Yesterday X, Alphabet’s “moonshot factory” announced that it is cutting staff and turning to outside investors for additional capital. The moonshot factory was once seen as the model of corporate innovation excellence, giving birth to companies including Waymo and Loon. It inspired copycat labs across the Global 500. I worked for a few of them and quickly saw that something wasn’t right. Innovation labs are like a 68 year old man who buys a customized Ferrari: It’s supposed to signal fertility and prowess, but usually it’s a signal that his kids haven’t spoken to him in 6 years. What is true for Italian sports cars is true for corporate innovation labs: The shiniest toys mask the darkest dysfunction. There is a better way. I talk about it here.

Why Innovation Labs Don’t work:

There is one overarching truth about corporate product launches: the biggest breakthroughs ignite the ugliest civil wars. More chairs get thrown, rumors get spread, executives get gaslit, and budgets get pulled when you make money than when you lose it. This is so consistent that after a certain point I knew that silence was violence. If no one is trying to kill you then you haven’t built anything of value yet.

The reason great innovations spark huge civil wars is because there are three competing forces that every innovator must navigate in a big company: FOMO, FOLP, and F U Pay Me.  

FOMO is Fear of Missing Out - it’s the fear that if the company doesn’t innovate it will lose market share and be eclipsed by competitors who are better, faster, and cheaper. 

FOLP is Fear of Losing Power - It’s the individual political instinct to undermine innovators in the name of self preservation and self promotion. It’s the driver of obstructionism. 

FU Pay Me is the need to make money for investors who don’t care about innovation. Or, more accurately, they care more about paying off their mortgage, sending their kids to college, and getting rich than they do about innovation.

An innovation lab is what companies do when they can’t reconcile FOMO with FOLP and F U Pay Me. The politics are so dysfunctional, the commercial pressure is so intense, that they give up trying to innovate in their core business. An innovation lab is how they sweep their dysfunction under the rug. An innovation lab is a futuristic decoy that says “we innovate here because we can’t innovate anywhere else.” Some companies like Alphabet had such an enormous pile of cash that the market didn’t really notice or care until the cash pile started to shrink.

But at a certain point the cost of not innovating explodes. The most common symptom is that your greatest talent in the core business feels stifled and leaves to launch new, innovative companies. Some of the companies grow up and threaten your core business. In Google’s case that employee was Sam Altman who left Google, and eventually launched OPEN AI, which now poses an existential threat to Google.

There are better ways to innovate than in a lab

Two years ago I began compiling data of the 200 most successful new products launched by Fortune 500 companies. (I called it the corporate innovation genome project. It was really hard. We only were able to account for 50 products. It needs a lot more work.) I conducted this study because I got sick of hearing people say, “the only way big companies can launch great innovations is in an autonomous innovation lab.” That wasn’t my experience. And the only way to know that would be to actually look at the most successful innovations launched by big companies and see how they originated. 

Here’s what we found:

1. Most great innovations were like AWS - AWS was created inside of Amazon because they couldn’t find a cloud service provider that was good enough. So they built their own. And once it worked, they sold it to literally everyone else. We gave innovations like this a fancy name: “supplier substitution innovation.” 24 of the products we analyzed were supplier substitution innovations.

2. Another viable innovation model is the Risk Metrics model. Risk Metrics was a risk management product developed within JP Morgan that was given to trading customers as a perk. Ethan Berman spun it out of JP Morgan and started charging customers for it. It was sold to MSCI in 2010 for $1.6bn. In our study we called this cost-center monetization innovation. 20 of the products that we analyzed fell into this category.

3. The least viable innovation model is the Alphabet X model. Only 6 of the 50 products we analyzed were developed in an innovation lab. 

All this is to say that the demise of Alphabet X can be a new dawn for innovation at Google if it’s handled well. It can force the company to pressure-test innovation so that it serves investor demands, and can withstand internal political pressure. The tension between FOMO, FOLP and F U Pay Me can be the healthy pressure that helps the company innovate better than anyone else.

One More Thing…

If you’re trying to build epic $hit in the face of enterprise obstructionism, you are not alone. Punks & Pinstripes is a vetted community of Business Punks. We’re the executives and entrepreneurs who are defiant and different. We help each other when it’s hard. We provide an oasis of solidarity in the face of conformity and obstructionism. And we achieve epic $hit together. Apply to be one of our next 25 members by January 31st here.