07

Jan

2018

This article appeared first under the title “Where Will the Crypto Craze Lead? A Venture Capitalist’s View” on ProMarket.org, the blog of the Stigler Center at the University of Chicago Booth School of Business.

Reprinted with permission from ProMarket of the Stigler Center at the University of Chicago Booth School of Business.

I would like to thank Luigi Zingales for having invited me to contribute and Samantha Eyler-Driscoll for her editing prowess.

________________________________________________________________________

Can individual cryptocurrencies be programmed with stability in mind and if so, could a plethora of cryptocurrencies exhibit, in the aggregate, stable behaviors?

By now, unless you’ve just returned from a multiyear retreat to Mars, you should be familiar with Bitcoin. You may even have an inkling of the mania currently surrounding Bitcoin prices. And if you’re really curious, you may even have heard of the world of cryptocurrencies.

 

To recap the basics: it all started with the release of the Bitcoin protocol as an open source software in 2009—the novel breakthrough being how brilliantly its founder, Satoshi Nakamoto, meshed together tried-and-true technologies to come up with a blockchain concept that creates trust where it does not pre-exist between agents, in a persistent and non-censorable way. From those singular beginnings, Bitcoin has inspired crypto-coders to such an extent that we now find ourselves in a world with over 1,300 cryptocurrencies, with an aggregated value nearing half a trillion US dollars—quite the Cambrian explosion if I may say so. Technology costs being what they are, the cost of building a protocol underpinning a new cryptocurrency is so low that the barriers to entry or the frictions of forking an existing cryptocurrency are minimal. It’s thus not unrealistic that cryptocurrencies will number several thousand in the near future. It also seems, so far, that cryptocurrencies exhibit a power law distribution, with the top 10 representing the majority of aggregate market value.

Behind the Boom

Besides their extraordinary proliferation, the year 2017 brought skyrocketing prices for Bitcoin as well as other cryptocurrencies. Clearly, cryptocurrencies are becoming mainstream and attracting interest from different constituencies. At first purely driven by cypherpunks and libertarians and later by early individual adopters and the underbanked, interest eventually expanded to a few early venture capital funds across the globe and some emerging markets, where these cryptocurrencies were viewed as a substitute for local currencies that were either failing or not trusted by the general public. The most recent stages of adoption have seen widespread excitement from punters in South Korea, Japan, and China as well as more traditional institutional actors, with Fidelity, Goldman Sachs, CME, and CBOE being but a few examples. The market is structuring at such a furious pace that regulators, central bankers, and legislators are having a hard time keeping up.

As with the dotcom boom of 1999–2002, exuberance, manipulation, and fraud have reared their ugly heads as well as poor governance and lack of transparency. Add a touch of geopolitical horse-trading and it is difficult to figure out exactly what the reasons are for the price appreciations; they appear to have more to do with sentiment than fundamentals. The market is fragmented across exchanges across the world, with price discrepancies that are difficult for the average investor to take advantage of. There is alleged manipulation from various actors, including a few exchanges and various “whales” who hold vast quantities of Bitcoin or other cryptocurrencies. The open religious wars between believers in Ethereum, Bitcoin, Ripple, or Bitcoin Cash–to name but four of the main cryptocurrencies–as well as the internal wars between Bitcoin actors (miners, core developers, investors), produce an inordinate amount of noise.

“For the first time in history, a financial instrument, be it money or an asset, has not been created institutionally and is thus highly suspect to institutions.”

In addition, the sudden governmental decisions to ban exchanges in China or facilitate trading in South Korea or Japan have created a “Wild East” atmosphere in which Asian retail investors have eagerly risen to prominence. It should be noted that Asian retail investors have traditionally been quite active in the forex margin trade, which can explain the sudden popularity to a certain extent. Furthermore, due to the deflationary nature of Bitcoin, most investors have a tendency to hold. As a result the market is quite frothy, with an explosion of new punters while sellers are far and few in between.

As for market manipulation, certain firms and investors located in jurisdictions not easily reached by either US or EU enforcement are indulging in wash trading, painting the line, creating phony accounts across exchanges, spreading rumors, and in some cases allegedly issuing new tokens purportedly backed by fiat currency to inflate prices and trading.

 

Code Is Law

Notwithstanding all the above, what’s clear is that cryptocurrencies are now starting to compete with other asset classes or currencies. Cryptocurrencies have an advantage, which is the programmatic way their “money supply” policy has been set. Code is law for a cryptocurrency; this should prima facie make them immune to human interference and more “trustworthy” compared to other traditional asset classes or currencies (which are subject to human intervention). Nonetheless, cryptocurrencies are of course imperfect as they stand. Critics will point to the lack of transparent or appropriate governance, the inherent instability of decentralized power structures, technical faults that may leave some vulnerable to attacks, or the fact that open source code should not be used to underpin systemically important financial systems. Then there also is the not so little issue of energy consumption for any cryptocurrency based on what is called a proof of work protocol, which may undermine long-term viability.

Undeniably the swift course of recent events is not optimal for the short-term health of the space, but it does not detract from the fundamental promises of programmatic money or store of value along a more distributed intermediation power structure. In other words, even though the promise of cryptocurrencies in its purest form is to disintermediate trust and transition it from being purely human and institution based to being more code based, we have not yet arrived at that end point, nor do we know if such an end point is either desirable from a societal point of view or technically feasible. But we do know there is considerable interest in alternative means of exchange or stores of value, that the financial services industry may gain from such innovation, and that even though unhealthy price appreciation and extreme volatility have been recent ledes, so far—and based on a consensus of economists’ and central bankers’ views—cryptocurrencies do not represent an existential threat to the established order based on size alone.

Undoubtedly, market interactions will hold the key to success by allowing technologists to address the drawbacks and crypto-believers to go on believing anew. There are, however, a few salient points we should bear in mind: competition and market structure stability.

 

Crypto Competition

On the first point, I see three types of competition: competition between cryptocurrencies, competition between cryptocurrencies and fiat currencies, and finally competition waged by fiat currencies issuers embracing cryptocurrencies themselves. Each case raises several crucial questions:

Firstly, in a world where new cryptocurrencies are birthed with relative ease, how can we definitively declare a winner among them? Will network effects achieved by the current leaders be enough or will the inherent weakness of governance, decentralized protocols, inflation, lack of stability, or deflation mean that new entrants can overcome the first-mover advantage with a superior protocol? Further, will competition bring out excessive profit seeking human traits, designing cryptocurrency protocols to maximize either seignorage or fees to the detriment of usability?

On the point of competition between crypto and fiat currencies: nation states do not easily relinquish the monopoly they hold on violence, which itself protects the right to tax. It follows that, should a given cryptocurrency achieve widespread use and end up challenging a fiat currency, it may become a clear and present danger to fiat currency issuers that they seek to check by all means possible. Banks may also be threatened because of their money-creating privilege. Not surprisingly we are currently witnessing central bankers and bankers across the world vocally expressing their displeasure at the rise of Bitcoin. They use arguments of greater or lesser validity ranging from cryptocurrencies fomenting fraud or Ponzi schemes, facilitating illegal activities, lacking credibility as an open source software, to outright serving as a harbinger of chaos. The irony here is that for the first time in history, a financial instrument, be it money or an asset, has not been created institutionally and is thus highly suspect to institutions.

On the third point, how will private cryptocurrencies behave once central banks start issuing their own digital or crypto coins (so-called fiatcoins)? Can there be peaceful cohabitation? Will fiatcoins precipitate the end of the daily use of private cryptocurrencies at scale, either due to market forces or due to a fiat diktat? Will cryptocurrencies be resilient enough due to their inherent properties, or because they hold a geopolitical utility to one country or another? Incidentally, introducing a competitive vector to the world of fiat currencies can only be viewed as a positive given the latest monetary development of the past 20 years and the slow erosion of trust towards financial intermediaries and central banks.

All are fascinating questions we will undoubtedly have the answers for in the near future.

 

Can the Market Be Made Stable?

Currency competition leads to a discussion of market stability. Inasmuch as one currency may lead to too much market concentration, competition between currencies, both fiat and private, may lead to either optimal market structure and/or price/value stability. So far, all cryptocurrencies have been volatile, with many critics adamantly claiming this excess volatility de facto kills their value proposition. Can individual cryptocurrencies be programmed with stability in mind and if so, could a plethora of cryptocurrencies exhibit, in the aggregate, stable behaviors? A pure stable coin is what dreams are made of, while a coin less volatile than Bitcoin should be feasible. But we still are left with the fundamental question of how many cryptocurrencies are enough. Given the twin effects of Gresham’s law and the short profit-maximizing goals of private agents, it might not be inconceivable that market stability and equilibrium may be difficult to achieve in a world unfettered by regulatory constraints.

In conclusion, believing that current leading cryptocurrencies will be long-term winners may be premature as the ecosystem is still in its infancy and new entrants or forks of existing cryptocurrencies are to be expected. Fiatcoins issued by central banks are a natural evolution, and too many cryptocurrencies may well be a hindrance. Nonetheless, cryptocurrencies are undeniably bringing innovation and excitement to the world of money and currencies. I argue that such excitement is a positive development, from a competitive standpoint, to challenge the stranglehold of incumbent financial intermediaries and central banks.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

01

Jan

2018

Tags: , , ,

What with all the noise around Google, Amazon, Facebook and Apple (GAFA) encroaching on banking services – and the flury of “Amazon Bank” punditry – I became curious about the employee migration patterns between banks and GAFA. Given the need to detox after the year’s end activities, I decided to pause imbibing my favorite beverages for a few hours and launched into a mini search project on LinkedIn.

First, this is not a scientific exercise, as the LinkedIn search is limited by the quality of the data inputted by LinkedIn members and the fact it probably does not cover 100% of the universe. Further, try as I might, I could not find a way to search by tenure – amount of time spent in current job – which would have refined the output markedly. Be that as it may, I believe the search results are directional as well as unsurprising.

Second, I set my universe of banks as follows: JP Morgan, Goldman Sachs, HSBC, Citi, BNP Paribas, Barclays.

Third, as mentioned earlier, I only searched for the four GAFA companies + Microsoft.

I do realize both universes are small slivers of financial services and technology firms. Still each will serve as a proxy.

Fourth, the search was performed as of January 1 2018.

Fifth, I performed the following six searches:

  • Currently working with any of the 6 banks / Past work experience with any of GAFA
    • total universe
    • filtered by the following keywords: payments, mobile payments
    • filtered by the following keywords: AI, artificial intelligence, machine learning, deep learning
  • Currently working with any of GAFA, Past work experience with any of the 6 banks
    • total universe
    • filtered by the following keywords: payments, mobile payments
    • filtered by the following keywords: AI, artificial intelligence, machine learning, deep learning

Sixth, i broke down the search by level of experience: 2 to 5 years, 6 to 10 years, over 10 years.

Finally, although I could not search by time period, it is safe to say the bulk of the above results probably covers the past 5 years at the maximum, which is the period of time when GAFA started building their expertise around payments in particular and financial services in general.

Here are the results:

 

Again, no surprise. All searches show a deficit against the Bank universe. There are more former bankers now working for GAFA + Microsoft than the reverse. This holds true whether for the entire search or filtered for AI or payments. GAFA + Microsoft prefer to hire seasoned banking employees over junior banking employees – the more so for the entire universe or for payments, less so relatively speaking in AI. I did not include Visa or MasterCard in the Bank universe, but cursory results show the output wold have been similar. I also did not include the likes of IBM or Oracle in the big tech universe as such an inclusion would not be representative of migration flux around payments, financial services, banking services and the competitive nature of the horse-trading going on at present between both universes.

It would indeed have been quite interesting to sort by time period. We know that the past 5 years have seen GAFA poaching banking and financial services talent to shore up their payments or credit teams. What we should expect is that for the past year and going forward, banks are pushing their recruiting efforts towards software engineers & data scientists. Seeing the migration patterns starting to invert in favor of banks via LinkedIn searches over the next couple of years will be rather illuminating.

Again, no surprise, GAFA has been building its expertise around certain banking services while banks have had a hard time attracting cutting edge talent from big tech. This LinkedIn search, however crude, gives us directional confirmation.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

17

Dec

2017

It is that time of the year where pundits unabashedly flog the predictions market like a stolen donkey. I will not escape this tragic destiny and am adding my two cents to the mix.

I am doubling down on my macro risks optics – see my post for 2017. Indeed, if 2017 added a macro risk angle to the fintech narrative, 2018 will augment this angle and may have even more of an impact.

In as much as fintech is the act of optimizing or disrupting the financial services industry, this act has unfolded, so far, in an era of globalization and free trade. The rise of national economics and populism, which is a direct challenge to the flavor of globalization we have witnessed to date, will have an impact on fintech. Whether that impact is purely qualitative, reshaping the fintech space, or whether it will also be quantitative, restricting the fintech space, remains to be seen.

The “America first” policy the current US administration is espousing has created a leadership vacuum when it comes to multi-lateral trade and has halted further “business as usual” globalization. To be clear, other countries have espoused similar “me first” views to the point where the probability of a clear breakdown in globalization, as opposed to a reset along more balanced perspectives, is becoming more than a fanciful prediction. Extreme outcomes such as outright trade wars between various economic blocks will have a dampening effect on trade, investments and, as a derivative, on how the financial services industry will be impacted and adapt. Cross border activities such as trade finance, remittances, p2p payments and lending may suffer as a result. Further, cross border fintech investments may be delayed or halted (Chinese corporations investing in US fintech startups for example). Although trade friction is currently more of a US driven issue, we also cannot discount fully the unintended negative consequences of a “no Brexit” deal, although the latest indications introduce a ray of hope. Still, a less than satisfactory Brexit deal as it applies to financial services will put a damper on investment activity or will increase the cost of doing business for any fintech startup with pan-European aspirations. Might we see more UK based fintech startups naturally expanding to geographic locations (b2b or b2b2c models) other than the EU?

We are also witnessing the potential end of a regulatory cycle. The US administration has clearly indicated its willingness to repeal what it deems to be overbearing and costly financial regulations. In as much as these regulatory changes will only have a domestic impact, we should expect a fintech boost to all things lending. If these regulatory changes have an international impact (capital ratios, compensation, leverage) we may see the start of further regulatory divergence between US regulatory frameworks and international ones or the treatment and approach to financial legislation. This will have an impact on capital markets, cross border commercial banking activities and reinsurance to name but a few financial activities. We should expect regulatory divergence to both be a risk for regtech (as the cost of doing business rises, while servicing divergent demands from corporate users will be more complex) and an opportunity (as more sophisticated regtech providers, able to handle more complexity, will be in a high demand).

Macro risks also apply to the world cryptocurrencies and the blockchain space. Many blockchain applications are cross border – see my comment on Trade Finance above. How will these applications fare in a world of trade protectionism? As the world of cryptocurrencies defy Newtonian canon, it is attracting the attention of policy makers at an accelerated rate. The price of maturity is scrutiny. The price of maturity in financial services is regulatory oversight. The price of challenging the monopoly on violence a nation state enjoys is financial “excommunication”. The drums of war will beat louder in 2018 as central banks, bankers, regulators and legislators will rise, some to protect consumers, some to pretend to protect consumers in order to better protect incumbents and their entrenched interests. Interestingly so, this macro risk as applied to cryptocurrencies is a double edged sword as, to date, any governmental clamp down across the globe has had the effect of making cryptocurrencies more popular across a given population. Additionally, launching a fiatcoin (digital or crypto currency managed by a central bank, with the proper design and privacy/bearer caveats) may also be viewed as a macro risk, as it would definitely be a macro policy. It is not inconceivable we could witness the coexistence of fiatcoins and private cryptocurrencies. Even in this configuration cryptocurrencies will be subject to macro risk based on the following two statement: “She who controls mining controls the underlying cryptocurrency” and “cryptocurrencies can be an effective addition to a country’s sharp power arsenal” (disrupting a trading competitor’s markets via indirect manipulation of cryptocurrencies markets may end up the night job of various state actors, if it is not already the case). Paradoxically, the ICO phenomenon may be one which will unite legislators and regulators across the world as most have started to verbalize a common theme: stay within current securities laws.

Assuming readers of this article are exposed to social media, they are all familiar with fake news in its many incarnations. Fake news (disinformation, misinformation, falsified truths, incomplete truths, errors and omissions) have so far been limited to how we consume news. I expect a natural extension of the fake news phenomenon to extend to the financial services industry in a more direct manner. Let us call this trend the “fake data” trend. It is obvious that various actors – private, state sponsored, hybrid – are motivated with sowing confusion and doubt to further various geopolitical goals. We should not be surprised if 2018 will see the rise of similar strategies applies to the financial services industry whether via outright manipulation – see cryptocurrencies – the introduction of fake data, or the corruption of existing data. This prediction becomes even more salient when coupled with cyber attacks. Current cyber attacks should also be viewed as a macro risk – after all the nationality and location of cyber hacks is a mystery – and have so far been passive. By passive I mean they have been for-profit motivated (ransomware, dark markets monetization, fraud). Our imaginations should not be stretched too much by envisioning active cyber attacks augmented with a “fake data” vector, where the goals are wider and deeper, like the destabilization of specific asset classes or markets, or systemically important financial actors. Might 2018 witness such attack vectors? Whether it is the case or not, the opportunity to arm financial services incumbents is an ever growing one. After all, the BIS has listed cyber attacks as its # 1 risk to the financial system for 2018. Fintech startups that address cyber security, the veracity and protection of data will thrive.

The above fake data/cyber attack hydra naturally leads me to my next point: Data.

Regardless which metaphor you are attracted to, “Data is the new oil” or “Data is the new asset class”, the undeniable truth is that the digital world we are building is a data creation engine that thrives on consuming the data it creates to further its growth. Nation states have caught on data’s importance and are presenting us with different macro visions. The EU has opted for stronger consumer protections with GDPR, and to a lesser extent PSD2. This will lead to innovation and growth opportunities for fintech firms and incumbents alike within clear boundaries. China has clearly opted for a more freewheeling approach whereby a more permissive use and monetization of user data is allowed. This will also lead to innovation and growth opportunities, maybe more radical ones. The US is caught in limbo in as much as legislative vision has been absent from the “data” agenda to date. This may mean financial innovation as it applies to the use of data will come from China and Europe rather than the US. This may also mean investment opportunities with innovative fintech firms that handle data may be more skewed towards the EU and China. Additionally, protectionism also applies to data. Russia, China and the EU are very specific when it comes to data generated within their borders and financial services firms with global aspirations need to navigate asymmetric landscapes. As such, fintech service providers that are able to harness these data complexities will thrive.

Let us now address my last macro point: Interest Rates & Stock Market valuations.

Both interest rates and stock market valuations offer risks and opportunities when it comes to fintech. Most analysts expect either 2 or 3 rate hikes from the Fed in 2018. We are undeniably in a rising rates environment across the globe. This is good news for savers, for banks, for institutional investors as they should expect higher yields to pad their respective bottom lines. (Bear with me here and assume either a flat yield curve will still allow financial intermediaries to make money on the short end of the curve, or that the curve will steepen at some point in 2018, making my argument doubly appropriate.) Higher profitability will mean more capital available for further digital transformation which should help fintech startups bent on arming incumbents for a shiny future. On the other hand, higher interest rates introduce more risk into the system. First in lending, where default rates might creep up, and second in how they may impact stock market valuations. So far, the expectation of interest rates has not resulted in major stock market jitters – the strength of the EU economy, the promise of US tax overhaul, stricter Chinese regulatory approaches to an overheated domestic market may have helped. Should this state of contentment not hold – others may refer to a state of complacency – and should rising interest rates, or other macro shocks such as a war, lead to stock market tumbles and worse another financial crisis as banks standings would be threatened, then the risk of the financial system at large may translate into an opportunity for those fintech startups still focused on d2c models designed to challenge incumbents. For that matter, the entire cryptocurrency space would also receive a boost of confidence as consumers at large may feel even more disillusioned with traditional financial services. Incidentally, the BIS also lists current interest rates and stock market valuations as a potential risk to the system.

In conclusion, we are living through a historical realignment both politically and economically. It is safe to assume this realignment will have lasting effects on the global economy and national economies, regardless of which vision steers government. The reintroduction of the political will in the economic sphere is now occurring as new “digital” technologies such as AI, blockchain to name but two, applied to financial services have global repercussions. Fintech startups will have to refine their understanding and sophistication when it comes to these macro risks. Their financial services incumbents are already acutely aware of these risks.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

11

Dec

2017

I have had the pleasure to collaborate with Aldo and his team over at Claro Partners on several occasions in the past. We also regularly brainstorm on innovation in general and on the future of financial services. This post is in direct line from this recent past.

Co-authored by Aldo de Jong and Yannick Rennhard from Claro Partners and Pascal Bouvier, fintech venture capital investor.

How can companies stay innovative, even when they’ve grown to a size where innovation is slowed down by processes, hierarchies, sounding boards, siloes and that cosy blanket of routine and habit?

Last January, we wrote that trying to innovate like a startup – throwing mud at the wall and seeing what sticks – is not the right approach. Organising hackathons, especially when they’re focused on developers alone, isn’t the right way either. So, how about building an external structure where ideas can emerge and grow… Why not set up an innovation lab?

Innovation labs, corporate accelerators and incubators, or however you call it, are places where corporate intrapreneurs get together – sometimes with additional partners, such as startups or external entrepreneurs – to explore interesting areas unbound by corporate bureaucracy and restrictions. At least that’s the idea. Innovation labs are meant to spark innovation that can be re-integrated into the company’s business, once its value proposition has been validated. They are extremely popular. Almost every large company has some kind of innovation lab these days, or is trying to create one.

Innovation labs should be like a laboratory of ideas, where people have room to experiment, to explore new ways of thinking, to fail and to create breakthrough products and services in the process. Unfortunately, innovation labs often turn out to be a lot more like chemistry shows for kids. There’s a lot of noise, a lot of colourful smoke and people wearing strange glasses. It’s a very enjoyable experience, yes. But apart from some ear-shattering explosions, nothing is really created in the end.

Where’s the innovation in innovation labs?

Let’s have a closer look at where expectations and outcomes for innovation labs diverge. The first and – quite obviously – the biggest problem is that innovation labs don’t seem to trigger innovation. The reality is that, if you define innovation as a new product or service offer that is validated on the market and creates value for the company, then innovation labs have a terrible success rate. Here’s why:

  1. Lack of tangible results
    Some innovation labs don’t create tangible results at all. They measure their success by the number of new ideas they’ve created, by the number of interesting presentations they held at any of the countless innovation conferences around the globe and the number of “likes” they got for their innovation ideas on social media.
  2. Lack of entrepreneurial commitment
    One of the big reasons for this lack of output is having the wrong people – more specifically – people who we call corporate experience seekers. These employees get recruited to contribute to the innovation lab on the basis of some misguided incentive or training program. The problem is that they usually lack the mind-set, the right incentives and the vigour needed to be successful in the startup world. They join the innovation lab, have a great experience playing entrepreneur (including table soccer, working with a laptop on a sofa, wearing sneakers and hoodies and whatever other innovation theatre clichés you can imagine) and they might hold interesting talks about their experience BUT they don’t create real, tangible results. The truth is that building a venture is a painful process and you should be in it for the right reasons.
  3. Lack of strategic alignment
    Another problem with innovation labs is that, if they do create ventures, then the resulting ventures are often not in line with the company’s core business or strategic priorities and therefore very difficult to re-integrate into the corporate offer. They are – quite frankly – a massive waste of time and money. Many innovation lab creators think that rules and limitations are bad for innovation, that people need total freedom to create good results. The opposite is true: the better you define the right area to innovate in, the better the outcome. First, you need to understand what opportunity area is most interesting for the company to explore – not just based on the corporate strategy but also an in-depth understanding of the ecosystem of the company and the current and future needs of its clients. Within those boundaries, though, individual freedom and possibility to make mistakes is important. At Claro, we call this autonomy in alignment, a principle that we used to summarise the new way of working as part of a project for Standard Bank, a South African bank.
  4. Lack of a problem
    Innovation labs that are focussed on exploring the implications of an emerging technology and creating new offers that leverage it (blockchain is a wildly popular example) often end up creating the wrong results as well. Exploring what a technological disruption means for a company definitely has its value. But if you start with a technology as the basis of your innovation, you’ll often end up creating solutions looking for a problem. If you just want to understand a technology, please call your initiative a “blockchain lab” or something like that. Calling it an innovation lab will raise expectations it will not be able to live up to. If you want to create innovation, think about the right problem to solve first and then select the technology that has the most potential to solve it.
  5. Lack of understanding
    The single biggest reason though, is that – driven by the need for fast results and the appeal of “just trying something” – innovation labs often practice a very loose methodology with a focus on doing things, rather than thinking about what to do first. This tendency to jump to the second step does lead to fast results, yes. But if you have to throw away your results because they aren’t relevant to your customers or don’t fit your market context, you’ll end up spending a lot more time and money than necessary. So, for example, if you want to create innovative financial services for digital natives, try to base it on understanding banking services for millennials first, instead of just throwing something at the wall and seeing if it sticks.

All of the problems described above are connected to companies trying to cut corners, sometimes just for the sake of looking innovative. At Claro, we have a different approach.

An insight-driven approach to innovation

We call it Insights-driven Venture Creation. It ensures sufficient time is spent on thinking and not only on doing. We’ve used this approach successfully with clients over the past year. Essentially, it is a combination of venture design and venture building, with the following key steps:

  1. Understand innovation context
    Make sure you create a broad understanding of your innovation context by first analysing disruptions, trends and emerging value propositions in relevant and adjacent markets. Then, obtain a deep understanding of your customer’s behaviours, needs and perceptions. Create the right frameworks and tools that summarise all your findings and help your teams innovate from a holistic understanding of your innovation ecosystem.
  2. Identify opportunity areas
    Based on that shared understanding of your innovation context, select the opportunity area(s) you want to pursue.
  3. Ideate on ventures
    Ideate on the right ventures to build within the opportunity areas identified, involving all relevant stakeholders in the process.
  4. Select ventures
    Select the venture idea that fits your innovation context best and recruit the right people (both intra- and entrepreneurs) for each.
  5. Prototype & validate idea
    Help the selected team define the right value proposition and business model based on an insight-driven product development bias and the corporate’s strategic priorities. Drive for market validation of the product as fast as possible, accepting that disruptive ideas will be more difficult to verify. Paper prototypes or digital “paper prototypes” are usually fine for this purpose. Iterate.
  6. Build and launch
    If the market validation is successful, grow the venture by planning the scaling of the offer and determining the right level of integration into the corporate’s organisational structure.
  7. Iteration
    Analyse your innovation process, learn from the past experience and try to adjust your innovation approach to improve it continuously.

Based on our experience, we believe that this approach has the best chances of creating relevant external innovation sparks for corporates because the innovation is in line with both the company’s interests and customer needs from the very beginning.

The right governance structure

But having the right approach alone isn’t going to ensure the sustainability of your efforts. If you’re thinking about upping your innovation game, you will also want to transform the core of your organisation:

  1. The right organisation
    Innovation thrives in a certain kind of organisational structure. Trying to make your innovation efforts fit the organisational structure of your company will most likely kill it. Allow for flat hierarchies and freedom, but still align the innovation efforts to your goals and strategy.
  2. Balanced portfolio
    Seek to create a well-balanced innovation portfolio based on short-term initiatives that drive your long-term, strategic innovation vision.
  3. Capacity building
    Build internal capacity within your organisation to internalise an innovation-friendly culture, and ensure the autonomy in alignment of your innovation department with the rest of your organisation.
  4. Timing
    Make sure to avoid the danger of killing good ideas too early because of your short-term financial goals, but also don’t miss the right moment to stop a failed venture.

In a project earlier this year with one of Australia’s large financial services providers, Claro did exactly that: First, we used our end-to-end innovation approach to help our client identify and understand the right opportunity areas to explore and transferred our knowledge into the client’s organisation. Then, we developed a toolkit that enabled the identification of the right venture ideas to serve the opportunity areas identified. While building a more resilient strategy, we also helped them develop a partnership engagement model to bring their innovations to market fast by collaborating with external companies. The first new ventures were launched to the market less than year after they created them with this approach.

The end of the innovation theatre

Corporations need to stop setting up siloed innovation departments or innovation labs that are just for show. Too many companies try to check the “innovation box” or – even worse – to make the company appear more innovative in shiny corporate brochures by establishing structures that are unsuited to create true innovation. The painful truth is that creating real innovation will always take time, commitment and the right approach. Even then, it is still a painful process. Unfortunately, it seems much more convenient to listen to the countless innovation gurus preaching “lean” innovation, promising an easy solution to the innovation challenge.

Unfortunately, the truth is, innovation is hard. It requires deep, quality thinking and time. There are efficient and inefficient ways to achieve it, but there are no shortcuts. Yet your ability to innovate will determine if your company is able to survive in a fast-changing world.

So, ask yourself the following:

  1. Do you really understand your customers, their problems and unmet needs? Do you know how you’re going to solve these with your innovation efforts?
    2. Do you know which area of your business has the most potential to innovative in? And can you explain why this is the right one for your company?
    3. Do you have a strong innovation vision and the right portfolio of innovation projects in place to guide your organization in that direction?
    4. Is your organization and culture suited for innovation? Do your employees understand where your innovation focus lies, what your customers will ask for in the future and how your company is going to serve those changing needs?
Facebooktwittergoogle_plusredditpinterestlinkedinmail