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James Hong

Sunday, March 25, 2007

A question to ponder: should big companies even try to innovate internally?

I just read an article on news.com interviewing Caterina, talking about her quest to create an innovation incubator within Yahoo.

Now let me first say that I know Caterina and Stewart, not as well as I'd like to, but what I do know is that they are both awesome people. The job Caterina has been tasked with is an incredibly hard one. For some reason or another, the larger a company gets, the harder it tends to be for innovation to happen there.

Certainly, I have no doubt that there are talented people at Yahoo who, given the right environment, have the ability to be extremely innovative. Despite Yahoo's reputation, I've met a lot of people there like Bradley Horowitz that I have been impressed by, people that do seem to "get it". However, my question is this: Should a company the size of Yahoo even be trying to innovate internally, or would it be better off taking the strategy of aggressively acquiring innovative companies early?

My thinking is this... most ideas fail. Rather than investing time and money into 100 failing ideas just to find 10 that work, isn't it better for Yahoo to let entrepreneurs start 10,000 startups, and just buy the 10 that work? Sure they will be more expensive than if they built them in house, but they'd also save money from not building the 9,990 failed ideas. Also, my guess is that an employee of a large company is not as likely to go through the same levels of pain and hard work that an entrepreneur would be. Most people just don't want to work as hard for someone else, and who can blame them?

Even though Yahoo has grown into the entity it is today by virtue of building innovative products, perhaps its future growth path should be driven by its ability to SPOT innovation, not create it. I'm not quite sure what my answer to this question is, it was just a passing thought and I'd need to think some more about it. Would be interested to hear what other's think.

14 Comments:

Anonymous Arnold Kim said...

Hi James,

I agree with your sentiment, and feel that that's what Yahoo's been doing... acquiring these other companies... though it's not been cheap for them. :)

No matter the talent in these big companies, these individuals aren't going to have the push or desire to put in the extra hours to really push their ideas forward.

It's one thing to have an innovate idea, and another to execute. I think the reason some startups succeed is by sheer force of will.

That being said, some innovative ideas may need the underlying technologies that Yahoo already has. For example, Google Adsense was a genius idea, but you are I could not have launched it and succeeded due to a lack of infrastructure.

3:28 AM  
Anonymous Arnold Kim said...

apologies for the double comment... but the more that I think about it... especially with my last comment about Google Adsense.... I do think big companies can innovate... and think it is a worthy task. I think what might get in the way is a fear of disrupting the status quo.

But leveraging their existing knowledge/market perspective, like Google did with Adsense is an advantage they shouldn't ignore.

3:50 AM  
Blogger Bradley said...

James,

For us it's not an either/or proposition. We'll continue to spot and acquire companies... and I'm proud to say that Flickr, Jumpcut, MyBlogLog, etc. were spotted and championed by members of my team. I think one of the reasons that they were able to spot these gems is that they were actually working on similar or adjacent technology... So we don't see this as an "alternative" to the acquisition path, so much as a facilitator.

Moreover, we're looking for opportunities where Yahoo is not ignoring it's assets in order to complete on a level playing field with the other 10,000 random startups out there. We intend to bring these to bear - whether it's audience, brand, infrastructure, content, etc. This gives us a huge leg-up on the competition... Not eliminating the risk entirely, but maybe shifting the odds from 100:1 to 10:1.

Anyway, theres more I'd love to share with you. Why don't we have lunch, it's early Sunday morning ;-)

7:47 AM  
Blogger Delexa said...

Sad to say, Microsoft takes the right approach here (at least from a business perspective), which is to notice a trend then duplicate it internally, building things from the ground up and integrating them into their existing products. Buying products like del.icio.us just halts their progress and leads to the "peanut butter memo". And Yahoo never seems to recoup their investment in any of these "small plays" though I'm sure they feel like big wins and add to their pageviews, I can't think of one acquisition in the last 5 years that has actually worked out to the benefit of their bottom line.

9:47 AM  
Anonymous Damon Billian said...

My personal take is that the company has to ask several questions...

1. Can we as a company do it better?
2. Do the companies in question already have large audiences that we wouldn't be able to build on our own?
3. Can we let these acquired companies stand on their own to further facilitate their ability to be innovative? I think this is a challenge when smaller companies get acquired by larger companies.

That being said, I do think Yahoo has done very well at picking some gems out of all of the startups (Flickr was a steal, IMHO).

9:48 AM  
Blogger Jeremy Zawodny said...

"Yahoo has grown into the entity it is today by virtue of building innovative products"

A lot of people forget how many of Yahoo's big products came as the result of acquisitions, not building innovative products.

10:45 AM  
Blogger james said...

jeremy, agreed.. i guess my main point is that yahoo was a huge innovator in the beginning (the web really would not have happened without it.. remember when the browser first came out??), but that over time acquisition starts to play a bigger and bigger role. So the push for more internal innovation seemed at odds a bit with the seemingly more natural path of just spotting good things and buying them.

people make good points though, that internally bred startups can have a huge advantage in pulling things off versus startups, given yahoo's traffic, relationships, etc.. provided yahoo is actually willing to support these projects beyond just funding them, i've come to the conclusion that it's probably a good idea.

10:57 AM  
Anonymous Anonymous said...

If you haven't read it I think you'll find Paul Graham's Hiring is Obsolete very useful.

5:23 PM  
Anonymous Ben said...

I agree with you that ultimately it's conceptually a great idea for a large company to innovate within, but it it's a terribly hard thing to actually implement and realize.

Reason being that I think many great startups would've gotten axed even if they were suggested at a large innovative company like yahoo. Why? Because it's gotta move the needle for the company (which is no small task at a company like Yahoo). Of course a 'startup' within Yahoo has many advantages that it can leverage, but it's actually got to be given that chance first.

Before they get to exploit the advantages of being within Yahoo, there will always be some decision maker saying "hmm, does this move the needle for Yahoo? Will X of our users use this? Does it make sense to put people on it?"

Though I clearly don't know of these thresholds in Yahoo, but I imagine it's quite a bit higher than 2 recent college graduates toying with new business models/ideas.

That's why I personally think it's not a question of the capability to come up with innovative ideas, but with public shareholders to answer to quarter after quarter, can they fight the incentive to filter out the great but immature ideas.

3:25 AM  
Anonymous DShen said...

It would seem unusual to me that you would ask an entrepreneur to create an incubator within a large organization.

While entrepreneurs are great at the creativity/innovation part of business and product development, they have little or no experience at taking that spirit and knowledge to the next level within a large organization. They only have half of the equation. The other half, I believe, needs to be driven by someone who has power, respect, and assigned responsibility within the org to carry such initiatives through AND experience in navigating bureaucracies to get things done.

So if Katerina fails, I do not believe it is her at fault at all. Blame it on the org who says they want something but does not have the true will to carry it through.

7:51 AM  
Anonymous chi said...

The answer to the question is yes, if nothing else for the employees. The direction seems to be around the company and we've forgotten the employee. Allowing employees to pursue ideas, passions, and be innovative makes for a better work environment. See Google's 20% rule.

7:31 PM  
Blogger disrupSean said...

That's the age-old (or at least, information-age-old) buy vs. build vs. rent dilemma..

So much has been written about this, what to recommend.. Christensen's "The Innovator's Dilemma" is a good starting point and probably most-cited book about this, Larry Downes has some interesting takes on it too in books like "The Strategy Machine."

I think it's good that people are trying out all sorts of approaches to this dilemma. Of course many big firms still try to build most things in-house and try to keep a stranglehold on what they produce, there are open teams of independents who quickly form to tackle a project and move on after selling it, and in between companies like Intel and Yahoo set up little labs designed to be distant from the bigger corporate culture. There is no one known answer, let the petri dishes bloom.

4:29 PM  
Blogger Dave said...

while i think it makes sense for them to try and do more with internal innovation, i'd agree acquisition is likely a bigger part of their strategy.

however, the other question to ask is what about investment?

i'm surprised more internet platform companies like Yahoo & eBay & Amazon aren't doing more at the early-stage investment level to help create complementary businesses *before* they decide to buy.

this could assist their strategy in many ways, by helping them steer some startups to their platform that otherwise would not, and also to have a hand in on a few deals before they get picked up / discovered by other investors.

i'm sure the refrain will be "that's not our business, we're better off leaving that to the VCs", and i think that's hogwash.

ultimately, it's a disservice to shareholders if the big companies are spending hundreds of millions or billions on later-stage acquisitions, and they AREN'T making significant earlier efforts at the other end of the funnel to help create opportunity.

these days, internet platform companies should think of themselves as both partner and competitor to VCs. if they're complacent, they'll get beaten and/or pay high[er] prices to acquire strategic assets. if they're active, they can make 20-50 seed investments every year with a modest amount of resources, and then have the option to monitor & participate in the deals that grow & prosper down the road.

MyBlogLog, along with less high-profile deals like Upcoming.org, is an interesting opportunity for Yahoo because it's a relatively small $ figure but allows them to acquire some strategic technology. however, they were competing with VCs funding a larger / later round, and in an alternate universe might not have won that deal.

but it's not just Yahoo i'm talking about here. Google, eBay, NewsCorp, and others should all be playing this game. it's just another way for them to make the most of their business.

- dave mcclure
http://500hats.typepad.com

3:23 AM  
Blogger Travis Reeder said...

It's very tough to push an elephant. I had tried doing it once by making a proposal to the executives of an unnamed large company and I got the ol' "Thanks, now piss off" reply.

Some companies do make it happen, but it seems that they do it only when they are falling down and they suddenly need to innovate to survive.

4:33 PM  

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