If you want to build an innovative culture, then you need to recruit and promote into positions of influence people who not only share these values but also who have the personal capabilities and qualities to thrive in the culture you want to create. For instance, if you want the organization to become more comfortable with risk taking, then you need people in the organization who are willing to take risks (and who follow Stoffels’s adage of “You take the risk; I take the blame”). If you want your organization to embrace individual accountability, then you need people who are comfortable being held personally accountable and who don’t run for cover when things do not work out as planned. While culture is much more than the sum of the values of the people in the organization, congruence between individuals’ values and skills and the culture is essential.
Can You (and Should You) Create a Start-Up Culture in a Large Organization?
In just about every large company I have researched or consulted for, there has been at some point or another an aspiration or even a formal program to create a “start-up” culture inside the organization. Some companies have gone as far as to break up their R&D functions into small “start-up-like” ventures, as did pharmaceutical giant GSK when it reorganized its research group into small disease-focused units called “centers for excellence in early discovery.”6 When IBM decided to enter the personal computer industry in late 1970s, it established an organizationally autonomous and geographically separate unit in Boca Raton, Florida (almost 2,000 miles from the company’s Armonk, New York, headquarters), to be able to move unencumbered by the corporate bureaucracy. The early phases of the HondaJet program were carried out by a small team of twenty engineers working from a hangar in Greensboro, North Carolina—quite literally half a world away from Honda corporate headquarters.
There are often very good reasons to create such organizationally autonomous units. They enable a focused team to explore innovative technologies or business models unencumbered by the distractions and pressures of the core business. As noted earlier, they can also be used to incubate (and protect) new cultures. They are sometimes used in an attempt to create a start-up culture inside a larger corporate structure. The hypothesis is that a large enterprise could become as innovative as a start-up if only it could replicate the culture of a start-up. Is this correct? And is it even possible?
Recognize first that start-ups represent a very diverse set of cultures. There are some common characteristics of start-up cultures, but there is no one start-up culture for innovation. Some start-ups have cultures conductive to innovation, but many do not. Remember, the vast majority of start-ups fail. For every Apple, Amazon, Google, or Facebook, there are thousands of companies that vanish. Just being a start-up does not guarantee a culture conducive to successful innovation.
Just saying you want to create a “start-up” culture inside your organization, then, is probably not particularly helpful. Instead, it is better to focus on the specific characteristics of start-up cultures that you seek to emulate and then try to understand whether it is possible to achieve those in an established enterprise. Having served as an advisor and board member of many start-ups ventures, as well as cofounding one, I see three salient cultural traits of healthy start-up cultures worth emulating. The first is an obsession with speed. Because most start-ups are in a race against the clock—or, more specifically, a race against dwindling cash—speed is an all-consuming priority. Every day, they burn cash, and therefore every day they get closer to what is known as the “cash-out date” (the day when cash balances hit zero and the company dies). The tyranny of the cash-out date creates an intense sense of urgency. An instrument in your lab breaks; you try to figure out how to fix it yourself on the weekend, rather than wait a week for a service technician from the manufacturer. Your strategy is flawed; you pivot immediately to a new approach. You see project schedules; you reflexively ask, “Why can’t we do that faster?” You face a tough decision; you get the right people in the room to resolve it today. The clocks inside start-ups seem to run faster. Start-ups also have the ability to move more quickly because they can operate unencumbered from processes, procedures, and policies that have been designed to support existing businesses.
A second significant difference is the level of individual accountability around companywide objectives. In start-ups, critical tasks are assigned to small teams or to individuals. There is no place to hide. If you cannot perform as expected, the organization can’t afford to carry you. There is no tolerance for incompetence. In addition, because the price of failure is borne by everyone, there is no tolerance for prioritizing functional or departmental subgoals over enterprise objectives. Problems that might delay a launch or lead to a poorly functioning product become everyone’s problem. The attitude “I did my part fine; the problem is someone else’s fault” just doesn’t cut it.
The third trait of start-ups cultures is comfort with extreme risk-reward outcomes. Many start-ups pursue audacious goals. Achieve those goals, and the company can become worth billions of dollars. Since most start-ups use some kind of equity-based incentive plans, a successful venture can make founders and early employees extraordinarily wealthy. But most start-ups fail. So most people will not get that big pay-off. In fact, many lose their jobs. And some founders may lose even more if they have borrowed against personal assets to fund their ventures. Everyone knows the risks when they join a start-up. This means, almost by definition, start-ups are full of people who embrace risk. Anyone who has a low tolerance for risk is not going to be working there.
Innovation in enterprises of any size can be helped by greater focus on speed, more personal accountability, and greater comfort with high risk-reward pay-offs. The question, though, is whether these traits can really be replicated inside larger corporations. The first thing that should be obvious is that simply breaking up a large organization into smaller units or creating autonomous teams is not sufficient to replicate a start-up culture. Urgency, accountability, and risk tolerance in start-ups are mind-sets. Re-creating these mind-sets inside an established company is challenging because they result partly from the unique pressures and circumstances under which start-ups operate. Consider the impetus for speed driven by the ticking of the cash outflow clock and the risk of bankruptcy. For most large enterprises, the risk of running out of cash and bankruptcy is remote. With more than $143 billion in cash and cash equivalents on its balance sheet as of December 31, 2017, for instance, Microsoft is not in any danger of folding this year.7 Time really is of the essence in a start-up. The same is true for individual accountability. An enterprise with 25,000 employees does not have to practice individual accountability to survive; a start-up with 25 people has no choice but to practice it. Likewise, the “all or nothing” pay-off structure of a start-up is very hard to replicate in an established enterprise with much lower underlying volatility of equity value. The upside potential of start-ups dwarfs that of the vast majority of larger enterprises.
Given the structural differences between a start-up and an established enterprise, it is easy to understand why most efforts to “re-create” a start-up culture by organizing into smaller units inside a big company fail. The problem with most of these efforts is that they conflate size and culture. Being small, per se, does not automatically endow an organization with the key cultural attributes of a start-up: speed, accountability, and tolerance of high risk-reward outcomes. The bad news, then, is that re-creating a start-up is a lot harder than just creating small autonomous teams or breaking up your organization into small units. The good news is that being large does not necessarily prevent you from adopting these mind-sets. Because conditions inside a larger enterprise do not usually make these mind-sets necessary for survival, it falls to the leaders to create them through their action, expectations, and policies.
Replicating the Speed of a Start-Up in a Big Company. There is no “law of physics” that says large enterprises cannot move quickly. They often don’t because, unlike a start-up, their surv
ival does not depend on it. To re-create the speed and agility of a start-up inside a large enterprise, leaders should take away the luxury of time. Set aggressive time goals for projects, hold project teams accountable for reaching those goals, and provide project teams the autonomy and flexibility to execute in ways that enable them to move quickly. Allow project teams, for instance, to opt out of any corporate policies that are not essential to comply with legal, regulatory, or ethical standards. It is remarkable how fast large organizations have been able to move when they have found themselves in desperate straits (e.g., facing their own cash-out dates) or when external circumstances have demanded speed. After Sergio Marchionne took over Fiat when it was on the brink of bankruptcy, one of the first questions he asked was why it took the company three years to introduce new models. He did not accept the answer, “It always took that long,” and he demanded that his development organization figure out a way to cut the time in half. The first major product launched under his tenure came to market in less than eighteen months.8 When confronted with a major public-health crisis, like the AIDS epidemic or the threat of Ebola, some of the world’s largest pharmaceutical giants (and regulatory agencies) have moved with record speed to bring life-saving therapies from the lab to market.
Replicating the Accountability Culture of a Start-Up in a Big Company. Like speed, accountability is a mind-set created by expectations and policies. High-accountability cultures establish clear expectations about performance and provide individuals the power (and support) to make decisions in the best interest of the organization. There is nothing about enterprise scale that prevents this. For instance, if you pursue the route of creating small autonomous teams or internal ventures to re-create the start-up environment, then treat the leaders of those teams like CEOs. This starts by appointing people with the requisite leadership skills (not just pure technical skills) and with a deep sense of commitment to the vision of the program. Like all CEOs, they should be held accountable for the venture’s success. With accountability, of course, must come room to operate within relatively broad boundaries. This is often the most challenging element of accountability in large enterprises. For senior leaders, it requires giving up some degree of control. Because unless internal venture leaders have significant control over the program they have been asked to run, they cannot have real accountability.
Replicating the Risk-Reward Incentives of a Start-Up in a Big Company. As noted earlier, it is very difficult to replicate the extreme risk-reward incentive of a start-up in a big company for the obvious reason that equity values of bigger companies are less volatile than those of entrepreneurial companies. As a result, the potential for a massive upside gain to an employee paid in stock options is usually lower (but so is the chance of losing your job because the company folded). In theory, it is possible to create high risk-reward incentives inside a large enterprise by shifting compensation away from fixed base salaries toward variable performance-based bonuses. If the variable bonus component is set high enough, then it may even be possible to replicate the financial pay-offs of a start-up. Technically, this is not very hard to do. You could take an internal venture team, pay the members far lower fixed salaries than comparable employees inside the company, but then reward them a bonus based on the performance of the venture (you could even mimic the pay-off structure of an equity option by using external benchmarks of valuation).
The problem with implementing such highly leveraged compensation systems inside established companies is more sociological and psychological than technical. The vast majority of companies employ hierarchical compensation schemes with pay related to position. People at about the same level (usually referred to as “grades”) get paid approximately the same. Performance bonuses are typically set within predetermined minimum/maximum bounds. These systems are generally considered “fair” in the sense that people with approximately the same level of responsibility are compensated about the same. The expectation is that high performers will get an opportunity to earn greater compensation through promotion. Highly leveraged compensation systems can create large disparities in pay for people at the same level (in fact, it is entirely possible for “lower-level” employees to earn greater compensation in any given year than senior executives under a true highly leveraged system). There is often a legitimate concern that by creating “haves” and “have-nots” inside the same company, highly leveraged compensation could destroy the shared sense of purpose critical to the functioning of the company.
In the few cases I have witnessed companies trying to create these systems, they have generally gotten bogged down in exactly these kinds of political dynamics. In one large company I consulted for, an internal venture team was established to explore a radical new, but risky, technology. The venture was established very much like a start-up. It was spun outside the company’s normal business unit structures and reported directly to a corporate venture group. The venture leader was given all the responsibilities of a CEO. A board of directors of senior corporate leaders was established to oversee the venture. The employees who joined the internal venture had to resign from their positions inside the company and none were guaranteed a job back in the event the venture failed. In return for lower fixed salaries, members of the venture team were promised hefty bonuses upon hitting well-defined milestones.
The problems with this scheme emerged when the team hit its first major milestone. This happened to coincide with a severe recession, which hit the corporation’s earnings hard and had triggered salary cuts, a freeze on bonuses, and lay-offs. In such an atmosphere, several corporate leaders thought it would be inappropriate to pay out the promised bonuses. They rightly pointed out that if the venture had truly been independent, the recession would have hit the market value of their equity in any case and they would not have been able to cash in. The team rightly felt betrayed by the reneging (the original agreement did not have a contingency clause, and the bonuses were far less than what they would have received for cashing out of a truly independent start-up). Eventually, a compromise was reached, and the bonus was paid on a deferred basis. Later, the venture was reintegrated back into the regular corporate structure, and the team was placed back on the corporate compensation system.
I am no great fan of rigid hierarchical compensation systems. At some level, they make no sense. Let’s take an example from sports. Few would argue that Tom Brady is not one of the best quarterbacks in the NFL. Because he is so important to the performance of his team, the New England Patriots pays him a lot (prior to the 2017 season, he signed a two-year contract for $41 million). It is pretty safe to say that stars like Brady make more than their coaches or even the team presidents. Their pay is based on their performance (and contribution to the team’s success), and not on their “grade level.” But under a typical corporate compensation system, the Patriots would pay Tom Brady more if he were “promoted” to coach or to a front-office job. In a sports setting, this absurd scenario would never happen. And yet this is exactly the way compensation works in most companies.
Given though how deeply ingrained hierarchical compensation systems are inside companies, I do not think it is practically feasible to replicate the financial incentives of a start-up inside them. But this does not mean you cannot use other, very powerful motivating devices. Money is not the sole force motivating many people. We are “compensated” for our work partly by the money we are paid and partly by the other psychological rewards we reap from trying to solve interesting and important problems. Many of the entrepreneurs I meet are motivated by having an impact more than making a ton of money. And the same is true for many of the scientists and engineers I meet inside larger companies. Being part of the team that creates a breakthrough in cancer treatment is a powerful motivator.
Think about Alphabet (the holding company that owns Google) today. At a current market capitalization of about $800 billion, it stands to reason that Alphabet offers new employees far less upside financial potential than employees who joined p
redecessor Google in 1998.9 Yet Alphabet continues to attract far more prospective employees per position than just about any company in the world, indeed some of the best technical talent on earth. Certainly, Alphabet compensates employees well and provide nice perks like free food and child care, and if Alphabet stock continues to perform well, the company’s stock-based compensation system will yield handsome financial returns for even the newest employees. But what attracts talent to companies like Alphabet is the possibility of doing really interesting and challenging work on important problems. That is exactly why in the past century top talent was flowing to Bell Labs. It was not about the money. It was about the environment, the freedom to explore, and the freedom to pursue projects that excited them. Whether you create an environment like this has little to do with your company size and everything to do with your leadership.
Conclusion: Engineering an Innovative Culture Requires Your Full Leadership Tool Kit
Some years ago, while visiting a large industrial corporation, a group of managers told me that the company was undergoing a cultural transformation to make it more innovative. As evidence of the “new” culture, they pointed out that the dress code was now casual (previously, the dress code was traditional business attire, including ties). As I looked around, I saw that most of the managers—who were mostly men—were all dressed nearly identically (khaki slacks, blue or white button-down shirts, and blue blazers). It struck me that the company had simply replaced one form of conformity with another. This made me suspicious that anything had really changed, and, in fact, upon further investigation, I learned that there were no substantive changes in incentives, roles and responsibilities, reporting relationships, team structures, or decision-making power.
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