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So you want to build an incubator. Pt 1.

We did, and here’s what we learned.

Scott Howard
Jan 27, 2017 · Unlisted

Q1. Why would a company want to form an incubator?

How do companies use resources?

Companies are created to provide value to their shareholders — value in this context being financial returns (still basically true even for B-Corps).

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  • Research & Development (R&D) — explore new product or service offerings and the efforts to bring them to market
  • Operations — invest in your infrastructure
  • Human Resources — hire new talent or train current employees

Why would you invest in anything outside the traditional bounds of on operating company’s functions? Where does an incubator even fit in?

I argue that investing in those traditional functions is not enough for a lot of companies and that an Incubator 1) Diversifies your explorations for growth, and 2) If built appropriately benefits all of these functions.

Why investing in traditional company functions is not enough

A great proxy for company survival is the average lifespan of S&P 500 companies. In the 1950s a company could expect to live over 60 years, but by 2027 that number is trending towards just 10 years.

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Average lifespan of S&P 500 companies with forward estimate, and two hypothetical alternative paths (stopping and reversing the trend)

It begins on the individual company level, where companies purposefully seek out exploration in the hopes of evolution, innovation, and expansion.

Most companies have a simple trade-off, investment for exploration

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Image Credit — NSF, National Center for Science and Engineering Statistics, National Patterns of R&D Resources (annual series)
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So we’re spending more on R&D but getting less economic oomph overall.

How can that be? Well just because you spend more is no guarantee you’ll get more out of it. Remember that time the powerball hit $1.5B? You bought more tickets than usual, right? How’d that pan out? Me too…

What happens if you do not successfully explore?

Let’s take the packaged food space as an example. In 2015 major packaged-food companies lost $4 billion in market share, much of it to smaller, more health-conscious companies. These upstarts were exploring alternative ingredients and delivery mechanisms, crafting better brands, and engaging with consumers in new ways. They were/are winning.

How does your company explore today if at all? What are the alternatives out there?

  1. Happenstance or “on the job” discovery — someone makes a discovery during the course of their job that aids in the evolution of the company. Congrats, you got lucky!
  2. Problem solving discovery — you discover a problem that needs to be solved either through the course of regular work or a focused workshop. Then you go back to the start and work towards overcoming that barrier between you and growth. This works but requires that you can identify the barriers keeping you from your next evolution. It also often results in focusing on adjacencies and incremental gains. That’s not a bad thing, just not what we’re looking for.
  3. R&D — you spend internally on exploration. This goes beyond “problem solving discovery” and commits firm resources regularly. Since R&D is performed by practitioners within the firm, they are subject to the politics, focus points, and biases of the organization. Also, most R&D has relatively small time and spend allowances before demanding positive outcomes (at least directionally). I place most “internal venture” programs within this category and will explain that later. R&D is best at discovering adjacencies to your existing offerings and is contrained by operating in the same business environment as day-to-day work.
  4. Incubation — you set up an environment that 1) facilitates the “startup’s” success, and 2) applies the pressures a startup would face that are crucial for growth. Incubation can bring outside companies into the fold or be internal teams that act as “startups”. Either way, there is fairly substantial separation on a day-to-day basis of the startups within the incubator and the rest of the firm. Incubation requires a good degree of separation so the startups can operate in the necessary environment.
  5. Acquisition — you can acquire another company that has been more explorative than you. This happens either early (cheaper but risker) or late (more expensive but less risky). Acquired new technology or products must be incorporated. Same for acquired talent. You’ll have to let me know which you think is more difficult.
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Q2) How incubators differ from internal “venture-style” programs

Increasingly, companies are setting aside a pool of money to make small bets on internal projects. I have client companies that have created the equivalent of an internal venture fund — they use a stage-gate process and as an idea progresses through those gates they allow it more resources (oxygen for ideas). This is not too disimilar to how startups raise capital in the wild. You have an idea and raise money. You do some work and if you show some progress, you raise more money. Repeat until success (or failure).

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There are three important distinctions between “venture-style” programs and incubators. First is focus. Second is mindset. Third is bias.

Focus — If the team executing the project is not 100% focused on that project, you have already hurt the probability of success for something that already had many obstacles to overcome. We’ve all seen projects stall. Having the project be in addition to normal work only exacerbates the chance that it will stall. Another key factor here is the rewards system. Combining motivations for day-to-day business and this innovative project together creates disharmony in the employee’s rewards system. All it takes is for one of the project’s team members to get too busy and the whole project will fall behind and become demotivated. If you want to be successful here you need both headspace and workspace to focus on the mission.

Q3) How do you sell an incubator internally

Incubators have the potential to change the equation.

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The Incubator Teeter-Totter

I’ll wrap up here on should your company pursue an incubator?

Is your company growing? Do you have a comprehensive view of technologies affecting your business? Are you evolving your product and services and swiftly bringing new offerings to market?


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