The A RT I ST EMEMEM

Hybrid
Start-
Up
E N T R E P R E N E U RS H I P

A new-venture model that

combines corporate and
entrepreneurial capabilities
Nathan Furr Kate O’Keeffe
AU T H O RS Associate professor, INSEAD Partner, BCG X

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ABOUT THE ART
Ememem is a French street artist who covertly creates
mosaics overnight in the potholes of sidewalks and in

C
fractured facades, which he sees as giving them renewed
life and bridging the old and the new.

OM PA R ED WI TH
start-ups, estab-
lished corpora-
tions have many
resources and
capabilities that ought to give them a substantial lead:
products, customers, operations, licenses, distribution, mar-
keting, and capital. But too often a couple of misfits with a
laptop manage to steal a corporation’s lunch. Why? Because
corporations lack one critical ability: the entrepreneurial
muscle to take an idea from small to big, from zero to one. If
its idea is radical enough and sound enough, a start-up can
disrupt an incumbent’s value chain.
Leaders try to respond by creating their own corporate
ventures, but those typically lack entrepreneurial quali-
ties because they are staffed by people trapped inside the
regime. Or they create an arm’s-length spinout to make
space for innovativeness, but then the spinout struggles to
access the very resources that would give it an advantage.
Enter the hybrid start-up, which combines the assets of a
corporation and the entrepreneurial capability of a start-up.
In this article we will highlight some big companies
that have unlocked the value of their assets, defended
their markets, and become digital leaders by successfully
creating hybrid start-ups. With the help of BCG X’s busi-
ness-building function (formerly BCG Digital Ventures), we
have examined more than 200 such ventures created over
the past nine years. They include new businesses created by
Commonwealth Bank of Australia (Cheddar), Airbus (UP42),
First American (Endpoint), AIA (Snackbox), Mercedes-Benz
(RepairSmith), Volkswagen (Heycar), and UPS (Ware2Go). Of

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 E N T R E P R E N E U RS H I P

I DE A I N BR IE F

THE PROBLEM
Established
corporations have
many resources and
capabilities that
ought to give them
an advantage over
start-ups. But every
so often a couple of
misfits with a laptop
manage to steal a
corporation’s lunch.

WHY IT HAPPENS
Incumbents lack the
entrepreneurial mus-
cle to take an idea
from small to big.
If an idea is radical
enough and sound
enough, a nimble
start-up can disrupt
an incumbent’s
value chain.

THE SOLUTION
Create a hybrid
start-up—a new
model that com-
bines the best of
people, processes,
and resources from
both inside and out-
side the company.
Evidence suggests
that it is two or three
times as likely as
an independent
start-up to succeed.

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 Ultimately the goal is to strike a balance between attachment to
the core where it makes sense and freedom everywhere else.
E N T R E P R E N E U RS H I P

the ventures in the BCG X sample, 152 are still active, 14 were “The idea is to combine everything that a corporation has—
sold, and 38 were shut down. Many have some $100 million distribution, data, IP, and other corporate assets—with the
in annual revenues. We have also examined hybrid start-ups entrepreneurial talent that you need to build a new business.
created with the assistance of other companies, such as Leap Then some magic can happen.”
by McKinsey, SparkOptimus, and Creative Dock, which have Likewise, as the practices that underlie entrepreneurial
had similar success rates. (For example, 55 of Creative Dock’s capabilities—such as lean start-up, design thinking, and
66 ventures launched since 2012 are generating annual agile methods—are better understood, they become more
revenues greater than $1 million.) easily available to potential competitors. Incumbents must
These results provide strong evidence that the model learn how to run fast experiments and scale them up, which
works. And a BCG analysis has shown that hybrid start-ups is essentially an exercise in corporate transformation. For
are two or three times as likely as independent start-ups to example, at AIA Australia, Damien Mu, the CEO, is leading
succeed. the creation of Snackbox, a business offering simple, cus-
tomizable, “bite-size” insurance products. Mu is clear that
he wants Snackbox “to infect the organization” with new
WHY CONSIDER A HYBRID START-UP? ways of working, a faster pace, and a higher level of commit-
Digital technology offers corporations many opportunities ment to the customer.
to create hybrid start-ups. Stuart Munro, Commonwealth The best way to get started, therefore, is to do some
Bank’s group head of strategy, helped launch its digital pay- hard thinking about what you most want from your hybrid
ment and cash-back-reward start-up, Cheddar. He explains, start-up and then match that with the right balance of
“There’s a blurring of industry lines happening everywhere. freedom and integration. As a rule, greater integration with a
To meet customer expectations and needs, we’ve got to corporation increases a start-up’s ability to access privileged
look more broadly than just traditional products and really assets, transform the core, or scale up. But it also slows the
enrich the proposition in aggregate.” venture significantly, limits outside funding, and may dis-
Corporations can use hybrid start-ups to create value in tract from external opportunities. So if your primary goal is
new ways from existing assets, defend against a disrupter, to use the corporation’s assets to spark new revenue streams,
create new assets to act as strategic complements, and create a strategic complement, or disrupt your existing
become more agile. business, you should probably not integrate the start-up.
Consider the European aerospace giant Airbus, which was Although Airbus wanted to acquire new digital skills from
collecting and storing vast quantities of high-quality data outside the company, it was clear that UP42 needed to oper-
from satellites. Digital platforms have lowered the barriers for ate as an independent and neutral platform that would work
other organizations to access Airbus data and for Airbus to just as well for any future partners as it would for Airbus.
recombine it with industry data or data from partners. Airbus By contrast, if the primary goal is to transform the core,
launched its hybrid start-up UP42, an industrywide platform, you need to keep the hybrid start-up more closely tethered to
to tap into the value hidden in these existing assets, creating a the organization. Snackbox, for example, needed that close
significant new revenue source for both itself and its platform connection to help it change AIA from the inside out and
partners. Today UP42 offers geospatial data, analytic tools, also to get access to expensive licenses, underwriting technol-
and applications to customers around the world. ogy, and product partnerships. If you do integrate, beware!
First American, a leading U.S. provider of financial The corporation often wants to make the hybrid start-up
products and services in the real estate sector, offers an conform to compliance, regulatory, and enterprise processes
example of launching a hybrid start-up to fend off disrup- appropriate for a million customers even if the hybrid has
tion. It created Endpoint to circumvent the traditionally only 20, arguing that one day the alignment will be needed.
slow, bureaucratic real-estate closing process. Paul Hurst, But that kills the speed and agility critical to success and will
the chief innovation officer at First American, explains, just waste resources if the start-up flounders as a result.

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 Ultimately the goal is to strike a balance between attach- initially looked for an automotive-industry veteran to lead
ment to the core where it makes sense and freedom every- the venture. But when the team met with Joel Milne, an
where else. Toby Norton-Smith, the head of Commonwealth experienced entrepreneur, he argued, “Look, you guys know
Bank’s venture division, explains, “I’ve learned from years of about cars. You don’t need a car person. You need some-
trial and error that there are two sides of the problem: getting body who knows how to build a consumer start-up from the
trapped too close to the core of the business [which slows the ground up, and that’s what I do.”
venture down] versus going so far out into start-up land that Milne’s capabilities proved central to the hybrid start-up’s
there is no way to tap back into the corporate [which limits success when he recognized a new business-model opportu-
scalability]. You need to go for the Goldilocks in the middle.” nity. The initial plan had been to transform automotive repair
services—an antiquated industry that hasn’t changed much
in the past 50 years and rarely embraces digital technolo-
WHOM SHOULD YOU PUT IN CHARGE? gies—into a digital marketplace. After Milne and the team
Big companies almost always want their own people to run succeeded in creating and launching the platform, however,
a new venture, but that can be a mistake. Although corpora- they noticed that customers didn’t return to the marketplace
tions have substantial assets and know-how that can help a after they’d found a reliable repair shop, making it difficult to
start-up succeed, they don’t have the entrepreneurial ability create direct, long-term relationships with car owners.
to discover where the new value to be created lies. The key Recognizing the business model’s shortcoming, Milne
challenge, therefore, is to find a true entrepreneur to lead wondered if Mercedes could offer mobile on-site repairs
the venture. rather than acting as a middleman between consumers and
Take the case of Mercedes-Benz. When the company repair shops. To test the idea, he slapped together a min-
wanted to leverage its customer relationships to tap into the imum viable product: He rented a U-Haul for a weekend,
highly profitable after-sales repair market, its executives hired a mechanic, and posted Facebook ads offering repairs

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 In addition to key assets and money, a corporation provides legitimacy that an
entrepreneur often lacks. It also offers the chance to have a greater impact.

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in consumers’ driveways. The response was so ecstatic that
Milne quickly added on-site repairs with mobile booking
and transparent cost estimates on the company website.
The hybrid start-up that resulted, RepairSmith, has deliv-
ered on-site repairs more than 150,000 times, achieving
a Net Promoter Score of 89% (Netflix’s score is 68%) and a E N T R E P R E N E U RS H I P
near 100% intent to repurchase—all with enviably high
margins. A senior company leader involved with Repair-
Smith reflects that hiring Milne was among the best decisions want to work in a start-up, but if I can have the best of both
Mercedes-Benz made: He knew how to build a start-up, and worlds, then fantastic.’”
he was connected to all the tech and venture people needed Of course, you need to strike a balance between insiders
to help it grow. and outsiders. Too many insiders will make it more difficult
How can a corporation attract a true entrepreneur to benefit from entrepreneurial capabilities. But too few will
to work on a hybrid start-up? The stability offered by an make it harder to learn from the start-up. Anthony Band-
incumbent partner willing to fund a venture can be a strong mann, who led Volkswagen’s charge to create the used-car
draw. Reflecting on why he joined RepairSmith, Milne says, marketplace Heycar, explains that the company needed
“The crappiest part of start-ups is constantly running out digital developers, which meant recruiting from the outside,
of money and fundraising all the time. With the hybrid but it also needed insiders to facilitate learning: “The CFO
approach I can just focus on the things I love to do.” is a Volkswagen person. This is an important component,
In addition to key assets and money, a corporation because we are drawing a lot of learning from Heycar into
provides legitimacy that an entrepreneur often lacks. Milne our organization.”
recalls the ease of renting spaces for RepairSmith, contact-
ing potential partners, and accomplishing other normally
challenging tasks, all because he had a brand name behind MAKING A HYBRID START-UP WORK
him. A corporation also offers entrepreneurs the chance Although the structure, leader, and team are important, the
to have a greater impact. Of course working in a corporate venture’s success depends equally on using entrepreneurial
environment forces some trade-offs—mainly dealing with capabilities to discover a true unmet need and rapidly iter-
sluggish processes—but for those who have experienced the ating on prototype solutions to create a sustainable service
challenges of raising money, the benefits can be attractive. or product. Twenty years ago that was a black art. Today best
practices are codified in books such as Eric Ries’s The Lean
Startup, Tim Brown’s Change by Design, and Nathan Furr
WHOM SHOULD YOU RECRUIT FROM THE COMPANY? and Jeff Dyer’s The Innovator’s Method. The challenge for
Part of what makes a new venture a hybrid is that it inte- corporations is to recognize that entrepreneurial capabilities
grates outsiders and insiders. The insiders help tap the are a skill set as real as marketing or finance.
parent company’s assets, provide bridges back to the core, Reflecting on the importance of those capabilities, Band-
transfer learning from the start-up, and give guidance on mann recalls early efforts to build Heycar as a traditional
how to get things done. But they must be the right people, corporate venture: “We started writing the book of how we
treated as equals with the outsiders (not as bosses), and would build this, adding one binder at a time, and soon I had
willing to hunt with them as a united pack. So who are they? this vision of 50 binders mapping out what would happen on
To find them, start by asking, “What knowledge that we the used-car site in position 48, semicolon, blah, blah, blah.
can’t find outside is critical for the hybrid start-up to create And we were talking about project time frames of two or
value?” Then look for employees within your company who three years. By the time this would be built, the world would
have that knowledge and can learn to work like entrepre- have changed three times.” Fortunately, VW realized that it
neurs. Often they are the people who talk about a need to needed “start-up entrepreneurship,” he says.
change things. Invite them onto the team and allocate 100% Entrepreneurial discovery starts with identifying a true
of their time to the project. Avoid “slack” talent in favor of customer need. Entrepreneurs usually don’t do that by con-
your best people; that may be the most successful way to ducting surveys and focus groups or relying on secondhand
retain them anyway. Hurst at First American observes, market research. Instead, consciously or not, they apply
“Some of our best product engineering and business talent ethnographic techniques, spending weeks interviewing and
from the core have been incredibly attracted to the idea of deeply observing the experiences of at least 12 to 16 (often
joining [such a venture], because they’re like, ‘Hey, I really many more) customers one-on-one.

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 start-up team, customers, and a cadre of engineers, design-
ers, and coders for 48 hours of fast, intensive prototyping
and testing in a process it calls the “Arena.” That process
rapidly generates customer-backed data the start-up teams
can use to make decisions about which idea to invest in.
E N T R E P R E N E U RS H I P

ACHIEVING SCALABILITY
That deep qualitative research can reveal opportunities “Success isn’t just about building products,” Paul Hurst
others miss. Mathias Entenmann, the BCG X partner advis- explains, “because that’s very narrow. We’re thinking about
ing on Heycar, recalls, “Initially we thought the used-car and building the go-to-market strategy, the operations, the
market was pretty well saturated, and Volkswagen was years sales team—essentially everything that’s needed to start
too late to enter it. But when we looked closer, we realized a new business—on day one.” Scalability also depends
that the market was broken, with lots of room for innovation on defining the appropriate business model and creating
and disruption.” By engaging directly, VW learned how integration with the core.
frustrated dealers and consumers were with online auto At the heart of scalability is discovering the unit eco-
marketplaces, which are often congested by fake listings. nomics of the business model. Unit economics represents
Such a discovery phase typically lasts about 10 weeks and a major departure from familiar corporate metrics such as
generates hundreds of ideas based on identified frictions in return on investment, but it underpins the success of famous
the marketplace. The team then tests each idea by posing four start-ups including Dropbox, Amazon, and Zalando. When
simple questions in the following order: (1) Does the friction those companies began, they realized that if their customer
matter? (desirability) (2) Can our idea fix it? (feasibility) (3) acquisition cost (CAC) was lower than the customer lifetime
Can we beat our competitors’ ideas? (viability) (4) Will the idea value (LTV), ideally by more than a factor of three, they were
scale up? (scalability) They start with desirability because effectively printing money: Every dollar spent acquiring a
everything else depends on it, but it is one of the hardest to customer would soon turn into three dollars. Robert Derow,
get right. The litmus test is how big a problem the idea might a BCG X managing director and a hybrid-start-up marketing
solve or benefit it might deliver for the customer. A sense of guru, explains that the goal is to “discover unit economics
that will emerge from the initial ethnographic research. at the level of addressable attributes, meaning that you
Once a few large problems have been identified, teams do can unpack your CAC or LTV by channel, by cohort, and by
rapid prototyping and testing to determine feasibility and attributes such as age, gender, keywords, and geography.”
viability. For example, at UPS a hybrid start-up team noticed For example, when AIA started exploring its go-to-market
that the owners of small and medium-size businesses were strategy for Snackbox, it experimented with five ways to
spending their weekends driving to self-storage units and describe the start-up in a seven-day advertising campaign on
working late to pack and ship backlogs of orders. What if UPS channels such as Google, Facebook, and LinkedIn. The ads
could build an end-to-end warehousing and logistics service reached 2,000 potential customers and had a click-through
like Amazon’s fulfillment division, but one open to every- rate that was 52% better than the average click-through rate
one? How would such a service be prototyped? Nick Basford, of 0.56% for financial and insurance ads. That was a very
UPS’s vice president for global retail and e-commerce, positive indicator. But the company also used the tests to
describes finding a small business that sold mufflers online, drill down deeper, finding that, for instance, “affordable
renting a storage unit for it, and emulating a fulfillment micro insurance” outperformed “micro-insurance market­
platform. That minimum viable product provided lessons place” and other descriptions by a factor of four. It used
about what to build to serve customers well, and UPS’s temporary landing pages to gather information about who
hybrid start-up Ware2Go has been growing profitably over was interested and who responded to which medium, such
the past four years. as video versus text. With rich data on hand about channels,
If you’re thinking, We already have a corporate innova- costs, and returns, it has outlined a scalable go-to-market
tion lab that does this, maybe think again. Speed, scale, and strategy and reduced investment risk.
rigor are critical to the process. Although such labs are good Effective metrics may differ according to the type and
at consumer research and brainstorming—and may even stage of a hybrid start-up. First American’s Endpoint, which
undertake some basic prototyping—they usually don’t get is challenging the status quo of the traditional escrow
as far as you need them to. That’s why on each project it process, looks at its ability to multiply the efficacy of its
advises, BCG X brings together corporate leaders, the hybrid employees—what it refers to as creating “bionic people.”

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As technology breaks down familiar barriers, incumbents need to figure out how to become
tech companies before tech companies figure out the incumbents’ business.

Airbus’s UP42 looks at new-partner acquisition, the diversity

of partner data and analytics products on the platform,
active customer usage, and revenue.
Scalability may require some organizational changes as
well. Evert Dudok, an executive vice president at Airbus,
along with Airbus SVP François Lombard and Sean Wiid as
UP42’s CEO, led the platform’s development to commer-
cialize Airbus’s untapped data riches. But doing so required
creating a platform with three layers—data, analytics, and
applications—and recombining Airbus data with that of part-
ners and even competitors. To do that well meant creating a
separate entity to reassure competitors of UP42’s indepen-
dence and then offering fair revenue sharing to attract crit-
ical partners. Because the developers structured the hybrid
start-up for success, UP42 has acquired 55 partners so far and
is doubling or tripling revenue growth every year.
Finally, scalability requires ensuring the venture’s com-
patibility with the corporate system. That doesn’t mean the
venture starts out operating under the corporation’s process
requirements and regulation. Doing so would undermine
the entire point of a hybrid start-up—increasing entrepre-
neurial capabilities and speed—and would kill the venture
outright. But it does mean that the venture is built with an
eye toward integration with the corporation one day. That’s
one reason that such ventures are hybrids: They remain
tethered to the right parts of the business to permit the
exchange of knowledge and learning.

A S TE CHNO LO GY B RE AKS down familiar barriers, incum-

bents need to figure out how to become tech companies
before tech companies figure out the incumbents’ business.
Properly conceived and managed, hybrid start-ups can
create new sources of growth from a company’s existing
assets, serve as a tool for transformation, transfer insight
and capabilities back to the core, and help future-proof the
business.  HBR Reprint R2302F

NATHAN FURR is an associate professor at INSEAD and a

coauthor of five best-selling books, including The Innovator’s
Method (Harvard Business Review Press, 2014). KATE O’KEEFFE,
based in Sydney, is a partner and the director of design at BCG X,
the tech-build and design unit of Boston Consulting Group.

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