As I look back at my career, I have founded multiple startups. But the two that were the most successful were an analytics startup inside a massive software company and a semiconductor company inside a defense contractor.
However, I had no guidebook for each of these journeys. And I honestly struggled to align the analytics company with ever changing corporate roadmaps, edicts, and architectures. And I struggled to spin off the semiconductor company from the defense company.
Finally, Linda Yates has written a book that aims to help internal startup entrepreneurs and large company leaders who want to launch ventures and create venture factories to combat the digital disruption they face. Most of Yates’s clients are 100% focused on venture building and investing — building their own venture factories and, in some cases, new “growth divisions” — to create whole new businesses. Many "are driven in this direction because they are being impacted by the digital disruptors; others have been talking about digital transformation for a long time but got caught with COVID-19 realizing they hadn't done as much as they should have; and an increasing number of companies are headed in this direction to help solve some of the big hairy challenges facing the world from climate change to water, to mental health, sustainability, poverty and more.”
Why Take the Journey?
Yates sounds in her book a familiar warning to others about digital disruption. Every legacy business in every industry in every part of the world is at risk from outside disruptors. Without question, digital natives are often armed with the latest technology, tons of venture capital and radically new business models.
It is also true that the number of organizations that have been successful at digital transformation remains low. According to the research of MIT-CISR, only 28% of legacy organizations are digital competitors. And for many, the question is can you get there from where you are. And as I have personally experienced, new internal startup businesses often “get crushed through envy, corporate politics, conscious neglect, and other manifestations of corporate antibodies” (page 8). She says that it is unfortunate how many senior executives feel helpless to respond.
Embracing the Internal Entrepreneurs
Fortunately, Yates says this downward spiral isn’t inevitable. Silicon Valley will not necessarily eat your lunch. Your company has built-in advantages including ideas, capital, intellectual property, customers, goodwill, global reach and homegrown talent. Organizations just need to unleash these advantages. To do this successfully, organizations need to “understand customer pain, marry it with the art of the possible — the technology and trends currently available to solve that pain — and place a series of small bets” (page 9). And with this foundation and her teachable, repeatable, scalable method detailed in the book, large companies can produce, like Silicon Valley VCs, singles, doubles, triples, and yes, even unicorns. Everything starts by embracing the internal entrepreneurs.
For CIOs and other business leaders who are leading these initiatives, the book provides a systematic process for considering and nurturing new ventures. Yates claims it takes three months of dedicated work, and you will have a new venture ready to launch. The book codifies with much detail what is needed to ideate, incubate, accelerate and scale ventures.
Even better, Yates claims if properly executed corporate ventures have a higher success rate than their VC funded startup counterparts. Existing companies already have a customer base that, if leveraged, can provide fledgling ventures with a base of people to interview and a path to discover unaddressed pains. They also have everything needed to create ventures and drive growth.
By seizing the mothership advantages, Yates says ventures can beat startups at their own game. But she is candid: legacy businesses have inertia, antibodies and orthodoxies to overcome as I discovered when people at the large software company tried to kill my internal software startup multiple times. To win, existing companies must disrupt themselves from the inside out.
Start With Customer Pain
To succeed, businesses must understand what is required and commit to helping their ventures succeed. Yates says there are three things that Silicon Valley companies do well.
- They understand the customer's pain. This includes being obsessed with talking to customers, not just surveying them.
- They marry the customer's pain with the art of the possible. What are the current trends and technologies that you can leverage to solve that pain?
- They make a series of small bets. Assuming there is enough customer pain to solve indicating a large market and the product or solution to solve that pain is feasible to build, the ventures must then make a series of small bets — using experiments and pilots to remove the greatest amount of risk with the least amount of capital.
Yates recommends starting the process by evaluating ideas for desirability, feasibility, viability, and suitability, i.e. can the venture take advantage of the corporate parent’s business capabilities? She claims too few companies start with the customer pain. Most jump right to what they think is a cool product or a service idea. Yates provides an amazing list of questions for entrepreneur ideation. These ensure the important business questions are answered before spending too much money.
Related Article: VC Firms Still Spending Like Drunken Sailors
Develop a Challenge Statement
Early on the process is about assembling a team, establishing an idea, and identifying what matters. To support this, Yates recommends starting by developing a challenge statement. A great challenge statement accomplishes three things:
- Establishes the aspiration for your new venture.
- Points to some early hypotheses regarding the pain you want to solve that give the venture a starting point to test through customer “pain point” interviews.
- Provides some boundaries so the venture isn’t trying to be all things to all people.
With a challenge statement and a stakeholder map laying out “who matters most” so the venture team knows who to interview, you can be incubating your venture. She stresses that without clear customer pain, you do not have a venture.
Several years ago, I was asked to evaluate a business service management software company. The company had been started by three former CIOs. They felt they knew what the market needed. But they had no design partners and missed what the market needed by 10%. After $10 million in angel investment, they closed their doors.
Conversely, Yates tells the story of Pear.AI, the venture launched by German energy giant, RWE. The team started with an idea for a venture for which they found no pain but by diligently conducting 100s of customer interviews they were able to pivot the idea and created a very successful startup which they later sold to another large energy provider for many multiples on their investment.
Customer Insights = Credibility
Once the selection process is complete, incubation begins. During this phase, customer insights are the currency of credibility. Yates stresses, like Steve Jobs, customers cannot tell you the solution, but they can share their pain. She explains the need for qualitative versus quantitative research. What is needed are interviews, not surveys, because the goal is to understand the customer pain that needs solving. Interestingly, she suggests at least five interviews a day during the incubation period.
To get this many interviews done, Yates suggests multiple approaches for finding interviewees including leaning on the mothership. For those that are new to the process, she provides a lot of wisdom on interviewing. As I have learned, the first interviews are the hardest. But you get more confidence the further you get into the process.
Every time you complete a set of interviews, Yates says you must take the time to synthesize the disparate inputs. Here is when you crystalize the real pain. Smart folks will look at the results and even kill off their original idea. If the team is true to the process and really listens, they will find the problem to solve. This is why venture capitalists typically invest in an A team with a B idea versus a B team with an A idea. The A team will have the good sense to pivot.
Related Article: Voice of the Customer: What Is It and Why Does It Matter for CX?
Gleaning Customer Insights to Solve Pain
Once you have identified the pain, you will be brainstorming ways to solve that pain. This is the moment when Yates suggests moving to storyboarding interviews during which you will also continue to create and refine customer personas. Here, the product questions start to be asked and answered. What should we build? Can it be built? Can it be delivered?
As you move beyond storyboards, Yates emphasizes the importance of prototyping. Tools for rapid prototyping clearly abound today. I remember doing them in PowerPoint. In an agile world, Yates stresses continuously testing. This is how to get to a minimal viable product. At one company, my head of development described an MPV as a “pig with lipstick."
With the customer development phase well under way and the product workstream added to the mix, Yates says the group now splits again and the business team goes to work. The internal venture’s lead/CEO candidate gets focused on building a very robust business, execution and operating plan. This plan should cover a range of issues including size of market, customer journey, how the startup will make money, competitors, risks and how they will mitigate them, the product roadmap, what the startup needs from the Mothership to seize competitive advantage and what their “Do it on Monday” action plan is.
At this point, the venture’s new venture board, the equivalent of the company’s internal venture capitalists, make the decision to fund or not fund. If the venture is a go, they launch and move to the "accelerate" phase. Given how hard it is for large companies to get their startups from 0 to 1, it is important to surround the startup with industry veterans. I did this with the semiconductor company. I got a local veteran that was well connected in Silicon Valley. Yates stresses that after passing this gate, it is critical to continue the customer-focused, risk-mitigation-through-experimentation discipline learned to date.
The final portion of the book is about establishing a venture factory. The goal is to ensure an organization doesn’t launch one venture at a time. Instead, it creates an organic engine of growth through building a portfolio of ventures. Yates suggests this is an important step because it sends a message to the company that leadership is committed to growth. As well, it helps expand senior leaders’ playbooks and mindsets.
Yates says the goal should be to create, build and launch a pipeline and portfolio of new ventures to drive meaningful growth. She provides a series of design decisions that when answered will yield the blueprint for your venture factory. She says the process starts with the basics:
- Who will the venture factory serve?
- What type of venture factory will you launch?
- What methodology will you use?
- What will be the governance model?
- What talent will you need?
- How many ventures do you want to launch per year?
- Where will you house your venture factory?
- What technology and tools will you use?
- What communication plan will you build?
- What budget and funding model will you adopt?
Doing this well involves corporate leaders being willing to operate like first-tier VCs. The advantage of the venture factory approach is it allows organizations to get closer to customers, attract better talent, become more agile and be able to pivot their core business — to move from being perceived as a value stock to a growth stock. Throughout the venture building process, it is critical for the Mothership to lean in to provide the seed funding, ensure access to customers, identify and share the core assets, competencies and capabilities that can help accelerate the venture, and remove the friction that gets in the way of ventures being able to reach escape velocity.
Yates suggests as ventures mature, organizations need to decide the end goal for the ventures they have created. Including a spin in? Spin out? Or creating a wholly owned subsidiary? As important, organizations need to deal with orthodoxies that limit startups from succeeding in existing companies including dealing with policies, procedures and politics. Yates concludes by saying the time to start is now. This is the moment to unleash your unicorns within. In conclusion, she suggests the following principles:
- Frame the challenge
- Unleash your internal talent
- Embrace risk and failure
- Add method to the madness
- Find real customer pain
- Master the art of the possible
- Work from the future backward
- Prototype, pilot and de-risk
- Seize the mothership advantage
- Do good, have Fun — leverage your venture building to solve the big challenges facing the world
Parting Words: Venture Factory Can Supercharge Corporate Growth
Without question, Yates has produced a complete cookbook for producing internal startups. The question that I was left with is when do companies need to create a venture factory? I would contend that it depends on the type of innovation a business needs. If innovation is needed around a company’s core businesses — unless management determines it will take too long and require different culture, skills and systems — an enlightened CIO supported by their business leaders can likely lead this form of innovation.
However, if the core businesses are at the twilight of the product life cycle curve, then different forms of innovation are needed. Here one of three strategies need to be considered: new products for current markets, current products for new markets or diversification. For these types of expansions, an internal venture factory makes incredible sense. As well, in many cases, even where growth is still occurring from core businesses, a venture factory can supercharge corporate growth for years to come.