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3 Selecting the future with big questions
From multinational corporations to small startups, companies from across many different ecosystems are adopting new business practices to meet innovation challenges. But they all start the same way: asking profound questions about the future of a particular industry or sector. The examples given in this chapter are in no way meant to be an exhaustive list of such questions. Instead, they provide insight into how successful leaders and companies have identified opportunities for innovation that could truly expand their value frontier.
Successful businesses are usually in markets saturated with competitors, where value comes from gaining better margins through higher prices and greater cost efficiencies. FedEx gains better margins by charging a little more than the competition while implementing cost efficiencies in their vast fleet of trucks and systems to monitor the speed of their deliveries. Once business leaders have exhausted their options for better margins, they seek new strategies for expanding their products and services into adjacent markets. Starbucks added meals to go, like hot breakfast sandwiches, to their original coffee menu. But leaders are usually cautious about reinventing their core business by going into entirely new markets, because it is considered riskier, both on the upside and the downside.
However, if you look at your business risks over a longer horizon, like five to ten years out, you will see that big intractable challenges, like climate change, resource scarcity, and social dynamism are not going away. They are practically guaranteed to continue presenting mounting risks and opportunities for your business. Future first leaders can generate enormous value by getting out ahead of these challenges, rather than losing value by becoming laggards in their industry. They can manage real and certain risks to their business, and be prepared to invent or reinvent their core business, rather than being caught by surprise. Future first leaders are constantly future-proofing their business by asking big questions.
What is the future of investing?
The first chapter introduced a huge challenge in traditional business accounting. By labeling side effects of commercial activity like pollution or income inequality, this accounting magically disappears them from the spreadsheet. Over the past several decades, a growing number of investors have innovated new ways to include these externalities in their bottom line. Once these challenges are identified and assigned a value, companies are encouraged to pursue novel efforts to mitigate or correct them.
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Nancy Pfund and double bottom line investing
In 2001 tech investment bank Hambrecht and Quist’s (H&Q) CEO, Dan Case, asked managing director Nancy Pfund to move from overseeing venture capital to managing the company’s philanthropy, and then to developing a community development VC fund at H&Q, which was designed to invest in the local community as a way to create new companies and develop more local jobs. At the time, community groups in the region were disappointed that Silicon Valley growth didn’t give jobs to the lower income neighborhoods of the local community. “We looked at job creation, place, sustainability, quality of jobs, community engagement,” said Pfund. “We developed several metrics and also worked with the Ford Foundation on crafting a formal approach.” With one foot in philanthropy and the other firmly in the day-to-day for-profit venture activities, Pfund became an early creator of a new investment strategy.
Philanthropy itself was nothing new. But, often, it remained divided from business practices. Probably the best known example of this contradiction is John D. Rockefeller. The oil baron gave generously throughout his life, notably to African-American Baptist churches and schools; Spelman––the nation’s premier historically African-American female college––is named after Rockefeller’s wife, Laura Spelman Rockefeller. The same man became the wealthiest man in recent history through cutthroat business practices, including crushing competitors and strike busting that, among other incidents, resulted in what became known as the “Ludlow Massacre.” While laws have been created and norms have changed to reduce the severity of these kinds of practices, many corporations today still maintain a firm separation between philanthropy and business practices.
Pfund asked if it was possible to break down the firewall between the two. The result was an early version of what became known as “double bottom line” investing. She established a fund that accounted for both traditional bottom line profit as well as metrics relating to social and environmental impact.
In the late 1990s, H&Q went through a series of acquisitions and mergers with large financial institutions. Partly as a result of these changes, Pfund created the $75 million Bay Area Equity Fund (BAEF) in 2004, eventually spinning it off from JPMorgan. In 2008, she formed DBL Investors––Double Bottom Line––taking the BAEF with her. Her next fund, DBL Equity Fund, was $150 million, and her most recent one, DBL Partners III, is $400 million.
Pfund has been successfully prototyping social impact investing since before it had a name. Like all venture capitalists, she is still looking for companies with the potential to deliver top tier market rate returns. At the center of Pfund’s investment philosophy is also the company’s potential social impact. “We’re always in the back of our mind thinking, ‘What would be the impact? What are the ways we could create impact with this company?’” said Pfund.
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DBL has two definitions of social impact. The most obvious are business models with impact baked in. For example, SolarCity (acquired by Tesla in 2016) could only achieve growth if it expanded the usage of renewable energy––a material net gain for the environment. The company also created thousands of accessible solar installer jobs. A second business model has a social impact that is less obvious. These are companies in which the primary commercial activity does not necessarily create social benefits that are readily apparent. At the same time, the management team is committed to creating double bottom line––not just as traditional philanthropy, but as a way to build competitive advantage.
Streaming music site Pandora, for example, might not appear to be innovating around any social challenges by providing music via the internet. However, the company’s active engagement with local Oakland neighborhoods is part of a strategy to attract talent and build positive community relationships. Pandora’s engagement is important because it points the way for companies from virtually any sector to use double bottom line accounting. Demonstrating that any company can have double bottom line impact is, in fact, part of DBL Partners’ mission. “We really do want to show the world that there are great impact companies that are obvious, but then don’t let any companies off the hook for being capable of designing significant impact, even if it is not as obvious,” said Pfund.
What is the future of social responsibility?
Over the past ten to fifteen years, the internet has flooded us with information about social challenges. We can now easily access enormous amounts of data and research about living conditions in India or ocean acidification’s impact on oyster farms. This situation alone has compelled a new crop of social innovation companies to ask how they can be socially responsible as a baseline before innovating into business models. Typically, these companies provide solutions to big social problems driven by enormous power inequities around the world, like access to healthy affordable food, clean water and sanitation, electricity, and affordable quality education. One advantage these companies enjoy is that the same internet-enabled awareness of the social problems can also prime consumers and investors to get excited about a new solution.
Revolution in the school cafeteria
Kirsten Tobey met Kristin Groos at Haas Business School. Tobey had a background in education and the non-profit world, while Groos had started in investment banking, and the two found a common cause in creating a business that could create a positive impact in education. The result is Revolution Foods, a company that aims to replace less-than-healthy and unappetizing school lunches with healthier, tastier meals.
Tobey and Groos graduated from Haas Business School in 2005 without traditional jobs at investment banks or consulting firms. Instead they had an innovative business plan. By 2005, public awareness about an obesity epidemic in the United States was widespread. One in four American children was obese and one in three children from low-income families was obese. This extra weight was putting kids at much greater risk for diseases like diabetes and heart disease. Revolution Foods committed to solving this big, well-defined social problem with a business solution first. Tobey recalled an early source of inspiration:
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I remember this one moment when we were first starting out. We sat down with a principal of a charter school, and we were trying to figure out if she would consider working with us. And I remember her saying, “please, please don’t let this just be a business school project. The world needs better food for our kids in schools like ours.” And so we began being pulled by this much greater social need, because there is nobody else out there doing this.
Then they came up with an innovative solution: partnering with urban schools to provide healthy affordable kid-friendly meals that were also eligible to receive funding through the federal school meals program. Soon after graduation, they received their first round of venture capitalist funding from Nancy Pfund at DBL Partners, then leading JPMorgan’s BAEF. Since they launched Revolution Foods in 2007, the company has expanded from its beginnings in Oakland to hundreds of schools across the country to the East Coast. They’ve also launched a branded line for grocery stores, making healthy options easy for parents.
Another player in the mission to bring healthy food to school cafeterias is Red Rabbit, headquartered in New York City. Founded by Rhys Powell, Red Rabbit aims to grow and scale into an inspiring example of how healthy food can be done in schools. Powell told me in an interview:
Our primary impact on our community is changing the way or improving the way that the 13,000 kids who eat our food every day see food. And by exposing them to quality made-from-scratch meals every day, we’re impacting how they, and hopefully their families, interact with food. They are then able to make good choices.
What is the future of consumption?
For as far back as most consumers can remember, there has been a general preference for the new. Gifts needed to be straight out of the packaging. Shoes were more exciting in the box, and cars seemed to drive better with that smell of volatile organic compounds. Longevity didn’t matter. We bought cheap goods and replaced them often. In fact, even throwing away those goods, once used, was part of the consumption process. The result was an enormous amount of waste.
Among the large sources of this waste are electronics companies. Despite the companies’ continual, rapid technological innovations, the environmental impact of their devices’ components was not on their radar.
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Ana Arriola, who has worked as a product designer and leader at Apple, Sony, Adobe, and Samsung, explained the old thinking about e-waste to me:
When the first iPhone was coming out, there was nothing about global accountability and manufacturing change, or auditing of sustainable and eco-friendly materials. No one had really thought about going down to the motherboard level and thinking about where the components were sourced from, and what rare minerals they were derived from, or where were they manufactured and was there child labor involved?
This was true even when she worked on the more recent iPhone for the 2.5G and the 3G and the Apple TV initial installations. “No one in my group was talking about it,” she said.
As awareness of these challenges has spread, companies like Apple and Sony have been forced to ask the question: How can we limit the negative environmental impact of consumption of our products? These questions have led to various types of innovation. They have begun to clean up consumption by starting with a cleaner product. Companies now demand access to sustainable materials, recycling, and ethical sourcing of the earth’s minerals and rare motherboard components. Their commitment to, and interest in, sustainable product design is at the heart of these efforts, and the degree to which they can write down the cost of goods used at a large enough scale. Tech companies and their retailers have developed better and more accessible e-recycling programs. Best Buy has disposable yellow bins where you can dump your mobile phone for processing that includes taking out the batteries and separating all the components for resale, recycling, or reuse.
Beyond understanding where the components come from, some companies are innovating around the maintenance of their electronics. In product design today, a growing trend is for more electronics and technology companies to start thinking about how the consumer can easily take apart and remove the components of the board. Or, as Ana said, “if the assembly and construction of the screws can be easily accessed by a ‘mere mortal,’ then they do not have to be sent to a special support technical facility.”
While they represent improvements in what we consume, none of these efforts deals with the central problem of consumption. By always seeking the new, we ultimately equate disposability with status and quality. The result was––and still is––an enormous amount of wasted things, wasted space, and wasted energy. But now some innovators are taking on this challenge.
Julie Wainwright and The RealReal
Nowhere is the hunger for newness more pronounced than in fashion. No matter how well a certain design sells, apparel companies must create a constantly revolving series of styles every season. For mass market consumption, the result is fast fashion: cheap, disposable product.
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Enter Julie Wainwright, a veteran of the dot com era. Wainwright has been an executive at companies since the 1990s. At the tail end of the first tech boom, Wainwright was the CEO of Pets.com, which crashed out spectacularly. Undeterred, Wainwright continued to see value and growth in new ideas.
In 2011, during a conversation with a friend who would never shop on eBay or at any type of consignment store, Wainwright asked herself what a company would have to do to make selling used apparel, fine jewelry, watches, home goods, and art acceptable to consumers of high-end products. Her innovation, The RealReal, exists in a unique niche; it is a retail website that sells consignment luxury items and deals while emphasizing recycling and reusing.
The model for the business is relatively simple. Luxury managers for The RealReal go to private homes and evaluate lightly used high-end goods, from designer jackets to jewelry to furniture and art. The RealReal takes approved items, verifies their authenticity, prices them, puts them on their website, and ships them to buyers around the world. Wainwright said, “By adding authentication and inspection, by experts, we have added real value to the buyer.” And the original owners get 60 to 70 percent of the resale value.
One of the big accelerators of The RealReal’s success has been the partnerships they’ve cultivated with Neiman Marcus and Saks Fifth Avenue. These department stores introduced The RealReal to their big buyer base and endorsed them to consign. It’s straightforward, but the site’s success––it now has more than a million members––is a result of successfully replacing the value people often place on “new” with “real.”
Recycling newspapers, glass, and plastic has, of course, been around for a long time. But there is no equivalent process for most of the apparel and accessories we pile up in our houses. Of her business model innovation, Julie Wainwright said:
People have been buying used things for a long time. Our take is so different, because it is more palatable than buying it in an unregulated market. We treat items with integrity and respect. That is one of our key goals. We are part of changing people’s perceptions. People change their patterns. They stop buying fast fashion and consume based on an item having value. Our whole concept was innovative.
Replicating The RealReal’s model––displacing new purchases with desirable quality-assured used ones––could create a sea change in consumption patterns and the waste they generate. The RealReal has attracted several leading VC firms as investors, including DBL Partners, which specifically valued the social benefit of the circular economy nature of the company as well as its potential for strong returns.
Although it is in a completely different industry, The RealReal’s model has more than a little bit in common with the sharing economy. In the case of Lyft and Uber, people have cars that aren’t being used. Airbnb offers rooms that aren’t being used. While the disruptive social impact of the Uber/Lyft and Airbnb business models have generated negative publicity on social media, especially in cities like San Francisco, the internet can help to monetize all this otherwise wasted capacity.
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What is the future of money?
The story of the invention of the credit card goes like this. In 1949, a businessman named Frank McNamara got the bill for his dinner with an associate at New York’s Major’s Cabin Grill. McNamara realized he had forgotten his wallet and asked: “Why isn’t there an alternative to cash?” McNamara and his partner, Ralph Schneider, started the first credit card––a small, cardboard card. Coined Diners Club, it spread quickly. By 1951, there were 20,000 Diner’s Club cardholders, though it took another decade before the card was made from plastic.1 Whatever the veracity of this origin story, it is irrefutable that consumers are continually transferring more and more of their transactions to non-material and electronic forms beyond what McNamara could have imagined.
Bitcoin, for example, can be used for infinitely small transactions with no transfer fee. Bitcoin’s dispersed ledgers means it is decentralized and very secure. Square’s small attachment allows small businesses to accept credit cards at a fee equal to or less than what traditional credit card companies charge. Instead of any expensive point of sale equipment, retailers just need a smart phone.
How PayPal and M-Pesa don’t show you the money
Another financial innovator, PayPal, also makes it easier for small businesses, individuals, or anyone with an email address to send money electronically, either nationally or internationally, without going through the traditional banking system. PayPal started with the question: How could they innovate around the challenges faced by people who didn’t use or have access to the full range of services offered by traditional banks?
The answer, according to VP of Global Consumer Products and General Manager, Consumer Financial Services and Venmo at PayPal, Joanna Lambert: “Transform financial services so that data can also help us to make transformative products that could change the future for some different constituents.” Beneficiaries include young people who can’t afford credit and are living paycheck to paycheck, and need to smooth out their cash flow.
These non-traditional financial services companies are also redefining the relationships with consumers, and between consumers and businesses, through the introduction of value-based limitations on how they will do business. For example, neither PayPal nor eBay allows consumers to use their sites to buy weapons. In April 2016, PayPal also announced they would stop plans to build a $3.6 million 400-person global operations center in Charlotte, North Carolina after the state instituted a “bathroom ban” that was considered discriminatory toward the LGBT community.2
Another financial innovation, M-Pesa, is targeted at consumers that are even further afield from traditional banking systems; it started out by allowing people in East Africa with no bank accounts to make payments using their cell phone. Cell phone ownership is common in East Africa, even among poorer people. M-Pesa allows small businesses to reduce risk by buying crop or livestock insurance. The demand for this service is huge. Roughly half of Kenya’s financial transactions last year went through M-Pesa. By June 2016, 7 million M-Pesa accounts had been opened by Vodacom in Tanzania, and it has expanded into Afghanistan, South Africa, India, Romania, and Albania.
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What is the future of energy?
To avoid climate disaster, we need to transform our energy usage from fossil fuels to renewables. The obvious responses to this challenge are being led by companies like SolarCity with their push to install renewable sources of energy. But this is only part of the future of energy. There is another aspect to this cleaner future, one often overlooked but every bit as important. Exploring this question begins by asking not just where and what will make our electricity, but how will we transport and store it? We can’t charge and power our cell phones, computers, toasters, and cars without distributing this power. As of today, our means for doing this are limited, inconvenient, and, most importantly, wasteful.
Panasonic’s billion-dollar gamble
Just as Toyota’s CEO asked a fundamental question about the future of his industry, another huge Japanese company is asking: “What is the future of electricity?” Part of Panasonic’s answer comes in the form of the $5 billion battery factory the technology company is partnering to build with Tesla. In some cases, we’ve seen leaders ask profound questions and respond with innovative but relatively small and inexpensive answers, like a hybrid business model or an elegant web platform. This is not one of those occasions. From its price tag to its physical size, nothing about the “gigafactory” is small. When completed, it will be the largest building in the world as measured in physical space, and entirely powered by renewable energy. Instead of agilely innovating around big challenges, Panasonic’s partnership seeks massive economies of scale, which it will combine with new manufacturing processes.
One of the primary consumer products being manufactured in the gigafactory is not actually for powering cars, but is a home battery called the Powerwall. The Powerwall allows homeowners to store their renewable electricity from solar or wind over the course of the day. At night the Powerwall feeds electricity from solar power back into the house. The battery can also help smooth out the gaps in wind production. With cheap enough batteries, renewable energies would suddenly become as reliable and affordable as conventional grid power. Tesla’s investment would also spur growth in, for example, solar array installing or wind turbine manufacturing.
The widespread adoption of cheap energy storage could also provide another answer to questions about the future of electricity. Today our power plants––coal, oil, solar, nuclear––need to produce the amount of electricity needed by customers at any given moment. If they overproduce, they have to get rid of the power somehow. They could, for example, simply convert the electricity to heat and let it burn off safely. One plant in the UK used to release excess electricity by heating a submerged metal plate. The power safely dissipated by warming the water in a lake. But the electricity was wasted.
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The point is that there simply aren’t many good ways to store electricity. Some power plants will use the extra juice to pump water uphill. In this way, the power is stored as potential hydroelectricity. During a usage spike, they can release the water back through a turbine. But an affordable, massive stack of batteries connected to the power plants would be a much more efficient and flexible storage system than dammed water. Instead of powering cameras, Panasonic’s batteries could eliminate the surges and dips in power consumption. Electric waste would be reduced on a national scale. This would both make renewables more attractive and reduce the waste and carbon emissions caused by unnecessarily burning gas or coal.
Massive investment is exactly what battery technology desperately needs. Over the past several decades, many computing technologies receiving substantial private and public funding have grown dramatically. At the same time, funding for research in chemical science and battery technology has been relatively flat, leaving noticeable gaps in the development of electronics. Many wearable technologies still must be plugged in and charged regularly. But there is still not enough funding for innovation around the challenge of affordable battery technology that holds a charge for over a week.
But there is another, somewhat subtler dimension to this massive investment in battery technology: The designs will be open-source. In other words, anyone is allowed to use the battery technology in good faith. Innovators can use the technology as a jumping off point to ask a whole new set of questions about energy––spreading transformation across a whole ecosystem.
What is the future of apparel?
When we think of dirty industries, we tend to think of heavy manufacturing or chemical plants. But an unlikely culprit, apparel, is actually the second most polluting industry in the world. In terms of total toxicity, it is second only to oil––even though apparel is a much smaller industry in terms of revenue. The apparel industry uses enormous quantities of water for dyeing clothes and huge swathes of land for cotton production. Over the past few decades, big brand apparel companies have been forced to contend with labor abuses at their international suppliers’ factories. Now, some are taking on these new sustainability challenges.
Cooking up sustainability in Nike’s innovation kitchen
Nike, the most valuable sports brand and one of the top apparel companies in the world, asked itself how it could make a shoe that wasted less overall material. The result was the flyknit shoe, a product that combines a proprietary high tensile strength thread called “flywire,” which acts as a reinforcing element in the eyelets of shoes, with proprietary yarns that are made from 100 percent recycled PET bottles. The new technology weaves uppers with fewer pieces, resulting in up to an 80 percent reduction in material waste.3 The enormous popularity of the flyknit shoe demonstrated to Nike and the world that they could successfully combine performance and sustainability.
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Noah Murphy-Reinhertz is a designer at Nike, but he also reports to Hannah Jones, the VP of Sustainability. Just as social impact investor Nancy Pfund evaluates companies using the double bottom line of solid financials and potential social impact, Noah has to combine two considerations in sneaker product design. The core business of Nike is to enhance human performance through products. At the same time, the sustainability team is developing tools that they are attempting to get people to use across the whole company. Noah’s question is: How can I bridge these two worlds of sustainability and innovative product design and creation?
Nike’s “innovation kitchen”––the unit where designers can let their fervid imaginations go wild––has produced some answers to Noah’s questions. One of Noah’s responsibilities is communicating the needs of top athletes directly to the designers in the space kitchen. Shortly before I talked to him, Noah had met with long distance runner Galen Rupp.
He’s on his way down to the Olympics. He’s coming off the Olympic trials, so we’re asking him, “Okay, the shoe that we made for you, how does it feel? How does it perform?” We’re also talking to his coach about where it’s working.
In the early 2000s, the team at the innovation kitchen also came up with one of the most revolutionary redesigns of running shoes in the past few decades. Like many innovations, it began with designers going out and talking to coaches. Toby Hatfield heard about a study of Stanford athletes running on grass with no shoes. He took the idea back to Nike’s facilities in Oregon and began running diagnostic tests on bare feet. Designers discovered that bare feet reacted totally differently than with padded running shoes on. It was a more natural stride, the way human feet had evolved for millennia. According to Noah, the innovation kitchen began “reimagining how could the shoe be more like a bare foot as opposed to this heavy duty thing that we put around our feet.” The result was the Nike Free, a shoe with numbered levels of support, ranging from normal padded shoe (number 10) to nearly barefoot (1). The minimalist innovation has been a huge success for Nike.
As the company moves forward, they are creating a different kind of numbered scale: a footwear sustainability index. Each shoe will be scored on its environmental impact, with the scores becoming an important part of every development team’s evaluation of the shoe as well as the shoe’s annual review.
Women’s fashion entrepreneur Eileen Fisher and her team are asking even bigger questions of the industry, like “What is the future of apparel? What should we be in the business of making for people to wear?” They set out a 2020 Vision to transform the company for long-term sustainability, by creating textile manufacturing processes that use less water and fewer toxic materials in fabric dyes. The company also uses mostly organic cotton in their products, further reducing the amount of pollutants in their products.
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What is the future of everything?
Artificial intelligence, space elevators, life extension, archiving all the literature of the world––there is seemingly no limit to the projects that Alphabet, Google’s parent company, will explore. Though virtually no one else has access to the sort of limitless financing that Alphabet provides its moonshot projects, this sort of unbounded questioning is how all leaders will find new challenges and new value frontiers to push.
But even Alphabet has additional criteria before they begin initial funding for innovation challenges. In their case: “Is this a billion-dollar industry? What are the future social and environmental impacts of the project?”
This combination of social and financial questions has resulted in funding a wide variety of experiments.4 A Google contact lens measures the insulin levels of wearers through their tears. Another nanotechnology project with life-saving possibilities is a cancer-detecting pill. Alphabet’s most famous undertaking, the self-driving car, could radically reduce the number of cars on the road while making them operate more efficiently and safely. The Loon Project imagines using weather balloons to float wireless routers, extending internet service to unwired parts of the world. Facebook followed suit by investigating the potential delivery of free wireless to people in developing countries using a series of connected planes that are extremely high up in the atmosphere.
Just as revealing are the projects Alphabet doesn’t pursue. Some ideas are discontinued for practical reasons. The space elevator––a cheaper way to lift people and supplies into orbit––proved impossible until a stronger cable can be built. Early experiments with teleportation also fizzled out after researchers determined that the process violated the laws of physics.
Other queries were rejected for value-based reasons. The hoverboard was too costly relative to societal benefits; it wasn’t going to suddenly encourage people to stop driving. The jetpack was rejected in part because it was too energy-intensive a form of transportation.
These moonshot projects can only be attempted by a huge corporation like Google or Facebook with the ability to finance research that has a high likelihood of never resulting in a useable product or service. But any leader can adopt the same openness to approaching innovation challenges that have a high risk of failure as well as a high upside, if solutions can be delivered. Once she or he finds an opportunity, there are more specific leadership mindset and organizational capabilities that can help deliver innovation. In the next chapter, we will delve into the future first leadership mindset that approaches global challenges as opportunities for innovating new forms of business value.
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Notes
1 Diners Club. The story behind the card. Retrieved from https://www.dinersclubus.com/home/about/dinersclub/story.
2 Soper, S. and Green J. (2016, April 5). PayPal scraps plan to invest $3.6M in North Carolina after anti-LGBT law passes. San Antonio Express-News. Retreived from http://www.expressnews.com/business/national/article/PayPal-scraps-plan-to-invest-3-6M-in-North-7229551.php.
3 Nike. (2013, November 27). How Nike flyknit revolutionized the age-old craft of shoemaking. The Guardian. Retrieved from http://www.theguardian.com sustainable-business/partner-zone-nike1.
4 Karch, M. (2017, February 22) Google X, the secret Google Lab. Lifewire. Retrieved from https://www.lifewire.com/google-x-secret-lab-1616267.