Agile Business Model Innovation: Because No One Can Pick Winners

We’ve coached over a thousand startups and large company teams working to create new products based on innovative business models. The number one mistake they making is simply recognizing that when it comes to innovation, no one can pick winners.

The data is overwhelming:

• Only 12% of venture capital funds outperform the market (1)
• Just 7% of angel investments account for 75% of the returns (2)
• YCombinator, perhaps the top Silicon Valley accelerator, made 940 investments to get 8 $1b valuation startups – a 0.009 “unicorn” yield (3)

Innovation efforts don’t fail because of stupidity. They fail because of math. Even Steve Jobs couldn’t pick winners. After the successful Apple II, he sold only 50,000 Apple IIIs and roughly 100,000 Lisa’s. That’s at a time when over 1.3 million PCs were being sold per year. The original Macintosh sold 320,000 units in 1984 against 2 million PCs and Mac sales promptly went down to 200,000 units in 1985. NeXT sold about 50,000 computers in a market where 80 million PCs were being sold each year. Pixar was an unsuccessful hardware company, then a somewhat successful software company, and finally, a very successful movie company. Even for a genius, innovation is hard. (The One Device has a more nuanced view of Job’s prodigious talents while making us remember the iPod Hi-Fi, ROKR phone, and long, twisty road to the iPhone.)

We all have to deal with the fact that when it comes to creating the truly innovative new business models companies need in order to grow, no one can pick winners. Venture capitalists can’t. Entrepreneurs can’t. Corporate leaders can’t. And yet, based on the way almost every large company I’ve encountered innovates, you would think they have special knowledge none of the rest of us have. Examples include:

• Silicon Valley tourism – bringing executives to “learn from the best” and “experience the startup vibe”
• Idea competitions – having a committee of experts pick “winning” ideas for further development
• Lean Startup training for executives
• Expensive incubator spaces
• Mentoring startups
• Investing in startups (corporate venture capital)

If you work at a large company, it’s likely that your company has versions of all of these programs and you’ve seen them fail to deliver new, scalable business models to market year after year. That’s because none of them radically increases the business model innovation opportunities tested.

If 7% of angel investments account for 75% of returns, failure rates are clearly over 90%. That means companies need to be testing dozens or hundreds of opportunities simultaneously for winners to emerge. Traditional innovation programs aren’t designed do that. Traditional Product Development, Agile Product Development, and Design Thinking don’t focus on scaling testing either. Not surprisingly, the senior managers we talk to see innovation programs as a “tax,” because they see very, very few winners emerge from corporate innovation programs.

The good news is that we’re at the beginning of a paradigm shift to what we call Agile Business Model Innovation (AgileBMI). The goal of AgileBMI is to create a repeatable, scalable internal business process that can test dozens to thousands of business model innovations simultaneously in a fast, low cost, robust, measurable, and corporate-friendly way. And, a way that spans from ideation to delivering revenue and profit, which is the actual goal. AgileBMI is the basis of what most companies are looking for to drive a Digital Transformation that updates their core product development and sales/marketing processes.

AgileBMI takes the lessons of:

• Agile Product Development for working in small teams at high velocity
• Design Thinking‘s focus on delivering value to customers as the core of any successful business
• Steve Blank’s Lean LaunchPad for what it teaches about searching for repeatable, scalable business models
• Henry Chesbrough’s work on Open Innovation for leveraging startups and partners to test quickly and inexpensively
• Our experience pioneering high speed, highly efficient lean innovation inside companies such as Eli Lilly with Chorus (1/3 the time and 1/6th the cost of traditional product development)
• Our experience building startups worth over $1 billion
• Our work on Validation-Driven Strategy (more to come here)

When I took over the Lester Center for Entrepreneurship at UC Berkeley in 2011, we had 12 teams in an incubator. That generated a few successes for sure. Within three years, we were running accelerators for over 250 teams per year spanning dozens of countries using a repeatable, scalable process without increasing our staff. And, because of math, we had many more successful startups. Read Blowing up the Business Plan at U.C. Berkeley’s Haas School of Business for more on how, by learning from brilliant entrepreneurs like Steve Blank, we shifted the paradigm and changed the culture at UC Berkeley in a few short years so we know rapid transformation is possible. Now we are working with smart companies like Bosch who see the future. Bosch is scaling their innovation ecosystem to over 100 internal innovation teams running in parallel each year.

Like Agile Product Development, there is no one AgileBMI process that’s “right.” It’s about staying true to a set of core principles that recognize:

• No one can pick winners: true business model innovation has a failure rate of over 90%. Testing lots of opportunities matters.
• Any viable innovation process has to span from ideation to scaling revenue in order to deliver the desired result – new, scalable, profitable lines of business.
• Strategic alignment and political viability are critical for success. Lean Startup is OK for startups, but not right for corporations.
• Training people to be more innovative doesn’t work; putting them in a situation where they can continuously learn how to get better at delivering results, that is products based on new business models to market, does.
• Corporate processes have to be repeatable, scalable, teachable, measurable and, most importantly, adaptable.
• Culture change is the result of process and incentive changes.

We will be writing here about what we’ve learned over the past six years scaling innovation ecosystems 20x+ inside large organizations and how the principles and practice of Agile Business Model Innovation are evolving. We are seeing the paradigm shift and that’s great news for corporate innovation leaders.

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