Why Internal Ventures are Different from External Startups

Henry Chesbrough is known as the father of Open Innovation and wrote  the book that defined the practice. Henry is the Faculty Director of the  Garwood Center for Corporate Innovation, at U.C. Berkeley in the Haas Business School.  Henry and I teach a corporate innovation class together.

——

Thanks to Steve for the opportunity to share my thoughts with you all.  This post follows directly on Steve’s earlier excellent post, Why Companies are not Startups.

The question of how corporations can be more innovative is one I have wrestled with for a long time.  For those who don’t know, I wrote the book Open Innovation in 2003, and followed it with Open Business Models in 2006, and Open Services Innovation in 2011.

More recently, Steve, Alexander Osterwalder and I have started sharing notes, ideas and insights on this problem.  We even ran an executive education course last fall at Berkeley on Corporate Business Model Innovation that helped each of us understand the others’ perspectives on this problem.  In this post, I want to share some new thoughts that build on Steve’s post, and connect them to Lean Startup methods.  However, I will then argue that while these methods are necessary to managing new ventures inside a company, they are insufficient.

First, let me recap a key insight for me from Steve’s post.  A startup is a temporary organization in search of a repeatable, scalable business model.  A corporation, by contrast, is a permanent organization designed to execute a repeatable, scalable business model.  While a simple statement, this is a profound insight.  When companies want to innovate a new business model (vs. innovating new products and services within an already scaled business model), the processes that companies have optimized for execution inevitably interfere with the search processes needed to discover a new business model.

This has serious implications for corporate venturing, for innovating new businesses – and new business models – inside an existing corporation.  The context for an internal venture inside an existing company is dramatically different from the context confronting an external startup out in the wild.  The good news is that corporations have access to resources and capabilities that most startups can only dream of, whether it is free cash flow, a strong brand, a vibrant supply chain, strong distribution, a skilled sales force, and so on.  The bad news is that, as Steve reminded us above, each of these assets is tailored to execute the existing business model, not to help search for a new one.  So what seem like unfair advantages for corporate ventures become inflexible liabilities that block the search process of the venture.

But the contextual differences go even beyond these substantial differences.  A corporate venture, struggling to search for a new, repeatable and scalable business model, must wage that struggle on two fronts, not just one.  The external startup has to work long hours, and make many pivots, to identify the product-market fit, validate the MVP, and articulate a winning business model that can then be repeated and scaled.  The internal venture must do all this, and more!  The internal venture must fight on a second front at the same time within the corporation.  That second fight must obtain the permissions, protection, resources, etc. needed to launch the venture initiative, and then must work to retain that support over time as conflicts arise (which they will).

Knowing Steve’s fondness for military metaphors, think of the corporate venture as fighting a war on two fronts at the same time.  Just as Germany’s domination of Western Europe in World War II was eventually undone by its decision to launch a second front by invading Russia, so too unlike a start up, corporate ventures cannot focus solely on winning in the external marketplace.   This leads to two key points:

Point 1:  You have to fight – and win- on two fronts (both outside and inside), in order to succeed in corporate venturing.  As Steve would say, this is a big idea.

One memorable example of this was Xerox’s internal venture capital fund, Xerox Technology Ventures (XTV).  Launched by Robert Adams in 1989, this $30 million fund grew to over $200 million in the next 7 years, as it launched companies like Documentum and Document Sciences out of Xerox’s fabled Palo Alto Research Center.  This financial performance was extraordinary, and put XTV in the top quartile of all VC funds launched in 1989.  Ordinary VCs would use this success to raise an even larger fund, and try to create the magic once more.

But Xerox instead chose to shut XTV down in 1996, despite its external success.  Why?  XTV’s success created lots of internal dissatisfaction within Xerox.  The success of Documentum and Document Sciences, they felt, came largely from Xerox technology and customers, yet the startup companies XTV funded got all the credit.  Worse, Robert Adams and his two partners got 20% of the carried interest in the fund, resulting in payouts of $30 million to the partnership.  This was more, far more, than the Xerox CEO was paid in those years.  So XTV won in the market, but lost inside the corporation.

This leads us to:

Point two: Corporate ventures may need to pivot to obtain and retain internal corporate support for the venture.  This is likely to be controversial for adherents to Lean Startup thinking because we traditionally think of pivoting to improve the product-market fit in the external marketplace.  But astute corporate venture managers, realizing that they must fight the war on two fronts, will also be alert to the need to pivot if needed in order to keep the internal support they require in order to succeed.  For example, the new venture might pivot away from current customers of the corporation in the early days of the venture, in order to reduce friction with the established sales force (who want to sell large quantities of the current product, not test minute quantities of some future product that may or may not ever be built in volume.  Worse, the potential new product might give customers a reason to delay the purchase of today’s products).

This also suggests that the internal organization must be carefully designed and prepared in order to sustain internal support for ventures over time.  Ventures that launch without this preparation are at great risk as soon as the initial enthusiasm for innovation begins to wane.  One bad quarter for the company, or one transition for a key internal champion, or the arrival of a new CEO who wants to clean house, any of these unforeseen changes could spell doom for an unprepared internal venture program.

This suggests a further modification to Lean Startup:  Get Upstairs in the Building.  You will need strong, sustained internal support for successful internal venturing.  You will need to get the bigwigs upstairs to sign up to the risks, and put structures in place to insulate and protect the ventures from the execution processes in a large company that will attack the new venture.  Think of it as internal political product-market fit, and prepare to pivot in order to increase that fit (and your support).

We will continue our conversations, and I fully expect that Steve, Alex and I will have more to say about how best to structure and support new ventures inside a large corporation in future posts!

Lessons Learned:

  • Internal ventures face a different context than do external startups.
  • Venturing inside a corporation is a 2-front war.
  • Lean Startup Methods are necessary, but insufficient, to fight this war.
  • An internal venture may need to pivot to gain or maintain internal support.  Get Upstairs in the Building, to generate this support.
  • Stay tuned, as Steve, Alex and I have more coming….

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20 Responses

  1. Big thank you to both Henry (for writing this insightful post) and Steve, for inviting outside perspective on his blog series on lean startup challenges.

    I see strong parallels between the corporate ventures discussed here and the newer corporate alliance & partnerships organizations in terms of the challenges facing these teams catering to two, seemingly complete opposite, interests.

    Alliance Professionals also are constantly navigating the potentially competing interests of their constituents, being their own company and that of the partner(s). Their role involves getting out of the building, upstairs in the building and across to all the other buildings with departments that could benefit but resist because of ‘prove it to me first’ attitudes.

    I am particularly interested in the challenges of innovation partnering (or ‘collaborative innovation’).

    If we subscribe to the reality that for most startups the path to success (= growth) is through partnership leverage at some point after the initial chaos has been concurred, how does a David work with a Golliath, whether through the intervention of corporate venture teams or alliance management teams?

    I am in the process of developing some thoughts on the topic of “corporate innovation = lean startup + partner development” and would love to share thoughts with anyone interested in further exploring this topic area.

  2. This is an excellent post. Thanks Henry and Steve.

    Creating ventures within larger companies is indeed challenging, and the personalities involved are different. One is certainty, tied to a a business or way of doing it that once was innovative. The other, exploring ways of serving markets, often at great risk until some traction can be observed…often serendipitously.

    Existing businesses are reluctant to give access to customers for fewer it will cannibilize business from their core business. So one cN pursue these things as new outside venture investments or through alliances with several companies serving functions in product development, distribution to markets they serve, or rarely supply chains. Both models are preferable to internal intrapreneuring. They’re more at arms length and can help avoid some of the inevitable internal rivalries. There was a good reason Steve Jobs kept the Mac group separate and aloof from the rest of Apple. Innovation flourished.

  3. I am very much in concert with your assessment of this topic, steve; of my 32 years in technology, innovation, venture and startupS, 15 yrs total was internal to IBM corporation and Johnson and johnson: and 17 yrs working with and for startupS. I enjoyed your analysis and will reach out to u separately to perhaps meet. I employ your lean startup methodology in my consulting work especially with non US companies attempting to so business here..thanks for the cogent insights

  4. Great post. I have been soaking up any information Steve Blank has put out for the past few months as I continue with my own startup. This is an interesting post, especially the part about how Xerox shut down its own successful business because of jealous employees. I think the toughest part of being an entrepreneur is actually making the “right” pivots. Anyone who’s a believer of this whole Lean Startup movement will agree that you need to pivot, but it’s still not clear to me HOW to pivot, or at least how to pivot optimally. It seems to me that Steve would say, “Just try something, get out of the building, and see if it works”. However, I think once you have a product going there needs to be some more quantitative and strategic arguments for new and changing hypotheses.

  5. Hank’s comments about internal ventures having to wage war on two fronts are correct. Most companies executing and improving upon an existing business model have armies of people inside the company who will defend – like antibodies against an infection inside the human body – any sort of new product effort that threatens their primary mission (and thereby their livelihood) in any way. It’s a rare company culture that is any different.

    Although there is no one best approach if a company wishes to launch new internal innovation efforts, in my experience I have found the following to be essential components and actions in a successful endeavor:

    1. Set expectations early and often with executive management group wanting to fund such innovation efforts. Creating proforma P&L, risk and market assessments are no different than what you’d expect to do for a VC-funded venture. For internal innovation projects, however, you need to also highlight how, if successful, the new product could change the revenues of the company, cannibalize existing product lines, and establish new platforms on which to base future incremental products. If you don’t set these expectations, the risk of internal innovation teams being killed off by insiders grows exponentially over time.

    2. To avoid the possibility of the innovation program being dismissed as irrelevant at a later date, don’t try to innovate where the potential revenue returns are uninteresting to the company. Financially, this threshold could be $500 Million or more for a company like Apple – or could be as little as $50 Million for a small manufacturing business.

    3. Seek out potential customers as early as possible to mentor product development – and help nullify potential internal assertions of revenue irrelevance. These customers could also later serve as potential investors, if the product being developed is valuable enough to them.

    4. Include – upfront – an escape mechanism that permits the internal venture to seek, secure and capitalize external investment as a JV spin-out if needed. The winds of corporate politics will shift naturally over time. The business model the internal venture finds might also be outside the core competence of the company. Both would make their efforts uninteresting and therefore not worthy of ongoing funding by the corporate parent.

    5. Form a small (4 or 5 person) advisory team of progressive and respected peers inside the company to assist the lead of any internal venture in navigating – and parting the corporate political waters – if need be. Such engagements are needed on an ongoing basis.

    6. Modify and streamline as much as possible existing corporate development processes (marketing, product development, manufacturing, etc.) to meet the needs for speed to market. It’s not that all new product development processes are necessary bad, it’s just that they are designed to be executed by functional experts the team may or may not have full access to. Adhering to a least a subset of corporate procedures will help mollify the corporate beast.

    7. Plan for early revenue wins – the earlier the internal innovation team can demonstrate the validity of their business model with revenues – the better. Planning a mission to Mars is noble, but getting the spaceship first off the launch pad and into orbit is the better approach.

    8. Probably the toughest element of all to find in a large corporate environment: Staff the internal program with a very small team of experts in key functional areas who (a) Have – or want and have the capability to develop – cross functional skill sets in other areas, and (b) Are prepared to be fired at any time.The chances of finding individuals like this are not to found in corporate cultures that do not embrace those who risk and may fail.

  6. We have been building startups (temporary organisations in search of repeatable, scalable business models) with the likes of Coca-Cola and Singtel, greatly informed and inspired by the your work and Steve’s. Our insight has been that the governance of the startups needs to be such that it can avoid the fight on the second front. The difficulty of finding product/market fit is difficult enough on its own.

    We feel that innovators from within the enterprise need to get out of the building (permanently, not just to meet customers), combining their hunt for value with external entrepreneurs. We also believe in entrepreneurially aligning the founders, giving them ownership and control of the startup because they are the only ones who have have the ability (+ fear + passion) to get the early traction. If internal founders need to leave the cloisters of the enterprise and are given skin in the game to do so, then the entire venturing team is aligned.

    Sequence seems important. Connection with the enterprise early on to get clarity on the problem that needs to be solved, then get out of the way. Integration back in, if ever, only happening when product/market fit is stable.

    This work is specifically for disruptive/adjacent innovation. Not for sustaining innovation.

    Have you seen anything like this?

  7. Thank you very much for these insights. I run a Center for Women’s Entrepreneurship in Pittsburgh and have also been a serial entrepreneur. Every day I talk with women about thinking entrepreneurially, whether they are starting a company or if they work IN a company (the Steve Jobs adapted “intrapreneurship” concept).

    I find that now functioning as an intrapreneur is much more difficult than originating a startup outside an existing business structure. Now with my entrepreneurial ideas I have to implement change with many more considerations than doing so in a with a blank (pun not intended) slate.

    But my risks are somewhat lower, my personal investments lower, and the existing structure provides economies of scale and resources I dreamed about having when I was a startup entrepreneur.

    So thanks for the insights; they are really valuable as I think about my next intrapreneurial venture!

  8. While this blog has a good point and is true, it overlooks the fact that most start ups fight wars on at least three fronts and maybe more. The picture painted here is a naive utopia.

    Start ups usually are fighting a war with their own Board – often on several fronts. Most VC Boards are dysfunctional at best and often distract rather than help. And they give this gift every month or two so that senior management barely has time to fight the main war with customers.

    If that wasn’t enough, most start ups are staved for cash and are fighting a war against resources.that limit their ability to do what they think is necessary to win the main war.

    Therefore, I think the business model arguement is correct, but I don’t find this multiple war argument compelling or realistic as explaining the limitations of internal venturing. There is more to this story

    • The control leaders have over the destiny of their internal or external venture depends on their degree of ownership. A skillful leader will be able to exercise control greater than what they own. A less skillful leader – less than they own.

      If a team holds more than 50% ownership in the entity, they can decide what on fronts to fight more so than if they held a minority (50% have a better chance of filtering out all but the most serious concerns of their minority investors.

      Turning back to the strictly intrapreneurial venture, a few more thoughts:

      1, I’ve found that the lead of these internal ventures should have full control of spending to approved budget levels, Needing external approval for the slightest expenditure in an already approved budget is time consuming – and opens the effort up to potential attacks by the cultural antibodies of their corporate sponsors – A sort of death by a thousand cuts.

      2. I’ve found the decision to sequester (or not) the intrapreneurial development team depends on how the corporate entity sees their initiatives.

      If the parent company is trying to shift its main culture to a more intrapreneurial one like that embodied in the internal venture – and that internal team is having success – then I would suggest that its efforts be made fully visible to the organization, but not treated any differently than any other group in the organization. (Lots of different ways here).

      If the parent company sees nothing wrong with their current culture – which could be toxic to the fledgling operation – then the day-to-day efforts of the internal venture should be sequestered. Their objectives, however, should never be hidden. Doing so – I believe – fosters behaviors in the main organization that could be counterproductive to the internal venture as it moves forward.

  9. Thanks for all the feedback above! In addition to these posts, I also have heard individually from people at companies like GE and BT (in the UK) that they also found it necessary to fight on two fronts. @Phil has a good approach that negotiates with Corporate upfront, and then cuts loose the team for specific disruptive projects. This does not tell us about the back end, how to integrate the resulting business back into the firm. Of course that leaves a lot of ground for other forms of internal venturing. @Paul Tyra has many good points, too many to respond in a short comment. Heck, all of you had good points. Sounds like @Steve has really been through the wars….

    We’ll be back with more on this topic. I think we know more about what NOT to do than we do about what TO do. Stay tuned….

  10. Well done. As an entrepreneur I’ve experienced the waxing and waning of group morale due to changes that you spelled out eloquently in the sentence:”the internal organization must be carefully designed and prepared in order to sustain internal support for ventures over time”. Our economy needs people teaching and redeveloping these concepts of how managerial adaptations could assist in a recovery, from the dynamics of individual ambitions dominating the collective motivation. Glad to see you doing it.

  11. Great post, @Henry! I have been wishing someone of your stature to make this distinction clear sooner rather than later. More and more large corporations are trying to model their internal innovations after the lean start-up methodology. But dynamics within a large organization are different as you said. A start-up or an innovation department within a large organization, especially if it is called an “Innovation” department can generate mixed responses from the rest of the organization. They could see these people as disruptors who have come to tell them what the future of the company will look like. It may not be appreciated.

    One of my friends at a large Asian bank used a very interesting strategy to avoid evoking negative responses to his innovation idea. He intentionally executed the idea to only a small %age of its full potential but to be better than status-quo. His co-workers saw this as an improvement without feeling threatened by his idea. This approach has been quite successful.

    • Sudhanshu, thank you for your comment. I do think that Lean Startup methods can deliver a quantum improvement in the success rate of corporate venturing. But as my post indicates, some adaptations will be required, in order to adjust to a corporate context for venturing.

      Your Asian banking friend has an interesting approach to managing the internal politics. It sounds like he has also figured out how to connect the fledgling venture to one of the businesses. That is something that Steve and I plan to explore more in future posts.

  12. Reblogged this on Thinking Out Loud… and commented:
    Great piece!! Flashback to my MBA thesis, and an O’Reilly & Tushman, 2007, working paper “Ambidexterity as a Dynamic Capability: Resolving the Innovator’s Dilemma”. I’ll need to re-write that thesis one day…

    Working paper

  13. Thanks For Information :)

  14. I found many similarities with the strategy described in “the innovator’s solution” from Clayton Christensen…

  15. I think the issue highlighted in the blog pertain more to ventures that have significant revenue potential short term and in what is deemed to be a competing product or business model. When I worked for 3M, venture capital was extremely successful in seeding new products without the internal strife mentioned above. The secret was to enter new markets with new products so that growth was not perceived as reducing growth opportunities for the core business but rather as an expansion into unchartered, high profit territory .

  16. I have found it helps the think of your innovation program as a “product” with a value proposition to your org… Just like any other business model.. We can then simply apply our customer discovery process to uncover value propositions for these “second enemy”. Just like a multi-sided market exploration might evolve.

    For example, we discovered one of our innovation programs significantly increased employee engagement within the business unit, in addition to exploring new business opportunities. This increased engagement led to as series of ever increasing output for the teams across the entire product line, not just the innovation program ideas…

    This is where it gets interesting… We discovered a new value proposition for our innovation program – increased engagement and output on “execution” related work.

    For may corporations, the “product” is often the innovation program itself, not the specific outputs of the program. If you are focused too much on the individual ideas, and resource your efforts accordingly, then you will definitely face challenges as the landscape changes (as it always does). Treat your overall program as a product, and you as the founder, and you’ll be in a much better positive to survive long term…

    Happy hunting…

  17. […] on your company’s resources to get things done. But as Steve Blank, Henry Chesbrough, and others have pointed out, that advantage is offset by the daunting fact that corporate innovators have to fight a war on two […]

  18. Reblogged this on contentcollaborationguru and commented:
    “A startup is a temporary organization in search of a repeatable, scalable business model. A corporation, by contrast, is a permanent organization designed to execute a repeatable, scalable business model. While a simple statement, this is a profound insight. When companies want to innovate a new business model (vs. innovating new products and services within an already scaled business model), the processes that companies have optimized for execution inevitably interfere with the search processes needed to discover a new business model.”

    The following post lays out, in simple and concise terms, the different challenges internal initiatives face when compared to startup ventures. Lean startup methods may work on their own (debatable, to be sure) in the outside world, but inside the firewall? More like fighting in the Thunderdome – you have to be alert and ready to fight a multi-front battle in order to succeed.

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