I have been talking with people about the idea of innovation.

In my mind, innovation is coming up with something novel, ie something that is totally new or something that does an existing function in a much better way. Innovation is a leap while refinement is a step. Innovation depends on some inherently creative insight while refinement is a matter of time and effort.

Given this definition, I have been thinking about the differences between innovation at big and small companies.

different rules

Small companies are more innovative. Even though they have fewer resources, small companies have fewer hindrances and more freedom to experiment. Experimenting means trying 10 things and hoping 1 of them sticks. For every big leap that works, there are 9 tries that fail. Since small companies have nothing to lose, they accept those 9:1 (or worse) odds and take the risks. Once in a while, a company hits on something that sticks and it takes off. (We never hear about the 9 other companies that never got a hit and died a quiet death.)

Big companies have all the resources in the world to pay people to be creative. The problem with big companies is that they have too much to lose and this fear of failure puts a huge damper on trying for innovation. If a startup does something stupid, no one notices; if IBM does something stupid it will be in the national news. In order to protect the brand, there is a line of people in a big company whose job it is to say no, who are there to prevent any stupid mistakes. While saying no prevents risks and embarrassing mistakes, it also prevents the occasional home-run success.

Another problem with big companies is the way financial accounting deals with innovation. At a small company, the inventors are spending (wasting) their own money or perhaps the money of professional investors who know they are taking a risk. Big companies however are expected to be stewards of their investors and big wild risks dont look so good on the profit and loss statements if they fail. Since 9 out of 10 tries fails, who's budget is going to pay for it? How do we account for these trials? Innovation just doesn't play nice with traditional accounting and corporate management practices.

different games

Since big companies and small companies play by different rules, they require different strategies. I would argue that innovation at a big company comes from acquiring winners not internal attempts.

Instead of trying to invent things internally, big companies should use their resources to survey the market and the invention-space looking for winners. Then it should purchase the innovative company, rework their design as needed, rebrand it, and market the hell out of it.

I think this acquisition strategy, which is used by Cisco and others, makes more sense although it is not pleasing to engineers. Every engineer in the labs dreams of doing his own startup, of making his ideas a reality. Few of them will take the chance so they all yearn for their large employer to invest more in internal development. I am sympathetic to this desire by dubious of its outcome relative to acquisition.

Small companies are pretty much small companies. They embody the hopes and dreams of their creators along with their personal drive, which may stem from frustration with big companies or just a desire to create. Little companies have nothing to lose so they play to win with reckless abandon; big companies have everything to lose so they play to maintain their lead. At the end of the day, I think most of the big breakthroughs will come from the small innovators.