Corporations are establishing incubators, e.g., Samsung, and accelerators, e.g., Orange, in order to advance their disruptive innovation initiatives. They are doing so on their own, e.g., Samsung, Swisscom, or in partnership with independent accelerators, e.g., Disney, Microsoft, and Barclays have partnered with Techstars. Many corporate incubators and accelerators are established in Silicon Valley, but not all. For example, Pitney Bowes established an incubator in India whereas Allianz established theirs in Munich, and Bayer in Berlin. The terms “incubator” and “accelerator” are frequently used interchangeably to denote an organization that aims at helping startups get off the ground successfully, typically in exchange for a small equity percentage in each startup. Both types of organizations provide entrepreneurs with training (typically in Lean Startup methods, and the Innovation Process), mentorship (including specific vertical industry expertise), partner networks (including VCs) and facilities. However, the two models different in two important ways. First, accelerators invest in their startups, typically $20-100K in each company, whereas incubators don’t. Second, accelerators support startups in groups, or classes, whereas incubators do so on-demand. The startup incubation/acceleration model, when done correctly, can have more long term impact more cost effectively than other approaches to disruptive innovation, e.g., acquiring innovation. It enables corporations to access outside startup teams (see also open innovation) and their product ideas (technology and business models), as well as develop their own intrapreneurs, e.g., Starbucks through its Lean Innovation Lab. A corporation can start with a startup incubation model and progress to an acceleration model. This blog addresses the role of corporate incubators and accelerators in disruptive innovation, rather than the general topic of startup incubation that has been covered extensively elsewhere. It presents:
- Four different corporate incubation/acceleration models.
- The steps necessary for establishing and maintaining one of these organizations.
- A process to help corporations increase the value and success rate they derive from their incubation/acceleration initiatives.
Corporations use different incubation/acceleration models as they are trying to achieve their objectives. We have identified the following four:
- A step in the innovation process:
- Model: The incubator/accelerator works with both intrapreneurs and entrepreneurs that propose disruptive solutions to existing problems, or work on potential disruptions that the company cannot otherwise pursue. The incubation lasts 3-12 months. At the end of this period an expert panel, which typically includes corporate executives and outside experts – including VCs –, evaluates the participating teams. The best teams are given the opportunity to continue developing their innovation by being: a) invited to join the corporation and are offered a retention bonus, b) offered an equity investment exclusively by the corporation or its venture arm, and asked to continue working outside the corporate structure, c) offered corporate investment but are also encouraged to raise money from VCs.
- Examples: Commonwealth Bank of Australia, Samsung.
- When to use the model: When the corporation has a long term strategy for disruptive innovation and is ready to commit resources to work closely with very early stage startup teams, see them through their ups and downs and tolerate their risk-taking and failures.
- Benefits to the corporation: The corporation commits long term to disruptive innovation. It is able to attract entrepreneurs that can eventually join one of the business units. Its intrapreneurs get to work side by side with these entrepreneurs and learn from one another. The incubation/acceleration and the corporate venturing groups are able to collaborate around the incubated teams. The corporate incubator/accelerator enables the corporation to connect with the broader startup ecosystem.
- Pay it forward:
- Model: The corporate incubator works with outside teams of entrepreneurs offering them facilities and training. Most importantly it exposes exposing them to real industry and company problems, and making available experts to help them understand the issues. The corporation does not receive any equity in exchange for these services. The incubation lasts 6-12 months.
- Examples: Allianz, Turner.
- When to use the model: When the corporation wants to a) start exposing its executives to startup thinking and practices, b) attract entrepreneurial talent, and c) elicit new ideas from outside its four walls on how to solve important problems.
- Benefit to the corporation: Creates goodwill with entrepreneurs while accessing talent, ideas and potential solutions to problems of interest. In the process it exposes its executives to startup teams, processes and thinking.
- Develop intrapreneurs:
- Model: Teams of entrepreneurial employees use the incubator to create innovative solutions and test business models that cannot normally be pursued by the business units.
- Examples: LinkedIn, Google, Starbucks.
- When to use the model: When the company has a strong innovation culture and long-term commitment to disruptive innovation.
- Benefit to corporation: Promote and strengthen intrapreneurship, risk-taking, and out of the box thinking. Rapidly develop new products and business models.
- Test new work environments:
- Model: The incubator is used to create and test new work environments that are based on core startup characteristics: openness, rapid prototyping, experimentation, risk-taking, working with uncertainty, and collaboration over distributed environments.
- Examples: ATT Foundry, Standard Chartered Bank (SC Studio).
- When to use the model: When the corporation wants to test startup-like environments but is not prepared to take on the risks associated with external startup teams.
- Benefit to the corporation: Experiment with startup approaches, organize and manage internal groups using startup company structures (flat management, open communication) in an effort to create high performance organizations.
For any corporation, the learning curve for establishing and maintaining a successful startup incubator or accelerator is steep because it involves performing many tasks, several of which are new and “unnatural” to the corporation. Moreover, most of these tasks must be performed simultaneously. Setting up an incubator or an accelerator involves:
- Selecting the right founder teams to incubate. This selection extends to the intrapreneurs as well. The right teams are characterized by their passion, ambition to solve a big problem and in the process create billion dollar businesses, intelligence, true willingness to learn, (including learning from their mistakes), and desire to takes risks that are not always fully aligned with corporate culture. Selecting the right teams also implies selecting the right projects to incubate. That often involves taking into account corporate priorities, as well as understanding how the efforts of the corporate venturing, corporate development and business development groups are trying to address these priorities. My suggestion is for corporations to focus on opportunities where they have a competitive advantage over any independent startup. For example, specific vertical industry expertise.
- Training the teams on Lean Methods and Agile Startup Models, Minimum Viable Product, Customer Development and Design Thinking, as well as providing them with vertical knowledge they could use in the solution they will be developing.
- Managing the startups being incubated, mentoring their teams on how to develop their idea into an initial prototype, helping them solve problems as they arise, rapidly iterating through successive versions in an effort to find the right product/market fit.
- Pruning out the startups that cannot translate their idea into a product, cannot find the right market fit for their product, and those that have team issues. It is well accepted that 9 in 10 startups fail. While incubation and acceleration aim at improving the startup failure rate, they do not eliminate it.
- Establishing the right culture across the teams being incubated but also helping each founding team forge the culture of the company it is creating. For intrapreneurs this implies establishing a culture that is very different from the corporation’s existing culture. This in itself may make difficult, if not impossible, for each incubated team of intrapreneurs to re-enter the company.
- Exiting the successful companies either as independent, self-sustaining entities that are able to attract new capital, or by spinning them in to a new or an existing business unit.
Because of our experience in dealing with startups in general and many of the issues above in particular, corporations are starting to collaborate with VCs on how to best set up their incubation/acceleration efforts in way that will make them successful. Let me now propose a process that can help corporations increase the value and success rate they derive from their startup incubation and acceleration efforts:
- Determine whether you need an incubator or an accelerator, select which of the four models you will employ, (you may even decide to use a model that is a hybrid of the four presented above) and decide whether to establish an independent incubator or create one in partnership with a third-party, e.g., Techstars. Incubators/accelerators created in partnership with third parties allow for faster time to market but can be expensive propositions and may ultimately limit the amount of knowledge transfer that will enable the corporation to ultimately run its own incubator.
- Master the steps of maintaining a successful corporate incubator/accelerator, described above.
- Obtain and maintain executive sponsorship and funding, preferably from the CEO.
- Set up dedicated funding processes for the accelerator. The funding may come from the corporate venturing group (CVC), if the corporation has already established one, or from a different budget. If the corporation has a CVC group, then make sure that it is well connected with the accelerator, even if it does not fund the incubated teams, in order to be in the position to continue funding the most promising of the startups. Seed-stage investments should not be treated as though they were just another investment in the annual budgeting cycle that is subject to the same rules and rigor as an investment in an existing product. While it is certainly important to ask a startup team to provide their rationale for why they will benefit from the funding, it is actually counterproductive to insist on revenue projections and ROI calculations at the time of a seed investment.
- Recruit the right mentors. Create a network of mentors that includes both corporate executives and outsiders with startup experience. These mentors are not just helpful to the entrepreneurs, but can provide invaluable advice even the business leaders within the core business. Evaluate the mentors as rigorously as the incubated teams, keep the ones that are being effective and replace the others. Work hard to keep the ones that are effective, particularly the corporate executives.
- Introduce business unit employees into startups that were created by intrapreneurs or the startups that will receive investment from the CVC group after the acceleration period ends in order to prepare the business unit for taking ownership of the solution being created.
- Provide the right incentives for the entrepreneurs, including the intrapreneurs, with the best of the incubated companies so that they will continue their effort after the acceleration phase and allow the corporation to achieve maximum benefit.
- Make the incubator/accelerator part of the ecosystem it is operating in, e.g., Silicon Valley. This means that the incubator’s leadership must network extensively in the ecosystem. Startup teams must be able to learn from their peers, identify and recruit talent from local networks, and quickly experiment with and embrace or discard new processes and tools as they become available in the ecosystem.
- Create simple contracts that define the relationship between the startup and the incubator/accelerator. This is even more important when an accelerator model is used since that model involves the corporation making an investment and taking an equity position in the startup
The current corporate incubator/accelerator movement is very real; and like other corporate initiatives, can show meaningful results if done properly. There is no single recipe or “best practice” for setting up an incubator or an accelerator. The type of organization the corporation establishes and the model it chooses depend on the corporation’s unique objectives, capabilities, time line and competitive threats/opportunities. The best corporate incubators accelerate corporate insight and corporate learning on a broad scale. Learning faster than the competition is perhaps the only remaining true method of sustained competitive advantage.
(Cross-posted @ Re-Imagining Corporate Innovation with a Silicon Valley Perspective)