Why Internal Ventures are Different from Startups

Venturing inside a corporation is a 2-front war

Henry Chesbrough is known as the father of Open Innovation and wrote  the book that defined the practice. Henry is the Faculty Director of the  Garwood Center for Corporate Innovation, at U.C. Berkeley in the Haas Business School.  Henry and I teach a corporate innovation class together.

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Thanks to Steve for the opportunity to share my thoughts with you all.  This post follows directly on Steve’s earlier excellent post, Why Companies are not Startups.

The question of how corporations can be more innovative is one I have wrestled with for a long time.  For those who don’t know, I wrote the book Open Innovation in 2003, and followed it with Open Business Models in 2006, and Open Services Innovation in 2011.

More recently, Steve, Alexander Osterwalder and I have started sharing notes, ideas and insights on this problem.  We even ran an executive education course last fall at Berkeley on Corporate Business Model Innovation that helped each of us understand the others’ perspectives on this problem.  In this post, I want to share some new thoughts that build on Steve’s post, and connect them to Lean Startup methods.  However, I will then argue that while these methods are necessary to managing new ventures inside a company, they are insufficient.

First, let me recap a key insight for me from Steve’s post.  A startup is a temporary organization in search of a repeatable, scalable business model.  A corporation, by contrast, is a permanent organization designed to execute a repeatable, scalable business model.  While a simple statement, this is a profound insight.  When companies want to innovate a new business model (vs. innovating new products and services within an already scaled business model), the processes that companies have optimized for execution inevitably interfere with the search processes needed to discover a new business model.

This has serious implications for corporate venturing, for innovating new businesses – and new business models – inside an existing corporation.  The context for an internal venture inside an existing company is dramatically different from the context confronting an external startup out in the wild.  The good news is that corporations have access to resources and capabilities that most startups can only dream of, whether it is free cash flow, a strong brand, a vibrant supply chain, strong distribution, a skilled sales force, and so on.  The bad news is that, as Steve reminded us above,each of these assets is tailored to execute the existing business model, not to help search for a new one.  So what seem like unfair advantages for corporate ventures become inflexible liabilities that block the search process of the venture.

But the contextual differences go even beyond these substantial differences.  A corporate venture, struggling to search for a new, repeatable and scalable business model, must wage that struggle on two fronts, not just one.  The external startup has to work long hours, and make many pivots, to identify the product-market fit, validate the MVP, and articulate a winning business model that can then be repeated and scaled.  The internal venture must do all this, and more!  The internal venture must fight on a second front at the same time within the corporation.  That second fight must obtain the permissions, protection, resources, etc. needed to launch the venture initiative, and then must work to retain that support over time as conflicts arise (which they will).

Knowing Steve’s fondness for military metaphors, think of the corporate venture as fighting a war on two fronts at the same time.  Just as Germany’s domination of Western Europe in World War II was eventually undone by its decision to launch a second front by invading Russia, so too unlike a start up, corporate ventures cannot focus solely on winning in the external marketplace.   This leads to two key points:

Point 1:  You have to fight – and win- on two fronts (both outside and inside), in order to succeed in corporate venturing.  As Steve would say, this is a big idea.

One memorable example of this was Xerox’s internal venture capital fund, Xerox Technology Ventures (XTV).  Launched by Robert Adams in 1989, this $30 million fund grew to over $200 million in the next 7 years, as it launched companies like Documentum and Document Sciences out of Xerox’s fabled Palo Alto Research Center.  This financial performance was extraordinary, and put XTV in the top quartile of all VC funds launched in 1989.  Ordinary VCs would use this success to raise an even larger fund, and try to create the magic once more.

But Xerox instead chose to shut XTV down in 1996, despite its external success.  Why?  XTV’s success created lots of internal dissatisfaction within Xerox.  The success of Documentum and Document Sciences, they felt, came largely from Xerox technology and customers, yet the startup companies XTV funded got all the credit.  Worse, Robert Adams and his two partners got 20% of the carried interest in the fund, resulting in payouts of $30 million to the partnership.  This was more, far more, than the Xerox CEO was paid in those years.  So XTV won in the market, but lost inside the corporation.

This leads us to:

Point two: Corporate ventures may need to pivot to obtain and retain internal corporate support for the venture.  This is likely to be controversial for adherents to Lean Startup thinking because we traditionally think of pivoting to improve the product-market fit in the external marketplace.  But astute corporate venture managers, realizing that they must fight the war on two fronts, will also be alert to the need to pivot if needed in order to keep the internal support they require in order to succeed.  For example, the new venture might pivot away from current customers of the corporation in the early days of the venture, in order to reduce friction with the established sales force (who want to sell large quantities of the current product, not test minute quantities of some future product that may or may not ever be built in volume.  Worse, the potential new product might give customers a reason to delay the purchase of today’s products).

This also suggests that the internal organization must be carefully designed and prepared in order to sustain internal support for ventures over time.  Ventures that launch without this preparation are at great risk as soon as the initial enthusiasm for innovation begins to wane.  One bad quarter for the company, or one transition for a key internal champion, or the arrival of a new CEO who wants to clean house, any of these unforeseen changes could spell doom for an unprepared internal venture program.

This suggests a further modification to Lean Startup:  Get Upstairs in the Building.  You will need strong, sustained internal support for successful internal venturing.  You will need to get the bigwigs upstairs to sign up to the risks, and put structures in place to insulate and protect the ventures from the execution processes in a large company that will attack the new venture.  Think of it as internal political product-market fit, and prepare to pivot in order to increase that fit (and your support).

We will continue our conversations, and I fully expect that Steve, Alex and I will have more to say about how best to structure and support new ventures inside a large corporation in future posts!

Lessons Learned

• Internal ventures face a different context than do external startups.
• Venturing inside a corporation is a 2-front war.
• Lean Startup Methods are necessary, but insufficient, to fight this war.
• An internal venture may need to pivot to gain or maintain internal support.  Get Upstairs in the Building, to generate this support.
• Stay tuned, as Steve, Alex and I have more coming….