When Ari Ginsberg discusses the business ecosystem, it can sound like he’s narrating an episode of the nature show Planet Earth. Ginsberg, a Professor of Entrepreneurship and Management at New York University’s Stern School of Business, talks about young startups as field mice—tiny players in the ecosystem.
But the startups “that really grow and make a huge impact—the Microsofts, the Googles, and so on—they become gazelles,” he says.
In addition to field mice and gazelles, there are also lumbering elephants: businesses that become slower and less fleet-footed as they gain scale. That’s when inertia becomes an issue, Ginsberg says. “They become very, very good at what they do…at milking their strengths versus moving on.”
Ginsberg focuses on entrepreneurial investments made by large companies, and how innovation ecosystems take shape, among other topics. In 2000, he introduced a master’s degree focused on entrepreneurship and innovation. He is also the former head of NYU’s Berkley Center for Entrepreneurship and Innovation.
We sat down with Ginsberg to discuss different approaches to innovation, celebrating failed ideas, and creating a more risk-tolerant corporate culture.
Exploiting Versus Exploring
When you have startups, usually you find they have some kind of S-curve [of growth] going on.
But so many [more established] companies disappear from the Fortune 500. Companies that were once great can disappear, because they’re not able to do that second S-curve. These new companies come along, and basically, they come up with radical innovations and then take the customers away. So the challenge for these large corporations is, how do you continue to make money off the strengths that you’ve developed, but at the same time pay attention to the need for renewal and innovation so that you don’t disappear—so that you remain competitive?
On the one hand, you want to exploit. That’s what organizations tend to do when they get bigger, they tend to exploit their strengths. They focus on operational efficiency…meaning routine. The more you get into a routine, you have stability. But then you miss out on the exploration. And if you do that, then you lose the future, and you may disappear. [Companies need to balance] those two activities, and create ambidexterity, where you can do both.
In addition to that, employees themselves may have good ideas, but…if [companies] don’t encourage employees to come forward with ideas, the employee is going to say, “Why should I do that? My boss is going to say, ‘It’s not in your job description. Go back into your work.’ Not only that, but even if they let me [and] say, ‘Fine, go ahead and take the risk,’ if I fail, there goes my career. Why should I take the risk?” So organizations have to develop a culture. And that’s another way of being…ambidextrous with respect to innovation.
The Right Way to Fail
The generally-accepted wisdom…is that you want to encourage and even celebrate failure—but with discretion. The reason for that is because if you punish failure, you’re not going to get to breakthrough innovation. There are CEOs that have a very strong opinion on this. A quote from James Quincey, who is the CEO of Coca-Cola, [says], “If you’re not making mistakes, you’re not trying hard enough.”
If an entrepreneur comes along and says, “I had a company, but it failed,” that’s not necessarily a basis for [a prospective investor to say], “Well, we’re not going to invest.” Because very often the key question is, did you learn? Failure is okay if there is learning involved. Then you have the right cost-benefit.
If an entrepreneur comes along and says, “I failed, but it really wasn’t my fault. This happened, that happened,” they’re less likely to get support. But if they say, “I learned a lot from that. I learned that I needed to do a certain type of research. I needed to ask different kinds of questions to validate my customer value proposition, etc.” Then the investor says, “Now we actually have someone who has got a higher level of consciousness and is more likely not to repeat these kinds of mistakes. They’re not a novice anymore.”
Especially when you’re trying to do breakthrough innovation, you’re aiming at complicated solutions that haven’t been tested before. So you have to be prepared for failure.
There’s also this expression of “fail fast and fail early.” One of the reasons that failure is important is because, if you’re gonna [fail]…do it early when [there are fewer] consequences. The worst thing to do is invest a lot in something and have it fail. You have to figure out a way where the cost of failure is lower.
Creating the ‘Failing Ideas Hall of Fame’
Some companies like Google, Inuit, and others…have rituals, where they celebrate failure. They also have what they call kill meetings. This is the [venture capital] attitude. You don’t celebrate failure for failure’s sake, and you don’t criticize failure just to criticize it. It’s more about analyzing.
So there are companies…that create the “Failed Ideas Hall of Fame.” Something that basically says, “Alright, we’re going to…memorialize these failures.” But why? Not to embarrass people, but as a way of saying, “We encourage that, but we also encourage the learning part.”
[It’s useful to ask] questions like, did the project remain true to its goals? Could it have been prevented? Was there enough research and consultation?
This is also where leadership is extremely important… [The leaders are] the ones who…create a reward system, and help institutionalize the importance of learning from failure…
Easing Failure Anxiety & Changing the Culture
There are different ways of going about emphasizing the importance of taking risks and accepting failure. One is this structural way where you basically isolate [the innovation division].
What you can do is have your unit that’s doing this kind of innovation somewhere else…managed separately. The skeptics are elsewhere. So maybe it’s not for [the skeptics], right? They don’t necessarily need to be part of that.
The idea [that] everyone should become an agent of change or an agent of entrepreneurship, you’re now talking about changing the culture, and one of the things we’ve learned about changing the culture is that it’s very difficult to [do] unless you develop a reward system for encouraging [innovation].
So for example, you could have a reward system that says, “Okay, I realize you’re in whatever area—you’re in accounting, you’re in this, or that. But every week, I want you to come up with…an idea that could perhaps improve what you’re doing.” So you’re rewarded for that, when the time comes for getting evaluated. You don’t simply get told, “Don’t worry, you won’t get fired.” But you actually create some form of recognition or award.
If you want employees to buy into [the idea that failure is acceptable]…they also need to feel confident that they have the capability [to take risks]. … But that’s not enough—they need to be motivated.
Talk About the Failures — and the Successes
Best practice suggests [that you ought to] not just discuss the failures. Also discuss the successes. When you look at companies like Coke, Netflix, Amazon, Domino’s, they have developed these best practices.
[There] has actually been research…comparing groups of innovators. In one group, both successes and failures were discussed. In the other [group, only] failures were discussed. And it turned out that afterwards, there was a greater improvement, fewer mistakes, and more innovative behavior in the group where both failures and successes were discussed.