The Innovation Sandbox

Thursday, August 9, 2018

By Lode Verdeyen, CEO Engie Factory

What does a typical large company do when an important project fails? Answer: the quick and ruthless severance of one or more line-managers in order to set an example and stop the blame from reaching the top of the company.

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Should the company act in the same way in the case of an innovation project? There are innovation projects with little risk, such as the purchase and implementation of an innovative but commercially proven technology with little uncertainty and a high probability of success. Conversely, the creation and marketing of a new product in a new market, far from the core business, will probably not be successful the first time, if ever. It will definitely be necessary to improve the design, production and marketing of the product in several cycles. But these are exactly the kind of innovations that can generate extremely high returns.

The process of reiterating, understanding what the important aspects are, optimizing the design and market requires patience and resources from the top management, and perseverance, creativity and energy on the part of the innovation project leader. For the company it is complicated to handle long processes with successive failures because it often goes against the reigning corporate culture.

Progressive companies try to establish a culture that allows failure, launching for example an internal campaign with the idea to convince workers that it is alright to fail in innovation projects. Sometimes they implement a prize for the best failed idea. However, we have seen instances where this is not enough: a decades-old company culture cannot be undone with a single internal campaign.

The instances where senior management punishes managers or workers who failed, in one way or another, do not encourage innovation; nobody with ambition is willing to take the risk of finishing her or his career prematurely.

Enter the Innovation Sandbox

The sandbox is a place where children play with sand and quickly shape their dreams with little effort. In addition, it is a safe area and the risk of injury is limited. The same concept is used in software development where, to test a new version of a program, tests are conducted in a limited and well-controlled environment; that is, in a sandbox. From these concepts, a new area is born that we call the Innovation Sandbox (or ISBX).

A company that wants to encourage innovation of the risky and uncertain type, should create an ISBX. It is a space well isolated with impenetrable borders, so that the current culture and processes of the company do not rule within it. It is a bootcamp where one enters as a hero and emerges as a hero, independent of the outcome of the project.

Within this ISBX, internal processes must operate at a much faster speed (10X, 100X) than in the rest of the company. This is of uttermost importance since the cycling is taking a lot of time, and the time to market is crucial. The incentives for the participants are shares in equity or a similar bonus scheme related to the creation of value. As a result, the rewards are potentially much larger than for other jobs in the company.

The ISBX cannot depend on services provided by other areas of the company such as HR, accounting, procurement, logistics, marketing, etc. These support departments work well for the company's core business, but they do not have the knowledge, contacts, culture and, especially, the speed needed to adequately support the ISBX. To obtain this specialized support, these services are contracted with external companies.

In mature venture capital ecosystems, it is easy to find these specialized companies; however, in countries or regions with a poorly developed startup ecosystem, it can be a problem. (In relation to Latin America, the ecosystem in Chile is growing rapidly, with a lot of new companies providing specialized services; in other countries, such as Peru, they are not available yet but are likely to appear soon.)

In the ISBX, projects are financed with internal or external capital, but according to the rules of venture capital: there are rounds of successive capital increases and, in the event that the available capital or the willingness to continue runs out, the project ends without scandal. It is essential that the innovator leaves with his reputation intact. Otherwise, which aspiring-innovator of the company will take the risk of being disposed of in a future project?

Finally, the innovator who, after a failed project, dares to return to manage a new innovation project, will be better prepared with more motivation and resilience.

Lode Verdeyen is CEO of Engie Factory, a corporate accelerator based in Santiago, Mexico City and Singapore. Engie Factory is an ISBX for the Engie group, accelerating and also investing in startups with sustainable products and/or services.

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