Insights from CompanyCrafters #2

The Seven Principles of Entrepreneurship (Part 2)

This article is part of a series that explores how established organizations – corporations, research institutions, even nonprofits – can apply entrepreneurial thinking to become more innovative and successful.

In our last issue, we introduced a set of principles that together can help managers in established organizations to operate more effectively by thinking and acting more entrepreneurially.  We called it "The Seven Principles Entrepreneurship": 

• Ski with your knees bent.
• Refine the skill of falling down.
• Get comfortable with "close enough."
• Be happy with a "conditional yes."
• Remember that business model innovation is often as important as tech innovation.
• Think small.
• Strive to understand and mitigate risk.

Having already explored the first three principles, we'll now look more closely at the last four.  You'll see that these share a continuing theme of adjusting one's behavior and mindset to thrive in uncertain and ambiguous environments – something successful entrepreneurs have always done well, and corporate executives increasingly need to embrace.

Be happy with a "conditional yes."
The tendency in big organizations is to seek budget approval for an entire, multiyear project up-front.  After all, nobody wants to launch into building, say, a new $275 million plant when they only have corporate funding approved for the first $30 million for planning and site prep. 

The problem is when we see corporate new-business-development folks trying to apply this up-front approval formula to venturing. 

In the entrepreneurial world, nobody expects to receive 100 percent funding up-front; it just doesn't work that way.  With independent ventures, investors believe in "milestone investing," progressively meting out capital sufficient to fund the next 9 to 18 months worth of activity and the achievement of the next crucial value-building milestones.  For instance, it's not uncommon for a venture requiring a total of $15 million in investment capital in order to reach self-sustaining profitability to seek seed funding of only a million dollars or less to build a prototype and do some preliminary testing; a subsequent "A" round may be for just a few million dollars to enable the venture to build a team, productize the technology and sign up the first few customers; and so on.  Typically, early-stage investors are keenly interested in continuing to participate in subsequent rounds; they just like to see incremental progress along the way. 

Internal corporate ventures – and here we're referring to risky ones entailing new technologies, new business models and/or new markets, not capacity-expansion projects and the like – should approach funding with the same venture-funding mentality.  Remember the principle we mentioned in our last issue: that 50 percent of a new venture's business plan will inevitably prove to be wrong, you just don't know which fifty.  If that holds true, it only makes sense for the parent company (playing the role of venture capitalist) and the internal startup team to agree on funding increments and associated milestones rather than the all-in approach.  Less capital is committed, inevitable mistakes or discoveries are less costly and more easily accommodated, and the new business remains nimble.
   
Remember that business model innovation is often as important as tech innovation.      
We've never seen any statistics or studies in this regard, but it sure seems that the majority of shareholder value created over the last half century had a lot more to do with companies innovating around their business model than around technology.  Think of eBay with online auctions.  Store brands and generic drugs.  Amazon cutting out the retail middle man.  Manufacturers asking suppliers to co-locate.  Dell building PCs to order.  Social networking typified by sites such as MySpace and Facebook.  The way HMOs and PPOs fused insurance and healthcare delivery.  Sure, in many cases, technology was involved, but technology was not the strategic driver that created shareholder value.  Instead, it was creativity applied to the business model (product/service mix, value proposition, channels, pricing) that made the difference.  This kind of thinking needs to be applied not only by entrepreneurs but by corporate new-business professionals as well.  [We'll delve further into business model innovation in future issues of Insights from CompanyCrafters. –ed.]     
 
Think small.
An executive in a tech startup, recently hired away from a Fortune 500 company, unfortunately brought his big-company thinking with him.  Inheriting management responsibility for a professional services operation of about 50 people growing at over 50 percent annually, he saw a crying need for more coherent project management.  His solution?  Call in the vendor who'd provided similar software and services to his last employer, and get a quote.  The result?  A half-million-dollar expense where PC-based project management software and rigorous management communication would have sufficed nicely; worse yet, the expensive "solution" never worked, the manager was fired and the system scrapped for a simpler approach.

Too often, we see established corporations trying to innovate and getting caught in this big-company, go-big-or-go-home mentality.  We've seen an internal corporate venture of a multinational tech company spend millions on PR – because, "That's how we do things at XYZ Corp." – before they'd even fully defined their product, value proposition, positioning and go-to-market strategy.  Bizarre.  Entrepreneurship, even if it's taking place under the corporate umbrella, calls for small, inexpensive, rapid-turnaround experiments and trials.  "Thinking small" doesn't mean that you don't have big aspirations for your new venture.  (Indeed, we don't think of startup ventures as small businesses; we think of them as global enterprises that happen to be young.)  But by iteratively discovering what works and what doesn't – what fifty percent of your original business plan was wrong – you'd be surprised how far you can get on how little capital. 

Strive to understand and mitigate risk.  
Contrary to popular belief, entrepreneurs and venture investors are not risk-seeking nuts, the business equivalent of helmet-free bungee jumpers.  In fact, the best ones are remarkably risk-averse, skilled at identifying and mitigating venture risk.  Whether they do it intuitively or explicitly, A-list venture folks are constantly working to wring risk – whether it's product risk or risk of a market, financial or management nature – out of their startups.  There's a method to their madness that corporate startups need to apply.

Our next several Insights from CompanyCrafters will continue to explore ways that established organizations can think and act more entrepreneurially.