Building Startups for Corporations – 5 lessons
In the digital transformation era more and more companies, including those from traditional industries, are searching for new sources of growth that exploit new technologies and go beyond their core business. To do so, they seek partnerships with or try to acquire high-tech startups in order to use them as a platform to explore the digital world and create new business models.
That’s why the sportswear giant Under Armour bought Endomondo and why Orange acquired Deezer. Often, if there are no attractive acquisition targets, many big companies go even further, deciding to build new tech-businesses on their own. That was the case with Amazon Cloud Services, CISCO’s Nuova Systems, Microsoft Surface and Coca Cola’s Wonolo or The Hivery.
INNOVATIKA has a long history of helping corporations build new products and businesses. We also have a track record of launching our own startups including iCanPilot, a digital strategy toolkit, and The Heart – European Center for Corporate-Startup Collaboration. These experiences have provided our team, including myself, with plenty of opportunities to learn what to do and what to avoid when building new businesses, especially in the corporate environment. Below, you can find a handful of lessons I’ve learned while walking that path
1. Find a big problem and solve it many times better than current solutions
The key reason for startup failures is a lack of what famous startup guru Steve Blank called “a product-market fit”. This means that there is not enough regular product users to make your business model viable. In most cases, the reason for this is twofold. Either you haven’t targeted a problem which is significant to your customer segment, or the product you offer doesn’t provide enough value to convince customers to switch from what they already use.
Corporate product managers often believe that creating a complex “swiss army knife-type product” in which multiple features, taken separately, are only 10-20% better than the competition. This approach works quite well in industries where a company has a strong presence and a proven product track record (smartphones, cars etc.) but it does the opposite in a scenario when new corporate ventures enter unknown areas of new technologies, industries or markets. My experience has shown that whenever a corporate venture starts with a value proposition which is not unique or strong enough, it won’t go beyond early prototype testing.
What to do then?
Firstly, find one customer problem which is painful and frequent enough to create market potential. Secondly, build a solution that is multiple times better at solving that problem than the existing alternatives. Thanks to reusable rockets, Elon Musk’s Space X has reduced the costs of launching a satellite to nearly one quarter of that achieved by national space agencies. In 2008, Spotify brilliantly addressed the problem of affordable access to legal music. Through its streaming service, it provided millions of songs for a couple of dollars a month – cheaper than the price of one audio CD. These massive differentiating benefits were so appealing that customers wanted to take a risk and try something which was totally new from their perspective. So before starting a new venture for your company, ask yourself if the solution you are proposing has the potential to be 2x, 3x or even 10x better than your competitors in terms of the key benefit it offers to the customer. Be brutally honest with yourself. If your idea is only slightly better than the existing competition, even if it is so in many areas, you should probably discard it. Otherwise, you’ll end up spending huge sums on marketing, trying to convince customers to switch from what they already know to something totally new. Soon, you might discover that your competitor has just introduced a new version of the product that is better than your solution. So aim high, look for the problems that keep your customers awake at night and design solutions that can bring about a huge change in their lives.
“Is your solution many times better than the competition in a key dimension?” – Peter Thiel
2. Be patient for growth
In a typical corporate setup there is huge pressure for rapid growth, big volumes and substantial market shares. Since these expectations are legitimate when you introduce a new version of your core product, applying it to the startup building process could lead to frustration and disappointment. When you build a new digital venture it takes time to validate and constantly change its business model, searching for the desired product/market fit. Statistically, successful tech startups take off between their 2nd and 3rd year of existence. This was the case with Airbnb, Facebook and many others.
The good news is that if you are patient, your growth could be exponential. Bear in mind the hockey-stick curve while planning revenues from new tech venture and properly manage the expectations of your CEO and CFO.
3. Do it through a separate entity
Corporations, by their nature, are about growing and protecting their core business. In contrast, startups are about searching for a product/market fit, pivoting when necessary and moving forward quickly. The worst thing is when you try to combine these two realities. When it happens?
- When you order your most experienced people or high potentials to spent “part of their working time” on the startup project, you can be 99 % sure that after an initial wave of enthusiasm the startup will lose their hearts and minds to the pull of the core business. This only makes sense, since that’s where their regular KPIs, bonuses, and appraisals come from. We have often faced this challenge in our corporate–startup incubator projects. The corporate teams didn’t have enough time and resources to focus on the new venture, so we needed to strongly support them with our people.
- When your managers are afraid that the new venture could threaten your core business. Remember the Kodak phenomenon. When, in 1975, Steve Sasson presented the first digital camera to the CEO of Kodak, he heard, “It’s cute but don’t show it to anyone”. Thirty years later Kodak lost the majority of its business, having been disrupted by digital camera industry.
- When you engage your core-business sales, marketing and IT departments. Instead of focusing on testing your value proposition on the market, you will find yourself in countless long-lasting debates: “Will this new business comply with our internal policies?”, “Will it spoil the brand?”, “Will it be compatible with our IT systems?” Building startups, you definitely shouldn’t answer these questions before you answer the most important one: “Am I able to generate a solid base of happy customers, that want to use my product, pay for it and recommend it to others?”
To avoid this internal, corporation vs startup fight you should separate these two entities. Some practical ways to do so are as follows:
1. Field a separate team. If you do not believe that the new venture is worth 100 % of their time, discard the idea. You do not need an army of people. From our experience, a 2-3 person “startup commando squad” is enough in the early validation stage.
2. Make the startup team leader accountable only to the CEO or new venture officer. This person should have an internal “venture investor role” to fund further stages of startup development.
3. Empower the startup leader to use external resources (marketing agencies, software houses, design studios).
4. Move the startup team away from mother-company facilities. Put them in an entrepreneurial environment. Tech-oriented coworking spaces or incubators are perfect places to do so.
5. Set up a separate legal entity as soon as possible.
4. Find the right people for the right incentives
Typical corporate managers are trained to excel at operating on familiar ground, avoiding risk. They seek security, learning opportunities, good salaries and a work-llfe balance. If you want to build a startup, you need another breed of people: entrepreneurs who are passionate about the domain they are building the business for. They love freedom (do not try to imprison them in regular corporate structures) but will be willing to work hard, in conditions of extreme uncertainty . They should be experts in Lean Startup and Design Thinking methods. As for the incentives: a hefty salary and corporate benefits wouldn’t convince them. What they want is equity share. Unless you are Google, Facebook, etc. you could struggle to find these kind of people in corporate open spaces. The best question you can ask yourself when hiring a corporate startup leader internally is: “ Which of my high potentials are likely to leave my company to set up their own businesses in the next 1-2 years?” Another good option is hiring entrepreneurs from outside (make sure your company is visible in the local startup ecosystem) or co-creating a startup with a company-building firm.
5. Manage the risk
Statistically, only 1 out of 10 startups achieve success in terms of reaching a massive scale, getting an IPO or being the target of a significant acquisition. Although we‘ve learned a lot about the startup lifecycle in last 10 years, the risk of failure Is still strong. And, by definition, the typical corporation hates risk. The good news is that you can do a lot to mitigate the risk of possible failure and alleviate the pain when it does occur.
- Co-create your new business with customers from the very beginning. Get out of the building as soon as you have an initial vision for your product. Before building anything, confirm that your target customers really have the problem you’ve assumed, and that this problem is big enough.
- Don’t burn too much funds to early. Implement a venture capital approach and fund every stage of the startup development separately, based on the results of the former stage. From our experience, 50-200 K USD is enough to successfully validate a customer problem and the product concept in most cases. Building and testing a digital Minimal Viable Product requires 200-500 K USD, depending on software complexity, the technologies used, costs of initial sales and the marketing campaign. Millions of dollars should be unleashed only when you have clear evidence that there is a strong demand for your product and that the scaling-up stage is imminent.
- Share risk with others – convince VCs or company-building firms to share the costs of new ventures. The fact that a big, established company wants to dedicate its funds and resources to building a new business could be a strong reason to believe it is worth their attention.
- Do your homework in the startup scouting field. There is a huge possibility that, under the corporate radar, a small team of passionate entrepreneurs is developing an idea similar to yours. Try to find them through the local startup ecosystem and check if they are open to a strategic partnership or even an acquisition/acquihire option. Even if they are not, you will learn a lot about the topic by talking with them.