Successful entrepreneurs are not only able to create a product or service that fits an unmet market need – but they also seem to have a knack for unleashing the creativity of their team. In my work with some 60+ companies as an angel, board member, venture capitalist or “mentor”, I’ve seen some very innovative companies – and most of them were innovative because the leader(s) or Founders put in some brain-power time to determine early-on what they could do to nurture creativity within the company.

Here are 10 ways that the most successful entrepreneurs created a truly innovative environment:

1) Foster an environment of experimentation and risk-taking – the great ones ensure that employees feel that they can experiment with risk – particularly in marketing, product development, and relationship management areas. I recall one company I was on the Board of that took the risk of trying out a new form of banner advertisement that incorporated e-commerce transactions right into the banner ad. Twenty-four months after launching, the company was purchased for $100M + and the entrepreneur who came up with the idea of e-com banner was handsomely rewarded.

2) Condition the team to a “Freedom to Fail” attitude – a cousin to the idea of risk taking is “freedom to fail” . Leaders who allow their team to sometimes try things, knowing that they might fail but also knowing that the team will learn something from attempting a new idea. This creates an environment where the team “fearlessly” approaches new markets and relationships without “sweating the small stuff.” (see Innovation Sparks, 9/24 and 10/2/09 entries for several great company examples)

3) Give control and responsibility to your “Creatives” – by creatives I include engineers, artists, editors – depends on the type of business. A great creative leader allows his creative team to have some control over the quality of their work and the output – rather than have to cater to the bureaucracy of an organization. One of the most famous examples of this was Steve Job’s Macintosh team. A more modern example are the scientific teams at Genentech.

4) Build a great physical environment –setting up an environment properly can ensure that employees have amenities to assist in their creative mindset. For example , IDEO’s campus includes a wide variety of playful rooms for client work, several well-stocked cafeterias (stocked with free food) and outdoor meetings spaces.  Google’s office complex (the “GooglePlex”) is run like a university campus and is so nurturing that an unconfirmed rumor has it that a recent summer intern spent the entire summer eat, slept, worked and recreated at Google ….and no one at the company realized that he used the GooglePlex as his home for 10 weeks.

5) Set up both intrinsic and extrinsic rewards for your employees – physical environment and other “perks” are extrinsic rewards (along with base pay and bonus/commission) that can, of course be an effective way of motivating creativity within the company. But truly innovative leaders also look for a variety of intrinsic rewards to give employees – such as public recognition, control over . At Netflix, for example, workers compete in an annual Waffle breakfast event – and take great pride in creating the winning recipe and eat-in each year…over 30 teams competed this past year.

6) Introduce stress into the team and key individuals – Impose deadlines, challenges and “stretch” opportunities for your creative teams. If the competition in the market doesn’t do it, it’s up to you to insert some stress into the system. Philosopher and entrepreneur, Renn Zaphiropoulos, believes that creativy cannot exist without some personal stress. See his video clip for more clarity on this concept…

7) Building a culture of communication, collaboration and “smart peers” – in my class at UC Berkeley, students love the Harvard Business Review article on “How Pixar Fosters Collective Creativity” by Pixar CEO, Ed Catmut. In the article,  Catmut describes the process by which teams at Pixar handle peer-driven problem-solving and creation of the next big hit movie.  The company creates internal and cross-company networks of peers who communicate directly over problems, work in a learning environment and and collaborate on solving complex production and creative issues.  I noticed a similar culture at The Active Network (San Diego), Facebook, Google, and many other young companies.

Set up internal processes for problem resolution and opportunity generation: although it may seem counter-intuitive that a “process” is needed to encourage the freedom to create – but in start-up companies the key to moving the business forward is being able to solve problems. Teams that have a process in working together to solve problems, can carry forward the momentum of the company. The best ideas come from intersections among departments, cultures, customer/business and more. “Intersectional innovation” borrows from one field and applies it in a new field (a great book on this is Frans Johansson’s The Medici Effect). One of the best-known processes for problem solving was developed by Sid Parnes at State University of Buffalo, NY – where the “Creative Problem Solving Institute” is located.

9) Envision yourself as a metaphor --– great leaders envision their role metaphorically as “shepherd”, “gardener”, or “producer”. S/he may not realize the metaphor until much later (although more experienced serial entrepreneurs may realize faster than others). The role they’ve playing in the success of the company was one of “herding” the sheep toward the right goals and projects, and “enabling/nurturing” the creative skills of the engineering/artistic team to create great products.

10) Learn to Balance and Embrace Opposites – Great managers are able to harness the power of opposites, such as success/failure, autonomy/control, or stress/fun. More on this in my next blog entry!