On the one hand, we intuitively understand that entrepreneur and corporate startups are not the same, but on the other hand, it is uncommon to name them easily. There are some contrasting differences that make two separate worlds. I usually point towards the key six.
[DRAFT] Six key differences between startups and corporate innovations
Commercialising innovation is as much about the team and the idea, which tend to be similar between intra- and entrepreneurs, as much about the process and context, which in turn are distinctive to each of them. Understanding them will help those of you who are corporate innovators to put yourself into a more precise corporate strategy and mode of operation. If you are a startup founder, you may discover why it is so challenging to acquire strategic corporate investors.
1. The Sponsor: capital investors vs the board of directors
The first difference lies in the interest of the sponsors of your innovation. There are countless differences between capital investors and corporate directors, so let’s name a few.
It starts with the number of potential sponsors. If one VC doesn’t invest in your brand, you have tens of competitors to attract. But if you won’t convince the single corporate budget holder to finance your initiative, your idea is most likely to be forgotten.
While entrepreneurs may come up with the craziest ideas, and you always find a suitable VC to invest in, the scope of corporate interests is much narrower. Corporate innovation always develops within a strategy, must fit into it, and must provide a long-term benefit to the mother company, not to the isolated project.
Finally, with so many VCs in the market, their fund rules, and portfolio diversification, it is not common for one VC to take part in several consecutive rounds (some do, but only a few). Convincing a board of management grants you access to the money pool for the entire project, and you have to convince no one else.
2. Return on investment: a shareholder value vs an impact on EBIT
It is the single biggest difference between the two. One strives for capital value, and the other wants to earn profit. To some readers, it may not be the most intuitive difference. In the end, don’t we all believe startup valuation is a reflection of future profits? Mostly, yes, but these are pushed so far into the future that some of us may already be retired.
We need to understand gross profit and net profit. Yes, startups have to generate margin on sales, but none of the early founders paid dividends. Investors explicitly expect further investment into the growth of the business. They put money in the form of shares and will most likely exit by selling their shares. This is how shareholders make money: increasing the value of the share. Many startups do not commercialise their technologies on their own but aim to be acquired by larger companies. In such scenarios, all shareholders will earn on their shares without ever seeing a penny of a net profit.
Corporate innovation is not for sales as long as it fits a corporate strategy and adds to a mother company’s competitiveness. From day one, the financial impact of the project is considered part of a wider balance sheet. Value increases are often avoided (e.g., IP value is kept close to zero).
Last but not least, while startups can only build value through positive growth, corporate innovation equally often leads to cost reduction. The corporate P&L is based on revenue minus costs, and there are two ways of making your impact. Newly founded startups have nothing to save on; they may only grow, grow, grow.
3. Growth path: pivoting vs project resetting
Once you join a group of startup founders, everyone depends on you, the other founders and investors. You are expected to sign up for a lifelong journey independently to see if your initial idea was right or if it will change. VC invest in teams as much as in the ideas. The brand is also expected to adjust if the initial idea needs to be reworked. Such change is called the pivot, and pivoting is a valuable skill often assessed by investors. Once you get their money, you work to defend their capital and not to chase your dreams.
On the contrary, if your company project won’t deliver the expected results, it will be closed, with little opportunity for pivoting. When the board signs up for something, they want it only and only. If you learnt something useful, or if you created anything valuable on a course of a project and if you want to make another use of it this may be ok. But for such, there is a need to create another project and again verify if and how it adds to a corporate strategy (and what if the strategy changed in between? It happens, too).
Numerous successful startups made pivots (often more than one) until they got their business right, but most corporate projects were designed and aimed for specific results from the beginning. If they failed, projects were closed, and teams were assigned to new roles. This is what I call resetting.
4. Decision power: founders vs sponsors
If you start your business, you have the power to decide about each step, also as a team. How you share this power and reach agreements is another story, but no one tells you what to do. Interestingly, this is the crucial motivation for many founders to be in charge.
Working for a big company means you have your bosses; the last thing they will share with you is the power to decide. Yes, wise directors listen and are open to project managers’ arguments, but ultimately, they still make the decision.
By definition, founders have only one thing in mind when they decide: the startup interest. When the corporate board decides about projects, they consider many projects competing for the same resources at once, the big company context, and whatever else they come up with. Ultimately, the decision to cease a project may even be counterintuitive if seen from only the project’s point of view.
Because the decision-making power lies outside the corporate project team and there are so many unknowns that may impact the decision, capital investors are hesitant to invest in corporate startups. The idea, the team, and the business may be all perfect, but the sole fact that they can’t anticipate future scenarios makes such co-investment a no-go.
5. Budgeting: investment rounds vs calendar budgeting
Most typically, when entrepreneurs raise investment, they sell a piece of the company in exchange for the money transferred to a bank account. All the money is there. The company makes full use of it and uses it as long it needs it. When the pool of cash dries out, there is however not much one can do to top it up. Whether pivoting, growing quicker or slower, inflation and salaries increase, the initial sum on your account stays unchanged. The only way to increase it (besides equity-free grants) is to run another investment round.
Corporate projects are different. When you start one, you come up with an estimation, e.g. for a three years scenario. But you will only get some of the money at a time. You may get a budget for a year and a promise to cover future expenses. Nevertheless, even a confirmed annual budget may still be cut. It may be raised, too, but to be honest, I rarely see it. The latter happens only at the end of a year when more money has to be spent before a date. Moreover, you can imagine that despite initial enthusiasm, the context of financial planning may also change, and the following year’s budget may be adequately “adjusted”. Large companies have several budgeting rounds and forecasts throughout the year when this may still happen.
6. The end: bankruptcy vs phase-out
Finally, how may this all end? If you play high stakes and want to become a startup founder who turns into a billionaire, you may also go down with a ship, and for bankruptcy, the money loss may be a low sentence. Bankruptcy often means ruined nerves or even depression, family issues, sometimes personal loans, and similar.
Working on a corporate project won’t make you a billionaire, but your risk is equally smaller. Dropping out from one project when phased out by a board’s decision may end up even better: getting a more significant and resourceful project.
One thing in demand among innovation sponsors is experience. Fallen startuppers (if they still keep their enthusiasm) and leaders of unsuccessful projects are and will be in demand.
What’s next?
Thanks for reading so far. If you like this article and want to read more about similar topics, here are two pieces which you will enjoy reading, too:
- The single biggest difference between corporate and startup. I explore in detail the difference between creating value and delivering profit. Precisely in the meaning from above, but this time deeper and more elaborative. (link)
- Why your innovation doesn’t kick-off? I wrote it with intrapreneurs (corporate innovators) in mind. It is about the two biggest challenges on the way from invention to commercialisation, and these are widespread and natural, despite many of us thinking of them as unique to our own context. (link)
- Product Onion Benchmarking is a bit different, but it still reveals how your company’s organisation and business model adds value (or opposite) to your products and services. (link)
