Since the inception of corporations, corporation innovation arm has been a critical and often times, internal function of the business. Corporate innovation is more than just merely a R&D function but scales beyond that as a separate division that can tap into the core business for resources and invest, experiment, and scale new products and services that will one-day serve as a the long-term incremental growth for the core businesses.
While we cannot understate the importance of corporate innovation the current process is also plagued with structural inefficiencies and bureaucracy such as financial and human capital deployment approval, areas of investment and it’s legal risks/implications for the core business (operational risks is likely very minimal given that the corporate innovation projects are usually minor to scale initially) and ultimately the alignment of incentives for the corporate innovation team.
If the corporate innovation team executed on several experiments and a few of them turns of to contribute another incremental 30% revenue growth business starting in Y2 of public launch (assuming the business has annual rev is $100M and growing at 50% YoY) then the incremental revenue impact will be pronounced.
The corporate innovation (CI) team could potentially deliver substantial growth for the core business but most CI team members will likely only get a small bump in salary, bonus and possible equity at best.
Which brings into the question of alignment of incentives between all the stakeholders, CI team lead, CI team members, core business management team and core business team.
“Show me the incentive and I will show you the outcome.” – Munger
The rise of web3 has presented a potential new solution to the corporate innovation problem in the form of decentralized autonomous organizations, commonly known as DAOs. A DAO-like incentive structure could possible provide better alignment of incentives between all the stakeholders. DAO, also known as decentralized autonomous organizations, are member-owned communities without centralized leadership. DAO is the new way to finance projects, govern communities and share values across all the stakeholders.
For example, ConstitutionDAO recently raised $40M in just a short week from the general communities to buy 1 of the 13 actual draft version of the US Constitution via the Sotheby’s auction in November 2021. What’s even more unique about this is that a decent % of the contributors to this DAO are not to crypto and Web3. https://www.constitutiondao.com/
Imagine translating similar initiative and structure across to corporate innovation, whereby, all the team members in the CI team will get a pre-determined stake of the outcome, revenue or gross or net margin for for x # of years with some y caveats, the CI team might be even that aligned on experimenting and creating products and services that could deliver even more return for the core business.
It’s worth noting this is not a binary alignment of incentives b/w from the core business mgmt team’s POV, they also need to be mindful of the perspective and thoughts that could come about for the core business team b/c the CI team is essentially getting risk-free investment from core business with some probability to capture way more upside than most of the team members in the core business.
Also, what would be the structure and basis of the decision-making processes of this DAO-like corporate innovation structure? Does each CI member and team lead have a % of the voting rights along with the core mgmt team owning a % of the voting rights as well, with core business legal team being an independent % in the case there is a strong pushback.
DAO-like Voting Rights and Distribution in Corporate Innovation
In practice, the CI team members and team leaders will combined own 50% of the voting rights and mgmt team combined (each mgmt team leader will own a x % of this) combined owns another 50% totally 100%, which means every major and minor initiative conducted by the CI team will go through similar approval DAO-like process. In the independent cases that the legal team needs to be involved, then the legal will own 10% of the total voting rights then the CI team and mgmt team voting rights combined will get diluted down to 45%, respectively.
Furthermore, if any of the initiatives reach scale and is bringing in x $ of revenue, gross or net margin (with possibility of tying other core business comps and KPI incentive to this), then the CI team will get x upside distribution over the next 2-4 years. This not only incentivize the team to experiment/innovate with projects that could deliver the highest probable chance of outperformance for the core business, it also further incentivize them to stay at the core business for years to come. This in essence, serves as a nimble startup within a core, established business.
Intersection notepad 