It's no secret that a lot of large enterprises  struggle with innovation - particularly when it comes to industry transformation. But many are being forced to find solutions.

Enterprises are seeing their industries disrupted on two major fronts. On one hand, by Silicon Valley startups that are springing up seemingly every day, attracting troves of VC funding at warp speed. And on the other hand, by big tech conglomerates such as Amazon, Uber, and Facebook, who are spinning off successful platforms (just look at Amazon AWS, Uber Eats, and Facebook Messenger).

 How should incumbent enterprises respond? Corporate incubators and traditional corporate VC have had mixed results. But aside from the capital they provide those ventures, large enterprises also have a range of hard and soft assets at their disposal that can help ensure the success of new tech startups. They can tap into this dry powder to launch and spin out strong startups themselves.

Strengths and Weaknesses of Enterprise Innovation

Traditional large enterprises already have some of the right ingredients in place for making homespun ventures work. These are, namely, a well-worn user acquisition process, a rich industry knowledge base, funding, trust, and user retention strategies.

Brand-new startups don't have these strengths. But for established companies, these inherent advantages are a mother lode waiting to be tapped.

As far as weaknesses go, one would be over-protectiveness. Big companies naturally want to shelter their core brands from damage. Outside of disruptive innovation, this tendency is actually a strength. A strong brand is a very important asset, and new experiments that tarnish it in some way can possibly undermine years or decades of trust-building and goodwill.

A related weakness is an internal culture of risk aversion that gets in the way of green lighting and funding new ventures. And that's not to mention the possibility of legal and regulatory hurdles.

Some companies who have self-awareness in these areas and still prioritize innovation have created "internal incubators," or departments dedicated to testing new startup ideas. But these corporate hubs often tend to create only incremental innovation -- maybe some new digital IP, or the revamping of the user experience on existing websites.

Those things might earn some buzz and raise some KPIs as inventive marketing gambits, but they don't come close to touching on truly transformative business models. And new ideas are still often hampered by too much oversight, undermining a young venture's ability to breathe, try, fail, and try again.

Enter the Venture Studio

Venture studios solve many of these problems. These studios, put simply, are organizations that build startups. They bring to bear many critical resources such as personnel, strategic thinking, and seed capital. There are independent venture studios, which fund and launch their own independent startups, as well as corporate venture studios, which focus on working with large enterprises to launch new businesses.

Today's most active venture studios are adept at spotting marketable startup opportunities and have the know-how to properly execute on ideas. They either operate independently or as "corporate venture studios." In the latter scenario, the resources of a studio and enterprise are pooled together and funneled towards the new spinoff business.

Working with a corporate venture studio helps solve many of the pitfalls that large enterprises face in acquiring or launching new ventures. This approach gives the enterprise more control and upside than simply buying equity in existing startups. It also grants the new venture the freedom to fail fast, which helps ensure it will be able to take the risks to accomplish more than just an incremental customer experience upgrade.

How to Think Like a Venture Studio

Enterprises need to think like venture studios to build startups with staying power. Here are some key principles of the approach:

  1. Autonomy. New homegrown ventures need to be separate from the core brand. This gives them space and flexibility to solve the chicken-and-egg problem of having enough supply to meet demand and vice-versa, while proving out the business model.
  2. A valid core transaction. The venture-building team needs to do whatever it takes to figure out the main value exchange between consumers and producers. It calls for doing some manual legwork to get some core transactions going. Sometimes this means manually hacking service fulfillment for the startup's early customers.
  3. A willingness to self-disrupt. This may seem like the scariest proposition of all, but it's often the most effective and necessary for large enterprises. Self-disruption, in this sense, means opening up the core of your business to third-party producers who will essentially compete with you within your own ecosystem. For example, a retailer might allow third parties to sell the same items it's already selling to their customers, possibly undercutting the retailer on price on some items. This approach will create value that will attract more customers (a big catalog, higher throughput, and lower prices thanks to internal competition) and more suppliers (access to a growing customer base). But it involves a willingness to embrace disruptive change and potential cannibalization of parts of the core business.

Build It Right

The venture studio approach is the most surefooted way to go for enterprises who want to innovate. It enables them to make solid plays in a dynamic, volatile tech scene while the getting is still good in many industries. And it's the most conducive approach to spinning out ventures with the best chances of winning in the long run.