6 practical tips for managing internal start-ups

The system is eating up individuals

“Not all the management team seem to realise that this is about discovering something new. And ROI is a useless indicator at this stage, as the results will come later.” This lack of understanding is caused by the system: no MBA programme teaches people how to build new business using modern methods, through systematic experimentation.

When a graduate with a degree in economics or technology is hired by a corporation, they soon learn to apply their administrative knowledge in practice. This type of competence is an excellent tool for optimising existing business operations. However, it’s not suitable for identifying new opportunities: it feels like trying to chop trees with a butter knife.

This unsuitability is particularly evident when the results of internal start-up programmes are included in traditional product or service portfolios: it’s like throwing skilfully incubated golden eggs at a wall to create a work of art and watching it slide down the wall.

Middle management is the demise of innovation: internal start-ups are sucked into endless reporting practices and are measured using traditional business indicators.

Eventually, the start-up ends up in a traditional portfolio, where it’s compared to existing business operations and no longer has a chance to grow and become significant. This wasted potential is often a source of frustration for both the start-up and the parent company. This, again, is a question of awareness and the ability to build non-traditional mechanisms.

Here are six practical tips for avoiding the typical pitfalls of managing internal start-ups:

Tip 1: Try or die

If the framework for innovation is not based on systematic experimentation, it will never be able to meet the needs of the modern world, with its vulnerabilities, uncertainties, complexities and ambiguities.

Innovation is complicated when uncertainty prevails.

Answers can only be found through experimenting and learning from quick failures.

Tip 2: Systematic experimentation is not random or chaotic

In my work, I too often see companies call just about anything an “experiment”. This quickly leads to a situation where anything that, in retrospect, has failed in any way is called an experiment. Consequently, the company will soon want to rid itself of any “culture of experimentation”.

Systematic innovation requires experiments to be based on assumptions that have been identified and acknowledged well in advance.

Of course, experiments also lead to new assumptions, which is part of the nature of this type of discovery.

Tip 3: Hatch quickly and never put all your eggs in one basket

Companies typically have a business portfolio of products or services, or both. All too often, businesses incubating internal growth companies include the results of an innovation programme in this same portfolio. As a result, these innovations usually die. Why is that?

It’s about the survival instinct: it’s safe for companies to invest resources in optimising tried-and-tested business operations and leave just 10 per cent for innovation.

After all, “the innovation hasn’t yet shown enough potential”. This is a self-fulfilling prophecy: if we don’t invest in an innovation in its early stages, it will never grow to such an extent that it will be worth investing in.

Tip 4: Measure the discovery of business opportunities

The difficulty of measurement is a recurrent theme in managing internal start-ups. “What should we be measuring? How do we know which aspects to follow? How can we avoid a situation in which each experiment indicates different things?”.

You can start by measuring the learning or response related to discovering new business opportunities, instead of using traditional business indicators.

This will ensure that your chosen indicators are much more forward-looking and your experiments are comparable.

The “pirate metrics”, for example, are a well-known set of indicators – but they are heavily context-related, so don’t use them without assessing their fit to your context

Tip 5: Managing innovation differs from managing existing business operations

The founders of a business typically focus on finding a scalable business model. They may also be looking for a scalable business model. At some point, investors come into the picture and replace the founding members with a professional executive. The CEO is assigned to take the company to a new level – that is, to optimise its business operations. In addition, at some point, the founding members will leave the company for new challenges or the company will start looking for new business opportunities.

This is a difficult equation: an organisation built for discovering new opportunities is very different from an organisation focusing on optimising existing business operations.

And these differences are not limited to structure; they also concern operating methods, roles, management methods and financing, as well as the indicators mentioned above.

It’s important to identify and acknowledge these differences and consciously create purpose-built models.

Tip 6: Create structures that support innovation and self-organisation

As stated earlier, internal start-ups and entrepreneurial spirit are suffocated by existing structures and processes in many organisations.

For this reason, it’s important to create appropriate structures to support the operations of internal start-ups. For example, The Lean Startup, a book by Eric Ries, mentions “islands of freedom” that are created to enable experiments. GE has introduced the Growth Board, which is comparable to an operating model of investors who invest in traditional growth companies.

Do you have any tips for managing internal start-ups?