Accelerated Growth in Turbulent Times has been saved
Accelerated Growth in Turbulent Times
Innovation is a key lever to creating future advantage, but how to shape it to take advantage of turbulent times is something most companies struggle with. Here we offer a framework for what to do, but first we explain what not to do, as you’re very likely trying that.
Chris Barker – Associate Director
What not to do!
Most companies think that innovation and start-ups are about incubators and accelerators. The former is where one hosts multiple start-ups, hoping for a unicorn (R1bn valuation) that covers other start-up costs. The latter is where one believes one’s access to the market positions one to seek out start-ups and introduce them to the market for an equity share. You could roughly think of the models as Venture Capital vs. Private Equity.
Both models are risky and can either enhance executives’ careers or destroy them.
The VC Incubator flaw:
To be confident of finding a unicorn, one would need to invest in 100 start-ups, each at an extremely modest R120k per month (i.e. entrepreneurs, very underpaid, in it for the upside). You’d do well to find a winner in 8 years, having spent near R1.2bn. Add to that the issue that SA start-ups are usually just slideware, as few parents in SA can fund kids to work in a garage for three years to produce a product with market traction, which is the starting point for VC in the US. There are few Innovation managers, or indeed CEO’s, whose careers can survive that leap of faith.
The PE Accelerator flaw:
This model is premised on the belief that you can find a start-up and introduce them to your customer base. That may work somewhat in large scale consulting firms, where every corporate is a trusted client, but it holds for nearly zero SA corporates, particularly given that their competitors will be the last to adopt their start-up. The above SA immature IP also applies, plus you would own a modest share of the start-up profits, which in turn are driven by a modest share of the revenues they can derive from the market (less their expenses). That’s not attractive at all. Yes, there are telecoms firms that are deriving great revenue from start-ups, but there’s a way better model covered below.
Identifying a unicorn yearling
In the graph below we show a start-up on a unicorn trajectory, doubling revenues every 2 years or so. For the first 7 years it looks like a failure, and indeed we are typically in the “zone of disappointment”. Think of how long it took 3-D printing, in-car wifi meshed networks, VR, etc. to gain traction. From year 11 onwards they get identified as successful unicorns, and their market valuation makes them too unaffordable for most SA firms to consider. So, we need to find ones in the zone of disappointment that hold out real promise. The problem is that these are hard to recognise, as projection of their revenues using even the two latest periods, misleads us to a low ultimate size.
So how do we find them. The answer lies in the 6 D’s of exponentiality, which we feel should be 7. Recognise these, and you’ll see a potential unicorn hidden there:
- Digitisation: It all starts when an industry is open to digital, which most now are (even complex travel, and call centres).
- Disruption after Disappointment: We don’t understand the exponential curve, then we get surprised and it’s too late to get in.
- Dematerialisation: Think of the move from physical to virtual or electronic. There are countless examples, from Uber (not owning a single vehicle) to Airbnb not owning a single accommodation facility.
- Demonetisation: You cannot compete with free. Today’s phones are a good example. They contain technology that would have cost over $1m in 1985.
- Democratisation: Available to everyone. Think of TripAdvisor.
- Decentralisation: Tiny devices everywhere. Think of the block chain distributed ledger.
- Domination: Scale to achieve market ownership. Think of Google or Facebook.
How to afford a unicorn yearling
The secret here is not to buy a first world-based unicorn. Ideally you want to build an Africa or SA businessand partner with the US-based unicorn. They typically have Africa way down on their list of priority markets and would welcome an approach from a large and credible SA company offering to take them into Africa. You can offer some funding for them, license fees, or a JV that ensures you own the majority of the African equity. For them the funding means a lot right now, but the credibility of an African success means way more than they can ever quantify.
How to find these unicorns
In our experience, there are a few proven approaches to identifying unicorns:
- Create a team of smart people, with an appetite for career risk, and task them to Google, speak to experts, phone, fly around the world, and seek out these unicorns. It’s expensive, but it works, and we highly recommend it for a company with a R20-50m/year budget.
- Another option is focused study tours to Silicon Valley, or more easily Tel Aviv. Firms there exist to help you screen for a list of start-ups and VC firms, and then spend a week in-country meeting up to 5 targets per day. It’s fun, eye opening, and great for opening the minds of execs. But it also costs a few million Rands.
- The hackathon approach works in the US; invite start-up companies to solve one of your problems by using their tech. We haven’t seen that work so well in SA (outside of tech-heavy telecoms firms), due to the immaturity of start-ups, given the lack of rich parent funding.
- But the model that has recently emerged, is mining of start-up databases. Not the massive Pitchbook database, with all its VC and funding info, but databases of start-ups that have been through a qualification process, and now include metrics such as proven industry interest, field of tech (e.g. AI), use cases (e.g. sales cost reduction), and most importantly, market traction (i.e. proven revenues). This approach costs very little, can be used to quickly hunt opportunities that fit your business, your customer base, and your market. This has only become available recently, as firms have built on Pitchbook to create these qualified start-up lists and have used their client engagements to enrich the database with winning and failing inquiries.
A comparative analysis of these options:
How to enter this start-up database space gently, and safely (start-up venture client unit)
A recent model, building on the access to these databases, is the VCLU (Venture Client Unit). Here a team uses the database to find opportunities to license or JV into Africa, but the trick lies in a phased approach, that de-risks everything, and gently builds the company’s confidence in this approach
In year 1, the process is used to identify start-ups to solve BAU (current business as usual) costs. Much like a hackathon’s benefits. The start-up is then adopted as a service provider. Not bought, not JV’d, not even licensed. That is a proving process, that’ll come later. Worldwide experience is delivering savings in year 1, of 5x the costs of the search process, and start-up service provider costs.
In year 2, one steps out a little further to find start-ups that improve BAU revenues. Not new revenues, just make existing ones better. The same 5x return is usually promised.
In year 3, you are ready to step into a full-blown innovation program, finding opportunities for new business lines, new growth, and even NMB (New Model Businesses). By now your company is comfortable that the process works, and large-scale investments in a new green-fields business is more easily embraced. But mostly, you will have built the team capable of doing this adventurous and seemingly risky work. Returns remain far out, as with any new business, but now you have bought the time to see you through perceived career risk.
Doing this with at-risk support to minimise your career risk
There are advisory firms that will do this at risk, discounting their fees in return for capped upside. If they fail you, you still look good for having managed your exposure. If they succeed, their proceeds are insignificant compared to the value created.
Further, once you are through phases 1 and 2, you have a list of start-ups you can truly believe in; after all they are working for you. What a nice place to start an acceleration unit; to take equity in them in return for exposing them to the African market. Or why not rather license them and create new revenue streams as part of phase 3?
Now go and succeed.