Failure culture is still a hot topic. Especially in Europe and its startup ecosystem. Many innovation experts suggest: celebrate failure! It’s a good thing. Embrace it. Although I fully accept that failure accompanies any innovation process just as high risks accompany high return opportunities, it is my firm belief that it should never be regarded as a good thing, nor should be celebrated. But how do we manage the that natural risk, which comes with any innovation project? Especially when we are designing new innovation strategies?
Innovation Managers, Tech Transfer Officers, or Heads of R&D are responsible for designing new innovation systems, programs and activities. Very often, these strategies aim at faster, more user-centric, more disruptive innovations and have something to do with startups. What these people usually do as a first step is analogy transfer. They will call it a „best practice analysis“. Learning from the pros. Nowadays, learning from startups is very common and at the same time looking at venture capital to gain a more strategic and financial-driven perspective. As typical for any analogy transfer, potential insights are vast, yet you need to understand the limitations as well. So we should be clear about the differences between the things we seek to compare. But since many managers often want easy answers, they love applying rules of thumb.
„9 out of 10 startups fail“ is a common rule of thumb among startup experts. Although this number is debatable according to some researchers and it leads to awkward inferences (one of my favorite ones from Quora: „If 9 out of 10 startups fail, then what are the chances that one of my startups will be very successful if I start 10 startups simultaneously, as opposed to one by one?“), it is still impacting many innovation system designs. But, this is dangerous, because RTOs and corporates often fail to work in startup mode. Here are some reasons why:
1.) Taking the numbers for granted: 9 out of 10. And the one startup being successful magically pays for all the failures. You cannot design an innovation funnel based on this. Neither plan the amount of ideas needed to fill your innovation funnel, nor calculate budgets. What you also need to take into account is that the 9 out of 10 rule is mainly drawn from professional VC portfolios. With high quality startups in their portfolio. Most RTOs and corporates are just starting to understand how the startup mode of innovation works. Don’t expect the same quality of teams, ideas and investments.
2.) Underestimate the organizational context: Startups are an entity operating in a free market. Whatever the RTO or corporate is going to design as an innovation system, in almost all cases the organizational context and its culture will impact its performance: intrapreneurs who have to innovate besides their daily duties, jury decisions follow internal politics, RoI expectations for an innovation portfolio after two years, or budgets are planned with a management reasoning.
3.) Mimicking startup culture: Unfortunately, copying startup lingo, working in fancy offices, wearing hoodies and eating more pizza does not make you any more innovative. Instead, it is a mammoth task to align your existing culture to a whatever vehicle (internal innovation program, own startup accelerator, etc.) is expected to generator more innovations.
And there is way more. However, there is one major mistake that I would like to put special emphasis on, because it is quite often neglected: assuming to effectively mimic a startup ecosystem without having access to real entrepreneurs.
For a VC it is clear that she has to invest into a portfolio of opportunities in order to find the one or two generating the returns. The individual startup is important, yet not critical. Now switching to the perspective of the startup, it is almost either succeed or fail. There is no portfolio. But since startups are run by entrepreneurs, they do not care about the risk to fail. They simply see the upside potential.
Let us now assume that a research organization wants to translate that into its world. From a macro perspective, the top management might demand more spin-offs, which is often the case nowadays. They spark a new innovation activity – probably incorporating some if not all of the mistakes mentioned above. They do not care about the failures, because they assume that spin-off #10 will generate magically all the returns. And they assume that everyone will follow. 9 out of 10. A winning portfolio from a macro perspective. But how about the micro perspective? A random 1 out of 10. What about the single venture that is expected to go all-in against the odds? And in a research organization, or any large corporation, not everyone is an entrepreneur. Rather the opposite. How do you motivate these people to take risks without a portfolio? Simply does not work. Could we then design smart ways to mitigate the risk so that also non-entrepreneurs are willing to become a 1 out of 10? Nice try.
At the end of the day, the major problem of any RTOs or corporates that want to enter a startup world is that they set up startup-like ecosystem without the major ingredient: entrepreneurs. Only they will make a viable innovation portfolio happen.