Large, established companies are arguably much better equipped than entrepreneurs to build new businesses. So why do the entrepreneurs so often beat them to the punch?
Established companies, public or private, are much better equipped to build businesses than entrepreneurs. They have strategic assets like reputation, experience, facilities, and established sales channels. But time and time again, entrepreneurs beat them to the punch. Despite their advantages, established companies are consistently unable to capitalize on their strengths.
Why don't more companies make the choices necessary to incubate and build a successful business? Here are five reasons:
1. They don't have the proper incentives. Independent entrepreneurs, angel investors, and venture capitalists all have unlimited upside in the form of equity to build the business. Managers within bigger companies are typically not given the financial incentive to shoot for success.
2. They are averse to the hockey stick. Bigger companies are inherently focused on the short term: the current year or even the current quarter. Whether they are public or private, they have trouble trading short-term profits for potentially larger long-term gains. Therefore, they typically deprioritize investments with negative initial cash flows--even if those investments will lead to "hockey stick" growth.
3. They don't have the right people. As we've discussed in the past, it takes a different skill set to build a business than to manage and grow a business. Big companies continually hire people that excel in the latter, which makes them less appropriate for startups. Plus, people who are attracted to careers in established companies are likely to be inherently less comfortable with the risk profile of startups.
4. They are worried about cannibalizing the core business. We've seen many a leadership team forgo opportunities to build new business because of the real or perceived threat of cannibalizing their core business. The truth is that investors and management teams need to think about capturing more of their market profit pools, rather than holding onto existing products or markets. Cannibalizing existing business can actually be a good thing if it leads to greater lifetime customer value. Sometimes, if you don't cannibalize your own business, someone else will.
5. They are unable to focus. Potentially the greatest challenge established companies face is that they simply are unable to focus enough resources on an emerging growth business. In front of a customer, they will usually prioritize their core product over their new product--often because it's an easier sale.
To more effectively build a new business established companies need to separate their emerging business with different incentives, different practices, different people, and different strategies. In short, they need to think like entrepreneurs. If they can accomplish this, they can easily outwit, outinvest and outlast any entrepreneurial team.
Are you an established business aiming to build a new business? Are you a successful entrepreneur who has won against a larger enterprise? Send us your comments and questions at firstname.lastname@example.org
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark