Addendum to Forks in the Road

I posted earlier about the different ways that valuable ideas may come out of university research labs.  But this series of posts is as interested in how ideas, born inside large and established companies, can also emerge to have significant impacts on broader society. This may seem like an unnecessary charity—like helping corporate executives cross the street—but it’s not.  Large companies are arguably the most infertile ground in which to grow an idea into a new business. 

Having spent years working in, working with, and studying corporate Research & Development, I can confidently say entrepreneurship—undertaking to build a new business—within large companies is more difficult and often more risky than launching the same venture on the outside. Indeed, there are a number of endemic means by which organizations slow and ultimately kill the growth of new ventures, something I hope to describe in a later series of posts.  

In the meantime, here is a brief description of some of the more well-worn paths available to the scientist, marketing executive, or operations manager who has developed a solution to a real problem. It is a parallel but unfortunately much smaller set of pathways for moving ideas out. 

Create a new business unit around this idea. This tends to be the ideal outcome: to have the organization embrace an idea that takes it in a new direction entirely, and bring its significant resources to bear on making the leap.  It’s ideal, or idealistic, because it’s the best of both worlds—all of the joy of having an impact with none of the trials and tribulations of building an entire organization. 

A great example of this path is the story of George Stephens, a 30 year-old employee and part-owner of a metal working shop in Chicago. In 1951, the company was producing marine buoys by shaping metal half-spheres and welding them together. Stephens loved grilling, but hated the low, flat open grills that were available.  Attaching vents, legs, and a grill to the company’s metal half-spheres, Stephens created a barbecue grill that dramatically improved the sport of grilling; it’s domed design provided better ventilation, better heat circulation, and less direct heat.  With the Weber company’s existing resources, he quickly built and sold 50 of them.  Within a few short years, the Weber Brothers Metal Works became Weber-Stephens Products. The rest is history.

How often does this happen?  Not that often. But when companies take the leap, it can be a wild ride. Apple Computer took the leap when they saw the potential of a digital walkman, and were presented with an idea for a business surrounding such products, Apple quickly threw its resources behind designing and developing the iPod and iTunes music store.  Introduced in 2001, it took roughly 5 years for this new platform to surpass their Macintosh computer sales.  The iPhone has taken even less time.

The sobering news is that few companies are capable of making such sweeping changes. Innovation threatens the very core of established companies: what they’re built for and what they’re good at. Few managers will risk stumbling in their current business in pursuit of something new and unproven, particularly when it means investing time and money building a business around people, technologies, and markets they have little or no experience with. 

It’s necessary to not only make sure the idea can grow into a viable business, but that it can do so within the particulars of your company. For example, does the top management team (and any managers in between you and them) understand the difference between this new business and the current businesses?  Do they recognize the strategic implications—and necessities—of committing to this new line of business?  Without their understanding and commitment the new business will be killed, in its infancy, in any number of ways. 

As much as anywhere else, making such an entrepreneurial leap well is critical.  Yet most companies are abysmal at launching new ventures, let alone doing so in ways that don’t sow the seeds of their own failure from the beginning.  Indeed, next to entrepreneurs looking to start new ventures from scratch, these posts are intended to share the tools and processes developed at the UC Davis Center for Entrepreneurship for effectively developing, evaluating, and launcing new ventures inside large corporations.

Adapt the idea to fit within a company’s current offerings.  In some cases, new ideas can be integrated into existing products as a feature or as additional products in a line of offerings. Typically, these features or products are designed for and built with a company’s existing manufacturing lines, and shipped and sold through their existing salesforce, distributors, and retail partners. 

The more prevalent examples—so prevalent we overlook them—include minor revisions on already major brands: Snickers with almonds, Coke Zero, the Avatar-special-edition-Director’s-Cut-3D DVD.  Not particularly earth shattering innovations, but if these new products add even a small percentage to the current business they can be successful.  With an annual global sales of over $2 billion, for example, if 5% of current customers decide to buy an extra Snickers bar to try the White Chocolate version—that’s $100 million in sales.  That’s not peanuts. 

A lot depends, of course, on the idea and its fit with the current products, manufacturing, and channels they have built up. I’ll address this issue directly in another post. The danger with this option is that the real value of new ideas often comes from a different set of customers or a different way of organizing.  

Fitting a new idea into an old product line, traditional product development and manufacturing processes, and existing sales channel can limit an idea’s chances to find its own best path forward.  

Take Nokia’s smart phone.  In 1996, they introduced the world’s first real smartphone. It still sells the most phones, but long ago lost its advantage in the higher margin (i.e., smarter) smartphones to RIM’s Blackberry, Apple’s iPhone, and now Google’s Android phones—companies that didn’t have to fit the new “smarts” into old phone development, manufacturing, sales and distribution. In large part this was because the best path forward for smartphones was not along traditional hardware manufacturing and sales but rather along developing the operating systems, applications, and supporting networks. 

Ask yourself: does the technology involved, and the value to users, come from what your company already does well?  Or will your company need to invest in, and develop, new capabilities—and do so as rapidly as the new and evolving businesses will? If not, then competitors will always be able to outpace large companies grafting new ideas onto old resources.     

Patent and license the solution to another company. Corporate R&D is well known for their ability to patent great ideas, and then do nothing with either the ideas or the patents.  More recently, these corporations and a host of consultants have decided there’s gold in them thar patents and have attempted to mine this gold by licensing the portfolios to other companies.  I will be brief: If you have an idea and your company has patented it, nothing will happen unless you take the initiative to find and court a willing licensee.  Of course, you will likely breach several confidentiality and non-compete clauses in your employment contracts in the process. 

Leave and form a new company. The last option is to leave and form your own company around this idea.  Obviously, as per the previous “patent and pray” option, this path raises the same legal problems if your idea lies clearly within your current employer’s line of business or if you developed it on their dime. But there are often cases  when corporations allowed, and sometimes encouraged, employees to take their ideas and launch new business. 

The more far-sighted (I would even say realistic) managers will recognize that the best, and certainly the most revolutionary, ideas need to grow outside the confines of an existing company.  The same can be said of the most entrepreneurial of their employees. Jeff Bezos, conducting an analysis of the Internet’s growth, saw the clear opportunities for new businesses and left the investment firm D. E. Shaw & Company to found his own company, Amazon. As an idea and potential venture, Amazon was clearly not the next strategic step for D. E. Shaw & Co.  And Bezos, then a senior vice president, was not built to be an investment banker. 

Amazon may be an outlier, but making the entrepreneurial leap from a big company is not uncommon.  According to a 2009 research report by the Ewing Marion Kauffman Foundation, the average age when most entrepreneurs start their own businesses is 40. 75% of them worked for another company for at least 6 years before making the leap (and the overwhelming majority did so willingly).  

Does the new idea stand a better chance of success outside of the the established company where it was conceived? What freedom would a new venture gain for all of the existing capabilities and resources it gives up?  And is the founding team really prepared to trade the autonomy and uncertainties of life on the outside for the support they had on the inside? 

Leaving a company is the mother of all entrepreneurial leaps.  It take careful preparation—something we’ll talk about a lot in the following posts.

Most new businesses are conceived by people in large companies—and become new ventures either by tapping the resources of these existing companies or making a go of it on their own.  Either way_and each way has equal risk—how the founding entrepreneurs chose to make the entrepreneurial leap shaped their fate.