I had a conversation the other day with a senior executive — let’s call him Bob — of a Fortune 10 company about their “internal start-up” culture. It seems that they are looking for breakthrough product ideas that do not align well with their core business. The solution seems obvious: let’s create the same kind of exciting, market-driven environment that you would find in a start-up!
Everything sounded fine for a few minutes. They thought that the most creative people in the organization needed to have elbow room that would be difficult to achieve in the risk-averse culture of a hundred billion dollar company. So how did they plan to achieve that?
- Freedom to break some rules: the start-up can use its own product roadmaps and sales strategies
- Freedom from process-driven corporate calendars and budgets: the leadership of the start-up is not bound by the revenue and earnings goals of their parent
- Freedom to take risks: they have permission to fail
It didn’t take long for the discussion to go seriously off track. When I started in with questions about how they were going to actually pull this off, Bob said: “Look, I’m in charge of new technology and platforms and I’m going to be the venture capitalist funding a new product, so that when it succeeds we’ll be able to fold it back into our current business.” I had seen this movie before. It’s called When Worlds Collide. When I suggested that Bob lives on a different world and would make a terrible venture capitalist, things got a little heated. As I recall it, Bob said, “In your ear!” A surefire way to put a fine point on your argument.
Bob lives on a planet where the scale of his business creates a climate for successful development of new products that can be sold to familiar customers using existing channels and tried-and-true processes. Above all, in Bob’s world, it is possible to make big bets. The examples are impressive. Everything from HP’s inkjet printing to the Boeing 777. Unfortunately for Bob and his start-up, none of those things matter. The start-up lives in a world of new markets, which means new customers, new channels and new processes.
Even though Bob has all the talent he needs for market success, the likelihood of failure is high. The Newton and the Factory of the Future did not fail because because Apple and GE could not innovate. They failed in large measure because corporations foster a system of beliefs that is fundamentally incompatible with taking capabilities to new markets. When I asked Bob how the start-up employees were going to be recruiteed and rewarded, whether they had a safety net for returning to the company in case of failure, and how many simultaneous bets he was willing to place, the answers were not encouraging.
I immediately did a deep dive into my archives, hoping to find traces of a long-forgotten venture that I helped steer into the ground. In the late 1990s Bellcore was poised to enter the online services business, hoping to attract newer, smaller customers than the seven Regional Bell Operating Companies who accounted for most of the company’s revenue. This was a time when Bellcore’s Applied Research group was generating a blizzard of patents in e-commerce and software, technology that I have talked about before. We were as smart and nimble as any West Coast start-up, and best of all we had the cash to fund a new venture, the talent to staff it, and the power of an existing sales team to go after those new customers. I was asked to lead the new company. We would be funded just like a VC-backed start-up…
When the dust settled and I reported lessons learned to the Bellcore’s CEO Richard Smith and later to Bob Beyster, CEO of SAIC, Bellcore’s parent company, the first thing I said was that there had been no structural reason for failure. A team from McKinsey had already given us the range of possibilities. We could have set up an independent business unit or spun 0ut a company in which we retained minority ownership. Setting up a new incubator would have required more time than we thought we had, and, in any event, Applied Research was already in the incubation business. We had chosen to bypass corporate reporting structure and create a company-within-a-company with direct oversight by a CEO who was committed to our success. It was exactly the Hughes DirecTV model.
There are three reasons that internal start-ups like ours tend to fail. Bob was not in the mood to listen because he is banking on success, but the topic comes up in every large enterprise, so I thought it might be a good time to repeat the conclusions here:
- Failure is common: Building new business is a portfolio game in which 90% of the returns come from 15% of the investments. It is fundamentally unlike product development. A “big bet” strategy only succeeds when there is high degree of confidence in your ability to sort out winners and losers. In a new market, that just never happens.
- Market-driven milestones drive success in new ventures. An internal start-up — even one with strong support at the top — cannot divorce itself from processes that are timed to fit corporate needs.
- Corporate sponsors of new ventures and VCs have different belief systems. They are fundamentally incompatible, and without early, explicit steps to stop it, corporate attitudes, practices, and beliefs will overwhelm the fragile culture of the start-up.
I want to spend the next several days elaborating on these ideas. I hope Bob is reading.