Venture Building from Idea to Scale with Michael Nichols

Corporate management is well schooled and how to efficiently extract more cash out of the core business but the tried and true principles of managing the core are at best counterproductive and at worst, value destroying when applied to the exploratory business venture. As a result many new business ventures are asked to scale to revenue before they are fully mature.

There is a technological or product solution, but no clarity on how to create a repeatable business model from solving a customer problem. This is the maturity gap. This maturity gap can be closed by adopting customer first practices of customer discovery, customer validation, and maturity assessment. In today's episode of the corporate explorer series brought to you by Wazoku, we describe these practices and their applications. We're joined by the perfect person to tell us about this.

He is coauthor of the corporate explorer field book. Former head of Bosch innovation consulting for Asia Pacific and now director of corporate ventures for MANN + HUMMEL, Michael Nichols. Welcome to the show.

Mind pool, idea drop and most recently poster lab. But let's get started with inside out innovation and the cycle and the limitations of this model. Maybe you'll tell us about what this is, Michael, and then I'll show on the screen for those people watching us on YouTube, the inside out cycle.

Think of it as gen one, gen two, gen three type innovation and product launches, what we're really talking about is generating the equivalent of a startup inside of a corporation or a venture, if you'd like to categorize it that way. So if you generate one of these ventures inside of a corporation, That's called inside out innovation as opposed to the other way of innovating, which is outside in.

I actually don't like the terms inside out and outside in because I think innovation is just innovation. It's always a combination of Internal resources and external, whether you're partnering or purchasing from the value chain, it's always trying to figure out how to start a venture by putting that value chain together into a venture that can repeat and scale, but you typically do it in a corporation with your existing personnel.

So you will generate projects internally at the corporation of Bosch. We were lucky to have project teams on these teams that would have a venture idea, and then we would put them through a program to validate that idea. A typical incubation type program is called the Bosch Accelerator. And there, yeah, it starts on the inside with the idea, but immediately you have to go outside and validate it with actual customers.

So When we're talking about inside out innovation, that's exactly what we're talking about. We could probably get into a really big session about what the challenges of inside out innovation are. But starting at the very high level, it already starts at what strategy are you pursuing? Is there a defined strategy? And if you're committing to innovation topics outside of the core business, what are they? Make them well defined, commit resources up front.

They're often not committed up front, and so you end up in the situation where you're validating a business where it's not sure that you'll be funded all the way to the end. And one of the ways I point out this dilemma is to imagine the innovation funnel, right? You have lots of ideas coming into the front, and then as you validate those ideas, whether it's in venture capital, outside of a corporation or inside, you eventually pare them down to the few that are.

Now in corporate, what's interesting, we spend lots of money at the front of the funnel, right? On the ideation part, on what I would call the theatrics of innovation, the mimicry of innovation. Lots of money available there, and ironically, as you validate the venture, And you start testing, not the technology. There's always money for technology and corporations, but as you start doing the innovation piece, the go to market, the business modeling piece, there's almost no money there.

That's one of the interesting challenges. So that's why I say you have to commit to, to fund that up front. Now in the startup world, which I'm now in, nobody gives you money for an idea. Nobody cares about the theatrics. And as you validate. On the market and produce actual evidence of repeatability, scalability, and that you're actually solving a real problem, there's almost infinite money available, right? There are people throwing money at you in the equity markets, et cetera.

So that's already one of the challenges of inside and out innovation, is to properly strategically frame it, and then, Fund it accordingly as you would get the type of funding out in the venture world, except that we seem to incorporate, not understand that the funding is not on the theatrical part on the ideation part. Most ideas are not good ideas in their original formulation. They only become good as you validate them in the market. And then you scale investment.

And I know Andy Binns is a big proponent of this scale investment as you learn. Don't do it before you learn, because that's the biggest risk you can take of all. So that's one of the major issues up front when you're talking about corporate innovation is to properly strategically frame them and then commit to the process of the innovation funnel and then scaling as you learn, funding as you learn.

But making sure that budget's there before you do it because corporates, unlike VC, they're on a yearly budgeting cycle normally. And if you don't hit them at the right point, there's just no money. And often, you'll hear later, for some reason, there's no money available. Even though you've got real customer traction.

That's beyond the core business and So if you just start at the top, almost every core business model over time, it's just, I think the nature of things in the world will come under threat from competition, value propositions erode. One of the examples I like to give is Harley Davidson. Harley Davidson's customers are literally dying their customer segment, right? So what will they do to replace them and create value propositions for the generations that could replace their existing segments?

Where it's. Ostensibly shrinking, right? So business businesses have to innovate to stay in the game and they can do that, as we said, in the core business with incremental, or they can do it in the exploratory way where you, it's not transformation that you need. It's new business models. You need new business models that scale and repeat. So it starts there, but the way, and this is where the gap already starts. The way that corporate typically. Addresses that.

If you just move on is they mistake invention for innovation. They start by creating a thing. So they're creating a technology. Usually I won't even say a product. So they start this exploratory innovation, assuming something you cannot assume. They assume that the customer problem is actually known. And even if you talk to your sales people to get the input, it's not usually the yeah.

The kind of confirmation that you would want when you're doing a venture, it's confirmation from the core business, not from this exploratory segments, right? The new segments, the new value propositions. So we mistake that we dump millions and millions into innovation or invention. And then while this worked in the core and Germans have a nice phrase for this, you could throw that and mention the baby over the fence right to advanced technology or product development team there.

The idea there is that they make it into a more Mature product, right? And then after that, if you've done that, it's usually focusing more on the features, the tech feasibility. You hand it over from advanced technology. After having done some initial PO, proofs of concept pilots with a few customers, you try to hand it over to the sales team of the core business unit. And that's where the gap ultimately is.

Because if you've actually just completed a thing without any of the validation of the customer or the value proposition, it's all been assumed. And so when we talk about the gap coming up, the biggest challenge of this type of innovation, it's that transferring that thing that you've created to a sales unit that is not trained. To do the type of validation of the customers that we talk about in the venture world, they're trained to be a machine, right?

To put new products into the machine, sell them to existing customers and existing business models with existing channels. The moment that the thing that you created deviates, then you create a massive uncertainty. You've created actually a cost for the sales teams and business development teams. They actually have to go out and validate this thing, and they don't know how, and it costs them money. And what ends up happening is these inventions just sit on the shelf.

And I say probably rightly right? They're not, these teams are not meant to take these uncertain things and go sell them. And if they did, it might actually end up damaging the idea anyway. And you're the, usually the early formulation of the markets, a niche. So they won't even be interested to sell it. And even things where you add, we could add a SAS model to our existing hardware.

If your sales teams don't know how to sell SAS, if they haven't been selling SAS, then it's going to fail because they may not even be incentivized to sell that on top of hardware. So this to me is exactly where the biggest problems in corporate innovation happen. It's the handover of this thing, the technology to the business units where the validation hasn't been done.

When I wrote about customer first, I meant if you could put the customer first already back at R and D validate that the thing you're building is actually needed by a significant segment of customers, then you might improve that hand over a conversion rate to the sales teams and business development teams. Because without that, without a validation of the business model, they won't be able to do anything with it. So that's what we really mean by this cycle.

It's actually a vicious cycle that we keep repeating. And you can find a study for everything, but there are studies out there that show that the return on R and D is going down. And I suspect it's particularly at companies where they need to alter their business model, but they don't know how to validate new business models. They only know how to plug new things into their existing system. So that's what's meant by that cycle.

And of course, the results are disappointing when you realize you have not validated the thing you're handing over. It's such a huge challenge for innovators for people like you who are driving innovation with inside organizations for our corporate explorers listen to the show who are. Working away diligently creating something new and they don't think about what happens if they actually get to success and they have something to hand over and then we often i've been that person.

You blame the sales team but the sales team are incentivized to sell something that's often more expensive as well so if you think about a new digital business model, it's usually a cheaper sale or it could be a disruptive product and you've built it from within sure it's no wonder the sales team don't want to sell it because maybe their commissions a tenth of what they got for the other thing maybe you have some ideas on that something from your own experience.

And rightly so they, they have not the expectation, particularly in automotive where Bosch is and where my current company is that you come to the customer with a perfectly validated. Technical product, right? It's gone through every quality assurance imaginable. There are no bugs and to ask them to sell software where the mentality is quite different. It's okay to have a bug. Microsoft is nothing but bugs and fixing them, right? So the mentality is different and they don't want to sell.

Put that in front of a customer where they might disappoint them. So it's, it starts with the business model itself. They may be in the wrong channel to sell software, and then they don't understand the product, they don't understand how to sell it. So what I've seen companies experiment with is hire new people with new incentives to do that. I, and I think this is probably the right way.

Otherwise you end up you didn't say the word, but in this, situation where there's resentment from the sales team and from the innovation team, which is not helpful. So it's a system problem, not a people problem. The people are just responding to their respective incentives. So setting up a separate sales department, maybe it does software plus hardware is smarter than trying to force it into your existing channels. Now that's frustrating.

That's frustrating because the advantage of being in corporate is your scale and your channels. It's the most valuable thing you have. And if you can't take advantage of that, even as an inside out team. Sounds insane. You're in the corporation yet you cannot take full advantage of their channels. That's the frustrating part, but it's also very understandable and it requires that we think about, and this is why I like the work of O'Reilly and Tushman, it's actually an organizational problem.

It's not a tech problem, although, maybe there are issues in the software I just mentioned, but it's the fact that the sales organization is not set up to, to validate these types of models and they don't even have the funding available to do the work necessary. So I hate to say it's nobody's fault. I do think it's starts all the way at the top of the company.

That when we start with buzzwords often, like IOT, AI is a new one these days, software enabled business models, software defined vehicles, the leadership has to commit already at the buzzword level, and this is the hard part, to a new business model. Perhaps the consequence is I need new sales channels. I need new sales people in order to even test these things and make sure that you can get the traction. You have to almost have those things in place.

That takes time because when you're, I've been in the game for a while, when you're younger your tendency is to, as you said, blame the salespeople, blame the business people. Why can't they see, why are they not innovative? And it has nothing to do with that.

Over time, you realize, okay, this is a systemic problem that if we truly hope to solve this maturity gap, what I would call the corporate innovation gap, then we have to have a serious discussion all the way from strategy through organizational setup to ever have a chance of scaling. And I say often, everybody can get you to MVP. That's a commodity. You know it because consulting firms are offering it, right? So everybody can get you there.

I have not yet seen anyone who knows how to solve this organizational problem.

As a leader and look down and go, Oh, we need a totally different configuration or alignment of the organization in order to make this new business model work at all is one huge restructuring of how I actually think as leader. And if I do that, maybe I'll be less valuable inside the new organization. And that's a huge mental issue for people. But then I'd love you to riff on another one, which is.

If i have a product you mentioned Bosch Mann + Hummel all i have a product that i'm known for that successful and then there's this product that is mvp, it might mess with my existing brand and it might affect the perception of that brand as well they need to be broken out they need to be introduced differently which also means different sales people.

If I separate it from the existing brand, and I realized that I can't take advantage of the core. Then I've taken away all the reasons that it's advantageous to do innovation inside of a corporation, right? And I think you see a whole industry of venture builders that have arisen based on that theory, you corporation cannot solve this. Therefore we're going to totally extract it from you, build it outside of your organization. And then try to test something there.

I would call on the question why you do that too, because that seems to be a waste of corporate resources and the shareholders money as well, if you're public or if you're private cutting into your future R and D spend, right? So it's really difficult to sort this out. So I don't want to trivialize this. It sounds easy from our perspective to say, yeah, the leader just has to make this decision. I suspect those leaders also know the truth that.

The probability of that new business model working is super low, right? So they realized that if I commit to re org ing, reorganizing my entire business model just to test something that has a low probability of failure, maybe the right decision is to kill it. So then that comes to another discussion, but we need business model innovation. So how will we actually set that up? That's a, that's an open question in my mind, how we do that, how you do it correctly.

And it may be something that's dependent on each business model out there. It may not be a common answer. I know us in the innovation space, we love to say, let's create an engine of innovation. They have to commit. to creating the engine and the funnel, and then something will pop out. But you need a hell of a lot of resources to do that, and I think that's where they balk, right? That's where they hesitate.

Because you're asking me to commit to a system, to a funnel, where the results are unknown up front. And if you're asking me to commit to a singular idea, I think the CEO's decision to set that, shut that down is probably correct because the probability of that having success with all the uncertainty still in it, that's part of the maturity gap is very low.

You don't invest in the academy for the future, but you've seen organizations you've worked in. You've worked in Bosch, you've worked in the accelerator. You've driven that accelerator. You're doing it now in Mann + Hummel. Maybe we'll share what you're seeing from the positive side for those people working in this to give them some encouragement.

And also on top, the courage to have the discussion that we have issues at scaling, doing self reflection on that, trying new things, because ultimately I think the answer is something like, we like to, in our innovation space, latch on to the one thing we're trying, like you'll see UX people latch on to design thinking or business modeling. People latch on to lane startup, right? Or CVC people will latch on to startup. So the only way to solve this or MNA is you're all wrong. We just buy it.

Let them validate on the market. I think the answer is somewhere like allowing all of those experiments to take shape. Because it's a numbers game and they're all just tools in one, one big innovation box where we're all trying to find an answer to that scaling problem to, to bridge the gap. And in both of the companies that I've been at, there's been an open mindedness around that to try it, to try things, knowing that it's difficult. Knowing that other companies struggle with this too.

And knowing and trusting that, yeah, I don't, I may not have the answer. It's clear. I don't have the answer, but that we're searching for the answer and the willingness to also say we need new business models, look for them, but knowing it's not one tool that's going to win the game. So I've appreciated that at both companies that they allow people like us. I would argue most people like us are deeply counter cultural in the organizations we're in.

So they allow you to pursue what I like to say, the truth, right? But do it in a way that's not necessarily congruent with their current culture. So they allow that experiment to run. That's already a big plus. And. I have a faith that if we keep running these experiments, the probabilities suggest that sometime we'll figure this out.

Because it's often not the case but one of the big problems and we won't get into it today but i'm sure you've. Experience this is that you can be you can experience huge gas lighting by the organization to go now you're wrong you're crazy this will never work you gonna, you're gonna damage the reputation of the company etc so that's maybe for another conversation michael happy for you to riff on that but one thing i did want to get to our audience is.

Indicators of business model maturity to understand when some of the key success factors showing that you have a mature business model at least people will take that away and just understand where things are going in the future maybe we'll give this a in this chapter is loads in it by the way, for audience i highly recommend checking out the book to check out that chapter but maybe just share a couple of the key ones michael as a parting thought for audience.

Everybody's Yeah, that makes sense. But I will tell you this thing is very rare to find so it's You It's a, we say must have need, extremely strong problem. And what do we mean by that? When somebody goes to sleep at night, it's the top three things in their mind that keep them awake at night. Not a nice to have not, yeah, it sounds nice. Not social desirability that you see with a lot of sustainability projects. We like it. And I come from American society, and I like it's not sufficient.

Did you get a check for that? Did you get an order for that? It's really, there's a strong pull to solve this problem. There's no other way to solve it in the way that you're imagining. So I spent a lot of time on that because that's the biggest stumbling block of all. And if you look at postmortems on startups, they almost all always fail because there's not a strong enough market need. Because without that, the rest of what I'm going to say just will not appear.

It's the first thing when we look at a maturity model, an assessment that we try to detect. The hard thing about it is it's very qualitative in the beginning. People often say, how do I know I have a strong problem? And the answer is like a lawyer answer. You'll know when you find it. You'll know when they're pulling. And how, and I say they. It's got to be more than one. It's got to be repeatable.

So the problem, in the problem, it's got to be severe enough and repeatable enough that your future scale is already built into it. If you were to solve it, it would automatically find scale. Okay, so you're already thinking forward on the problem, then it's understand who has that problem. Who is it? What is this customer segment? It already starts there. Are there enough of these people, right? So this is a repeatability problem, repeatability of the segment.

Does it differ every time they have the problem? So you're thinking again of forward to scale. You're going to hear inter repeatability. So this is the common theme behind all of this. Is it, if you're in a corporation, is it a regional problem? Or is it a global problem? So you're thinking through that. In the VC world it's the same because they're thinking forward to the exit. It has to be big enough to justify such an IPO or an exit to a company, a global company.

So we spend an inordinate amount of time looking at customer problem and repeatability. Now, if you get that notice, I have not mentioned technology yet because it's irrelevant to this point. If you get that, then you start asking yourself almost simultaneously, do we as a company or as a venture to even have access to this customer? Do they have budget? Cause it's, it doesn't, good if there's a strong problem and repeatable, but they don't have the money to solve it.

Okay. So then you go from there. Okay. They seem to have a budget. We And if we don't, we have to figure out a business model for that. Then you start thinking, okay, can I solve this problem with our capabilities as a company? Can we solve it? Can we do it in a repeatable fashion? Now we're talking tech scalability, right? Can we produce the value proposition?

Is it a value proposition that's 10 X better than any other solution they have, including doing nothing, which we often forget we tend to classify our competition in terms of the the very myopic technical thing we're doing, competition goes back to the problem definition. Which includes doing nothing at all, right? So you have to think of competition in that sense as well, very broadly. So you do that.

And now we've gotten you to MVP, which I said everybody can do, but getting an MVP that really has that strong customer pool, that's already rare. When you have it, but it's very qualitative. And then the next part is, and this is the hardest part go from MVP with a few customers that are representative of a larger scalable segment to scale the sales.

This part is always underestimated as one of the, my Venture Principal says, she says it always takes twice as long and costs twice as much, as you think it will. And, so you have to, that's the sticking point, that's where the maturity gap is in the Venture world, it's called the Valley of Death. It's the same thing, same concept. Getting to there and figuring out how to do repeatable sales. That's the trick. That's where we're looking at stickiness.

We're looking at the scalability of the sales, right? Repeatability of the sales model. I would argue if you could get there, you have a repeatable sales model. The corporation from there could take it. Now it's ready. Now it's ready to scale, but getting there is really the problem. So I've set it at a narrative level. And I think you've heard in my description, one of the reasons we struggle so badly in corporate.

Is we want to put metrics on that we want to put quantitative KPIs around that and I'm suggesting in those criteria that at least half of what I said is qualitative and do not underestimate the qualitative proof the qualitative evidence because that's really what drives whether you have that must have or not. So I think business in that sense is a social science, right?

So it's very much about understanding customer behaviors, understanding what drives them to solve problems, the urgency of solving problems. And then the other part is building a solution that creates value. Value by itself is a qualitative concept. We often try to make it quantitatively understandable.

We do that later, but corporates, I think struggle because those early business cases to a CFO sound like utter nonsense show me your five year plan, show me your EBIT, your revenue targets, and you're saying, I could give you those, but the certainty around those is really small and we can only get more certainty as we do those steps that I just mentioned. So I think of it as.

You're building the evidence, often highly qualitative up front, for what eventually goes into a projected PNL with a net present value calculation. But that evidence you're building gives me the confidence that what I put in that Excel sheet is actually real. So that's how people work in Venture capital. It's really a lot of thumb in the air.

You hate to say it, but it's and that's what makes I think Corporate executives feel uncomfortable with it is that this early stage is so qualitative There's so much uncertainty and I'm also telling you it you don't know it till you have it You don't know it till you have it, because you feel the pull from the market, that traction, that everyone harps on when we're in the venture capital world.

I spend most of my time in the chapter trying to explain what's meant by those terms, but really what's behind it is not rocket science. Found a repeatable severe problem. The customer segment that is big enough to justify an investment that you have access to, and they have budget that you can solve and create a value proposition that matters and then find a repeatable sales model on top of it. And that's it, but it's so damn hard to find. I'm just going to leave it there.

In the end, it's not what they're used to, but I think you can absolutely build a business case that can understand by using some probability based models, right? Expected value models, and then showing them with these criteria, actually the discount rate should fall as you validate, right? That's the whole point of the validation and the model is that you're saying, Yeah, when it's an idea, discount rate should be 80%, but as you get to MVP, we're getting closer to 40.

When we found that repeatable sales model, now we're at about 25 percent discount rate, and if we would learn to speak that language, I think CFOs would get it a lot better. So that's on us too, to improve our messaging.

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