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Don’t expect the impossible: corporate start-ups can never be real start-ups
Kegham Arzo • September 14, 2020
Ask almost anyone smart doing a business degree at the moment about their career plans, and you’re bound to hear the word “start-up”. Even if they don’t use those specific one-and-a-half words, they will almost certainly list the typical features of young companies when describing their preferred working environment. What you certainly won’t find are talented graduates queueing up for 9-to-5s at medium-sized manufacturers in provincial towns without so much as a co-working space.
Why start-ups are attracting employees – and would-be employers
Partly, of course, this is a lifestyle trend. Status-conscious twentysomethings want to do cool stuff – and free beer every Friday against a backdrop of bare-brick walls in Shoreditch or Kreuzberg is definitely cool. Mainly, though, it’s a rational decision: today’s young talent has watched companies which were start-ups when they went into high school become powerful corporate – just as many an established company has started to look distinctly sickly. What is more, talent entering the labour market now is far more conscious of the importance of corporate culture and working practices in their own professional advancement and mental health. They want openness, flexibility, and participation (even equity) not just for their own sake, but because these are attractive career propositions.
As young digital firms are now taking tangible market share from established corporates, it’s not just the difficulty of attracting young talent, either, but sheer business necessity that is making them take a closer look at what their start-up competitors are doing right. What they are seeing is how comparatively small teams of people with initially low invests are, again and again, identifying opportunities and turning them into exponential growth.
Being able to do that is a tempting prospect, of course, so large corporations and traditional owner-managed firms alike are now actively looking for ways to transfer the dynamism of start-up culture and digital business mentalities into their organisations. Frequently, the result is a corporate incubation project; others are buying their way into young tech companies as silent partners or active investors; some are even going for the ‘from-scratch approach’ and starting their own corporate start-ups.
This is, on the whole, welcome news. I am not here to criticise companies for (perhaps somewhat belatedly) waking up to the epochal shift in the economy and doing their best to not get left behind. There are, however, quite serious pitfalls. Not infrequently, corporates launch themselves into incubators, investments, and internal start-ups with a huge degree of relish – and large amounts of resources – only to find that, later down the line, all they have to show for it are significant write-downs. The companies they developed, took stakes in, or set up have failed and, perhaps even more dishearteningly, the much-vaunted potential for acquiring digital talent has not materialised.
Why 90% of start-ups fail – and not even 10% of corporate start-ups succeed
Why is this happening? The obvious answer is that 90% of all start-ups fail. Yet beyond this truism, corporates have to ask themselves why they are not even getting a 10% success rate. I would argue that the issue is the corrosive effect classic corporate culture has on early-phase companies: as soon as complex hierarchies with the lengthy decision-making lead times these entail come into play, once auditing processes, compliance procedures, and corporate identity codes rear their heads, the advantages start-ups have – and what gives them their 10% chance of succeeding – dissolve. Secondly, and not unimportantly: start-ups have disruptive business models, yet corporates do not want disruption to their business models.
For all the talk of “cannibalise your own business before somebody else does”, this is a circle that is impossible to square. If a corporate has a genuinely successful start-up on its hands, its only real option is to bring it in house quickly before it turns round and kills its creator. Yet it then quickly becomes impossible for said start-up to maintain the breathtaking speed, breakneck agility, and balls-to-the-wall risk-taking mentality that makes it 90% likely to fall flat on its face and 10% likely to hit the jackpot. It’s a catch 22.
It’s not that corporates are doing something wrong – well, nothing they could sensibly stop doing. In my view, it’s just a simple category error: corporate start-ups are not really start-ups. Whether we’re talking about a young company in which Established Inc. buys a controlling share early on, a start-up which takes part in the Established Inc. X Incubator Programme, or Established Inc.’s own start-up Xstablished, the result will be the same. For all its talk of “encouraging experiments” and “promoting disruption”, Established Inc.’s primary duty to its shareholders, owners, and staff is to protect its market share and stop costs spiralling out of control. That means that it might keep financial oversight of its incubator/investments/in-house ventures a bit looser for the first few months or years – and probably understands enough about how things work these days to let them provide free MacBooks and Club Mate – but real venture-capital-style cash-burn in the quest for the pot of gold at the end of the rainbow is not going to happen. Neither should it.
The truly talented start-up employees know this, and will start deserting the moment the corporate investor hoves into view, leaving their less responsive teammates to steer the ship as the course becomes clear. As for in-house start-ups: true talent avoids these like the plague from day one.
How success can be achieved
The exceptions prove the rule here. Where established corporates chalk up successes with start-ups, they distinguish the legal entities to such an extent that the connection between the two is almost invisible to the untrained eye; they exercise the lightest of touches when it comes to auditing; and they offer something of genuine use to the start-up – like the use of real-world infrastructure or, in B2B contexts, introductions to clients and suppliers. They also do things no corporate would ever do in-house, like offer equity participation. On the other hand, they don’t flood the young company with money, which lowers their risk if it does go belly up.
To repurpose a proverb by way of summary: if you love something – or just like it enough to not want it to fail – you’ll set it free. Just as parents have to let their offspring go their own way in order for them to become successful adults with whom they can have mature relationships, corporates who profess to love start-ups need to make sure they have the freedom they need.
Amidst all the reports of yesterday’s garage/spare-room/co-working space start-up becoming today’s multi-billion-dollar enterprise, many traditional industrial companies – large and small, mass-market and niche – feel overwhelmed by the prospect of the digital transformation. While some bury their head in the sand, assuming – despite mounting evidence to the contrary – that their own particular area of industry is somehow safe from digital challengers, others understand the urgency of adapting their business to match the epochal shift in the economy, and are willing to invest in order to push their transformation forward. This latter group should be commended. As any good shrink will tell you, accepting that you have a problem is both the hardest step to take and also the core prerequisite to beating it. And it is not easy to accept that simply producing what you have always produced and selling it to the customers you have always sold it to is no longer a recipe for success. So industrial companies who have recognised the shift in the economy – and who are prepared to adapt previously profitable business models to an uncertain digital future – have already cleared the highest hurdle. The problem, though, is that they are falling down at the next one. Digital industrial strategy: keeping the cart behind the horse
Today, I came across this article on Reuters about problems at car parts manufacturer Benteler. It caught my attention not only due to the business strategy questions it raises, but also due to an emotional connection I have to the company: Benteler was my first employer. And it was a great place to start my career. Surrounded by top industry professionals, I quickly found myself on a tremendously enriching learning curve – and building friendships with colleagues with whom I am still in contact today. So it is sad to read classic financial press copy like “compounding problems at the family-owned company”, “ill-fated U.S. expansion”, and “restructuring talks with creditors” about a company I owe so much to. It certainly seems like there is a political issue, too: I can understand why the German government might not be so keen to help out a company which fled to neighbouring Austria on a corporate tax dodge and has now come back begging for cash… I think the really interesting question, though, is just what happened to such a large-scale and highly-professional global operation – a textbook example of German family-owned business success – to reach such an unfortunate state? Well, here is my opinion – not as “insider” anymore, but as someone who knows the company and its market well. So let’s start by looking at that market . For decades, Automotive was a continuous growth market in which well-established, globally-active automotive suppliers were able to participate by expanding their manufacturing capacities and growing with the OEMs. This dynamic started to change in 2017, however, in line with shifting customer behaviour. Car ownership among the younger generations started to decrease and in recent years, new business models catering to those who do not buy and run their own vehicles have sprung up, especially in larger cities: car-sharing providers, rent-a-bike schemes, ride-hailing apps. What is more, the new millennium has brought improvements in public transportation together with a growing environmental awareness. In the long term, all of this serves to discourage consumers from buying a car. And now, for the second time in this young century, there has been a breathtakingly sharp drop in demand, sending global volumes plummeting and impacting directly on suppliers who are largely reliant on OEMs.
In late January, Tesla’s share price hit a record high and took its market capitalisation to $100 billion. That makes it worth more than the US’ stalwart carmakers Ford and GM – combined – and dwarfs valuations in the historically incredibly successful, highly profitable German automotive industry. Now, I certainly wouldn’t be alone in stating that this is a valuation not supported by the underlying numbers: even the most ardent of Tesla cheerleaders will agree that the dizzying figure says as much about Elon Musk’s gift for marketing and investors’ search for digital outlets for the huge sums of money they have sloshing around. Here’s where I am on my own, though: I don’t just think Tesla is overvalued – I don’t even think Tesla will make it to 2025!