On this week's episode of Inside Outside Innovation, we sit down with Elliott Parker, CEO of the Corporate Venture Studio High Alpha Innovation. Elliott is back on the podcast to talk about his new book, The Illusion of Innovation, where we talk about the pitfalls and practicalities of launching innovations in a corporate environment. Let's get started.

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Interview Transcript with Elliott Parker, CEO of the Corporate Venture Studio High Alpha Innovation

Brian Ardinger: Welcome to another episode of Inside Outside Innovation. I'm your host, Brian Ardinger, and as always, we have another amazing guest. Today we have Elliott Parker. He is the CEO of the Corporate Venture Studio High Alpha Innovation, and author of the new book, The Illusion of Innovation: Escape Efficiency and Unleash Radical Progress. Hey, welcome back, Elliott.

Elliott Parker: Brian, good to see you. Happy to be here. Thanks.

Brian Ardinger: It's good to have you back. I think it's been almost two years, 90 episodes since you were back on. So, let's refresh the new listeners about who you are and what is High Alpha Innovation, and then we'll get into the book.

Elliott Parker: Yeah. So, I'm CEO and founder of High Alpha Innovation. We're a venture builder that works with corporations, universities, and world class entrepreneurs to build amazing what we call advantaged startups that go solve really important problems.

Brian Ardinger: It's a fascinating model. There's a lot of things that have popped up since our last conversation. We can dig into all of that stuff, but the reason I wanted to have you on is you've got this new book out called the Illusion of Innovation. And I think you've distilled probably a lot of your learnings over the years into this book. The title itself, the Illusion of Innovation, what does that mean to you and why did you title it that?

Elliott Parker: The book is an act of love and frustration. It's the idea that, the frustration piece is that so much of what large corporations are doing under the guise of innovation doesn't work. Doesn't produce the meaningful change they seek, and often leads to disappointment and we need to fix that.

The love part is that I want corporations to be successful. We all should want corporations to be successful. There are certain things, certain problems that only corporations can solve that people collaborating through the form of corporation can address. And so, the problem is that corporations over the last 50 years have actually become worse at confronting opportunities and challenges.

There's more capital on corporate balance sheets than ever before. And at the same time, they've become less capable of meaningful innovation. And what I wanted to figure out is why is that and what do we do about it? And that's what the book focuses on.

Brian Ardinger: Well, I mean, you, you think about it maybe 30, 40, 50 years ago, the bigger companies had the bigger R&D budgets, and they were, seem to be exploring and building in different ways. And now you see a lot of this company kind of pulling back on that and like you said, kind of doing innovation theater. Do you think companies can create innovations by themselves today, or you know, what's been broken in the model?

Elliott Parker: Yeah. I think the way that companies go about it needs to change, actually. That we're in a fundamentally different point in the economy than where we were 50 years ago. And the old model, the corporations could centralize assets and resources inside the wall of the company, control those resources and the transactions between them and generate profit.

The new model in the economy of today, it's much more decentralized. Meaning small teams and individuals have a lot more power. And can do things that previously only corporations could do.

The challenges that corporations in many cases haven't changed how they go about innovation, R&D, M&A, primary levers for innovation have become less effective than they once were. Still very good options, but less effective than they once were. It's a big problem. The irony of it is, is that they're better managed than ever before.

They're just optimized for the wrong thing. We've gotten really good at managing our corporations to make them safe and predictable. We've gotten a lot better. There's a lot less variance in the system, and it turns out it's that variance that produces learning and produces meaningful innovation. And so, as a result, we're seeing less of it. Companies are better managed. Ironically, it's a problem.

Brian Ardinger: Yeah. I think you have a quote in the book, growth results from actively seeking surprises, not from predictability. They are two different, I guess, muscles almost. You know, working in a predictable business model, executing on that, optimizing for that is different than I'm in the wilderness. I sense or I have a hunch of a problem here. How do I figure out how to create value from solving that problem or whatever?

Elliott Parker: You've got to seek deliberate inefficiency, which is a hard thing to do. Our organizations are optimized in every way for capital efficiency, meaning cutting out costs, avoiding problems, making things as predictable and safe as we can.

That does not produce innovation. In fact, that produces sterility over time and produces death. We don't live in systems like that. We don't thrive in systems like that. You've got to find ways to invite some degree of purposeful inefficiency that creates learning by discovering anomalies and things that challenge the status quo.

Brian Ardinger: So, you talk a little bit about how do you embrace that chaos instead of the predictability. Can you talk about maybe some examples or ways that companies can start thinking about surviving or thriving in a chaotic environment versus a static environment?

Elliott Parker: Yeah. In the end, the CEO of Netflix said it really well. Reed Hastings, he said, chaotic and messy will beat sterility every time as long as that chaos is productive. And that's the trick. It's making that chaos productive. I think the best analogy way that I think about it is what we see in natural ecosystems where there's a tremendous amount of resiliency.

Think about the Amazon jungle and the way the Amazon jungle innovates. Incredibly resilient, and yet none of the innovation is done in a hierarchical way. It's not objectives driven. It's not broadly communicated in the system. It's not centralized. And it's not expensive. Innovation in the Amazon happens in a very decentralized way.

It's a random walk. It's not objectives driven. It is constrained by available resources, but there isn't some master plan. It's not communicated, and it, it happens at the level of individual organisms or cells in that ecosystem. Where if the innovation of mutation fails too bad for that organism, but the ecosystem's fine.

On the other hand, if that mutation succeeds, the ecosystem is poised to adopt it, propagate it. If everything we do inside of companies is the exact opposite of what we see in naturally resilient ecosystems like the Amazon jungle, and it ought to cause us to pause and, and question the way we do things.

Brian Ardinger: I think a lot of corporates fundamentally understand they need to be thinking more innovatively and doing things. And I don't think it's lack of necessarily knowledge. Like there's a ton of people out there talking about processes and things that they can do to be more innovative in that. But there seems to be a fundamental disconnect from taking action in the right way versus taking action and just for the sake of taking action.

Can you talk about maybe some examples or ways that you've seen companies really embrace the fact that they do need to innovate and embracing new ways to do that?

Elliott Parker: The fundamental challenge, it hasn't changed since Clay Christensen wrote the Innovator's Dilemma almost 30 years ago. I'd argue that we've actually, even the theory being widely understood, we've actually gotten worse at dealing with the problem because of that issue of being optimized and better managing for safety and predictability.

The challenge is that as an organization scales, we develop systems of governance, incentives, processes, talent that is optimized for that predictability, safety for preserving what exists. And we then apply those systems to things where it requires mistake making, where you, you need to go learn. And we're surprised and disappointed when that system for scaled execution doesn't work for learning and making mistakes.

The solution is that you've got to develop an entirely different system of governance, incentives, often talent and processes that is designed to go learn.

What we see in our economy is that startups do that really well. They're optimized for capital inefficiency, which sounds funny to say. But they're very inefficient by design because that's how they learn, and they stumble into new growth trajectories. And so inside of organizations, you've got to find a way to break out from your existing system, set up a new system where this can be done well.

Our answer, what we often think about is building external independent venture backable startups as a way for corporations to tap into innovation that would otherwise be hard to do internally. Startups, turns out, are a great way to run experiments.

Brian Ardinger: So, let's talk a little bit more about that. You've had, you know, real life experience and, and working with companies and creating, I guess, separate ventures, you know, based on the problems that you want to solve, or they want to solve. What companies have kind of embraced that and what are some success stories that have come out of that?

Elliott Parker: Any company that's facing any form of disruption or finding innovation to be difficult, which I, I think is just about every company, right? So if you're wanting to access transformative, truly transformative innovation, the standard approach of putting in place a really smart team of innovation, and with all the will and desire in the world.

When we look across corporations, for example, the success, they're very hard to find and I think that's remarkable. Yet it's what we're all trying. Our view is that it's not a problem of intelligence or will certainly not. It's a problem of structure. So structural challenge requires a structural solution.

Our view is then many cases externally launching businesses can help. Good example of how this works, we worked with a, a large corporation a few years ago. That came to us and just said, help us understand this customer space. Come up with new ideas, better ways to serve the customer. We immediately identified an opportunity for a new business after talking to customers in the space.

Something that needed to exist in the ecosystem. That corporation couldn't go build it because nobody else would play along. And similarly, if you and I, Brian wanted to go launch the startup in the space, we wouldn't be able to get the traction. But what we could do is pull together the ecosystem players as investors and go launch that business.

Eighty-five percent of the market came in as investors in that startup soon after we launched it. An amazing founder behind it who's doing incredible things. And what's interesting is that startup that we built then created a way for the corporation that originally partnered with us to do it to sell their own products differently.

This startup went out and built a new marketplace. It opened up new pathways for the corporation. Transformed their business model through this startup. We have lots of examples in our portfolio of that happening. It's a fantastic way for corporations to learn and build optionality for the future.

Brian Ardinger: One of the challenges with innovation is you can't pick the winners at the very beginning. Yeah. And because of that, it takes a lot of ideas to actually figure out which ones can get through the wilderness and become big or transformational and such. How do you account for the flow of ideas and having enough and being able to execute on enough of those early-stage ideas such that you do have enough potential outliers that come out on the backend.

The fact that a lot of internal corporate innovation stuff fails is because they have a team of three people and they have five ideas that they test, and that's not enough so that then it's killed right away, and it never gets funded again.

Elliott Parker: I think this is a mistake that a lot of organizations make in the desire to be, make things predictable and to take these learning problems and treat them like execution problems where we can predict what's going to happen and the result is that the quantity of things we're considering is ditched for a focus on quality. And the reality is you said you can't predict ahead of time.

That's true in our world of venture capital too. And I look at our portfolio of startups, if I predicted ahead of time which of those were going to be top performers and under performers, I would've been wrong very consistently.

And so, our goal is to launch as many things as we can and see what happens and put the right incentives and governance in place and well, these entrepreneurs can do amazing things. It's very hard to know. So, job of an innovation team inside a corporation, my view is they are in charge of converting assumptions into knowledge on behalf of the corporation. The way you do that is by gathering insights.

And ideally, you're looking for insights that challenge the way we currently think about the world inside the corporation. You're trying to uncover anomalies, surprises. The hard thing is think about these insights as almost like an asset class you're investing in. You're trying to collect as many insights as you can.

And they behave like any power law asset class where it's just one or two insights that are going to propel the organization and create most of the growth. Most of the insights you gather won't do anything. So, when you're dealing with a power law asset class, your goal is to have a portfolio that's as broad as possible.

In other words, innovation teams need to be focused on gathering as many insights as they can. You do that by running as many experiments as you can at the lowest possible cost per experiment because you don't know ahead of time which experiments, or which insights are going to lead to the breakthroughs. So just go get a lot of them.

Brian Ardinger: And then how does that play out where, again, if we're trying to find transformational stuff and companies, by and large are not very good at the transformational because it undercuts their existing business models or conflicts with some of that kind of stuff. Versus like the horizon one kind of optimization innovations that happen. On that spectrum how does this play out and where should companies really be playing?

Elliott Parker: Companies should spend most of their time and effort on those horizon one innovations. I mean, most of the things that we benefit from in the world are sustaining innovations. There's slight improvements over what existed before.

That's what corporations do fantastically well. That's what they're designed to do. The problem is that portfolio sustaining innovations over time does not produce an enduring organization. In fact, if you look at your innovation portfolio, and most of the innovations are focused on efficiency, that sounds great in the near term, and that's what we are trying to save costs and prove the company.

The funny thing is, I look at this in the book, examples of this, an approach like that will over time render your company more fragile, less capable of dealing with big shocks to the system. And so, to have a company that grows and endures, you need those horizon three, you need those transformative innovations. You've got to find a way to do it.

It still needs to be a, for most companies, a minority part of their investment in terms of time and resources. The question we often ask corporations is when you look at your current situation in the marketplace and competitive threats. First question to ask is, how much innovation do we need and how soon do we need it?

And that ought to dictate then how much you're focused on horizon one versus horizon three, and what tools you're using, whether it's M&A, R&D, venture building, outside venture investment, partnerships, all the things that you have at play. Your mix needs to change depending on the answer to those two questions, how much innovation do we need and how soon do we need it?

Brian Ardinger: And how much control do you want of the potential transformational things that you create? Yeah, I see a lot of folks in the corporate venture space, they're just looking for returns or optionality or to kind of mitigate the potential downsides by investing in startups and that without looking at it from the standpoint of like changing their industry or transforming their industry.

Elliott Parker: One of the, the biggest mistakes we see corporations make when it comes to venture investing or venture building is they view this tool as a way to augment revenue. I can't think of a worse way to augment the revenue. A scaled corporation. But it is a fantastic vehicle for learning about the market and bringing those lessons back to the core business where you've got this amazing lever.

It's a lot easier to grow a business from 50 billion to 51 billion than it is to take a startup from zero to a billion. So, these startups, these new ventures outside are fantastic ways to learn and to build options for the future. Terrible way to augment your revenue.

Brian Ardinger: So, if we have some listeners out there that are in the space trying to figure out some ways to dip their toe into it or think more holistically about how to create new ventures and new innovations within their company, what are some easy steps that they can do to start building that muscle or or getting involved?

Elliott Parker: First thing, adopt the motto: more experiments fast, cheap, and weird. And what I mean by that is you ought to look at the experiments that you're running in your organization on the innovation team. We define experiments as any action you're taking where the outcome is not known ahead of time. You want to then design those experiments carefully and run the test so that you're documenting what you learn. But when you look at your portfolio of experiments that you're running. Are those experiments fast, cheap, and weird.

And push yourself. How might we make them faster, cheaper, weirder. And by weird, I mean designed to uncover anomalies and challenge the status quo. So often the experiments that we're running, even in our innovation teams, when you really look at them, they're actually designed to reinforce what we know as an organization and to help us feel good about what we're already doing. Help us find reasons to preserve the status quo. You need to actively go run experiments that tell you why your current business model isn't going to work anymore.

Brian Ardinger: Right. Find the areas that suck.

Elliott Parker: Exactly right. Exactly right.

Brian Ardinger: Excellent. Well, let's talk a little bit more about the book. Is there anything else in the book that you want to make sure that the audience understands and knows about and reason why they should pick it up?

Elliott Parker: I am generally not a fan of business books. Personally. I think you can learn a lot more from reading about history and science and discovery and other things like that, that will inform the way you think about business and strategy. So, this book is kind of written in that vein.

It's meant to provide a language to those who want their organizations to be more effective rather than a step-by-step how to, there are analogies and stories in here that you can use to persuade others to also want your organization to be more effective in the face of opportunity and challenge.

For More Information

Brian Ardinger: Elliott, if people want to find out more about yourself or more about the book, what's the best way to do that?

Elliott Parker: Find me on Twitter, ER Parker. I'm on LinkedIn of course. The book, The Illusion of Innovation is available at all the places where you buy books.

Brian Ardinger: Excellent. Well, thank you again for coming on Inside Outside Innovation. Look forward to getting you back on the platform here soon.

Elliott Parker: 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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