Risk, the most valuable currency between startups and the industry

Tomorrow, I’ll be presenting a keynote titled “Trading Risk, the Most Valuable Currency Between Startups and the Industry” for the CEA at the LETI Days event. The main points of this discussion will be on the positive nature of risk for businesses, the cultural gap that French (and Europeans) have regarding dealing with risks, and on how to strategically game the innovation rules.

Innovation pipelines are broken

One of the key tools that I’ll try to describe is how to use what I call a Reverse Pipeline logic.

The way you’ve been trained in any business context is to manage innovation with a typical Go / No Go Pipeline logic. In a nutshell, you start with as many ideas as possible to develop a new solution for your market, then you select the best ones, you reinforce them further, select the best ones again… Until you only have three prototypes to present to your board, which depending on the feng shui of the meeting room, will select one or another and green-light it to the market.

Merkapt - Go no go pipeline.jpg
The classical go / no-go innovation pipeline.

This is the worst possible way to innovate.

I mean, if you want to push incremental innovation to the market, of course, it will do the job. More or less. But eventually, you are just inbreeding your own stale ideas, over and over again. This seems safe, but this is just lazy.

The problem with the go / no go pipeline, is very evident: because it’s designed to minimize risk taking, it doesn’t push you out of your comfort zone. If you stay in your comfort zone, you won’t uncover anything new about your market (or any other market for that matter).

Reversing the pipe

Now, granted that there’s no magic methodology, different heuristics exist. One of them that served me well for many years, with numerous customers in various industries, was building Reverse Pipelines:

Merkapt - Reverse pipeline.jpg
Reverse-pipelining innovation.

The overall process is as follows:

  • Pick a few core ideas. Five is plenty enough. Ideally, they translate your strategic drivers, best practices from a subsidiary nimbler than you, or even, advanced projects from key competitors.
  • Build two projects for each idea (a low cost and a premium version; a domestic project, and an overseas one; etc).
  • Immediately prototype one out of two projects, and while you build them, refine the other scenarios and add more versions (from a low-cost model to freemium, sponsorship, micro-revenues, product as a service, etc).
  • Push on and expand your portfolio of projects with each prototype iteration, the soft cap being around 100 project scenarios, 10 active prototypes, and eventually a first product.

This way of pipelining may seem daunting, but it’s rather quite simple to reach. It obviously needs some commitment and resources over a 2-3 year period. And as we’ll see further, startups can help you fuel that.

The core virtue of this reverse pipeline, is that it forces you from the get go to take risks (immediately prototyping), learn from it, take more risks in a more educated way, recycle, expand and improve. Your team will quickly learn to push their comfort level to a new  « acceptable level of risk » and build a critical mass of opportunities:

Merkapt - Building critical mass
Investing in risk to generate market knowledge.

With enough risk, options appear

That will serve you well because innovation has an important level of randomness (you can call it serendipity if you feel more reassured by that). People who try to win every time, don’t make money. The trick is to bet as low as possible, as many times as possible, to maximize the payoff opportunities.

In investment terms, it’s call « Optionality ».

Merkapt - Portfolio critical mass
Building optionality through critical mass.

Building optionality doesn’t come as a natural thing, and it’s not taught in your typical executive MBA ever. 

Gaming the system with startups

Finally, this tool should help you also connect the risk-adverse culture of your industry, to the mandatory risk-taking purpose of startups. The big pharmas have more or less invented sub-contracting risk to a portfolio of partners. But, in 2015, startups are everywhere. Barriers to entry to any market have been crushed to the ground. It is probably already quite easy to duplicate this system in your own field:

Merkapt - Industry trading risk with startuos.jpg
Playing with different business cultures to innovate.

And, if you want to reboot your innovator’s DNA, make sure that some of these startups are run by your own intrapreneurs.

Hope that helped shed some light on a few counter-intuitive notions about risk in innovation. You can find all the slides from this public keynote here:

 

Author: Philippe

Philippe has been training 200-300 startups a year since 2007, consulted for dozens of multinationals on rupture innovation or corporate incubation, and was directly involved in more than 150 startups building their market fit and scaling up their business. He also teaches business model innovation in key MBA programs whether they are in Paris or Shanghai. And since 2017, Philippe is now living in Amsterdam, one of the best European business hub around.

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