Have you built a successful organization with a strong core product, but are wondering how to build the next breakthrough innovation? Founders will often ask us how they can increase creativity and innovation in their organization so they can find this next product.
The ability to do so is the difference between a great and an extraordinary company. For example, Square has a strong core product: offering payment solutions to merchants; however, they kept investing in future product lines and developed Square Cash which is now responsible for the majority of Square’s market cap.
In this post, we’ll look at why it is difficult to innovate in an existing organization and strategies for doing so based on lessons from companies like Square, Uber, Airbnb, and Opendoor, all of whom have successfully done this.
Ideas are Fragile
When is it time to focus on building the next product line? Often it is after you’ve achieved product market fit, achieved significant milestones, and have built a lasting sustainable business. It’s a tall order to do all those, so if you haven't yet then you may want to focus on those first. Once you have though, it makes sense to explore the next innovative product line.
The difficulty in incubating new ideas at companies stems from the fragility of ideas. Ideas are fragile and in their early stages often seem crazy! Who would want to sleep in a stranger’s bedroom? Who would get into a stranger’s car to go to the airport? Who would trust a company to buy their home, their biggest asset, at the click of a button sight unseen?
These are the challenges facing any startup trying to do something new; however, it’s even harder for ideas within an existing company. An existing company has pre-existing structures, processes, opinions, and compensation, which are all tied around their existing products. These all combine to often suffocate new ideas.
The first step in allowing new ideas to flourish is protecting them; they need time and space to develop before their potential is realized and they no longer seem so crazy.
Imagine planting a seed in a busy campus pathway. It puts out a tiny shoot, but is almost instantly stepped on, trampling any potential of what could have been. It could have grown into a beautiful oak tree or small tulip, but we’ll never know. Put a few stakes around it so no one can walk on it and we see it grow into a tall redwood tree bigger than anyone could have imagined.
New ideas in an existing organization are similar, easy to spot all the flaws in an idea, but hard to imagine the potential. Companies are always starved for resources, whether it be engineering, product, design or other leaders so there is always pressure to focus on the most obvious ideas. Managers want resources for their own projects, so they’re naturally disinclined to support new projects; therefore, the only projects that survive are often those without obvious flaws, yet these are often low-risk, yet also low-reward projects. The truly transformative projects that can double a company’s market cap are the least likely to work, the highest risk, and easiest to spot flaws in.
When I started at Opendoor, I suggested investing in helping customers find and buy their dream home whereas most of the company had been focused helping customers sell their home to us in a click of a button. I suggested starting with an iOS and Android app to help customers tour our homes with the theory that the easier it was to visit a home, the more homes a customer would visit, and the faster the customer would be able to buy a new home and in turn sell their previous house to us.
There was a natural hesitation to investing in this new bet. We were constantly saying no to engineering projects, as we never had enough engineers and many internal stakeholders wanted engineers to work on their own projects. People thought it would be crazy to devote engineers to this, that it would take forever to build, and it would have no impact on metrics when it did ship.
We quickly whipped together a prototype in a weekend and proved that this wouldn’t be a yearlong project, but instead something we could ship iteratively over weeks and get immediate feedback on. This gave us the oxygen we needed to build it, shipping it in under three months, and instantly doubling the number of homes a customer visits after launch.
Finding the next innovation
We’ve discussed why ideas need to be protected, but you may be wondering how do we even come up with ideas in the first place? Much of this is just giving space and time for insights while promoting creativity.
Creativity is the intersection of taking different concepts, cross referencing them amongst each other and seeing what comes out. Exposing yourself to diverse viewpoints and exploring various topics, even if they don’t seem immediately relevant, helps lead to this.
This creativity often yields a unique insight. When Square started, the iPhone had recently been released and it had a two-way audio jack, both outputting sound to headphones and also accepting sound as an input. The unique insight was that you can pass an audio signal up the headphone jack and that the magnetic strip on credit cards produces a wave which can be transmitted as an audio wave.
With Square Cash, the insight was a way to move money onto a debit card in reverse in seconds. This insight came up while working on the core Square merchant product, but didn’t have an immediate use. It was stored away as an interesting insight and later formed the basis of Square Cash.
Another example is Zimride, which helped coordinate rides between college kids carpooling home over break. The breakthrough insight came when the iPhone added GPS which made it possible to track cars in real-time. This insight led to the creation of Lyft.
People have these insights all the time; the key is paying attention to them. If you’re constantly running from meeting to meeting or stressed trying to finish a project, you may not be able to appreciate one of these insights. You need the headspace to be ready to go deep on one of them which is why you should create space to pay attention to these insights. If one of them comes up, just write it down in a list which you can easily refer back to when you have time to dive deep into them.
Many of these insights tend to come through changes, whether they are tech breakthroughs (the iPhone adding GPS), process breakthroughs, or regulation breakthroughs (such as COVID relaxing rules on telemedicine allowing new companies to emerge).
The best insights often come from bottom up thinking, although Steve Jobs was great at top down innovation. As a leader, your role is creating a culture that promotes creativity and this bottom up thinking. You need to make sure your team has the space to run with an insight they have. Don’t immediately kill an idea and don’t micromanage; let people devote a few hours or more to an idea.
One tool for this is hack weeks, where people explore and build a prototype of a new product. I’m always amazed by the breadth of ideas generated and how quickly a prototype can be whipped together.
If you want transformative ideas rather than incremental optimizations, you need to set the right expectations. Any ideas should add a zero to a metric (i.e. 10x). Reject any ideas that just add a percentage (i.e. 20%). When you reject the incremental optimizations, people will start coming up with the crazy 10x ideas rather than be constrained by the safe bets. To be clear, there is a place for optimizing, but most successful organizations are already quite good at optimizing their core product.
Nourishing Ideas
Now that we’ve looked at why ideas need to be protected and how to generate ideas, let’s look at how to actually give the space to thrive.
Startups are different from larger companies. They have nothing and haven’t hit product market fit, so they’re optimized around speed and finding product market fit as fast as possible. They optimize for speed of decision making over correctness of decisions. Larger companies which have achieved product market fit have built something and feel the need to protect it. They are no longer fighting to stay alive and have shifted to preserving the value created which often means prioritizing correctness of decisions over speed.
Speed is critical when developing new ideas. How do you ensure teams working on new products have alacrity while existing within a larger organization? The key is separating these teams from the broader company, including all the processes which have developed to ensure correctness and consistency over speed.
For example, in an early startup recruiting can be hectic. The team is focused on finding the best people via whatever means possible and that works well when hiring a couple people. Once the team scales and you’re hiring dozens of engineers, it makes sense to centralize the recruiting function and put in place processes, such as around the interview process, titles, compensation bands, etc.
Find a strong leader for these new initiatives who can help shield the team from the rest of the company. This leader needs to report directly to a senior leader such as the CEO which gives them further cover. It’s often easier if this leader is a well-respected person who’s already proven themself at the company and understands the organization dynamics.
This leader will insulate the team from things designed for efficiency, such as recruiting, finance, headcount approvals, budget approvals, HR policies, and so on. Recreating these within the startup will result in inefficiencies, but that’s okay. In the near-term, we need to optimize for the team’s speed of execution, not efficiency.
When deciding what functions should be duplicated versus leveraged, consider what you're innovating on with the new product as well as which functions the entrepreneur wants to recreate on their own. Often this means product, design, engineering, operations, sales, and business development may be separate from the core company and instead roll-up to the product leader. Other functions related to corporate oversight, such as HR, legal, and finance, can be left centralized, but with different policies. These can be a superpower for the new team as they focus on building and don't have to deal with other details such as hiring a CFO, building a finance team, finding real estate, etc. You need to make sure you have freedom to pursue different policies that make sense for you. This often causes thrash and extra work for the centralized teams which is why it's important the leader understands how to navigate organization dynamics and has the protection from a senior leader such as the CEO to quickly make necessary changes.
This new team may have a different culture than the main company and that’s okay! Culture affects what you build and different products may need different cultures. This even includes the designer or engineering culture. The process around engineering design docs and code reviews may differ.
Wrapping Up
We’ve discussed how successful companies can nurture innovation. We've discussed why it is difficult to innovate outside the core product, how to find the next breakthrough, and how to build this breakthrough inside an existing company. If you're looking for further reading, check out Loonshots, which goes in depth on how to nurture crazy ideas within existing organizations. It has many great stories about how this has been done successfully and unsuccessfully over time.
Please reach out to us on Twitter (@rabois, @melanter) with any feedback or questions!