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Why ‘Corporate startups’ usually fail: most common reasons

The innovation market is steadily growing, and large corporations with stable market positions, revenues, and a well-established product cannot ignore this. They understand that their competitiveness and sustainability in the long term depending on the implementation of innovations. A University of Washington study confirms these assumptions: 40% of Fortune 500 companies fail to retain their position in the ranking if they don’t adopt new business solutions within 10 years.

In the pursuit of innovation, corporations have resorted to several methods: creating an internal department of innovation, corporate gas pedals, their own venture capital funds and the purchase of ready-made businesses.

In all cases, be it acceleration or venture capital investment, corporations most often cooperate with those companies that have already developed a viable product, have revenue and assembled a team. Since up to 99% of startups fail, such caution on the part of already rather sluggish corporations is understandable.

Why company can’t create internal startups

Innovation expert Gary Pisano notes that almost every corporation has tried to bring the “startup spirit” to its team, but to no avail. Growing a startup inside a company to solve specific tasks is a promising idea at first sight, but in practice its implementation rarely leads to success. As a rule, corporations either buy ready-made companies or invest at a later stage. There are several reasons why in-house startups fail. They are united by the peculiarities of internal structure and established business processes.

First: Corporations work mostly with services and products that have reached the maturity stage. Any product goes through several stages of development: it appears, develops, grows, reaches the already mentioned stage of maturity, and then plateaus – when the market, the product, and the target audience are clear. Companies that have reached this point, as a rule, have a functional hierarchy, focus on management and control, emphasize the efficiency of processes, cost optimization, maintaining a positive customer experience. In general, the very organizational structure of a corporation is contrary to the spirit of a startup whose team operates under uncertainty.

Speed is important for a startup due to severely limited resources, while in a corporation a large number of processes and procedures are created to support business units.

Another reason is the level of individual responsibility, which is much higher in a startup. A young company cannot afford to keep an incompetent employee, while in a corporation such a person may occupy a position for years, since his or her activity has no serious impact on the work of the department.

The third reason for the failure of corporate startups, which Pisano points out, is related to the unwillingness to take risks. The corporation is either not interested in it, or often cannot make a risky decision quickly because of complicated approval procedures. A startup, on the other hand, has no other choice, because the very launch of the project is already a risk.

Of course, the viability of startups differs from corporation to corporation. IT companies like Google, Microsoft or Facebook are much more flexible than big banks. But in addition to corporate spirit, there is another factor worth mentioning: entrepreneurial activity. As a rule, strong businessmen prefer freedom and smart money from venture capitalists to work for the outside market. Corporate venture-building is an a priori less free, but safer environment, grounded in internal needs. In many respects, that is why truly bright startups are born outside of corporations.

Building startup-accelerator inside the corporation: why that’s impossible

About seven years ago, venture-building companies started actively appearing all over the world. Venture builders, startup factories, startup sandboxes – there is no universal term for them.

They are a sort of conveyor belts of innovative companies which take responsibility for the whole cycle – from the startup to turning a profit or selling out. Whereas with the help of gas pedals corporations look for existing startups for the realization of their tasks, startup studios can grow a company from scratch for a specific request.

Unlike corporations, startup studios usually employ entrepreneurs with experience in business development and sales.

Corporations may try to recreate such a model in-house: give a subdivision freedom, hire a person with extensive entrepreneurial experience as the head, and provide the team with options and shares. But in practice, a different model is much more common: joint investment in an already established startup or the search for and purchase of a project for a specific task.

Another problem is related to the fact that corporations most often create startups for their own market tasks and competencies, which limits the team and prevents the startup from going through an independent stage of developing its own idea and finding a successful market model. Without the ability to completely change the original idea, target audience or business model, the prospects for successful implementation are noticeably narrowed. And the stories of many leading companies show that their success would not have been possible without this freedom of action. For example, Instagram grew out of the little-known checkin service Burbn. At some point, the founders realized that the platform’s growing popularity was hindered by its unjustified multifunctionality and that a narrow niche needed to be identified in order to make a qualitative breakthrough. The company concentrated on photo sharing, and the result is known.

Corporations, on the other hand, usually build innovation around their core product; in their case, pivoting is impossible. This severely limits the scope of search and the likelihood of success.

In addition, it is much more difficult to find managers in corporate startup teams. Classic startups are created in order to then go for an IPO, so all employees are motivated by the opportunity to earn as much as possible from the sale of their share. When a young project is created to develop a corporation, it is more like regular office work than entrepreneurship for an invited employee.

It turns out that creating a corporate startup is, in a sense, an attempt to ride the elements. But just as surfing is different from training in a swimming pool, a real startup grown in a highly competitive market with limited resources will be different from a “room” project.

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