To Innovate Like a Startup, Make Decisions Like VCs Do15 May, 2018 / Articles
A lean startup approach, we are told, can empower big companies to innovate rapidly and effectively in the face of continual disruption, potentially even transforming enterprises into centers of continual new growth. Responding to this promise, many companies have started putting these ideas to use: A recent study of 170 organizations with $1 billion or more in revenue found that over 82% are currently using a lean startup approach in some aspect of their business.
Yet for all of the resources that have gone into applying a lean approach, these organizations do not have much to show yet. Faster times to market, greater flexibility on the way there, and greater focus on the customer — common results of a successful lean implementation — are all positives. However, they hardly represent the transformation that has been promised with this new approach.
What is missing from this equation for growth?
Quite a bit — half of it, to be exact. The model for creating new growth that we see in successful innovation hubs everywhere involves two sides: the entrepreneurial side, responsible for managing the discovery, validation and development of new businesses, and the venture side, responsible for managing a portfolio of these businesses with the use of investment theses and funding decisions in order to shape and ultimately capture new value. More than any particular activity or agent, it is the continual interplay between these two sides that drives growth.
Applying a lean approach in your organization is getting half of the model right, but it is not enough. For enterprises to create successful growth systems, they need more than lean startup methodologies; they also need venture capital investment mindsets and mechanics. They need what we call a growth board.
A growth board is a group of senior executives within an organization that meet regularly to review, discuss, and ultimately fund or kill new growth initiatives. It functions as the enterprise equivalent of venture capital and uses many of the same mindsets and lenses that VCs do in evaluating and deciding on opportunities. Over the past few years we have established and convened growth boards at over a dozen Fortune 200 companies to provide the other half of the new growth ecosystem.
The impact is substantial. Jud Linville, CEO of Citi Global Cards, says, “Installing growth boards led to a dramatic change in how we resource and support growth at Citi Cards. It ensured we could move fast on big opportunities, forced us to kill startups when needed, and helped us think like startup investors, searching for imperfect signals and good-enough answers rather than demanding unknowable forecasts from our teams.”
Done correctly, growth boards are not simply an executive-level extension of the entrepreneurial mindset encompassed by lean methods, but add an entirely new dimension to the conversation about business initiatives. Together, these dimensions combine to form the best possible foundation for discovering and growing the initiatives.
Hannah Jones, VP of innovation for Nike, says the company uses growth boards to search for new opportunities to better serve athletes and drive sustained profitable growth. “The rigorous methodology serves as a framework we use to solve customer frictions and serve unmet needs to focus on real, in-market learnings.”
Growth boards are complex, evolving things, not easily reduced to a series of steps or created out of a box. That said, here are some principles to keep in mind as you introduce growth boards into your current innovation plan:
Convene members regularly. Growth boards only function well if they follow a regular cadence, with all members present. This is not a one-off or sporadic meeting, but an ongoing conversation played out over regular intervals. New ways of thinking about opportunities must be developed by the board as a team. Quarterly meetings with all members present to review, discuss, and make decisions are the best way to organize your growth board. No voting in absentia, no catching up later; you have to be part of the conversation — in person — to participate.
Consider a large volume of bets. Like VC firms, growth boards concern themselves with portfolios, not single opportunities. A growth board meeting should focus on a sizable number of bets built around a coherent growth thesis. By acting on a portfolio, your growth board gets to apply learnings from each opportunity to the others, to maximize learning velocity. And considering a variety of opportunities also maximizes your chances of finding breakout successes.
Once leaders make the shift from thinking in terms of single bets to a portfolio, they empower teams to increase the number of ideas they test by an order of magnitude — from two or three to 20 or 30 — and encourage a high failure rate. This change is productive: You want to get away from imagining that you can pinpoint what the future looks like, and instead use a portfolio approach to discover the correct version of the future at just the right time.
Ask the right questions. Once you’ve convened your team of senior executives, developed a growth thesis, and seeded a portfolio of opportunities, you need to guide the board to ask the right questions. The right questions are different for the various stages that startups go through, but they are always aligned with commercial truth rather than innovation theater.
At the seed stage, the questions should be about speed and cost of learning — what kind of evidence do we have to confirm or reject an assumption? At this stage you’re looking for signals that a team is on the right track, as opposed to hard, quantitative metrics that would put undue burden on nascent ideas.
In the MVP stage, the questions should be about the customer and product-market fit, as well as the unit economics that will drive the enterprise value. What kind of machine are you building, how much do customers like it, and how much value could it ultimately bring to the organization are all lines of questioning to explore at this stage.
Only when it’s time to scale should you start asking about profitability, margin, and revenue projections. The worst thing you can do is measure a startup against enterprise financial ratios.
Fund teams and problems, not ideas. When funding new initiatives, executives typically think about which strategies to implement and how to execute them. Growth boards, by contrast, fund the problem space and the team going after it, not the idea or strategy per se. Like VCs, they are primarily focused on finding a really big problem and a great team to solve it. The solution itself is likely to change as the team learns more about the space. By focusing on teams and problems instead of solutions, growth boards discover growth instead of planning it. As a member of a growth board, you are there not to manage ideas but to establish the permissions needed to gain advantages for your organization.
Learn and move forward quickly. Growth boards are as much about learning as they are about funding or defunding any particular idea. The byproduct of evaluating multiple solutions in one problem space is gaining a deeper understanding of that space than could be achieved by any other means. But the value of this learning diminishes if the board and the teams reporting to it get bogged down in some issue or other. To get the most value from your growth board, discover what can be learned, then make decisions to kill or move forward quickly. Velocity of learning is crucial; where new growth is concerned, those who learn the fastest win.
Companies have spent the better part of the last decade investing in startup methodologies without reaping any real benefits. This is through no fault of the lean startup process. Rather it is because lean by itself is not enough to stimulate new growth. Growth boards are the missing piece of the startup ecosystem that ignites the power of the entrepreneurial approach. With an effective growth board in place, a company can start to realize the benefits that have eluded it.