What if You Ran Your Innovation Lab Like a Casino? An Interview With Eisaiah Engel, Author of "Innovation Casino"

In the latest episode of "What If, So What?" host Jim Hertzfeld invites Eisaiah Engel, author of "Innovation Casino," to dive deep into the essence of innovation in today's business landscape. Engel shares his unique perspective on tackling innovation challenges across the spectrum as he and Jim explore the critical role of innovation in achieving differentiated, premium branding and generating alpha returns. 

This episode is a must-listen for digital leaders seeking actionable strategies to harness innovation for enduring growth.

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Transcript

Eisaiah Engel (00:04):

So, at the end of the day, innovation is key to being a differentiated premium brand and being able to generate alpha returns.

Jim Hertzfeld (00:13):

Welcome to What If, so what the podcast where we explore what's possible with digital and discover how to make it real in your business. I'm your host, Jim Hertzfeld, and we get done by asking digital leaders the right questions. What if, so what? And most importantly, now what? Hey everyone, we're here live with Eisaiah Engel, author of The Innovation Casino. Eisaiah, welcome to the podcast. Tell us a little bit about yourself, a little bit of your background, and what motivated you to write this book. Hey,

Eisaiah Engel (00:42):

Good morning Jim. Thanks for having me here. I'm the author of Innovation Casino and the book is really born of my experiences on both extremes of the innovation spectrum. Starting as an entrepreneur in San Diego, where I was born and where I'm from, I started three companies, one after the other. I did that for about 10 years and learned what it was like to innovate in a startup with no resources. Then, I moved to Dallas and joined a Fortune 500 telecom firm where I innovated. I still worked there and saw the opposite extreme of possibly every resource available in the world. And realized that even with that, there's challenges, too, but they're different. And so based on my observations in a startup and in a large telecom firm, I came up with the idea of Innovation Casino to create a way for both startups and large companies to solve innovation problems symbiotically with each other. 

Jim Hertzfeld (01:36):

So that was an interesting answer, a little unexpected because I thought when you talked about 180-degree differences between companies, I thought you were gonna say something like big and slow-moving, but you revealed that there's a lot of resources, which is interesting. Kinda reveals a different problem. You know, I think we run into a lot of organizations that are trying to get that innovation advantage, right? And some do it really well, and some are really trying to figure it out. But why do you think innovation is so important to organizations and to their customers in the first place?

Eisaiah Engel (02:09):

That's a great question, Jim, and I approach this from a marketing perspective. 'cause I'm a marketing guy, and as a marketer, what you want to do is build enduring growth. And you do that by getting customers who are willing to pay a premium, who are willing to remain loyal, and who are willing to refer their friends and refer other people. In order to do that, by definition, you have to be unique because why would they pay a premium if you offer this exact same thing as a bunch of other competitors? Why would they remain loyal if they can get a better price? So, at the end of the day, innovation is key to being a differentiated premium brand and being able to generate alpha returns as opposed to just returns that are in line with the market. Alpha returns are where you beat the market. And back to my previous question, where I talked about the resources running a company from my experience, it has been very much about taking resources, whether it's investment capital, employees, whatever, and then generating returns with those resources. So if you wanna generate alpha returns and a large company, large companies are very much in that game, especially if they're public. You really have to have customers who are willing to pay a premium, refer others, and remain loyal. Right.

Jim Hertzfeld (03:23):

Well, that's, you know, I think what you're saying is that it's just a good business plan, right? Yeah. It is important to incorporate an innovation model into the organization. And so why do you, you know, why do you think organizations struggle with that? What do you think is holding them back, especially the large ones who are, you know, really maybe sitting on, you know, maybe the market leader today, right? Maybe they're just not interested in it, but they are the leader, and they've been there forever, and they're in a position of strength. But the companies that really want to do that have already been bought into that business case. What, what's holding them back? Yeah,

Eisaiah Engel (04:00):

That's a great question. I think it has to do with human nature. In a startup like my startups, we had no history, no resources. It was all about making a guess out there, executing your business, and hoping that you beat the odds and generate that alpha return. You know, your dreams come true in a big company. They've already beat the odds. They're already the one and one in a thousand. I think in my book Innovation Casino, I actually go through the odds of generating an Ink 500 company by state, but nationwide, it's one in a thousand companies become an Ink 5,000 company, which is, you know, 20% returns for three years over, I think it's over 2 million in revenue and whatever that is. One in a thousand do it. A large company has already beat those odds. So why do you want to gamble that and lose out?

Eisaiah Engel (04:54):

The other reason also has to do with human nature. When you get a lot of humans together, large companies have bigger teams than startups. So there's a lot more socialization of ideas that has to happen, and rightly so, but that makes it hard to deliver breakthrough innovation. And what you get in a large company is after your core products have matured, you know, the natural thing is to go and investigate other products that either could be new core products or could drive demand for those core products like non-core. But like, for instance, an app. An app the fact that there are apps on an iPhone drives demand for the iPhone. The same thing happens in every industry. There are auxiliary products that drive demand for your core products, and it's tempting when interest rates are low and, taxes are low and shareholders just wanna see growth.

Eisaiah Engel (05:47):

It's tempting to just send internal teams on missions to go and make non-core products, but then what you get is more organizational sprawl. And in a startup, which is the opposite of that, you have the people who can make decisions for the company, the c-suite of that startup. They're more focused on what that core product is. But in a large company with hundreds and hundreds of products, the c-suite can't get in there and lead the different departments to make big concentrated bets. So you get a lot of people who are trying to go along to get along. You get a lot of people innovating around the edges because no one has the authority to get down in there and say, no, we're gonna focus. That's the c-suite. And they can't do it if they're distracted. That's the reason why larger companies struggle to innovate.

Jim Hertzfeld (06:32):

I love that. I mean, the human element, right? And I think we've always had the scene in the technology world. We've said the biggest problems we've had with projects or products is rarely the technology, right? It's, it's, you know, the concrete sort of hard stop. It's, you know, adoption is understanding, empathy for the customer, and giving it rights. And so the human el element is always the variable or is actually, so someone a long time ago once said to me that the soft stuff is the hard stuff, right? So, <laugh>, that's a great one. So you addressed this uniquely in your book, you outline an approach that large organizations can take to get around these, these complexities and these these and get around the odds, right?

Jim Hertzfeld (07:20):

And I love the premise of it because I think there's a, you know, traditionally, there's just this core either competitive element, or there's some sort of, I had an instructor call this the Moses myth that there's some figure that is gonna come in and make it happen, right? Part the seas <laugh>. Yes. You know, so tell us about this approach. How does it work? You know, what's your, what's the theme of your approach here? How do we make it happen?

Eisaiah Engel (07:46):

Yeah, that's a great question. So, what's the way that a large company can focus on innovation without getting bogged down? That was at the premise of the book. And what I found was there are two things, two main things. One is to focus on your core. That means divesting what's non-core, getting it outta there so that your CEO all the way up to your CEO can focus on what's core, doubling down, tripling down, and really trying to make what's core be 10 times better. Because that's your lead advantage in the market. But as you do that, you still have to account for the things that plug into the core, especially in a software environment. Let's just use the most popular example of all time - the iPhone. Making that iPhone better requires having all the non-core things that go into that iPhone, like all the apps, but Apple doesn't make those apps.

Eisaiah Engel (08:40):

So that same model, especially when it comes to AI and all the data that's coming off of, that's coming off of legacy industries like rail cars or vehicles or manufacturing, there's a lot of data. There's a lot of AI models you can train. And when it comes to that, that fits really well with the financial model that I laid out in my book, where external developers could be building those on top of your core product. So if you make, if you're a car manufacturer and you want people to be able to use the data coming off of their cars, instead of standing up an internal team to build a software app, no, make your car and your platform 10 times better and open that up to external products. That's the premise. So the what if, so what model in this whole thing is what if you could still care for that non-core innovation without loading up your organization and distracting your c-suite?

Eisaiah Engel (09:45):

So what you would do that with is what I've laid out in the innovation casino, which is taking everything that is non-core and funding it with external companies to go and build those things. To prove this out to the CFO, I modeled in my book the odds, I took the outside view, and I looked at the odds of generating returns from investments in non-core innovation and found that it works a lot like a casino. In a casino, you have two sides of the coin. You have a player, and you have the house. A player walks in with limited time and limited money. They make a few concentrated bets in hopes that they'll be the one in a million that they will put down a dollar and walk out with a million bucks. That's the odds of the startup entrepreneur, but it's also the odds of traditional venture capital because a startup entrepreneur makes one company venture capital invests in 20 companies.

Eisaiah Engel (10:48):

If you look at the odds of venture capital, it's very much just investing in 20 companies. When it's one in a thousand average US that are going to become at least an Inc 5,000 company, when it's one in a thousand, the odds of generating that are, are just, you might as well be walking into a casino. So when you increase the number of investments, your odds of generating at least zero to 3% IRR go, almost theoretically they go up to a hundred percent if you could administer it correctly and, which is another part of the whole thing. But theoretically, if you can take the odds of generating an Ink 5,000 company from your investments in innovation and spread those out across 2000 bets, I've modeled that you will recoup all of your money. But so what, like, who wants to do that?

Eisaiah Engel (11:38):

Like, you're not in business to just recoup your money. It's not, you know, an interest-free loan. The purpose of this model is to show a large company how they can basically put money out and get it all back. But the alpha comes from growing demand for their core products. So if you come out with the next iPhone of your industry, which is a software platform, and you'd want the third-party developers to build on that, to generate network effects, to generate market expectations of growth, then you can use the financial model and innovation casino to, to artificially stimulate demand from developers to build stuff on your ecosystem and give you a shot at becoming the dominant platform. Now.

Eisaiah Engel (12:31):

So, what I've modeled is how to take third-party investor money and use it to create what's called an ecosystem innovation fund, which is just another type of corporate venture capital fund. But instead of taking the, you know, the best, like the player in the house where you're investing in 20 companies, a hundred companies, whatever, it's about investing it in 2000 companies so that you can just break even on that fund. But then giving that investor in exchange for participating in that fund warrants on your parent company stock, which is where all of the alpha should be coming from.

Jim Hertzfeld (13:07):

That's great. I love your reference to what if, so what; thanks for asking those two key questions. That's great. Kudos. But I love the idea of the platform, and this resonates with me because, you know, we have a lot of customers who are trying to build products and become product-oriented, specifically around digital products. But I think the platform idea is catching on. You know, and I've seen, we're seeing that in legacy industries. I work a lot in automotive and the physical platform of the car, which has been the thing that's been around. But I was with an OEM last week, and walking into an automotive OEM right now is like being in Silicon Valley and walking into, you know, those, those are the, we know all the players, right? It is the mood, the feel, the look, and the culture. You know, that's definitely catching on. But I love that you've added on to that, and I think that joint that marriage is really critical. I love the challenge that you've put out there in the book. So what one of the things, you know, we'd love to ask one final question. What if, so what, but, but now what, so what can some of our listeners do about this right now after they read your book?

Eisaiah Engel (14:23):

Well, step number one is to figure out what's core to your business. In a world like the last decade with low interest rates low taxes, companies have the luxury to dabble around and all sorts of non-core things and invest their retained earnings or, you know, the income that would've been retained earnings into growth. But now that interest rates are higher and investors have, they could just put their money in the bank and generate returns. There's gonna be more questions about what are you doing with our money? And to survive in this world, companies need to slim down. They need to cut expenses out of their business, and they need to focus on what they have that right to produce, which is their core products. You know, the market, what I, even the right, it's like, what do customers really think you're gonna build for them?

Eisaiah Engel (15:14):

And that's your core products. And if that's not good enough and that's, you know, the core products aren't gonna cut it, then a company needs to figure out what's gonna be the new core product or core products and go all in on that and not worry about these non-core things that are generating demand. So that's the first step to take. That's a c-suite question. And that's, I think, a question that's going on right now in a lot of ports. Okay. So once you have that cared for, you have to figure out what you do with all the other great ideas that are not core? Do you set up an idea management software where your employees or customers can submit ideas like the Salesforce idea exchange? You want to collect that. You wanna put that out there for, for, for this next step.

Eisaiah Engel (15:58):

And then the final step is to, once you have a place where you, you have those ideas that you wanna fund, the next step is to set up a corporate venture capital fund, or I call it an ecosystem innovation fund that behaves a lot more like a grant program than like corporate venture capital or even venture capital, both corporate venture capital and venture capital. They all act like players in the innovation casino. They all invest large sums of money in a handful of companies, 20 companies or less, for six out of 10 VC portfolios. But even if it's a hundred companies, that's still player odds. So the key is to invest in 2000 companies. So, if you're in an industry like automotive, like telecom, there are a lot of larger companies within your supply chain that you can pool with. So the idea is when you set up an innovation, an ecosystem innovation fund, you create rules sort of like a government grant, like an SBIR grant, Small Business Innovation Research grant.

Eisaiah Engel (16:59):

It's one of the most successful grant programs around. It's been around since the eighties. It's spawned things like 23 and me, Qualcomm and they make investments. Right now it's about up to 300k they give to startups. So not a million bucks, you know, it's 300K, and it's all about checking the boxes of innovation criteria. Well, if you took that approach but then applied it to venture capital where you're recouping your money, 'cause it's not a grant, you're recouping your money, hopefully with returns, you could fuse those ideas together to create rules that you and your large suppliers and distributors share. And in doing so, you only have to make a hundred investments each and pull half of each investment with 20 other large firms to get to 2000 investments. So setting up those rules, pooling them with your Yes. And you're seeing stuff like this started to happen in telecom with like one of, one of those large suppliers, I won't name them. Set up a telecom 5G innovation fund. They have carriers on there, they have equipment providers on there, and then they have downstream software companies on there. And what if you could pull those investments together to get to 2000? That's how you implement this approach,

Jim Hertzfeld (18:18):

Right? Right. Pretty radical. Pretty

Eisaiah Engel (18:21):

Radical.

Jim Hertzfeld (18:22):

Eisaiah, I think it's, but I think it's. You've done the homework. I think you've built the models. I think you've looked at the history. I think it's intriguing. It's an innovation on innovation; let's put it that way.

Eisaiah Engel (18:34):

Ah, there you go,

Jim Hertzfeld (18:35):

<Laugh>. Yeah, it's very, very meta. Eisaiah, this is a great conversation. Thank you for coming to the show and taking the time today to explain. There's a lot more in the book Innovation Casino. And I look forward to talking to you again. Thanks,

Eisaiah Engel (18:51):

Jim. It was great to be here.

Speaker 3 (18:54):

You've been listening to What If? So What? a digital strategy podcast from Perficient with Jim Hertzfeld. We want to thank our Perficient colleagues, JD Norman and Rick Bauer, for our music. Subscribe to the podcast, and don't miss a single episode. You can find this season, along with show notes, at www.perficient.com. Thanks for listening.