Beyond Innovation Labs: Integrating Startups into the Parent Organization

The following is adapted from my new book, The Startup Way, on sale now.

The fact is that most startups fail: both independent ones and those within a larger organization in the form of innovation projects or labs. Managing a startup within a company presents a particular set of issues.  A startup within an established organization that is limping along is only moderately threatening to the established order. But a startup that is having real success is more dangerous. Whatever exceptions were made to allow the organization’s existing middle managers to go along with the creation of this new experiment will come under tremendous strain when the experiment goes well. That's why the hardest part for most organizations is knowing what to do when they succeed.

When I meet innovation lab directors, rarely do they have a plan for this scenario. And because the backlash can come swiftly (and fatally) when an internal startup succeeds, it’s not adequate to cross that bridge when we come to it. Establishing the metrics that define success, creating “islands of freedom” with appropriate and scalable liability constraints, and convincing senior leadership to adopt this new approach each involve difficult negotiations that require professional and full-time attention.

The fundamental questions are: For any experiment that succeeds, how will it find a home in the organization? Will it be absorbed by an existing division or become an entirely new division? How is that decided? Whose decision is it?

Here is one way of visualizing what is happening when a startup experiment is launched within a larger company. Every division needs a way to test, refine, and scale new ideas in order to innovate and grow. But ideas by themselves are worthless. They are valuable only when embedded within a dedicated team that can relentlessly pursue them, stay true to the vision of the experiment while being flexible enough to pivot when necessary, and ultimately discover their true full potential.

A number of thinkers have been beating the drum for a few years now that entrepreneurial management is distinct from general management. But this leads to a common confusion: that these distinct forms of management can be kept in isolation from each other and operate separately. They cannot.

A tiny startup with a brand-new product is at one end of the experimentation-execution continuum. A mature division that is producing steady, quarter-over-quarter growth with an existing product is on the extreme other end.

But even a newly created startup has to execute. Even a startup with only ten customers has to start asking itself how much energy to invest in serving existing customers versus acquiring new ones. And the laws of corporate gravity still apply:

The path of one internal startup over time, within a division. It begins as part of a cohort of seed-stage experiments and, over time, grows. As many of its peers die for lack of traction, it continues. Over more time, the ratio of experimentation to execution shifts, until the startup is dominated by execution activities. Then and only then can the parent division take over full responsibility for managing it.

The scarcity of resources most startups deal with argues for more, not less, financial discipline.

 Similarly, even the stodgiest product team will be doing some experimentation and some innovation, a point the author of The Innovator’s Dilemma, Clayton Christensen, has been trying to make for years. In most cases, good business practices will cause missed opportunities, because in order to serve existing customers well, companies don’t want to do anything too radical. The team may be trapped by this dilemma and unable to produce something truly disruptive, but it is engaged in “sustaining innovations” that may still be quite radical in their own way.

Thus, every organizational unit is more properly understood as a portfolio that contains some mix of experimentation and execution. As startups mature, the ratio between the two naturally changes. But it also changes when existing organizations reinvest in their own startup DNA. This has implications for the flow of ideas throughout the company, as well. Internal startups may well grow to become established lines of business or even entirely new divisions. But the innovation teams within established lines of business are also an important source of new ideas that can be tested. In this way, entrepreneurial management provides a systematic counterforce to the innovator’s dilemma and other forms of corporate inertia.

My new book, The Startup Way, has just been released. You can find more information here.