Small companies are better than big businesses at maintaining a culture of innovation. David Lawrence from the UK Innovation and Science Seed Fund explores the secrets to their success and discusses how venture capitalists identify start-ups with potential.
Big business tends to struggle with innovation. That’s the view of Dr David Lawrence, an independent member of the advisory committee of the UK Innovation & Science Seed Fund, who worked for many years in senior research and development roles at agrochemical giant, Syngenta.
“Few large companies experience more than one wave of innovation,” he explains. “They tend to have one technical thing they do and get big on the back of it.” He gives the examples of Kodak and Nokia, which became the biggest photography and mobile phone manufacturers in the world, but then failed to change and adapt to the new era of digital cameras and smartphones.
“The problem with big companies is that there are too many short-term things you can do to make money,” he explains. “Anything innovative seems a long way away, awfully risky, and not worth very much.” To give an old example, in April 2007, Steve Ballmer, CEO of Microsoft was quoted saying “There’s no chance that the iPhone is going to get any significant market share”!
The same forces apply to the drug development world, where big pharma has struggled with new innovations over the last couple of decades and now relies on acquiring inventions instead. In contrast, small biotechs often succeed because they have only a few people and one or two technical options. “They don’t have the choice to move onto something else,” he says. “People are committed to making an individual idea work.”
Dr Lawrence, who lectures at Imperial College London on entrepreneurship and innovation, noted there’s scientific evidence that innovation comes from turning off some of the higher centres in the brain to let the imagination fly. “The behaviours that encourage this sit more easily in smaller organisations,” he says. Google, for example, used to allow employees 20% free time, and it was this flexible side of the business, especially in the department they called ‘Black Arts’ that invented Android, Chrome and Google Glass.
“It’s an interesting question as to whether Google still does that, and the answer is probably no because they have too much existing business to defend,” he says. “It doesn’t look good when investors are walking through, and people appear to be playing games or doing nothing.”
For venture capitalists working with small companies, Dr Lawrence says the big question is not whether they’re going to succeed, but whether – if they do – they’ll make money, and whether there’s a good plan to find out with limited time and investment. Finally, and just as important, does the management team look capable of successfully executing it?
This is dramatically different to the way in which a large company operates, he argues. With bigger budgets, the key questions are always about how you market an invention, how much it’s worth, and its chance of success. “These aren’t the sort questions you can ask in venture,” he says. “By definition, if it’s innovative, you don’t know what you can do with it, because it hasn’t been invented yet.”
As a consequence, his role at the UK Innovation & Science Seed Fund isn’t advising start-ups on the steps to success but giving them insight into pitfalls that derailed past innovations. “I also check whether they’ve got a good plan to succeed,” he explains. “A lot of technical people don’t have a very focused plan early on.”