5.1 HOW DO WE CREATE A SPEEDBOAT WITHIN A LARGE SHIP?
CORPORATE INCUBATION STUDIO
Smart ideas and promising new business can perfectly originate in a large corporate environment but could fall between the cracks of the organization, might not fit within the core business model of the corporate or are deemed too high risk to be developed within the current business units of the organization.
We deem it useful to briefly elaborate on the possibilities to innovate and grow by creating and potentially spinning-off new stand-alone businesses from a corporate through dedicated startup incubation studios.
In order not to miss out on such innovation, many corporate incubation studios have seen the light to ensure that corporates are able to nurture and develop new ideas, technologies and businesses, and provide facilities, resources, expertise and mentoring to develop promising ideas or speed product development and time to market.
The funding source for capital and other resources is typically a single corporate, with the studio leading the problem/solution process within the parameters of the pre-determined corporate goals. Corporates also regularly collaborate with external venture builders whose main focus is on creating companies from the ground up.
Such programs intend to create a startup or scaleup-like-environment removed from the corporate organization’s day to day operations. The rationale is that such smart ideas and promising new businesses will be able to grow into stand-alone business divisions of the corporate or ultimately be spun-off as a separate company.
The corporate will have the following objectives while establishing a corporate incubation studio:
• Nurture and develop new ideas, technologies and businesses free from corporate structures and bureaucracy.
• Develop new businesses and speed product development and time to market through a focused incubation process.
• Allocate talent, capital and support to various projects through an iterative process.
The startup entrepreneurs will have the following objectives while joining a corporate incubation studio:
• Benefit from and leverage abundant corporate resources, allowing the entrepreneurs to focus on innovation, leadership and scaling the business.
• Maximize the equity stake for the startup entrepreneurs.
• Optimize the exit opportunities through an external trade sale or liquidity provided by the corporate.
Corporate Incubation Best Practices
Corporate Support and Resources
Any aspiring entrepreneur needs access to many resources, such as logistics (legal, accounting, HR, etc.), development, branding/marketing, investments, domain expertise and clients. Access to such resources is not always evident and function as a huge distraction for entrepreneurs.
The purpose of incubation labs is to streamline the access to resources, and allow for the founders to focus on innovation, leadership and scaling the business.
Budgets are dedicated to the corporate incubation studio which allows the entrepreneurs to dedicate their time to the development of new ideas and businesses for a certain period of time, while benefiting from the corporate’s extensive resources, such as facilities, expensive equipment and technology and access to the corporate’s customer base to test-case their value proposition.
It is crucial for the corporate incubator to adopt HR policies which enable the relevant entrepreneurs to fully dedicate themselves to the development of new ideas and business without any further obligations to the corporate itself.
Corporates first need to determine whether they will focus their corporate incubation efforts on a specific industry vertical or cover several industries. Focusing on an industry vertical permits to leverage the corporate’s deep industry expertise which can be recycled for multiple projects, with the network and investments aligned between the corporate and the portfolio companies. An economic downturn in this specific industry vertical would on the other hand have exponential consequences due to the lack of diversification.
A focus on different industries has the advantage that more potential problems and solutions are identified, but the lack of deep industry knowledge in all covered industries is likely to have an adverse impact on the success rate of the incubated businesses.
Nearly all corporate incubation studios apply a stage gate process to the incubation process.
The stage gates would consist of identification of the problem to be resolved or opportunity to be exploited, through ideation, validation, prototyping, discovery up to scaling.
The entrepreneurs would be required to pass each stage gate as a hurdle before they pass to the next stage. Each stage may result in a “go” or “no-go” decision for a specific opportunity. The most important consideration is that each stage gate de-risks the project, resulting in a higher survival rate for those ideas which pass the gates.
Funding and other resources are staged and depend on the project passing different gates. The process is entirely iterative, allowing both the corporate and the startup teams to have a clear and objective understanding about success or failure.
Corporate Policies and Procedures
One important element to ensure the success of corporate incubation is to liberate the entrepreneurs from extensive corporate policies and procedures applicable to the existing businesses.
The guidelines should be restricted to basic policies governing company values and other policies which are mandatory from a legal and regulatory perspective.
At November Five, we create digital solutions that drive people and businesses forward. We are problem solvers and opportunity chasers, committed to maximizing our capabilities, growth and results. As we build our own ventures, we work towards these commitments, serving our greatest potential.
Thanks to the blend of our agency and corporate venturing model, we offer our clients the opportunity to work with a truly entrepreneurial team that is able to move and iterate fast, with proven capabilities to grow business value and delivering tangible results.
In turn, our clients inspire our industry-agnostic views and expose the real business and mission-critical challenges enterprises are facing today. Purposeful insights that can be translated and quickly iterated into market-fit and -ready solutions, offered by our spin-off ventures.
The proof of the pudding is when our agency clients also become the early customers and partners to boost our ventures’ market entry. Spencer.co and Gorilla.co are already the first and successful examples of this strategy.
Tom Vroemans, CEO November Five
Corporate Integration or Spinning-off
The corporate should clarify at the outset whether it plans to keep full ownership of the new business once developed and success has been confirmed or plans to spin-off the business as an independent entity, permit external investors or arrange a trade sale.
Such choice is primarily important for the founding team of the new venture as it will determine whether it is run as an externally funded company, allowing for typical startup or scaleup incentives such as founder equity and stock option grants to be implemented.
It is unfeasible to implement such incentives within an incubated business that will never be fully independent or sold, which is required to generate large equity returns for the entrepreneurs as if they were running an external startup or scaleup.
One of the main concerns with corporate incubation is the protective nature of such environment. In the event the ideas or new business do not come to fruition, entrepreneurs may always return to their old or other jobs at the parent organization, or externally sourced entrepreneurs move to the next opportunity while having been paid by the incubation studio during the incubation process.
It is not unreasonable to assume that the availability of abundant resources makes the entrepreneurs less hungry and motivated than founders of external startups and scaleups who do not have a safety net to return to if their startup or scaleup fails.
In addition, one should take great care to ensure that ideas and businesses are not only tested with the parent company and its customers, but also with third parties, including the ability to pursue partnerships with competitors of the corporate or from developing products which compete with established products of the corporate.