We all know the average lifespan of a business has dramatically dropped in recent years, but still, large organizations have such a difficult time successfully creating new business lines and renewing themselves as a result.
In his session at a recent Innov8rs Connect event, Mach49’s Edward Ross gave us two clear examples. Marriott should have been able to create Airbnb, and Chase could have created Stripe, now with $36 billion market capitalization. These large companies were well funded and well staffed to create these new ventures, but they didn’t.
So, the question is - why is it hard for large organizations to start new ventures?
First, the mothership or core business have to do the hard work right alongside their internal entrepreneurs, removing the orthodoxies or antibodies that typically starve an internal start-up of oxygen or, at worst, kills them repeatedly. Large organizations are great at optimizing the core business that’s made them really successful, but utilizing that same mindset is how they kill venture after venture..
Second, the problem lies in how ventures are created. In Silicon Valley startups, the organization deeply understands customer pain. Large legacy organizations typically rely on outdated methodologies like customer surveys that are statistically significant but strategically irrelevant. Silicon Valley startups are wonderful at getting on the phone, asking customers about their true pain, and deeply understanding that problem before starting something new. For example, no one knew they wanted healthy meal kit delivery services; but the customer did know they were tired after a long day of work, didn’t have time to cook a healthy meal, didn’t have time to go to the grocery store, etc.
A Better Way: Corporate Incubators
There is a better way, however. A corporate incubator is a place where startups can grow and live inside a larger organization, allowing companies to institutionalize and scale growth efforts for decades to come.
However, most corporate incubators fail.
First, they have no methodology. Corporations keep trying traditional VC and start-up incubator models a.k.a. money and mentors. This model doesn’t work for large corporations because they cannot afford the large failure rates. Corporations need much higher success rates, which come with a customer-driven, repeatable, and scalable methodology for venture creation.
Second, there is mothership friction. Companies have the ideas, talent, and assets to create ventures and drive growth, but they also have inertia, antibodies, and orthodoxies that have to be overcome. Corporate accelerators often fail to engage the mothership to make the from-to shifts in metrics, compensation, procurement, policies, politics, etc. to ensure their ventures reach escape velocity and thrive.
Third, executive decision makers fail to grow. Senior executives must get out of a management review board mindset and adopt a discipline and perspective up top-tier venture capitalists. They need to focus on option value, not net and present value. They need to strive for customer acquisition and revenue versus short term profit. Executive decision makers need to remove the greatest amount of risk on the least amount of capital, embracing placing a series of small bets and building to learn, then standardize, then scale.
Setting Up a Corporate Incubator for Success
Tapping into Mach49’s experience building corporate incubators with a 90% success rate, Edward suggested companies follow these three stages.
Ideate
In the ideate stage, organizations need to focus on the portfolio review, challenge framing, and new venture competition. First comes the portfolio review. For many companies, ideation isn’t their problem-assessing and prioritizing the ideas is where they need the most help. To analyze the current innovation portfolio, ask the following questions:
1) Desirability: customer – do we think there is any/enough customer pain?
2) Feasibility: product – can a solution be built?
3) Viability: business model-do we believe we can make money?
4) Suitability: mothership alignment – are we the right company to build it?
Next comes challenge framing. A simple way to launch the incubation phase of a new venture is to bring together a group of people to create a challenge statement and initial stakeholder map. The challenge statement establishes the aspiration or moonshot for the new venture and points to an early hypothesis that correlates to customer pain points. An initial stakeholder map identifies who matters most, giving the team a starting set of potential customers, partners, or other key influencers to interview from day one.
After that, organizations can develop a new venture competition. They can challenge the next generation of internal entrepreneurs with a company-wide venture plan competition. Frame the challenge, define guidelines for submission, host a pitch day, select winners, and then provide feedback to those who are not selected.
Incubate
After ideas are chosen to move forward, the incubate phase allows 12 weeks to launch the new venture. In a specific timeline process, Month 1 is centered around finding the customer pain and establishing what people need. Month 2 is determining the product or service that will be built. Month 3 is about designing the business and establishing how it will generate revenue.
During this process, customer pain point interviews are held along with storyboard interviews and prototype interviews, which come out to between 150 to 300 interviews in 12 weeks.
After this process, the venture emerges with some specific outcomes. First, there is a fundable business with a milestone-driven, detailed execution plan. A new venture board is now in place to help seize the mothership advantage, and the start up team is prepared to help launch the new ventures. Also, pilot customers are ready to test products and services.
Accelerate
Now, it’s time for businesses to step on the gas pedal in the accelerate phase. The process here establishes pilots, product-market fit, and revenue. Finally, the venture is built to scale with a repeatable revenue model, positive unit economics, a scalable delivery engine, and a sales and growth model.
After this phase, the team is self-sufficient with a validated and proven business model and pricing, and the team has repeatable and measurable processes for customer acquisition, customer success, operations, HR, product development, and partnerships and channels.
Seizing the Mothership Advantage
Next, these ventures need to seize the mothership advantage. The organization with a new venture is like the double helix strand of DNA. As the incubator grows, leadership must think fresh and help identify and manage potential challenges to venture-building across the company. This bleeds into all areas like politics, compensation, metrics, policies, and others.
Edward did several pre-conditions for success. Venture teams need to be full-time internally or externally; it’s impossible to do innovation part time. Venture teams must have a GM/business owner candidate. Plus, they need to get access to seed funding. There needs to be a fully engaged new venture board, also paving the way for post- incubation governance options.
Above all, realizing growth from your innovation efforts requires a strong commitment from your C-suite, coupled with a deep understanding of how innovation actually works, and how that's different from managing the current business. Without both, it will be hard to deliver upon targets for growth.