Big companies building startups; four best practices

Many large organizations are now looking at how they can generate new growth by launching new adjacent startups or business units. Skunkworks teams, corp incubators, and product development agencies are buzzing — trying to disrupt themselves before being disrupted.

However, all startups are not born equal nor have the same objectives.

At prehype, we built startups with big companies. While not very public, we are one of the most active ’startup-as-a-service’ firms across US and Europe having worked on startups for companies ranging from NewsCorp over LEGO and Royal Bank Of Scotland to Verizon and Danone. We are also building our own startups, you might know of BarkBox, ManagedByQ orAmberJack. What we are learning is that while we use many of the same methods, building with a big company as a partner makes the startup different. We call them Fat Startups. (teaser, more on this is in a blog post soon)

There are in general many embedded dynamics that make these ventures unlike what you might see amongst more traditional startups. Here are a four tips on areas to consider if you are building a startup associated with a big company:

1. Money doesn’t mean success. While your CEO might be talking a lot about ‘embracing a culture of failure’ — the rest of your organization does not often agree. Inside a big a company, there are few who gets a bonus for wasting a lot of money on a project that doesn’t end up working. Ironically, that will make the organization try to throw a lot of resources on approved ideas. While getting a lot of money to do e.g. marketing might feel nice to start with, it won’t give you a higher chance of success, if your core concept doesn’t work (often mainly because users don’t have the problem you have set out to solve) or the unit economics are not attractive. So try to avoid being stuck in that (seductive) honeytrap. The best way to reduce the risk of innovation — is to reduce the cost of trying.
2. Innovate on the structure of your new venture. While many people talk about innovation, few try to innovate the way they do innovation. Structures defines outcomes. So think about how you structure your new corporate venture. Is it a new business unit or an external venture? Have you thought about how to get help from the existing business units — or maybe you want to brand it different from your existing business to stay off the radar. Look at your incubation efforts like a Hollywood studio.You won’t be able to predict which of your projects will be a success — so make a process that allows you to have a portfolio approach.
3. Do you have talent on your team that have tried to built something from scratch before? Many companies only staff these projects with either internal innovation teams or agencies. While filled with many talented, creative and smart people — you tend to find few who have actually tried to build a company from scratch before. It’s very different playing the game — than watching it. So find a way to get entrepreneurs involved. They might not be able to give you the magic tricks to make your business big — but they can tell you a thing or two about what not to do. The difficult part is to find a way to work with them. Don’t expect someone who is very entrepreneurial to want a staff pass, to care about a 401 plan or to only work ‘your’ idea. So be creative with ways to add proven entrepreneurial experience to your initiatives.
4. Avoid just expanding your business. Making new startups can be so much more than just extending your existing business to digital. Increasingly your competitors can come from many sides. When Apple launched Facetime, they didn’t care much about how they would disrupt long-distance calling cards. Your next competitor might be very different than your old one — and you might just be collateral damage in their innovation game. So start looking broader about what offering might be right for your business to create. The route to growth is likely to be different than a direct extension of your existing business.

Finally, get going! Venture creation is risky and filled with mostly unknowns. In a corporate environment, those are traits that nobody enjoys. However, if you are the one tasked with innovation you should take responsibility for getting started. Doing nothing is worse than doing something wrong.

About the author: Henrik Werdelin is the co-founder of Bark & Co as well as Managing Partner of Prehype, a venture development firm headquartered in New York with offices in London, Copenhagen and Rio.

Prehype is a group of entrepreneurs who help established companies and VCs facilitate spin-outs, incubation and venture partnerships. We run programs for companies like NewsCorp, Mondelez, GE and LEGO where we identify new innovation/business opportunities and then incubated these new business initiatives via lean incubation process.

Henrik has been part of the startup scene for over 20 years as both an investor, founder and advisor. His experience ranges from being the Entrepreneur in Residence at leading venture capital firm Index Ventures over advising or investing in start-ups like HotPotato (now Facebook), GoTryItOn (now Rent the Runway), ReadMill (now DropBox) Brit.co, FancyHands, Path and Sunrise. Before being an entrepreneur/investor, Werdelin was Vice President of Product Development and Strategy for MTV Networks International where he spearheaded the development of many of MTV’s award winning innovative digital products. He is a frequent speaker at top-tier business schools and industry forums and has been quoted in numerous publications and media outlets on subjects such as corporate innovation, product design and entrepreneurship. He is Danish but lives in the US with his family, where he was named amongst the Top 100 most Creative by the industry magazine Fast Company and Silicon Alley Insider’s ‘100 People in Tech’.

http://prehype.com — Follow Henrik on twitter @werdelin