Nature, Nurture and the Environment of Innovation
We know that great innovations can be born in garages and dorm rooms, and in corporate R&D programs, universities, labs and innovation hubs. And they emerge from cities famed for their creativity as well as places whose largest resource is ingenuity fueled by need. Turning ideas, wherever they come from, into new products, services, processes, enterprises and even new industries requires innovative leadership, strong teams, and both technical and financial support.
We look at a handful of those factors from the perspective of advisors who help early-stage businesses make their way on the road to scale and success.
THE CULTURAL ENVIRONMENT
The cultural environment can have a significant impact on whether a fledgling endeavor takes off, and some places seem to be especially hospitable to innovation and entrepreneurship. What are the some of the qualities that foster creativity? What attitudes and support systems can allow business to launch?
Deborah Op den Kamp is a consultant with Spencer Stuart in Silicon Valley. “There are some wonderful things about Silicon Valley that make it uniquely able to create the level of innovation: there’s no badge of disgrace for your company failing, there is a wealthy outflow of capital, you have access to lots of other creative people who can inspire you. All those things create this wonderful blend that makes it possible to innovate here more frequently than maybe happens elsewhere.”
Linda Shore, Managing Partner for Mexico at Odgers Berndtson says, “In Mexico we have a younger generation not averse to risk, the education is getting better, most of our good universities are promoting entrepreneurship, we’ve got government opportunities motivating them, and we also have companies, traditional corporations and VCs willing to take a risk and invest in these startups. 2018 saw several exits and valuations in the hundreds of millions of dollars. That’s a first for Mexico. Entrepreneurs are now becoming angel investors and VCs. International investors, particularly from China, are now looking to Mexico. That’s the environment here.”
A culture that values learning has a distinct advantage, according to Richard Lin, Office Managing Director of Korn Ferry’s Taiwan/Cross Straits Practice. “The Chinese are known, especially in antiquity and classical times, for invention, whether it’s the crossbow or the wheelbarrow or the classic four point compass or paper,” he says. What made the Chinese so innovative? “There’s always been a culture of academic orientation, intellectual pursuit and development. Confucianism emphasized that.”
Dimitri Tsamados, a consultant with Eric Salmon & Partners in Singapore explains, “The first civil service in China implemented a system of exams, following the Confucian tradition, about 2,000 years ago. Education has been extremely important for a long time and all the administrators in China were people who had studied, and so everybody knows it’s important to receive a good education because that’s your way to succeed in life. When it’s been drilled in you for 2,000 years, people take that seriously.”
Shore highlights the innovative influence of necessity. “Emerging economies tend to have high creativity and are less burdened with legacy and infrastructure, which normally are a deterrent to innovation. So, people must solve complex problems with whatever tools they have available. I’ve seen people in Mexico who cannot pay for advanced software and have solved problems by creating highly complex spreadsheets that work better and are more adaptable.”
Emerging economies tend to have high creativity, & are less burdened with legacy and infrastructure, which normally are a deterrent to innovation ... People must solve complex problems with whatever tools they have available.
As an example of the innovative power of necessity, the finalists for the African Innovation Prize for 2018 won with projects that address pressing issues including agriculture, the environment, health, sanitation, and connectivity.
For example, according to the African Innovation Foundation press release, “The Shiriki Hub is a Smart Solar Kiosk, powered by strong solar panels and equipped with large capacity batteries, Internet of things (IoT) sensors, and a custom designed router, offering device charging, virtual top-ups, and low-cost connectivity. Designed as a business-in-a-box and distributed on a micro-franchise basis, this is an ideal solution for digital connectivity to rural populations and temporal settlements such as refugee camps.”
As reported by Financial Times entrepreneurs in South Africa created a remote pharmacy that works like an ATM, to help relieve some of the pressure on over-burdened health clinics and provide much-needed access to lifesaving medicine. Patients have access to pharmacists via a Skype-like interface, and the kiosk dispenses medicine for several chronic conditions.
Governments have an impact on a region’s ability to innovate, too. According to Pierre Fouques du Parc, Managing Partner for France at Boyden, “If a country isn’t attractive tax-wise, a company is going to pull their engineers and go to locations with low-level taxes. They are going to Ireland, to India, to China.” He says, “It’s not only large conglomerates. A mid-cap company, even a small company can put their R&D wherever they want.”
By many accounts, the U.S. Government’s investments in West Coast research laboratories during WWII, and subsequent programs that encouraged venture capital investment, aided in the success of Silicon Valley as an innovation hub.
In Europe, according to The State of European Tech Survey: 2017, “Europe as a whole demonstrates bullishness about the future of its tech ecosystem.” However the continent is still facing a challenging period for innovation.
“The Science, Research and Innovation Performance of the EU 2018” report indicates that while Europe is a leader in science and a “research powerhouse,” the region does poorly in realizing its innovation potential, with low levels of venture capital, and public R&D expenditures as a share of GDP remaining below 2010 levels. In May 2018 the EU rolled out a plan for regulation and financing to foster innovation in the region.
The investor climate certainly contributes to whether a new business gets the resources and guidance necessary to scale up, and local, national, and global events can impact the availability of resources and access to markets. As reported in The Economist, young, high growth companies are emerging across the US in part because of the wider distribution of support. “Access to risk capital for startups, including through crowdfunding, is no longer limited to the two coasts. Local governments are increasingly supporting training schemes, accelerators and other bits of soft infrastructure that greatly boost startups’ chances of success.” (Gazelles in the heartland: American entrepreneurship is flourishing, if you know where to look. The Economist, Sept. 30 2017)
In emerging markets, sometimes you’re on your own.
Tsamados explains, “An immature startup scene, you can’t turn to the previous generation and ask them ‘how do you scale,’ because the previous generation of entrepreneurs did products, they did industrial goods, they did banking, but technology-driven startups, ecommerce startups and the like really only emerged in the last 20 years, so we don’t have that sort of experience and you’re not supported the way you would be in the US.”
“Even your investors, most of them are recent VCs so they haven’t seen a full cycle, very few of them have taken companies public, and they are discovering, together with you, what it means to go from one market to multiple markets, to go from one product to multiple product lines,” he says.
THE INSIDE STORY
A vibrant internal culture often distinguishes the successful from the unsuccessful organization, so much so that legacy companies invest heavily in recreating startup culture in their own businesses, and fostering qualities of agility, resilience, and experimentation.
“The scale-up and startup businesses which have been successful—they are extremely agile and they are extremely fast,” Pierre Fouques du Parc says. “Agile because usually they have to change their business model. The startups who succeed usually take ten years, and in ten years’ time, they basically have to reinvent themselves a couple of times: reinvent the offering and re-engineer the product and the business model. They are fast because time is their main constraint and their main obstacle. Usually the startup and the scaleup are always fighting against time, which is their worst enemy.”
The scale-up and startup businesses which have been successful—they are extremely agile and they are extremely fast.
Lin recognizes the importance of an internal culture comfortable with constant reinvention, and the risk that entails. “Startups cannot pay lip service, they have to innovate, or they die. The startup companies we work with, they just tend to be much more adventurous. They are risk-embracing, not afraid to make mistakes, and they tend to be more calm in the face of setbacks; they see setbacks not as disasters or anything catastrophic, but learning opportunities—they reflect upon it.”
James Quincy, President and CEO of The Coca-Cola Company said, “If we’re not making mistakes, we’re not trying hard enough.”
Company cultures that embrace risk, failure, and experimentation innovate more and get new products to market faster. Charlie Ang, founding President of The Innovators Institute says, “In the past, failure meant that basically you had a big idea, it didn’t work, we wasted millions of dollars and years. That was the old way of innovation.” He says, “The new way of innovation is something very lean, with very little investment, and it means you are touching the customer at every stage. Basically, any failure in an innovations space actually means a negative experiment. A customer wants this or a customer does not want this. It is just a negative experiment. We are not overly invested in it, it’s just testing; this time it’s positive, this time it’s negative. What happens is that you want to really increase your rate of experimentation.”
Op den Kamp says, “Sometimes you hear that referred to as ‘minimum viable product;’ let’s get something quickly out the door as long as it mostly works so that we can get feedback on it and improve it, rather than invent in a vacuum. Those concepts are great, but you can imagine not every executive in the world is wired that way. So our job is to figure out people who are wired for embracing a level of ambiguity and change and are not only comfortable with that, but embrace it."
Companies also need a culture of openness and curiosity. They need to be able to step outside of their cultural comfort zone and both consider and understand broader markets.
“What I think is the ongoing challenge for Silicon Valley is that this place is isolated from the rest of the world in that we often think that the rest of the world, or even the country, is just like it is here. That is simply not the case,” Op den Kamp says.
“One of the companies that is thinking very actively about what I call the middle of the country is Pandora, the music streaming service. Their biggest competitor is actually terrestrial radio, people listening to the actual radio. And so at Pandora they focus very deeply on how do we reach Americans who don’t live on a coast, how we think about their musical tastes and habits and how we understand who they are,” she says. “They spend a lot of time thinking about music for everyone.”
The new way of innovation is something very lean, with very little investment, and it means you are touching the customer at every stage.
Lin has a similar client experience. “When WeWork came into China, they insisted ‘we want to create a WeWork that is China, that is for China.’ They asked us all these questions about Chinese people, Chinese culture and work habits, Chinese values etc., and constantly asked us ‘if we did this, how would the Chinese view it, how would people perceive this, what’s next?’
Tsamados describes how some international players failed to understand emerging markets before trying to break into them. “It took time for big international players who were coming to emerging markets to really get the pay-on-delivery culture. This is a feature that you see in Russia, China, India, Iran, and Indonesia. These are often low-trust environments, so the idea that you’re going to give money when you buy something before you receive it, sometimes as long as a week before you receive the good, is not natural.”
Companies that do step outside of themselves can achieve great success. Tsamados explains, “In the 90s and early 2000s, Unilever and Johnson & Johnson started coming up with single dose products for emerging markets. That’s what has driven growth, because people in those markets couldn’t really afford to buy a whole tube of toothpaste or a whole bottle of shampoo. With single-use, customers could buy the product for cents instead of dollars, and that was the only way that you could actually start entering the households of people who had never bought your product.”
Building an innovation-friendly culture is often the result of good leadership.
Lin sees great leaders “as having a vision, setting an agenda, creating a mission,” and adds “it’s all about loving what you do, creating that passion and energy. Those are things that are intangible but can drive an organization to new heights.”
There is also a practical side to good leadership. Pierre Fouques du Parc explains that effective leaders are also good communicators. “They need to communicate to external stakeholders, to investors, to future clients, to future prospects.” And for an entrepreneur, it isn’t simple. Sometimes, he says, “They need to communicate on something that does not yet exist, so they communicate on the concept, they communicate on the future, so they need to have very, very strong communication skills, especially if they want to convince investors.”
“They need to communicate a lot internally,” as well. Pierre Fouques du Parc says, “A leader of a startup basically goes to bed every night and doesn’t know if he’s going to be able to pay the salaries next month. But he wakes up and he will tell all his employees that they are going to be the number one in the world in one or two years’ time. So, these leaders need to be extremely resilient, and they need to communicate a really strong ambition to their employees.”
Leaders who listen can inspire and capture fresh thinking from all over their organizations. Shore warns, “When companies use brainstorming techniques they cannot shut ideas down (even bad ideas) and they cannot allow hierarchy to dominate. Brainstorming should not be used to validate the boss’s ideas, but to explore the best ideas.”
She says, “Many great ideas come from people who are working on the day to day and understand the problems that come with it. Collaboration and teamwork are the key. It is very important not to ridicule ideas during any type of brainstorming sessions.” She says, “Good leaders are not only good listeners, but also good at extracting ideas from less extroverted people.”
Shore may be describing one quality of a servant-leader. Lin says, “They tend to be more reflective, they tend to talk a little bit more about their failures rather than their constant successes. I think those that talk about their failures and how they've come out of it are perhaps stronger, faster, better. Or at least more learned. You tend to think this person survives more business cycles, more challenges.”
Projecting empathy and humility is a relatively recent development in organizational leadership. Ang describes leaders moving from what he calls leadership 3.0 to leadership 4.0. He says, “3.0 leaders are basically managers, but this is no longer enough. The 4.0 leaders, they are innovators, they are futurists, they are technologists and they are transformers; they take their companies to the next level.”
He explains, “What was good in the past is no longer good enough. Imagine a Steve Jobs or an Elon Musk. The Global 500 companies, their top leaders need to have that caliber now—a kind of new set of capabilities now which are what typically inventors do, what innovators do. No longer the kind of leader who can just run a big corporation and do it better. But someone who can reinvent a whole industry.”
Op den Kamp says, “I think some of the best founders out there are students of the universe, constantly reading and talking with other CEOs, understanding challenges they faced in the past and really opening themselves up to new ideas and new ways of thinking. It’s a level of openness that I think creates real opportunity to pursue new ideas that keep them from stagnating.”
I think some of the best founders out there are students of the universe ... understanding challenges they faced in the past & really opening themselves up to new ideas & new ways of thinking.
And being open includes being completely open to imagining something completely new. “Use the analogy of Uber,” Ang says. “If someone in the transportation industry—before Uber came about—was thinking 'how can the cloud or how can mobile phones impact what I’m doing?' they would never have thought of Uber, because Uber is not one single technology. Uber is everyone having a mobile phone, having access to GPS, having micropayments. Many technologies are combined together to allow Uber to happen.”
The combinational innovation Ang describes represents what future-facing leaders can do.
For Op den Kamp, “The companies that are future facing tend to have an attitude toward reinvention that enables them to imagine different scenarios. For example, maybe I’ve always been a hardware company and software was an afterthought, but now I’m going to be a software company that licenses my software onto other people’s hardware because that’s the only way to continue to survive. And I’m not going to cry over not being a hardware company anymore, I’m going to embrace the change.”
Anticipating and embracing change is essential to future-facing leadership. Lin explains, “Companies just have to continue to look for what’s next. What’s going to be the next thing that consumers really want? What do they really need? What are they using their devices, their products, their services for?”
He says, “I see companies increasing the rate of innovation all the time, it’s incredible. Software is popping up questions all the time: ‘do you have to send this or do you want to share this,’ anticipating your needs before you even think of them. And a lot of it really is Big Data, collecting that intelligence on a continuous basis.”
Are leaders and organizations prepared for the future? Ang describes four levels of future readiness. “The lowest level is called future-shock. Most organizations and most leaders are at that level. And future shock means that when this disruption happens—it will be a shock—it’s too late to respond. Once they are aware of the disruption threats to their business, or their career, then they are one level up; they are future anxious. And when they are future anxious that’s where there is the knowledge gap. 'Hey, something is going to hit me but I don’t know how to respond.'"
“That anxiety is also a motivator for them to find answers. If they are trying to make decisions based on the new possibility, that means they are future ready. When the future comes they will benefit from it, because they are riding on the right curve. But there are some companies who are the fourth level—this is the highest level—that I call future leading. So, it’s a bit like Elon Musk; electric mobility will happen with or without Tesla, he’s trying to accelerate this future and be the one to make it happen.”
Perhaps an under-celebrated quality of a successful leader is the ability to build a good team.
“There is an important quality in successful entrepreneurs—that they are very good at recruiting,” Pierre Fouques du Parc says. “Hiring still remains the big success factor for a leader. Whether it is a small company or a large company, hiring is a key factor. Successful startups were very good at recruiting the right people, very early. And that is a skill, that ability—when you are a good recruiter when you recruit the right people it’s a skill you can use in any type of company, from any size.”
IT'S ALL ABOUT PEOPLE
As Fouques du Parc suggests, an innovative leader cannot capitalize on a good idea without the right people. Who are they, where are they, and how do startups and early-stage companies attract and retain them?
Shore talks about placing several innovative people into entrepreneurial roles. “They came from very traditional companies. They were paid good salaries, but what moved them was the ability to work in that free environment, to think, to create, where there are no barriers, there were barely any hierarchies. They work as a group. They get a lot of money in stock grants. It’s like combining the best of the traditional world once they are a little more corporate, without limiting their creative side.”
an innovative leader cannot capitalize on a good idea without the right people.
Tsamados describes the need in some countries to import talent. For example, he says, “In Iran, a country of 80 million people, 80% of online transactions happen on the Digikala platform. There’s no point of hiring anybody locally because if they’re not working at Digikala, they’ve never worked on that scale of ecommerce. So companies like Digikala need to look outside of Iran to people who have seen what will be the future for these companies. We rarely saw non-locals being hired by large local companies until only a few years ago. They know they need to pay to get top-notch talent, and they will pay what is required, because otherwise of course they can’t recruit.”
“What we’ve seen over the past five years is a significant injection of foreigners into local startups because we don’t have the expertise in the region and that’s quite interesting, we see a number of Indonesian startups or a number of Singaporean startups that will recruit their chief product officer from Germany, they recruit the CMO from the US, they recruit their CTO very often from the US also because we have too few of them in Asia Pacific.”
Because talent is critical, hiring organizations may have to choose between compromising or leaving a position vacant. Pierre Fouques du Parc describes such a situation. “For one search we are looking for a CTO. We had been looking for months. The client was a company owned by a venture capital firm, and the CEO was still not convinced by our candidates. We found a couple of candidates but they refused. So, we kept searching, on and on because the client is so demanding and he’s not going to hire a candidate who does not match 100%. He preferred to have a vacancy rather than hiring a candidate who is not perfect.”
Stakes are always high. Op den Kamp says, “Often when CEO founders, particularly, talk about the challenges they face in scaling their company, one thing they’re trying to think about is ‘how do I preserve the culture that I’ve created, I don’t want it to be diluted or changed in any way.’ So how do you keep control of the values and culture and how it permeates the company? We think of culture as the unwritten rules of how an organization operates, that’s what creates the kind of fabric of a place."
You certainly can see instances where a company culture does not hold together, and it stands in the way of a company being successful. Focusing on culture and the values that your company is going to live by is also critical to success.”
Shore describes an early stage company funded by a Mexican VC firm, dealing with the competitive market for talent. “They were already at the stage where they needed a chief technology officer, and the people they kept looking at didn’t have the profile or experience. We found a candidate in Guadalajara who was truly amazing, but the company’s budget was very, very low, so we helped set up the deal in such a way that they could make up for the low salary with an LTI; stock grants equivalent to 4-5 years’ salary.”
These founders, one is an MBA from Harvard, the other, Stanford. We explained to them ‘you’ve got to make your best offer once. You don’t want to bargain top talent that way. Not when you’re starting.’”
It’s hard enough in mature markets. In emerging markets, innovators who need top talent get creative. Tsamados says, “The talent for good engineers, people who know how to design and architect a technology product or even build a product roadmap are almost unknown in a country like Indonesia, and GoJek and Traveloka—one has bought and the other has built an engineering organization in India.”
“It’s not a question of price, India is actually more expensive than Indonesia, but they couldn’t find the talent in Indonesia so they went where the talents were, and both have built organizations that are the high-end of the engineering world.”
Just how important are people to early-stage companies? Pierre Fouques du Parc says, “Every time we do a search for a small company, a scaleup company, they are very, very hard clients. They are tough clients, very demanding. Extremely demanding. In terms of hard skills, in terms of soft skills, in terms of behaviors, in terms of mindset, in terms of culture.”
Lin is optimistic about the state of innovation and entrepreneurship. “I think the current innovation environment is excellent, a lot of its driven by China and the US but India, Russia, many other countries are involved in helping drive it. I think we’re in an era—everyone always thinks they’re living in an exceptional era, but I think the rate of change and the fact that we’re living in an era of unprecedented peace is providing an environment of unfettered innovation.”
Shore shares that optimism and is encouraged by where this generation of entrepreneurs is headed. “It’s a global phenomenon. There is a surge of new leadership with a completely different focus, and part of that is giving back and making a better world. With anybody I talk to—I met with entrepreneurs from a Colombian company they opened with one person from the UK and another from Holland, and you see that same thing—they want to give back and make a difference. They have these core values, and they are taking leadership roles.”
There is no flawless recipe for success, no exhaustive list of the ingredients that guarantee a good idea will become a great company. But new ideas are taking shape and taking flight under some consistent (and sometimes intriguing) circumstances.
“This is the new Renaissance,” Ang says. “Even a youngster today can build something and use it to solve a problem—whether it’s a big problem in the world or a small problem in their own neighborhood. So, the power of innovation is no longer vested, as in the past, in large countries or large companies. Now, it’s the one-man, one-woman, lone innovator that can do magical things.”