Once, in a meeting room filled with senior directors, the HIPPo (the highest-paid person in the meeting) asked me: “For our company, I want you to create a business like Airbnb.” Did he mean the multi-billion sunken investment, more than a decade without a penny of profit, and a lack of a foreseeable return on investment? Not quite. It is better to know what you truly wish for.
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The single biggest difference between corporate and entrepreneurial startups
Working with corporate and entrepreneur startups, I learned one fundamental difference between their opposing goals. While the former strive for profit from day one, the latter create value and are often punished for bringing in profit too early (I know how silly it sounds for corporate intrapreneurs, but this is true).
Such goals define contrasting marketing strategies and shape different business models. The underlying foundation of corporate startups is to reach positive EBIT, or EBITDA, in the best case. The first is the operating profit, and the other is the same profit, but you can ignore invested capital. In layman’s terms, corporate sponsors crave dividends. A scale is secondary. Marketing and business models have to support the strategic goal.
In contrast, if financial investors wished for a dividend yield, they would put some money into stocks, funds or bonds. However, VCs exist to differentiate investors’ portfolios. They want to pay a dollar for a share and exit when it is worth tens (though, on average, the VC industry isn’t more profitable than dividend funds). Ultimately, startups shall deliver such value growth. How can the right marketing strategy and business model adaptation help founders provide such results?
Delivering value to investors
Marketing delivers business objectives, which in turn provide business value. However, the value is different for all brands. If your investors want you to drive the valuation of the business, and you may ignore the profitability of your model for a while, marketing will also help you with this.
Marketing is merely a tool, a process you apply as wished. So, you set a strategic goal, and marketing strategy should (when done right) deliver it. What is a source of value for your business; where do your investors see their future gains? There are many possibilities. Let’s name at least a few:
- Customers: Starting with the obvious, you may want to grow your customer base. However, growing your customers may be a goal alone, so you may drop your prices or maintain a hefty acquisition cost, leading to a lack of profitability. If your investors do not bother today, and it is enough to promise that one day, these all may be turned into profit, you need a highly scalable acquisition strategy and forget about efficiency.
- Users: These are not the same as customers. Customers pay you money, and users may be various people logging in to your SaaS or interacting with your services. If you focus on user acquisition, your model will likely sell ads to them or their anonymised profiles to your future clients (if you do not pay premium for YouTube access, you watch ads instead; you eat lunch, or you are lunch). However, having more users does not directly make your brand successful.
- Data: Users may be needed (but there are other sources!) to gather data. Therefore, you want to attract them so they interact and fill your data lake. It, in turn, feeds your algorithms and, thanks to machine learning, enables predictive models. You want to sell the model, but you need data first. Marketing may help you with this. For example, I learned that Duolingo app users feed a language processing algorithm, and the app has launched to collect their feedback, UGC (user-generated content) – what an intelligent way!
- Ecosystem and partnerships in the value chain: When you introduce a new standard, and your business charges the license fee for using it, your midterm goal is to make it widely used and lock in users. When done at scale, you are fit for price increase and profit. But if you charge high too early, you may not get there. For example, this is especially relevant to businesses similar to payment processors, starting from credit cards via PayPal and Apple/Google Pay these days, and the business model for it is called “a layer”. I will write about such business models in another article.
- Volume: Finally, show a volume—loads of money, products, subscriptions, returning users and so on. Still, you may not aim to earn money. It is like an extension of a Kickstarter campaign. You sell cheaply to gain momentum, learn the process, and validate your business idea. If your investors believe in high returns in the future, they need to review your cost structure now critically. Hence, you grow volume for scale. We all know countless unicorns, from Uber via WeWork to almost every social media brand. A common sense in investing in these is, or was: one day, they grow so large that profit will follow naturally. It’s still valid, even though we already know it rarely happens.
As said, these are a few, and with some extra effort, we could invent more.
Delivering profit
In general, none of the above has much value in a corporate startup as long it doesn’t bring operating profit first. It is unnecessary to grow your customer base if it is not profitable. Building partnerships is superfluous if your position in a value chain is weak. Moreover, from my experience, increasing volume without profit is often a no-go.
I need not to write about reaching a scale. One needs a scale to earn. I mean the ability to turn a business into a genuine return on investment, into a clear flow of a dividend in the foreseeable future. Better sooner than later, but such timing is a relative measure. Hence, corporate startups are under more considerable pressure, live shorter and large companies innovate less frequently than we may expect them to.
If you strive for operating profit, you need to tackle three things: COGS (cost of goods sold), OPEX (all costs of operations) and gross profit (gross margin times volume). And you have to manage all these at the same time. Opposite to entrepreneurs’ startups, which focus on one primary source of value, the corporate one needs to keep an eye on many goals simultaneously. Sadly, it often means we spread ourselves too thin.
- COGS: Cost of goods sold is the most typical for the commerce category. You buy cheap and sell expensive. But the reality is that it is easy to purchase and challenging to sell. Driving COGS down is generally possible either with a scale or a loss in so-called quality ( To prove your model to corporate-startup sponsors, you may first secure the price for goods and services under a contract and virtual scale (e.g. you sell hundreds, but you already agreed on the price for times when will be selling thousands). Later, you may report virtual earnings to justify further business growth. You must convince everybody that your business model is already profitable, but the scale must still be here. I often did this myself when selling eMobility services (we earned like hell on a single contract, but we had too few contracts). This article has no suitable space to discuss whether payment terms or inventory management belong to COGS or operational expenses. Still, it is worth mentioning that handling the products and services of suppliers is often more than simply a buy-and-sell activity.
- OPEX: Operational expenses cover almost all categories of costs besides capital investments. For clarity, I am omitting any accountancy measures and how various costs may be reported in a “smart” way. VC investors are more forgiving when it comes to spending (i.e. modern offices, juice bars, extravagant branding campaigns and expensive tools and licenses). On the contrary, corporate startups usually keep their costs down to the extreme, often unreasonably low, including the fact that corporate innovation is not usually the best-paid department. Despite that, from my point of view, money is merely a hygiene factor, and I wouldn’t complain too much about it. Nevertheless, corporate teams are fewer than their startup competitors and generally make their living on scarce resources. Often, brands offer services and systems that they have not yet implemented (but they know how to implement them when ready). Unlike the private startups, which first develop MVP, validate it, and launch it afterwards, the corporate ones often “test” the market without all the effort in advance.
- Gross profit: Gross profit is a gross margin at volume – Not only you keep the prices high, but you also need to acquire plentiful customers. As said above, founders run startups focusing mainly on acquisition. Corporate teams think of both from day one. Ultimately, this is where marketing plays the most significant role. Marketing, when done right, drives perceived value and creates demand at the same time. The obsession with gross profit is also the reason why corporate innovation is sold expensively. In contrast, many private startups start by offering their customers cheaper alternatives.
I refuse to say who is in a better position: a corporate intrapreneur or an entrepreneur startupper. It depends, and the context is far broader than the comparison above. But in general, corporate projects, once out, live short. How short? Until the mother company’s CFO’s patience lasts. If no profit is gained, the mother organisation ceases funding, closing the business. Then, it starts a new one and assigns new tasks to its employees (it isn’t the most brilliant idea to lay off your most experienced intrapreneurs).
A private startup, however, will try harder, pivot, work evenings and weekends, skip holidays, and its founders will borrow money against a mortgage or worse. Private startups die with founders broke (sometimes literally). Corporate ones do not go as far. For a corporate startup, pivoting is almost always considered a failure and leads to project phase-out. This is also why they often do not go far enough, but it is a topic for another story.
What’s next?
Thanks for reading so far. I would love to read your comments. Publishing at uouee.com is my way of staying in touch with my peers (clients, mentees, former attendees of my training, and participants of accelerator programmes I was engaged in). I know we all work in the same business: innovation. Your experiences inspire me and other readers, so why not share them?
If you are interested more in how I manage the commercialisation of innovation, let me recommend some other reading:
- An article about difficulties corporate innovators face regularly: Two barriers to intrapreneur innovation. (link)
- As explained above, if you are growing your customer base, you may want to consider who your customers truly are. Read this: Who is my customer? (link)
- No matter whether you are an intra- or entrepreneur, when developing new products or services, you may like to benchmark yourself against competitors. Then, I recommend Product Onion benchmarking. (link)
If you like the stuff above and want even more, simply subscribe to #uouee, and I will share the most relevant stuff when ready (no spamming, GDPR compliant, just you and me).
