Elliott Parker, CEO of venture-builder High Alpha Innovation, has worked with companies of all sizes and found that the larger they are, the less likely they will produce significant innovation.
Elliott Parker Explains How Entrepreneurs Can Out-Innovate Large Competitors
For 25 years, Elliott Parker has advised companies of all sizes on how to grow through more real innovation. As CEO of High Alpha Innovation, he now partners to co-create startups with corporations that will drive more new ways to achieve out-of-the-box excellence.
In his new book, “The Illusion Of Innovation: Escape “Efficiency” And Unleash Radical Progress,” Parker argues that what passes for innovation in most major firms is just “sound and fury signifying nothing,” because their real priority is operational efficiency aimed at pleasing shareholders indoctrinated by business school dogma about Return on Investment Capital (ROIC).
“Large corporations, especially publicly-held companies, have systems of governance and incentives that are optimized for safety, predictability, and the reliability of their business model,” he told Startup Savant. “It’s a deadly trap that creates what I call ‘innovation theater’ of people acting like they are doing something creative. Executive teams know innovation is supposed to be important, so they allocate resources to activity that is meant to produce it, but which usually just destroys value because leaders are not prioritizing a learning process that is fundamental to significant innovation.”
Those that refuse to deviate from what they already think they need to do are like “corporate hospice workers because if organizations don’t adapt to changes in the business world they are dying,” he says. “Small teams, whether at startups or in scaled companies, have proven that they are the primary drivers of meaningful innovation.”
Research and development and mergers and acquisitions remain the primary drivers of corporate growth, but while companies invested half a trillion dollars in scientific and technological searches for new ideas in 2019, returns have been diminishing for a long time.
“Research productivity for the aggregate US economy has declined by an average of 5% per year since the 1930s,” Parker wrote. “On a per-dollar or per-person basis, this suggests that science is becoming far less efficient and impactful. The number of researchers required to double chip density today, for example, is more than 18 times larger than what was required in the 1970s.”
Between 2010 and 2019, US firms distributed $4 trillion in dividends and $6 trillion in buybacks, a sign that leaders no longer believe it worthwhile to seriously invest in innovation to try to beat market returns, he noted.
Likewise, in 1996 there were 7,300 publicly-traded companies, but now largely due to M&As there are a little over 4,200, this despite US population growing 1.5 times greater from 1976 to 2022 and the increase in gross domestic product per capita being 2.2 times higher. Researchers estimate the gap between the number of public companies in the US and how many there should be is 5,800 to 12,200.
Ironically, all this activity is not really helping the remaining companies. Innosight, an innovation consulting firm where Parker once worked, found that the average life span of firms decreased from 40 years in the 1960s to half that in the 2020s. A study at Arizona State University in 2023 found that for the prior century, 60% of US public companies did not even outperform one-month Treasury bills, a proxy for risk-free capital. It also reported that just 2% of firms were responsible for 90% of the net wealth creation in the stock market.
However, the Ewing Marion Kauffman Foundation reported that in the average year, entrepreneurs launch 552,000 U.S. companies, but only 125-250 reach $100 million in revenue and very few “ever reach escape velocity,” Parker wrote. “Building companies with enduring impact is incredibly difficult and rare. Enduring companies are outliers that create long cycles over which they can solve problems.”
After earning a B.S. in finance from Brigham Young University and MBA at the UCLA School of Management, he was hired by Arthur Andersen, the global consulting and accounting firm that collapsed in 2002 when one small element of the company went haywire.
He worked as a strategist at Innosight, founded by the pioneer of disruptive innovation theory, Clayton Christensen (who died in 2020), a highly respected critic of what has long been taught at business schools. “They preach the ‘gospel of finance,’ overemphasizing the predictability of short-term safety at the expense of progress, growth, and real innovation,” Parker said. “They also focus students on specialization in a discipline, such as marketing, operations, finance, and so forth, but the real world doesn’t work that way. Major corporations manifested the resulting fragility of their business models and lack of resilience during the COVID-19 pandemic.”
Parker went on to start several other firms before founding High Alpha Innovation in 2015 and has launched over 40 venture-backed startups over his career.
What Determines Whether Innovative Teams Are Successful
Innovative startups don’t fail because they did not pivot or the founders did not get along, as is often claimed. According to a study by CB Insights, the primary reasons are they had a flawed business model or were outcompeted and ran out of money.
Paul Graham, founder of Y Combinator and a successful investor in hundreds of startups, urges founders to make sure their companies are “hard to kill and cheap to run.” The world’s most enduring institutions, Parker points out, are “hyper-conservative about fiscal matters, unconcerned about short-term growth because they are tightly held.” A survey of Japanese companies more than 100 years old showed more than a quarter had enough cash on hand for two or more years. The lesson, Parker says, is “keep your burn rate low, funding operations through revenue as much as possible, being slow to hire and creative in acquiring customers.”
That means doing constant experimentation to learn what customers really want, obsessively trying to engage them, and pivoting when required. The overall pace of innovation in the business world is being driven by the increased ease of communication and access to technology building blocks, with pervasive AI-enabled computing radically increasing the velocity of learning.
“Thanks to real innovation by companies of all sizes, the future is going to be weirder than any of us can imagine and is arriving quickly,” Parker wrote.
Big companies are generally best off partnering with and investing in startups and small companies outside their organizations to avoid imposing predictable objectives on a process that is necessarily messy. Real innovation requires searching for the unknown and it simply doesn’t work for financial and operations leaders to set a relatively short-term timeline to reach goals, as evidenced by the lack of breakthrough innovation by most corporations. But the leaders of scaled organizations are experts at executing what they specialize in and if innovators can convince them to apply those skills once a new opportunity is found, that could have enormous positive results.
“If you have an opportunity to partner with a large company or set up an independent unit, it is important to learn CFO-speak,” Parker wrote. “Chief Financial Officers care about two things: how much cash the company generates and how much the company is worth, the multiple. These are the metrics that determine the stock price for publicly-traded companies. You can remove the negative impact on earnings that these activities normally have by moving this into standalone ventures that explore new ideas that are not part of the core business, looking for growth in horizontal exploration, rather than going deeper into the vertical that is its focus. That turns these creative efforts into a balance sheet investment rather than an operating expense. Corporate leaders can set standards so that the experiments are in line with its overall strategy.”
Good things in business often take time, while bad things usually happen quickly and are easier to spot, Parker wrote. “But optimistic views about the future, on average and over time, have proven more correct than pessimistic ones when it comes to innovation. Optimism bestows resilience and adaptability. So be non-consensus and right in the long term.”