A conversation with Neil Soni, author of “The Startup Gold Mine”
This is part of my series on thought leaders in the innovation space. Check out the other articles here.
Neil Soni has seen the business world through two important lenses having worked in the startup world and for large corporations. His startup experience began in college when he set up a marketplace to connect high school students, college students, and colleges to create a peer to peer recruiting model. As metrics on students improved, the cost of recruiting for colleges would decrease. After the Bill and Melinda Gates Foundation took over the work Neil began, he moved on to run growth at MomTrusted.com, a marketplace for parents looking to enroll their children in child care or preschool. Momtrusted became and still is a profitable company, but Neil moved to his next adventure when the founders decided to keep the company small and not raise more money from venture capitalists.
As the person in charge of growth at MomTrusted, Neil took his skills into consulting and began specializing in helping startups grow. In 2015, he was brought in as an External Innovation Consultant for Estēe Lauder Companies Inc. (ELC) to grow their innovation capabilities. Now in addition to consulting and having founded his own startup, Unlimited Brewing Company, Neil has written a book, from the perspective of someone on both sides of the table, targeted at startups making deals with large companies.
Neil’s book, The Startup Gold Mine: How to Tap the Hidden Innovation Agendas of Large Companies to Fund and Grow Your Business, outlines how large companies make decisions, provides playbook-style guidance on how to close a deal, and offers suggestions for companies large and small to adapt their practices to be more compatible partners.
Fear of cannibalizing existing revenue streams is holding you back
Neil sees the concern over cannibalizing existing revenue streams as a limiting belief. “Companies seem to be under the impression that if you never do it, no one will ever do it. Maybe there are ways to do that with patents, but even Kodak found out that the digital camera patent didn’t stop digital cameras from being invented.”
The story of Anheuser Busch’s response to craft beer competitors illustrates how fear of cannibalization can lead companies astray. Faced with a new threat from craft breweries, Anheuser Busch’s initial tactics centered around making it harder for consumers to access craft beer. “It was very clear that the executives in that company were under the mistaken belief that, “If we just stop people from being able to drink craft beer easily, it won’t turn into a big thing. It won’t become a big business.’”
The second approach Anheuser Busch tried was to dilute the meaning of craft beer. “Shock Top is a brand that they actually invented in-house. It’s a fairly successful brand and one example of in-house innovation. But Shock Top is a brand that they invented to create the impression of craft within a large company. I would say they did a decently successful job at it. But then consumers found out because the internet made information so much easier to access. Consumers were able to look up which brands are owned by which companies. So that tactic faded.”
By focusing on cannibalization or how craft beer was eating into their market share, Anheuser Busch created their own missed opportunity. “They’re now using it to their advantage by upping price points. Maybe people aren’t drinking the same volume as they were drinking, but they’re spending more.” Neil has a more holistic view. Instead of being concerned over a drop in sales for an existing product, he advises considering how to grow the overall business without focusing on one specific product.
For more information on the Anheuser Busch story, including their acquisition of Goose Island and other craft breweries, Neil recommends the book Barrel-Aged Stout and Selling Out.
Understanding the true value of innovation is not necessarily a straightforward goal. While revenue is one common measure, it can look different depending on the size of the company. At the beginning of an initiative, it’s often difficult to bring in revenue that is meaningful for a large company. “If a startup in year one got a million dollars in revenue, you would say that’s significant. In a large company, however, I’ve seen projects with a million dollars of revenue, and maybe $50K in profit. People will say that the project is not going anywhere. Margins are too low, there’s not a business there.”
In considering the valuation puzzle, Neil recalls a common saying. “Everybody remembers the general who wins the war, the general who loses the war, but not who avoided the war.” The reality of innovation is that, even if a company does a great job of staving off or absorbing a competitive threat, the effort isn’t always reflected in revenue. “That’s not going to show as a meaningful increase in revenue, and it’s not going to show a decrease in revenue. You just fended off the threat. You’re not going to get much recognition for it. But it might’ve been a major victory.”
Depending on the project, companies may have to get creative with how they measure their innovation efforts. “We did a couple projects at ELC for the first lipstick 3D printer. The program probably cost about $250K–$300K. In terms of revenue, they weren’t selling anything initially. It was purely for a PR play.” ELC worked with their influencer network to create custom lipsticks that influencers then pushed out to their fans. Influencers that were normally paid to market products agreed to participate for less than usual (or even free) in exchange for being the first to use the new technology. The ELC team quantified the results of the campaign by calculating the normal cost paid to influencers — as much as $10,000 per post — as a marketing cost savings. “And then we added up all that free marketing, and it added up to about $600,000-$700,000.”
A clear path to market and a strategy to scale
When structuring innovation programs and building teams, Neil finds that limiting the size of your input or idea pool helps facilitate better communication and prevents buzzword bingo. “There’s a fine balance for having input from a lot of people so you get wide-ranging points of view in a workshop or a team. I do think that a lot of companies are taking that too far.” Neil looks to Amazon’s two pizza rule as a guideline. “Amazon had that two pizza rule where you need to be able to feed the whole team with two pizzas. I actually really like that because I think there’s some point to getting a wide range of inputs.”
“If you’re going to do something innovative, it’s probably going to be controversial in some way, internally.
A two-pizza-sized group allows for a fairly diverse range of views without the tendency to avoid controversial topics. “In large groups, there’s usually some senior person in the room, people are showing off, but nobody actually wants to say the hard truths or really dig into the controversial parts of what you’re working on. If you’re going to do something innovative, it’s probably going to be controversial in some way, internally. So when you have a bigger group, you’re more likely to avoid the controversial parts. If it’s a small team, it’s likely to be less political.”
Beyond team size, Neil says there are three crucial elements to consider:
- Establishing a clear path to market
- Establishing a clear path to scale
- Feeding the inputs from customer data into a mergers and acquisitions strategy
By establishing a clear path to market, innovation projects become more effective and cannibalization can be less of a concern. “In many innovation programs, there is an inability to get a product to market solely through the innovation program. If I were designing a program from scratch, I would say we needed a lab or some format to get things out to consumers without going through an existing brand that could be threatened or has other considerations beyond just innovation.”
In creating a clear path to scale, teams can begin work with some idea of how experiments turn into something that can make a serious difference for a large company.
“There are many situations where it makes sense to acquire or maybe invest rather than build it in-house yourself.”
The final element relies on insights from the market and customer data. With access to customers, innovation teams have an understanding of the next big things in the industry and what customers are really reacting to or excited about. “You might not need to invent it in-house. You might not be capable of inventing it in-house. You might not have a team or the infrastructure. So there are many situations where it makes sense to acquire or maybe invest rather than build it in-house yourself.”
Be better positioned for startup partnerships
As someone who has been on both sides of the table, Neil has some advice for large companies seeking to innovate externally. To start, large organizations should have someone on their team with startup experience, ideally a founder. “Ultimately if you’re trying to work with startups, you need to be able to connect with them in a way that’s genuine and have them believe that you’re going to have a mutually beneficial relationship. It starts with having somebody who can empathize, and who has been in that situation before.”
Streamlining procedures is another step large corporations can take when working with startups. “Another thing is being cognizant of how valuable time is to a startup.” While six months may not seem long to a large corporation, it can be a lifetime to a startup. Lengthy payment terms and processes can put a strain on startups. Particularly in cases where there is an exclusivity agreement, startups who partner with large companies may have difficulty covering operating expenses when their other avenues of revenue are cut off.
Lengthy contract negotiations can cause deals with startups to fall apart. “From a small company standpoint, it makes a difference if you can get to a ‘no’ quicker. That at least helps you move on. If you think you’re working on a deal with P&G, or United Airlines, or Anheuser Busch, a large part of your thought process is being taken up by that deal.” If the answer is “yes,” Neil advises large companies to have clearly defined next steps. “You can build your procedures to have clear next steps. If you are interested, have a playbook for what happens next. I found that having those procedures very well outlined made a big difference.”
As the startup world changes and access to capital increases, large corporations eager to partner with startups have more competition. “I think a lot of companies might be under the misconception that they’re so big that they’re the only player or at least one of two players. They think they know the other player’s policy, too. But we have so many different models now. You’re not the only game in town if you’re the large company, and it’s hard to win deals without flexibility…”
Blanket contract agreements can also suffer from an inability to keep pace with changing technologies. In one negotiation, Neil saw a legal team include a requirement to audit a potential partner company’s servers. “It was a little bizarre being as this company didn’t have servers. They were either using AWS or something like AWS.” The company, left with the option of handing over server passwords, understandably declined. “Another thing that came up was payment information. I think they were using Stripe. Obviously, Stripe was storing the information, not them. And that caused the legal team some issues because they had never heard of Stripe at that time. The partner company sent all of Stripe’s documentation showing how Stripe is storing stuff.” The legal team responded by saying they needed a month to review the Stripe documentation.
In Neil’s view, streamlining procedures and staffing teams with empathetic experienced startup founders all ties back to creating a good reputation as a large company wanting to work with startups. “There are large companies who don’t necessarily deal with startups in a mutually beneficial way, and that creates a bad cycle. The startup community is not as big as people think.”
The pros and cons of external innovation
During his time at ELC, Neil focused on external innovation. However, he doesn’t believe looking externally is always the right approach. “I don’t always think it’s a superior model. For example, there are problems that internally you might have, which somebody outside the company wouldn’t even be aware that problem exists. There’s a lot that companies can do around internal startups, or letting employees create companies and funding them. They can still operate in-house, but on independent teams.”
“There’s a lot that companies can do around internal startups, or letting employees create companies and funding them.”
The advantages of looking externally for innovation concern pace and perspective. “I do think that the pace of outside companies is much faster.” And in terms of scope, external companies have the benefit of not being “tainted by your internal company’s biases, which goes back to cannibalism.”
Neil advises large corporations seeking to partner with startups to cast, what he calls, innovation nets. “I think there are different nets you can go and create. Those nets could be certain universities that you develop relationships with that consistently churn out ideas that are relevant to you. Carnegie Mellon has a lot of work going on around self-driving vehicles — autonomous vehicles, robotics, and artificial intelligence. So if your company has anything to do with one of those three things, it probably makes sense to build a relationship with Carnegie Mellon. You could get early access to companies or even student teams that are working on interesting projects related to that.”
Another approach Neil suggests is building relationships with venture capital groups that invest in companies relevant to your business. “Honestly, you don’t have to make a direct relationship with them. Some of this can also come back to reputation.” Regardless of the recruitment strategy, Neil reiterates the importance of creating a simple path to engagement. “That could be through a landing page. It could be through a public event/competition. It could be through somebody in your innovation group who is a speaker or a well-known person…”
These strategies for partnering externally are also applicable to internal innovation programs. “Internally the net could be your own employees. I would bet your employees, especially your direct consumer-facing employees, have a lot of input into what customers are missing and what they might want. Maybe more than your insights team would have.”
The Walmart acquisition of Jet.com is one recent example of external innovation that has caught Neil’s attention. “As an observer, I really like that Jet had raised a lot of money, but they did not have anywhere close to clear market traction.”
“I advocate for large companies going outside as opposed to internal because there’s a lot of talent out there that you don’t have internally, especially if you’re trying to shift your model.”
In Neil’s view Walmart had identified two important factors: “One, there was internal talent on the Jet team that they really wanted in-house. And then two, they wanted this rebranding. I advocate for large companies going outside as opposed to internal because there’s a lot of talent out there that you don’t have internally, especially if you’re trying to shift your model. By definition, you don’t have that talent internally, because if you did, you wouldn’t have needed them in the old model. If you’re trying to shift, you need to shift your talent as well.”
Neil believes that, while Walmart knew they weren’t failing, they were clearly lagging behind online. “They probably could’ve gone out and spent a ton of money to fix that internally, but you still have the Walmart brand, which has done a ton of offline, but didn’t have the same reputation online. So then you still have to go get the talent, too. This way, now you have the talent, and you’ve got the brand. And I think with public companies, it’s even more important to send a clear message to the market that you’re taking this seriously. I think Walmart did a really good job of that with [the Jet.com] move.”
For more information and strategies for creating beneficial partnerships whether you’re a large company or a startup, check out Neil’s book.
If you want to read my other articles about innovation experts and practitioners, please check them all out here.