Many of the current studies and opinion pieces on corporate innovation, such as a recent Sifted article by two IESE academics, focus on de-risking corporate innovation.
At a first glance this makes sense — what corporation would not want to minimise the dangers of an embarrassing failure? It is true, the concept of de-risking must be at the heart of all meaningful corporate innovation programmes. But very often, “de-risking” is turned into an empty catch-phrase, revealing a misunderstanding of both risk and the goals of corporate innovation.
Without risk, there is rarely any significant upside.
There are two types of goals for corporate innovation: Either to drive efficiency through the transformation of systems and culture or to drive growth through new business models or new technologies (for reference see the Stryber Digitization Framework). The latter is the kind of innovation that results in growth and makes a difference to the success and survival of companies in the long run.
Contrary to popular belief, risk isn’t something that must simply be eliminated. Risk is a two-sided variance of an outcome from an expected mean. That means: risk has a positive and a negative side. Without risk, there is rarely any significant upside.
Many corporate innovation initiatives, such as corporate venture capital investments, are inherently risky: any investment might return a large payoff, but they are most likely to return no payoff at all. Other initiatives such as startup scouting or opening a coworking space (two examples from the above Sifted article) don’t carry significant risks: a corporate will have a very good idea what the outcome will be. The potential losses are usually small but the upside is also limited.
Individual risks must be managed by fitting them into a larger portfolio strategy
This is where the discussion about de-risking becomes interesting. In corporate venture capital, de-risking must be at the heart of investment decisions. Generally speaking, no fund should put all their available capital into one startup - it would be too exposed to that one startup failing. But it can still generate significant returns if it de-risks its investments by distributing them across a portfolio of 10+ startups. The return will be much more predictable than when investing in just one startup but the upside is still significant.
Corporate venture building lends itself to a similar approach. RBS put ~£100M into one startup, digital bank Bo, which was shut down earlier this year. Kudos for being open to risk-taking. But de-risking its approach by investing smaller amounts across a portfolio of new ventures could have yielded more predictable and positive results for RBS.
On the other hand, when it comes to de-risking initiatives like startup scouting, two problems become obvious. First, the question is what the goal of such initiatives is. If the goal is to drive growth, startup scouting can only ever be a small stepping stone and not the whole initiative. Otherwise, we find ourselves in the realm of innovation theatre. Secondly, de-risking this particular initiative is much less important as it is low risk (and lower reward) to begin with. “De-risking” often seems to be used interchangeably with reducing costs. But costs and risks are two very separate concepts.
If the goal is to drive growth, taking selective individual risks is necessary.
When driving growth is the goal of a corporate innovation programme, taking selective risks is inevitable. If a corporate wants to create new and significant upside and revenue streams by building up new technologies or new business models, it will be required to take risks at a project level as this type of innovation usually deals with unproven business models or technologies where success is never guaranteed.
Risk on a project level must therefore be welcomed and accepted. But these risks can and must be managed in two ways.
First, on a project-level the risk of a new venture can be significantly reduced by using best practices and drawing on the experience of seasoned entrepreneurs.
Second, these individual risks must be managed by fitting them into a larger portfolio strategy to reduce overall risks while still aiming for significant upside. That is the proper approach to de-risking corporate innovation initiatives.
To summarize, corporate innovation efforts must always have clearly defined goals. If that goal is to drive growth, taking selective individual risks is necessary.
De-risking the overall programme will involve mitigating risks on a project level and combining individual risks into a portfolio that generates more predictable outcomes while still allowing for a significant upside.
The concept of de-risking alone will never guarantee success, however. Other equally important building blocks for successful corporate innovation efforts include setting strategic goals, quantitative analysis of the ambition level and ‘innovation gap’, a selection of the right innovation strategies and a corporate governance setup that creates the right environment for exploring new business models and for driving growth.
