The $3.1 Trillion Innovation Paradox: When Buying Beats Building (and Why That's Wrong)
Why Your Brain Loves M&A More Than Innovation: A Founder's View of Corporate Psychology
Here's a number that will blow your mind: in 2023, companies spent $3.1 trillion on M&A compared to just $1.8 trillion on R&D. That's corporate leaders voting with their dollars, essentially saying "we'd rather buy innovation than create it."
Seems logical, right? Well, hang on to your spreadsheets, because this is one of those beautifully irrational things that makes my brain tingle. We're about to dive into a psychological paradox that's costing companies trillions – and trust me, it's going to be fun.
At Welltory, I don't have the luxury of throwing money at this problem. When you're building a super health app, you can't just be "pretty good" at a few things – you need to be in the top 3 globally for every major feature. Heart rate variability analysis? Top 3. Sleep analysis? Top 3. Blood pressure monitoring? You guessed it. (And yes, I'm only listing the ones where I'm absolutely certain we're up there). So I've had to figure out how to create innovations at scale, whether my brain likes it or not. My brain loves it. But I am a founder, my brain should work like this.
So, let’s dig into the problem. Why CEO’s prefer M&A with 70-90% failure rate instead of internal R&D with 40-50% failure rate?
CEO's Brain Loves M&A More
Back in 1979, Kahneman and Tversky discovered something fascinating: our brains feel losses 2.5 times more strongly than equivalent gains. Fast forward to today, and this creates a hilarious paradox in corporate boardrooms: executives will see an innovation project with a 70% chance of success as riskier than an M&A deal with a 50% chance. Why? Because if your innovation fails, poof – money gone. If your merger fails, hey, at least you've got some assets to show for it. The logic is about as solid as a chocolate teapot, but here we are.
But wait, it gets better. Ever noticed how developers would rather die than use someone else's code? For them, building from scratch feels safer than integrating a ready-made solution. Now flip that around: for CEOs who haven't innovated in years, buying a company feels way safer than creating something new. Same psychology, different comfort zone.
And here's where neuroscience gets really juicy. When a CEO thinks about M&A, their brain's pleasure centers light up like a Christmas tree (technically, it's the ventral striatum, but "Christmas tree" is more fun) [Frontiers in Psychology, 2021]. It's literally giving them a tiny hit of dopamine just thinking about that next acquisition. Meanwhile, thinking about innovation activates their brain's anxiety centers. It's like their neural circuits are screaming "Danger! Danger! Original thinking ahead!"
The Bonus System: Or How to Make Sure Nobody Innovates Ever
Let me throw some more numbers at you from McKinsey's 2023 research:
- Only 16% of companies tie M&A bonuses to whether the deal actually worked (shocking, I know)
- CEOs get a 2-4% salary bump just for growing through M&A, even if it's a disaster
- Increase your R&D budget by 20%? Watch your bonus shrink by 15%. Because apparently, investing in the future is bad?
But here's what really fries my circuits: the neuroscience shows that our brains process quick rewards totally differently from long-term benefits. Quick rewards? Full party mode in your ventral striatum. Long-term benefits? Your prefrontal cortex barely shrugs.
Let me show you what this looks like in real life. Here's how long it takes to create a real innovation at Welltory:
1. Q1: "Hey, look, everyone's getting glucose monitors! Let's collect that data!"
2. Q2-Q3: "Cool, now let's figure out how to get quality data without annoying our users."
3. Q4: Scientists finally get to play with the data. If we're lucky, they come up with something brilliant.
4. Next year Q1: Test it with our brave early adopters
5. Q2: Design time! Make it beautiful AND usable
6. Q3: Launch to everyone (fingers crossed)
7. Q4: Finally see if it actually worked
Try fitting that into your annual bonus cycle. Spoiler alert: you can't. That's why we ditched OKRs for our innovation teams. Now we just look at results when they happen, regardless of when the fiscal year ends. Revolutionary, I know.
One more time:
CEOs get paid for M&A despite its success with huge bonuses.
The annual bonus system kills the motivation to launch risky R&D projects.
If you have OKR and annual bonuses - it’s hard to be innovative.
Why Specialists Kill Innovation (Sorry, Not Sorry)
Here's another corporate innovation killer: specialization. The bigger the company gets, the more specialized everyone becomes. There's actually fascinating research about this [Strategic Management Journal, 2023] – hiring super-specialists might speed up individual processes, but it kills innovation scale.
But let’s make next step and think about teams’ specialization.
If your team only knows about one screen in your app, how the heck are they supposed to revolutionize the whole product? They can't! It's like trying to paint the Mona Lisa while only looking at her left eyebrow.
The more information is available to the team, the better.
Here's what innovation really needs:
Generalists (people who aren't afraid to dive into adjacent fields) [HBR, 2020] and diverse teams of people with different backgrounds [UNESP Research, 2023].
A mission big enough to force them to understand the whole picture - technical, user, and business context.
Most breakthroughs happen at the intersection of different knowledge domains, when a smart specialist ventures into an unfamiliar territory and looks at it with fresh eyes.
I spend half my time being human glue, connecting teams and contexts. It's gotten so ridiculous that we're now creating mandatory knowledge standards for product folks, designers, and tech leads.
Yes, I want our designers to understand architecture and our architects to get customer psychology. Call me crazy, but I'm betting this investment will pay off big time.
The Psychological Safety Myth That's Driving Me Nuts
You know that Google's Project Aristotle thing? Where they tried to prove psychological safety beats talent and resources as the key to innovation success?
Well, it's gotten so blown out of proportion that now everyone's preaching this "don't be afraid to fail, don't fear mistakes" gospel. What a load of nonsense.
Here's the truth: Failure needs to hurt enough that people actually want to avoid it. Mistakes should come with enough consequences that people try their damned hardest not to make them.
Yes, team dynamics and psychological climate matter. But you know what matters more? Taking on big, scary goals and owning them completely.
The true story about innovation & pressure:
We ran a fascinating experiment last year. We challenged one of our teams to "get us into the top 3 best sleep apps for Apple Watch." The success metric was crystal clear: users who have both our app and the world's best sleep apps should actively choose to use our sleep analysis feature - which would prove we're at least as good as the competition.
The team's first approach was to play it safe. They analyzed competitor features and decided to start by copying the ones most praised in user reviews. Their logic was: "Let's build the basic foundation first, then think about how to make it better."
When they presented this approach, I shared a startup analogy with them: "Imagine a founder pitching to an investor: 'I want to build an Asana competitor - the world's best task tracker. Here's my approach: I'll build a website, add registration, team management, payment system, billing, a standard task and project database like everyone else has, plus migration tools from Asana, Trello, and Jira.'"
"The investor would ask: 'Wait, what's your big idea? What makes you unique? What exactly am I investing in?' And the founder replies: 'Oh, that's the next phase. I'll think about it later.'"
So my response to the team was: "No way, guys. Until you have a real idea about how to make something SIGNIFICANTLY better than competitors - not just a 'better product' strategy - you have no business working on ancillary features. Go back and think harder."
This was pressure. An ambitious goal with no escape route. To be honest, the team was really uncomfortable when we backed them into this corner and forced them to innovate. There was definitely no warm fuzzy feeling of psychological safety at that moment (though we never threatened to fire them if they couldn't figure it out). And guess what? When faced with no alternative but to innovate, they delivered. They created our amazing "sleep wave" feature that actually teaches people how to sleep better. The cool part was that they were sure that they did it even before launch. Such a big difference it was. And they were happy.
Nothing can beat the happiness of creating something people love.
The Science Behind Why This Actually Worked
1. No-choice heuristic: When your brain has no escape route, it actually starts solving the problem
2. Yerkes-Dodson law: Turns out moderate stress is great for creativity. Too little stress = no motivation. Too much = panic. You want that Goldilocks zone.
3. Basic brain economics: Your brain is lazy by default (sorry, but it's true). You need to wake up that noradrenergic system to get the frontal cortex looking for new connections.
So Maybe There's Hope for Corporate Innovation?
Maybe if we start acknowledging human nature instead of fighting it, we might actually get better at innovation?
For starters, boards should stop paying CEO bonuses for M&A deals that don't deliver results.
And CEOs need to remember that R&D isn't doomed to fail if you do it right - in fact, it can have a way bigger impact on your business than M&A.
As for top managers and teams responsible for innovation - stop trying to motivate them with quarterly or annual bonuses. Reward them for success, yes, but make it substantial and tied to actual results.
But honestly, it's not even about the rewards. Short-term goals make people crazy - they automatically treat urgent things as important things. Plus, people always think $100 today is better than $200 tomorrow. That's why you absolutely CANNOT give them short-term bonuses if you want them thinking long-term. They're already fighting hyperbolic discounting of future successes in their heads, plus the fact that our brains see the future as an abstraction.
Companies need to realize that management systems, rewards, hiring practices, and even culture should be different for teams working with different levels of uncertainty. You can't use the same yardstick for a growth team running 100 experiments a month and an innovation team that's been working on one project for three months with no guarantee of success.
From what I've seen in our practice at Welltory, here are the key success factors for innovation teams:
Diverse composition: Different people, different perspectives, different skills. But preferably generalists - people who aren't afraid to venture into adjacent fields. Here's an interesting bit: innovations often come from NON-professionals. The kinds of people who'd never get hired to innovate in a corporate setting because their resumes don't fit. That's why our company looks different - we have way more people with multiple degrees than usual, AND way more people with no degrees at all. Why? Because we've been selecting people based on complex test tasks that check for unconventional thinking, without even looking at resumes.
Ambitious but crystal-clear goals. Goals so tangible people can literally visualize success like a movie in their heads. And make them non-negotiable - no hiding in other activities or alternative objectives.
Autonomy WITH support. Teams need freedom, time, autonomy, and faith in their abilities. You can push them hard and set ambitious goals, but they need to feel your belief in them. Your support should be as tangible as your intolerance for mediocrity.
Knowledge and broad context. Every team member needs to understand the key aspects of the business, market, users, product, and technology. Don't be shy about teaching designers about architecture, telling architects about customer development results, or explaining the science to product managers. Innovation happens at the intersection of contexts, usually when a specialist dares to dive deep into another field. It's like a reverse Dunning-Kruger effect - specialists in their field often underestimate simple or unconventional solutions.
I'm hoping to expand our innovation teams this year and double-check if I'm getting all this right, or if there are more secrets to uncover. Though who am I kidding - of course there are. That's what makes the future exciting.
What innovation insights and secrets have you discovered in your practice?