What is a “Corporate Startup”?
The homepage of the Corporate Startup Lab (which I helped start and lead at Carnegie Mellon) declares:
“Fundamentally, a startup within a company is the same as one inside a garage: a group of entrepreneurs trying to make the world a better place using new ideas and inventions.”
While to some extent the term “corporate startup” is hopefully self-explanatory, I thought it would be good to elaborate what we mean by it.
When we talk about corporate startups, we are focused on a specific type of innovation process inside companies. But first, let’s focus on what we mean by innovation, and for that, I’m going to steal a quote from my colleague Sylvia Vogt at CMU who jointly teaches the Executive Education course on Leading Innovation with me. She explains:
“Creativity is spending money to generate ideas, while innovation is spending ideas to make money.”
Using these definitions, creative ideas are a prerequisite, but we’ve been focused on the second sentence — figuring out how to make money with these ideas. (While this has been our focus so far, one big research goal of the Corporate Startup Lab is to apply what we’ve learned to generating non-monetary value as well — think about goals like lowering environmental footprints or innovating within large nonprofit organizations.) And when it comes to corporate startups, we aren’t including all types of innovation but instead focus specifically on adjacent and transformational innovation. In other words, looking at innovation targeting new customer markets and/or new solutions.
The image above is from a well cited 2012 HBR article “Managing Your Innovation Portfolio” where the authors use the above 3x3 matrix which they call an “Innovation Ambition Matrix.” Using this matrix, we are focused on the top right half of the matrix — specifically adjacent & transformational innovations.
Are Corporate Startups Possible?
Once people understand what we mean by a “corporate startup,” the next question is typically around the viability of these activities. For example, a recent HBR article titled “Why There’s No Such Thing as a Corporate Entrepreneur” declared:
“Can we please agree that there is no such thing as a corporate entrepreneur?
The term corporate entrepreneur devalues what real entrepreneurs do, and it creates a haze of hokum around people trying to innovate in large companies that sets them up to fail.
There is an ocean of difference between people innovating or designing new offerings inside a large company, and actual entrepreneurs.”
As I explained in the comments, I actually can NOT agree there is no such thing as a corporate entrepreneur. I’ve met too many of them over the last couple of years helping start Carnegie Mellon’s Corporate Startup Lab. Companies like PNC Bank, Alcoa, Verizon, MSA, Bosch, Philips Respironics and Optum have executives I’ve met creating corporate startups right now.
More generally, as I think about products that have changed and improved my life over the last decade, at least as many of them came from transformative innovation within established companies as came from traditional startups — just think about technology products (a sector ripe for venture investing and startup accelerators) created by large established players: Apple iPhone, Amazon Web Services, and Google Docs. As you move to industries like healthcare, the ratio skews even more to established companies being the source of transformative innovation.
While some people like to point out that bureaucracy often brought on by restrictions within established companies can inhibit these type of activities — which certainly can be true in some cases — it’s also worth pointing out that certain ideas really can only be started with the resources large companies can leverage (I will expand on this as a future post.)
Yes, But The Tools and Processes Are Different
While we believe startups can exist and thrive inside companies, we also acknowledge that some of the tools and processes required are inherently different from independent startups. The easiest example of this is how they are financed. I spend my days as a venture capitalist, so this one hits particularly close to home. A traditional startup is financed by talking to dozens of folks like myself and hoping a few of us decide to move forward with an investment. Companies need to figure out the right mechanisms to value and fund these activities, especially since a startup’s time horizon is much longer than the next annual operating budget. At the Corporate Startup Lab, we’re actively researching and creating tools (free to download) to help support all the unique aspects of corporate entrepreneurship while also highlighting tools and processes that work well and can be leveraged from traditional entrepreneurship.
Corporate Startups Key to Remaining Relevant
To wrap up, I’d like to make one final point to corporate executives: not only CAN you do this, but your organizations MUST engage in corporate entrepreneurship to remain relevant.
Innosight, the consulting firm Clayton Christensen helped start recently updated their analysis of corporate longevity. The chart below shows both the acceleration of companies disappearing from the S&P 500 as well as their forecast for this trend to accelerate.
While there are a number of reasons for this, the primary one is that as the rate of change is accelerating and so transformational innovation is key. Put another way, the things that got your company to its current position in the marketplace will not keep it successful indefinitely.
In the first HBR article mentioned above, in which they set up the Innovation Ambition Matrix, the authors acknowledge there is no “golden ratio” (one set ratio that is best for every company). However, they go on to suggest a good starting point is a minimum of 20% investment in adjacent innovation and 10% in transformational innovation. Interestingly, in follow up research focused just on “high performers that invest in all three levels of innovation” they explain:
Of the bottom-line gains companies enjoy as a result of their innovation efforts, what proportions are generated by core, adjacent, and transformational initiatives? We’re finding consistently that the return ratio is roughly the inverse of that ideal allocation described above: Core innovation efforts typically contribute 10% of the long-term, cumulative return on innovation investment; adjacent initiatives contribute 20%; and transformational efforts contribute 70%
In other words, to avoid disappearing like your peers on the S&P 500, you need to invest in adjacent and transformational innovation by creating corporate startups.
If you want help building your own corporate startup capabilities, the Corporate Startup Lab is here to help. Check out our site to learn more about and feel free to reach out if you’d like to discuss opportunities to collaborate.
