Is Your Corporation Ready to Build Startups?

Elliott Parker

At High Alpha Innovation, we partner with leading corporations to innovate through external startup creation. Launching startups is hard, but the rewards are worth it. For most corporations, true transformative innovation can only be achieved through external startup engagement -- through partnerships, acquisitions, investment, and proactive building of new ventures. The governance, incentives, and processes scaled corporations use to run their business efficiently are ill equipped to nurture new business ideas that are different from the core. Scaled organizations are designed to execute -- not to learn -- and transformative innovation requires learning. This is the heart of the “innovator’s dilemma” that Clayton Christensen introduced to the world in 1997. 

In contrast, startups are designed expressly to learn, and to do so very quickly. With the right incentives and governance, talented founders can accomplish amazing things in little time and with relatively modest means. At High Alpha Innovation, we combine the understanding of scaled enterprises with the learning ability of startups to drive transformation. 

Many of the corporate leaders we speak with wonder if their organizations are ready to build external startups. While external building is increasingly becoming a standard tool in the corporate innovation toolkit, for many organizations, external building is still new -- and not intuitive. 

When we are evaluating corporate partners with whom we want to launch startups, there are three primary characteristics we believe lead to success. If you are a corporate executive contemplating launching external startups, make sure you have the following in place (and if you don’t, we can help you):

  1. Senior leadership support: Teams building external startups will inevitably encounter significant headwinds within the corporation. When a new venture concept is widely viewed as attractive, many “helpers” will emerge to embrace the opportunity (and slow things down). When a new venture concept is viewed as disruptive or threatening to the core organization, leaders with something to lose will try to shut the effort down. In either case, senior leaders -- including the CEO -- need to be ready to step in and remove roadblocks. 

  1. Strategic rationale for venture building: External venture building is most successful when there is broad understanding among corporate leaders about why venture building is critical to the future success of the organization. We have yet to encounter any corporate leadership team that is satisfied with the quality or quantity of their company’s innovation output. The immediate rationale for building is that it unlocks access to new innovation that would otherwise be impossible to pursue inside the organization. Financial returns from venture building can be attractive, and at a minimum should provide enough returns to fund the activity, but for most scaled corporations the financial returns should not be the primary objective for venture building. 

    Rather, the ideal strategic objectives for a sustained venture building program should be learning and optionality. Startups are designed to learn, and can help the scaled organization learn quickly about new markets and opportunities. When an organization builds a portfolio of startups, this pool creates optionality -- the ability to adjust and move in new strategic directions as the future unfolds. We believe it best to consider the startups corporations build as “call options” to hedge and benefit from a range of unknown futures. Startup building creates more resilient corporations. 

  1. Access to capital: One of the primary immediate benefits of external venture building is that it enables corporations to fund innovation from the balance sheet, with patient capital that does not impact the corporate bottom line. Startups require capital to grow, and they require momentum in the beginning to achieve lift. 

    Before embarking on a startup building journey, it is important to make sure the pathways to capital are defined, both for the launch of new ventures, and for follow-on investment in the ventures that are performing well. For many corporations, their existing corporate venture capital fund can be a good source of follow-on funding for launched startups. Note that if an external venture is properly structured, capital from other investors, including strategic investors or venture capitalists, can also be used to fuel the growth. In this manner, corporations can leverage others’ capital to build more, and do so more rapidly, than they could on their own. 

For corporations that have not launched external ventures before, or for those struggling to do so independently, our team at High Alpha Innovation can work with senior leaders to ensure there is adequate leadership support, a strategic rationale for building, and ready pathways to capital. Get started -- the future is coming quickly!

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