly emerging companies. These factors need to be further identified, industry by industry (a nice example of an “industry-specific” mentorship can be found here), and used as a tool by everyone working with startups: government agencies, accelerators/incubators and individual mentors.

Image credit: http://kaboompics.com/one_foto/1315

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Big Brother Loves You

Posted on January 11, 2016 by Eugene Ivanov

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By contributing to economic growth and creating jobs, small businesses play an important, perhaps, increasingly important, role in the global economy. Moreover, as the cradle for novel technologies and business models, small companies serve as the engine of the innovation process.

Yet, establishing a small business carries a heavy load of uncertainty: only half of new companies survive through their first five years; the attrition rate for high-tech startups exploring new, riskier technologies is even higher. Every measure that could help small companies succeed will therefore have a profound positive effect on the world’s economy in general.

Obviously, governments should take a lead in supporting small businesses; however, big corporations too can assume some responsibility in looking after their little brothers. Getting access to corporate resources, through establishing “big-small” collaborations, will allow small companies rapidly scale their businesses and acquire new customers, increasing their chances to succeed. This brotherly love doesn’t have to be completely altruistic, though. For large companies, working with nimble, inherently entrepreneurial startups can help rejuvenate and speed up corporate innovation programs.

The collaboration between large and small companies may take different forms, and one in particular, corporate venture capital funds (CVC), is rapidly gaining traction. According to a research firm CB Insight, in 2014, there was a 28% growth over 2013 in corporate VC groups making their first investment in startups; the number of existing CVC funds was expected to double in 2015. In fact, one-fifth of all venture deals in Q3 2015 included CVC participation.

Moreover, from the startups point of view, corporate money has turned out to be a particularly successful investment. As described in-depth in a 2013 Harvard Business Review article, over the period of 1980-2004, startups that had gone public after being funded by at least one corporate VC investor outperformed those funded exclusively by traditional VCs (as measured by average annual revenue growth, increase in ROA and stock price performance).

Why is that? The explanation seems to lie in the objectives that the corporate and traditional VCs pursue when investing in startups. While traditional VCs invest capital with the sole objective of financial returns, CVCs often invest for primarily strategic reasons, with financial return being only a secondary consideration. In fact, in a CB Insight survey, 4 out of 5 CVCs named strategic value of working with startups as a key decision driver. Moreover, the vast majority of CVCs actively work with their portfolio companies providing them with domain expertise and access to their proprietary networks. One could argue that the industry-specific expertise delivered by corporate teams would be much more valuable to startups that the one drawn from the “generalists” employed by traditional VCs.

Image credit: Ralph Earle (1751-1801), “Portrait of Two Brothers”

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The dawn of the “craft economy”?

Posted on December 16, 2015 by Eugene Ivanov

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In a 2012 Harvard Business Review article, Maxwell Wessel made an interesting point. He argued that the corporate scale had ceased providing large companies with the same competitive advantage as it used to in the past. Being bigger doesn’t guarantee safe harbor anymore. The cost of starting a new company is becoming lower and lower, and, with first-class management systems available in the cloud and Alibaba.com-driven manufacturing in China, the minimal efficient scale is rapidly shrinking. Small companies can now compete with larger players–and even “disrupt” them–with the ferocity not imagined just a few decades ago.

Writing for HBR in October 2015, Nicco Mele builds up on this argument by pointing out that while the global M&A pace is accelerating, resulting in the creation of new corporate mega-behemoths, America’s largest companies are steadily losing market share. Mele suggests that the ongoing industry consolidation is just a desperate attempt by large corporations to defend themselves from the attacks of smaller competitors. And yet, insists Mele, America’s return to a more entrepreneurial, more fragmented economy–comprised primarily of small, dynamic firms–is inevitable. Mele calls this emerging economy craft economy.

To me, the most intriguing aspect of this discussion is not the predicted demise of the “big,” but, rather, the increasing significance of the “small.” Of course, the important role played by small businesses in the U.S. economy is nothing new. According to published data (here and here), over 50% of American workers (120-130 million) work in small businesses. Small businesses employ half of all private-sector workers and 39% of workers in high-tech jobs. They provide 60% to 80% of the net new jobs annually and they produce 13-14 times more patents per employee than large firms.

At the same time, small businesses don’t reward their employees with a lot of job security: only half of new companies survive through their first five years, and only a third will be in business for at least 10 years. The attrition rate for high-tech startups exploring new, riskier technologies and business models seems to be even higher. It would therefore appear that increasing the longevity of small businesses and improving their wellbeing may have a profound positive effect on the U.S. economy in general.

Ironically, it’s large corporations that can make startups and early-stage companies more successful. This point was highlighted in a recent report by the World Economic Forum (“Collaborative Innovation Transforming Business, Driving Growth”). The report promotes innovation-focused collaboration between young, dynamic firms and large established companies. For small firms, such collaboration allows them to use resources of large companies to rapidly scale their businesses and get access to new markets, increasing therefore their chances for ultimate success. For large companies, working with nimble, inherently entrepreneurial startups may help them succeed with high-risk/high-return innovation projects.

Regardless of whether one believes in Nicco Mele’s concept of craft economy of tomorrow, the real question of today is how small and large companies can work together to ensure global economic growth through innovation. In other words, how David and Goliath should structure their collaboration to craft value together.

Image credit: https://apaintinginthelouvre.wordpress.com/tag/the-battle-of-david-and-goliath/

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Investing in culture of innovation

Posted on December 9, 2015 by Eugene Ivanov

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Everyone would agree that the rational risk-taking–and acceptance of failure as a likely outcome of any exploratory project–represents one of the most crucial components of the bona fide culture of innovation. What is missing in our endless talks about establishing the culture of innovation is which practical steps organizations should take to promote and encourage entrepreneurial spirit of their employees. A couple of studies (nicely summarized in a Harvard Business Review article) shift this conversation from pure talk to specific actions.

The first study (published in the Journal of Financial Economics in January 2015) showed that companies that offered stock options to non-executive employees were more innovative. The positive effect of stock option grants on innovation was more pronounced when the average expiration period of options was longer. It was also demonstrated that the employees involved in innovation activities treated stock options as an incentive to risk-taking rather than an award for superior performance.

Another study (dating back to April 2011) found that certain labor laws that make it more difficult for firms to fire employees increased the engagement of the employees in innovation activities. The authors of the study called this phenomenon the “insurance effect” and argued that the lower threat of termination produced by stronger anti-dismissal laws decreased the “cost of failure” for employees to engage in potentially risky projects. As a result, these employees were more willing to take on innovation projects relative to their engagement in routine projects.

Uniting the both studies is an idea that long-term incentives may have a strong positive effect on innovation. As the HBR article puts it:

“If workers feel pressure to deliver results in the short-term, either for fear of being fired or in order to be promoted, they may be less likely to pursue riskier innovations. On the other hand, if failure in the short-term is acceptable or even rewarded, and if workers have a stake in the company’s long-term performance, they should be more likely to innovate.”

The beauty of the above findings is that they’re easily testable. To do so, companies can introduce these purely administrative policies:

  1. To make stock option grants the principal incentive for engagement in innovation projects (as opposed to cash bonuses and the plethora of non-monetary recognitions and rewards).
  2. To place employees involved in innovation projects on fixed-term employments contracts (as opposed to employment-at-will). Creating tenure-like job arrangements for people involved in strategic innovation initiatives could be another option.

In more general terms, a message that all organizations should hear is that treating employees well will make these organizations more innovative. It’s this simple.

Image credit: www.pexels.com

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The beauty of crowdsourcing

Posted on December 3, 2015 by Eugene Ivanov

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Last week, I spoke with Paul Arnold, a seasoned business writer and BBC alumnus. The topic of our conversation was crowdsourcing: how companies use it and why they’re often disappointed with the results of their crowdsourcing campaigns. The full text of the interview can be found here; a few (edited) excerpts follow.

  1. (Why do your clients turn to open innovation?)

There are a few reasons why companies go for open innovation. Firstly, they realize they don’t have internal expertise or experience. That’s the most obvious consideration. The second consideration is that some companies, especially those with some exposure to open innovation through crowdsourcing, realize that there is a diversity of solutions. Sure, they can go to their experts, but not only is it actually more expensive to pay for experts, but there is a limited amount of experts you can talk to, and they are almost always aligned with you. So basically you are asking them what you already know.

The beauty of crowdsourcing is that you are completely agnostic to a solution that may come. It could be completely unexpected. I know cases where companies hired consultants to analyze solutions they were getting through crowdsourcing. They were smart enough to realize that they were onto something very valuable, but the ideas were so novel to them that they couldn’t understand them. And there was no other way to get these solutions except through crowdsourcing. The companies would never have gone to this source, because they didn’t know this source existed.

  1. (Why is crowdsourcing still the least used open innovation tool despite the fact that it’s actually very good?)

Crowdsourcing is damn simple, because it only has two components to it. It is a question and a crowd, and that’s it. The major problem, in my experience, is with the question. Unfortunately, not every problem can be put to crowdsourcing and even if you have the right problem you need to formulate it in such a way that it becomes solvable by crowdsourcing. And many organizations do a very bad job of that. Very often, they try to solve a problem in one giant leap. But experience shows that you have to split your problem into chunks and solve them separately or in parallel. Not only is this more efficient, but it’s actually faster, because when you fail (to solve a problem in one giant leap) you have to start again.

  1. (In your“Are We Faking Innovation?” article you highlighted a surprising survey on innovation where 85% of respondents said that innovation is important to their companies, but 72% had no understanding of what innovation meant to them. Is this something you have come across often?)

Amazingly, it happens all the time. I had a client and spoke with two of their research directors who were working for the same department. When I asked them to give me a definition of what innovation meant for them–in terms of market share, expected revenues, time horizons and things like that–they gave me vastly different responses. And those two were people who had a budget to fund innovation projects under them.

Now, I’m a great fan of diversity, but in some cases, diversity of opinions is not welcome. In fact, it’s not diversity; it’s a lack of an overall corporate oversight. At one point I advocated that companies should write an Innovation Charter, and some people said: well it’s just a piece of paper and everyone is sick and tired of these “mission statements.” Sure, I understand this complaint, but my point is that in very many companies, there is no common language of innovation. So it’s not surprising that people don’t know what innovation means for their particular company.

Image credit: http://fancycrave.com/

 

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Want the correct answer (and perhaps to be a millionaire too)?

Posted on November 9, 2015 by Eugene Ivanov

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Over the past few months, I’ve been preaching the virtues of crowdsourcing to young entrepreneurs and startup (co)-founders. Perhaps, I’m not a good preacher, but very often, my message is being met with a visible skepticism. Why would I approach a “crowd” of people if I have a problem, my interlocutors inquired? All I need to do is to ask my mentor (advisor, friends, schoolmates, former colleagues, etc.).

I’ve got a huge respect for startup mentors, these very busy people who manage to find time to share their experience with younger peers. And speaking of friends, for many years, I’ve been married to a woman who is my best friend and whose advice I value more than anyone else’s. And yet, I’ll keep insisting that the collective wisdom of crowds is (almost) always better than a point of view of any single individual, however accomplished.

Recently, while reading a book on prediction markets, Oracles by Donald N. Thompson, I came across an example that makes my case in a persuasive and fun way. Thompson writes about the popular TV show Who Wants to Be a Millionaire originated in the UK in 1998 and then replicated in 81 countries. In this show, contestants have to answer a series of increasingly difficult multiple-choice questions for instant cash awards; the correct answer to the last question would earn the contestant one million in the local currency.

While relying mostly on their own smarts, the contestants have so-called lifelines. One of them is “Phone-a-Friend,” allowing the contestant to instantly phone any person she considers best fit for answering the question. Another is “Ask-the-Audience,” whereby the contestant asks the studio audience (of about 150 people) to vote for the correct answer; the contestant will then choose one of the proposed four options.

Characteristically, and conforming to what I preach, in 80 (out of 82) national versions of the show, the ask-the-audience option produced more correct answers than ask-the-expert. For example, in the UK, the audience was correct 87% of the time, while experts only 55%; in the US, the numbers were 92% and 65%, respectively. And what is important to note here is that there was absolutely nothing special about selecting the audiences for the show: these were people who simply appeared at the front of the line on the day of taping.

(The two countries where the audience didn’t produce more accurate answers were France and Russia. Thompson believes that in these two particular cases, the audiences were deliberately misleading the contestants.)

Sure, I perfectly understand the difference between winning the Who Wants to Be a Millionaire show and creating a successful startup company. But correctly answering a series of increasingly difficult questions is part of both processes. There is a proof that these questions will be more precisely answered by groups of randomly selected, diverse and independent individuals. This is exactly what crowdsourcing does.

Image credit: ferociafatale.com

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Are We Faking Innovation?

Posted on October 30, 2015 by Eugene Ivanov

tumblr_nqx977yGTE1tubinno1_1280Let me begin with a couple of quotes.

“Innovation is like teenage sex; everyone talks about it, nobody really knows how to do it, everyone thinks everyone else is doing it, so everyone claims they are doing it!”

(Cris Beswick, Founder of the Future Shapers)

“Innovation is not delivering, our innovation systems are breaking down.”

 (Paul Hobcraft, innovation consultant)

Pretty strong words, eh? Cris Beswick’s quote comes from a recent survey on innovation sponsored by Wazoku, a UK collaborative idea management software company. 85% of respondents to this survey considered innovation important to their companies; yet 72% had no understanding of what innovation meant to them. 53% of surveyed managers were unaware of their organizations’ definition of innovation and how it fit with the overall corporate strategy; 38% of the managers said innovation wasn’t their job.

What’s going on? We all agree that innovation is a key to success in today’s business environment; our corporate leaders swear by it; we collects, build upon and vote for thousands of ideas (and even implement a few of them); we hold innovation hackathons and appoint Innovation Champions–and yet, our managers and rank-and-file employees, supposedly the driving force behind any innovation program, don’t even know what innovation means for them and their organizations.

Are we faking innovation? I think we’re. We fake innovation when we fail to discuss innovation strategy in the context of corporate strategy. We fake innovation when we launch an innovation program just because our competitor launched similar program a month ago. We fake innovation when we buy idea management software and start collecting “thousands of ideas” without prior thinking what we’re going to do with all these ideas. We fake innovation when we appoint a Chief Innovation Officer and give her neither line authority nor fixed budget (or a budget that can be promptly taken away in case of “emergency”). We fake innovation when we provide our employees with no rewards for participation in innovation activities (“because in our company, innovation is everyone’s job”).

In order to clean the accumulated rust off the innovation process, we must come back to the original meaning of innovation (no matter which precise words you use to define it): innovation is about creating value. No value, no innovation–it’s this simple. For as long as buying software or running innovation jams haven’t resulted in measurable improvements in corporate performance, this is not innovation (at least, not yet). Sure, value doesn’t always have to be defined in dollar terms; in the innovation equation, the dollar sign can be replaced with something else. But value can’t.

In more practical terms, companies must always begin with defining the place innovation occupies in their overall corporate strategy. Some strategic goals can be achieved by aggressive marketing, obsessive quality control or by optimizing internal processes. Innovation can be restricted to new product development only–and that’s fine.  But there is no reason to call innovation every business initiative aimed at hitting company’s revenue targets.

Equally important, innovation leaders must learn how to create a balanced innovation portfolio. There are various innovation “horizons,” each with different investment risks and terms of return. Optimal innovation portfolio must reflect real corporate needs, not a rush to join a popular–and often ill-understood–quest to “disruptive” innovation.

And we also ought to tone down our endless talks about culture of innovation. Yes, I know, sustainable innovation can’t be established without a profound cultural change. But I also know that you have to start running real, not faked, innovation programs to change people’s attitude toward innovation. As I argued before, you begin the innovation process with structure and process. And if you keep perfecting them, while communicating the results to the rest of your organization, sooner or later, structure and process will become culture.

Image credit: http://startupstockphotos.com/

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Can we make crowdsourcing available to small companies?

Posted on October 23, 2015 by Eugene Ivanov

AAEAAQAAAAAAAASKAAAAJDE2OTRkNTI0LWM5ODktNDNmNi1iZTYyLTcwYmJhNmVlYmE5NgCrowdsourcing is a powerful open innovation tool allowing organizations to tap on the collective wisdom of their own employees (internal crowdsourcing) or pools of external talent around the world (external crowdsourcing).

Internal crowdsourcing (usually managed through Internal Innovation Networks) can be particularly useful for large multinationals having numerous, geographically remote locations, with the majority of employees barely seeing each other face-to-face and rarely communicating on strategic issues.

For external crowdsourcing, large companies can use two major venues. First, they can build their own crowds through creating external innovation portals that would solicit innovative ideas from the outside inventors. Although the effectiveness of external innovation portals can be questioned, companies use them also as a marketing/PR tool.

Then, companies can rent a crowd by hiring the so-called open innovation intermediaries, such as InnoCentive, Nine Sigma, IdeaConnection or HeroX. These service providers help their clients solve complex problems by outsourcing them to hundreds of thousands of on-line “solvers.” As I wrote before, using open innovation intermediaries can be remarkably successful way to crowdsource.

Unfortunately, while crowdsourcing is becoming an increasingly popular innovation tool for corporations, it’s practically unavailable to small companies. Why?

To begin with, small companies can’t use internal crowdsourcing because, due to their size, they lack the critical mass of diversity required for a meaningful crowdsourcing campaign. Nor do they have sufficient resources to run external innovation portals or pay fees for the services of open innovation intermediaries. Of course, small companies can take advantage of smaller networks of mentors and advisors–often acquired through business incubators and accelerators–but the utility of small networks can’t be but inferior to the intellectual power of large crowds.

What can be done to make crowdsourcing available to small companies?

  1. External funding could be provided to help small companies engage in open innovation activities. A precedent already exists. In 2013, the State of Ohio awarded NineSigma a grant of over $2M to provide services to the state’s mid-size companies (between $10M and $1B in revenues). The success of this initiative is manifested by the fact that 350 jobs will be created in Ohio over 3-5 years as a result of the program. Similar approach could be adopted nationwide by the U.S. Small Business Administration by providing financial resources to small businesses to pay for their open innovation activities. The SBA’s flagship 7(a) Loan program can be used as a “blueprint.”
  2. Small companies can crowdfund their crowdsourcing activities first. This approach was pioneered by HeroX that allows its clients to crowdfund their projects in case they lack resources to sponsor them outright. Other open innovation intermediaries can follow the HeroX’ suit.
  3. A more sustainable long-term approach would be to organize small companies into private innovation networks in which each member of the network can enjoy the collective wisdom of its own “crowd” by sharing intellectual resources with other members. Such networks could be originally built using the structure and resources of existing business accelerators/incubators and, perhaps, local Chambers of Commerce. Obviously, a viable business model will need to be established to make such networks operational.

Image credit: scottrileyirvine.tumblr.com

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