As an organization scales and grows, its ability to foster innovation and pivot its business strategy evolves. I say evolves rather than suffers because there are ways to harness the expanding resources of a growing organization such that innovation flourishes in ways that were impossible at earlier stages. That said, in most cases, innovation does indeed suffer as large organizations struggle to reconcile their scale with the infrastructure and bureaucratic processes needed to support it. This is especially painful in particularly dynamic industries (like advertising technology), where market development and product innovation occur extremely rapidly. In these industries, large organizations need to be able to either quickly innovate or create significant barriers to entry such that they have a broader timeframe to respond to competitive threats.

“Innovation” within an organization typically means the ability to effectively modify business strategy, core products and services, enter new markets or industries, or change the culture of a team. “Scale” typically manifests itself as some combination of growth or change in an organization’s revenues, clients, or team. How a scaling organization deals (or should deal) with innovation-related challenges has to do with a number of different variables, but determining which methods should be used to address these challenges depend primarily on the stage in the companies growth and maturity. Below are some examples of the ways in which several late-stage companies have addressed innovation issues that did not exist at earlier stages of their development:

Big Co Examples:

Benzinga Corporate Entrepreneurship Matrix

  1. Google: Experienced brain drain, as the brilliant engineers that joined a younger tech leader in order to have an impact and build innovative products started to leave because they struggled with an increasingly bureaucratic organization. Google took a multifaceted approach to this problem by not only increasing pay and emphasizing their 20% time program, but also by continuing to grow their internal venture group and publicizing their interest in building all sorts of random products. It is worth noting that fostering innovation has a special place in Google’s heart in part because search, worth an estimated 93% of their annual revenues, is a large but rapidly maturing sector with stagnant growth rates (and Google’s market share growth has slowed to a crawl). That is to say, they need to emphasize new markets, start-ups, and technologies because their investors aren’t thrilled with their reliance on the search industry (thus the much scrutinized “Watch This Space” campaign) and are howling for new revenue streams.
  2. Cisco: Created the Emerging Markets Technology Group as they began recognizing inherent threats to their business model caused by massive size ($40BN 2010 revenues, 70k employees). This specially-formed group is armed with a mandate to build and fund innovative ideas, wherever they may find them. Interestingly, this group was not only provisioned with hard resources like staff and capital, but was also manned by senior employees that had the influence to ensure that these projects would be seriously considered and integrated by the mothership.
  3. AOL: Created AOL Ventures as the company struggled with its brand heritage as the “90’s dial-up company that sent you America Online cd’s in the mail” and a series of damaging business decisions demonstrated an inability of senior leadership to innovate successfully (think Netscape and the Time Warner merger). By creating a small elite venture team to invest company capital in strategic ventures, AOL is working to regain a toe-hold in nascent tech industries and companies, as well as provide a medium to inform larger strategic decisions within the organization (I hope). It seems that the AOL Ventures team is also seeking to foster the company’s new innovation-related brand message among the thought leaders of the tech ecosystem by hosting a number of tech-driven events and meetups. I am pretty skeptical that this is actually motivated by anything other than improving deal flow, but what do I know.

Small Co Examples:

Having spent the first few years of my career working solely for seed and venture-stage start-ups, I am probably a bit better qualified to postulate on the way this phenomenon manifests itself in younger organizations than older ones.

Challenges to Innovation in the Early Stage:

  1. Too Many Cooks in the Kitchen: When companies are young, everyone has thought equity because its the only way to keep iterating and pushing the company forward. As a company grows, these same employees need to take on more specialized roles and should not be involved in all decisions. Innovation can become mired in confusion and disagreement when these employees try to stay involved in all major decisions.
  2. Stop Following the Ball: My high school soccer coach always used to yell at me during games for leaving my position and following the direction of the action around the ball. It is very tempting for a start-up to “follow the ball” and always try to pursue market trends and sexy new products, because at this point the company has a real client base, money in the bank, stability, etc. The problem is that as companies reach this middle stage of growth, it becomes more important than ever to stay focused and stick to the fundamental thesis of the company. I like Mark Suster’s recent blog post on this subject.
  3. Managing Customer Expectations: Along the lines of #2, now that a company’s customers are spending real money and have been a client for a significant period of time, they want all sorts of custom implementations. They want the company to build the products that they want (or think they want), regardless of what is already in the development pipeline. If allowed to exist, this type of abusive relationship can crush innovation because it distracts from both execution of the core product development and takes away from any spare resources that would be used to build and test new ideas. 37Signals’ recent “Getting Real” has a great chapter on ignoring feature requests from customers.

Best Practices to Maintain Innovation in the Early Stage:

  1. Clarity and Communication: It may sound trite, but by keeping clear communication channels between leadership and the rest of the team, innovative ideas can easily reach top executives, and those executives can clearly dictate the strategic course they would like to take. By clearly defining and emphasizing roles/responsibilities, the organization actually becomes better able to accommodate innovation and change. This practice assumes that the CEO has a vision and is able to make decisions based on that. If this is not the case, don’t worry about this step, because the company is already in trouble and innovation is the least of the problems.
  2. Sales: A company should NOT innovate through its sales team. Understanding what type of product the organization is selling and what sort of sales team structure is required to sell that product (Ex: selling software requires a specific type of sales team) is critical. There are time-tested sales structures out there. Find the relevant one, make sure everyone understands how it works, and stick to it. See Fred Wilson’s post on commission structure for more.
  3. Culture: This one is tough, but the stakes are high. Nothing kills innovation like a poorly scaled company culture. Maintain a company’s unique culture by continuing to do the things that kept the culture vibrant in the early days. This means different things to different organizations, but take the time to think through what brought the team together in the early days of the organization and make sure that those things are still happening: town halls, karaoke bars, cross-divisional brainstorming meetings – whatever it is, maintain it. Note: the mainstream press has a habit of attributing non-professional idiosyncrasies like using scooters in the office or taking breaks to sit in “relaxation chambers.” This is not culture and it definitely has nothing to do with innovation.
  4. Hiring: When the company was founded, every employee counted and each member of the team had to be innovative, ambitious, and motivated – that’s what was needed to get the company off the ground. As a company scales, the risks of hiring people that don’t fit those criteria seemingly decrease and it becomes daunting to expend the same energy in recruiting these individuals. Doesn’t matter. It is still important. Do it however possible because these are the individuals who can leverage the company’s new-found scale to power their innovative ideas.