3 times external innovation beats building internally

Corporate Innovation

March 05, 2019

For innovation leaders, the question of where to focus the company’s energy and resources is a never-ending one. For each new idea or opportunity that has the potential to drive growth, the question re-emerges: what is the best approach?

Do we build this internally? Do we partner with or invest in a startup? Do we launch a spin-out? Do we acquire a startup?

The short answer is: it depends.

There are a number of different options for corporations looking to innovate beyond the core business. Companies may choose to invest in or establish partnerships with an existing startup, collaboratively launch a new product or business, or co-create a new startup with entrepreneurs.

When External Strategies Make Sense

Whatever the path taken, there are some ideas and opportunities that, by nature, will better serve the company when they operate at arms-length from the parent corporation.

Here are a few things to watch out for that might tip the scales.

1. Opportunities far from core company objectives

Sometimes innovation teams will unearth opportunities that have the potential to create immense value for consumers, but that don’t align with the company's focus.

Imagine a direct-to-consumer brand has an idea for how to monetize the data generated while packaging and process returns. Or an innovation team working within a CPG company realizes there must be a better way to conduct user testing using technology – and that no platform yet exists.

Pursuing opportunities like these might create immense value for the end user (including users within their company) – but the ideas are just a little too far afield from the core business to justify the investment of time and resources.

Rather than choosing to pass on these opportunities, however, a company might instead choose to partner with and invest in a startup tackling a similar problem, or to spin the idea out as a new company. This prevents any mission drift within the core business, while still capturing the potential upside of the opportunity.

2. When resources required for success > resources available internally

Tackling an innovation opportunity can be expensive, and has no guaranteed payoff. Even if the market opportunity is huge, there is so much else a new venture needs to get right – from the team to the product to the timing. There are some ideas that innovation executives will look at and think, “This is a great idea – if only we had the resources.”

Partnering with an existing startup or spinning out a new company can help solve this challenge. Suddenly the venture isn’t just an internal budget item, but an independent company capable of raising capital elsewhere. This allows the corporation to lessen its overall investment, sharing the risks and rewards with angel investors, VC’s, or other corporate partners.

This has the added bonus of leaving budget available to build other ventures internally, or to invest elsewhere in external innovation. By building an innovation portfolio, rather than taking a big bet on a single venture, a company exponentially increases its ability to capture the potential upside from the same investment of capital and people power.

3. When going after winner-takes-most categories

Whether a solution is first to a blue-ocean market, or has strong network effects, or has a high switching costs, there are categories that play out as “winner takes most”. We’ve seen this play out dramatically in tech startups with everything from search (Google) to e-commence (Amazon) to reservation management (OpenTable) to payments processing (Stripe). Once the incumbent is entrenched, they’re hard to topple - but it can take bold moves and aggressive growth strategies to get there.

This path to growth is one that, understandably, most new ideas launching within industry incumbents don’t have the luxury of pursuing. The tactics designed for pursuing the extreme outcomes of go-big-or-go-home can be ill-suited to corporations pursuing more conservative, but certain, growth.

Anyone pursuing innovation like this within a corporation will find themselves asking the impossible questions:

Do we take a more aggressive stance on growth, and expose the corporation to potential reputational and regulatory risk?

Or do we play it safe, and risk losing the market altogether?

There is, however, the third path. In categories where an entire market is up for grabs, spinning out a startup or partnering with an existing startup often provides a better chance of success than an internal innovation project would have.

Not only will this give the startup a better chance at capturing the market – with the corporation as a key partner, they have an unfair advantage over the competition.

One size does not fit all

When innovation teams are deciding how to move forward with new opportunities, looking outside the company isn’t always the answer. If the initiative is core to innovation goals, if success relies on hard-to-access internal assets, or if keeping the new solution out of the hands of competitors is a must-do, then it may make more sense to build the opportunity internally.

But when opportunities require more capital than innovation teams can commit, are far afield from strategic priorities, or have the potential to create or re-define markets, external innovation may be the best path forward.

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