On June 5th, at SAPPHIRE NOW in Orlando, the SAP Startup Focus program will be hosting a Forum around the theme of ‘Think Like A Startup’. Participating in the Forum keynote will be Paul Walborsky (@PaulWalborsky), CEO of well-known research, blogging and event firm Gigaom, and Josh Lerner (@JoshLerner), Jacob H. Schiff Professor of Investment Banking and Chair of Entrepreneurial Management at Harvard Business School.
**5/30 UPDATE: Joining the ‘Think Like A Startup’ keynote panel will be Dr. h.c. Hasso Plattner, Chairman of the Supervisory Board, SAP. With his unique point of view as both a founder and a leader at a large enterprise, Dr. Plattner will certainly be offering highly insightful commentary on how to leverage the best of both worlds.
In an interview, I spoke with Mr.Walborsky and Prof. Lerner to get a preview of the session.
KM: We’re excited about having both of you at our keynote. My first question is – do you believe that at a very fundamental level startups really do dance to the beat of a different drummer compared to the rest of the business world? Is it an adaptation to survive or is it just selection bias?
Mr. Walborsky: Startup entrepreneurs often lack experience in industries they are trying to disrupt, but they possess a mindset of innovation and intent to disrupt the status quo. The probability of success for a new startup is so low that entrepreneurs must rely on a powerful belief system and passion in order to take on those odds. Many succeed in spite of little capital.
Prof. Lerner: For most of past three decades, investments made by the entire venture sector totaled less than the research-and-development and capital expenditure budgets of large, individual companies such as IBM, General Motors, or Merck. So it would be reasonable to be skeptical of whether the start-up model represents an alternative model of organizing innovation relative to the corporate R&D lab.
But when we look the impact of venture investing and the start-ups they back on wealth, jobs, and innovation, we see that despite their modest size, these efforts have had an unmistakable and substantial effect on the U.S. economy. To be sure, these entities have had relatively modest impact on certain industries dominated by mature companies. But contrast those industries with highly innovative ones, and the picture looks completely different.
KM: Do software startups and large software corporations differ from startups and corporations in other industries? Say if we were to compare Software as an industry with Pharma, Energy or Telecom?
Prof. Lerner: Clearly, the nature of innovation varies by industry. The amount of capital deployed, the time until the development of the new product and service, and the extent to which start-ups can “go it alone” all vary by industry. Thus, it is not surprising that the relative contribution of start-ups varies by industry. Nonetheless, there are certain principles that characterize effective start-up management across industries.
Mr. Walborsky: The ability to achieve speed to market varies across industries. With software there’s a very low barrier to entry; you can build applications that can be rolled out to the market and tested quickly. This rapid speed to market in software development often produces a rapid pace of innovation.
In Pharma, it takes about 12 years for a new drug to make it from the lab to your medicine cabinet. Only 5 in 5,000 drugs in preclinical testing make it to human testing. On average, 1 of those 5 are approved for use.
There is a narrow window of opportunity for innovation, and if you’re too slow to market you might advantage your competitors. Speed to market may dictate a company’s success or failure.
KM: Arie DeGeus wrote about the well-known study at Shell where they discovered that “A full one-third of the Fortune 500 industrials listed in 1970 had vanished by 1983”. Does innovation really offer a route to long-term survival or is extinction inevitable and innovation a lost cause to begin with?
Mr. Walborsky: All industries and companies need to mutate to evolve in the same way that humans and every species need to evolve to survive. Mutation in business is innovation.
Sometimes large companies are so focused on their business model and unwilling to change and they become complacent. They fail to innovate.
If your company fails to mutate you will become extinct. Blockbuster Video did not mutate. They failed to disrupt their current business. Netflix mutated their model, creating a DVD mail distribution channel. Netflix later mutated to a streaming of original content company.
Prof. Lerner: Over the last century, and even today, the lion’s share of R&D spending took place, and continues to take place, in industrial laboratories, not in startups or with entrepreneurs. The basic pattern has been more of stasis than change: research today, as during the 20th century, is still dominated by the very largest of firms. But beginning in the 1970s, and accelerating in recent years, there has been dissatisfaction with the “bang for the buck” that corporations have enjoyed from their research facilities. Firms have responded by changing the way research laboratories were organized and managed. Many corporations have emphasized divisional laboratories and alliances in favor of central facilities. But in many cases, these efforts have mere shifted the locus of the problem rather than introducing fundamental reforms. I would argue that there is a need for a more fundamental rethink, incorporating the best of the corporate and the start-up model.
KM: If we were to turn the tables and have a session on ‘Think like an Enterprise’ at a startup conference – what would be the best advice you would offer a startup on what they can learn from much larger companies?
Prof. Lerner: Just as corporations can learn from start-ups, so the reverse can take place. One example is relates to the duration of venture financing. Since the early days, venture funds have been structured as being eight-to-ten years in length, with provisions for one or more one-to-two year extensions. Venture capitalists typically have five years in which to invest the capital, and then are expected to use the remaining period to harvest their investments.
The uniformity of these rules is puzzling. Start-ups differ tremendously in their investment periods: from quick-hit social media businesses to long-gestating biotechnology projects. It is not surprising that the venture funds have increasingly focused on sectors such as software and social networking, which are characterized by fast innovation “clock speeds.” But this may leave many promising start-ups unfunded. Certainly, within corporate research laboratories, great diversity across industries exists in terms of the typical project length. There are many reasons for revisiting the constancy of the venture project lives!
Mr. Walborsky: Entrepreneurs excel at disruption and innovation but when it comes to building a company, they can be blinded by their initial successes. The critical question always follows: does the team have the capacity to cross the chasm from an entrepreneurial mindset to scaling a large, profitable business?
Where enterprise companies excel is in discovering profitable new business models and leveraging their core capabilities and value chains for greater impact.
Suggestions for blending the two (models) is one of the outcomes of our session.
KM: Thank you for taking the time to answer these questions. I look forward to seeing both you in Orlando.
To add this session to your SAPPHIRE NOW agenda, click here. To learn more about the startup activities at SAPPHIRE NOW, view the schedule or read our blog. This interview was conducted via email and responses have only been lightly edited for style, not for content.
Kaustav Mitra ( @KaustavMitra) is the Global Vice-President and Program Lead for the SAP Startup Focus Program. Follow the program on Twitter, on Facebook and on LinkedIn. This blog was originally published at startups.saphana.com.