V1 innovation within a V+1 org

Startups are optimized towards launching version 1.0 offerings, identifying product-market fit, and putting in place the best go-to-market organization to attract new customers. Once the “magic” happens (or should I say the challenging work pays off), when users and products find each other in a happy place, the growth loops evolve towards retention in addition to the original focus purely on acquisition. As the company matures, there is a natural tendency to increasingly drive the business towards delivering incremental products, focusing on the existing target audiences. After all, that’s where the revenue has come from historically, so why not concentrate the R&D and go-to-market investments on what we know best and minimize financial risks? Larger companies sometimes have a hard time going after something unproven that will take investing multiple years to become a meaningful part of the revenue. It could even take market share away from existing offerings!

Yet if this v1 innovation culture isn’t maintained to a certain extent, that muscle will atrophy. The risk of new players surprising the incumbent with a significantly better solution for an adjacent target market will become a reality. Clayton Christensen wrote extensively about this. His best-seller book “The Innovator’s Dilemma” remains as accurate today as it was in the age of the hard drives shrinking in size. Mature companies, large and small, continue to focus on sustaining innovations, improving existing products, and doubling down on existing go-to-market strategies for proven target audiences. Don’t get me wrong, protecting and growing current product lines is critical for any business’s long-term viability. Improving existing offerings release after release and striving for operational excellence to maximize the right balance of long-term profitability with growth is paramount.

So how should an existing company with a portfolio of V+1 products and an existing org structure think about disruptive innovation to use the term from The Innovator’s Dilemma book? How can a company leverage existing technology and expertise to deliver something new, which could radically change the revenue mix and market share if successful, while minimizing the impact on the existing offering and run rates? Going from 0 to 1 requires a fundamentally different approach than V+1 products. Established companies already benefit from IP, go-to-market expertise, known brands, shared teams, and funding. They need to leverage these to their advantage compared to startups, who need to build everything from the ground up.

The company will need to form a “start-up within” group to achieve this disruptive innovation, with a dedicated team driven by a clear mandate. That team needs access to the technology and financial backing from the parent business. Yet it requires the agility to experiment and the opportunity to disrupt the existing company businesses when successful. Being successful at disruptive innovation goes way beyond the Product / R&D focus. It requires a holistic view that also covers sales and marketing. This requires an open culture that is not afraid of trying things out, failing, and learning from their experiences. If the leadership and shareholders of the company are not ready to stomach multiple pivots on the path to disruptive innovation, they are better off not taking the first step.

Putting things together

To maximize the chances of a successful outcome for the innovation process, the aligned leadership team of the company will need to commit and deliver:

  1. A strategic clarity and well-defined goals
  2. A dedicated innovation team
  3. full authority over secured funding
  4. accountability for measurable outcomes

Let us look at each of these in more detail.

Getting people together and telling them, “You are now a start-up; go figure it out” is too simplistic. The first step is to provide strategic clarity and well-defined goals to the innovation team members. This is the responsibility of the company leaders, driven by the executive sponsor, ideally the CEO – and make sure that the C-Suite and Board share a strong alignment. This clarity and goals will set the area of focus, which could leverage existing technologies and IP or could benefit and expand the existing brand positioning and awareness in customers’ minds. It also requires an initial definition of the target audience, adjacent or completely different. Focus on the problem to solve and explain why your existing portfolio is not well suited to solving that problem. And please, resist the urge to provide a solution.

Once you have strategic clarity, it is time to form a dedicated innovation team. The magical word here is “dedicated.” If you are only willing to have team members join the “start-up within” part-time while keeping their “day job,” stop right there – you are setting them up for failure as they will not be able to allocate the effort required to be successful. Just think about it: under pressure such as quarter-end or shipping a significant release, how will the people involved manage progress on the disruptive innovation? Note that I am not advocating for a team of 20+ people, at least not at the pilot stages. Two “co-founders” to 4-5 cross-functional founding-team members are all you need to get going, bringing expertise from go-to-market, user experience, product, and development. From experience, prioritize existing team members to join this team if possible. While it might sound easier to acquihire a failed startup and put them in charge of the disruptive innovation, opening the opportunity to initiative-taking and well-connected existing employees will do miracles to drive support internally and shape your company culture beyond this group. You will need to clearly define who the Innovation team leader will be – the General Manager / mini-CEO.

And now, for the money part – that dedicated innovation team needs to have full authority over secure funding. I can feel the CFO ready to put a strong objection here, but please read me out. Having funding sorted out upfront for the next 2-3 years, with increasing amounts unlocked at every milestone, gives the internal innovation team a significant advantage over a start-up. They will not need to spend a large amount of their time raising additional funds, honing the art of the pitch more than the art of building great products that customers will love. The critical part is that the team has full authority to use the funding to pursue the goals. They know that after each successful stage, the next tranche of funding will unlock automatically – more on this later.

That innovation team needs to be accountable for measurable outcomes at each stage of progress, and these outcomes need to be pre-agreed early in the process. The team needs to be responsible for rapidly exploring and iterating on new product ideas within the strategic clarity defined above. They should also be able to leverage shared teams within the organization, such as research, data analysts, or finance, but should be free to go outside if things are not moving fast enough.

The in-house disruptive innovation process

Like startups who go through rounds of raises and need to prove to the investors that they have reached a certain level of traction and delivered on their plans, the in-house innovation team should be bound by a stage-gate process from idea to graduation of a successful v+1 offering. At every gate, the decision will be to either move forward, continue in this phase (persevere), pivot, or go back to the start.

As a first step, I recommend forming a growth board responsible for the stage-gate reviews and approval to move to the next round, unlocking the next tranche of funding. This growth board should be 5 to 6 individuals (not more) from the corporate leadership team and should include the CEO, CFO, and executive sponsor (if it’s not the CEO). On one side, the executive sponsor will need to meet weekly with the innovation team, with the primary responsibility being to remove roadblocks as they happen. The growth board will require monthly updates regarding lessons learned, project updates, metrics, and tracking towards the next milestone. The stage-gate quarterly meetings need to include the project achievements review and a discussion about learnings over the last period. In addition, new opportunities uncovered are brought forward during the stage-gate meeting, looking at the opportunity for a separate innovation team to get together. That meeting will also require the growth board to decide whether to move ahead, pivot or persevere. I cannot emphasize this enough: the growth board NEEDS to take that decision when at a stage-gate and provide a valid explanation, not based on opinions.

While each company will have the opportunity to adjust the different gates to match their internal needs, the overarching process will follow a similar pattern to the startup world, with additional rounds and the growth board being the equivalent of the investors:

  1. Ideation – equivalent to the “friends & family” round
  2. Refinement – now you get towards the “angel” round
  3. Minimum viable product & messaging – getting towards the “seed” round
  4. Product-market fit – entering the “Series A” round
  5. Traction & Scale-up – ready for “Series B and C” rounds
  6. Graduation to V+1 organization – call it IPO or Exit – congrats, you won, please start again!

The Ideation (or ideas gathering) phase requires an open mind and discussions with people from across the company and outside. This is an opportunity to open to team members’ knowledge of the front lines and all geographies. Think of it as crowdsourcing from a team of talented individuals – they are working at your company after all. You are leveraging their field of expertise and market intelligence. Researching trends and adjacent market needs will also happen in this phase. The goal here is to collect a broad range of ideas. Consider running brainstorming sessions across the organization, and why not host cross-functional hackathons? You will be amazed by the depth of information available throughout the company and the positive impact this broad participation will have on your culture and V+1 offering. But remember, get the free riders, those who do not actively participate, out of the brainstorming sessions quickly. At the end of this phase, your innovation team will need to pick the top five most promising opportunities to present at the stage-gate meeting. These rankings will need to be based on the information gathered from a technological, social, economic, and competitive perspective. And the role of the Growth Board is to select the maximum two that will move to the next stage – if you have more, you will need additional innovation teams.

During the Refinement phase, the innovation team doubles down on the ideas selected previously and goes deep into learning about the industry, the market, and the existing solution used. This includes talking to potential users and building the hypothesis of the painkiller that will be ten times better than anything else currently used. To help you get in the right frame of mind for this phase, review Clayton Christensen’s book “Competing against luck.” Market sizing, feasibility, and initial cost estimates will happen at this stage – note for the growth board, assume these will only be directional and be open to significant changes as new learnings come in. At the end of this phase, the stage-gate meeting will go through a review of both opportunities. The growth board will select the most promising idea and will have to decide whether to move it to the next phase. If not, it is time to consider a pivot or go back to step 1.

Now that you have narrowed down the team’s focus to a single idea, it is time to start building and validating your hypothesis. Using terminology from the Lean Startup movement, startups (and investors) often refer to this as the MVP or Minimum Viable Product. I prefer to think about it beyond the product itself and look at the Minimum Viable Product & Messaging. It would be best if you indeed were doing numerous iterations of the value proposition through landing pages and Google Ads ahead of you building the actual product. As this is not a course specifically about the Lean Startup methodology, I can only encourage you to read Erik Ries’ book “The Lean Startup” and Steve Blank’s book “The Four Steps to the Epiphany.” The main goal of this phase is to validate the core hypothesis and iterate as quickly as possible, collecting the maximum amount of learning in the least amount of time. At the end of this phase, the stage-gate will have confirmed a problem to solve and that it is feasible to build such a painkiller. Getting some revenue from early customers is nice but should not be the goal. As with every step, the growth board will need to decide whether to move to the next stage, continue iterating around the MVP, or pivot and go back to a previous step.

During the Product-Market Fit phase, you expand your focus from looking at “can this be done?” to “if we build it, will they come?” You go beyond validating hypotheses and start delivering feature-rich solutions that the target audience requires beyond the fundamental value proposition. This is when you focus both on product-led growth and go-to-market-led growth. You look at your offering from a 1s and 0s, positioning, marketing, and revenue generation perspective. Beyond confirming that you have a strong value proposition, the attention of the cross-functional innovation team needs to move towards the whole business model, covering partners, channels, resources, cost structures, pricing, and revenue streams. This is where the book “Business Model Generation” by Alexander Osterwalder and Yves Pigneur comes in handy. During the Product-Market Fit phase, your focus is around growth loops, and your metrics now include retention and growth rates, net dollar retention, and overall user engagement. During the stage-gate at the end of this phase, the growth board will be presented with a V1 product and organization to sell and support it, with growth projections and, ideally, a view into achieving profitability. Remember, the innovation team is not a VC-backed startup… it is part of a mature organization that might not be over-indexing user growth over everything else. As the growth board reviews the product, GTM organization, and go-forward plans, the decision will depend on the confidence level in the next phase, fueling the fire.

As the innovation team switches towards the Traction & Scale-Up phase, the focus moves toward micro and macro growth loops. Ensure that the core innovation team has gone through the Advanced Growth Strategies training from Reforge at this stage if you are serious about succeeding in the scale-up phase. If there is overlap with other parts of your organization, this is also when you start leveraging your existing sales & marketing teams. Yes, this new offering might take over some of the revenue streams from your older products, but then again, would you rather this be a competitor or a new entrant? As this growth phase continues, the product and team requirements will become increasingly like the V+1 organization of the rest of your portfolio, which is very positive. The formal Graduation to the V+1 Organization of the product delivered by the innovation team is the best outcome possible and will result from the final stage gate in front of the growth board. At this point, some of the innovation team members will want to stay with the V+1 product to drive sustained innovations, while others will be ready to roll up their sleeves and start all over again. Either way, recognizing this significant achievement by the company is necessary.

Modeling a funding requirement

One thing to remember: As the innovation team successfully passes a specific stage-gate, funding for the next phase unlocks automatically. It is growing at each level by at least a pre-approved amount.

While every case is different, it will be easy to model the headcount and cost structure of the Innovation team and the process overall. It is possible to scale this model up by running multiple innovation teams in parallel on separate projects if your budget allows it.

Start with a simple table that maps out the next 8-12 quarters (the standard unit of mature businesses) and provides a view of the estimated headcount. I recommend assuming that the first 4 phases described above will take four quarters from a team size perspective. The next four quarters focus on scale-up, and the four quarters after are getting ready to transition to the V+1 organization. Use an estimated sense of headcount required by core function (product, development, UX, sales, marketing, …). Then, consider the supporting role needs such as research, support, and DevOps. These supportive functions could either come from your existing shared services or could be set in place to serve multiple innovation teams in parallel.

Development 23356812
Marketing  111233
Sales   12356
DevOps  111122
Support   12235

The numbers above are only placeholders – use your specific expertise and market knowledge. Hardware will differ from a mobile application, resulting in different funding requirements and timelines. Such a model will enable you to understand the budget to allocate over the next 2-3 years. Please account for the learnings, pivots, and potential accelerated growth by multiplying by a particular factor. In addition, you should plan for a specific incentive package for the core team, a compensation plan for achieving the right metrics on the aggressive schedule they are asked to deliver against.

Concluding thoughts

As you consider the benefit of a disruptive innovation team within your organization, consider the broader company and how such a “rebel” group can potentially impact existing revenue streams. People are naturally concerned about their areas of responsibility, achieving their objectives and could feel threatened by this new thing done by a skunkworks group. At the same time, this innovation team has the potential to inject a new sense of excitement into an organization, impact its culture, and sustain innovation. Therefore, make sure to regularly report back on the progress of the innovation team, sharing the “lessons learned” so that the V+1 organization can improve from the V1 group and vice-versa.

Make sure to set clear “rules of engagement” for the innovation team from the very top of the company:

  • The team needs to be protected from the rest of the organization.
  • The team needs to have the right to build, buy, or partner.
  • The team budget is secured for at least 2, preferably three years.
  • The pre-approved budget increases automatically when achieving specific milestones.
  • The broader company needs to promptly provide information and IP (source code…) but has no say over specific decisions within the innovation team.

Getting disruptive innovation from within a mature organization is not about building large teams and spending a lot of money up-front. It’s about leveraging the best practices from successful early-stage startups. It’s about defining strategic clarity and then getting a small, dedicated team to deliver based on simplicity and velocity.

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