Why Are Big Companies Losing to Startups?

“You suck at innovation.”

I unfortunately have to tell corporations this all the time.

Why is it that a corporate employee can come up with an innovative idea and get nowhere with it? Despite having an abundance of resources, the corporate innovator is often left begging for time, talent, and treasure. 

Why is it that this same employee can quit their job, found a startup, and be wildly successful as an entrepreneur—with the same idea? There has never been a better moment in history to be an entrepreneur than right now. The nature of innovation today encourages nimbleness, flexibility, and creativity above all else. It’s an exciting time to be an innovator.

For those same reasons, it’s a drain to be stuck in a traditionally structured business. So here are the trillion-dollar questions: Why do big companies suck at innovation? And what can they do about it? 

Innovation Itself Has Evolved

Large companies are unaware that they themselves are at fault for not innovating as easily as their disruptive startup competitors. They are trapped in an antiquated way of innovating that hasn’t responded to the evolution that has happened to innovation. Innovation itself has evolved. Technology has become democratized, talent costs less, time investment has shrunk. The reason why corporations are failing is because they are not thinking and acting like a startup. 

When I sit down with CEOs who have hired me as a consultant, I make it clear that they might individually be a talented innovator, but their business lags behind. More often than not, their company is hostile to modern “innovation,” despite their marketing and branding using the word (incorrectly) all the time. Most of the companies I work with spend millions of dollars innovating because they conceptually know it’s important, but they don’t understand why they do it.

When I ask corporate leaders what it is that they’re trying to evolve into or develop, they usually have a hard time answering the question. This is because companies are good at staying the same and bad at changing. An “innovation department” within a traditional business won’t be able to do anything beyond the limitations of its structure.

Innovators, by our very nature, challenge stability, question it, tweak it: we make things better through change. We take losses one quarter to experiment so that we can double, triple, or quadruple our profits the next with something truly disruptive. It is the innovator’s job to cut away what doesn’t work, enhance the things that do, and fill in the gaps with the new and radical.

Reasonably, this makes most operational leaders very anxious. That’s why there are so few innovators leading larger organizations; the people in charge of hiring innovators are ideologically opposed to them.

Because so many companies fear change, they never really innovate. In essence, big companies deny their innovators the chance to do what they do best. That’s why so many innovators leave large organizations to build their own startups. And this is why so many companies suck at innovation.

You’re Hiring the Wrong People

Big companies are losing to startups in one other key area: talent.

The problem starts in Human Resources (HR). Most hiring departments are operating on a two-decades-old paradigm. In this mindset, third-party qualification is the most important thing. Certifications, degrees, references—these are the things that get you hired by outdated HR departments. Meanwhile, first-party qualification—actual ability to do the job, efficiency, culture-fit—are considered secondary, things to only be taken into consideration once the MBA or other worthless degree box has been checked.

The result: hiring departments with no guarantees that they will bring in people who can do what they were hired for.

Most of the companies I work with would never hire me. They’ll bring me on as a consultant to help them innovate their business, but their HR departments would see my lack of certifications and the amount that I bounce between businesses as a problem; in reality, these are my skill sets, the very reasons why I’m hired to innovate for massive corporations around the country. What makes me an asset as a consultant to today’s corporate executive leadership is precisely what makes me a liability to most HR departments’ hiring practices—which were created twenty years ago.

Corporations will routinely pass on Davichi’s just to end up with “average” Paul the MBA. Their HR departments prioritize stable operators over entrepreneurial innovators. This is why so many companies can’t innovate: they don’t have any true innovators in their organization.

If a big company somehow manages to hire innovators, they struggle to keep them. Every year, traditional companies lose their best employees to startups. Even worse, the people who leave those companies tend to start businesses that directly compete with their previous employers. Big companies have effectively created a pipeline from their onboarding programs to their direct competitors.

Based on a November 2021 survey of 8,000 U.S. employees, commissioned by QuickBooks, 57 percent want to start their own business. One in five of them will actually found a startup. If that number holds true across the country, that means there will be 5 million EINs (Employer Identification Number) generated in 2022 alone.  The less large companies do to compete through innovation, the more that number will rise.

How to Do Better

In an innovation economy, startups dominate the money and talent pool. Big companies are dying a death by a thousand cuts while their best employees leave to found businesses that eat their profits. 

The solutions are obvious, though many companies don’t want to hear them. In order to respond to contemporary innovation, companies need to do four things:

Focus on talent over degree. People are the heart of any business. It’s not enough to just hire talented people; you have to take care of them and let them be human. High-performance individuals will do well only if you let them. A degree should never trump the provable success that talent creates. I would hire a serial entrepreneur over a MBA anyday.

Act more like a startup. Startups tell great stories. They inspire people. They lead with vision over facts. That’s how they get the best people and the most money. Startups also move quickly and nimbly; they are able to respond to the evolution of innovation. The more you can make your business like a startup, the better positioned you’ll be to take every opportunity that comes along.

Get out of your own way. Process and operations are overrated. Too many companies get bogged in how they historically do things that they never stop to ask how well they actually do them. Performance beats process every time. This goes back to the first point. If you let your people do things the way that they do them best, hopefully the reason you hired them to begin with, you won’t need to waste any time creating convoluted processes.

Move faster and act at scale. A startup with a smart team can get more money, faster than the largest corporate  innovation teams. Large companies move to slow and to small compared to their startup competitors.  In just a few startup competitors there is more people focused on purely innovation than 99% of large corporations. Now if you take the totallity of startup competitors, around the globe, in every market most corporate innovation teams are highly outnumbered.  

Evolve Your Business

If you want to bring true innovators into your business, and if you don’t want to lose the top-people you have, you need to innovate better. You need to take risks, earlier, and make changes—innovations—that shake things up. 

The corporate world doesn’t like things that are messy because mess implies waste, and operational belief systems try to minimize waste. But innovation, by its very nature, is a messy process full of failed experimentation. 

Innovating might be uncomfortable, but that’s how you’ll know you’re doing what you need to. No matter how scary it might feel, evolving your business is infinitely less frightening than watching it die a slow death.

For more advice on innovating better, you can find Innovating Innovation! on Amazon. The above is adapted from Innovating Innovation!

Written by Mike Stemple.
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