What we eventually learned from Jeff Bezos, Square, Bank of Italy, IKEA and Southwest Airlines to form our own ‘Innovation Stack’.

by Richard Walsh‍

‘Aha’ moments are usually riddled with hindsight bias, and fabrication, but this one was real. 

It was early 2022 and my co-founders and I were sitting in our investment bank's offices rehearsing our management presentation with our team of advisers and current investors. One of them asked us, "Should we care that [unnamed competitor] is going to have access to the data room?" This was a fair question, with a fast-follow, "What information should we prevent them from seeing?" Undoubtedly, these types of questions are commonplace in any sell-side mandate. 

The initial reaction is to say, 'Oh yeah, for sure, keep them out!' But, when pressed on what information to limit, it struck me that I had no idea. Most of our projects are, one way or another, in the public domain. Our developer relationships are no secret. Our entire team is on LinkedIn. Most of our competitors use similar contracts, be it for site control, EPC or revenue agreements.  By then, we certainly had the reputation of not being the highest bidder, but hopefully a fast, fair, and value-adding (humblebrag!) partner.  

At that time, I'm sure we ended up withholding some information, as private equity and infrastructure investors are thorough and like to cover all their bases. But our response was ultimately, “Who cares, show them everything”. Part of it was surely bravado and our confidence in the strength of our relationships with our customers, partners, and employees; but we were also frankly unsure of what exactly to withhold and why. 

We knew our business was objectively successful; we knew we worked hard, had a fantastic team, a massive network, unmatched experience, and industry expertise built over more than a decade, and a well-diversified, high-quality portfolio of projects (humblebrag #2!). But, interestingly, we still couldn't voice our differentiator or secret sauce.  

Well, that has since changed, thanks to what we have learned since that revelatory moment and more than a few folks along the way. 

JEFF 

Jeff Bezos, heard of him? Unfortunately, Jeff and I still haven't met, but he has shared such a multitude of nuggets in his annual shareholder letters, it feels like we're best friends. Perhaps our favorite nugget at Madison is this amazing quote about Amazon that really struck a chord with us the first time reading it:

‍“We don’t have a single big advantage, so we have to weave a rope of many small advantages.”

Us, too, JB! 

Bam, that was it for us, too. One of my co-founders and partners, Jack (a big baseball fan and a surefire bet to show you his Red Sox wallet when asked where he grew up), likes to use the phrase 'bunts and singles' to describe our business. 

Since the beginning, we had identified closely to the concept of stacking up bunts and singles (in lieu of home runs and strikeouts). Now, thanks to my pal Jeff, we were thinking of it as weaving the rope of small advantages. Then, to tie a bow around it, our CRO Cam subsequently added 'big wins'. Ta-dah! We were left with small advantages. BIG WINS. A step in the right direction to be sure, but this still didn't describe our moat or special sauce. 

JIM

So now, fast-forward to a treadmill at a gym near our office in New York. I'm sweating profusely, while listening to the Invest Like the Best podcast and I hear the host, Patrick O'Shaughnessy mention a book called the Innovation Stack: "There's this great book called ‘Innovation Stack’ by one of the founders of Square, where the whole idea of Square's eventual moat was all these small things that are built on top of each other, and then the chain of innovation is itself, the competitive advantage…"

I hit pause on the treadmill, grabbed my phone, and a few clicks later I had ordered the book, which arrived the next day (we're coming full circle!). And finally, after reading the book, we had a complete answer. Our moat is a series of small advantages, resulting in big wins, and together known as an innovation stack! 

You might be asking, what exactly is an innovation stack? According to Square co-founder and author of ‘The Innovation Stack’ Jim McKelvey:

"It's a problem/solution/problem chain that continues until eventually one of two things happens: either you fail to solve a problem and die, or you succeed in solving all the problems with a collection of both interlocking and independent innovation. This successful collection is what I call an Innovation Stack."

It's the reason why good start-up advice is to 'just get started' and that 'right feels early.' Of the four companies Jim discusses—Bank of Italy (which eventually became BofA), IKEA, Southwest Airlines and his own, Square—none of them could have communicated or predicted what their innovation stack was going to be prior to it being in place.

BANK OF ITALY

A.P. Giannini wasn't the obvious founder of a bank that would transform the industry and give us the holistic banking model that we know today. He came from a poor farming family and tragically witnessed his father being murdered over $1—while worth more in the 1800s, his death was no less tragic or ridiculous. This experience inspired him to provide banking to 'the little fellow' and to avail banking to women. His innovation stack continued with low rates, a direct sales force and consumer advertising to inform the public that banking—with low minimums, simplified underwriting, and multilingual tellers—was now available to all classes of people. The Bank of Italy had open floor plans, expanded hours, offered new products like home mortgages, auto loans and installment credit, and began to expand rapidly to other markets opening new banks all while maintaining a distributed ownership model that gave tiny amounts of the company's stock to numerous people. Giannini’s innovations and pioneering leadership changed the banking industry and customer experience forever.

IKEA 

Ingvar Kamprad also didn't fit the mold of an innovative founder. The genius behind IKEA started his career selling matchboxes and then copying his other mail-order competition until he finally landed on selling furniture. His competitors quickly got wind of this and kicked him out of the market by banning him from furniture trade fairs. He responded cleverly by renting space near the fairs and giving future customers the opportunity to touch and feel the furniture and see it for themselves. This was the first step of IKEA's innovation stack and is still alive and well today.  

Originally, IKEA wasn't just kicked out of furniture fairs in Sweden, they also weren't allowed to manufacture furniture in their home country. This forced them to go overseas where labor was cheaper, and the natural resources were of better quality. Because the shipping costs were high, they had to knock down their furniture, implement interchangeable parts, and ultimately ask customers to assemble their own furniture. This seemed crazy at the time, but resulted in what is now known as the 'IKEA effect' coined by Daniel Mochon of Yale, and Dan Ariely of Duke, which is a cognitive bias in which consumers place a disproportionately high value on products they partially created. All of this led to lower prices, while creating a unique in-person experience at their showrooms filled with artfully designed winding paths, food and childcare. IKEA is still humming today and is thought to be one of the most profitable private companies in the world. 

SOUTHWEST AIRLINES

At Southwest Airlines, Herb Kelleher believed he was competing not with other airlines but with other means of transportation. He was known for asking his team, What are we competing against, not who? This led to many strategic choices, which at the time seemed unconventional, but from a first principles view and the benefit of hindsight, make a lot of sense. They only flew one type of aircraft, which meant their pilots and crews were well-versed on their entire fleet and could swap in and out of roles if needed. They didn't offer assigned seats, classes of seats or meals on planes. Planes only make money when they are in the air and Southwest wanted to do everything they could to expedite turnaround times and have their assets making money. They put their employees first, knowing that if their employees were happy then their customers were happy. And if their customers were happy, their shareholders would be happy. And finally, they didn't take themselves too seriously and had a lot of fun along the way!

The good news for those with existing innovation stacks is that what makes an innovation stack hard to predict, also makes them hard to copy. As Southwest Airlines former CEO Herb Kelleher said when addressing the many failed copycats during his tenure as CEO, "They all took one thing out of twenty and said, 'This is what is going to make us the next Southwest,' but actually it was our holistic mixture." 

MADISON ENERGY INFRASTRUCTURE

So, like the Bank of Italy, Southwest Airlines, Square and several other successful companies, our moat at Madison doesn't lie in some single secret ingredient, patent, software code or distribution network. It is, to quote Luke Wilson’s character in the classic movie Old School "really a combination of things." And this combination of things, or innovation stack, has atemporal nature to it, making it both interlocking and independent. 

At Madison, we started in 2019 by promising our partners certainty, speed and trust and providing them with access to capital and a team to execute projects in an efficient, reliable manner. Today, we continue to work with partners across North America and have expanded our team to add expertise in real estate, engineering, legal, marketing, and capital markets. We grind day in and day out to raise and structure the best financing with the most flexible capital partners to ensure we can close fast with rates that are attractive to our customers and partners. And we’ve continued to grow and evolve. Last year, we launched Accel-Dev to provide early-stage capital to our current partners and to seed the next wave of partners in new and promising markets. 

Today, we are working directly with leading businesses and organizations to help them manage complex, multi-site portfolios and dynamic energy loads and to transform ambitious sustainability goals into reality. We are prioritizing our clients above all else and assisting them across the clean energy infrastructure sector with resiliency, sustainability, and budget certainty by offering solutions in areas like onsite solar and energy storage, community solar, and with large, offsite projects. We are investing and inventing on behalf of our customers and partners using best-in-class digital tools and a tech-forward approach to get there faster. 

We made two acquisitions over the past year—Pro-Tech and Sun TribeSolar’s C&I team—to better serve our clients. Our team can now take a project from concept to operation thanks to our in-house construction team. We’re investing heavily in artificial intelligence and digital solutions with help from EQT’s digital and data science team, and we recently hired top talent from SpaceX and McKinsey to grow this critical part of our business. Most importantly, our people show up every day and work hard because they care. They care about our customers, our partners, our mission, our values, and each other. And they know that the work is important and that it’s supposed to be hard (and fun!).  

Together, these bunts and singles and small advantages have amassed into what we know is a big win. We have created an innovation stack resulting in a modern clean infrastructure ecosystem that's on a mission to deliver operational value, certainty, and sustainability to leading organizations and communities. It's a blast stacking up these innovations with our fantastic team at Madison and is something I hope we can do together for a long time to come.

Thanks for reading and good luck with your own stack!

PS -Jeff, I hope you read this and if you'd like to chat, I can be reached at rwalsh@madisonei.com.