1) THE INNOVATION MANDATE

Independent of acquisition or not, enterprise leaders want to ensure they have a clear innovation purpose for their organization. Some companies let their teams experiment randomly because they believe in magical random ideas. But that thinking failed with nearly 100%. The Innovation Mandate aims to help the leaders of innovation teams understand the significance, scope, and magnitude of the innovation effort, its expected long-term results, and how they can be achieved. Moreover, successful innovation should be in the context of the company’s long-term development strategy, values, markets, and ability to deliver. Those innovations must be defined by their Significance, Scope, and Magnitude.

Significance

The significance of innovation for the company.  I.e., We experience a massive shift in the XYZ industry and need to…
Or we see an opportunity in the rising TBD-Market and want to play a leading role there – and so forth.

Scope

The SCOPE of the innovation effort. I.e., we expect our innovation teams to create a solution and bring that solution successfully to its designated markets. Our existing resources are unavailable to bring new, possibly competing products into our market. Or our team is fully utilized with our existing business and won’t be able to be entirely focused on disruptive innovation.

Magnitude

The MAGNITUDE of innovation
The new solution should bring € 8 Billion in the next seven years and be able to replace our declining 5 Billion OMG Business. Or, the new solution should generate € 1 Billion in new business and ensure our strong market leader position in this market segment. In any company north of a billion in revenue, having a new product with a 50 Million potential would not make a difference – and the innovation team or startup needs to know.

TO-DO:
A so-called >>CEO Mandate for Innovation<< needs to be documented independently of any innovation effort. The bigger the enterprise, the more relevant that mandate is. It explains in detail the Significance, Scope, and Magnitude of the expected innovation engagement. This mandate must also be accompanied by an innovation strategy to get there. Innovation teams struggle with their effort without it, and investing in startups without a clear mandate almost never gets any positive outcome. In one of the following blog posts, we will discuss those mandates in more detail.

ORGANIZATIONAL CONSIDERATIONS

The organizational considerations are very similar when enterprises acquire startups to innovate or build from within your organization.

1. General Integration
   Your existing organization is highly optimized for what you and your team have been doing for years. Employee utilization of all your thousands of employees is above 80%, and there is no room to do something entirely new – like an innovation. When Google acquired YouTube, it was wise NOT to integrate the company until it was big enough to have found its structure and culture. Today everybody is happy that they never did.
2. Innovation-Specific Sales
   Innovation needs to follow a specific audience pattern of early adopters to succeed. Also, initial orders are small, and your existing sales force is tremendous, so they have no room for extras. Moreover, they are unprepared to deal with early adopter customers within your existing customer base. At Tesla, the early adopters were not clearly defined until the first cars were ordered, almost exclusively by venture capitalists in Silicon Valley.
3. Innovation Financing
   Innovation is all about growth financing. Growing by 100% and ramping after a few years from 100 Million to 200 Million is a challenge for every CFO. The innovation team needs to manage their own financing with the knowledge of all the unique aspects. Nespresso was a new era in the coffee business and a financial business model novelty within Nestle.
4. Innovation Marketing
   Marketing innovative solutions are profoundly different than conventional enterprise marketing. The team must understand how to evangelize a new solution and keep customer behavior changes at the forefront.  They must understand advocacy development to bring those solutions to the market successfully. Also, the innovation team needs to deliver a different marketing concept that doesn’t need to align with the extensive brand marketing. Remember, “The biggest advertising company in the world never placed an ad – Google.” Tesla, Vorwerk (Thermomix), and many others use unique direct marketing techniques far from advertising and promotion. Mostly marketing is embedded in the whole business model.

The deeper we look into those aspects, the clearer it becomes that integrating an innovative product into the conventional organization for production, sales, marketing, and finance is a considerable risk and a big mistake. Innovation cannot grow inside a massive and highly optimized organization with rules and regulations that do not allow experimentation and ignore those rules and processes. On the contrary, an innovative team NEEDS to change rules, build new processes, and find new ways into markets to expand its innovative footprint.

TO-DO:
Take Innovation as a holistic process that starts before ideas are created and finishes when the innovation is successful in its designated market. Think through all aspects of organizational development, team skills and talents, team selection and compensation, culture and motivation – BEFORE you make any decision on how this will be happening.

When enterprises acquire startups to get to innovation

COMPANY & TEAM QUALITY ASSESSMENT

There are a few strategic questions to ask the founders before even considering investing time to go into more details. Professional Venture Capital firms ask those questions one way or the other before even letting them pitch.

1. How is your leadership team structured?
   Make sure it is a diverse team of subject matter experts, business minds, and marketing creatives who all can think boldly and execute fast.
2. Why did you start? What drove you to do this company?
   Make sure it is more than an idea that a few angels possibly found. Ensure there is some subject matter expertise behind it. Moreover, ideally, the founders experienced a problem they are now solving.
3. In what way are you genuinely unique, globally
   Understanding their innovative character or at least the uniqueness of their solution. Know what the competition looks like and what the difference is.
4. Are all founders fully invested in the company
   Solopreneurs are a show stopper for any professional investor. They would never get funded and may see an acquisition as a nice exit. But they are still a single founder organization that may not be stable or holds for the future.

Acquisition specific questions

Ask the founders:

1. Are you willing to sell?
   If your business concept is bold enough to bring it to Unicorn status, why not do it yourself?
   Why should we not do it ourselves if you need a partner like us?
2. Do you understand enterprises?
   We are successful by streamlining organizations to the max. Perfect processes, no risk, no change. When being integrated into our enterprise, what will you do to prevent being absorbed by our structure of rules and regulations?
3. Do you think large-scale innovation?
   Will you and your team be able to build a billion $ operation in parallel to our existing organization?
   And if yes, what is your plan to get there?

99.9% of enterprise innovation attempts fail because nobody took the time to think through all its aspects – and the invested millions and even billions did not help.

TO-DO:
Make your detailed list of interview questions. Remember the Significance, Scope, and Magnitude of what you expect from the team. Hire a team you can see building a billion €/$  business operation.

Summary

When enterprises acquire startups to get to innovation, an extensive goal development, planning, and strategy how to get there is mission critical. Because of the significance innovation has for the company, the scope of organizational development, and the magnitude of capital and time needed to be successful, the CEO is the only person who can decide to engage in any form of innovation. When buying a startup, remember what it takes to bring a young team with crazy ideas that nobody has tried before to succeed. If not exquisite investors working with them to help them to get all the way to the top, it will be you who needs to take over that role. When acquiring a startup, enterprise leaders must first understand the Significance, Scope, and Magnitude of their innovation effort. Then making professional considerations about the organizational structure and guidance of those teams who usually never saw an enterprise from the inside. Only then diving into the sea of startup acquisition makes even sense. At that point, the question of whether it even makes sense to buy and integrate a startup. So far, more than 1,000  startup acquisitions have failed, and not a single startup helped an enterprise get to innovation adds to those considerations.

Alternative

The alternative of building such a startup inside the organization is much more promising. Considering all the above aspects, you will find people familiar with your business, particularly interns and people who have been with the company for two or so years. You will not be able to win or afford your top teams for innovation, and you will need them to keep your current business alive. In our own experience, the most effective way is to assemble an internal Innovation Dream Team that is 100% dedicated to the job and stays there for the next few years. With the proper selection, assembly and onboarding method, motivational aspects, and culture development, they will stay and make the impossible a reality.

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