Fail smarter — learning innovation from startups

Innovation never is a straight road

In retrospect we are fascinated by ideas that have prevailed and that often changed the world a little or even a lot: from the steam engine to the railways to airplanes and the Internet, it is often technologies that gave the impetus. Today they are called blockchain, artificial intelligence (machine learning) or messenger RNA. During the Covid pandemic, start-ups such as Moderna and Biontech showed how they could outperform Big Pharma with mRNA technology because they were able to react much faster and more flexibly.

Business angels are working hard to determine which innovations will be the ones that will prevail. How do you recognize them? What needs to be done to turn a good idea into a success? As an angel, you get in touch with startups very early on, which show up as a treasure trove of ideas. This is where creativity and entrepreneurial thinking can really let off steam. We look back on 14 years of startup investments and try to figure out where this innovative power comes from, what it takes for it to be a success and what established companies can learn from it.

Bubbling innovations

Good ideas grow everywhere in Switzerland and as a business angel you see a lot of them: predicting the success of movies using AI (Largo Films), harvesting the energy of the jet stream at an altitude of 8 kilometers (Brainwhere), translating the universal language of newborn babies (Zoundream) or measuring the advertising effect of posters or radio advertising in real time (Significant). This is where innovative minds take on a problem and find a unique solution to it, mostly with the help of technology.

How do you recognize the potential of a start-up or an innovative business idea right from the very beginning? There is no checklist for this, but we have discovered a few simple features that are helpful:

• The business idea arises from a specific customer enquiry or an articulated customer problem, but the solution is then directed to a larger market.
• The idea exploits a strong trend that can only be seen in the beginning (“The trend is your friend”).
• The team behind the idea has made a technological breakthrough, it has the will and the skills to make the idea a product or service. This is especially true if team members have already proven it successfully with other ideas.
• The team has managed to gather many important minds (co-founders, financiers, consultants) behind the idea.
• Where there is no competition, there is probably no market either. The absolute uniqueness of the idea (“we have no competition”) is rather a negative signal. In most cases, there is at least a substitution solution.

Startups have more ideas

The innovative power of startups is often considered as given. But this is not so obvious, because why should entrepreneurs with little experience and even fewer resources automatically have better ideas? After all, these are people who, in addition to a day job, work on new business ideas in the evenings and on weekends without a market research department at ­their side. Here are a few possible reasons:

• Idea generation does not result from sophisticated creative processes, it is created in free space. At startups, not the pressure from outside or the financial necessity creates ideas, but the recombination of different experiences and knowledge. Often a customer problem experienced by themselves meets a new technical possibility, from which the idea for an innovative solution is born.
• Start-up founders have “skin in the game”. By using their own time and financial resources, they are directly motivated to give everything.
• They have little to lose and much to gain. The investment in the form of time and money in the initial phase is relatively small, compared to the man-years of development effort­ of established companies. However, if successful and scalable, the return can be huge. A failure is also not a drama, as many self-revelations show in so-called “fuck-up-nights”.
• They learn early to sell their ideas to investors, co-founders, partners, even if they cannot show a finished product yet.
• They are experienced in dealing with networks that are not held together by money or contractual obligations, but by values and belief in a common idea.
• They are used to constantly discussing, refining, enriching or discarding ideas with outsiders. Through this intensive exchange, a mediocre idea can ­become an ­extraordinary one. The urge for secrecy, which is often cultivated in research­ departments, leaves this potential untapped.

The long road to success

We know that only about 20% of all startups survive the first three years. The build-up time resembles a roller coaster ride, behind every bend comes a surprise: After the first big customer was celebrated yesterday, today insolvency can threaten. For adrenaline is always taken care of! No founder, no innovative lateral thinker can do it alone, it needs a broad-based team with complementary skills (“The Hipster”, “The Hacker”, “The Hustler”). In addition to the quality of the team, however, a few other possible success factors have been found:

• An evaluation of the success of our startups shows that innovations in the middle sector have a higher chance of success. They are new enough to stand out from the competition or the status quo, but not so new that significant change is required. The electric car pioneer Tesla understood this very well, because its firsts model — the Roadster — has a completely new (electric)­drive, but this was installed in a standard vehicle, the Lotus Elise. This made it easier to achieve acceptance and to limit development costs. This MVP-thinking is typical of startups.
• The smallest, usable product, also called MVP, is an important concept for the success of innovations and startups. It is a matter of collecting your own data about customers and their needs with several quick experiments before launching a “perfect” product. Own data is very important, because market research does not­ help much in new products or services, especially in terms of willingness to pay. A well-planned MVP is designed for receiving hard commitments, e.g., in form of a payment. Even for the development of industrial diesel engines, the MVP approach helped to shorten the development time from five to one year. It is not a question of whether the new product can be built, but whether it should be built. If there are no paying buyers for an MVP, a new one is planned, and if it does not work better, it was probably a flight of fancy. The benefit lies in the fact that significantly less time and money is invested in “false” ideas. Fail early, fail cheap.
• Dealing with money has a big impact on success. In an early phase of innovation, startups can only rely on small financial resources, some even finance themselves completely (bootstrapping).­ As a result, all measures are carefully considered and any unnecessary effort is avoided. With an empty belly you can simply run faster and do not give up so easily. In addition, these innovators are looking for paying customers much earlier, so that money starts flowing in much more quickly. When, in later phases, external money finances growth, this discipline is already anchored in culture. We have learned that too much money can make a good idea die sooner: the sense of experimentation is lost, the organization grows too fast, the hunger for success disappears.
• Important for success is the ability to quickly change the strategy when information about the customer makes­ this necessary. This change in strategy, without abandoning the vision, is called Pivot. To strengthen this thinking we like to schedule a fixed date per quarter for a “strategy change or -continuation” meeting. Thus, questioning the strategy becomes an unexcited routine and not a crisis. These changes of strategy are particularly useful if they are based on a well-developed system of experiments (A/B tests, MVPs, pretotyping, etc.).

Some of these approaches originate from agile thinking, The focus is on how to learn more and what data these learnings are based on. Data is the key to success.

Making innovations cheaper

Even well-established companies need innovations to survive, and they spend a lot of time on it. But the result is sobering for many, because small product improvements swallow huge investments, and a high percentage of innovations turns out to be a flop. By startups they can learn how to make flops cheaper, and if they get cheaper, they can make more of them. The key are smart experiments, the more the better.

In practice, the approach of “internal startups” has become known, these are teams that enjoy a high degree of autonomy in established companies and drive innovations there that are not trusted with the normal organization. However, these teams should consider the insights of startups to become more effective:

1. Understand innovations as a series of experiments that collect as much data as possible from customers early on (not about customers!). The starting point is data that describes the customer problem as well as possible.
2. The financing of innovation projects is based on clear milestones (“metered funding”) to deliberately have a light underfunding. More money will be available from the customer.
3. Have the courage to let a bad idea die early. Nevertheless, the team has gained a lot of insights about the customers and the market, it has “failed smarter”.

It is obvious that this means to build up entrepreneurial thinking in technically oriented teams. Ideally, this will make innovations faster and cheaper.