Archive for February, 2010

An Innovation Manifesto

Posted by Tim in evolving economic entities, innovation, networks on 28 February 2010

There have been a few before, but here’s another Innovation Manifesto:

Innovation doesn’t need a manifesto – it needs action.
We won’t wait for someone to give us permission to innovate- we’ll just try things out.
Innovations have a life-span – we will try to execute ideas that last, and that make things better.
Not-Invented-Here is not for here. We will execute the best ideas we can find, regardless of where they came from.
Innovation is a process of flow – we generate ideas, we select ideas, and we execute ideas. Since the last two are the parts that most people aren’t good at, those are what we’ll concentrate on.
We will build fast prototypes, and iterate rapidly instead of trying to make things perfect from the start.
We will find small, inexpensive ways to test our ideas.
We will learn from the ideas that don’t work.
We will scale up the ideas that do work.
Innovation is the best way to enact strategy – we will keep the two aligned.
Innovation happens in networks – we will understand ours as well as we can, and build them to facilitate innovation.
Innovation is not invention – we will focus on making ideas work, not just having them.
New ideas have to become embedded within the economy – we will build new networks for our great ideas, and put them within innovative business models.
We know that innovation is the best way to keep our jobs interesting – we want to avoid this:
We will not complain, we will instigate change.
Our strategy and our brand are built by what we do every day, not by what we say. We will use innovation to build both.
The purpose of innovation is to help our customers and to make the world a better place. These are our primary evaluation criteria. (from Graham Horton)
We realize that the approach to innovation depends on the novelty of the idea. (from Ralph Ohr)
Eliminate habits, that is the beginning of innovation. Both with risk & fun. (from Marion Popiolek)
We will inspire others and bring them on board because innovation is a team sport. (from Jorge Barba)

So.

Who’s with me? What would you add?

20 Comments

Three Blogs I Love

Posted by Tim in filter, innovation, networks on 27 February 2010

I’ve spent the past couple of days reading an astonishing number of excellent blog posts. I share nearly all of them on my twitter feed, so if you want a compilation of those, check that out. Today I thought I’d share three different blogs which always seem to have great content.

First up is Innovate on Purpose by Jeffrey Phillips. Phillips writes for managers and others that are involved in the innovation process. The posts here are fairly concise, unadorned, and nearly always exactly correct. I haven’t run across any other innovation blog that I find myself agreeing with so consistently. Here is a clip from a recent post called Just Do Something:

There’s always something you can do, and starting now is much better than starting when you finally get the OK. In many firms, the OK may never happen. Create a small innovation capability and generate ideas about the future, new product and service ideas, and help other teams generate ideas. You’ll attract others who have similar needs and interests and gain incredible credibility. Eventually you’ll be the go-to person for innovation. Don’t laugh, I’ve been in at least two organizations where the head of innovation was simply the person who started doing innovation and was eventually recognized as the expert.

If you’ve been reading our blog regularly, I’m sure you can see the parallels between that message and some of the things that John and I are saying consistently. Phillips is also a regular contributor to Blogging Innovation, another outstanding innovation resource.

Next up is Network Weaving, written by June Holley, Valdis Krebs and Jack Ricchiuto. This is one of my favourite network analysis blogs. They’ve each been doing organisational network analysis for many years, and their experience and depth of knowledge comes through each post. Here’s an excerpt from a recent post by Ricchiuto called The 4 Laws of Networks:

Innovation = learning x diverse connections
I disagree with the argument that innovation is the child of desperation. I wish it was so, because if it was, we would be on a planet devoid of incredible amounts of preventable child deaths, failed economies, and the rest of what would otherwise be tragedies that could be prevented by innovations of all kinds. The pragmatic reality is that innovation happens at the intersection of learning and cultivating diverse connections. When you have diverse connections in a network, learning almost cannot not happen. Networks literally become learning disabled if the connections become too homophilous and without learning, no innovation is possible.

One of the subtle points of this post is that all four laws involve multiplication – not addition. It is an excellent example of the increasing returns that are inherent within networks. All of the posts on Network Weaving are like this – they make good points on the surface, and there are also insights lying underneath as well.

The last blog I’d like to highlight is This Week in Review by Mark Coddington. Coddington started his weekly review of news relating to the current state of journalism on his own site, but it was recently picked up by The Nieman Journalism Lab at Harvard. There are a couple of things that I love about Coddington’s blog. The first is that it is a tremendous resource. Personally, I’m interested in what’s going on in journalism, particularly from a business model standpoint. However, because it isn’t my core area of interest, I don’t have time to read everything on the topic. It is Coddington’s core area of interest, and he does an outstanding job aggregating information, filtering it down the key stories each week, and connecting up all the ideas into a coherent narrative. Here’s an example from this week’s post, discussing a great post by Jay Rosen:

Innocence, objectivity and reality in journalism: Jay Rosen kicked off some conversation in another corner of the future-of-journalism discussion this week, bringing his influential PressThink blog out of a 10-month hiatus with a post on a theme he’s been pushing hard on Twitter over the past year: Political journalists’ efforts to appear innocent in their reporting at the expense of the truth.

Rosen seizes on a line in a lengthy Times Tea Party feature on “a narrative of impending tyranny” and wonders why the Times wouldn’t tell us whether that narrative was grounded in reality. Journalistic behavior like this, Rosen says, is grounded in the desire to appear innocent, “meaning a determination not to be implicated, enlisted, or seen by the public as involved.” That drive for innocence leads savviness to supplant reality in political journalism, Rosen said.

The argument’s been made before, by Rosen and others such as James Fallows, and Joey Baker sums it up well in a post building off of Rosen’s. But Rosen’s post drew a bit of criticism — in his comments, from the left (Mother Jones), from the libertarian right (Reason), and from tech blogger Stephen Baker. The general strain running through these responses was the idea that the Times’ readers are smart enough to determine the veracity of the claims being made in the article. (Rosen calls that a dodge.) The whole discussion is a fresh, thoughtful iteration of the long-running debate over objectivity in news coverage.

That’s the other reason that I love his Reviews – they are a fantastic example of creating value through aggregating, filtering and connecting. If you click through to all the links from just that story, you have about a half hour of rally interesting reading to do. But you get a pretty good feel for what’s happening from Coddington’s summary. That’s not mere aggregation, nor is it simply curation. To create value in this way you need all three parts – aggregating, filtering and connecting.

So those are three of my key resources. I hope you check them out yourself!

5 Comments

Designing Espresso Innovation

Posted by Tim in business models, design, innovation strategy on 26 February 2010

Here are some thoughts on ‘design-driven innovation’ versus ‘design as making things look cool’:

Design-Driven Innovation – Nespresso from Tim Kastelle on Vimeo.

And here are some related points:

We often think of design as making stuff look cool, but when we talk about design-driven innovation, we’re actually talking about creating new categories of goods and services based on a deep understanding of what our customers are trying to do.
With many design-driven innovations, market testing is very difficult because it is extremely hard for people to envision how the innovation will work. However, this does not mean that mean that customers are unimportant in the innovation process. It simply means that they can’t tell us in advance what they want. So design-driven innovation faces higher levels of uncertainty than innovation processes trying to solve a known problem.
The Nespresso case is apparently very popular in Europe, where the system was first launched (a full description of the way the system works can be found here). It is a great example of business model innovation (here is an excellent discussion of this). I talk about the importance of working from the espresso-making process out to the machinery instead of vice-versa – many of the innovations in the business model follow from this choice. By setting up the Nespresso Club to sell the coffee, they essentially built an iPod/iTunes style system – this model was just as innovative in coffee as it was in mp3 players.
This is another great example of the difference between invention and innovation. The patent for the espresso capsule was granted in 1976, but the first Nespresso machine was not on the market until 1991. This is not at all unusual.

Nespresso is a pretty interesting case study. It shows some of the benefits of design-driven innovation, and the benefits of business-model innovation as well. It’s pretty good coffee too.

7 Comments

How to Fail at Innovation

Posted by Tim in evolving economic entities, filter, selection on 25 February 2010

The way to fail at innovation is to try to avoid failing.

The idea of failure has popped up quite a bit this week for some reason. Innovation is filled with tensions that we have to become comfortable with if we’re going to succeed. One of the big tensions is between success and failure – when you’re innovating, you can’t have one without the other. In a very interesting post, Arne van Oosterom suggests that this is good argument for emphasising adaptability rather than innovation for many firms, as this eliminates the discomfort caused by the tension between the two.

I am in complete agreement with van Oosterom that adaptability is a desirable trait for organisations to develop. But in doing so, I don’t think we can abandon innovation. I think that we need to develop strategies for dealing with failure.

This was the conclusion reached by both Peter Yates (ex-CEO of PBL, among other things) and Patricia Cross (Non-Executive Director of Wesfarmers and numerous other organisations) in their talks at the Leaders’ Edge Luncheon here in Brisbane on Tuesday. The topic of the talks was ‘Tales from the Corporate Battlefield’ – and it sounds like both of them have been in plenty of battles. And one of the common themes that they touched on is that if you’re doing anything worthwhile, you will experience failures. It’s not fun, it’s not something to be embraced, but it’s inevitable.

This theme was also addressed by Hutch Carpenter in a fantastic post this morning. In making the point that innovative firms will fail, he included this picture:

He includes this quote from Jeffrey Phillips – one of the best innovation bloggers around:

As Edison and countless others have demonstrated, you rarely get it right the first time, and if you are stymied by early failure, then you’ll never find and implement the best ideas. Innovation, as has been pointed out by individuals with far more to say about it than me, will create some failures. Your job isn’t to avoid the failures, since you can’t predict them in advance, but to reduce the cost and impact of the inevitable failures. In other words, keep moving.

So there’s the contradiction that we have to deal with – if we’re going to successfully innovate, we have to fail. The key is to figure out how to do it as cheaply as possible. As I’ve said before, if everything that you try works, then you’re not trying enough things. These contradictions are one of the things that makes managing hard, but it’s also one of the things that makes good managers so valuable. Failing isn’t fun, and it’s natural to try to avoid it. However, it is a necessary element of success.

In other words, the one guaranteed way to fail at innovation is to try to avoid failing.

4 Comments

Too Much IP Protection is Bad for Innovation

Posted by John in innovation on 24 February 2010

There were some good (all reactions are good!) reactions to the blog post on the problems of using patent counts to measure innovation so I thought I would follow up with some evidence on patents and intellectual property (IP) strategy.

Conventional thinking is that any IP generated within an organization should be carefully guarded by secrecy agreements, trademarks, patents or a combination of these things. As many universities become more commercially focused, researchers and students are now encouraged to safeguard their IP as well. In fact, I taught a Masters course in technology management last year where several grad students could not discuss their projects in class because they has signed confidentiality agreements.

Many years ago when I was doing biochemistry research my laboratory director took on a project in the aquaculture industry. After early results the director thought that he had made a breakthrough in aquaculture nutrition and consulted the commercialization office of the university. Secrecy agreements were signed by him and the research assistant, who was instructed not to talk to anyone in the laboratory about the project.

One day the research assistant asked me for some technical advice on processing samples and I was more than happy to give it, but what followed next was a very nasty surprise. Within an hour I had the director screaming at me and accusing me of industrial espionage. The closest thing I can compare it to is the scene from the Lord of the Rings where an aging Bilbo sees Frodo wearing his old ring and turns into Gollum with his desperate obsession over “my precious”.

Gollum

So much for academics and IP protection but what happens to businesses when they get obsessed by IP?

The best study of the relationship between IP protection and innovation is by Keld Laursen (Copenhagen Business School) and Ammon Salter (Imperial College London). They are world class researchers and if you disagree with their results then its worth reading the original paper.

Using a dataset of 2700 UK manufacturing firms, Laursen and Salter looked at the relationship between different IP protection strategies and innovation outcomes. While they looked at formal protection such as patents, trademarks and designs, they also looked at informal protection tactics such as secrecy agreements, complexity of design and lead times over competitors. What they found, for both types of IP protection was that moderate rates of IP protection correlated with increased innovation but intensive IP protection resulted in poor innovation performance. They explain this result as follows….

There are several possible interpretations of this finding. We suggested that firms
might develop a myopia of protectiveness, being overly protective of their new
innovations. They focus their managerial resources and attention towards the
acquisition of legal protection to the detriment of other activities, such as the
mobilization of complementary assets. They may become obsessed with secrecy,
limiting their opportunities to work with others, such as lead users, or to trade
knowledge informally with suppliers, customers and competitors. In this respect,
firms may suffer from a “Gollum effect”, locking themselves away from the rest of
society in the vain pursuit of full protection.

Next time someone tells you that you should be protecting all of your IP, ask yourself why they are telling you this. IP is a means to an end and not an end in itself.

10 Comments

Olympic Innovation

Posted by Tim in book riffs, design, innovation on 23 February 2010

The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.
-F. Scott Fitzgerald

That’s the quote with which Richard Lester and Michael Piore open their outstanding book Innovation: The Missing Dimension. The opposing ideas that they discuss throughout the book are interpretation and analysis. They argue that both are necessary components of innovation, but that they require completely different skills and mindsets to manage. Here is how they describe the issue:

In new product development, interpretation and analysis exist in perpetual tension. This tension is inevitable and unavoidable, and we believe it is the central management problem that innovative businesses must confront. The tension… springs from many sources. Interpretation proceeds through conversations over time – within and among the various communities that contribute to new product development and between the designers and the customers who use those new products and incorporate them into their lives. Analysis, on the other hand, takes place “outside of time” – at the point when a product must be optimized according to well-defined and articulated objectives.

This line of thinking is very similar to the argument that Roberto Verganti puts forward in Design-Driven Innovation – and I’ll talk about those links later this week. Today, however, I want to use this dichotomy to talk about another perpetual question that arises every four years:

Here’s an idea: sports where there is an unequivocal winner, like skiing and ice hockey, are primarily analytical, while the judged sports are primarily interpretive. As a consequence, they have different forms of innovation, and it explains in part why they seem so different to us.

In the analytical sports, who wins is reasonably straightforward. If you get down the mountain fastest, or skate the fastest, or score the most goals, you win. In these sports, the problems are well-defined, and most of the innovations are primarily equipment-based. The well-defined problems lead to engineering-style solutions. So you have innovations like this:

The innovation there is the clapskate – a blade where the back detaches at the end of the stride. This allows the full blad to be in contact for a longer period of time, which transfers more power from the skater’s legs to the ice. So you go faster.

In the analytical sports, these type of innovations lead to continually faster speeds, or longer jumps, but in the main, the sport still looks the same. Interestingly, most of the innovations don’t come from the athletes.

It’s a different story in the interpetive events. In these sports, the athletes themselves are coming up with the innovations. As they do this, they remake the sport. Dominic Basulto has a great post about the nature of innovation in snowboarding – where the judges often don’t understand the difficulty of new moves.

He includes this quote from a WSJ article called When Snowboarders Baffle the Judges – it explains why Shaun White showed off all his new jumps in events leading up to the Olympics:

The emphasis on innovation this season has snowboarders grappling with whether they can trust the judges to score their new moves fairly at first sight. Many top riders, including Mr. White, are haunted by the prospect of becoming the next Jonny Moseley, the free-spirited American mogul-skiing champion who failed to medal at Salt Lake City in 2002 despite his debut of a revolutionary trick he dubbed the “Dinner Roll.” Though he executed it perfectly and the move has since elicited higher marks for difficulty, he received lower scores for his jumps at the time than his competitors got for their tried-and-true twists.

“Tricks can be deceiving,” Mr. Moseley says. “I worked twice as hard to be able to perform that in the Olympics than anyone else.” Mr. White says he could have saved his surprise moves for Vancouver to increase the “wow” factor and prevent copycats from stealing his thunder, but he decided it was more important “to educate the judges.

That sounds a lot like the conversations between stakeholders that Lester & Piore describe, doesn’t it? As the athletes in interpretive events innovate, the look and feel of the sport changes dramatically. The last interpretive-style innovation in an analytical-style sport that I can think of is the Fosbury Flop in high jumping. Dick Fosbury actually came up with a completely new way to do the high jump. I can’t think of a similar shift in skiing, or the other more ‘objective’ sports. Verganti and Lester & Piore all conclude that interpretive processes are more likely to create radical innovations. We see the same outcomes in the Olympic sports. The innovation in snowboarding is definitely more radical than the innovations we see in downhill skiing. This is a useful thing to keep in mind when we’re managing innovation within our organisations.

I’m not sure if this resolves the question of whether or not ice dancing is a real sport. But I think we should embrace the Lester & Piore argument – both analysis and interpretation are important, and we need to be comfortable with both to be genuinely innovative. We need to have both skills within our firms to innovate successfully. So maybe we need to embrace both forms of sport, and both forms of sporting innovation in the Olympics as well.

NOTE: This article talks about innovation at the Winter Olympics, and it’s all analytical!

(Speed skating picture from flickr/BWJones, snowboarding picture from flickr/prosto photos, both under Creative Commons Licenses)

7 Comments

Establish Authority by Creating Value

Posted by Tim in aggregate, book riffs, connect, filter on 22 February 2010

One of the best ways to build connections within the economic network is to be an authority – and since revenue often follows connections, this is a useful strategy to consider. How do you become an authority? I’ve run across a couple of suggestions recently.

First up – this from the JournaMarketing Blog (I’m not trying to pick on the guy, his recent posts are much better, and worth checking out):

Services like Friendfeed make it easy to pull together information from a lot of different sources. So if you’re looking for a way to become an authority in your field, find the 5-10 top sources in that field, and pull their feeds into one location — on your own website. You’ll earn the goodwill of those other sources by linking to their content. And you’ll gradually become the 1-stop shop for anyone looking for information in your field.

Compare that process to the one outlined by Chris Brogan and Julien Smith in Trust Agents:

Say that you’re asked a question by e-mail about a specialty of yours… You could just respond by e-mail, but you don’t. Instead, you write about it on your blog. You point the person who made the original inquiry to what you wrote, so taht person gets what he or she wants; but now, anyone else can see it as well. People who arrive via Google by searching for similar information can visit and post comments weeks, even months, later. Your blog post, which used to offer answers to typical questions asked by a few people, has now become a resource…

Imagine that you do this 500 times. Over time, you’ve probably been asked 500 questions about your specialty; suppose you had answered all of them on your blog. These 500 posts now make up a pretty hefty set of resources, with a lot of insider information and tips, and you’re heping a fair number of people. As you do so, you’re starting to become known for your expertise.

So, our choice: establish your authority by creating value for people, or do it by appearing to create value. Which do you think will work better? Which person are you most likely to believe? Which takes the most work?

Aggregating by itself does not create value – this is a common fallacy doing the rounds these days. To create value, you have to aggregate, filter and connect information. In the Trust Agents example, you are not just aggregating the stuff that you know. You are filtering it so that it addresses specific problems that people have, and you are connecting up ideas to help solve those problems. And you are also connecting your solutions to people, actively through e-mail and telling people about your blog, and more passively through search engine visits.

The difference, of course, is that it takes a lot more effort to create 500 good quality blog posts. It will probably take more than a year, or even longer. And even then, you’re only “starting to become known” as an expert. But that’s what it takes to establish genuine authority. You have to put in the hours – there’s just no way around it. Of course, the payoffs (both emotional and financial) to being a genuine authority are generally higher as well.

These ideas apply whether you are building a personal brand, or whether you are creating an innovative business model. You need all three skills to creat value. You have to be able to aggregate, filter and connect to establish authority by creating value.

(Photo from flickr/Wessex Archaeology under a Creative Commons License)

7 Comments

What Art Curation Can Teach Us About Innovation

Posted by Tim in design, innovation strategy on 21 February 2010

We often think of art as being innovative by its nature – but what about curating art? A couple of weeks ago Nancy and I went to a talk Amanda Pagliarino, the Queensland Art Gallery’s Head of Conservation. She was discussing some the challenges that her team faced in getting all the exhibits ready for the Asia Pacific Triennial 6 at the Gallery of Modern Art in Brisbane (the ABC did a nice review of the show last week on the Artscape show).

The talk was fascinating. Pagliarino talked about some of the issues involved in mounting five of the larger pieces of art in the show. Here is a picture of part of the process of installing Line of Control by Subodh Gupta (with more here):

This was apparently one of the heaviest things they’ve ever exibited – so they had to figure out how to have the crane inside the gallery for a full day, how to set it up so that the diesel fumes wouldn’t have an impact on other pieces in the gallery, where to place the piece so that the floor would support it for the length of the show, and several other obstacles.

The issues with Mushroom Mantra by Charwei Tsai were completely different:

For this, they tested a number of different types of mushrooms to see which were easiest to write on, which would decay most effectively (and without creating too much of a smell!), and what kinds of dirt would work best.

Each of the five pieces that Pagliarino discussed had issues that her team had to address. All of them were different, all of them were completely new to the staff at GoMA, and several of them were problems that no gallery curator in the world had encountered previously. So there was a lot of innovation involved in putting this show together. Several of the problem solutions were ingenius. All in all, it was a terrific talk, and I learned a lot.

I think that there are several innovation lessons here as well:

It takes a unique skill set to innovate in a situation where nearly every problem is unique. Many jobs encounter difficulties that can be addressed through some form of troubleshooting. In the case of art curation, there is more of an emphasis on creatively attacking ideas, rather than running through a process. One thing that I found very interesting is that the QAG team often used experimentation – they tried multiple small experiments (as they did with Mushroom Mantra), and they failed quickly, cheaply and privately. Once they settled on a solution through experimentation, they were ready to install the pieces in public. However, in some cases, time was so tight that they just had to use their best judgement.
That said, over time the problems can be divided into classes. One of the unique features of GoMA as a gallery is that it has a couple of absolutely gigantic walls. They have taken advantage of these spaces to mount some unusually large pieces. After the talk I asked Amanda if she thought that they had developed a unique competence in installing really big pieces of art, and she said that she thought they have. Mayo Martin has an interesting perspective on some of the issues surrounding bigness in this exhibition, which are also worth reading (though I disagree with him about Chen Qiulin’s house from the Three Gorges region).
This leads to the third point – that art curation appears to be very strongly collaborative. When they encounter problems that are new to them, they use the international network of curators to find out of anyone else has dealt with the problem before. It sounds like nearly all of the knowledge in the network is tacit, which suggests that the most effective curators will be skilled at working the network.
Finally, I think there are some significant parallels between art curation and managing. Both frequently encounter unique problems that require you to think on your feet and come up with something new. Most of the jobs can be done by routine, but it is how you deal with these situations that determine how successful you you really are. This is something that I think we need to keep in mind when we’re training managers – MBA students often want to learn things that they can apply. These are the things that are good for routine problems, but they don’t help with unique ones. We need to get better at training people to deal with these.

One last example from APT 6 – one of the pieces had been commissioned by QAG specifically for the show. They sent the dimensions of the wall that would house the piece to the artists making it in North Korea, who when put together a mosaic. When it arrived, the dimensions of the piece matched those of the elevator, which are about one meter higher and one meter longer than the wall on which it was meant to hang. After trying everything they could think of, the curators eventually concluded that they only way o exhibit the piece was by cutting a meter off the top and off the sides. I would have thought that one of the first rules of art curation would be “don’t cut up the art”, but in this case, it was all they could do. “Don’t cut up the art” actually probably is the first rule of art curation – but sometimes, you just have to get the job done. When you’re curating an art exhibit, and when you’re managing innovation, sometimes the rule book has to go out the window.

3 Comments

Building an Entrepreneurial Network

Posted by Tim in business models, innovation strategy, networks on 20 February 2010

What is the biggest challenge facing an entrepreneur? There’s coming up with a great idea, which can be hard. There’s finding funding, which is definitely a challenge. There’s getting your idea to work, and we’ve been arguing here for quite a while that execution is critical. But I think that the biggest challenge is actually building your network – and it’s one that people give almost no thought to at all.

On the last day of the Australian Association of Angel Investors National Conference yesterday, we started the day hearing elevator pitches from three start-ups. It was pretty interesting to listen to them, and there were some common themes. All three firms had what sounded like great technology. The ideas were clever, they appear to meet market needs, and all of them are far enough along that they’ve successfully executed the ideas. All of them need more money now to get to the point where they’ll cash in, but I think that to actually get to that point, they need better ideas about developing their networks.

There are two key parts to this. The skills you need to execute an information-based business model are aggregating, filtering and connecting. Building the entrepreneurial network is all about connecting – and also getting people to unconnect.

The first key part is linking into the value network which surrounds and supports your innovation. Entrepreneurs often focus too much internall, on their own ideas, and don’t think as much about this, but it’s a critical issue. Which parts of the economy support your idea? What is your relationship to them? Finding financing is part of this, and so is finding suppliers and distributors.

In large firms, these links usually already exist. That is the easy part for them. The hard part is getting their own internal systems to change – this often means they have to break some of the existing links in their system which is hard. Entrepreneurs have the opposite problem – they have no existing links at all. They have to build their own, and in doing this, they often have to get people to choose them over their current collaborators. In many cases, entrepreneurs are trying to build links to existing companies as part of their exit strategy. When I was working for a software start-up ten years ago, everyone’s exit strategy was to sell out to Microsoft. The conversation at the AAAI Conference shows that the strategy now is exactly the same, except that we’re all trying to sell to Google instead.

In either case, your position within the value network will determine whether or not this can happen. Alan Noble from Google said yesterday that in many cases they are waiting for software start-ups to demonstrate these links before they’ll consider buying the firm.

The second part of building the network is connecting with customers. With the large firms, it means that they either have to get current customers to stop using whatever they’re buying from you now and switching to the new innovation. Many firms resist this, because they don’t want to cannablise existing markets. The other option is to find new customers for the new idea. The problem here is that the new customers often require a completely new value proposition – and existing firms find it diffiult to create these.

Again, entrepreneurs face the opposite problem. They don’t have to worry about cannabilisation – in fact, they want to cannabilise existing markets! Their problem is that they don’t have any customer connections at all. And in many cases (as in all three firms presenting at the conference), the assumption is that superior technology will automatically win. We know this isn’t true, even when the technology is demonstrably superior along all technical dimensions (see the story of the 56k modem, for example).

The example yesterday came from a firm with a bunch of bioremediation technologies. One of them sequesters hazardous waste, and it apparently does it more cheaply and more effectively than the current technology. The potential market is very big, and they are in negotiations with a couple of major firms to buy the product. The problem for them is that everyone knows that the current technology works. Why take a chance on something new, especially if there are major downside risks if the new technology doesn’t work as advertised? How can you demonstrate that your new technology will work when it hasn’t been used in this exact application or on this scale before? It’s a big problem.

To break these existing bonds, you not only have to be better, you have to get people comfortable enough with your innovation that they are willing to abandon what they’re currently using – you have to get them to unconnect from something else before they’ll connect with you.

I think that entrepreneurs would benefit greatly from thinking about building a network. To me, the most interesting questions for these start-ups are: how will you link in to the value network? and who is your competition and how will you get people to unconnect from them? If I were investing my own money, I’d want good answers to both of these questions before I signed a cheque.

(Picture from flickr/Eole under a Creative Commons License)

1 Comment

Financing Innovation: Report from the AAAI Conference

Posted by Tim in business models, innovation on 19 February 2010

We keep talking about how it’s not enough to just have good ideas, we have to execute them to turn them into innovations. A lot of good ideas can be tested on a small scale to see if they’ll work, but many ideas need a fair bit of cash to execute. If you work in a big company, there should be some kind of process in place for selecting and executing ideas. If you’re an entrepreneur, you need to find the money yourself. I’ve spend the past three days at the Australian Association of Angel Investors (AAAI) National Conference 2010 in Adelaide, learning about innovation finance from the side of the people with the cash.

As with many important ideas about innovation, Schumpeter was the first to really draw attention to the critical connection between entrepreneurial idea execution and the importance of finance. The importance of that connection has only increased since he first made it in the early 20th century. Angel Investors are a key part of the finance ecosystem as they are the most common providers of seed funding. So the work with people that have great ideas, but often not a whole lot else. The venture capital funding doesn’t usually come into play until the idea is more developed.

Here are some of the things that I’ve learned while listening to talks at the conference:

The finance people talk about ‘innovation’ the same way that we talk about ‘invention’ here, and we’re referencing the same thing – an idea that hasn’t been executed. As Dan Mothersill put it: “The net sum value of a killer idea is zero.”
The bulk of the Angel investment in the US, Europe and Australia is going into biotechnology, software and medical devices. Cleantech and other energy related ideas have been the fastest growing sector over the past year or so. This is interesting because other stats that were discussed yesterday suggest that most successful start-ups are not reliant on Intellectual Property rights as a key part of their business model, but most of the money is going to industries with strong IP regimes (with the exception of software). I wonder if this reveals a problem in the screening process?
Some interesting stats: according to Angelsoft, which compiles data from around the world on over 20,000 idea proposals per year, this is how many of those were evaluated and funded in 2009:

That’s part of why I’m wondering about the screening process. On the other hand, Angel investors that screen rigourously make a much higher return than those with less process (and the good processes are checklist driven!). The consensus is that about 50% of Angel investments result in all the money being lost, about 40% break even, and the whole game is worthwhile because of the payoffs from the other 10%.
The vast majority of Angel investments exit and make money once the start-up is bought out. Initial Public Offerings of stock continue to be pretty much non-existent (13 in the US last year!).
There appears to be a strong move towards collaborative investing. AAAI primarily represents Angel networks. They share the effort on evaluating ideas, and if the idea gets through all of the due diligence, then several members of the network will end up putting in money. Related to this, many of the conference participants are reporting that VC funds have been moving away from seed funding in recent years. The Angel networks end up filling this gap. My suspicion is that there is definitely a network analysis story in here. I bet that there are structural differences between the collaborative and investment networks of successful Angel networks compared to those of less successful ones.
Sue Preston from CalCEF Clean Energy Angel Fund in the US and Nick McNaughton from Blue Cove Ventures in Australia both said that M&A interest in start-ups increased dramatically in December after over a year of being essentially dead in both countries. Others reported similar observations – this seems to be an interesting signal about the current state of the economy.
McNaughton also discussed innovation in China and suggested that Angel investors are not paying enough attention to Asia. On his recent travels there he discovered that there are over 240 companies working on making electric cars in China. This is consistent with research that I’ve done in the area as well – the idea that the Asian economies are primarily driven by imitation rather than innovation is about 10 years out of date. We need to take this more seriously.
When Eric Schmidt from Google spoke at TED last week, he gave everyone in the audience a free Nexus One smart phone. When Alan Noble from Google Australia spoke here, he gave all of us a free look at a Nexus One. Unfair!

The conference has been quite interesting, and I’ve learned a lot. I also have some thoughts on how entrepreneurs link their ideas into the economic network, but I’ll save those for another post. In the meantime, I think it’s sufficient to reflect on the critical importance of finance to innovation. It’s an idea that we probably haven’t discussed enough here, but I definitely aim to give it more thought!

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