Stop Chasing Unicorns
- Posted by Dan Toma
- On 20/09/2021
Ever since the whole frenzy with corporate innovation started back in 2010 countless millions have been spent by corporations around the world on a variety of innovation-driving vehicles. Some companies were driven by the fear of disruption, others were driven by the pursuit of higher return multipliers. Regardless of the reason, a significant group of companies are disappointed with the results of their investments.
The root cause of the frustration with the innovation investments’ return has to do with the expectations corporate leaders have. Somehow, someone, at one point, sold corporate leaders the idea that innovation equals exponential return multiples. And in the name of this creed, anything that was below an exponential return multiple has been (and unfortunately still is) tossed aside.
But let’s pause here for a second and see how Venture Capitalists deal with the pursuit of exponential returns. At the end of the day investing in innovation is their day job as they don’t have a legacy business side gig that pays for the investment in innovation – every investment needs to count.
If you look closer at the performance of a VC fund you will be surprised to learn that about 65% of the investment return 1 time or below 1 time the initial investment. In the Innovation Accounting book, we call these investments ‘Dead Horse’. About 13% of the investments of a VC fund are what we call ‘Faster Horse’, having a return multiple of no more than 4x. About 23% of the investments however return anything from 5x all the way to 20x – our ‘Work Horses’. And only 1.4% of the investments are ‘Unicorns’ with a multiple above 20x – these are the Airbnbs investments, the UiPaths, the Ubers or the Instagrams.
So taking it back to the enterprise world, if a VC investor knows she’s likely to hit a Unicorn less than 2 cases out of 100 investments what makes corporate leaders think they can do better. Chasing unicorns in a corporate setting is not the best way to go about spending the innovation budget – on the contrary, it might be the worst.
To begin with, unlike the VCs a large company is constrained by a core business, by investors and by a legacy. The enterprise does not have the flexibility in investing in various industries like a VC does. Therefore the chances of finding a unicorn drop even lower.
Second of all, VCs invest in startup teams that work full time on one single idea. In the corporate world things are a bit different. As much as we hate to admit it, fully dedicated teams that don’t have a core business assigned to juggle with on top of the innovation project are more an exception than the norm. Again this will take a toll on the likelihood of finding a unicorn.
Furthermore, the people that work in startups have a different mindset (and motivation) than the ones in a corporate innovation team. Startups are by design risky endeavours and it takes a certain type of mindset to live with failure every day or with the prospect of losing your house in the next 3 months. Enterprise employees chose their career path because of low tolerance to risk – what makes corporate leaders think that they will switch this off for that one project?!? This again will lower the chances of finding a unicorn.
So instead of pursuing the lofty goal of only investing in high return multiple ideas, corporate leaders need to take a more pragmatic stance. The context they are playing in, the capabilities and the resources they have are way better suited for chasing Work Horses. A Unicorn’s performance can be replicated by a handful of Work Horses – coming again to highlight that innovation is a number’s game. Furthermore, Work Horses are as good at protecting a company from disruption as Unicorns are, if not better.
This piece shouldn’t be interpreted as ‘don’t innovate, you are not good at it’ this should be taken as ‘be mindful of what your company is actually suited to deliver and align your expectations. Be pragmatic about innovation not romantic.’.