Should we launch our idea as an internal venture or external startup?
Since Clayton Christensen introduced the concept of the innovator’s dilemma in 1997, corporations have been experimenting in earnest with methods for launching new ventures and products. What many organizations have learned is that transformative innovations -- those ideas that are far from the core business -- are nearly impossible to launch internally. This is frustrating! The innovator’s dilemma is real. Increasingly, corporations are experimenting with external startup launches as a way to commercialize concepts that the internal incentives, governance, and processes of the corporation would slow down.
A question we are often asked is: How should one choose between internal or external paths for the launch of a new venture? The short answer is that the corporation should choose the path that is going to create the most value in the least amount of time. Easier said than done!
At High Alpha Innovation, we are applying innovation theory to make decisions about which new business concepts are best suited for an external launch path. We find that in our collaboration process with corporations, about 20% of the concepts we generate together are strong candidates for external launch. The other 80% are better pursued through internal commercialization pathways or through partnership with existing companies, if they should be pursued at all.
We have developed the launch criteria below to help us sort ideas into internal and external launch categories. Here’s a quick test: If you can build a forecast of first-year financial results for a new business concept with a high degree of confidence, you should likely launch the idea internally. If you can predict what is likely to happen, you’re probably facing execution challenges, and you should likely launch internally. You know what needs to be done -- go do it! However, when you’re primarily dealing with learning challenges, launch externally. If you understand the problem, but aren’t confident in the solution, an externally launched venture will likely have the advantage. This is because scaled enterprises are optimized for execution; independent startups are optimized for learning.
Another quick test: If the idea is strategically critical -- meaning the future of the corporation depends on the new venture’s success -- launch it internally. You want to control the outcome carefully. If, on the other hand, the idea is merely strategically “interesting” -- something the corporation needs to learn more about -- then launch externally. You don’t want your core team distracted by the new venture, and you’ll learn faster by watching well-incentivized founders run the venture with limited or no strategic or operational constraints imposed by the corporation.
The good news is there is tremendous value to be created and captured in building new ventures, and corporations have dramatic advantages over independently launched startups. The trick is to properly structure and manage the incentives and governance, appropriately matching them to the needs of the new venture. External launch should be a go-to tool in every corporate innovator’s toolkit; it is the most successful approach to the innovator’s dilemma that we have seen so far.