Businesses around their initial public offering (IPO), often seek to enter new or adjacent markets in order to stay on a revenue growth track while their core business sometimes might be in a less revenue generating mature phase. Many do this through acquisitions but sometimes, this option isn't available to them either because of company culture or simply because there is no compelling company to acquire to strengthen their core portfolio offerings. In these cases, corporate incubators can become the main source of innovation and new revenue. Here are some best practices I've learned that can transform ones ideas into a new hyper-growth business unit, including during my time at Trulia, Nokia and Siebel.
#1: Build the vision. Mobile first + design thinking.
Large companies have the advantage of scale, which sometimes can be a deterrent to innovation. To reinvent themselves, one needs to take advantage of technology megatrends. The most compelling technology megatrend one can apply today is "mobile-first."
Mary Meeker, the noted business analyst, argues that the technologies giants are putting more than $36T in market value up for "reimagination" to spearhead this concept for the future.
Here are a few key common characteristics found of new market leaders in this space that large companies should emulate:
- Extreme personalization: mobile-first offering are location aware and contextual because they can reach their users instantly using "push notifications.
- Radical simplicity: hard product design decisions are mandatory on mobile because of size limitations imposed by screens and keyboards.
- No pain of paying: when was the last time you "paid" your Uber driver? To most of us, we get more out of the transaction if no credit card or cash was in the picture. The magic of booking a trip on Airbnb is that the transaction is no longer centered around a booking, but rather on the promise of meeting someone new or discovering a new place!
Design thinking is an effective approach for mobile-first. It starts from consumer needs, which can be identified via user research, product feedback, or strategy discovery. From there begins a phase of prototyping which continues until a product or service meets the original requirement, at which point the offering can be produced and scaled using the large company's resource vastness.
#2: Manage success path. Business equation + milestone-based funding.
Large companies often require reliable long range forecasts which fast-growth business units aren't able to provide early on in their introduction. The danger of trying to establish financial projections too soon is that they can't be accurate and that they hamper innovation and potential introduction.
To bridge that gap, companies can establish "business equations," that will allow their hyper growth divisions to focus on the unit economics. Here are a couple of examples:
- Consumer engagement: the success of most consumer services hinges on engagement or the hypothesis that "if users like what they get, then they will come back." While reality is always more complex, the number of clicks (hitting a save button, making a purchase, viewing a detail page, etc.) is a reasonable proxy to evaluate whether users like what they get. This can be translated into the following equation: consumer engagement = number of clicks per visit (i.e. how much users like what they get) * number of visits per user (i.e. how often users come back)
- Marketing services revenue: many businesses will pay a fee, or cost-per-lead (CPL,) to partners and vendors who help them grow their sales pipeline. In other words, "we will give you money when we make money." The business equation for these vendors can be formulated as follow: marketing services revenue = number of leads per partner * CPL.
New business units should first identify and baseline their business equation, then optimize them. Until then, evaluating business performance will be a wild guess with perceived high risk. However in a short period of time, the business unit will come up with more informed estimates, which eventually will become a reliable forecast. Establishing milestone-based funding, a practice originally created by venture capitalists, is a way to help hyper-growth businesses move from one stage to the other and to manage risk effectively.
#3: Scale with selective insulation. Decision model + risk culture.
Once the vision is set and the business equation has been optimized, it's time to scale! The best candidate for partnership and launch is the strong vertical division of a successful large company. This however, cannot be achieved without a solid collaboration between the intra-preneurs of the hyper-growth business unit and the functional experts of the core business in marketing, sales and functional infrastructure components. Critical to cross-functional collaboration and success is a solid decision model, identifying who is responsible for the decision and who should provide input.
As the business scales, it is also important to bring in the right people in at the right time: too many entrepreneurs will create more chaos than necessary, too many corporate type, too much process. Navigating the lines of dedicated vs. shared resources on a case by case basis is critically important.
Few technology companies can claim that they have mastered the art of internal innovation. Using the mobile-first revolution however, having realistic expectations about the right metrics, and selectively insulating new businesses from the core business dramatically increase the chance that a new business will grow and create value.