Dancing Giants: Can big companies still innovate?

By Adam L. Penenberg , written on March 17, 2014

From The News Desk

You hear it all the time. Big companies can't innovate. It's become a meme, conventional wisdom, accepted as fact. Massive corporations have massive bureaucracies. They're sclerotic, afraid of cannibalizing core businesses, unable to adapt quickly to new markets or changes in markets they once owned.

When is the last time you thought of HP, Dell, IBM, or Microsoft as cool? They were once behemoths -- and in Microsoft and IBM's cases, still are -- but have all the characteristics of companies in grand decline. People have even started referring to a "tech rust belt" when they talk about these companies.

So you can imagine what must have gone through the minds of corporate executives when they learned that scrappy startup Whatsapp was being acquired by Facebook for $19 billion just five years after being founded. At $19 billion, that makes Whatsapp, with its 55 employees, worth more than the market caps of American Airlines, Xerox, Moody's, equal to two News Corp.s and almost three Fidelitys. It makes Whatsapp roughly equal in value to a another hot startup: Tesla.

As you'd expect, big corporations aren't standing idly twiddling their thumbs while their businesses creatively destruct. They're beginning to emulate startups.

This is the subject of Pando's newest 10-part series, "Dancing Giants: Can big companies still innovate?" which starts today. [Note: The entire series is being sponsored by Atlassian, so you'll only see their ads around "Dancing Giants" pieces. But the series was conceived, commissioned and edited entirely by Pando. Atlassian had no input whatsoever in the editorial. For more on our policy towards single sponsor series like this one, see here.]

If challenged to name giant companies that behave like startups, you might think first of Google and Apple, companies that have innovation imprinted into their DNAs. In fact, a host of large companies have been seeking ways to tap the frenetic energy and innovation of startup culture within their own ranks. GE is aping lean startup methodology in developing new kinds of hardware and Intel is looking to invest in startups that are working on technologies that could assist its own research and development. Intuit has been spinning off in-house startups while Nordstrom has been experimenting with hackathons. Hearst has a system to award phantom equity, a hack to compensate employees who the company believes are innovating. Microsoft has partnered with Javelin, a New York-based company that provides tools and workshops based on the lean startup methodology made famous by Eric Ries and Steve Blank. Samsung has the Samsung Open Innovation Center and founded a startup accelerator for software developers.

Absorbing startup culture into a traditional corporate structure is no easy feat, however, and there are several challenges. Big companies have more involved processes -- budgets to keep track of, resources to deploy, hierarchies to scale -- so it takes longer to start a project and see it through to the end. Meanwhile, anything that doesn't contribute to the bottom line receives less attention from management.

Another problem is attracting top talent. The millennial generation, which will compose a majority of workers by 2016, have a different orientation toward work. The best and brightest aren't satisfied with taking the safe route for a healthy salary at a mega corporation. Instead they are with striking out on their own and taking their chances at startups, where they can own part of what they create and keep a healthy share of the profits through equity.

An additional issue involves equity. Most companies are not structured in a way that allows them to offer a piece of the action to employee with great ideas for new products or technologies. Look no further than Paul Buchheit, the 23rd employee at Google who was also the creator and lead developer of Gmail. Today, Gmail has roughly 425m active users and is worth billions to Google. While Buchheit received equity by being an early Google employee -- at the the he joined, it was still a startup in the real sense -- you can be pretty sure he didn't receive a founder's equity stake in Gmail. He has since left the company to work in and invest in startups.

Large companies must also resist the impulse to throw money at problems. Mergers and acquisitions fail more often than marriages: Cisco buying Flip Video, AOL taking a bath on Bebo, which it bought for $850 million and sold two years later for $10 million; News Corp. writing down hundreds of millions of dollars on Myspace. A big, established company can't buy out a plucky startup and hope innovation and world-beating products will soon start flowing. They also can't simply build a product and hope users will come. News Corp. blew through $30 million to launch The Daily, an iPad newspaper, and tens of millions more to operate it until it shut down less than two years later due to lack of interest.

Entrepreneurialism has to be stoked from within an organization and demands a different approach to product and business creation. For some it means allowing employees who create promising product ideas the ability to take time off to develop them outside the stultifying corporate environment and rewarding them with a slice of the action if they succeed. For others it's about treating each new acquisition as an independent R&D lab or creating their own startup incubators and accelerators. Meanwhile some companies are choosing to keep their corporate structures in tact but to iterate products through the lens of a startup.

Which is to say big companies aren't dead nor will they necessarily become extinct. But they have to adapt. And that's what this new series will explore.

[Art by Hallie Bateman for Pando]