BrazilTips for corporates looking to foster internal startup management
With innovation and agility having become the key tenets of business success in the new economy, larger companies have taken to launching internal startups to make the most of the energy and creativity external startups which have risen to compete with them exude. According to experts from consulting firm The Next Organization, however, a tendency to micro-manage is seeing many companies stifle this potential.
Innovation is becoming very important in an ever faster paced world. The product life cycle of products is becoming shorter and shorter, making effective innovation management more difficult and at the same time more important than ever. When innovations are rapidly following up on each other it is for larger companies difficult to keep up with the pace of which renewal occurs.
One growing way of improving innovation capacities is through looking externally to tap the right skills. This is called corporate venturing. This process sees corporates buy partial or entire stakes in innovative companies, often startups. In recent years, corporate venturing has been on a strong rise. Corporate venturing has according to data from KPMG increased from around 11% of total venture capital activity in 2010 to over 20% this year. At the same time, total value has skyrocketed, increasing from $12 billion to around $65 billion, on the back of a booming venture capital market, at over $120 billion.
Corporate venturing
Despite its bullish current state, there are a few challenges which corporate venturing faces. Acquisitions can be expensive, and it is hard to integrate a startup which has different roots than the acquiring company. This is why in recent years more attention is being given to internal startup management as an asset to drive corporate innovation. Basically, an internal startup is an ordinary startup but initiated within an existing division or company. The advantage is that companies have all the building blocks, which startups require; skilled employees, capital support, intellectual properties (patents), contracts, office spaces and strategically support. Thus, large companies are fully tooled to build their own corporate startups.
One example of the internal startup mechanism is Trip Advisor, which became part of the larger Expedia in 2004. The successful business was later spun off in late 2011, having enjoyed a solid launch, as it disrupted the business model of traditional travel agencies in a unique manner. The widely known digital platform promotes services from hotels, restaurants or other recreation destinations and lets travellers advise each other what to visit – an early example of user-generated content being used in a consumer basis. Several suppliers of travel-accommodations such as Booking.com, Expedia and Hotels.com now offer their services via Tripadvisor’s platform.
With many technological leaders leveraging the tactic, it is unsurprising that another example comes from Google. The company’s internal startup incubator, Area 120, unveiled last year, has to date led to the creation of a number of projects, including a personal stylist app Tailor, a voice messenger Supersonic, and most recently, an app for watching YouTube videos together called Uptime, as well as Appointments, a salon booking tool.
However, similarly to independent startups, many internal startups also fail at a rate of between 50% to up to 90%. The top five reasons startups fail: there is no market need for them, the projects run out of cash, they do not hire the right team, or get outcompeted, and fail due to pricing/cost issues. According to experts from The Next Organization, in discussion with Consultancy.eu, in order for corporates to get startup management right, they need to get three building blocks right.
Internal startup management
The consultants said, “One of the pitfalls of starting an internal startup is the behaviour of the parent company itself. An internal startup must be able to make quick decisions, anticipate rapidly on trends and have the opportunity to make mistakes. However, the parent company finds itself in a different phase of the business life cycle which is characterised by a control focused management style aiming for continuity instead of innovation.”
In this case, the parent company can be seen to focus too much on reporting processes and find it difficult to let go of intertwined interests. This micro-management can impact the potential agility of an internal startup – one of the major pluses of initiating one in the first place – and makes it harder to recover in a fail-fast model in the process. In this case, the best way to control a startup as a parent company is by not doing so, instead considering the startup as an independent company.
“An internal startup must be able to make quick decisions, anticipate rapidly on trends and have the opportunity to make mistakes.”
Following on from this, finding the right person to lead the startup is a crucial aspect of its success. For many firms, it might seem like common sense to recruit for an internal startup internally – however, even the most entrepreneurial and enthusiastic employee looking to pursue a new business idea, they will also company habits. These may well have a negative impact on the internal startup’s success. Behaviours which they might bring on board, which are not always appropriate for startups, include long daily meetings, restraints on marketing budgets, and a focus on detailed and technical aspects of new products and a long time to market principle – further impacting on agility.
Elaborating, the experts stated, “The best way to cope with this dilemma is by appointing the internal entrepreneurial as the responsible person of the internal startup, including a fair share in its (financial) successes. It is therefore advisable for large companies to behave as a formal investor for the internal startup and have clear agreements with the entrepreneur.”
Finally, internal startups face the challenge of being launched into the shadow of the parent company’s reputation. Both positive and negative perceptions of the parent company could inhibit the startup’s potential success. Common sense would dictate that a negative reputation of the parent company could see the internal startup, no matter how independent, tarred with the same brush, making customers less likely to purchase products, and investors less interested in investing as well as media reception potentially more hostile. However, an excellent reputation of the parent company might limit the internal startup’s success too, seeing those engaging with a new product expecting one standard of the parent company left disappointed, even if the startup excels in other ways.
This burden of expectation could see stakeholders voice disapproval in a way that football fans criticise a second generation soccer star, who ‘fails’ to live up to the reputation of their parent, despite playing in a different position. As a result, the parent company often resorts to a more centralised policy, which allows the internal startup to operate less independently.
The Next Organization’s advisors concluded, “Startup management is applicable for all companies seeking to enhance their internal innovation capacity.”