On this week’s episode of Inside Outside Innovation, we sit down with Elliott Parker, CEO of High Alpha Innovation. Elliott and I discuss why innovation is getting harder and what to do about it, as well as new models for tackling transformative and disruptive innovation.
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Interview Transcript with Elliott Parker, High Alpha Innovation
Brian Ardinger: Welcome to another episode of inside outside innovation. I’m your host, Brian Arbinger, and as always, we have another amazing guest. With us this week is Elliott Parker. He is the co-founder of High Alpha and CEO of High Alpha Innovation, which is an Indianapolis based corporate venture studio, which partners with organizations to create and launch new ventures. Welcome Elliott to the show.
Elliott Parker: Hey Brian, happy to be here.
Brian Ardinger: I’m excited to have you here because you and I have crossed paths a couple of different times with the stuff that you’ve been doing in startup and corporate innovation work outside the core tech hubs. And the stuff that High Alpha has been doing. Over the last decade we’ve seen a lot of changes and innovation, and a lot of innovation has actually come to the work of innovation. Can you give us a brief history of an evolution of High Alpha and this venture studio model?
Elliott Parker: Yes. So High Alpha is a venture studio based in Indianapolis. What that means is we’re a combination of a build function with a source of capital. Think about it as a venture capital fund that builds companies. I’ll make that small correction to the intro. I’m not a co-founder of High Alpha. I actually joined about three years ago. High Alpha has been around for five years. It was started by some friends of mine five years ago. They’d been working together in a company called Exact Target, that our managing partner at High Alpha, Scott Dorsey, founded about 20 years ago.
They exited Exact Target in 2014 and decided they enjoyed starting companies. And so wanted to go build a studio. Investors said you ought to raise a fund to sit alongside the studio. And this idea of a venture studio came together. That combination of build plus a source of funding. So, our team at High Alpha has gotten better and better at launching new companies over the last five years.
This year 2020 has been kind of a breakout year in many ways for us, despite all the challenges. In the end we’ll get, the count 10 or 12 companies launched in 2020, but we will soon launch company number 29 out of the studio. And we’ve invested out of the fund in another 30 plus companies. All B2B SaaS focused. And along the way, as we’ve gotten better at this systematic building of new ventures, we’ve had a lot of scale enterprises, big companies come to us, and say, can you help us do what you’re doing in your venture studio?
I mean, there’s been a lot of interest just recently in the venture studio model with big companies, either starting their own form of a venture studio or looking to partner with an external studio. And initially that was not part of our approach. We were focused on building startups inside of High Alpha, but it makes a lot of sense to team up with scaled enterprises to do this.
Because although it may take us longer together to build a new startup than it might if we were doing this on our own. You know, we can launch a new startup every four weeks, but Hey, if we can build a startup with a bigco as a co-investor with us and potentially as a first customer or distribution partner for that startup, that startups got to a much better chance of getting to scale and getting to scale quickly.
So, we’re very, very excited about teaming up with big companies to do this. So that’s the LSD, the impetus behind High Alpha Innovation, which we created earlier this year to focus specifically on applying this venture studio model with partners like university corporations.
Brian Ardinger: So, we’ve seen this happen where corporations are looking at the startup realm and saying, Hey, how can we move as fast and how can we launch things that we’re seeing out in the market that these disruptors and that, why do you think it’s so difficult for corporations to get that innovation mojo and to the launch new starts in the way that the startup marketplace actually is doing it?
Elliott Parker: For a number of reasons. I think Clay Christiansen hit the nail on the head with the Innovator’s Dilemma at 23 years ago now. And I spent many years working at Clay’s consulting firm InnoSight where we tried to help companies overcome this challenge. One of the things I learned is that to pursue innovation requires a certain set of processes and governance, the right incentives, the access to the right kind of talent.
When you’re building a scaled enterprise, you’re not optimizing that scaled enterprise for learning and innovation. You’re optimizing that scaled enterprise for execution. So you develop a certain set of governance, talent, process, and incentives that help you execute to do so at scale. And to take that operating model and say, now we’re going to try and deploy this model to go learn. It doesn’t work.
On the other hand, what we’re seeing out in the market is that startups are designed to learn, to innovate, to move very, very quickly and to disrupt. And so what we try to do in the venture studio models, we’ve created an out of the box off the shelf collection of the right governance process, incentives, and talent that we can deploy to drive systematic innovation and to do so quickly. So, in scaled enterprises. It’s very hard to take what they’re so good at and to redirect it for something that they’re not optimized for.
Brian Ardinger: So, talk through maybe an example of how a company would come to you and say, Hey, we want to innovate. We have some ideas that are on the shelf, but really don’t know how to get that done. Why would they come to High Alpha? And how would you walk them through that process of launching or building something?
Elliott Parker: Yeah, most of the companies he’s come to us because they are dissatisfied. To some degree with the quality and quantity of their innovation output. Things are moving too slowly or it’s not disruptive or transformative enough. It’s no wonder, right? Innovation is getting harder inside of big companies for a number of reasons.
There are certain types of innovation that are both necessary for big companies to pursue. And at the same time, impossible or near impossible to pursue internally, it’s a real challenge. And so most of the time, the companies that come to us are saying, Hey, We need to move faster. We need to get some points on the board, some meaningful points on the board.
And over the course of three or four months, we can launch a new venture backable startup and put some meaningful points on the board that way. So, it’s the way to do something pretty rapidly at a cost that in many cases is lower than what it costs to do internally or certainly many times lower even than it would cost to go build a proof of concept with an existing startup. It’s sometimes easier just to go start a new company.
Brian Ardinger: So, in that particular like functionality, how does it actually work? A corporation comes to you and say, Hey, we need some innovation. They come to you, you work with your team to iterate and build and execute on some of these new models and MVPs, so to speak. And then at that end of it, do they get that company or is it a company that starts as a startup that they work with? Walk us through that.
Elliott Parker: Good question. So, we deploy the same model that we use in our core venture studio. And in our venture studio, we found it very important to rely on what we call foreseen functions to make us develop the confidence that we need to make informed launch decisions and to get things built.
That’s how we launch a new company at a regular cadence so that when big companies come to us, we can start at many different points in the process. We might start at the beginning of say, big company comes to us and says, Hey, there’s this kind of strategic area we need to go learn more about, or we need to build some optionality within.
And we will start with a blank whiteboard and use our process to generate a few hundred business ideas in the first few weeks, and then take those ideas through an evaluation process that culminates in a sprint week where we take the top ideas and try to compress the first six months of a startup into a week. And at the end of that week, make a good, informed go, no go launch decision.
In other cases, companies are coming to us with something they’ve already, maybe already prototyped, or they’ve developed internally. It’s just not moving fast enough. They feel like it’s got opportunity outside the business and we can take those things and put them through the later stages of our process around through a sprint design, a best-case business model hypothesis, go launch that business, and then support it post-launch to make sure it’s got the best chance of succeeding that it possibly can get.
Brian Ardinger: So, this makes a lot of sense for innovations that are H3 or on the farther out horizon, that it’s harder for an existing company to execute on. What’s your take on innovation that’s maybe closer to the core? Should companies be looking again to outsource that and, or build a competency within their own walls to do the H1, H2 type of innovation?
Elliott Parker: Yeah. No. In most cases, companies should be doing that internally and they’re well equipped to do it. There are a lot of things about our process that can be applied to that. But in most cases that tactic of setting up an innovation team, walling off that innovation team from the core to a degree, and letting them go pursue opportunities is the right thing to do. To go pursue kind of core adjacent H1, H2 types of innovation.
What we say when we’re going through a process with a big company to do this, you know, 80% of the ideas that we’ll generate along the way are things that they should be doing internally on their own. Or maybe in partnership with a startup that’s already doing it out in the market. It’s only 20% that fit this model of let’s go build an external startup to solve this problem.
And that applies when there is a high degree of ambiguity about how to proceed, meaning learning is more important than execution in the beginning. And then secondly, it’s likely that the end solution is going to conflict or challenge the core business in some way. Meaning it might be competitive, but it might not even be that.
It might just be that the new business is going to reprioritize stakeholders differently, for example, or apply a subscription model rather than a per unit pricing model, things like that, where if that’s the case, oftentimes a startup is actually better equipped to win in that environment than the established company is. So, let’s go build a startup together that can compete and win, but also leverage the strength of the bigco to do it.
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Brian Ardinger: Yeah, it’s less likely that the large corporations’ antibodies will have a chance to kill the new thing before it has a chance to get growing and moving forward.
Elliott Parker: Yeah. And in particular that’s part of what we come in with skin in the game, right? The idea of setting up an external company with shared equity and bringing in other investors and things like this is for some companies, this is a new idea and many wonder, well, why would we give up equity? Or why would we share in that?
And a couple of reasons which one you just hit on by having professional company builders in a venture studio, having a small stake in that business with you that thing’s more likely to succeed. It’s less likely to be pulled back into the core prematurely. It’s more likely to succeed because as a venture studio, this is what we do all day is build companies and support them. We’re going to do everything we can to make sure that company succeeds. It’s a way to safeguard it. It’s also a way to ensure that that thing’s going to just move faster than it would otherwise we are less reliant on the incentives, talent, governance, processes of the core.
Brian Ardinger: So, the other thing we talk a lot about with corporate innovators, the pushback is, well, why don’t we just go out and invest in a venture fund? Or why don’t we go out and just buy companies that build that innovation void? What are your thoughts on pluses and minuses to those particular models?
Elliott Parker: That can be a great approach, too. I think about all these things as complimentary tools in the toolkit. It depends on what a company needs to achieve. The way we think about it is you’ve got to ask yourself two questions, how much innovation do we need and how soon do we need it?
If you need a lot of innovation, meaning you’ve got to take some drastic steps to reinvent your core business model, to transform the company and you need to do it yesterday. Well, you’re probably spending more of your time focused on acquisitions as a way to drive innovation.
On the other hand, if you’ve got more time, you don’t need that innovation immediately. You’ve got some time to learn and to build some optionality going out and making investments, striking partnerships, building new can be great things to do. I think about CVC. As a powerful tool, primarily for learning about what’s cutting edge in a certain space.
So a lot of times companies start a corporate venture fund with the goal that, Hey, we’re going to go make investments. These investments are then going to blow back into our core operations in some way, transform our company. That rarely turns out to be true, but what can be very effective about the CVC approach is we can go out and learn about what startups are doing in that space. The CVC team should be closely plugged into the strategy team to be able to say here things that we’re seeing on the horizon that will impact our business. We need to be thinking about.
With external building option through a venture studio, that the goal is a little bit different. It is learning, but it’s also, I think, more about building optionality. So what I mean by that is if you’re operating in an environment of uncertain futures where we don’t know what’s going to happen, the best way to maximize returns and minimize risk is to go run as many experiments as you can at the lowest possible cost per experiment. Building startups.
In fact, this is how we do that in business. That’s how we run cheap experiments, you know, cheap in quotation marks. It’s relatively cheap to go build a startup rather than centralize that innovation and have it fail inside your core business.
So oftentimes companies will look at a landscape or a set of opportunities out in the market. There isn’t anyone doing exactly what we would like to see exist in the market. There is no startup to go invest in that’s doing it quite right. So, what we say is, well, let’s go build it. Let’s go build it from scratch. Let’s custom design it to fit the need and let’s assume that other people have that same problem. And there’s a big opportunity there that we can go explore it.
Brian Ardinger: So, can you give us any, either case studies or examples of companies that are doing it well, or things that you’ve seen that have worked in this new model?
Elliott Parker: A lot of interest just recently companies, either building their own venture studios or are looking to partner with others. I think we’re at the front end in fact of a wave of this. When High Alpha was launched five years ago, I don’t think anybody was using the term venture studio.
In some ways this wasn’t entirely a new model. Ideal lab has been doing a version of this for 20 years and so on. But it was a new term. And now at last count there were over 600 venture studios or startup studios around the world. There’s been an explosion.
And I think we’ll see the same thing in big companies. You know, 15 years ago, a lot of companies were starting to play with the idea of the corporate venture capital thumb. Now nearly every large company has one. I we’re at the front end of a similar wave with venture studios.
Some companies are starting to deploy it 15 years from now. Most will either have a venture studio or be partnering with an outside venture studio to do it. We’ve teamed up with a number of companies over the last year to either help them build a venture studio capability inside their company and or in the process, go build some startups.
And so there are some examples of companies doing that well. Recently, just in the last few months we launched a company for example, with Silicon Valley Bank, called Bolster. That’s a good example of how this model works, where we were looking for opportunities to innovate in the ecosystem in which Silicon Valley Bank operates. Identified a need for early-stage venture backed startups, where they need access to fractional talent, both at the senior leadership level or at the board level. And decided to build in essence, came up with an idea for a marketplace that would combine people willing to provide that level of support and the startups that need it.
Brought in a leadership team to run that business. They refined the business model, made it much, much better. And then brought in other investors. Union square ventures and Costanoa ventures to co-invest alongside High Alpha and Silicon Valley Bank in launching that business. And they’ve been up and running now for several months and are doing a fantastic job.
Brian Ardinger: Are you finding more or different types of industries that are better suited for this, or are you seeing it across the board? Everything from consumer-packaged goods to energy or what are you seeing from that perspective?
Elliott Parker: I think it applies across the board. We certainly are seeing more interest from industries that are feeling the crunch right now of disruption, loss of interest in financial services, insurance, healthcare at the moment as one would expect. But no, I think the approach applies in any industry. And certainly where companies are looking at, you know, every company right now, everybody’s got a digital transformation strategy right now.
Software is really eating the world as Marc Andreessen said years ago. And every company, no matter what business they’re in needs to get more proficient and better at deploying software to do the things that they do. This is a way to put some points on the board. And to drive some of that digital transformation and innovation fairly quickly.
Brian Ardinger: And the last core topic I want to talk about is, and we kind of briefly talked about this in general, but how do you see COVID as a game changer? Has it helped or hindered companies to get the fact that disruption is coming? And what are your thoughts around the trends that Covid is going to bring. And how that’s going to impact the industries?
Elliott Parker: I think COVID has been amazing at revealing weaknesses and accelerating some of the trends that were already in place. And so, if you think about over the last several decades, collectively what we’ve done inside our scaled enterprises, we’ve focused on making those companies ever more efficient. People running around with Six Sigma black belts and all these things, which is good to a point. But I think has been overdone.
And Clay Christianson before he passed away, was working on this idea of the capitalist dilemma. This idea that this focus on return on invested capital is the primary metric by which we measure the success of big companies has led us to make some really bad decisions along the way. I think he was onto something big.
We focus so much on making big companies really hyper efficient in their operations. Think about the way that we run supply chains. Very little redundancy or resilience and supply chains. And then COVID comes along and reveals the fragility that this efficiency causes.
And I think there’s now a look, a lot of companies are looking at how do we become more resilient rather than efficient. We need to accept a certain level of capital inefficiency to make sure the company sticks around for the long-term. And this is the role that innovation plays.
Over the last few decades so much innovation has been focused on driving capital efficiency. This is absolutely the wrong objective, that results in a heavy emphasis on core innovation. I think a better focus for innovation is resilience. And if we can direct some of our innovation efforts to that goal, recognize that it’s going to be a little bit capital inefficient by design, we’ll have better outcomes and companies that can endure not only endure challenges like COVID, but come out of them stronger than they were before.
For More Information about Elliott Parker
Brian Ardinger: Elliott, thank you very much for coming on Inside Outside Innovation and telling us about what’s going on and some of the trends that you’re seeing. If people want to find out more about yourself or about High Alpha, what’s the best way to do that?
Elliott Parker: So, we’re at a HighAlphaInno.com. That’s highalphaINNO. People can find me on Twitter. I’m occasionally putting out some tweets @ERParker. It’s probably the easiest way to get ahold of me.
Brian Ardinger: Well, Elliott, thanks again for being on the show and looking forward to continuing the conversation in the future.
Elliott Parker: Appreciate it. Thanks Brian.
Brian Ardinger: That’s it for another episode of Inside Outside Innovation. If you want to learn more about our team, our content, our services, check out InsideOutside.io or follow us on Twitter @theIOpodcast or @Ardinger. Until next time, go out and innovate.
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Originally published January, 2021