8 out of 10 CEOs rank new business building among their top five priorities despite recent heightened economic volatility.

Yet 87% of corporate ventures fail after the MVP stage, mostly due to cultural conflicts and non-effective governance frameworks to execute and turn that innovation into reality.

How to reverse this course and arrange a win-win-win situation (for the corporate, the innovation units, and the customers)?

During our recent Innov8rs Learning Lab on Venture Building & Scaling, Frank Mattes (CEO at Lean Scaleup), Sean Sheppard (Chief of Staff at U+), Ann Hofvander (Managing Partner at U+ Americas), Linda Yates (CEO and Founder of Mach49), Alceo Rapagna (CEO at Innoleaps Group), Adrián Heredia (Founder and CEO at Byld), Andrés Carrillo (CEO at Kuiko), and Álvaro Portela (Director of Marketing at Digital Business & Classifieds at Vocento) shared principles and practices to succeed at corporate venture building.

Crossing The Chasm: Two Competing Value-Creation Systems

According to Linda, corporations can drive meaningful growth by disrupting themselves from the inside out or the outside in. Large corporations can trump any startup thanks to the assets they can leverage: talent, brand, capital, technology, customers, IP, credibility, and more. Nevertheless, barely 10% of corporate startups make it to market launch and survive the MVP stage.

"There's no reason that Netflix could not have been created and launched by Blockbusters; Airbnb by Marriott; Uber by Toyota; and Miro by 3M. That's a lot of money being left on the table”.

This high failure rate suggests a white space between ideation and scaling. Innovation units usually hand over validated ideas to corporate business units for scaling up. Yet most new ventures don't survive this "transitional" phase because both innovators and leaders lack the frameworks to make it happen.

Typically, there are two competing value-creation systems in any corporate. On one side are the “Red Shirts”, as Frank calls them, the process-driven people working in the running business, like CEOs and CFOs. They work with a lot of knowns – customers, value proposition, value chain, competitors, partners – and have a short-term horizon.

The Red Shirts exploit the existing business model to maintain its relevance, repeatability, efficiency, and productivity. They're committed to eliminating the variance and the mistakes, avoiding personal risk, and sticking to proven success formulas. Of course, their systems, procedures, and management approaches are inadequate for exploring new business models.

On the other side is a second system, the "Blue Shirts", trying to create the new and explore. These are the corporate innovators – the "rebels" as others define them – who look for new, repeatable, and profitable business models and future revenue streams. They operate with lots of unknowns and have a long-term horizon. They're on a mission to explore new ways and break the rules.

“The Red Shirts pay the salary. The Blue Shirts pay the pension”.

Ann echoes Frank and says the Blue Shirts are open-minded, resilient, and willing to kill ventures, as they see failure as a great opportunity for learning how to avoid future mistakes (rather than something to negatively affect their career). This culture is incompatible with the corporate culture, where clear KPIs, processes, and gates must be met before innovation can happen. And, as we all know, revenues and cash flows are not the best ways to measure the business impact of new ventures.

These differences worsen during the handover, resulting in the failure of many new businesses. Is there a way to manage this transition and increase the chances of success for new ventures?

Key Success Factors For Corporate Venture Building

It is however possible for corporate ventures to be smoothly transitioned from ideation to scale. It all starts with aligning with leaders: no new business can succeed without the board's support. Hence, success relies heavily on cohesion and collaboration between the "Red" and "Blue" systems, the core and the beyond-the-core. Afterward, innovators must focus on setting their venture up properly so that it can make it to market.

1. Ensuring Leadership Support

Creating an environment where failure is a positive thing and people with different mindsets can collaborate, align goals, experiment, and learn is the responsibility of leaders. Transparency is essential in this case. A regular meeting schedule - ideally daily, weekly, and monthly - is crucial to promoting such a collaborative culture. In this way, everyone always knows what everyone else is doing, where the blockers are, and what the learnings and insights are.

For senior executives to create this space and meet innovators halfway, innovators must know how to speak the C suite's language. Linda believes innovators must demonstrate to leaders that they can structure conversations around what matters most to them and the entire business. Speaking the same language makes aligning innovation projects with business plans easier.

Alvaro agrees with Linda: innovators who speak leaders' language are less likely to have their projects overlooked. All of this starts with knowing how the corporation operates and understanding the areas leadership is interested in.

2. Balancing Corporate and Market Needs

Nevertheless, Adrian believes that finding out what the corporate is interested in and developing a project accordingly isn't enough for ventures to succeed. A deep comprehension of what the market wants and balancing these needs with the corporate's expectations is also crucial and cannot be overlooked. Analyzing the market is necessary to understand consumers, have a pulse of what they need, and identify big trends, hot topics, and repeatable models. Should your research indicate that consumers are not interested in your offering, kill the venture immediately.

3. Understating Customer Pain and Placing Small Bets

Customers won't tell you what they need. They will tell you their pain. It's then up to you to stay current on 'the art of the possible' and solve that pain, as Linda points out. Once you've identified the pain, place a series of small bets and experiment as you accelerate the venture. This will remove the greatest amount of risk and the least amount of capital. The goal is to build a portfolio of ventures to generate growth that matters across the spectrum of new venture creation, from ideation to scaling.

“Developing a product based on the market and target user feedback allows you to de-risk your investment into ventures because we're investing money as the success comes".

Sean explains how to understand customers' pain, place small bets, and reach early customers in five steps:

  1. Concept creation: in this preliminary innovation development stage, explore the 'problem' space and create a list of opportunities, i.e., ideas worth developing.
  2. Validation: validate those initial concepts by creating lightweight prototypes that, in broad strokes, show what you want to offer to the market.
  3. Market testing: define a clear strategy for taking the MVP to market, considering aspects such as pricing sensitivity.
  4. Build: determine all the characteristics the MVP should have and build it accordingly.
  5. Scaling: gather feedback from your early customers as you launch the MVP. You need early customers because they're willing to tell the world why they're better off with you than without you. Their loyalty is strategic; they share your vision, understand your reality, and are willing to give you the two things you need most: their time and their truth.

4. Building an Internal Innovation Ecosystem

If you want to seize the mothership and if you don't want to have a bunch of naysayers, you must have advocates throughout the corporate, says Linda. A true advocate is someone who might not be an entrepreneur but has an entrepreneurial mindset. You need them in the functions and departments where your venture-building teams operate. Engaging your advocates is also an effective way to bring together the whole organization and make everyone feel like they are part of the venture journey.

Linda shares the following prompts to help you build your internal innovation ecosystem and identify the advocates you need:

  • Who in legal will write the one-page term sheet for the deal with another startup you need to accelerate the venture (not the 40-page term sheet)?
  • Who in procurement will get a new vendor the startup needs to partner with on your approved list in a week vs. 90 days?
  • Who in marketing is going to challenge the traditional brand police and help the new venture develop momentum in the market?
  • Who in HR is going to fast-track employees needed to build the new venture who don’t look like your typical employee?
  • ... and so on through all the departments likely to see requests from your new ventures as they accelerate and scale.

A New Way to Venture: the “Excubation” Model

As a final consideration, Alceo proposes a new alternative model to the three traditional venture strategies corporates have relied upon so far:

  1. Internal innovation unit (high proximity to the core and high corporate control), usually led by R&D and digital departments: this unit is typically good at developing and launching incremental innovations.
  2. Incubation or internal corporate venture building (medium proximity to the core and medium corporate control): a group of internal people with the right intrapreneurial attitude are given funding, space, and freedom to try to invent something new. Yet the corporate still holds a very high level of control. Many intrapreneurship projects fail because of a lack of entrepreneurial mindset. Internal constraints, such as a lack of decision-making room, delays in execution, and resources, also hinder intrapreneurs.
  3. Partnerships, M&As, CVC deals (low proximity to the core and low corporate control): since corporates can rely on external companies, talent, technologies, and channels, usually, partnerships, M&As, and CVC are the preferred solution to go into new territories. However, differences in goals, strategy, interests, and culture put partnerships and M&As to the test. As a result, most of them fail. Another downside of M&A is that it's a very costly strategy. CVC deals also have limits; they require huge investments into startups without gaining control over them.

According to Alceo, these challenges call for the "Excubation" model, a new hybrid approach combining corporate power and startup flexibility. Excubation can be placed in between the incubation and the M&A, so it's basically external. Still, the corporate's role is more extensive than just being an investor or buyer over another company.

Excubating means financing an external venture run by dedicated entrepreneurs and a few intrapreneurs. Regarding strategy and culture, the resulting projects are aligned with corporate goals. Thus, they fully capitalize on corporate competitive advantage while remaining operationally agile and flexible. Consequently, "time-to-market" and risk are reduced, and success chances are maximized. An additional benefit of excubating is that it doesn't cost as much as an acquisition.

The framework of a new venture in an excubation context is slightly different in terms of equity mix. As well as the corporate that funds it, external venture builders and external investors are also needed. In fact, new ventures require the discipline of investors to succeed in the long run, not to replicate corporate dynamics.

The perfect equity mix is hard to define. But Alceo and Adrian are clear: for external investors to invest in the venture, it must be 'attractive'. To care, they need skin in the game, which for Alceo means 40-70% ownership.

No model works everywhere, and excubation is no exception. The success of a venture is often not determined by its relevance but by its execution. And excubation enables corporates to execute the transition from ideation to scaling quickly and effectively.