No, internal and external startups are not the same
Friday, May 30, 2014/
To set the tone for this piece let’s look at two definitions, the first for a startup and the second for a company, as defined by Steve Blank.
A startup is a temporary organisation designed to search for a repeatable and scalable business model.
A company is a permanent organisation designed to execute a repeatable and scalable business model.
So the first thing that these or any other startup v company definitions will tell us is that startups and companies are not the same. Therefore, the conclusion that I, and many others, have drawn is that achieving innovation or building a new venture is completely different internally to externally.
Different rules apply.
For any given startup, they are faced with extreme risk and uncertainty. They need to validate an entire business model from scratch!
This means customers, costs, revenues, value propositions, partners and everything else associated with a sustainable business model need to be created, almost out of thin air.
This is no small feat.
For an internal startup, they too are faced with risk and uncertainty. And technically, they are building a new business model from scratch.
However, the existing company that is currently executing a known business model likely has capital and resources well beyond the needs of any external startup.
Does this alone give them an advantage?
Well, companies are executing known business models and this means they have processes, hierarchy, a brand, skilled resources and numerous other integral components that are designed to execute their current business model/s.
This doesn’t mean they aren’t continually trying to optimise their current business model, but it does mean that their current structure is not designed to incubate new ideas and assess problems, explore new business models around those ideas and problems, and ultimately validate, commercialise and build a scalable offering off the back of those initial ideas or problems.
The other difficulty is that internal startups are faced with other risks that are typically associated with internal people. If the internal venture doesn’t have the support of the right people, then it will likely fail. Or, what if the people at the top of the company supporting the venture leave? What if markets change, the company needs to decrease costs and the first thing to go is the stuff that isn’t yet making money?
These are not risks that an external startup faces, therefore an internal startup requires a different environment if it is to achieve success.
So how do the success indicators differ for an external versus internal venture?
Well, there are no clear-cut metrics, however, typically an external startup will measure its progress based on its hypothesised business model progression and validation. The more facts they find, the faster they can turn those facts into something tangible.
Startups are temporary organisations designed to learn
Only further down the track will they focus on hard numbers that relate to their bottom line, and this is important to note, as constant validation of a startups progressions needs to be achieved even prior to first revenue.
Internal ventures still need to measure their progress based on hypothesised business model progression and validation (of the new venture, rather than the existing business model of the corporation). However, an internal venture can only get to this stage if it has the platform to do so.
That platform needs to consist of the support mechanisms required to genuinely give this new internal venture a realistic opportunity of success. This may mean CEO or board level support is required. But, it needs to exist and it needs to be maintained, otherwise, there will be no incubation of ideas and problems, or exploration and validation of business models.
That equals no innovation. No innovation equals stagnation. No innovation opens the door to numerous incumbents and no innovation increases the risk associated with numerous components of an existing business model being outdone.
Startups, internally or externally, although they only exist temporarily (as per definitions above) are not short-term engagements. They are designed to become companies themselves. They require years of dedication, support and nurture if they are to deliver the value they are designed to.
What this boils down to is, quite simply, startups and companies are not the same. The context of their respective situations is completely different and this means that in order to incubate and execute innovation, there are different mechanisms for doing so.
I believe corporate startups will deliver waves of innovation over the coming years, but again, they need the platform to give them this opportunity.
So, if you’re thinking about internal startups, become familiar with startup best practices like lean and customer development, but, keep in mind you need enduring support from the top if there’s a hope of it working out.
Nathan Kinch is currently Entrepreneur in Residence at Edgelab Ventures and has recently raised funds for my second startup.
Image credit: Flickr/evablue