steve-blankSteve Blank is a kind of folk hero in startup circles. A successful entrepreneur, Blank, though his writings and Lean LaunchPad seminars at Stanford and online — more than 150,000 students have taken it — has become kind of a startup guru whose aim is to take the guesswork out of product development. Most companies don’t fail because they couldn’t attract a management team or gin up a product, he says. They fail because they didn’t create a product that will sell. Both he and Eric Ries, a former student, have become synonymous with the lean startup methodology that provides a systematic approach to creating startups.

Not afraid to express himself, Blank has plenty to say about the difference between startups and large companies, and why big corporations have so much trouble innovating.

405x650_Homepage_Tower_DGWhy do big companies have trouble innovating like startups?

People have been asking that for decades. The short answer is that startups are not smaller versions of large companies; startups search for business models and companies execute business models.

OK, so what’s the long(er) answer?

The key distinction lies between search and execution. Companies in their early days are obviously start-ups, but the reason they grow is they do something repeatable and scalable. To do that, you need processes, and procedures, and key performance indicators, and everything that’s organized for execution. The problem is every time you add another step to process or procedure you kill innovation. By their very nature, corporations are execution machines unless organized differently.

Why can’t large enterprises set up innovation satellites to exist as separate startup entities within the wider corporate structure?

I call that approach “innovation theater”: It makes you feel good when you put on a play for the CEO and the board, but the outcome is not going to move the needle. There are companies that have figured out that this needs to be a more integral approach rather than just theater. Instead, you need to create an environment of continuous innovation, which is not easy. Founder-driven large corporations like Amazon have it and Apple had it when Jobs was alive. It’s hard because it’s all the pieces of changing processes that give you the ability to chew gum and walk at the same time. The chew gum is you can’t screw up the execution engine because if you do, you go out of business. But you can’t ignore the innovation side; if you do you’ll also go out of business.

Big companies have a lot of people they have to please – shareholders, board members, the Street. Startups don’t, at least, not at first.

Yes. Over the past 20 or 30 years companies have been acting like cash is dear, meaning there’s not enough of it. They’ve been brainwashed by Wall Street and private equity investors to say: “No, no, no. It’s not just profits we care about; it’s return on net assets, it’s IRR, or internal rate of return.” They’re measured by how efficiently they use cash. A CEO might then choose to outsource everything because he’ll look more efficient. He’ll get all the capital equipment off his books. What he won’t do is invest in long-term innovation or have internal corporate R&D labs. They’re expensive and the results are unpredictable.

This then changes the character of the person heading a large enterprise?

It sure does. All of a sudden, the people running those companies – and here’s a big idea – become financial experts rather than innovation experts. They’ve become experts in pleasing the street rather than experts in pleasing customers. What’s worse is the transfer of wealth has not been to innovation, but into the hands of private equity. We’ve essentially legalized looting the corporate treasury for private equity firms rather than building innovation.

Some companies try to bridge the gap by simply buying startups. Is that a good strategy?

In the Valley, we tend to buy IP, teams, sometimes product lines or old companies. There’s a hierarchy. The sum of all this is your innovation portfolio. But if you’re a Silicon Valley startup and a large company has bought your competitor, one might think you’d cower in terror, but it turns out we all celebrate. The reason is there’s a 95 percent chance the large company is going to kill that startup. The founders will leave the large company after their stock vests. Then the innovation disappears.

If large companies can’t innovate, how do they stay on top for so long?

Joseph Schumpeter coined the phrase “creative destruction,” which describes the efficiency of capitalism when new companies emerge that then destroy old industries, and Clayton Christensen came up with “disruptive innovation” in his book, The Innovator’s Dilemma. Both assume the market is efficient. But it’s not. We have a free market that’s distorted, and the more distorted it becomes, the less innovative it becomes. Then you stagnate. Large companies in large industries on the verge of becoming obsolete have figured that out: “We might not have the DNA to innovate anymore, but we could gain the system with buying off regulators, or politicians, or basically making a tax on innovation.”

These people are known as “rent seekers.” The best examples are the movie and music industries, which have tried to kill almost every potential new innovation rather than creating their own. They’re no longer run by creative people; they’re run by their boards or staffed by finance and legal people. Auto dealers are also rent seekers. They attempt to strangle innovation in its crib. It’s the antithesis of what we do in Silicon Valley. Countries where rent seeking takes the form of corruption and bribery have the world’s worst economies.

Then what does that make New Jersey, which is preventing Tesla from selling cars directly to consumers?

New Jersey equals a banana republic of the old Soviet Union — like Kyrgyzstan or whatever. The dealers are rent seeking and it’s clearly not in the interest of consumers. Instead it’s  promoting the interests of an industry that deserves to die because it’s not efficient and doesn’t serve consumers. That’s because rent seekers don’t create anything of value.

At some point stacking the deck won’t work anymore. Can a large company other than, say, Google, innovate?

I believe innovation should happen in four places: One is, do you remember the old idea of a suggestion box or Google’s 20 percent? There’s an implicit idea here that says: “Everybody in the company should at least have the ability to individually contribute to innovation.”

Two, companies can also be good at process innovation. They make their products cheaper, or faster, or come out with New Coke, and Old Coke, and Green Coke, and Cherry Coke, which are product line extensions. They innovate along the core of their existing business model. They know who their customer is, and who their competitors are. This is what great execution companies do.

The third type of innovation is continuous innovation, and this is much harder. This is: “I might know my customers, but instead of Coke, let’s get into the snack food business because, while it’s not the same syrup plants, I have these trucks going to these stores and maybe we could get these stores to buy other goods that we can give them discounts on.” That is: what are some adjacent products that are not product line extension, but are around my core business model and really belong in that division?

The fourth type of innovation is the one that great startups do, and that’s disruptive innovation, where you say: “We know these one or two things about either customer, or technology, or whatever — but it doesn’t fit into any of our businesses. Let’s incubate it somewhere. We need a home for these things.”

That last one sounds a lot like Amazon Web Services.

Are you kidding, from a book distribution company, where the hell did that come from? Also, for Apple, the iPod, iPhone, and iPad. They were a computer company, what tare they doing in the music business or the phone business? Those were disruptions.

By the way, Amazon Web Services is one of the reasons almost every software company or every company is dealing with this onslaught of startups. It was an unintended consequence. I’m sure Jeff Bezos didn’t wake up one day and say: “Let’s create chaos for every corporation in the world.” But now we have entrepreneurship everywhere.

When I was an entrepreneur, the first step was raise $5 million because you needed to spend $2 million on computers and another million on enterprise software. Now I have the biggest computing array in the world at my fingertips, which I paid for on my credit card.

That’s when a disruptive startup becomes a large company that ends up disrupting all other industries.

Yes. I’d say about half of Fortune 500 companies have now realized, “Oh, crap. It’s the 21st century, we’re screwed. How do we fix this?” Almost all of them are going through the process of trying to figure out how they can organize their efforts internally to be more innovative.

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[Featured image via Steve Blank, Dancing Giants illustration by Hallie Bateman for Pando]