By Eddie Yoon, Principal, The Cambridge Group
One of the hardest places to get capital to commercialize a great growth idea is within Corporate America. Startups can tap the venture capital market. Corporations can go to the general capital markets by issuing stocks or bonds. But let's say you are a general manager or director/VP of a business unit or brand within a corporation. Your options for funding a corporate idea are very narrow — basically, you have to go through the often bureaucratic and political process of getting a budget from the managers above you. Many great commercial ideas never blossom because they get choked out by internal politics, risk avoidance, shorter payback horizons or perceived lack of capabilities.
Companies need a different process for funding innovative projects. I call this idea "innovation capital markets," and it's a system that's a hybrid of venture capital, general capital and corporate budgeting. Innovation capital markets would fund specific innovations vs. entire corporations. These might be innovations with a risk/reward profile that go beyond the typical corporate budgeting process. It might be growth platforms that are “orphans” that don't fall within a current business unit, like how Redbox was started with McDonald's. It could be where a mid-level executive turns to after internal budget process has ended with a "No," and which allows them to turn to pre-vetted, non-disclosure agreements signed by investors who have an appetite for a new kind of investment. The investment would have the upside of an entrepreneur but the assets of a large enterprise.
The inspiration for this idea came from the TV show Shark Tank. The first time I heard about Shark Tank, I thought it was just another reality show. When I tuned in, I was surprised to see that legitimate business was being conducted. By some measures, the sharks have invested $20 million in more than 100 companies. The average valuation for the companies is about $500,000, and entrepreneurs sold about 30-40 percent of their equity.
The notion of applying the Shark Tank model inside companies was created by one of my clients, a large consumer packaged goods player. It set up an off-site event with its top executives and created an internal Shark Tank-like contest to pitch new business ideas. For two days, three teams of executives worked into the night pouring over consumer, retailer and financial data to come up with disruptive ideas to drive growth. On day three, each team presented to a panel of sharks, consisting of members of senior management, myself, and Mark Cuban, who they'd brought in for the event.
The event was a huge hit. Much of that was due to Cuban, who was in full Shark Tank persona. Folks who were taking a while to take the stage were told to walk faster. Others with preambles longer than 5 seconds were cut off and reminded that this wasn't a history class. Cuban acted as a human TiVo device for meetings, allowing us to fast forward or go back on the key parts of the meeting. Watching executives pitch to Cuban was an object lesson on the importance of the 30-second elevator speech.
He asked salient yet sharp questions and had everyone in stitches as he good-naturedly poked and prodded each presenter, bringing an entrepreneur's lean mindset to the discussion. Those who asked for more money were asked what they spent now and why that wasn't sufficient. "So you're telling me you want another $20 million for smart marketing," he'd ask, skeptically. "What does it say about the first $20 million you've already spent?"
Overall, it was great watching an idea go through approval to funding at light speed vis-à-vis typical corporate America timing. Cuban immediately came up with a cool cross-pollination idea to have the company participate on a future Shark Tank episode with an investment of his. The startup gets a connection with a multi-billion dollar company, while the company gets some earned media to show its entrepreneurial chops.
The Shark Tank event has had a lasting and meaningful impact on the company already. The winning team won largely because it embraced the classic Harvard Business Review Marketing Myopia concept of building a growth strategy not on the products they sell, but rather the end benefit or job it provides. Those who were poked and prodded while presenting were given kudos by their peers for their courage, and set a great example that it’s okay to endure a little embarrassment to push potential ideas with big economics. The company is working more collaboratively cross-functionally, at a faster, more urgent pace and with careful attention to cash flow.
Innovation capital markets are a huge category creation opportunity. Not just for entrepreneurs within Corporate America and investors, but for companies themselves. I have to believe that the overall innovation success rate (the paltry 10-15%) would have to go up once senior management saw which ideas were getting funding and which mid-level executives were generating them. Imagine a world where individual investors could get in involved. Couldn't you imagine mom investors jumping on board the Swiffer investment? Or perhaps the fun Flip Video recorder (which I miss terribly) could have survived within Cisco? Wouldn't M&A success rates also improve, as venture capitalists and their portfolio of companies and strategic buyers within Corporate America collaborate more closely?
Just think if innovation capital markets existed decades ago for Xerox Parc within Xerox. Would we be buying xPods, xPhones and xPads at Xerox stores all over the country?
This article was originally published on the Harvard Business Review.