One way that corporates respond to the threat of disruption is to create new ventures that break away from the traditional operations and create new revenue streams. These spin-off businesses can launch new brands, exploit new technologies and attract new types of customer.
At first glance these ‘start-ups’ might appear like those created by entrepreneurs. However having launched over a dozen new businesses I have observed at first hand big differences between corporate ventures and entrepreneur-driven start-ups. If you are from an entrepreneurial background and are considering joining a corporate venture, or vice versa, it’s worth understanding these before making the leap. Here are eight things to look out for:
1 Meeting different needs
The founders of a start-up spot an unfulfilled customer need and set up a business to address it. Their challenge is to prove that there is a market for their new product and they can make money from it. Corporate ventures on the other hand are primarily set-up to address the corporate’s need, such as entering a new market, creating a new revenue stream or creating disruption before someone else disrupts them. Very often a corporate venture is not the first player to enter a marketplace and so their challenge is to differentiate themselves from the existing players rather than carving a new niche.
2 Big name versus no name
One of big hurdles for a team of entrepreneurs is being heard. Without a track record, it can be hard to get an audience with potential customers, suppliers or investors. Having secured a meeting, the initial conversation is typically convincing their audience that they are credible and have a viable proposition. Corporate ventures have a huge advantage. Just being able to say “I am part of XYZ Corp” opens doors and accelerates conversations towards meaningful discussions.
3 Back office v DIY
A team of entrepreneurs must create a business from the ground up. Founders roll their sleeves up and do the grunt work themselves or burn valuable cash buying in expertise. Corporate ventures can rely on the parent’s resources to run the back office and admin, leaving the venture team to get on with building the product and launching the business. However, these support resources usually come with constraints. Often they have to fit the venture’s work around other priorities. While they can be very keen to get involved, they often struggle to understand that the venture’s needs are different to the corporate’s normal business. By engaging these “free” resources, they can bring with them company red tape and legacy thinking that can slow down growth of the venture.
4 Different risk appetites
When entrepreneurs talk about risk management they mean ‘not losing money’ – their own cash and their investor’s cash. Corporate ventures define risk much more broadly – reputational risk usually matters much more than money: the risk of damaging their brand, their regulatory position, legal exposure and most importantly the individual careers of those sponsoring the venture. This fundamental difference affects both the speed and outcome of decisions as corporate ventures can face heavy scrutiny and prevarication by stakeholders.
5 Owners v Managers
As investors take up equity in start-ups, they motivate management by ensuring they retain sufficient ownership and even control of the business. New corporate ventures on the other hand may give key managers a minority equity stake, options or other incentives to drive them but control and ownership normally rests with the corporate (or corporates in the case of a joint venture). Therefore, it can be much harder to create an entrepreneurial culture within the venture, especially if it is being staffed with existing employees.
6 Governance agendas
Entrepreneurial start-ups generally have straight forward governance structures as shareholders are usually aligned with the success of the business. The governance of a corporate venture can be very complicated, especially if it relies on the corporate to provide product, distribution channels or other resources for the venture. Board members of the venture often have senior roles in the core business and can find themselves conflicted between the needs of the venture and those of the core business. This can easily result in decisions being made that are not in the venture’s best interest.
7 Attracting talent
Any new business’ success depends on attracting great talent. For an independent start-up, it can be hard to hire new people when the future of the business is far from secure. Talent must be won over by a combination of the founders’ charisma and a belief in their dream. Corporate ventures generally present a less risky proposition to potential hires. Even if the venture doesn’t work out, the candidate can fall back on having the corporate’s brand on their CV.
8 Different end games
An entrepreneur’s goals are usually clear – to build a good business that generates a great return on investment. Once again, the corporate venture’s objectives are often not that simple. Its primary purpose may not be to create a return on investment. Instead, it could be to attract talent that the core business cannot recruit or create IP and expertise for the core to leverage. It may not even matter at all how the venture performs financially, as long as it blocks a competitor from entering the market.
As pressure builds on corporates to reinvent themselves, there is bound to be a growing number of corporate ventures. This creates a new career opportunity for those with a passion for launching new businesses and the skills to leverage a corporate parent’s resources and influence while being able to navigate its complexities.