Here is an excerpt from an article written by Stephen Wunker

Stephen Wunker

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This post is part of Creating a Customer-Centered Organization.

If American companies are to grow their way out of the doldrums, they will need to show some of the imagination of upstarts.

Consider Zipcar, whose recent IPO valued the 11-year old company at over $1 billion. The company came from nowhere into a rental car business dominated by giants such as Hertz and Avis, creating a new market of by-the-hour rentals. Meanwhile, the incumbents focused on battling each other at longstanding airport locations. As the giants continue to duke it out, Zipcar has captured 80% of the industry it created. Ironically, Zipcar repeated a story that happened once before in the rental car industry. Hertz is the leader at the airport, but Enterprise Rent-A-Car grew to become more than double Hertz’s size through concentrating on neighborhood-based locations, where the giants did not compete.

The S&P 500 companies, which now have nearly $1 trillion of cash on hand, should take heed. While entrepreneurs are grasping for venture capital, the nation’s leading firms seem puzzled about how to spend their money. Their lack of imagination stunts economic growth.

A big problem is that these companies tend to treat nascent opportunities the same way that they approach established businesses. They want data, even though data on non-existent markets is inherently fictional. So they focus on the market as it is today, where data are more easily obtained, and they employ the most conservative estimates about new sources of growth. They may also concentrate exclusively on what their customers want, which biases them toward incremental improvements of current solutions. As Henry Ford reputedly said of his industry, “If I had asked customers what they wanted, they would have said a faster horse.”

When they do go after an idea, big companies can pursue it so cautiously that opportunity slips through their fingers. For example, a decade before Apple released its iPad, Bill Gates demonstrated a tablet computer to a capacity audience of 12,000 at a big Las Vegas hotel. Unfortunately, Microsoft tied its tablet concepts to its Windows operating system and made them merely pen-enabled personal computers, so these products remained a tiny niche of the computing industry.

Entrepreneurs follow a different path for a simple reason: they have to. If a new rental car company wanted to defeat the behemoths at the airport, it would have a rough slog. If its ambition was to improve on current products in tiny increments, venture capitalists would ignore them. Start-ups create new markets, or they struggle for oxygen. Necessity truly is the mother of invention.

If big companies are to seize more fast-growth opportunities, they can learn from the venture capitalists that back the most successful entrepreneurs. Venture funds create a basic thesis about what industries will grow, and then they place a lot of inexpensive bets and give start-ups leeway. Rather than invest in fancy spreadsheets and measure progress against detailed financial projections, they toss growth estimates out the window and expect companies to iterate their way to a viable position. In a big company, success is measured by a track record of success, whereas a typical venture fund expects more than 60% of its investments to be total write-offs. Yet venture capitalists exceed the returns earned by public companies for one simple reason — they fail very fast and very cheaply.

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Progress starts from finding and capturing new markets, and recognizing how different they are from established ones. By embracing uncertainty, demanding bold ideas, and realizing how little they understand about how new ventures will fare, big companies can put that $1 trillion to use. They can give entrepreneurs a run for their money. This would cause some headaches for venture capitalists but make both customers and the national economy much better off.

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To read the complete article, please click here.

Stephen Wunker is the author of Capturing New Markets: How Smart Companies Create Opportunities That Others Don’t (McGraw-Hill, June, 2011).