New Business Incubators, Innovation Labs, or Innovation Programs within mature companies have a pretty high failure rate and are often limited to a 3-4 year lifespan. There are many potential failure mechanisms that drive this outcome, not just one or two, so all the key elements listed below are required to be successful. Each is described in more depth in the rest of the article.
- Executive Level Support as Formal Part of Growth Strategy
- Clear Goals with Realistic Success Metrics &Time Horizon
- Well Defined Innovation Methodology &Portfolio Management Strategy
- Capable & Appropriately Skilled Portfolio Management Team
- Clear Understanding of Core Business Resources, Processes, & Priorities
- Autonomous Governance & Defined Guardrails for Early-Stage Ventures
- Custom Joint Governance Framework for Scaling Stage Ventures
Note: This article is focused on “New Business” growth and innovation, which means whole new product lines or new business models, not variations or incremental improvements of existing products or businesses or internal processes.
Executive Level Support as Formal Part of Growth Strategy
Let’s start at the top. New business innovation is hard, requires significant resources, and is inherently risky, so it’s not possible to succeed without the support of those who control company resources, set policy and have a long-term perspective on company direction. For most companies that means the C-suite and/or the Board of Directors. Ideally, an internal new business innovation capability should be an integral component of the company’s long-term growth strategy, not a “skunkworks” or “under-the-radar” side project which are easily wiped out by a change in leadership or periods of financial hardship. What most important is that the innovation capability is recognized as a material part of the long-term strategy by the collective company leadership that controls its resources and sets its priorities.
Clear Goals with Realistic Success Metrics & Time Horizon
Getting support from company leadership is one thing but aligning on the right success metrics and expectations is another challenge by itself. New businesses usually don’t grow into large ones very quickly and many of them will fail along the way, which is one of the reasons why being part of a “long-term” growth strategy is important. While short-term indicators are important, the ultimate measure for a new business innovation capability is to create a sustainable, positive material impact on the business. For a mature company, this will likely take many years to develop. You can define the magnitude of the impact desired and derived the investment required to achieve that, or you can define an affordable investment and project to potential impact, but you can’t disconnect the two. They are directly correlated. Expecting a huge long-term impact but underfunding based on an arbitrary, near-term affordable investment is a recipe for disappointment.
Well Defined Innovation Methodology & Portfolio Management Strategy
Since the timeline to ultimate success is long and the simple reality is that new business innovation is inherently uncertain and risky, it’s important to have a well-defined and financially modeled investment strategy; often some combination of a portfolio of multiple investments and a pipeline of continuous investment in new options as intermediate successes emerge. While many new venture opportunities will fail, the right management strategy can help enable dispositioning of those options as quickly and cheaply as possible, allowing resources to be allocated to new or more promising options.
Capable & Appropriately Skilled Portfolio Management Team
Managing and innovation portfolio is a fulltime job and depending on the scale may require a team of resources. The skills for evaluating and managing new business innovation and exploration are quite different from those required to optimize the execution of established businesses, so the best leaders or managers from your core business are not necessarily the best fit for this type of role. This doesn’t mean that they must be outsiders, but the skills and experiences must be evaluated through the right lens. A mix of both internally and externally sourced staff with the right behavioral skills and experience isa good starting point. In addition to the innovation portfolio management, the venture teams also need strong “intrapreneurial” skills and should be managed with an appropriate incentive and reward system adapted to the unique requirements of innovation.
Clear Understanding of Core Business Resources, Processes, & Priorities
One of, if not the biggest failure mechanisms for adding new businesses to a mature company is poor Company Fit. Assessing the degree to which a new business is aligned or not aligned to your core business priorities and operational norms is challenging, because they typically evolve with the growth of the business and become embedded in the culture of your company. When a new business that has different operational requirements or priorities is introduced into that culture it will encounter multiple points of resistance or friction which, cumulatively, can slow down and ultimately kill it. Having a good understanding of the resources, processes and implicit priorities embedded in your company culture, or using assessment tools, can help you identify potential mis-aligned opportunities early and either stop, adapt, or structure them to reduce the risk of late-stage failures.
Autonomous Governance & Defined Guardrails for Early-Stage Ventures
Since we’re talking about truly new businesses or business model innovation, the probability of Company Fit challenges is high. One of the mitigation strategies for poor Company Fit is consciously establishing an explicit custom governance model around the new ventures to support their operational requirements and impose maturity and business model appropriate metrics and guardrails around them. Doing so can itself be challenging, so it doesn’t make sense to do so very every early-stage opportunity. A more manageable approach is to define a more autonomous governance model for the front-end of your innovation portfolio. This is effectively what an “incubator" is within an established business.
Custom Joint Governance Framework for Scaling Stage Ventures
As a new business venture within the “incubator” achieves a level of risk reduction that warrants investment for scaling it is ready to "graduate”. However, while it may be getting good traction and have a lot of positive indicators, this is often the most vulnerable stage for a new business venture. The investment is likely reaching a level that is material to the company, but if it’s investing for growth, it may not yet have positive cashflow or is investing that cashflow back into growth. It’s too big for the incubator, but not ready to be thrown into the mix and compete for resources with mature core businesses on a pure P&L basis. At this point it’s worth the effort to create a custom governance model for the venture; probably one that is jointly managed by both the innovation capability management team and relevant core business operational leaders. The venture may need to be managed underthis governance structure for several more years, but the governance framework should define the criteria and conditions that determine that.
Summary
This is a relatively short blog article attempting to describe a solution framework for a very large and complex challenge still faced by many of the most successful companies in the world. While it covers the key points that we think are required for almost any established business, each company will have its own unique challenges and requirements in addition to those above. It is certainly easier to describe than to implement. If you are considering developing such a capability for your company or refining one that’s in place, but missing some key elements, we’d be happy to help. Just click on the button below to contact us.
