Internal venture or external startup?

When companies set out to innovate a new business model, they are signing up to fight a battle on two fronts: internal venture or external startup?

When organizing startup collaboration programs, accelerators and round table discussions I have had a privilege to chat about corporate venturing with several leading Finnish corporations. One of the topics that always pop up is whether you should build internal ventures or operate with external startups. The better the challenges are identified the better collaboration between startups and corporations work.

While reading this post it is good to keep in mind the difference between startups and corporations. If we simplify, a startup is a temporary organisation in search of a repeatable, scalable business. A corporation, by contrast, is a permanent organisation designed to execute a repeatable, scalable business. Startups are taking risks to grow fast and corporations are built to execute and minimize risks. While it sounds simple statement it’s actually profound insight.

Internal ventures and external startups are for different purposes.

In internal venturing, a company uses internal ideas and resources to establish a new business. This is often an effort to penetrate new markets and encourage growth. Internal ventures have the advantage of support from the parent companies but making them successful can be challenging. The biggest difference is that when internal startup fail the people still get their salary next month. When external startup fail, people lose their jobs. The pressure, motivation, fear and passion is not the same.

Internal startups are there for cultural change and to make them succeed there are few things to remember:

1. A real startup culture

Think how you can make the internal startup operate as a real startup: Will the internal startup get funding directly from the corporation or should it solve the challenge by its own? There should always be healthy pressure and money should not be something taken for granted. When there is no funding pressure it is a common mistake that internal startup won’t pivot even if it should. In addition, in internal startup teams it is challenging to build lean leadership method and philosophy that supports lean operations.

2. Guidance

When building new businesses, the guidelines should be just right. Too concise guiding doesn’t leave space for innovativeness and too wide guiding has nothing to catch.

3. Fail fast

In internal startups, there is a risk that the team/corporation falls in love with the idea and won’t kill it fast enough. Healthy pressure can be built systematically: for example, setting decision check points with management team: to continue or not to continue.

To avoid falling in love with unremunerative idea it is also possible to give ownership to the internal startup team and let it tear away to operate as independent startup. Giving intrapreneurs ownership and control it also gives them ability (+ fear + passion) to get the early traction.

4. Go to market

There is always plenty internal ideas, but internal startups should remember to think big enough and understand how to enter the market. Internal startups can’t often think about return on equity nor repayment period. As a structural challenge, it is also difficult to find own budget that doesn’t need to be followed quarter based.

External startups are to build new businesses with and to scale with

If internal venturing is innovating and building products and services internally from scratch, working with external startups is utilizing what already exists and access to new technology, talent and market information. Startups are the ones we hear about new products, business models, services, apps and widgets before other people do. To be able to keep up in the competition we need to know what’s coming next and to be able to evolve with the markets.

In personal development, we can read lots about reverse mentoring and in business there is nothing more educating than working with a wide range of startups. Based on 500Startup’s Unlocking Innovation Report, 92 % of corporations are engaging with startups to gain access to new technology, 46 % to gain access to talent and 45 % to collect market information.

Ideally, you work with both, internal ventures and external startups

As explained in the beginning corporations and startups operate differently. Corporations and their operating divisions implement known business models. Based on facts they know how their organisation is creating, delivering and capturing value. Their business model is not filled with hypothesis, but with series of facts. A corporation execute the known business model and as plans and processes are in place, and rules, revenue, profit and margin goals have been set, forecasts can be done based on series of known conditions. For this reason, existing companies are good at continuously improving existing business models incrementally.

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Simply focusing on improving existing business models is not enough anymore. To assure their survival and growth, also corporations need to invent new business models and keep up in the evolving markets and changing world. This challenge requires entirely new organisational structures and skills. Skills, that startups and new organisations are naturally good at.

In best scenarios, corporations work with both, internal ventures and external startups. To make innovation process effective it is important to make it structured and ideas and teams diverse.

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To help you to structure the process you can split the process in three phases: problem-solution-fit, product-market-fit and go-to-market plan. In the end of each phases there should be a decision check point to decide if the project should be killed or continued. This helps you to screen and go through more ideas and avoid wasting anyone’s time or money. Also, when you have both internal ventures and external startups innovating new products and services, keeping them in the same pool also helps you to avoid favoring your internal projects that you easily fall in love with.

Key takeaways

  • Internal ventures face a different context than do external startups
  • Internal ventures are for cultural change
  • External startups are to build new business with and to scale with
  • External startups give you access to new technology, talent & market information
  • Corporations need new organisational structures and skills to not only to improve existing business models but also to invent new ones