Scale or fail: How incumbents can industrialize new-business building

Repeatable, successful innovation requires a dedicated ‘growth engine’ that can build promising ventures into growing businesses.

Across industries, digital attackers and an accelerating pace of change have increased the pressure on incumbents to innovate quickly and create new avenues for growth. Repeatable, scalable innovation—in the form of new-business launches—has become an imperative, and its importance has increased more than 70 percent since COVID-19. As the stakes rise, an increasing number of established corporations are taking a page out of the start-up ecosystem’s playbook. For example, 41 of the world’s 50 largest public companies 1 now have an accelerator, incubator, or corporate venture-capital fund (or all three). Investment has also seen a dramatic rise: corporate venture capital participated in a quarter of all venture-capital-backed fundraising in 2019. 2

Despite this urgency and concentration of resources, success stories are rare. Even companies such as Y Combinator, one of the most successful at selecting and building early-stage ventures, see more than 50 percent of their funded ventures die. 3 Mature companies typically aren’t set up for this kind of rapidly scalable innovation. Instead, they are built to protect their incumbent positions and have tens of thousands of employees and a complex network of stakeholders. While advantageous for steering large organizations on a path of incremental growth and risk management, this setting is wholly unsuitable for creating fast-moving, high-growth ventures.

It is possible to greatly improve the odds, however, by developing the muscle to build multiple businesses and to build each one better. To explore the most effective growth models, we drew on our experience helping clients build more than 200 new businesses, best practices observed in venture-capital-backed start-ups, and proprietary research. These insights suggest companies can achieve sustainable success by forming a “growth engine”—a dedicated team established to manage the building of multiple businesses from launch to scaling to maturity. This growth engine facilitates the free flow of new ideas and focuses support along each stage of a venture’s growth, helping to accelerate the journey from promising idea to mature company.

Meeting heightened interest from investors

Sidebar

We recently conducted a survey of 50 equity analysts to gain a better understanding of the value at stake for incumbents that launch start-ups. The results show that in an increasingly crowded innovation marketplace, the bar for success is high, and despite significant investments in business building, many companies are falling short of their goals. One respondent commented, “Most corporate accelerators exist just for secondary benefits like PR agenda, while the major purpose of innovation (value creation) gets lost.” 4 Beyond the baseline conditions for new-business success (see sidebar “Two conditions for successful growth”), equity analysts expect corporations to raise their innovation game significantly across three dimensions (Exhibit 1): 5

  1. Demonstrate that their new businesses are not simply “backyard success stories.” Validation must come from outside the parent company: these start-ups must be able to secure funding independently from investors in the market. Just 48 percent of respondents believed that internal-only valuations were sufficient proof of a start-up’s value.
  2. Prove value growth using concrete, transparent metrics. Too many companies point to strategic benefits, which are both vague and unprovable. Value creation must be assessed using tangible metrics such as top-line revenue, which was cited by 80 percent of respondents.
  3. Commit to seeing the journey through. To ensure the growth venture has the necessary capital and opportunity, it must have a dedicated unit and ring-fenced funding to protect it from short-term earnings pressures on the parent company. In total, 84 percent of respondents believed this structure will improve value growth.
Keys to new-venture value include market validation, hard metrics, and independence from the parent company.
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Introducing a new growth model

To flourish, new businesses require a tailored, light-touch governance and operating model tied closely to the very top of the organization. This structure calls for support from a dedicated unit with specific business-building/entrepreneurial talent (sales, growth hacking), tech talent (software engineers, DevSecOps engineers, data engineers, and data scientists), and product talent (product owners, designers) to achieve the sole purpose of maximizing the odds of success by balancing risk with execution speed.

Sidebar

A number of leading companies have achieved this balance by developing a growth engine that incorporates the necessary flexibility and scalability to propel innovation, from conception to a multibillion-dollar business, for multiple ventures simultaneously (see sidebar “bp Launchpad”). The growth engine is a separate entity from the parent company and focuses support along three phases of growth (Exhibit 2).

Driving innovations from concept to maturity requires a dedicated growth engine, focused across three broad maturity phases.
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Phase one: Foundation

For an early-stage product or business looking for a market, the growth engine takes on a dual role. First, it implements in new ventures best practices that lay the necessary foundation for growth. Second, it establishes strong financial discipline: project leads must validate a business’s potential under a constrained-funding scenario, which focuses leaders on the items that are most critical for their project’s success.

To achieve these objectives, parent companies must vet new entrants and take them on only if they meet criteria for being “ready.” That means the product must be ready for testing and have a leader capable of steering the project through its first six to 18 months, similar to the standard for seed-level venture investing.

Once promising ideas have been screened, the growth engine acts as an incubator. It supports the project by offering guidance on best practices and hands-on delivery muscle (for example, rapid design-driven prototyping) to begin testing the product in the market. As well-defined success milestones (adoption, customer-acquisition costs) are passed one by one, funding is gradually increased until the business has validated its potential for hyperscaling.

Phase two: Scale-up

The challenge now shifts from establishing first signs of traction (the “zero to one” stage) to rapidly scaling the business (the “one to ten” stage). As the venture enters this scale-up phase, the capital requirements grow exponentially. Consequently, the growth engine should confirm several elements before beginning rapid acceleration:

  • The market’s appetite and the venture’s scaling potential must be validated based on customer-oriented key performance indicators (KPIs) such as revenue, number of users, or value created.
  • The unit economics and business model must either already be profitable or demonstrate a clear pathway to profitability.
  • Last, and most important, a leadership team capable of steering the team through rapid growth must be in place.

Once a venture is judged to be scale-ready, the growth engine shifts its support to operate as a “scale-up factory.” It deploys relevant experts who have experience in achieving scale, such as developing targeted marketing programs or managing scale-up operations. The growth engine also works with the venture to take advantage of its parent company’s advantages, such as providing leverage in negotiations with key vendors, building distribution networks, or accessing the senior levels of potential B2B customers.

Phase three: Strategic growth

In this phase, the relatively mature venture no longer needs hands-on support. The growth engine shifts to a strategic role both on the venture’s board and as a lead player in either helping the business reintegrate into the parent company or maximizing returns through exit.

As new ventures move from hypergrowth to relative maturity, executives can verify a venture’s readiness for reintegration or exit along two fronts. First, it has graduated from the growth phase of typically triple digits annually to the high double digits. Second, the new business is or will be a material contributor to bottom-line earnings. For integration into the parent company, ventures must consider two dimensions:

  • Strategic alignment with the parent company. In some cases, integrating a growth business into the parent requires a willing disruption or replacement of legacy business. For example, a financial-services institution that launches a fast-growing digital-banking venture might gain an advantage by folding the incumbent into the digital venture’s brand.
  • Impact on future revenue. Moving too quickly on this front, though tempting, carries the risk that increased governance and short-term pressure to deliver profits will cost the parent company a larger contribution from future potential returns.

Defining the parent company’s role

Although the growth engine should function as a separate entity, executives at the parent company have an important role to play. It is critical for parent companies to first define success for each venture and then use these criteria to tailor the growth engine’s support across all three launch phases. To determine which ventures graduate from one stage to the next, C-level leadership must co-develop with the growth engine’s leaders a vision, investment strategy, and financial targets. This exercise should create a simple framework for ongoing assessment of each venture’s potential growth and strategic fit.

Governance is then usually delegated to the overarching venture-building layer, supported by regular performance check-ins with each business’s board (or proxy for earlier-stage start-ups). Trigger points for further approval on major decisions should be standardized by the parent company. This way, the governance is oriented around each venture’s major decisions while supporting the necessary incentives and ownership structure for the founder team.

Avoiding common pitfalls

As executives embark on their business-building journeys, they should be aware of five common pitfalls:

  1. No North Star. An organization with ambitious goals but an unclear vision and incoherent strategy often makes poor choices when it comes to choosing and prioritizing opportunities. After all, how can you tell which bets to make or how big they should be without a clear strategy for achieving your vision? As one survey respondent explained, “If the strategy is poorly crafted or articulated to the markets, then the expected return along with future investment levels will decline.”
  2. Soft measures for defining success. The organization may be able to articulate its goals, but its metrics for measuring the success or progress of a new venture do not reflect how that business is valued. In our survey, 44 percent of respondents stated that they don’t assign value to companies that cannot show hard evidence points, even if they demonstrate product innovation. 6
  3. Ambitions of a start-up, culture of an incumbent. The single biggest challenge in scaling new ventures is getting talent and culture right. 7 Too often, corporations expect unicorn-level success but are unwilling to implement the do-or-die incentives that encourage private founders to take the necessary risks. Similarly, without these incentives, the best and most proven talent is not attracted into the new business.
  4. Stakeholders first, customers second. The world’s 50 largest companies have close to 200,000 employees, on average. 8 A workforce of this size creates an extensive network of stakeholders who can exert a significant gravitational pull on business-building efforts and slowly suffocate initiatives. For the most successful start-ups, the most important validation comes from the customer. High performers rely on the vision of founders while listening closely to customers.
  5. A focus on planning, not execution. Planning is important in any business build, but companies often obsess over creating a perfect plan. The path to building a business is never clear at the beginning. The only practical way to move ahead quickly and effectively is to have a broad plan that provides some basic structure for the team and leadership, and then execute through rapid iterations and adaptations based on what is learned from customers.

For large corporations, building value from new ventures cannot be a paper exercise; real value must be demonstrated, and quickly, if the market is to believe a company’s venture-building activity will amount to more than increased costs and distraction from core goals. However, with the right structure, leadership support, and capabilities in place, companies can reinvigorate themselves through new growth.

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