A little while back, I had mentioned established companies are looking at investing in start-ups and “de-risking” their businesses. I am linking to the detailed HBR case report. Please note that while the article may be behind the paywall, I am highlighting specific portions.
The reason for this development:
Leaders try to respond by creating their own corporate ventures, but those typically lack entrepreneurial qualities because they are staffed by people trapped inside the regime. Or they create an arm’s-length spinout to make space for innovativeness, but then the spinout struggles to access the very resources that would give it an advantage. Enter the hybrid start-up, which combines the assets of a corporation and the entrepreneurial capability of a start-up.
Digital technology offers corporations many opportunities to create hybrid start-ups. Stuart Munro, Commonwealth Bank’s group head of strategy, helped launch its digital payment and cash-back-reward start-up, Cheddar. He explains, “There’s a blurring of industry lines happening everywhere. To meet customer expectations and needs, we’ve got to look more broadly than just traditional products and really enrich the proposition in aggregate.”
Corporations can use hybrid start-ups to create value in new ways from existing assets, defend against a disrupter, create new assets to act as strategic complements, and become more agile.
How is it useful for the incumbents themselves?
Likewise, as the practices that underlie entrepreneurial capabilities—such as lean start-up, design thinking, and agile methods—are better understood, they become more easily available to potential competitors. Incumbents must learn how to run fast experiments and scale them up, which is essentially an exercise in corporate transformation.
How to manage these entities:
The best way to get started, therefore, is to do some hard thinking about what you most want from your hybrid start-up and then match that with the right balance of freedom and integration. As a rule, greater integration with a corporation increases a start-up’s ability to access privileged assets, transform the core, or scale up. But it also slows the venture significantly, limits outside funding, and may distract from external opportunities. So if your primary goal is to use the corporation’s assets to spark new revenue streams, create a strategic complement, or disrupt your existing business, you should probably not integrate the start-up.
Is it a win-win situation?
In addition to key assets and money, a corporation provides legitimacy that an entrepreneur often lacks. Milne recalls the ease of renting spaces for RepairSmith, contacting potential partners, and accomplishing other normally challenging tasks, all because he had a brand name behind him. A corporation also offers entrepreneurs the chance to have a greater impact. Of course working in a corporate environment forces some trade-offs—mainly dealing with sluggish processes—but for those who have experienced the challenges of raising money, the benefits can be attractive.
There are other issues discussed, but the article overwhelmingly highlights the “successes” and sounds like a “smooth affair”. It isn’t so. When there is a competition for internal limited resources, politics breaks out. Therefore, leadership must assess clear policy frameworks around this, deploy experienced personnel to provide guidance/legal/administrative backup with clear mandates, and reorganisation within the ranks to ensure the “success”. The metric of “success” isn’t hitting the “X” goalpost or a “valuation”, but provides circular feedback to improve the outlook for the entire organisation.
Last but not the least:
As technology breaks down familiar barriers, incumbents need to figure out how to become tech companies before tech companies figure out the incumbents’ business. Properly conceived and managed, hybrid start-ups can create new sources of growth from a company’s existing assets, serve as a tool for transformation, transfer insight and capabilities back to the core, and help future-proof the business.