GUEST POST from Geoffrey A. Moore

Having spent the last several years working with public companies in the tech sector who want to apply zone management principles to catching their next wave, I finally had an epiphany.

Every one of my clients had an Incubation Zone of one sort or another, and all of them had put concerted efforts into running it in an efficient and orderly way. This included crowd-sourcing a large funnel of potential ideas from the workforce, taking those ideas through a well-structured qualification process with clear benchmarks for progressing to the next stage, and funding a handful of the best ideas to get through to an MVP and market validation.

My epiphany was, this is a Production Zone operating model, not an Incubation Zone model. That is, these enterprises are treating the Incubation Zone as if it were another cost center. No venture capitalist operates in this manner. They are not process oriented—they are coin operated. But they do have a method, one that has proven itself countless times, and that’s what I want to describe here.

Anchor Tenets

In my view, there are five key principles that successful VCs keep close to their hearts. They are:

1. Trapped value. If you are going to be coin operated, the first thing to do is find the coins. In B2B markets, this typically equates to identifying where there is trapped value in the current way of doing business. The value may be trapped in the infrastructure model (think cloud computing over data centers), the operating model (think self-organizing ride dispatching from Uber over the standard call center dispatcher), or the business model (think software subscription over license and maintenance). The point is, if you can release the trapped value, customers will enjoy dramatic returns, enough to warrant taking on the challenge of a Technology Adoption Life Cycle.
2. 10X technology. VCs are fully aware that there are very good reasons why trapped value stays trapped. Normally, it is because the current paradigm has substantial inertial momentum, meaning it delivers value reliably, even though not optimally. To break through this barrier requires what Andy Grove used to call a 10X effect. Something has to be an order of magnitude better than the status quo to kick off a new Technology Adoption Life Cycle. Incremental improvements are great for reinforcing the status quo, as well as for defending it against the threat of disruption, but they do not have the horsepower to change the game.
3. Technology genius. 10X innovations do not fall out of trees. Nor are they normally achieved through sheer persistence. Brilliance is what we are looking for here, and here public enterprises face a recruiting challenge. They simply cannot offer the clean slate, venture funding, and equity reward possibilities that private capital can. What they can do, however, is pick up talent on the rebound and integrate them into their own playbook (see more on this below). The point is, top technology talent is a must have. This puts pressure both on the general manager of any Incubation Zone operating unit and on the Incubation Zone board to do whatever it takes to put an A Team together.
4. New design rules. The path for breakthrough technology to release trapped value involves capitalizing on next-generation design rules. The key principle here is that something that used to be expensive, complex, and scarce, has by virtue of the ever-shifting technology landscape, now become cheap, simple, and plentiful. Think of DRAM in the 1990s, Wi-Fi in the first decade of this century, compute cycles in the current decade, with data storage perhaps the next in line. Prior to these inflection points, solution designers had to work around these factors as constraints, be that in constricting code to run in 64KB, limiting streaming to run over dial-up modems, or operating their own data center when all they wanted to do was to run a program. Inertia holds these constraints in place because they are embedded in so many interoperating systems, they are hard to change. Technology Adoption Life Cycles blow them apart—but only when led by entrepreneurs who have the insight to reconceive these assets as essentially free.
5. Entrepreneurial general manager. And that brings us to the fifth and final key ingredient in the VC formula: entrepreneurial GMs. They are the ones with a nose for trapped value, able to sell the next new thing on its potential to create massive returns. They are the ones who can evangelize the new technology, celebrate its game-changing possibilities, and close their first visionary customers. They must recruit and stay close to their top technology genius. They must intuit the new design rules and use them as a competitive wedge to break into a market that is stacked against them. Finally, they must stay focused on their mission, vision, and values while course-correcting repeatedly, and occasionally pivoting, along the way. It is not a job description for the faint of heart.

Now, these are what I claim to be the anchor tenets of the VC playbook. For the purposes of the rest of this blog, let’s take them as a given. Now the question becomes, how could a public enterprise, which does not have the freedom or flexibility of a venture capital firm, construct an Incubation Zone operating model that incorporates these principles in a way that plays to its strengths and protects itself against its weaknesses?

An Enterprise Playbook for the Incubation Zone

We should acknowledge at the outset that every enterprise has its own culture, its own crown jewels, its own claim to fame. So, any generic playbook has to adapt to local circumstances. That said, it is always good to start with a framework, and here in outline form is the action plan I propose:

• Create an Incubation Board first, and charter it appropriately. Its number one responsibility is not to become the next disrupter—the enterprise already has a franchise, it doesn’t need to create one. Instead, it needs to protect the existing franchise against the next technology disruption by getting in position to ride the next wave as opposed to getting swamped by it.
• In this role, the board’s mission is to identify any intersections between trapped value and disruptive technologies that would impact, positively or negatively, the enterprise’s current book of business. We are in the realm of SWOT threats and opportunities, where the threats take precedence because addressing them is not optional.
• The first piece of business is to identify potential use cases that could emerge at the intersection of trapped value and breakthrough technology, to prioritize the list in terms of import and impact, and to recruit a small team to build a BEFORE/AFTER demo that highlights the game-changing possibilities of the highest priority case. This team is built around a technology leader and an entrepreneur. The technology leader ideally would come from the outside, thereby being less prone to fall back on obsolete design rules. The entrepreneur should come from the inside, perhaps an executive from a prior acquisition who has been down this path before, thereby better able to negotiate the dynamics of the culture.
• The next step is to socialize the demo, first with technology experts to pressure test the assumptions and make improvements to the design, and then with domain experts in the target use case, whether from the customer base or the enterprise’s own go-to-market team, who have a clear view of the trapped value and a good sense of what it would take to release it.
• The next step is to pitch the Incubation Zone board for funding.

> This is not an exercise in TAM or SAM or anything else of the sort. Those are tools for determining ROI in established sectors, where category boundaries are more or less in place. Disruptive innovation creates whole new boundaries, or fails altogether in the process, neither of which outcomes are properly modeled in the normal market opportunity analysis frameworks.

> Instead, focus on beachhead market potential. Could this use case gain sufficient market adoption within a single target segment to become a viable franchise? If so, it will give the enterprise a real option on a possible future. That is the primary goal of the Incubation Zone.

Whether the effort succeeds or fails, the enterprise can gain something of real value. That is, success gives it a viable path forward, and failure suggests that it need not spend a lot of resources protecting against this flank. The job of the board is to determine if the proposal being pitched is worth prioritizing on this basis.

• Once funded, the focus should be on building a Minimum Viable Product and using it as the basis for selling a bespoke project to a visionary executive working at a marquee brand. The intent is to build a whole product for this customer on a project basis, doing whatever it takes to release the trapped value, thereby showing the world what good could look like. This project will require a ton of custom engineering, so it is key to price this on a time and materials basis, giving away the license while protecting the IP rights. Success consists of creating a marquee reference that garners the attention of the tech sector analysts and media.
• The next funding milestone focuses on productizing the MVP for initial distribution. Ideally, this would be done internally with the enterprise IT department serving as Customer Zero. That allows for deeper dives into what’s working and what’s not as well as data collection to verify that trapped value is not only being released but recovered. It also positions the CIO as a highly credible reference to support New Product Introduction.
• With productized offering in hand, the final step is to introduce the new product into restricted distribution, not general availability. Your goal is to target a beachhead market with a single use case—just the opposite of what general distribution is designed to accomplish. Thus, the entire go-to-market effort, from product launch, to pipeline generation, to sales, post-sales implementation, and customer success needs to be under the direct management of the GM of the Incubation Zone operating unit. Success here is measured by classic chasm-crossing metrics, focused on winning a dominant share of the top 30 accounts in the target market segment.

Crossing the chasm represents the fulfillment of the Incubation Zone’s real option mandate. This sets up a second set of funding milestones depending on what exit path is to be targeted. We can dig into those dynamics at another time.

That’s what I think. What do you think?

Image Credit: Pixabay

Sign up here to join 17,000+ leaders getting Human-Centered Change & Innovation Weekly delivered to their inbox every week.