Why companies must incubate

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As part of our ongoing series examining the ecosystem necessary to bring technology to market, we asked Jason Flick, Co-founder and President of You i Labs and President and CEO of Flick Software, to share some of his insights. This is the third of his commentaries and we welcome your feedback.

By Jason Flick

Over the past couple of years, incubators inspired by organizations such as Y Combinator and TechStars (see TechStars harnesses the power of mentorship) have taken the limelight and become hotbeds for angel investment and innovation. Montreal alone has seen at least six new incubators created so far in 2011. It is being done and it makes sense. In contrast, large enterprises often invest thousands of times more in R&D than the typical web or mobile startup needs to get to market, with questionable results.

Nokia could have had 5,000 startups for the price of 19,000 R&D employees. Its total R&D budget was $7.8 billion in 2010, more than Google’s or IBM’s. Nokia’s output for that R&D spending has been “visibly disappointing,” read a recent story from Businessweek. Nokia is losing significant market share despite $23 billion invested in a smartphone platform that should be in its prime now that smartphones are outselling PCs. This is but one example of a huge R&D expenditure that has offered a poor return. There must be a better way for an established enterprise to develop and bring new technology to market, but what is it?

The answer is incubation. Let’s explore it from the perspective of three considerations that must be addressed to provide a win-win for all involved:

1) Where do you want to innovate and how are you going to enable this new entity to efficiently innovate for you?

Internal R&D by a large organization is excellent at red ocean innovation, where competitors crowd the market and wage fierce battles on features. Startups allow you to embrace a blue ocean where there are few if any competitors. This strategy provides opportunities which often have higher profit margins and larger growth opportunities. Yellow Tail Wine is the stereotypical example of this type of performance; it went after an unsophisticated beer-drinking market with wine and was quite successful. To succeed, you must be able to visualize the end result without prejudice and imagine new ways to bring your product to market faster.

When we look at our own experience with YOU i Labs, it would have been great if it had been incubated by Nuance, a company that is a leader in licensing input technologies. With its structure, tools and market access, it would have cut YOU i Labs’ cost and time to market in half.

2) Operations relationship – three ways we’ve seen companies successfully incubate

Hands-off

This is the most common approach still being used today by large enterprises, where they have a small team with a fund that invests in companies that they feel could increase their market share. This typically involves investing in a company you know is focusing on a challenge that you or your customers need solved. This brings to mind Intel Capital, Samsung Ventures and Qualcomm Ventures.

Hands-on

You hire the staff into a shell in your offices and feed them weekly updates on how and where they need to take their product. This is still a completely separate entity on paper and the individuals are incented upon success, but they would feel very much part of the day-to-day operations of the patron company. In the most extreme cases, it is outsourced product development in an area where there is limited internal expertise. This enables the company to hire top talent into an environment with a faster development cycle.

Mentoring

The third option is a hybrid in which your organization creates a formal framework for startup innovation. This framework lays out how your company creates an incubator and establishes some minimum guidelines for one-, two- and three-year goals, but the startup entity runs completely independent from a day-to-day perspective. It has limited governance around what it can do with IP and who it can do business with.

As the patron, you have to consider how close you should bring this fledgling to your organization. It has to be separate or it can’t be dynamic and adaptive, but close enough to lever your resources and institutional knowledge. As the startup, you have to consider how the incubation agreement is structured. The patron company is providing you with money, information, tools and support. What are you providing in return? An agreement that is fair and equitable is key to everyone’s success.

3) Establishing the framework

True blue ocean innovation is very difficult inside an established organization. As I said earlier, fresh thinking free of prejudice is crucial. If the entrenched culture, biases and assumptions of the patron organization has too much influence on the new venture, it will be all but impossible to achieve true blue ocean innovation. What often happens is that profitable products end up accelerated to their end of life before their full commercial potential is realized.

That’s why it is important to have a framework which is structured very much like a formal incubator, with a separate physical location. There must also be a clear roadmap in place to determine:

  • How many startups can be supported at any one time
  • How capital and resources will be deployed
  • What the exit strategy will be
  • The return that will be paid back to the patron company
  • What kind of governance structure will be put in place

Some of this can be gleaned from existing incubators with a roster of successful graduates, but much of it needs to be tailored to the specific objectives of the patron company.

Final assumptions

There is seldom a correlation between what a company invests in R&D and its future success in terms of revenue. Startups are famous for having successful technology R&D because they can iterate and adapt so quickly and tend to be closer to the ground – e.g. the customer. Rather than invest billions in internal R&D, many of our large technology enterprises may find their money better spent if they put a percentage into incubating startups. The most effective way to support this kind of activity is to physically remove that startup from the prevailing culture and provide it with some degree of autonomy. This is the best way to create a win-win for both the burgeoning offspring and the diligent parent.

Jason Flick is co-founder and president of YOU i Labs and Flick Software, a successful serial entrepreneur and product visionary. Jason has founded half a dozen companies in the past 18 years and is advisor and executive to nearly a dozen software companies. He is passionate about the disruption mobility has created and how businesses can leverage it.

/// COMMENTS

2 Comments »
  • Ix

    May 31, 2012 4:19 pm

    Interesting read.

    While I emphatically support the incubator as a path to innovation, I disagree with quite a few of your assumptions about the measurable value of R&D. You claim that “There is seldom a correlation between what a company invests in R&D and its future success in terms of revenue.” In fact, many studies have found the opposite, for example: http://scripts.abe.kth.se/cesis/documents/WP156.pdf.

    While this study is focused on Swedish companies, it finds pretty compelling arguments for the direct relationship between R&D investment and revenue.

  • Jason Flick

    May 31, 2012 4:51 pm

    I don’t disagree that companies must invest in R&D, but the point I was making and I should have clarified this a bit better, was that the fortune 500 (huge companies) are incapable of delivering huge value for there R&D. The report you mention reviews 1700 companies in one country. Many of these 100′s of employees not 100′s of thousands. These are the ideal companies to build innovative products through R&D.

    Jason

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