In this episode, we wanted to know, “What’s the right approach to failure in corporate innovation?” To get best practices, Innovation Leader’s Kaitlin Milliken sat down with Rita McGrath, a professor of strategy at Columbia Business School. Shaun Stewart, CEO of New Lab, also shares insights. 

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Transcript

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Rita McGrath: Well, the reality of corporate innovation is that good ideas and terrible ideas look almost identical when they’re born. 

Shaun Stewart: So most of us are pretty comfortable with failure, because in regards to the types of technologies that are being built here, they’re already moonshots in their nature. 

Kaitlin Milliken: Hey, you’re listening to Innovation Answered, the podcast for corporate innovators. Today, we’ll explore the dynamics underlying failure — and how better understanding them can put you on the path toward success. Then, we get answers from answers from experts about how businesses can pivot and move forward. 

Any innovative endeavor — especially Horizon Three, transformational work —  involves risk. Failure is always a possible outcome. But planning for it, managing it intelligently, and knowing how to keep moving isn’t a common skill set.

Shaun Stewart: When something fails — whether its a potential prototype, or a potential design approach — that just means you now know another approach that doesn’t work and can take that off your list and start to consider the paths that may work. And failing fast as much as that become a cliche term, in the R&D side of things, especially when it comes to developing hardware, that’s important. To find what’s not gonna work as quickly as as you can, and move on from there. 

Kaitlin Milliken: That was Shaun Stewart, CEO of New Lab. Based in the Brooklyn Navy Yard, New Lab houses early stage startups and entrepreneurs leveraging frontier technology to forge the future. Before taking the reins at New Lab, Shaun worked at Airbnb and Google’s self-driving car business Waymo. 

According to Shaun, anxiety surround failure can stifle new ideas. Startups live and breathe in an environment of experimentation. That setting generates lots of ideas and, therefore, more possible solutions. 

To find out more, we called Shaun to discuss what role failure can play in the startup world and how that ideology differs from large companies. 

To get us started, can you tell me about how your lab was created and how it moved from there? 

Shaun Stewart: So New Lab is based in the Brooklyn Navy Yard in an 85,000-square-foot building that was built and operated by the Navy. We were approached much later in history by the Bloomberg administration, who essentially felt this incredible kind of piece of history in advanced manufacturing and innovation here in New York, needed like its next chapter, needed a recovery and a Renaissance. So to make a long story short, they proposed building a community of entrepreneurs, building startups in frontier technology. So it’s cheesy, but we’d like to say, “the NLoah’s Ark or frontier tech.” And so they spent two-and-a-half years building and opening New ab, which today has about 130 or more companies here, early stage startups and about 750 entrepreneurs who come here every day.

Kaitlin Milliken: So you’re interfacing with startups and entrepreneurs. How do you categorize success?

Shaun Stewart: I mean, you had the traditional measurements of success for this community. So we’ve we’ve had 380 million of exits since in the last two and a half years of operating. So it’s five or six different acquisitions that have occurred and the companies have been built and developed here. People love to source, like to cite, how much venture capital is raised by a company as a sight of success or a metric of success. And so we’ve had $700 million in venture capital raised throughout the community. And the combined valuation has grown from when we started, it was an average of $6 million per company to now $19 million per company, which is a total combined valuation about $2.6 billion overall. And so those are some of the kind of more traditional measurements of how we track the growth of the community, the success of how this community is helping each other. The way…the other pieces that are anecdotal, but things that I like to track is just seeing how the ecosystem, the community, the corporate partnerships, and the government programs, how they actually drive success for the entrepreneurs and how they impact their likelihood of succeeding. 

Kaitlin Milliken: Of course, when there’s success, there’s a lot of failure and learning that happened before getting to that point. But failing as a startup or an entrepreneur that feels really different than failing at a big company. Can you give us some background and talk about how these groups attitudes towards failure differ?

Sean Stewart: So most of us are pretty comfortable with failure. Because in regards to the types of technologies and products that are being built here, they’re already moonshots in their nature. And so it’s expected that the first approach and the first strategy of how you build the product is not going to be the winning one, it’s going to take multiple iterations and multiple attempts. And the result of that is a pretty thick skin. And from typical entrepreneurs in this community, that failure is part of it. Then there’s failure of the overarching company concept that like the company or the startup actually closes its doors and isn’t financially successful. And that’s a different type of failure that we don’t have the same kind of liberal approach to and we don’t consider that to be a guaranteed element of the cycle. 

Kaitlin Milliken: Great and it sounds like New Lab really has the infrastructure to allow for pivots and provide the startups in your space with support. Not every big company has that figured out. What are some of the things that these corporates might be doing that will lead to failure in working with startups?

Sean Stewart: Yes, but I mean, corporate innovation, there’s usually both the internal and the external approach. And some of the more famous internal ones are certainly like folks like Alphabet with Google X and its Moonshot Factory, or Lab126 with Amazon. And I think it follows a few key learnings on how you develop innovation within within the four walls of the corporation. And their approach is typically to silo or segment the teams that are working on the longer term innovation and R&D so that they’re not distracted by quarterly KPIs or month to month objectives or OKRs. 

You’re dealing with, with a need to keep these people hidden from the day-to-day challenges at the core business so that they’re not distracted, then you need to invest with patience. If you look at something like Project Show for Google X, that started over a decade ago, and it certainly didn’t start generating revenue until last year. And so you needed to have a company that was willing to invest with that patience and long term vision, that innovation would have a return on investment eventually, but not an immediate gain. Then you need to attract and retain the best talent, which is building a culture where failure is okay and in some cases celebrated. You hear these urban legends of places like Google X bonusing, people for closing their own projects, because you want to incentivize people to move fast and move on from things and approaches that aren’t working. And so that kind of approach and building that type of culture is great. I think not everybody can access the quality of talent that you’ll see at a Google X, or a Lab126, or any of these other similar ecosystems. 

And so if you’re one of these Fortune 500 companies that may be doesn’t have the same appeal to the best computer vision engineer on the planet or people coming out of out of academic institutions after studying AI or whatever the field of technology is the most relevant, a lot of them are starting to look outside of their ecosystems to develop innovation, through utilizing startup communities and accessing talent, like New Lab has done with a lot of the corporations we work with. And I think that allows for that same recipe you’re using New Lab as a community where you can move your R&D and innovation away from day to day KPIs and your okrs or objectives for the company. You can do it in a way that has patients that these people can be given the space and the time and the resources and facilities to make progress. 

Kaitlin Milliken: And this is my final question, when it comes to failure, what should be large established companies really learn from startup?

Sean Stewart: Yeah, I think it comes back to that acceptance and building a culture around the fact that you shouldn’t be scared to admit something is failing, especially if you’re pushing the envelope, trying, you know, dramatically new approaches involving cutting edge technology that’s still in development. You need the people working on that to be comfortable enough to admit it’s not working and a new direction is needed. You often in corporations, you’re pushed to hit the objectives and the results that are relevant that month or that year. These people need to, in an innovation perspective, they need to be in an environment where failure is okay. There’s patience around the timelines to getting progress, or generating revenue or whatever the objective is. But that culture needs to mirror the type of environment you see when you’re working at a startup, which is an understanding that the first approach is very rarely going to be the right one. 

Kaitlin Milliken: So failure can have a silver lining. However, teams need to create a safe environment for risky ideas. 

But how do you know when an innovative idea is worth the risk? To find out, we chatted with Rita McGrath, an author and professor who teaches strategy at Columbia Business School. We’ll be back with Rita after the break. 

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Running an innovation initiative at a big company involves building confidence. Your colleagues in the other parts of the business have to trust that you can deliver value. And quick wins are often the best place to start. 

Our recent research report is a catalog of quick wins, exploring the importance of finding ways to create tangible value — fast. That includes bringing in a new tool, redesigning internal processes, creating new capabilities, increasing efficiency, and more. Our report include both survey data from other innovators and excerpts from interviews with experts. 

To get a copy, visit our website: innovationleader.com/research. Our original research is only available for our members. To learn more about membership, visit our join page. Now, back to the show. 

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And we’re back with Rita McGrath. Rita is a thought leader and professor of strategy at Columbia Business School in New York. Her new book about spotting inflection points — Seeing Around Corners — was released this fall. 

So to kick us off, since this episode is about failure, what’s your philosophy when it comes to failures in corporate innovation?

Rita McGrath: Well, the reality of corporate innovation is that good ideas and terrible ideas look almost identical when they’re born. So the only way you can really figure out which is which, is by running a series of experiments. And I actually have kind of a mixed feeling about the word failure because it implies you should have known better. And what we’re talking about here is really exploring things that are fundamentally unknowable. The data don’t exist yet. 

So I’d like to think about it more as hypothesis testing, or experimenting, or testing to learn. And so what you want to think about is not so much, “Oh, my God, I failed,” but, “Was it worth, you know, $500, for me to learn XYZ” and in that, if you look at it that way, failure becomes a lot less horrible.

Kaitlin Milliken: So I’d love to talk a little bit more about experimenting. Not every corporate culture is very kind to experiment. What are some of the factors that make testing new things difficult?

Rita McGrath: Well, I think if you treat your environment as though you had a lot of facts and you could know what the outcome should be, and you do that in every circumstance, that’s going to make it very risky for people to do anything with the outcomes at all uncertain. So that tends to promote a really incremental, very, very cautious kind of mindset. And my research going back decades has suggested that when you have to make a lot of assumptions relative to the knowledge that you have,  you really don’t know. You don’t have a basis for understanding. So what you want to do is break your decision making process down into pieces, so that you know each step along the way you can say, “Okay, we learned this, what does that suggest we should be doing next?” So the kind of corporate culture in which that’s punished or you know, “You were wrong, you had to change your direction.” That’s really going to make it difficult for people to experiment.

Kaitlin Milliken: And when it comes to experiments, is it better to keep them in a separate unit, an innovation lab or center, or to integrate that into everyone’s job?

Rita McGrath: Well, I think there may be a case to be made for separating it, especially if you’re that very early stage of doing all this because it can be very confusing to people. I think as you mature in levels of innovation proficiency, that you really want to have it be something more and more people are comfortable with. Because in an ideal world, you’ll have lots of little experiments going on all along the front lines of your organization. I  call that, in the book, I call it getting out to the edges.

Kaitlin Milliken: And I would love to talk a little bit more about your book. Can you tell me about what readers can expect from that?

Rita McGrath: Sure, the book is about strategic inflection points and I define an inflection point, as some change typically in your environment. That makes the assumptions embedded in your business less and less about reality. And it feels as though they happen overnight. But in reality, if you pay attention early, you can detect the emerging signs of an inflection point appearing long, long, long before they really land on your doorstep. So the book itself is taking that insight and saying, “Well, how do you see them? Having seen them, how do you decide what to do about them, which is not always obvious or easy?” And then the hardest part of all is, how do you bring the organization with you on that journey?

Kaitlin Milliken:  So in terms of finding inflection points and acting on them, do you have any examples of companies that have done a good job?

Rita McGrath: Yeah, I mean, one of my favorite examples is Adobe, which basically changed its whole business model from shrink wrapped boxed software that you ran on a standalone device to software that runs in the cloud that you pay for by subscription. I mean, that’s a radical change in business model. But they really acted on a couple of things. The first was the shock of the 2008 recession, when people said, you know, we can just hang on to our existing software for another couple of years, and their sales really took a hit. But more importantly, the shift of software to the cloud, and the recognition that if they didn’t move into that market, there were all these little players that could come along and start nibbling away at pieces of their business, capturing market segments Adobe wasn’t serving. So I think that was a very foresighted view of going into the future.

Kaitlin Milliken: And are there any other examples outside of Silicon Valley of maybe more traditional, older companies that have seen and reacted to inflection points?

Rita McGrath: Sure. I think one of my favorite examples in the book is an over 100 year old metals distribution company called Klöckner that saw the move towards digital platforms and said, “You know, if we don’t do that for the steel business,” which was their own business, “somebody’s going to do it to us.” And they embarked on a multi-year journey to really transform the way the company did business from literally sending faxes around to having an automated platform where buyers and sellers could interact much more seamlessly and easily.

Kaitlin Milliken: The interesting thing about inflection points is that has a lot to do with timing, and we find that can be really tricky for corporate innovators to decide when is the right moment to act on something. Do you have any advice for teams about finding the right timing or what to do if they’ve missed the moment?

Rita McGrath: So finding the right timing is often a question of supporting ecosystems. So one of the really interesting things in the research behind this book is that, if you really study it, you know, any major inflection point you’ll see people talking about it for sometimes decades before it actually becomes a reality. So if you go back into 1995, right, there were articles being written by Fortune reporters in 1995, describing everything that the internet could do to retail back then. Lots and lots of stuff. But back then, even though many retailers did freak out about it, and poured millions into websites, and one thing and another if you think about it, most people didn’t have home computers. They had, you know, only about 40 percent of the public in America anyway had home computers by the year 2000. The way you access the internet was on a dial-up modem which was painfully slow. We didn’t know how to pay for things on the internet. We didn’t have the shipping infrastructure. We didn’t know how to package things. People didn’t know if internet ordering was safe or could be trusted. So there was this whole ecosystem that needed to be in place before ecommerce could become a reality. 

So I think the first thing to watch out for is in the initial throes of something big changing, there’s this temptation to sort of leap into it, and spend a lot of money sort of trying to be first. And that’s usually a mistake. At the same time, by the time everybody’s talking about it, it’s become a reality and the low hanging fruits been scooped up already. That’s kind of leaving it a bit late. And what ends up happening then. And we’re seeing it now with this whole generation of direct to consumer companies — so companies like Bonobos, and Harry’s and Dollar Shave Club — they’re being bought up by big incumbents who kind of missed that wave. So if you leave it too late, either you’re going to end up playing the frantic game of catch up or you’re going to have to buy your way back in more expensively.

Kaitlin Milliken: Another situation we see that comes up Timing is maybe something fails initially, it may not be the right fit for the market at the time. But some companies have successfully revived that piece of technology or the new product when the market is ready. Do you have any thoughts on that or examples of teams that have done that successfully? 

Rita McGrath: Sure. I mean, there’s lots of examples of ideas that were kind of ahead of their time. In fact, I’m told the original iPad preceded the iPhone, but they decided the world wasn’t ready for a tablet computer. And we’re kind of waiting to add that internet connectivity to make a true discussion based device. 

You know, very often early ideas, pre-sage ones that were successful later on… So a battle that’s playing out right now is Netflix versus everybody in streaming. And, you know, Netflix came up with that idea. Netflix was one of the early developers of the technology we now know as streaming technology. They were one of the very first to say, “Oh, we’re going to develop original content and on top of developing streaming.” But now all the others are kind of going, “Hang on, we can do that.” And so you got Disney in the game. And of course, the old stalwarts, you got Hulu and HBO and all the others. And so I think it will be a very interesting play, as this inflection point moves through and people have given up on cable and perhaps, you know, universal consumption of entertainment, and moved towards these individual streaming services. It’ll be interesting to see who wins, My hypothesis about who’s going to win is either some party that’s open to bundling, so you’ll get the revival of the cable bundle, right. Or you’ll get companies that have really strong complementary assets. 

So I think Amazon is a very formidable competitor there. And you might even see acquisitions in that space. So you know, Netflix may decide its best future is being acquired by an Amazon or somebody like that. And they’re one of the few companies that would have the scale to be able to do that. Now, imagine to yourself if you had an amazon prime plus Netflix one single price subscription embedded with everything kind of offering that would be pretty compelling.

Kaitlin Milliken: Yeah, that’s most of your entertainment needs, and of course, everything else because it’s Amazon. 

Rita McGrath: Right, exactly. 

Kaitlin Milliken: Another challenge we see when it comes to navigating failure and success is organizational politics. How can teams go through that and find their allies in order to rebound from failure? 

Rita McGrath: So what we find with innovation is there are three kind of generic roles that I talked about when I talk about the leadership challenges of innovation. So at the…kind of think of it at the top of the house, or the top of the division, or the most senior executive level. You’ve got this sense of, “Let’s set a clear direction, and let’s make it clear what we’re going for.” So at Microsoft, for example, you got Satya Nadella saying, “I want you focusing on leading indicators in the businesses we’re moving into The leading indicators, our usage, and customers are only going to use our product if they love them. So a leading indicator is customer love. And can you imagine this is coming Microsoft. It’s unheard of, right? If you look at their past, and he talks about things like empathy and understanding what customers are trying to do, and making products that customers are delighted by. It’s just a really different sort of move. Now, he’s not sitting there saying what that means. He’s sort of saying broadly, “I want stuff customers love, I want them to enjoy usage. I’m going to watch that.” What you as the employee or the team does to create that is kind of up to you. So that’s sort of the broad executive leadership role. 

Then at the entrepreneurial part of the house, you have a series of people that are involved in actually working on the innovation teams. So these are the technologists, the marketeers, the design thinking people, and they’re building these new businesses. Now, a lot of times those folks are kind of hard to deal with. They, they’re breaking through. They want to make something happen. They have a sense of urgency, and they can be pretty difficult for the mainstream part of the corporation to kind of digest. 

So in the middle, you’ve got a role that I call the Sherpa role. And it’s kind of like if you want to climb Mount Everest, your Sherpa goes with you. And the Sherpa kind of looks at the scenery and says, “You know, the wind is coming from there, we need to take this path. And if this is an issue, we need to go that way.” And the characteristics of the Sherpa are often not well understood. They’re usually people that have a long tenure with the company. So they know where all the bodies are buried. They have a lot of political capital. They understand, you know, how to talk to people. They’ve got lots of influence. They’re usually very respected. And they serve both as a guiding and protecting function for the venture teams. And they kind of create that political support. So I think that’s one idea in terms of how to set up your venture teams. I think having a really strong corporate governance function on the venturing side is also pretty critical. So a growth board, a venture board, somebody that has resource allocation authority that can make some of these decisions about, you know, “This thing really is important. We’re going to keep at it.” That sort of thing.

Kaitlin Milliken: Two more really quick questions. One is in regards to the fail fast, fail cheap mantra. How do teams actually accomplish that? What are the barriers to it?

Rita McGrath: Well, again, back to this notion of an experimental attitude. So if a team… The great way of thinking about this is fall in love with the problem you’re trying to solve, but don’t fall in love with the particular solution, right? So if I think there’s something, I’ll make this up, if I think there’s something really cool to be done with robotics, and caring for the elderly, right? I mean, that’s a very big space. I may decide to start off with, “Well, we’re going to have a robot that does pedicures.” I’ll make that up? Is that a good idea or not? I don’t know. But what I can tell you is that, you know, a significant number of falls that senior people have, which of course lead to a cascade of many other problems come because they’re not able to properly look after their feet and specifically their nails. 

So there’s a big problem. Now is a robot the right solution or who’s going to pay for it? Is it something the family has to pay for? The elderly person has to pay for? Maybe the health care system pays for it? All that stuff’s going to have to be learned. So what I would want to do is run a series of small experiments to determine the validity of the problem. Then, I try a bunch of different solutions to that problem. Then, I’d see what the financing mechanisms might be. So what pot of money or resources of my contesting. And so you really say to the people in your corporation, “I think this is a really big opportunity space.” So if we can all agree, this is a cool and interesting opportunity space, then your job as the innovation leader is how do I break that down into pieces, so that all along the way, I can test these hypotheses with increasing levels of confidence that I’m headed in a positive direction? 

Or if I discover nobody’s willing to pay for it, the problem is not big enough, and it isn’t really nails, it’s something else about their feet that’s an issue. I pivot, or I give up on the idea. So the idea is to do that, though, with a lot of care for risk and cost and downside. And if you can demonstrate to people that you’ve done that, I think you earned the right to take the next experiment.

Kaitlin Milliken: So we covered a lot of ground during conversation. What’s one piece of advice that you would want to leave with corporate innovators about failure and finding success?

Rita McGrath: Don’t think of failure so much as failure. Think of it as the cost to learn. And when you are talking about things you’re trying with people, don’t frame it in terms of “You know, if we get this right, we’re going to get a 10x return on investment” because it’s too early to tell that right. What you can say is things like, is it worth spending $50 bucks to go interview 10 assistance in an elder care home to find out whether this is a promising direction or not? And so I think it’s what’s the cost to learn and what’s the value to us of doing that learning.

Kaitlin Milliken: So failure in a carefully planned experiment can be a small price to pay for essential learning. 

[ACKNOWLEDGEMENTS] 

You’ve been listening to Innovation Answered. This episode was written by Molli DeRosa. She and I also edited this show. Special thanks to Shaun and Rita for sharing their insights. 

That’s it for our third season! All of our episodes are available on our website at innovationleader.com/podcast. That page also has a bunch of bonus content that can only be found on the web. If you liked this show, please rate and review it on your streaming platform of choice. 

This is going to be my final episode as the host of Innovation Answered. I’ve had so much fun launching this show and interviewing thought leaders in the world of innovation. It’s been a pleasure and a privilege to tell those stories. Thank you so much to Scott Kirsner and Kelsey Alpaio for all of their help guiding this show. So don’t worry, I’m leaving you all in very good hands. And as always, thanks for listening and stay tuned for more Innovation Answered soon.