Remember Seinfeld?  If you don’t, you’re either too young to drive or you didn’t have a TV from 1989 to 1998. Ah Seinfeld… we laughed, we cried (because we were laughing). It forever changed our approach to puffy shirts, the name “Newman” and how we look at soup. Festivus anyone? Yet who knew Seinfeld could teach innovators so much about complexity and its hidden cost?

Okay, maybe that’s a stretch… but hear me out. With just four main characters (Jerry, George, Elaine and Kramer) the show ran for nine years and 180 episodes. This – from a show explicitly about “nothing.” It’s worth marveling at how such a simple structure led to so much variation. While good for a sitcom, the same math can wreak havoc on organizations trying to innovate.

To illustrate the point, let’s do some counting. How many unique relationships were amongst Seinfeld’s four main characters? Did you guess 11? Six pairings, four three-way relationships and one quad (everyone’s relationship as a whole). Every group of relationships matters. For example, Jerry had one-to-one relationships with Elaine and George. Jerry and Elaine (as a couple) also had a relationship with George. Remember when all three were going to the movies but Jerry had to back out. It got weird. George and Elaine had never gone out together without Jerry. It was a combination they hadn’t tried before. A new dynamic. It could get awkward, especially if they went to Rochelle, Rochelle, a young girl’s strange, erotic journey from Milan to Minsk.

Add a fifth person (baseball legend Keith Hernandez) and the 11 unique relationships jump to 26. By the time you get to 15 people the number of relationships explodes to 32,752. What’s the deal?

This subversive math helps explain why large integrated businesses have so much trouble innovating. By “integrated” I’m describing organizations that tie their businesses together under the same, unified, core processes (human resources, finance, sales, marketing, brand, procurement, etc.). Integrated firms are contrasted with “modular” firms that organize businesses in highly autonomous structures with separate processes for each group.

Integrated firms are victimized by “Seinfeld math.” Just like adding a new character to Seinfeld, when integrated firms add new businesses their organizational complexity spirals out of control faster than they realize. For example, due to their integration each business unit can be called upon at any moment to coordinate and harmonize “synergy” with other businesses under the masthead. Relationships must be managed. Starting a new hardware business? You may need to coordinate with (or at least placate) the folks in software, R&D, the legacy hardware group and the enterprise group. That’s five groups – 26 unique relationships. Large integrated companies can have dozens or even hundreds of product and service groups that can pop up and demand coordination at any moment. Ever wonder why you have so many meetings just to “coordinate”? Meetings to coordinate future coordination? It takes time and money to manage this mess. It forces processes to be rigid. It slows things down. A massive unintended consequence is a stifling of innovation. Some call it creeping bureaucracy. I’ve called it Seinfeld math. It’s the cost of complexity.

There are destructive symptoms. For example when growth is needed, the battle cry of the day is for “innovation” and “diversification.” Integrated firms start adding new innovative businesses. Then, as complexity balloons, somebody eventually shouts “stop the madness.” The company is a rat’s nest. There’s a retreat back to fewer “core businesses,” causing new growth initiatives to get cut under the banner of short-term necessity. They’re seen as distractions. A few years pass. Growth stalls (in part because growth investments got the ax a few years prior). Once again the business funds more innovative businesses. It expands. Complexity re-rises to fever pitch. It cuts back. Expansion. Contraction. The vicious cycle repeats itself every five to seven years. Sound familiar?

If the cost of complexity is so obviously harmful to innovative growth, why don’t large integrated businesses change? Why don’t they become more modular? Modularity follows different math – a different scaling law – where added businesses create mild linear increases in complexity (rather than wild exponential increases)?

One culprit is traditional financial planning. People see the pennies they’d save by integrating everything under the same systems. Why have duplicate sales teams? Human resources? Finance? etc. Organizations loathe redundancy. This can blind them to the off -balance-sheet cost of complexity and how it more than outweighs any pennies saved by consolidating.

While significant, this complexity is admittedly just one piece in a much bigger innovation puzzle. Yet if you’re trying to grow a large innovative business it’s critical to understand these basics. The next time you decide to shoehorn a bunch of diverse innovative businesses into one integrated, consolidated system of processes and capabilities, take a page from George Costanza – always do the opposite. Know enough about complexity to keep things simple. The rest is yadda, yadda, yadda.

We’ve all been there.  Listening to a speaker, reading an article, sitting at the feet of an innovation expert.  They seem smart.  They’re charming… likeable in fact.  Some are venture capitalists, others are executives, consultants, authors or professors with impressive pedigree.  They begin to share their wisdom; give advice.  They hand you the keys to the kingdom of knowledge.  Sometimes they’re insightful… but other times they’re hacks.  If you enjoy vapid platitudes as much as I do, here are top 10 useless tips on innovation:

1. Put together the right team

Without this chestnut I would have run out and deliberately picked the first “wrong” team I could find.  Whew… I really dodged a bullet there…

2. Have persistence

… and all this time I thought quitting was the key. I stand corrected.

3. Cultivate an entrepreneurial culture

Can’t argue my way out of this steel trap.  So… when trying to be entrepreneurial… be entrepreneurial.  Makes sense when I look at it that way.

4. Create a compelling value proposition

I guess that kills my idea for a foot cream that actually gives you athlete’s foot.  Dang!

5. Have the right timing

How counterintuitive.

6. Understand the customer

Can’t we just pretend they’re cuddly Mogwai that turn into Gremlins if we feed them after midnight?

7. Target a rapidly growing market or one where you can deliver growth

Isn’t it easier to grow a company when there isn’t any growth in the market or the business itself?  That’s probably really deep if you think about it…

8. Confront reality 

Sounds good “on paper,” but in the real world I much prefer to ignore the real world.

9. Have great focus

I’m sorry, what were we talking about?  I was trying to figure out why the yellow angry birds are so good at breaking wood but so useless with glass.  Is wood harder than glass?  Depends on how thick it is… basketball backboards are made of really thick glass.  I wonder if it’s possible to make a coffee table out of one?

10. Take calculated risks

Thanks for being so specific.  

I like stories.  They give me an easy way to remember things.  Storytelling is an art I hope to get better at – l know lots of people feel the same way.  Stories can also have negative, unintended consequences.  Psychologist Daniel Kahneman wrote “confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable.  The bias toward coherence favors overconfidence.”[i]  In other words stories are good at preserving ideas, even bad ideas.

Bad stories can lead to destructive business decision making.  One example is the story that companies can only become “great” if they have humble CEOs – as proffered by author Jim Collins in Good to Great[ii].  As far as I know, this theory has been thoroughly and exhaustively discredited by every objective empirical evaluation it’s been subjected to.  For starters, it was based on a statistically insignificant sample, its definition of humility or “Level 5 Leadership” was critically subjective and porous, it’s consistently failed predictive testing, it suffered debilitating hindsight bias,[iii] of the 11 companies the theory relied on – two went bankrupt, three posted negative stock returns over the next ten years and eight survivors returned an annual combined average 6% over the decade (if you ignore the bankruptcies).  That’s okay, but hardly “great.”

Meanwhile Apple, with CEO Steve Jobs of legendary non-humble flamboyance returned an average exceeding 300% per year over the same period.  If you think this would be enough to slow down Good to Great’s story, you’d be wrong.  Hundreds of thousands of copies continue to be sold each year.  It’s still one of the ten most popular business books on Amazon.com.  Executives continue to make decisions by it.  The story lives on.

Good to Great isn’t alone.  In fact, it’s part of a much bigger story that’s been told since ancient times.  This is the myth that “nothing matters more than leadership.”  Venture capitalists and managers alike consistently cite the quality of leadership as a top criterion for investment.  Leadership sections burst at the seam in every bookstore.  This… despite empirical evaluations that tend to find the impact of leadership to be relatively small.

For example, the impact of changes in leadership were studied across 167 companies over a 20-year period, concluding that company and industry have far larger effects on sales and profits than leadership.[iv]  Leadership studies of large samples of CEOs, University Presidents and managers of sports teams showed organizational performance to be largely determined by factors beyond leadership control.[v]  More studies show changing CEOs has no statistically significant effect on organizational survival or death[vi] and a wide review of leadership research as far back as 1977 found that, while leaders have some impact, their actions rarely explain more than 10% of the performance difference between the best and worst organizations.[vii]  Despite their voracity and empirical weight, the popular management reaction to these studies has largely been… so what?  Don’t ruin a good story.

We like stories because they simplify things.  Once simplified, we like to keep it that way.  Just pause to consider how easy it is to misattribute the success or failure of a business to its most obvious, simple, anthropomorphic manifestation – the leadership team.  Whether reading about Washington crossing the Delaware or seeing Elvis in a piece of toast, we’re drawn to human-centric interpretations of the world.  We like our stories, especially when they have heroes and villains.  Such stories give us a feeling of coherence and easily come to mind.  Yet stories can do as much harm as they do good.  Don’t be a sucker for cute stories that fly in the face of fact.  If business is to advance as a science it must abandon charming myths when they conflict with reality.  That’s my story and I’m sticking to it.

Steve Jobs wasn’t known to be a fan of gutless whining. That’s why I imagine he’d be rolling in his grave if he heard something I hear all the time.  I call it the “Steve Jobs Excuse.”

It goes something like this… let’s say you’re a manager in a corporation.  You’re frustrated with your company.  You wish it could be more innovative but it seems too slow, too bureaucratic, too political, too inbred or too complacent to make the bold changes you wish it would.  You find yourself throwing your hands up in the air (or leaning over your drink at happy hour) saying something like “there’s no way we’ll innovate and grow with our current leadership.  What it takes is the rare CEO with the mental agility to balance the core business with visionary new growth.  We just don’t have that.  None of our leaders are innovators.  Nothing can help us, were doomed [or something more colorful].  It takes someone like Steve Jobs to turn our organization around and I don’t see that happening here anytime soon.”

I appreciate how demoralizing it can be in a company struggling to innovate.  Truly.  I also have the utmost respect for Steve’s talents and accomplishments.  Having disclaimed those sentiments… stop being such a wuss.

Yes, companies can be slow, bureaucratic, political, inbred and complacent.  Yes, sometimes they wouldn’t know innovation if it hit them between the eyes.  Yes, leaders can be dreadfully incompetent, cowardly and even harmful when it comes to the challenges of growth.  My point is – as long as they’re paying your bills – you owe them a duty not to give up.  More importantly, you owe yourself a duty not to give up.  Don’t quit.  Never accept innovation and growth as futile just because your leaders are too stupid to make it happen.  It’s your job to charge the hill no matter how many times you get shot and roll back down.  If you don’t – who will?  The fate of your company and the communities that depend on it are in your hands.  Failure is not an option.

Circling back to the Steve Jobs Excuse, don’t give in to a rescue fantasy.  You’re better than that.  You’re not a princess (that is… unless you actually are) in a castle waiting to be saved by a handsome knight.  You’re no hooker with a heart of gold hanging around Sunset Boulevard to get snatched up by Richard Gere to live in the Hamptons.  Don’t assume some mythic CEO is your only hope.  That’s defeatist thinking.

Look… sometimes horrible leaders can, and do, kill perfectly good companies.  But keep in mind, literally thousands of great companies have had inspirational, innovative growth without Steve.  There have also been countless businesses, big and small, with visionary leaders that crashed and burned.  All kinds of companies have risen and fallen with all kinds of leadership.  Just beware of the hindsight bias. It’s also dangerous to succumb to the fundamental attribution error – a tendency for people to over-emphasize personality-based explanations while under-emphasizing the role of situational influences.  Don’t stop trying to be part of the solution and refuse to be part of the problem. Progress can only hope to begin when you stop waiting for someone else to save the day.

I know there can be career risk in “fighting the good fight” innovation-wise when you have poor leadership.  I know it can be thankless, frustrating and… just plain maddening.  Still, don’t give in to futility.  Don’t let the dark side of the Force win.  Great change is rarely easy.  That’s why your company needs you to be bold, persistent, creative and to never give up. In the words of Martin Luther King, “human progress is neither automatic nor inevitable… Every step toward the goal of justice requires sacrifice, suffering, and struggle; the tireless exertions and passionate concern of dedicated individuals.”  Don’t succumb to the Steve Jobs Excuse – my guess is he wouldn’t tolerate it either.

Around four years ago Professor Clayton Christensen and I were sitting in his Harvard office contemplating a research paper on venture capital.  As a side note he said “I ran into this guy who told me about a potentially interesting way to fund startups.  I think he’s nearby in Lexington, you might want to contact him and check it out.”  That was the first time I’d ever heard of revenue-based funding (aka royalty-based funding).

Fast forward to today and I’m excited to announce the first inaugural conference for the Revenue Capital Association – the world’s 1st trade association for revenue- and royalty-based funding (RBF).  Click here for event and registration details.  RBF funds have started popping up everywhere (including 3 new funds in the Pacific NW alone during the past 18 months or so). RBF is a way to give startups growth capital.  It isn’t right for every startup.  It isn’t right for every investor.  Yet for a large number of startups and investors it creates some alternatives worth getting excited about.  Yes… the words “revenue-based funding” and “exciting” can be used in the same sentence.

The overall framework for RBF is simple: investors give money to businesses (ex. $1M) in exchange for a percentage of that business’s revenue (ex. 2-5%) until either a maximum payback limit is reached or enough time passes by.  An exciting thing about RBF is… investors can give businesses money without depending on an “exit” or “liquidity event” (such as an acquisition or IPO) to make decent returns.  That means they can consider funding a wider variety of companies.  In turn, businesses can raise money without giving up equity (i.e. control or ownership) – and anyone with enough experience knows equity is the most expensive form of capital.

The economy has been brutal.  Startup capital was among the first things to dry up when things went bad and while it’s getting better, months like this September are keeping investors jittery.  The irony is – this is when the world needs innovation most.  This is when, more than ever, deals need to get done.  That’s why RBF is truly exciting.  It’s another way for businesses to raise growth capital.  It’s another option.  Another tool.  At a time when great ideas and funding need to find each other any innovations that help the process are welcome indeed.

Click here for event and registration details regarding the 1st inaugural conference for the Revenue Capital Association – the world’s first trade association for revenue- and royalty-based investing.  It may be a small thing, but we’re trying to make a difference.  We’re trying to change the world.  We hope you’ll be there too.

Innovation is a lot like British naval warfare in the late 1800s.  Imagine yourself at sea pointing a crude artillery gun at a target around 1,600 yards away.  You raise the gun barrel by turning a small wheel.  You look through an open sight (like a rifle) and wait for the roll of the ship to bring the target into view. Pushing a firing button at just the right time, you’re lucky to hit the target two or three times every half hour.[i]

In warfare and innovation most shots fail.  Still, you can’t miss too many times before rivals get the upper hand and sink you.  Loss can be catastrophic.  Despite the clear advantages of anything that might improve your performance, it’s all too common for innovation to be staunchly resisted by those who – ironically – would benefit most from it.    

Case in point, in 1900 an American junior officer, William S. Sims, met British Admiral Sir Percy Scott.  Scott had a reputation for remarkable accuracy in naval artillery.  He used a number of innovations such as guns that could be easily elevated and depressed to follow a target throughout the roll of a ship at sea (rather than a gun with a more fixed position).  He modified his telescopes so they wouldn’t be shifted by a gun’s recoil.  He also he put a small target at the mouth of the gun that could be moved with a crank to simulate realistic conditions for target practice.

Learning all he could from Scott about this innovative new “continuous-aim firing,” the American – Sims – spent months training and modifying his own equipment until he too set remarkable records in target practice.

Determined to spread what he’d learned within the US Navy, Sims authored 13 official reports documenting his success with continuous-aim firing.  His arguments were supported by masses of copious facts.  He cited the records of Scott’s ships with accumulating data from his own tests.  He explained the technical mechanisms and training procedures in detail.  He articulated where existing mechanisms were inadequate and how modifications could be made.

The Navy’s first response was… no response.  Silence.  His reports were filed away, forgotten and half eaten by cockroaches (literally).

This sent Sims into despair.  How could they ignore him?  Lives were at stake.  The benefits were so clear.  The costs of failure so high.  He grew seriously ill.  He wrote more reports, adding even more data and changing his tone from official to downright angry.  He sent copies to other officers in the fleet and began to create a stir.

Finally, Washington responded.  The Bureau of Ordinance (responsible for the equipment used in gunnery practice) replied that their equipment was as good as the British (from whom Sims learned continuous-aim firing).  Secondly, since their equipment was as good as the British, the trouble must have been with the men – who were not their responsibility, being the jurisdiction of ship officers.  Thirdly, continuous-aim firing was impossible.  The Navy had experimented with it themselves and the trials hadn’t worked.  End of story.

As you may imagine, Sims did not go gentle into that good night.  He’d proven that it worked.  The tests done by the Navy were critically flawed.  He was using continuous-aim firing with success at the same time he was being told it couldn’t be done.  The world was upside down.

Next Washington began attacking his character.  He was accused of being difficult (which he almost certainly was at this point), nutty and a dishonest evidence falsifier.

This was the last straw, giving Sims the audacity to write President Theodore Roosevelt himself.  Fortunately for Sims, Roosevelt paid attention and ultimately made Sims Inspector of Target Practice.  Sims was later heralded in the Navy as “the man who taught us how to shoot.”[ii]  The Navy improved its aim.

The story of Sims and continuous-aim firing seems absurd.  Why didn’t the Navy embrace any improvements that could materially enhance its performance?  Why had it been so reluctant, even hostile, before being all but forced to comply by fiat from the President himself?

As absurd as it seems, Sims’s tale is all too common in the world of innovation.  People love to talk about innovation.  Trumpet its virtues.  From Presidents to CEOs to economists to my dry cleaner, everyone uses “innovation” as the new feel-good filler word.  When in doubt, say “innovation” and people will nod in Pavlovian approval.  Yet another word for innovation is “change.”  The introduction of something new.  Unlike “innovation,” “change” doesn’t automatically get red carpet treatment.  While some embrace change, particularly if it’s positive and beneficial, there are others who resist it – even if it’s positive and beneficial. In almost cliché fashion, inherent conflict arises between those who’re vested in the need to change (Sims), and those who’re vested in the status quo (Navy).  Accepting Sim’s changes required shifts in the daily protocols, habits and social structures of US naval warfare.  Gunnery officers, formerly low on the totem pole, became among the most prestigious members on a ship.  New routines, ship designs and fleet tactics had to be deployed.  Men in Washington had to admit their previous solutions had been sub-optimal and that an innovation of British origin… my goodness… had proven superior.[iii]

We’ve seen similar reactions in the field of predictive reduction – the science of business predictions. On the one hand, the use of empirical and quantitative methods have proven, time and time again, to be more effective at answering a variety of “holy grail” business questions such as whether a business will survive or fail.  For most, the benefits of such innovations are so obvious – so profound – there’s boundless enthusiasm.  Curiously for others, the more they learn the more they shut down. The more proof of benefit is offered, the more they retreat. Innovation can threaten too much change – even for the better – than they’re ready to accept.  Regardless of your innovation’s promise, keep in mind that even the most positive change is rarely a benign act. It can be a battlefield.

 Author: Thomas Thurston, President, Growth Science

Need random verbage for a slide presentation?  Want to impress the boss?  Want to toss out a tough question in your next meeting, even if you’ve been playing Angry Birds under the table the whole time?  Want to sound like you have an MBA… or if you already have one, want to sound like you got your money’s worth?  If the answer is “yes,” you’ll love the Business Jargon Generator.

The idea isn’t new – in fact I adapted it from a similar “Random Phrase Generator” my Dad had in the 1980s (he worked for the government so it came in handy all the time).  Whenever you need to fill space in a business presentation, document, meeting or other encounter, simply string together one word from each list (in order 1, 2, 3) and… presto!  You’ll have all the business jargon you need.

For example, if you’re not sure what to call your next PowerPoint slide deck you might use “Experiential Paradigm Convergence.”  Nobody will know what it means – and that’s the point.  It could mean anything.  Hey – they may even think you’re onto something subtle and insightful!

Want to throw a curve ball at someone during a meeting, ask them how they plan to handle “Extended Scenario Innovation.”  Make sure you do it with a straight face, then watch em’ squirm.

Want your boss to think you’re forward-looking? Ask why nobody’s been prioritizing “Proactive Competence Alignment.”  If your boss asks what that means, say it’s to ensure “Global Impact Integration.”

If you’re an entrepreneur trying to raise venture capital, you might try using every word on this list in your next pitch.  After all, who wouldn’t want to fund “Holistic Network Generation” based on “Intuitive Value Mobilization” to achieve “Catalyzed Mindshare Convergence”?

You’re welcome.

Author: Thomas Thurston, President, Growth Science International, LLC