Blog Post by Ajay Madhok
mediaX Distinguished Visiting Scholar
Geopolitics, economic cycles, and now, pandemic, are among the many global challenges converging simultaneously, creating higher volatility and uncertainty for businesses at large. And larger businesses particularly face unprecedented tension to stay relevant when present demands and future goals are continually shifting. They need a new model to stay relevant, and design for resilience to sustain growth.
As the technology and methodology for creating businesses has evolved, a new model has emerged for entrepreneurs and corporations to create new growth vehicles that leverage the foundational assets of the corporation, and the enterprise of a startup. Purpose-built Innovation empowers large corporations to seize growth opportunities using the same startup playbook, instead of getting disrupted by them. It provides a framework to create new ventures with entrepreneurial talent as a strategic capability to renew and refresh their core assets. This blog provides an overview of this model. For a deeper dive, here is a presentation on the subject, and the narrative for the slides.
What has changed?
Open Source solutions, Cloud Computing, and commercialization of new technologies such as AI, ML, and Blockchain have not only increased the pace of innovation but also reduced its cost and adoption time. Take Financial services industry as an example. New entrants continue to disrupt the sales and origination cycles with new products that make it simpler and more efficient for a particular customer and market segment. Robinhood, Betterment, and Wealthfront offer investments with zero transaction fees; SoFi, CollegeAve, and Tuition offer student loans on much easier terms. They have engaged the next generation of customers not by attacking incumbents head-on, but by offering them great experiences at lower costs.
What is causing it?
One of the structural shifts behind this disruption is that the Capital —Talent equation has flipped. For much of the past five decades, financial capital was considered a scarce resource. Today, however, there is abundant capital, and talent is the scarce resource. When capital was expensive, investments to improve profitability trumped investments to increase growth. Success in the new era demands as much (or more) focus on identifying new growth opportunities as on optimizing the current business.
With technology as a key enabler of growth, the assets that are in short supply today are the skills and capabilities required to exploit new technology, translate ideas into new products, and re-imagine businesses. The combined implication of scarce talent and abundant capital is that internal R&D cannot keep pace with startups, who can operate in garages, pay engineers in dreams, and move at software speeds. While acquiring a startup can bring innovations and their innovators, limited insights into the startup ecosystem make it challenging to separate spinners from winners. And by the time the market exposes winning startups, sky-high valuations make it expensive to acquire and harder to integrate.
The new playbook
Despite these new challenges, a large company can create new growth vehicles. They attract scarce talent by providing them a fertile environment to experiment, and the opportunity to quickly scale winning ideas leveraging their foundational assets – their data, insights, know-how, and distribution reach. They can improve the chances of success for their innovators by empowering them to build, test, and iterate new product ideas, with more flexibility than traditional R&D. They can embrace win-win models to integrate these new growth vehicles faster and better than those acquired through traditional M&A.
While some of the opportunities will turn out to be capability-building investments, others will lead to technical advances, and some will be market explorations to roll-out enabling innovations. Over time, it will bring about small and not-so-small changes that collectively generate huge benefits creating value for all stakeholders. The result of continually updating the products, services and business models is corporate resilience. This is equally true in research, development, marketing, and management.
The process in brief
1. [X] Start with the foundational assets that can provide an inimitable differentiation to a purpose-built startup. These assets include Customers, Data Insights, Know-How and IP, Distribution Capabilities, Brand strength, Buying Power, and Negotiating leverage.
2. [Y] Combine Startup Talent, the builders who are willing and able to build startups, with Corporate talent, the Executives in residence from the big company who understand the needs of their potential customers. Together, they have the ability to quickly innovate, build and test new products, and that gives the purpose-built Startup more flexibility than a traditional startup model. And the EIRs bring the ability to consume and integrate the startup with the mothership post M&A.
3. [Z] Work with the EIRs as a partner, discover their significant pain points, build a solution to solve that issue for the partner first, and then scale it for the industry. By bringing the customers into the loop upfront to discover and calibrate opportunities results in a product-marketchannel-model fit more efficiently, taking away a lot of the Zero to One risk. Contrast this with the typical startup journey of going from an idea to funding to MVP to testing the product-market-fit and pivoting.
4. [-W] Remove the overhead of corporate processes, its immutable policies, and the decision hierarchy. A startup is created to break things that can be done better. In contrast, big company processes are optimized for stable operations and fulfilling shareholder expectations. This does not mean avoiding regulatory challenges but enabling the startup to conduct experiments in a controlled manner, where even a total failure won’t harm the big company but bring in new learnings fast.
5. [^⍺]The purpose-built teams are aligned, and rewarded for agility and continuous iteration for value. While the corporation defines their challenges and sets the direction of innovation with prioritized business cases, the team does the legwork for them, experimenting with ideas, prototyping, validating, and piloting to provide solutions with the agility of startup. This includes the startup, the agile processes and the business alignment to be acquired and integrated into the larger organization.
Businesses and work-systems are becoming more open and decentralized, more startup-like. It presents an opportunity for a large corporation be more like a startup — modular, adaptable, and reconfigurable. A Purpose-built Startup is a new way of building new products and services. They are acquisition-ready by design to enable business, technology and cultural integration. They enable corporations to keep their products, services and business models up-to-date the same way as SaaS keeps software up to date.
This framework provides a better interface between the corporate and startup worlds. It brings decision makers on the corporate side who understand how entrepreneurship and startups work as well as the assets of the corporation.Partnering with startups in this new configuration empowers established companies to maintain their core while innovating like a Startup.
In summary, Purpose-built Innovation is a novel approach that empowers us to create new growth vehicles by improving their chances of success leveraging our assets, paired with great entrepreneurial talent, a growth mindset, and agile processes. It is designed with self-reinforcement properties to get stronger with each cycle, and enable us to renew and update our products, and business models with the agility of startups.
Through a proven model that improves ROI on corporate innovation efforts, mediaX at Stanford University explores complex challenges, creating ideas, and building them into blueprints for pilots that can be validated in a highly time and cost-efficient manner, with even more flexibility than a traditional startup.
Ajay Madhok is the Founding Partner of Reboot Digital and an Advisor to Playground Global. He is a growth architect, challenging norms to uncover technology-powered growth opportunities, calibrating businesses for commercial success, by enlisting entrepreneurial talent to deliver outcomes via purpose-built startups. Ajay’s re-imagination experience includes building four ventures, with two getting acquired, one merged, and one acqui-hired. He is an expert in product innovation and ecosystem development for a range of industries including Telecom, Media, Education, Logistics, and Financial Services. He is currently researching innovation models that large enterprises can practice to stay competitive and relevant, avoiding patterns that limit growth. The purpose-built startup is one such model that draws on his experience in combining foundational assets of an enterprise with startup talent to create new value.