Inside CVC: The 16% Problem: Andy Binns on Why Corporations Struggle to Scale Innovation

In this episode of Inside CVC, hosts Steve Schmith and Philipp Willigmann speak with Andy Binns, co-founder and Managing Director of Change Logic, and co-author of Corporate Explorer and the forthcoming Corporate Explorer Fieldbook. Andy has spent his career helping CEOs, boards, and innovation leaders at companies like Analog Devices, RELX, and UNIQA Insurance build new growth businesses while sustaining the core.

Listeners will hear:

• Why most corporations fail to scale innovation—the “sixteen-percent problem”
• How boards and CEOs can rethink governance and incentives to unlock real growth
• What it takes to build an ambidextrous organization capable of exploring and executing at once
• Lessons from Europe’s Mittelstand and what large enterprises can learn from them
• Why embracing uncertainty and saying “I don’t know” may be the smartest move a leader can make

Transcript

Steve: 0:01

Welcome to Inside CVC, the podcast that brings together leaders in innovation and capital and investment to explore the trend shaping the business of corporate venture capital. I'm your host, Steve Schmidt, and together with Philip Willigman, we're speaking to corporate investors, entrepreneurs, and ecosystem builders driving the future of innovation. InsideCVC is brought to you by UPath Advisors, helping corporations and startups unlock sustainable growth through strategic partnerships. To learn more, visit uPath.com. That's the letter U, hyphenpath.com. And to catch up on all of our episodes, search InsideCVC on your favorite podcast platform or visit uPath.com forward slash podcast. Today we're joined by Andy Bince, co-founder and managing director of ChangeLogic and co-author of Corporate Explorer. Andy helps CEOs and boards build new growth businesses while sustaining the core, what he calls the challenge of corporate ambidexterity. In this episode, Andy breaks down what he calls the 16% problem in corporate innovation, the discipline required to scale new ventures, and the role boards must play in steering companies through uncertainty. We also explore what global leaders can learn from Europe's Mittelstand and why embracing I don't know might just be the smartest thing a CEO can say. Here's our conversation with Andy Bins. Andy, welcome to Inside CVC. How are you today?

Andy: 1:36

I am splendid. Thank you, Steve. I'm delighted to join you.

Steve: 1:39

Oh, thank you. I love the energy. I think today's going to be a great conversation. Um, why don't we hop right in? You talk about the 16% problem when it comes to corporate venture. Um, can you talk about what that is and perhaps more deeply what that says about boards and CEOs who oversee growth?

Andy: 1:58

Well, look, the the reality is that corporations tend to have all of the assets that they need in order to innovate and grow in new markets. But the reality is that more often than not, they fail to capitalize on them. And and then they look for solutions to that problem. And the uh solutions that they look to uh are very often the ones that avoid using their assets. They tend to be the ones that involve seeking to use other people's assets, in other words, engaging startups, uh engaging external capital, and so on. And this is a really puzzling reality, uh, and one that has sort of consumed my uh life as a consultant, researcher, author, and and I'm trying trying to understand. And and and I think that the solution to these things we can talk about, but the problem has a lot to do with the sort of uh focus that we have on organizations as being a bad, wrong, can't be fixed, right? Uh and I think that this is not um uh accurate and that there are ways of solving some of the persistent issues with corporate innovation.

Steve: 3:14

It's so easy that it's so interesting to me that you what you describe as a, you know, I'll say it very rudimentarly, a not my money sort of example there, particularly if you're a manager, a shareholder, and you know, I'm I'm hired to drive shareholder value and investors' money, et cetera. What is, you know, how much money do you think is being wasted in sort of in this mindset or this approach?

Andy: 3:37

You know, I don't know. I I I think um it's significant. I mean, you you can just tell it by by any time you engage uh a senior management team in the way that they regard um the uh uh uh an investment that hits their PL versus an investment that hits their balance sheet. They tend to regard these as totally different. The quality of the conversation, the quality of the discipline, the interrogation of the data that they apply in order to understand the quality of what they're doing is entirely different. It's like, oh boy, we've got to spend you know five million on uh this uh potential new market area with new development. Oh, that's a significant investment. Oh, we're gonna spend 50 million on buying this little startup that nobody's ever heard of and don't know what it does. Well, that's no problem. That's no issue, right? And so this sort of asymmetry for me, which I have literally seen and experienced in corporations. If I'm a shareholder, what are you doing, guys? You know, one of them is is feels uh for them risk-free, right? The other one feels incredibly important. And it has to do with incentives, it has to do with the way in which um uh they're they're paid, they're uh incented, their performance is managed, and you know, shareholders think about it. And I I think CVC's got to think very carefully uh about its contribution um in this context, because uh, you know, for me, uh if I'm a shareholder uh of a public company uh and I see uh a uh a corporation that is doing CVC for investment purposes, right? I'm like, what are you doing with my money? Why would you think that you'll do better than the market? VCs only just about do better than the market over 20 years, right? You've seen this research. So why would you do better than a VC better than the market? I I don't get this. And so I think there's like uh underneath this um uh CVC story is this kind of reality, and it only they only get away with it because of the first fact about how little attention is paid to the capital investment versus uh um investment off the PL. That's that's now we can talk about why I still think it's a fantastically important thing to do, but let's let's just start up with the uh contentious point first.

Philipp: 5:59

Andy, it's a pleasure to have you on the show. Um and uh I I I do like to push back a little bit. Um obviously, you know, coming out of the C VC space and and uh spending uh 10, 15 years working with corporates, um connecting them to startups, you know, creating new value areas. I I would argue that yes, you know, if a corporate is doing an investment in a space which is completely unrelated, not strategic, maybe not even transformational over the next five to 10 years, and purely financial um financial investment. I agree with you. But on the other hand side, if you are um you know a corporate and you make an investment or partnership with a startup which may have a technology which could get you there faster, isn't that a smart thing to do?

Andy: 6:47

So yes, and that's why it has potential, right? Um is that this the CVC is a tremendously important um uh uh you know arrow in your is it a quiver that carries arrows? Uh uh I I think, right? It's one of those things that you need to use. But but that but let's just pursue the positive case on this for a moment, Philip, because I want to absolutely follow you. I think it's incredibly important that corporations engage in startup ecosystems. And I think an investment is a super way of doing that, partly because it gains access to technology and other assets, but also because it exposes senior management to a different way of running an organization, running a business, making uh bets on the future. And so I think the more that they can be involved, um, you know, get get some board exposure and so on, um, uh uh the the the better. And I and I want to invite you to think about what a corporation needs to do when it comes to scaling in a new area, right, uh, as being about completing uh a path to scale, right? That that in any successful corporate venture, and I can talk about a few examples of this, it comes about because they they they follow um uh uh one of the obvious strategies. They're going to acquire their way to growth for sure, um, at some level, but they're also gonna build assets and they're going to leverage them, right? And and so the the the thing about the the the corporate path to growth is you've got to think about all of these different tools, all of those um different assets um uh in order to get work to it to your objective.

Philipp: 8:35

No, I I totally agree with you on that, Andy. And I would love to you know invite you to maybe share some of these uh examples um while while we go through the discussion today. Um but if if you if you think about you know being you know CEO or CFO, how should they think about you know CVC, MA, venture building as part of their capital allocation strategy? Um and is there like a you know is there like a magic formula um you could you could share with them?

Andy: 9:06

So for me, I'm I'm gonna be mission driven. I'm not going to have a magic formula. Right? And that doesn't mean that a magic formula isn't relevant. I I don't happen to know what that should be. Um, Philip, I think I can I'd be interested in know why that's a good good answer. Um what I mean by mission-driven is I want to know how what do you think what where do you think the future is tending in for your corporation, for your market, and how do you participate in ways that are going to scale to something that's of six significance and actually right? And so think about um uh one of my favorite examples is uh Lexus Nexus. You you've heard of Lexus Nexus, Steve. You're a journalist. Definitely heard of Lexus Nexus, right? So if you go back to uh uh around about you know 200 um six-seven, right? Lexus Nexus is is is got uh it's about a uh a billion uh or so of revenue, uh, and it has primarily legal information services, case law, um, that it codifies and makes available to lawyers online, uh, and then news information, uh the Nexus side of it, right? Uh uh makes it available online. And it has this little business that is selling um information to different governments and law enforcement agencies a little bit to insurance. Okay, fast forward 10 years, and now Lexus Nexus is a two and a half billion dollar uh business with an entity Lexus Nexus Risk, um, which has eclipsed the original business entirely, right? And and and how did it do this? It did this firstly um by giving autonomy to that business that was selling risk information, individual data, data about individuals, all publicly available, pulling it together with different data sets, and essentially inventing the category of big data, uh if we're you know we're old enough to remember the time when that was the uh the big thing in the market, right? And they were able to get into that market by building on the asset they had, acquiring technology, a startup, uh Sizent, um uh acquiring data from a company called Choice Point that was in the insurance market, and then combining these assets with the ones they already had, and then getting really good at building on those assets as a team and essentially becoming a uh a technology firm. My point is that you go to scale, and we should talk about why I keep saying the word scale so often, right? You go to scale through the combination of assets, not through only one answer. And CVC is a little piece of that answer, right? A little piece of that answer. And if it's detached organizationally from the rest of the answer, it's never gonna do any good. It's never gonna do any good. All it is is the plaything for the CFO. You use scale so often. So why do you use scale so often? Why why do I talk about scale so often? Yeah. So so in in my book, Corporate Explorer, I frame out this candidly extremely obvious uh uh uh framework to say that innovation is about ideation, incubation, and scaling. Right? Ideation, you know, what's the customer problem, what's our concept of how we solve it, incubation, how do we prove it out, experiment, de-risk, and then scale, how do we turn it into something that has revenue that's of consequence? So much of the action in innovation is on the first one, right? Is on ideation, you know, the sort of jamboree of uh idea contests and idea formation. And I have to say, my clients, the CEOs of major corporations, they get a great buzz out of that. They love it, right? Um, and and they love kind of pitch competitions where people, uh uh employees come forward with their ideas. Incubation they like less, right? Um, because that's the hard grind of um validation through experimentation. So I think incubation is incredibly important as a discipline, but it's a it's a knowable discipline. And I I give huge credit to people like um Steve Blank for having sort of codified uh a way of thinking about uh business experimentation. But then you've got scaling. Hey guys, that's revenue, right? And if I am a shareholder uh of a corporation, it's actually revenue that I care about, not experiments and learning and our ability to have foresight, all these lovely soft outcomes, right, actually revenue. And so my challenge is how when I get an idea and I'm gonna spend the time to do everything else, how do I think this might scale? You know, and if you go back to 2006, 2007 uh at Lexus Nexus, um, and and and I interviewed all the people like Jim Peck, who's the CEO, was the CEO of uh Lexus Nexus Risk, who actually did this story. But I was also fortunate to be, you know, in in it working with them a few around that time. That they were actually thinking from the beginning, what's it gonna scale? What's our thesis about how we're gonna reach customers, how we're gonna assemble product technical capabilities, and then how we're going to do this for enough people for it to matter, capacity, right? And they actually were thinking about it. And and one of the acquisitions, one of the VPs at this acquisition, they made Choice Point, said to me in the interviews, they said, you know what, Andy, but from day one, they knew what they wanted to do with us. They had a plan for how they were going to convert this acquisition into value, right? And that's the kind of thinking. And so often when it comes to scaling, we're kind of hands-off. We're like, oh, we can't touch this uh startup because they know just what they're doing and we don't want to infect them. This is the kind of corrosive thinking, uh, low ambition thinking, right, that leads to so many failed um startup acquisitions in corporates.

Steve: 15:18

You touch upon ambition. Why is it it's sort of this this continued to be a challenge with all of this proof of ambition and purpose and focusing on the customer?

Andy: 15:29

You know, Steve, this is exactly you know what I what I spend my life working on is like how do you get it so that organizations sort of are able to uh find the the signal in the noise, right? Because the signal is there, and there's all this noise around it, which is sort of day-to-day business, organizational politics, uh, and the rest of it, that fail that that that degrades their focus on, hey, we know what the future looks like looks like, and and we we have the ability to participate in it, so why aren't we doing it? You know, and that is that is the that is the fundamental challenge, you know. That that is the fundamental challenge.

Philipp: 16:09

Yeah, I fully agree with you that if a corporation puts a strategy in place and has the ambition that's there where they want to go, and then you have the different pieces come together. But if you are a board and you're overseeing this, the governance, how do you actually really get to the point of understanding the vision? How can we maybe rethink uh the role of the board to really help them to say this is the aspiration and the ambition you know we have for this new strategy or this new venture to really have the board support the execution of the for the for this?

Andy: 16:46

I think this is this is very much the question, Philip. So I'm pleased you've you raised it. And it it's different, different parts of the world. Uh I mean I've worked with Japanese CEOs and boards, I've worked with European CEOs and boards, I'm now working with uh with a with an African CEO and hold another one, uh and a lot of American C CO CEOs and boards. And I think that you know there are different kinds of um uh concerns. Um the the the the European question, which is one that I feel you know very pressing, right? Um because I think it's the it's the one where there's the most uh alarming case for change, right? Absolutely. Because the and it's it's partly structural, the sort of the the supervisory board, management board structure in the DACH region uh is I think highly corrosive to this intention. So it's really, really tough um to get through it, um, particularly when there are all kinds of entertaining uh complexities to ownership structures involving you know families and foundations and all the rest of it, so that you know the the the interests uh are not easily uh uh aligned. Uh that everybody wants stability, right? Um and uh and the world isn't stable. The world is incredibly uncertain. And so uh my message for boards is you know, live in that uncertainty, right? Live with the reality of the world rather than with the hope that uh you can be at a moment of continuity, and this is a nice point in your career to sit back and enjoy um presiding. You haven't got that luxury. You you you dealt a different hand, and you've actually got to get really active as a board to understand. And I think that does happen in Stanley. I think there are boards that are getting really active. I don't, you know, the the Dach region companies that I'm involved in, um, they have set up, you know, sub-committees to be responsible for innovation. They're actually engaging with um uh new ventures and so on. So I think there is some of this happening in pockets, but I think uh the region needs to really think about reinventing that role of the supervisory board.

Philipp: 18:57

What are the things boards should anticipate? To be really ahead of the game of the management, um, and also to ensure that the management is not surprising the board, um, because I feel like the the board level really has to understand where the future is going and has to think a few steps ahead. Any any thoughts from you on that?

Andy: 19:16

Yeah, I mean, I I'm not sure that it's the board's job to be expert in different market domains and technologies and so on. Uh I'm not sure I'm gonna give that job to the board. I'm I'm gonna look to management to do that. What I do think the board needs to do uh is to think about how that they expect to see uh a management team that is in a process of learning. I don't I want to be highly suspicious of any management team that comes to me with a self-confident, um, beautifully pre-packaged strategic answer to what's going on in the world. Because that tells me they're not learning. You know, they're not actually engaging in the uncertainty and the risks that's out there. They're just you know snowing me with uh with with with with a story. I want I want to I want to hear where they're learning, where they're risking, where they're failing, right, and what they're learning from those failures, right? So that my strategic approach is far more adaptive and less planned.

Steve: 20:22

When I think about what you've talked about here and ambidextrous uh abilities and how, as a multinational corporation, you have to navigate all of these policies that are shifting every day, these new technologies like AI. How do you do that? How do you navigate all of that uncertainty, make those bets, move fast, and and still try to go to market even faster? And if you're a consumer brand, be everywhere in that same endeavor.

Andy: 20:47

Yeah, so I think it's worth just explaining this notion of the ambidextrous organization you just mentioned. This this notion of uh doing two things at once. That's how it's meant. It doesn't mean doing one and then the other, it means doing two things simultaneously. And of course, you know, it's actually more than two things because um, you know, the the the you've got the the core business. I want to get the feet on the street now and I want to convert leads into revenue, right? That's absolutely what you need to be to be doing. And the explore, which will be a multitude of different experiments and participations in the future, including CBC, and including um uh your having your own corporate startups, including uh how you're going to what your uh um uh acquisition targets might be, and so on. And so, but what you've got to do is understand that these are two different business systems and they require different management systems, different measurements, uh, different reward systems, and sometimes you know different teams and premises, right? Um uh the the the the some of these sort of physical separations are needed as well as the system separations. I don't mean running them as in two entirely distinct entities. That doesn't work either, because you've got to be able to convert uh this explore piece into new revenue streams. So at some point you're going to move one into the other, or as in the Lexis Next example, create an entirely new entity. So there's there's um there's some sort of balancing that is required to do that. But it takes reality that you're gonna have to do two things at once. And Steve, Philip, guess what the biggest uh obstacle is to doing that? It's people, right? Absolutely. People who at usually at the senior team level who fear being the loser in that split, right? Hey, I don't I don't want to have AI off in some unit run by Steve, right? You know, he's just gonna take it and uh and not worry about my needs of my business, right? So this this kind of you've got to attend to the human factors, which are actually what gets in the way of so much of this, right? Uh and and that can be worked on, it can be solved, and it's it's it's tough work, right? And and at no point do I ever want to minimize how hard it is to do this inside large corporations. I'm pretty convinced it's utterly essential.

Philipp: 23:11

I sometimes have the feeling that leadership um is just struggling, struggling with doing two things at the same time and also doing one thing at one speed and the other thing at a much faster speed. Uh and that even though they may acknowledge that, they wouldn't do this in a you know, in a semi-public setting and saying, hey, I need support or I need to really learn how to do this. They much rather spend their energy on, okay, let's come up with another plan, why we changed the plan we decided last time off. Um and we make it, you know, we make it, you know, different decisions or why we decided to reduce the investment into ventures or innovation. I think they're they're spending much more time on that, to making an argument why they are right, versus to say, hey, this is actually something new I have not done, and I'm feeling comfortable with the uncertainty, but I will dive into it and I will bring the right people on to make it happen. That's what I'm observing quite a bit, especially going back to Europe and the the Dach region or the Germany region where a lot of people are currently shutting down innovation venture. Um and it's because, oh, it's a cost uh at the moment, and we need to, you know, um save costs. That's why we're going to close it down without looking into the future.

Andy: 24:27

That's what I'm seeing right now. Yeah, no, I think that's fair. Um, you know, the DACH region probably should close down some of that innovation because I think they're just spending it without any sense of what they're getting for it. And I I I can't go into examples, but my my experience is that there's just not enough focus to that to that spend. It's just spend. Um, and so now if they if they cut the cost and they don't refocus on spending in the right places, then yeah, I'm with you. It's it's it's not good.

Steve: 24:56

And you're gonna close here in a few uh minutes or with some advice. Before we do, I'm curious as I've listened to our conversation and thinking about some of the challenges that incumbent manufacturers, automotive suppliers, OEMs, even other diversified manufacturers, and I think about speed and scale and innovation and cost down. And a lot of these incumbents are getting crushed by by Chinese competition and and so forth. I'm curious, that being on top of mind of a lot of boards, et cetera, is there any advice that when you see the very competitive uh the very competition that Chinese manufacturers today present, any anything that that can be learned that that these incumbents can learn from that? Yeah.

Andy: 25:49

I think, you know, firstly, I'm saying you're absolutely right. It's really a tough place to be in. And um you know the the the the the the the best advice, and um I'm gonna I'm gonna use a little bit of Vince Roche's um wisdom in this, but I'm gonna use another example as well, is is how do you uh how do you get after new sources of value? And usually new sources of value are further up the stack, right? It's not simply a matter of uh being in the component level. You've got to figure out how you get to source of value. Automotive um uh industry, I think, is wrestling hard as to you know how does it get the full value from being that point of integration of a consumer offering, right? Uh and and it's you know the other um you know end point is of course, you know, the the phone or device, right? Well, the how do you think about a car as a device um is I think fundamental because uh uh uh ultimately we're not gonna have drivers, right? And so there's gonna be all this unallocated time that we're sitting in a vehicle. How are you gonna use it? How do automotive uh manufacturers get involved in delivering that value is is going to be the core part. And and and I think that I would use uh for for a sort of a path to how to get there, I would use um uh Panasonic uh uh as an example. Um and this is by no means a completed story. I don't think uh uh Kasumi-san at uh at Panasonic has finished the work of uh this transformation at all. But what's really interesting, they're absolutely caught in this cheap um uh jack uh cheap Chinese uh competitors, uh high-value um uh information players from the US. And what are they doing, right? They have this still have a tremendous um um uh install base and customer base. And how do they do it? Well, they've got this entity called Panasonic Well, uh led by this uh amazing uh woman, um Yoki Matsuoka. And what Yoki is taking them into is how do we solve really important end customer problems? How do we get out of thinking of ourselves as purely a device manufacturer and think about how we can solve important problems with technology, data, relationships, insight. That's the the place that I think um um uh any manufacturer, any anybody who's in a component level um or um a business needs to get really deeply serious about. Um and uh and I and I would argue that CVC have a role to play in this, and part of that role is also humility. I had a um uh a Japanese, different Japanese company the other day. Uh the executive said to me, Oh yes, yes, we're getting customer insight. We have CVC investments. Guys, that's not enough. Right? And uh and I do think that CVC um has the opportunity to plug into executives to help them get deeper, see what kind of levels of immersion are required in order to generate real customer insight about the problems. Because the the the message is that there is value out there you haven't seen. You just haven't spent the time to learn about where it is and to get obsessive about.

Steve: 28:59

You know, that's one of the things I appreciate about what Philip is doing around CVC and his open innovation summits is that what you describe and in the various places where Philip spins around the world. I mean, it was in Vietnam a couple of weeks ago on doing exactly what you describe and bringing pieces, right? Bringing that exposure. So any, why don't we close? I I would like to say imagine you're in a boardroom, but my sense is from this conversation, you don't have to imagine that you're in boardrooms often. Um, can you maybe share some of the you know the best advice, the most important advice that you are given to boards and CEOs right now?

Andy: 29:32

Um I the first advice is you know accept that you are in a world of constant uncertainty. And the most powerful thing you can say is I don't know. If you sit there and say, I don't know, and I think this may be the answer, and I'm gonna go test it and find out. And so that's an ability to suspend the the Judgment of your own ripeness and to just live in that position of uncertainty, but also have the disciplines test to learn your way there.

Steve: 30:09

You've been listening to Inside CVC with Andy Bins of Change Logic. To learn more about his work and the Corporate Explorer, visit Changelogic.com. If you've enjoyed today's episode, follow InsideCVC on your favorite podcast platform and visit UPath.com forward slash podcast for more conversations at the intersection of corporate venture, innovation, and growth. I'm Steve Schmidt and alongside Philip Ligman, thanks for listening, and we'll see you next time on Inside CVC.