The Hammer Blog

Process (or Not)
Why Large-Caps Fail to Innovate, and Start-Ups Innovate to Fail
October 28, 2012

Innovation is the life-blood of the life science tools industry, but too few people fully appreciate just how unlikely successful innovation really is, in large corporations and in small start-ups alike (albeit for precisely opposite reasons).

Here’s an instructive two-part exercise to help illustrate the point. As quick as you can, jot down:

  1. One truly transformational life science tools technology that was first developed and taken to market by a large corporation (let’s say a company with over $1 billion in revenues at the time, expressed in 2012 dollars).
  2. The names of six start-ups that first introduced potentially transformational new life science tools, but either failed or else morphed into something completely different before those new technologies could gain significant acceptance.

Don't Bet on the Bigs...

If your answer to Part 1, above, happened to be “PCR” (as frequently proves to be the case when we pose this question), thanks for playing and better luck next time. Cetus Corporation, where Kary Mullis and others invented the polymerase chain reaction and developed its applications, posted income of just $2.2 million, in 2012 dollars, the year lightning struck.

DNA microarrays? When it went public two years after introducing its first GeneChip product, Affymetrix’s reported revenues were just $18 million in 2012 dollars.

Automated capillary DNA sequencing? In 1987, at the roll-out of its trailblazing ABI 370 sequencer, Applied Biosystems’ revenues were $173 million in 2012 dollars - substantial, certainly, but still very far from the Fortune 500 club.

In fact, to find the last time a major-league company first introduced a truly transformational life science tool you may need to look all the way back to 1974 - more than a generation ago - when Becton, Dickinson and Co. (BD) introduced the first fluorescence-activated cell sorter (FACS™). Its revenues that year were approaching $2 billion 2012 dollars. Maybe you can think of a more recent example, but I can’t.

...Nor the Minors, Either

The second of the two challenges posed above...naming at least six start-ups which first introduced seemingly transformational technologies only to fail ignominiously, is actually a trick question. If you can’t do this then you probably shouldn’t be in this business, because you haven’t been internalizing the hard experiences of others. Think Cyntellect, U.S. Genomics, Plureon, LabNow, Cellumen, GeneLabs, TissueInformatics, Odyssey Pharmaceuticals, Signature Bioscience, Incyte Genomics, Aclara, DoubleTwist, LION, Physiome (I could go on and on, but please don't make me) - some of them amply funded, most of them highly innovative, and all of them, ultimately, disappointments.

What’s the point of this exercise? There are two, really: first, that major (Fortune 500-sized) corporations rarely innovate - a proposition that will surprise no one. And second, that start-ups are only marginally better at innovation than their big brothers. An odd notion, at first glance; after all, tools start-ups are innovative almost by definition. But does a clever idea really count as an ‘innovation’ if it fails to make it into the market, thrive there, and earn handsome returns? We think not. So, because most start-ups are unsuccessful, it follows that most start-ups fail to actually innovate. This is important to understand for the same reason that it is valuable to realize there’s a difference between merely being busy and actually accomplishing something. There’s a difference between being innovative and innovating.

Start-Up & Large-Cap Innovation Failure: Two Sides of the Same Coin

Self-help books for entrepreneurs list any number of common causes for start-up failure, including under-capitalization, management inexperience, the challenge of building an effective sales organization, barriers to entry, macroeconomic forces, and even just plain bad luck. But wisdom comes from discerning the commonalities among a host of seemingly unrelated events. So what’s the common factor here?

Anyone who has worked in and around numerous start-ups knows that the hallmark of such ventures, for good or ill, is creative chaos: false starts, frequent mid-course corrections, multiple simultaneous diverging strategies, and repeated 180s. We tend to put a happy face on this by extolling the start-up’s unique ability to ‘turn on a dime,’ but in practice that frequently amounts to little more than spinning its wheels. Linus Pauling’s advice that “the way to have a good idea is to have a lot of ideas” - to throw things at the wall and see what sticks - may work well for grant-funded academic researchers who have no responsibility to turn a profit, but for investor-funded entrepreneurs each false start, every abandoned initiative or U-turn, represents nothing more than unproductively dissipated capital and an ever-contracting runway to nowhere.

In contrast, as anyone who has ever done hard time at a Fortune 500 knows, the defining characteristic of large corporations is organizational inertia: the inability to nimbly change course to explore new options, and the unwillingness to embrace calculated risk or to accept the existence of unknowns. Here, the happy-face term is “mature process:” layers of management oversight, supervisory committees, stage-gate development systems, Six Sigma or other soup du jour management theories - an infinite regression of checks and balances, admittedly necessary to guard against out-of-control gut instinct and rampant individual initiative, but which, in combination, suffocate innovation by rewarding managers for saying “no.” Would-be innovators in such organizations frequently bemoan the difficulty of ‘steering a supertanker.’ Imagine Kary Mullis, in 1983, being required to demonstrate an acceptable net present value and internal rate of return before exploring his polymerase chain reaction idea.

In short, the steering mechanism of the typical start-up is far too loose, sending it drifting all over the road, while that of the typical Fortune 500 is just too tight, forcing it to plow an unyielding line through the hairpin curves of markets, history, and technological breakthroughs. And each of these two diametrically opposed steering mechanisms is equally fatal to successful innovation.

Learning from the Other Side

To their credit, some Fortune 500s do occasionally try to kick-start innovation by mimicking start-ups: creating skunk-works, corporate R&D campuses, centers of excellence, or other sorts of ‘game preserves’ for would-be innovators, sheltering them from the larger organization’s stifling ‘process.’ Such initiatives come (and go) every few decades. Sometimes they work. Frequently they don’t, because ultimately a good idea must leave the nest - must fledge out into the larger organization to be commercialized - where it suddenly hits the cold steel hull of the supertanker with its turf wars, silos, imperative focus on making this quarter’s numbers, and the conflicting self-interests of its many managers and executives and business units. A slavish addiction to stifling process is only one of many forces (albeit a major one) which conspire to kill innovation in the Fortune 500 company. Creating insular ‘process-free zones’ within this greater conspiracy doesn’t begin to do enough to safely see real innovations to market.

Sadly, this same willingness to try to adapt what the other guys are doing is seldom seen in start-ups. Rare indeed is the entrepreneurial venture that implements enough mature process, early enough in its life, to guard against constant swerving and wheel-spinning. Smart people become entrepreneurs, in large measure, because they hate being told what to do. And, anyway, in principle the start-up’s board of directors, representing investors, exists to provide some checks and balances on the founding leaders’ less well-considered impulses (although it seldom actually works that way).

This unwillingness to adopt some measure of the big-leaguers’ mature process to the start-up problem is, to say the least, unfortunate. Unlike the Fortune 500 - where there are innumerable impediments to innovation - at most start-ups there is really only one: the sin of hubris, which inevitably leads to the absence of reality checks and the failure to synthesize the insights and knowledge of diverse stakeholders into one rational, sustained, and optimal strategy.

How much ‘process’ does it take to help keep a start-up on a steady and successful course by systematically harnessing all of its wisdom? Not that much, really. We’re not talking about intricate stage-gate product development processes involving thousands of pages of forms and approvals, eye-glazing NPV and IRR analyses, Six Sigma black-belts, tier upon tier of oversight committees, and endless navel-gazing. We are talking about challenging and rigorously examining assumptions, demanding data-driven validation instead of opinions, testing rather than guessing, and giving everyone in the organization both the freedom and the responsibility to say “I’m not sure I agree. Here’s why.”

The essence of 'mature process' is a heartfelt commitment to the principles that: (1) the team is wiser and more knowledgeable than any one of its members, and (2) that data are better than hunches. Paperwork and bureaucracy are merely the trappings required to systematize these principles within a large corporation. A start-up, in contrast, has the freedom to embrace the same underlying principles without shouldering all of that overhead, but this requires an unswerving commitment to self-examination on the part of the organization's leadership in order to bar the door to hubris (the "because I said so" mind-set).

Large-caps fail to innovate because they become so caught up in the trappings of process that they lose sight of its purpose. Start-ups, on the other hand, innovate to fail when they reject a reasonable dose of process in favor of mere guesswork and executive fiat. Both types of organizations owe it to their investors, and to themselves, to become a lot smarter about this.