Innovate Like a Venture Capitalist

May 6, 2015

Venture capitalists are the world’s experts at creating growth businesses: think Netflix, Facebook, or Dropbox. Their methods hold a trove of lessons for how corporate managers can create an environment that fosters new sources of growth. Coupled with techniques and leadership behaviors specific to large organizations, these methods can help free large firms from process and cultural constraints, enabling real change.

This article was shaped by 42 interviews with companies across a wide variety of industries, seeking to understand how they were approaching the challenge of innovation; see below for more details.

Here are the four key elements of the VC’s approach (click to enlarge the graphic):

Let’s take a deeper dive into each of these elements…

1. Chart a clear course: The best VCs have a clear focus to their investment strategy so that their innovation competencies and portfolio investments are closely aligned. Charting a clear course involves defining innovation goals and boundaries, and communicating them to the organization.

  • Defining innovation. Many innovative companies don’t consciously focus on innovation; rather, they focus on growth, and innovation is embedded in everyday practice as an enabler to drive that growth.
  • Boundaries. The most successful companies have a laser-sharp focus on where to apply innovation within their businesses. Within those clearly defined boundaries, teams are empowered to set their own goals and execute asthey see fit.
  • Leadership. Innovative companies are populated by senior leaders who embody risk-taking, experimentation and entrepreneurship. Their daily routines involve challenging, coaching, and encouraging these behaviors in others.
  • Colleague engagement and communication. Successful companies use a wide variety of methods to ensure a high level of awareness and understanding about how the company is driving growth and innovation. Colleagues also clearly understand their role in enabling this growth.

2. Structure for success. A VC firm is a microcosm of innovation in action. The professionals are trained and experienced in quickly identifying and fostering innovation, whether they be sustaining innovations for existing portfolio companies or new ‘disruptive’ investments.

  • Innovation competency. While anyone can generate innovative ideas, designing and executing more complex and disruptive innovation requires specialized skills and a certain personality. Most innovative companies identify and nurture this talent.
  • Dedicated teams. Successful innovation teams are small, dedicated, multi-functional, co-located and appropriately resourced — with the right people (in terms of both skills and chemistry), support, sponsorship, and clear boundaries.
  • Process and metrics. An innovation process must encompass both idea generation and implementation to be successful. Further, it needs an element of flexibility. Metrics are critical to gauge and track innovation successes and failures.
  • True disruption. Disruptive (versus sustaining or incremental) innovation requires a separate set of structures, processes, people, metrics, funding and timeframes — isolated and protected. One size does not fit all.
  • Environment. A playful, informal, and visually stimulating physical environment has a big impact on “state,” the creative thinking process, and the quality of output. It needs to be consciously managed.

3. Look near and far. A VC’s competitive advantage is his or her ability to uncover and execute on a promising innovation before other investors recognize the opportunity. For this reason, their understanding of relevant trends and external networks are of paramount importance.

  • Trends and insights. The most innovative companies dedicate resources to keeping tabs on future trends that may impact strategy and growth. They cultivate a wide and diverse external network to identify future trends and ideas and to build competency in unfamiliar areas. Effective insight development fuels the idea engine. Traditional market research is good at identifying and mining immediate needs. Innovative companies rely on untraditional research techniques to uncover unconscious needs, under-served consumers or “jobs” that need disruptive solutions.
  • External focus. Many innovative companies have made external orientation a habit and an accountability. Getting out into the world for exploration, field trips, inspiration, connections with other companies, etc. is a regular, encouraged and monitored practice.
  • Open innovation. Effective open innovation entails harvesting ideas internally AND externally from a variety of sources, including non-traditional ones. A focused and targeted brief is critical to yield the best results from external networks.

4. Push the envelope. Educated risk-taking is key to driving the large returns VCs seek. VCs mitigate risk by staging investments, experimenting and learning throughout their journey. They acknowledge that usually, speed-to-market trumps perfection. And they aren’t afraid to shut things down when they are clearly not working.

  • Perfection vs. speed. Striving for perfection slows speed to market and limits competitiveness for incremental innovation; perfectionism hinders or prevents disruptive ideas from surfacing or being fully developed.
  • Embracing experimentation. Cultures that embrace experimentation encourage risk-taking and rapid prototyping. They view failed experiments as essential to learning and discovery. People are provided with tools, processes, and time to experiment.
  • Risk-taking. Individuals will not advocate for risky ideas if (1) they perceive they will damage their reputations or incur some other sort of punishment, or (2) they perceive there is no reward for doing so.
  • Rewards. People who generate ideas for growing the business are recognized and rewarded in ways that clearly distinguish the contributions between one colleague and another.
  • Passion. Innovative companies realize that passionate, energetic, committed and courageous people make the difference for innovation. If they believe in an idea, these people will overcome any barrier. Innovative companies place passionate people on the most important growth initiatives.

Here’s a summary slide (again, you can click to enlarge it):

(This article was adapted from a project I initiated while at Pfizer Consumer Healthcare, with support from the consulting firm Innosight. We conducted a total of 42 interviews with companies across a wide variety of industries and geographies to understand how other firms are approaching the challenge of innovation.)

Deborah Arcoleo, Director, Advanced Innovation Center of Excellence, The Hershey Company