Large enterprises that have a linear business model in which they sell a product or service directly to their customers can innovate through incremental or disruptive tactics. Incremental innovations are ideas and process improvements that provide a measured increase in performance from a current product or offering. On the other hand, disruptive innovations require the complete 'rethinking' of the existing enterprise's business model.
Disruptive innovations typically provide the most impact and the greatest return on investment. However, it's difficult to allow for the incubation of a disruptive startup within a larger business. The ROI isn't always clear right away, and it may take a while to pay off. There's also the risk of your new business model cannibalizing the old one. The benefits of continuing to innovate will eventually flow through to your bottom line. But it's hard to let your new business grow in the meantime. So, here are a few tips about how best to structure your startup.
1. Invest in Platform Innovation
There are several types of business model innovation, yet Platform Innovation is the best type to invest in during today. It's also the type of innovation that is most under-invested in. And considering that in 25 years, as much as 50% of the profits for companies in the S&P 500 will come from platforms, these enterprises need to start getting serious about platforms if they want to thrive in the era of Modern Monopolies.
Incremental innovation can be found in different parts of an enterprise depending upon the organization's setup. In some instances, there might be an innovation officer and/ or an innovation lab. Anheuser Busch's "Beer Garage" and Wal Mart's innovation lab are both located in San Francisco. These initiatives are focused on improving the existing linear business model, not tearing it down and rethinking it for the 21st-century economy.
Platform Innovation opens up a whole new world of possibilities. Enterprises must be comfortable with the prospect that a successful platform business could replace their current business models at scale. What if Hyatt had started Airbnb? In comparison to Hyatt's recent launch of "The Unbound Collection", Airbnb started with a lot less money and is now worth almost double Hyatt's current market cap.
2. Use your advantage: Existing enterprises are better equipped to build successful platforms
On paper, an existing, linear enterprise has a competitive advantage to kickstart a platform compared to a startup. It has industry connections, experience, customers, and money. At launch, one of the biggest challenges for a platform startup is overcoming the chicken and egg problem. A platform launched with the support of a large, existing enterprise in a similar industry can benefit from the enterprise's resources to get easier access to users for one side of the platform (either consumers or producers).
3. Start with the right leader
You need a leader within the organization who has respect and direct access to the CEO. This leader also needs to be a former entrepreneur having been on the ground floor of a startup. A seasoned and proven entrepreneur will ensure the platform's business model is sound and can eventually provide value back to the enterprise as the startup scales. This individual must also be comfortable in a product environment and have the ability to rally a team of product managers, designers and engineers to hit product milestones.
4. Let the startup be
Carve the startup out from the organization! Legally, financially and every other form of separation you can manage. If the startup needs help and advice from the enterprise's leaders, they should certainly ask but there shouldn't be a formal process in place they have to follow.
Legally, the startup should be incorporated as a separate entity with its own incorporation documents. The enterprise is an investor, but there should be stock allocated for founder equity, employee shares, etc. The startup should have its own bank accounts and be able to make purchases without procurement and legal bureaucracy. Time is of the essence when launching a startup and putting barriers in place that prevent the leaders from making quick decisions, will jeopardize chances for success. The enterprise should make the investment in time and resources upfront to find the right innovation leader. Then step back and let them be great.
5. Remove dependencies to the enterprise's infrastructure
A startup needs to move fast and be agile. If the startup is building products with integrations into the enterprise's infrastructure, say goodbye to anything agile. These startups should aim to build server infrastructure and products completely decoupled from the existing business, especially at the beginning. Building integrations into existing infrastructure can be expensive and time-consuming. The best remedy is to be lean and figure out work arounds which remove the need to invest precious development resources into anything but the platform product.