This article first appeared in First Round Review.
“Only the Paranoid Survive”
Andy Grove – Intel CEO 1987-1998
I just had an urgent “can we meet today?” coffee with Rohan, an ex-student. His three-year-old startup had been slapped with a notice of patent infringement from a Fortune 500 company. “My lawyers said defending this suit could cost $500,000 just for discovery, and potentially millions of dollars if it goes to trial. Do you have any ideas?”
The same day, I got a text from Jared, a friend who’s running a disruptive innovation organization inside the Department of Defense. He just learned that their incumbent R&D organization has convinced leadership they don’t need any outside help from startups or scaleups.
Sigh….
Rohan and Jared have learned three valuable lessons:
- Only the paranoid survive (as Andy Grove put it)
- If you’re not losing sleep over who wants to kill you, you’re going to die.
- The best fight is the one you can avoid.
It’s a reminder that innovators need to be better prepared about all the possible ways incumbents sabotage innovation.
Innovators often assume that their organizations and industry will welcome new ideas, operating concepts and new companies. Unfortunately, the world does not unfold like business school textbooks.
Whether you’re a new entrant taking on an established competitor or you’re trying to stay scrappy while operating within a bigger company here’s what you need to know about how incumbents will try to stand in your way – and what you can do about it.
Startups and scaleups outside of companies or government agencies want to take share of an existing market, or displace existing vendors. Or if they have a disruptive technology or business model, they want to create a new capability or operating concept – even creating a new market.
As my student Rohan just painfully learned, the incumbent suppliers and existing contractors want to kill these new entrants. They have no intention of giving up revenue, profits and jobs. (In the government, additional saboteurs can include Congressional staffers, Congressman and lobbyists, as these new entrants threaten campaign contributions and jobs in local districts.)
Intrapreneurs versus Saboteurs
Innovators inside of companies or government agencies want to make their existing organization better, faster, more effective, more profitable, more responsive to competitive threats or to adversaries. They might be creating or advocating for a better version of something that exists. Or perhaps they are trying to create something disruptive that never existed before.
Inside these commercial or government organizations there are people who want to kill innovation (as my friend Jared just discovered). These can be managers of existing programs, or heads of engineering or R&D organizations who are feeling threatened by potential loss of budget and authority. Most often, budgets and headcount are zero-sum games so new initiatives threaten the status quo.
Leaders of existing organizations often focus on the success of their department or program rather than the overall good of the organization. And at times there are perverse incentives as some individuals are aligned with the interests of incumbent vendors rather than the overall good of the company or government agency.
How Do incumbents Kill Innovation?
Rohan and Jared were each dealing with one form of innovation sabotage. Incumbents use a variety of ways to sabotage and kill innovative ideas inside of organizations and outside new companies. And most of the time innovators have no idea what just hit them. And those that do – like Rohan and Jared – have no game plan in place to respond.
Here are the most common methods of sabotage that I’ve seen, followed by a few suggestions on how to prepare and defend against them.
Founders and Innovators should expect that existing organizations and companies will defend their turf – ferociously.
Common ways incumbents kill innovation in both commercial markets and government agencies.
- Create career FUD (fear, uncertainty and doubt). Positioning the innovative idea, product or service as risk to the career of whoever adopts or champions it.
- Emphasize the risk to existing legacy investments, like the cost of switching to the new product or service or highlighting the users who would object to it.
- Claim that an existing R&D or engineering organization is already doing it (0r can do it better/cheaper.)
- Create innovation theater by starting internal innovation programs with the existing staff and processes.
- Set up committees and advisory boards to “study” the problem. Appoint well respected members of the status quo.
- Poison funding for internal initiatives. Claiming that you’ll have to kill important program x or y to pay for the new initiative. Or funding the demo of the new idea and then “slow-walk” the budget for scale.
- File Lawsuits/Protests against winners of contracts.
- Use patents as a weapon. Filing patent infringement lawsuits – whether true or not. Try to invalidate existing patents – whether true or not.
- Claim that employees have stolen IP from their previous employer.
- File HR Complaints against internal intrapreneurs for cutting corners or breaking rules.
- Isolate senior leadership from the innovators inside the organization via reporting hierarchy and controlling information about alternatives.
- Object to structures and processes for the rapid adoption of new technologies. Treat innovation and execution as the same processes. Lack tolerance for failure at innovation. Do not cultivate a culture of urgency. Don’t offer a a structured career path for innovators.
- Lock-up critical resources, like materials, components, people, law firms, distribution channels, partners and make them unavailable to innovation groups/startups.
- Control industry/government standards to ensure that they are lock-in’s for incumbents.
- Acquire a startup and shut it down or bury its product
- Poach talent from an innovation organization or company by convincing talent that the innovation effort won’t go anywhere.
- Influence “independent” analysts, market research firms with “research” contracts to prove that the market is too small.
- Confuse buyers and senior leadership by preannouncing products or products that never ship – vaporware.
- Bundle products (Microsoft Office)
- Long term lock-in contracts for commercial customers or sole-source for government programs (e.g. F-35).
How incumbents kill startups in government markets
- File contract appeals or protests, creating delays that burn cash for new entrants.
- File Inspector General (IG) complaints, claiming innovators are cutting corners, breaking rules or engaging in illegal hiring and spending. If possible, capture these IG offices and weaponize them against innovators.
- Hijack the acquisition system by creating requirements written for incumbents, while setting unnecessary standards, barriers and paperwork for new entrants. Ignore requirements to investigate alternate suppliers and issue contracts to the incumbents.
- Revolving door. The implicit promise of jobs to government program executives and managers and the implicit promise of jobs to congressional staffers and congressmen.
- Lobbying. Incumbents have dedicated staffs to shape requirements and budgets for their products, as well as dedicated staff for continual facetime in Washington. They are experts at managing the POM, PPBE, House and Senate Armed Services Committees and appropriations committees.
- Create career risks for innovators attempting to gain support outside of official government channels, penalizing unofficial contacts with members of Congress or their staffs.
- Create Proprietary interfaces
- Weaponize security clearances, delaying or denying access to needed secure information, or even pulling your, or your company’s clearance.
How incumbents kill startups in commercial markets.
- Rent Seeking via regulatory bodies (e.g. FCC, SEC, FTC, FAA, Public Utility, Taxi/Insurance Commissions, School Boards, etc, …) Use government regulation to keep out new entrants who have more innovative business models (or delay them so the incumbents can catch up).
- Rent Seeking via local, state and federal laws (e.g. occupational licensing, car dealership laws, grants, subsidies, or tariff protection). Use arguments – from public safety, to lack of quality, or loss of jobs – to lobby against the new entrants.
- Rent Seeking via courts to tie up and exhaust a startup’s limited financial resources.
- Rent Seeking via proprietary interfaces (e.g. John Deere tractor interfaces…)
- Poison startup financing sources. Telling VCs the incumbents already own the market. Tell Government funders the company is out of cash.
- Legal kickbacks, like discounts, SPIFs, Co-advertising (e.g. Intel and Microsoft for x86 processors/Windows).
- State Attorney General complaints to tie up startup resources
- Create fake benchmark groups or greenwash groups to prove existing solution is better or that new solution is worse.
Innovators Survival Checklist
There is no magic bullet I could have offered Rohan or Jared to defend against every possible move an incumbent might make. However, if they had realized that incumbents wouldn’t welcome them, they (and you) might have considered the suggestions below on how to prepare for innovation saboteurs.
In both government and commercial markets:
- Map the order of battle. Understand how the money flows and who controls budget, headcount and organizational design. Understand who has political, regulator, leadership influence and where they operate.
- Understand saboteurs and their motivation. Co-opt them. Turn them into advocates – (this works with skeptics). Isolate them – with facts. Get them removed from their job (preferably by promoting them to another area.)
- Build an insurgent team. A technologist, visionary, champion, allies, proxies, etc. The insurgency grows over time.
- Avoid publicly belittling incumbents. Do not say, “They don’t get it.” That will embarrass, infuriate and ultimately motivate them to put you out of business.
- Avoid early slideware. Instead focus on delivering successful minimal viable products which demonstrate feasibility and a validated requirement.
- Build evidence of your technical, managerial and operational excellence. Build Minimal Viable Products (MVPs) that illustrate that you understand a customer or stakeholders problem, have the resources to solve it, and a path to deployment.
- If possible, communicate and differentiate your innovation as incremental innovation. Point out that over time it’s disruptive.
- Go after rapid scale of a passionate customer who values the disruption e.g. INDOPACOM; or Uber and Airbnb, Tesla in the commercial world
- Ally with larger partners who see you as a way to break the incumbents’ lock on the market. i.e. Palantir and the intelligence agencies versus the Army and in industry, IBM’s i2, / Textron Systems Overwatch.
In commercial markets:
- Figure out an “under the radar” strategy that doesn’t attract incumbents’ lawsuits, regulations or laws when you have limited resources to fight back.
- Patent strategy. Build a defensive patent portfolio and strategy? And consider an offensive one, buying patents you think incumbents may infringe.
- Pick early markets where the rent seekers are weakest and scale. For example, pick target markets with no national or state lobbying influence. i.e. Craigslist versus newspapers, Netflix versus video rental chains, Amazon versus bookstores, etc.
- When you get scale and raise a large financing round, take the battle to the incumbents. Strategies at this stage include hiring your own lobbyists, or working with peers in your industry to build your own influence and political action groups.
Jared is still trying to get senior leadership to understand that the clock is ticking, and internal R&D efforts and current budget allocation won’t be sufficient or timely. He’s building a larger coalition for change, but the inertia for the status quo is overwhelming.
Rohan’s company was lucky. After months of scrambling (and tens of thousands of dollars), they ended up buying a patent portfolio from a defunct startup and were able to use it to convince the Fortune 500 company to drop their lawsuit.
I hope they both succeed.
What have you found to be effective in taking on incumbents?
