EXCUBATION explained PART 3
This is the third installment of our ‘EXCUBATION explained’ series, covering the basic concept and our core set of excubation rules one by one. We suggest you start with part 1 for the full picture ( Part 1 of our "EXCUBATION explained" series)
As a recap, we are covering the seven rules of corporate entrepreneurship:
Rule #1: Separate innovation from execution
RULE #2: ATTRACT ENTREPRENEURIAL TALENT
Rule #3: Facilitate innovation flow
Rule #4: Manage innovation portfolio
Rule #5: Inspire employees in the core business
Rule #6: Educate employees
Rule #7: Support idea flow
Rule #2: Attract entrepreneurial talent
Google, aka Alphabet, is already a very valuable company – but it could be even more valuable had it been able to retain the entrepreneurial talent that left the company to found Instagram, Pinterest, Twitter to name just a few that now represent a multi-billion dollar market capitalization. But Google – as innovative and entrepreneurially driven as it is - obviously didn’t manage to provide an environment compelling enough to keep these founders (semi-)inhouse.
Attracting and retaining entrepreneurial talent is the most critical enabler for successfully building new businesses. This makes it one of our seven key rules of corporate entrepreneurship.
Outside of and even more so within corporations there is a limited number of entrepreneurial talent with the right skill/will profile for successfully building new businesses and currently there is something going on that could be called war for entrepreneurial talent. This talent needs to be identified and incentivized in the right way.
However, it’s not just about attracting and retaining talent. Research suggests that up to 60-70% of failed startup endeavors within and outside of corporations failed because of the skill/will profile and combination within the startup team. Thus, it’s also about building the most effective teams out of this talent and combining the right set of internal and external team members.
Three motivators for entrepreneurs
To attract entrepreneurial talent we typically see three important enablers:
1) Ownership and decision responsibility
2) Effective boundary conditions (access to resources, technology, IP, processes)
3) Financial upside in line with success of the business
Designing these elements carefully is critical but very difficult in a corporate environment. Giving a startup team ownership and decision responsibility might even be the easiest part. Typically set up as project organization or even separate organizational unit within an existing business unit a startup can already go a long way. Establishing an entrepreneurial culture and providing the right boundary conditions is already much harder. Different from established corporate processes, hierarchical decision making and the role of politics, entrepreneurs need an environment to run pragmatic processes, make fast paced decisions and build networks of people to follow a mutual mission. The right risk reward models need to be found and enabled within the boundary conditions of a corporation. Most corporates don’t have experience and are reluctant of setting up equity participation models for startup teams
Finding and building the right team
In each corporate there is a strong group of entrepreneurially minded people who have gained significant work experience and would like to found their own company. However, many don’t find a way to transition from their fixed job into an entrepreneurial role all by their own, are missing the right idea and/or the right team as well as financial support. We believe each corporate needs to set up a recurring mechanism to identify those talents, bring them into a community of like-minded people and link them with compelling corporate startup ideas. To operationalize this, Excubate typically applies a model called “corporate founders club” – an internal community of up to 200-300 people within a large organization that is interested in becoming entrepreneurs. Putting yourself in the shoes of one of these people, say the corporate controller “Klaus”, you get an idea of how the model works:
This should go hand in hand with a strong startup support model that takes these teams and ideas and runs them through a stringent and disciplined process that builds a scalable business model. This will be covered in upcoming newsletters.
Creating ownership and effective boundary conditions
Entrepreneurs want to move fast and make quick decisions they take responsibility for. This is what they find in greenfield startups and what a corporate needs to enable too, by resembling a startup environment. Separate team, separate budget, separate processes, separate location – but smartly supported by the corporate with resources, people and expertise and guided by a disciplined process as mentioned above. This is at the core of the Excubation approach. Corporates have some strong advantages vs. greenfield startups: Their existing resources (technology, intellectual property, products, customer access) are valuable for the corporate startup and should be made available in a reasonable way to help speed up the new business. Also, critical support functions like HR, finance, legal can support the new business and professionalize it quickly. To avoid getting lost in the corporate process and speed, we suggest to appoint “point people” in each core and support function that understand the mode of operations of the new business and run pragmatic workarounds, e.g. to identify and approach pilot customers for a new service or to establish linkages to experts within or outside of the corporates to help solve issues the startup is struggling with.
Defining incentives and participation models
Creating a startup-like incentive model is both extremely difficult but actually also quite easy for a corporate – if approached with the right mindset.
Entrepreneurs, depending on their own lifecycle stage, need to balance financial security with financial upside and are not necessarily only driven by the latter. However, it is crucial to build at least some form of financial participation model into the incentives structure, either by giving the entrepreneur an equity share or an equity equivalent (phantom shares).
The compensation structure needs to move from the left on the below spectrum to the right and can change for an individual venture over time. This already typically causes corporates headaches, given that many have no experience and actively shy away from not owning 100% of their subsidiaries and potentially reducing the maximum upside from a successful startup. We believe that those corporates who are open to such models will have a strong competitive advantage and that most of corporates’ perceived issues (e.g. less financial upside in the long run) can be mitigated (e.g. via establishing a call option within a defined timeframe after the startup shows success).
For example, Microsoft’s Accelerator ran a program together with Techstars that started off on the right by giving 94% of equity along with $20k seed funding to a startup/founder team and after just a few months bought their equity share back for $5M, moving all the way to the left and keeping the founder team as employees. At the same time, they acquired a promising new product/business model to complement their Xbox/Kinect technology.
As a corporate – different from a greenfield startup – there are additional options to create a compelling value proposition that pure startups don’t have and that put corporates in an even better position: Additional fixed salary, additional perks or the option to return into their original job position, should the startup not work out. The latter, however, might be questioned from a motivational perspective and could create a too laid back perspective on (“burn your boats” approach).
Two of the biggest challenges for implementing an equity participation model for a startup team are the right timing and the right approach/financing of a “buy-out”. The longer a new venture is being built internally, the higher the fair value will be that the startup team has to pay for an equity stake. Thus, we typically favor an early setup of a legal entity and early participation of the founder team. In case that happens later in more of an carve-out model, there are multiple options to help the founder team finance a larger equity share, ranging from leveraging external investors to having the corporate provide a non-recourse loan (which is only to be paid back in case of a divest/liquidity event).
Excubate has experience along the above lines in each area and typically starts off with a workshop series to help you define your individual approach to attracting entrepreneurial talent. We determine the status quo along the lines highlighted below and define an action plan to build your talent pipeline.
We are pleased to discuss the above topics in more detail with you and spend time on the phone or in person to help you run successful corporate entrepreneurship initiatives! Please get in touch with:excubate® corporate startups
Dr. Markus Anding and Tammo Ganders, MBA
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