On this week’s episode of Agile Giants, we’re going to do something just a little different. There’s a lot of questions that I’m regularly asked when it comes to corporate innovation and agile product development. I’ve combined some of those questions with questions that I heard from you on social media and I’ve come up with five common questions that I get.
We’ll see how this works, but if this is interesting to you let me know other questions that you might have and maybe we’ll start weaving these in about once a quarter.
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Sean Ammirati: 00:08 Welcome to Agile Giants: Lessons from Corporate Innovators. I’m Sean Ammirati, your host, Co-founder and Director of The Carnegie Mellon Corporate Startup Lab and partner at the early-stage venture capital fund, Birchmere Ventures. Each week, I’m going to talk to guests who are experts at creating startups inside large corporations. I believe fundamentally a startup within a company is the same as one inside the proverbial garage, a group of entrepreneurs trying to make the world a better place using new ideas and inventions. However, I also believe some of the techniques and processes are just inherently different. This podcast is going to explore those similarities and differences.
Sean Ammirati: 00:55 On this week’s episode of Agile Giants, we’re going to do something just a little different. There’s a lot of questions that I’m regularly asked when it comes to corporate innovation and agile product development, and so I’ve combined some of those questions with questions that I heard from you on social media platforms like LinkedIn, Instagram, and Twitter and I’ve come up with five common questions that I get that I want to do a little Q&A on today. We’ll see how this works, but if this is interesting to you let me know other questions that you might have and maybe we’ll start weaving these in once a month or once a quarter.
Sean Ammirati: 01:29 The first question that I wanted to talk about is a question that comes up a lot, which is: how do you budget for innovation?
Sean Ammirati: 01:37 Really, people typically mean one of two things when they talk about this. The first is just some people are literally curious like, “How much money should I allocate to doing innovation for my company?” Obviously, the answer is different depending on the size of the company, the company’s strategy, that type of thing, but I always make the point to them as it relates to that question, make sure you’re taking a portfolio approach. What I mean by a portfolio approach is make sure you’re allocating enough money to allow you to have multiple different ideas explored before you step back and say, “Is this a good or bad use of company money?”
Sean Ammirati: 02:17 Put another way, if you’re really doing transformational innovation and you try to look at the success of those ideas after just one project, the only thing I can assure you is that you won’t have any confidence if you’re onto something or not after just one idea. We’re talking about doing maybe a dozen project before you ultimately figure out if you’re onto something or not. Relating to this multiple project thing, you also want to make sure that you’re killing ideas quickly in the process. You don’t want to take the money you have allocated for that budget, let’s just use the number of $10 million because it’s simple math. You don’t want to take that $10 million and spread it out equally across 10 ideas because you’ll end up underallocating money against some of your promising ideas and overallocating your money against ideas that aren’t really working out that well.
Sean Ammirati: 03:04 You want to do multiple projects. You want to kill those ideas quickly. That leads to the next point, which is that you really want to make sure you’re thinking iteratively. Take those things that could kill a project and pull them forward. Do those first and then end up working on some of the other things later. One of the ways I encourage entrepreneurs to think about this, corporate entrepreneurs and traditional entrepreneurs for what it’s worth, is think about your startup idea as a queue of risk, and you’re going to sort that queue based on, how devastating could this be to my idea if ultimately not successful?
Sean Ammirati: 03:41 Second, how expensive is it to validate or invalidate if that idea that you have about the startup is a good one? Any startup is full of a bunch of ideas that you might call like leaps of faith and there’s no way that you can guarantee all of those leaps of faith will be successful. Rather than try to lie to yourself and assume that they will be successful, try to be honest about what they are and then figure out the right order to go and attack them in an iterative way. Then, this gets to the last point on the thinking portfolio perspective of the first of the two different points around how to budget for innovation, which is you want to make sure you’re asking the right questions about that idea and the right questions change as an idea goes through its process. The right questions about an idea when you’re first exploring it are very different than the right questions to ask about an idea when you’re months into the investigation.
Sean Ammirati: 04:38 On the front end right when you’re beginning to evaluate something, I actually think for truly transformational ideas, for truly ideas where you’re going to a new customer segment or bringing a new value proposition out there completely, I think it’s actually really hard to predict how successful an idea could be or won’t be. The much better question to ask at that stage is really, “If this idea is successful how meaningful could that business be? How large could it be? I think that’s the right types of questions to ask on the front end and then, why do you believe that? How do you end up coming up with that calculation for how valuable it can be?” There are other really good questions to ask as well, such as, “What’s our unique insight into this idea relative to others?”
Sean Ammirati: 05:24 I think a bad question to ask at the beginning of that process is, “Is this idea going to be successful or not?” Again, lots of leaps of faith there. It’s really hard to figure that out. Now, once you’ve been working on an idea for a while and you’re getting customer feedback and you’re validating some of those critical assumptions or pivoting or iterating your thinking based on what you’re hearing from the market, then I think a really great question is, “Okay, am I onto something? The assumptions that I originally had, are they playing out like I was hoping for?” Then, I think sort of probability of success when you back into it becomes a really interesting question to ask at that point. Again, that’s sort of a really quick couple-of-minute rundown on how to take a portfolio approach to budget for innovation.
Sean Ammirati: 06:09 The second thing that people often mean when they ask this question of how to budget for innovation is they’re really asking, “How should I value my innovative projects” See, the challenge here is that many corporations try to value innovative projects similar to how they would value other expensive capital projects. If you’re a retail company, you may be trying to value your innovative startup ideas inside your company the same way you would make a determination if you should open up another retail store in another major metro area. The challenge is that the outcomes are very, very different.
Sean Ammirati: 06:51 When it comes to opening another retail location, given a bunch of factors like where it is, the demographics there, you can be pretty confident plus or minus one standard deviation that the outcomes are going to be similar to what you’re projecting. You open a retail store in a major urban corridor and adjusted for the price per square footage, you should get a similar amount of revenue plus or minus one standard deviation. Therefore, the metrics that you can use to value those projects, like IRR and NPD work out well because those calculations assume an average distribution of returns. They assume kind of a bell curve.
Sean Ammirati: 07:31 The problem when it comes to innovation is that the average outcome is going to be it doesn’t work out. Most of the really transformational ideas you’re going to explore are going to not work out. That’s why you can’t do one and then assume that that’s predictive of how all your projects will go. Instead of looking like a bell curve, the chart if you will of the expected outcomes against the portfolio, it’s going to look more like a Power Law curve. Well, the problem with this is that while you can still calculate an average similar to IRR and NPV, which kind of those calculations are based on assuming an average bell curve-like outcome, well, you can still do that precise calculation. The only thing you’re precisely calculating is a number that you don’t expect at all.
Sean Ammirati: 08:23 One of the ways I often talk about this is think about the average temperature people like to drink tea in America, and I realize this is a bit of math and math is not the most exciting on the podcast, so let’s just use this analogy. What’s the average temperature people like to drink tea? The average temperature is basically room temperature because a lot of people like iced tea and a lot of people like hot tea, but almost nobody walks into a restaurant and says, “Give me a cup of your finest room temperature tea.” While you could calculate that number, that number would be meaningless because all of the outcomes end up on the two ends of that curve, the two tails of that curve if you will, so iced tea and warm tea.
Sean Ammirati: 09:08 Similarly, for most ideas inside of a corporation that are truly transformational, these corporate startups if you will, they’re going to end up either succeeding fabulously or failing, again, at the edges or the tails of those curves. You need to do a calculation other than IRR or NPV because you don’t have an average set of outcomes. That’s why myself and Matt Crespi at The Corporate Startup Lab have ended up building the Option-Gate Model because we’re trying to use math that assumes these binary outcomes are a success or a failure and then values that appropriately and option pricing allows you to do just that. If you’re interested in seeing that tool, you can go to corporatestartuplab.com/tools and give us your email address. We’ll only email you updates about the tools and you can check that out.
Sean Ammirati: 10:02 Those are kind of the two things people typically mean when they come to me and say, “How should I budget for information?” I wanted to go through a few other questions that I get regularly as well. I’ll do these a little quicker.
Sean Ammirati: 10:14 The second question that I get a lot when I talk to corporate entrepreneurs is, “How do I deal with failure?” Because I think most of the companies who are being led by these senior executives, the senior executives have gotten to that position by not failing on a regular basis, and yet, as we talked about in the last question, many startups inside of a large company won’t work out. The question is, well, what do you do with those where they don’t work out? This is kind of different than what you do with that high-potential executive who’s going from different role in the organization to kind of climb the corporate ladder quickly.
Sean Ammirati: 10:55 My opinion on this is that you need to really understand what the cause of that failure is. There’s a couple of different reasons why a startup might fail. One reason a startup might fail is because some of those leaps of faith we talked about a few minutes ago, some of those leaps of faith may just be wrong. The entrepreneur, corporate or otherwise, may do a great job proving and validating that those ideas are incorrect. In some ways this is kind of much better than the alternative, which is not realizing those assumptions are incorrect and spending a lot more money on the idea and then having ultimately you figure that out later. In some ways, this person has actually been successful for you.
Sean Ammirati: 11:39 Now, if the person regularly keeps coming up with bad idea after bad idea and failing over and over again, I think you have to ask yourself, “Well, how are we sourcing these ideas?” I’m not saying, “Don’t hold your teams accountable”, but the point is off of one given idea, if it ends up being incorrect because a leap of faith that you took didn’t work out, that’s really nothing but exactly what you should expect. Really, what you’re going to want to do with that person is give them another idea to explore because they did the right thing.
Sean Ammirati: 12:09 Now, if that person ends up… or that team ends up failing because they don’t do the process correctly, they don’t do the investigation correctly, then I think you have a very different situation on your hands and you need to work to either coach them up or change the team responsible for innovation because you don’t want people not doing the work involved. For example, if an idea fails because the team refuses to go and talk to customers early in a given idea exploration, then I think you have a problem there that you need to correct. If they go talk to people early in the process and they realize that customers just don’t have the problem that you were hoping for, they probably did that really efficiently from a dollars invested perspective, and you should look to give them another idea that they can go run a similar process with.
Sean Ammirati: 12:58 I think the challenge is that we use the term “failure” in corporate America to talk about both of those different activities, but those are really very different types of failure, failure of an idea and failure of the process. My point is people who end up doing the right work but invalidating an idea, they actually should be treated almost as similar to those who have been successful. That’s the second question that I get a lot that I thought would be fun to talk through today.
Sean Ammirati: 13:28 The third is a common question that comes up and people frame this differently, so they will ask questions like, “Well, how should I think about letting people work on these ideas part-time on the side?” Or sometimes they’ll reference like the “Google 20% time” or they’ll use terms like, “How do I think about innovation on the side of my desk?”
Sean Ammirati: 13:52 I think regardless of how you frame this, it’s worth pointing out that often what you’re asking your teams to do is to just add more work to people who are already incredibly busy. That’s not going to be for everybody in the organization and I don’t think it’s sustainable to ask them to do that forever. That said, we’ve seen a number of organizations do a really good job with having pretty concrete, simple processes for people across the company to do this early exploration in addition to or alongside their “day job” or primary job.
Sean Ammirati: 14:31 I think for a period of time that works well, and I actually think people’s commitment to doing this and working on this on “the side” is often predictive of really good corporate entrepreneurs. I talked to Tanya Baker at Goldman Sachs a couple of episodes ago about this when she was talking about the HR tech executive inside Goldman who was turned down for the first batch of GS Accelerate, and then the second time through has been successful by continuing to work on it between the tow. I think actually that that’s not unique to Goldman Sachs. I think often entrepreneurs and corporate or traditional settings do whatever it takes to be successful. They make the time to make it work. Ended up often very, very predictive.
Sean Ammirati: 15:19 On the other hand, I think one think that’s important to point out is that at some point you’re going to need to free up hours for that person to make meaningful contribution on it. Once they’ve made enough progress, at some point you need to give them the resources and the time to really focus on it, and that kind of gets back to this question of making sure you’re budgeting enough resources for it. In the interim at the beginning, one of the things that I’ve seen companies do really well that I think is helpful is they’ve given their employees who are interested in this type of work just access to some really simple tools to learn how to do this and to understand the process.
Sean Ammirati: 15:57 Again, I think the GS Accelerate interview a couple of weeks ago was a really good example of this, They have the training, they have the process, they have the questionnaire. They’re sort of guiding their employees through the questions and the things that need to be evaluated at this top of the funnel of evaluating these ideas. The Bosch Corporation has done this really well as well with their startup platform, and talked a little bit with Dennis Boecker about that. There are a number of organizations that have done this well, and I think if you’re trying to do this “side of your desk” or part-time innovation thing where you’re sourcing ideas from all over the company, make sure you’re giving them the tools, the framework, and the right things to empower them to ultimately be successful.
Sean Ammirati: 16:46 Now, I was thinking about, what would be the most common question I get as it relates to agile product development? I actually think in Corporate America, the most common question that I get there is, “Why aren’t my teams faster? I’ve ‘implemented’ agile”, which is always kind of interesting to hear what they mean by that, and they want to know, “Why hasn’t product gotten shipped quicker? Why haven’t I realized all the wonderful outcomes that Jeff Sutherland talked about?”, on the episode when we were talking about Scrum.
Sean Ammirati: 17:23 Just a note to make sure we’re kind of aligned on what we mean by “agile”, and I’ll link to the Agile Manifesto in the show notes here, but as a reminder, and again, you can hear the whole story of this on the interview that I did with Jeff, the Agile Manifesto really was a simple document that talked about four things that they think successful software projects, and I think you can now generalize this outside of software, have relative to projects that weren’t as successful. Those four things were that they valued individuals and interactions over processes and tools, working software over comprehensive documentation, customer collaboration over contract negotiation, and responding to change over following a plan.
Sean Ammirati: 18:10 One of the things that I think is interesting is as the business community has sort of hijacked if you will the term “agile”, we’ve ended up thinking of agile more as like do more quicker, which is often the benefit of rolling these things up, without understanding the actual cultural change we’re trying to implement in terms of how to actually make your projects more agile. The first thing I would say to you if you’re wondering like, “Why aren’t my teams moving quicker?”, is, “Have you really applied agile? Or did one of your leaders read a book and try to kind of quickly give their version of that?” If it’s the latter, I’d really encourage you to find the resources to help you actually make sure that you’re doing what you think you’re doing.
Sean Ammirati: 18:56 A couple other things that I think if you have tried it that are sort of common failure points, one of them is make sure you’re not constantly switching the people on the team working on these ideas. Many companies will use a tool like Scrum, and then they’ll switch their Scrum teams every couple of sprints. Well, the reality is that you’re ending up backing out a lot of the benefit that you’re getting from a process like Scrum when you’re constantly changing team members because productivity for these agile teams is not measured on a person-by-person basis, but on a team basis. If the team is constantly changing, then it’s hard to really understand what the velocity is of that given team.
Sean Ammirati: 19:47 Another common thing that I see often is that people are not as clear with their teams as they think they are on what the objectives are. This is different than negotiating a contract where the specification is extremely detailed, but you want to make sure that the teams that are doing this are actually very clear and collaborative with you on what you’re trying to validate or invalidate with the work that you’re doing.
Sean Ammirati: 20:15 The third thing, which kind of relates to this clarity, is make sure that you’re actually doing the right work. Sometimes when I meet with executives and they want to know why their agile teams aren’t moving faster, it’s not a question of how much work are they doing, but it’s a challenge of how productive is the work that they’re doing. Teams are doing a lot of work and they’re very busy and cranking out a lot of stuff, but it’s actually not the right stuff. When you do that, that’s often in my experience misdiagnosed as the team is not moving quickly when, in fact, they’re just not being led well or the sort of collaboration between the engineering team and the rest of the organization isn’t as strong as it could be.
Sean Ammirati: 21:01 One last question, and it was actually last week at The Millennium Alliance in Miami, Florida, and man, this came up so much throughout the couple of days I was with that group there, which was as we were talking to different executives about their innovative projects, the question that kept coming up was like, “Well, how do all these big trends that I’m reading about in The Wall Street Journal impact my innovation? … I’m in transportation. How do autonomous vehicles and urbanization… impact innovation?” I think what they really mean there is not like, do they impact innovation or not? Clearly they do. I think what they really mean is, “How should I take a look at those trends and actually weave those into the individual ideas inside my innovative portfolio?”
Sean Ammirati: 22:00 I actually think this gets to something on the corporate startup canvas that is the one piece that I think actually would be well served to be on the regular Business Model Canvas as well. Again, and most of you know the story, you can go to The Corporate Startup Lab Medium account to see the article. If not, myself along with three of my colleagues at The Corporate Startup Lab, Matt Crespi, Anna Finley, and Albert Tomasso, we created the document as really a complement to the Business Model Canvas, so it was the Additional Thinking Canvas that you could use to complement the work that you’re doing with the Business Model Canvas.
Sean Ammirati: 22:39 The idea behind it was that together they would give you all the benefits you get out of the Business Model Canvas, but also these important questions to ask yourself that were specifically relevant for corporate entrepreneurship. That is still true. I will say the one box on there that I think would be valuable to have on the regular Business Model Canvas as well, because I think this is a question that corporate and traditional entrepreneurs need to ask themselves is, why now? As it relates to this question of how did the trends fit it, it’s important to point out that often really good ideas aren’t actually well-executed ideas until the answer to “why now?” works out.
Sean Ammirati: 23:22 Uber would have been a great idea along some dimensions at least in terms of consumer experience, for a long time, but until people were carrying around computers in their pocket, i.e. Android and iPhones, it really wasn’t an idea that would be easy to execute. Now, with a computer that can talk to the internet and know right where you are at any point in time, it really made that a reasonable innovation to be created. As people often look at the recent IPO of Chewy and say, “Wasn’t this sort of pets.com?” Or some of the other first internet ideas, and the reality is that there are certain things that have made that business model make sense now that weren’t true before.
Sean Ammirati: 24:08 The answer to “why now?” is important for traditional entrepreneurship as well, but I think it’s actually even more important for corporate entrepreneurship because your business has momentum heading in a certain direction, and what you’re trying to do with corporate entrepreneurship is create the future inside your company instead of somebody else creating the future ahead of you or in spite of you and disrupting your business. Those trends coming at the industries that you serve are really important to address.
Sean Ammirati: 24:39 If you think about… I think still the most popular interview that we’ve ever done on Agile Giants was with Gustavo Lopez at MSA and he told the story of how they created Safety IO. The trends of internet of things, machine learning, all those things were parts of the pieces and customers being used to buying SaaS offerings. Those were all parts of the pieces that allowed a strong answer to “why now?” that actually made it make sense for that to be when MSA would actually jump in to create this corporate startup.
Sean Ammirati: 25:13 I think the trends are incredibly important, and actually spending time thinking about them and taking them back to first principles and thinking about how they apply to it is really important. This actually really cleanly comes back to the first question, which is, those answers to “why now?” can inform not just one idea or two ideas as they would in maybe a normal entrepreneur’s experience, but you can actually think about them in forming entire portfolios of a corporate startup activity.
Sean Ammirati: 25:44 If you run MSA, and if you’re Gustavo, you can think about a portfolio of ideas influenced by these megatrends. Or if you run Bosch, you can give out an entire set of trends influenced by this. I think that the answer to “why now?” Is incredibly important as it relates to that because it ends up giving you visibility into maybe how you want to think about in general doing those portfolio ideas that you’re exploring.
Sean Ammirati: 26:14 Those were kind of five common questions that I got and kind of generalizing some of the stuff I heard from you online and some of the things I’m asked regularly. Again, this was just an experiment, so if you liked this episode, let me know. One of the easiest ways you can let me know is by going to iTunes and leaving comments and five-star reviews. If you don’t like this idea, I’d prefer you not do that on iTunes, but instead, just send me an email. My email is just first name and last name @gmail.com, so email@example.com, and would love to hear from you ideas, suggestions.
Sean Ammirati: 26:47 I also have a few ideas coming out for what I’m hoping to do with this podcast over the summer and specifically for August and maybe the first part of September. I’m thinking about doing a series of interviews with corporate venture capitalists. I know that the panel that I publish from The 3 Rivers Venture Fair on The Corporate Venture Capital Value Proposition has resonated with a lot of you and interested in maybe fleshing some of that content out over the summer. Similarly would love email feedback if that makes sense to you or not. You can also message me on any of the different social platforms, again, Twitter, Instagram, or LinkedIn. Thanks so much and hope you have a great week.
Sean Ammirati: 27:32 I hope you enjoyed this episode of Agile Giants. If so, consider sharing it with a friend, and if you think it’s worth five stars, which I hope you do, please go to iTunes and rate it so that others can find this content as well.