With digitalization all the rage, companies are expending vast amounts of energy and money to stay in the game. Determined to become nimbler and more innovative, many forward-looking businesses are making a home for internal digital transformation ventures led by skilled employees.
Inspired by the success of some of the world’s most innovative companies, such as Google, Intel, Apple and Amazon, these tribes of intrapreneurs are sparking innovation throughout established companies, but the internal startup model has its own set of obstacles. What is more disappointing is that most of these stumbling blocks are seldom acknowledged.
The intrapreneur’s dilemma
In pursuit of attaining a thriving digital venture of their own, big companies may not hesitate to provide initial funding to an internal startup. Moreover, by coming to life inside established companies, internal ventures can tap into existing competencies, assets and expertise. But this is where the intrapreneur’s dilemma starts taking shape.
Though these internal innovation entities do not have to undergo the scrutiny of venture capitalists or pass stringent markets tests, unlike external startups whose plans and capabilities are rigorously evaluated, the path for intrapreneurs after initial funding is received gets much bumpier.
No doubt, coming to life inside a big company means that intrapreneurs are surrounded by resources, capital, systems, processes and more. But this comes at a price: For these internal startups, everything is a trade-off.
Despite the availability of ample resources, securing additional capital and talent is a constant uphill battle for internal startups. Their unit is subjected to never-ending comparison and competition against other business divisions of the company with better prospects and established legitimacy, as well as offering a short-term upside.
Finally, even if the intrapreneur succeeds and the venture starts making real money or achieves a remarkable feat, it may not represent even a fraction of the company’s incremental growth. For these miniature think tanks inside legacy organizations, earning respect and recognition for their value is often impossible.
Once the internal startup gets the required resources to function from its parent company — talent, cash, systems and processes — inertia in the organizational structure is apt to set in. This results in rigidity, making it difficult for the venture to be totally flexible. Being part of a big company limits the freedom of these intrapreneurs, and established business units may bristle at the idea of allocating hard-earned funds to what they consider a frivolous venture with an uncertain future, compounding their dilemma.
Ironically, the victory of an internal startup often marks the end of its identity. When an intrapreneur succeeds, their venture is usually absorbed back into the primary business of the company. In the name of embracing and scaling the innovation brought in, established corporate leaders who lack the vision, expertise or skills needed to drive the venture replace the mavericks once at its helm, sapping its energy and prospects of growth.
In some companies, innovation also triggers the growth of “antibodies,” meaning people who are at odds with introducing a new model of work, even if it offers an ingenious solution. Existing business units that perceive the internal startup as a threat to their existence may attempt to cut off further funding. Others continue to chafe at the idea of money being squandered on an uncertain startup venture. Opposition or apathy within the parent company means intrapreneurs end up working in a siloed culture imbued with resistance and leadership conflicts.
An alternative model for intrapreneurs
It is indeed challenging to launch new ventures inside a huge company. But it doesn’t mean that there is no alternative for innovating within an existing business.
Nitin Nohria, a former Harvard Business School dean, and Hemant Taneja, managing director of venture capital firm General Catalyst, envision a different funding mechanism — the venture buyout or VBO — as a solution to help these internally hatched ventures withstand the hurdles and grow into an enduring entity.
VBO mechanism, decoded
In simple terms, a venture buyout entails partnering an established organization with a venture capital firm to spin out and later scale an internal startup. The VBO brings high-risk growth capital to meet the funding needs of the internal startup and accelerates revenue growth augmented with increased cash flow and finer unit economics.
Seeking external funding also enables a growth-centric transformation of internal startups. Drawing from the unique skill set and experience of VC firms, these innovative ventures can make the right stage-gated investments in line with their growth milestones.
At the same time, VBOs also create a strong incentive, smoother pathway and feasible time frame for the internal venture to function independently — by going public, co-existing with the existing business or getting acquired.
By enabling big companies to tap into the VC cosmos, the VBO gives these businesses the same access to innovation at scale, in the form of thriving internal startups, as well as monetary gains like those that have fueled growth for their ingenious competitors.
Apart from providing internal startups with funding, VBOs can equip established businesses with a mechanism for unleashing the full potential of their internal startup. By capitalizing on the expertise of VCs, the VBO model helps bigger companies grow and support enduring ventures.
The end result is a win-win for intrapreneurs and the parent business that backs them. Getting the focus right from the beginning can help internal startups grow and prosper, and this is exactly what the VBO funding model aims to do.