Mature companies are rightly focused on increasing their innovative capabilities to remain competitive and drive growth, and many of them look to the fruitful results of the venture-backed startup community as a role model for innovation practices. They see the resulting innovation that comes from this environment, assume that the startup investment and development methodologies are the cause or enabling mechanism for innovation and try to replicate or emulate them within their corporate environments and innovate the “startup way”. However, there are two problems with this approach:
- The innovations that everyone sees from the startup community are the startups that are successful, not all the ones that fail. So, this begs the question: “Is the ‘startup way’ the driver of innovation, or is innovation the driver of startup success?
- While there are certainly many aspects of startup-like approaches to new solution development that are worthy of emulating, the corporate environment is a fundamentally different context and attempting to translate all of the methods directly can have some very negative consequences.
In this article, we’ll explore how the corporate and venture-backed startup contexts are different and what that means for how companies should consider developing their innovation practices.
Similar, but Materially Different
Developing new products or businesses as a new business venture within a corporate innovation lab or practice has a lot of similarities to venture-backed startups. They are both likely to start small, with limited resources and staged investment; focused on defining and quickly validating a value proposition and/or feasibility hypothesis; etc. But they also differ in some very material ways.
The funding contexts are very different. Startups typically have their investment risk syndicated across multiple investors, each of which who is investing with a diversified portfolio of investments. Corporate typically must carry to full investment burden for their innovation projects. Venture investors are looking for one-time returns on an exit like an acquisition or public offering, while corporations, especially publicly traded ones, are focused on driving new sources of recurring revenue growth and profits making the most desirable exit for the venture growth and integration back in the core business operations.
From a assets and liability perspective, startups really have nothing to leverage, but also nothing to lose and therefore can take big risks with little consequence. Mature businesses, on the other hand, have significant assets to leverage, but those assets need to be protected from unnecessary risk. The focus on leveraging those assets can also bring a lot of the operational constraints and expense with them to the new venture and can sometimes be more of a liability than a benefit in the early stages.
Culturally and operationally, startups organically develop the operational processes, priorities and culture that are most relevant for the business that they are developing. In the case of corporate new business ventures, the culture and its implicit priorities are typically unconsciously inherited from the parent or sponsoring company, which may not always align to what’s needed for success for the new business or product. The more diverse or transformational (more innovative) the new venture is from the core business, the more likely it is to run into friction when trying to align with that core business.
The key point here is that ‘startup’ best practices cannot easily be dropped into a corporate environment and drive success; the contexts are just too different.
Don't Call Corporate Innovation or New Business Projects "Startups"
There are a lot of great aspects of the startup approach to business or product development and growth that are valuable and highly applicable to helping drive growth within mature businesses, but they can’t just be directly replicated in the corporate context. Even just calling your innovation projects ‘internal startups’ can create unexpected problems inside the company, inside the venture, and with external partners. For better or for worse, ‘startup’ is a very loaded term that comes with a lot of expectations, not all of which are even accurate. For example, employees may expect that because they are participating in an internal ‘startup’ they should be eligible for some extraordinary upside compensation if the venture is successful, but probably aren’t willing to sacrifice their current competitive salary and benefits like early-stage startup employees typically do. They may assume that they can and should take extraordinary business risks to move quickly, like startups often do. Unlike startups, who have nothing to lose, mature companies have significant assets that could be at risk if they end up being held liable for a startup risk gone bad. The reality is that a corporate new business venture is not a startup. While it might aspire to emulate some of the desirable practices of startups, they must be adapted to fit within the realities of the corporate context in which they exist.
Thoughtfully Designing your Innovation Practice
The point of this article is not they corporations should not attempt to emulate or use startup-like practices to enable innovation and new growth, but that they need to do so in a thoughtful manner that recognizes and accommodates the differences between the corporate environment and the true venture-backed startup environment and choose language that accurately reflects the differences to avoid confusion and inappropriate expectations. Some practices can be readily applied to the corporate context, like staged investing, LEAN methods that focus on hypothesis definition and iterative validation and refinement, etc. But many practices need to be significantly modified and new ones developed to fit into the specific goal and constraints of the sponsoring company.
If you’ve already established an innovation capability and have neglected to account for some of these factors and they are creating some friction, don’t give up. With some targeted adjustments, you may be able to remove some turbulence and improve the effectiveness of your innovation practice.
Summary
Investing in innovation is more than a fad. Like investing in quality, in the eighties, or digital fluency in the nineties, it’s an investment in corporate capabilities that raises the competitive bar for whole industries. Those on the leading edge can benefit, while those that lag will suffer the consequences. We’re still in the early stages of defining best practices for corporate innovation capabilities, so don’t make the mistake of blindly copying practices from one segment of the market and expect to achieve the same results. Tailoring the right innovation practices for your company’s unique goals and circumstances takes thoughtful understanding of the how the various aspects of innovation depend on each other and the context in which they are applied. If you’re interested in learning more, or how we can help you with your own innovation challenges, just click on the button below to contact us.
