Internal Ventures Aren’t Going to Save Big Corporations

How to survive in the face of change?

Will traditional corporations still be standing once the digital transition has finished redefining their industries’ value chains? It’s a question that worries most of the executive committees at most of today’s big corporations, giants that grew massive in the “before”. Before the internet, before startups, before the awakening of the multitude, before the book industry, the music industry, the retail industry, the banking industry showed us all what was happening.

These dinosaurs want to regain the upper hand, to once again be those who are defining the sector. And so there are initiatives that are born, aiming to grow into a disruptive innovation that will generate cash and assure the corporation’s dominant position in tomorrow’s economy. These are the partnerships with startups, corporate venture arms, workshops on design thinking, C-level trips to Silicon Valley, hackathons…

The latest fashion is to create, using “intrapreneurship”, agile teams within the corporation piloted by salaried workers: internal startups. They are supposed to bring together the best of both worlds, the agile methodology of startups and the resources of the corporation, to create synergies with internal departments and provide control over the initiative. Corporations want to leverage the entrepreneurial profiles they have hiding within them, offering them the possibility to work on these projects full-time, equipped with a budget (oftentimes unlocked after a call for projects and a pitch competition, complete with a panel of judges) and aiming to discover disruptive innovations that will be the motors of new growth.

The idea sounds great. But reaching the goal is practically impossible.

The Post-it at 3M & the digital camera at Kodak: The myth of disruption through intrapreneurship vs the reality of the intrapreneur

We can see that the process of launching internal startups has resulted in very little up to this point — where are the growth results having a visible, significant impact on the revenues, profits and market caps of big corporations? The disruptive innovations that gave birth to new, profitable business units and that are cited regarding intrapreneurship almost all date from the 1980s and ’90s: the post-it and 3M, the PlayStation and Sony, Java and Sun Microsystems.

That doesn’t mean that intrapreneurship isn’t needed. It can still generate a new digital mindset and culture (iterative development, short project cycles, autonomous working…), accelerating the development of products and services, producing important incremental innovations. But the goal of finding a disruptive innovation thanks to “internal startups” will virtually always lead to failure and disappointment with regards to the expectations of the executive committee. As explained by David Butler, ex-VP of Innovation at Coca-Cola and one of the original standard-bearers for intrapreneurship in the US, who recently changed gears: “There are certain things that prohibit the kind of growth you need as a start-up that just cannot happen in corporate structures”. Those “certain things” are mainly due to two factors: the human factor and the governance factor.

1 . The human factor

The human factor isn’t strictly tied to the nature of the talent that today exists within big corporations. As we always say at The Family and Pathfinder, Anyone can become an entrepreneur — but not everyone. What we mean is that entrepreneurs can come from any organization, having had any career path, but that not everyone is an entrepreneur. But there certainly are entrepreneurs hiding within the ranks of traditional companies.

The problem with the human factor is linked to the intrapreneur’s position. The unpredictable success of a startup comes at the price of taking a real risk, passing through a radicality nourished by ambition without any limits.

Skin in the game: Hernán Cortés scuttling his ships before invading the Aztec Empire

These are impossible when one is a salaried worker who knows that safety net is there in case things go wrong. Intrapreneurs just take up their old post once again if a project fails; entrepreneurs actually go through the bankruptcy. Intrapreneurs get a certain budget allocation for a certain amount of time, and they can periodically renegotiate that budget depending on how they follow an established business plan (exactly the opposite of the launch/acceleration of a startup, which starts from a problem to solve, not a business plan). Entrepreneurs, on the other hand, can try to raise funds that then become associated with a “death date” (defined by how much runway they have — basically how much cash is still on hand versus how much cash they’re burning through every month). Intrapreneurs have to battle for oftentimes symbolic shares in their project, meaning that they’re less aligned with its outcome; entrepreneurs start with 100% of their company and are driven by the ambition of growing it into a big corporation, like those now found in Silicon Valley, or a company worthy of being acquired for tens of millions of euros.

2 . The governance factor

The second reason that internal startups have difficulties is due to their governance: intrapreneurial teams are rarely free in terms of the strategy, financing and operations of their project. They must explain, justify, negotiate, and battle just to make a decision.

A startup is a business that is searching for its business model. In order to have any hope of succeeding, it can’t get behind an idea or a solution, but instead must find a real problem and attack it without ever giving up. Through successive iterations, the startup tries various solutions until it finds one that serves a market (the famous product-market fit). This phase means that entrepreneurs must be focused on execution — the key to success -, free to test & pivot, not worrying about constraints related to existing talent, finances, legal obstacles, social standing, or organizational hierarchies that existing businesses must deal with. It is this freedom and agility that allows a startup to innovate.

Intrapreneurs are always constrained in their possible actions, in their agility and execution, by the interactions that they have with their organizations. They aren’t given free reign over their project, they aren’t the “dictators” of their startups, they don’t have final say in who to recruit or how to dispose of their funds.

So why intrapreneurship?

The goal of intrapreneurship thus shouldn’t be just to create internal startups that will be the next disruptive business units for the corporation. It should have multiple goals: push the culture of teams forward, accelerate the development of new products and services within the corporation’s core business, guide the digital transformation of organizations, retain existing talent and pull in new talent… These are ambitious goals that justify intrapreneurial efforts in every big corporation.

The true goal of intrapreneurship: transformation

But putting intrapreneurship in place isn’t easy: between 70–90% of intrapreneurial projects fail. So what’s the right way to go?

It starts by putting a set of intrapreneurs within an entity that is separated from the company’s business units. Here problems and ideas identified within the business units can be tested and validated, giving way to MVPs that are then launched on the market as quickly as possible. This group can eventually be financed by an internal fund dedicated to its operations. It should be managed or sponsored by a high-level, influential decision-maker within the corporation, with its governance directed by a board with representatives from the various business units, from corporate strategy, from the Innovation Department… Within this group, the intrapreneurs can be assisted by “accelerators” who push them through problem validation, testing phases, defining investment needs, finding indicators of product-market fit, and executing various initiatives.

Getting to disruptive innovation

In parallel with intrapreneurial efforts, truly disruptive innovation that creates entirely new business models attacking problems that are adjacent to or even far from the corporation’s core business will always come from elsewhere.

“What we’re doing now is model 2.0. We changed direction — now the start-ups are completely independent,” explained David Butler, then VP of Innovation at Coca-Cola, in 2014.

Big corporations aren’t required to simply watch their value chain be transformed before their very eyes, doing nothing besides trying to acquire the newcomers at the apex of their valuations. A new way is possible, following the entrepreneurial path, with historical examples (Nespresso) and academic theories (Clayton Christensen). This path means realizing that in order to build the new “growth engines” of tomorrow, traditional companies must invent new products far from their legacy organization. Founded with an understanding of how the value chain has changed and making use of all assets and capabilities, these products must be run by real entrepreneurs who are not salaried members of the corporation, who hold a significant part of the startup’s capital (with the corporation having a significant part as well) and whose operational independence is guaranteed within the startup’s statutes.

It is through this third way, run in parallel to intrapreneurship, that companies may now finally unleash disruptive innovation within their organizations.

Thanks to Kyle Hall