Look outward, not upward to grow mighty oaks from acorns.
The growth of established companies has slowed. Like old oak trees reaching their maximum height, large organizations struggle to expand, losing ground to the competition as they grapple with changes in user behavior and watch their market share being eroded by tech companies, start-ups and internationalization.
Yet in 2018 alone, S&P 500 companies invested a combined total of more than $1.3 trillion in research and development, capital expenditures, and mergers and acquisitions. Given that this is 13 times the record $100 billion deployed by the US venture capital industry that year, you’d think big businesses would be doing better – but each dollar invested in corporate growth today returns 15% less revenue than it did ten years ago. Mature companies are spending more to grow less. What’s more, many start-ups are founded by people who took their ideas from their previous company. That may be a dream for those entrepreneurs, but it’s a nightmare for leaders at established organizations, who are also waking up to the fact that their companies aren’t as well-equipped to navigate rapid changes in customer behavior and expectations as their new competitors.
Lots has been written about how individuals can build fast-growing start-ups, but we have not seen the same amount of focus on how corporations can build new products and services. This is important because building a new venture or business unit as a corporation is not the same as building a start-up as an individual. The rules of the game are different.
Over the past 20 years, I have done both. I have been involved in building numerous successful start-ups and I have designed incubation programs for some of the world’s leading corporations. I have learned two unpleasant lessons: it’s more important than ever for big companies to (re)learn how to build from scratch; and it’s harder to build a successful new venture from within an established organization than it is to build from scratch as an individual. It shouldn’t be this way.
In today’s competitive, fast-paced market, towering lone-oak companies need a swift strategy shift to gain and maintain new growth – a strategy built around launching lucrative offshoot companies, or ‘acorns’. There are three components of this new way of thinking about your growth strategy: the right structure, the right opportunity, and the right relationship between new companies and the parent organization.
1. The structure: hunters vs farmers
I find that organizations mostly have ‘farmers’ as staff: people who are very good at harvesting, optimizing and systematizing products that were planted many years ago. But if your business is structured around farmers and you want to innovate and grow, you need more hunters – people who can spot opportunities and, more importantly, create something from scratch.
These people are not the same as serial entrepreneurs – after all, launching a company from a garage is fundamentally different from doing so from under the shadow of a big organization. Therefore, a unique approach is required. In my experience you should look for people who:
- Have a natural founder/customer fit A hunter needs an intuitive sense of problems as customers see them. If there is natural empathy, there is less need for focus groups and research.
- Are agitators The type of person that pushes projects forward without being told to do so; impatient, wants to make things happen.
- Are generalists Ready and able to do many things and willing to try everything first, to understand how to problem-solve in the longer term. It’s the opposite of people who might say “This isn’t a good use of my time.”
- Have gravity Think of a person who is able to naturally draw people in to support your mission. You need to draw in customer and industry stakeholders – as well as the hired team, so they will do the work needed to build the business.
- Know how to reframe problems The ability to identify the relevant problem and solve it in a different way to move things forward.
In short: think of a person who you would invest in pretty much no matter what their idea was. Find them, then build them an organization that gives them freedom to operate autonomously.
2. Where can your company play?
The second component in your growth strategy is identifying the right opportunity for your new growth business. Large organizations usually try to initiate growth by simply expanding into a different “flavor” of the same thing – sometimes literally. Often, for a company like Pepsi, innovation means a new liquid in a new bottle.
In today’s market, you need to rethink that approach. You need to branch out from your current company’s core offerings and try something new. How can you come up with the right opportunity for your new acorn company? Many people start with an idea, but I suggest starting with a problem instead. What problem can you solve for your customers?
This is the question that defines your company, and the service or product you provide is the answer. They go hand-in-hand. By focusing on the problem instead of the solution, you think of your company more abstractly and creatively, which can lead you towards expanded business ideas. When you define a company by the problem it solves, agnostic of utility, you get to the heart of its deeper purpose. Disney is no longer simply a movie producer or theme park; it’s in the business of creating magical entertainment for families.
Likewise, had we defined our pet brand, BarkBox, by its utility, we’d be in the dog treat and toy delivery service. But seen through a longer, problem-solving lens, we’re in the business of making dogs happy. Not only is this redefinition a lot more fun, it immediately suggests possible offshoot businesses that can grow the company. All we need to do is find other ways to please a pup.
Or take an example from financial services, where the Royal Bank of Scotland (RBS) decided to solve a common problem: customers do not understand the terms of their loans. They worked with experts in artificial intelligence to develop software that walks customers, point by point, through the terms of their loans. As a result, customers get a detailed explanation of their contract, and the bank got proof of their informed consent. But RBS were not only solving a problem for themselves and their customers: the software service they created, Safe to Sign, was later spun off as Nift, providing related solutions to many other companies in the banking services space.
Sometimes, a company already has expertise in a function which it can leverage into a wider, saleable service for its entire industry. Amazon famously used its sophisticated data warehousing to create Amazon Web Services.
Figure out what problem your company wants to solve for customers, and you’ll find plenty of new opportunities.
3. Maintaining a positive relationship between parent and acorn companies
The third component that every growth strategy needs is a clear understanding of the relationship between the parent company and the acorn. When the acorn falls from the tree, how far should it go?
The answer ranges from being an internal project of an existing department, to an entirely independent new entity. There are pros and cons to each position. Too close, and the acorn won’t get adequate sun, but acorns carried beyond their parent’s habitat are much less likely to survive. How close or distant you keep acorn companies will influence how they’re funded, staffed, governed, and operated.
In the internal project model, funding is allocated to the acorn through the parent company, typically through its innovation department’s budgeting process. Talent is reassigned from within the parent organization and incentivized through pre-existing bonuses schemes or stock options. On a day-to-day basis, there’s no discernible difference in the way business is conducted and decisions are made, and there’s no legal structure between parent and acorn. The acorn company is able to utilize patents and licenses. The two maintain an extremely close relationship.
The polar opposite is to make a completely new and autonomous entity. By creating a completely new entity, the parent organization behaves as if it were making the seed investment in a free-range start-up. The assets that are being transferred need to be clearly identified. The acorn is its own, legally independent new company, with the authority to hire full-time employees to whom it can grant stock or stock options.
Most companies opt for the internal project approach. It’s easier to get going, but the independent project is easier to make big – and sooner than you might expect, you may realize you want to spin out the new venture to realize three key benefits.
Momentum is oxygen
The more independent a corporate venture is, and the clearer the process for it to unlock additional capital, the faster it grows. Entrepreneurs will be more effective if not asked to wait between achieving a target and unlocking additional capital. This allows them to maintain momentum.
If a venture is external, it forces the corporation to specify what resources the new venture is getting and define the value exchange. This allows the interface between the new and mature ventures to have clear touch points and forces a debate about what true value the parent corporation provides.
Stock as currency
The ability to use both cash and equity for acquiring assets and incentivizing talent is a distinct attribute of the external model. With external ventures, separate bonus agreements and equity programs (phantom or real) are available, helping the new venture to attract a different type of talent than would normally be drawn to the parent.
To decide which relationship structure works best for your companies, weigh your priorities for the project. If your top priority is running the acorn as a cheap, scrappy start-up, motivated by an entrepreneur’s sense of ownership and personal investment in the outcome, you must be willing to sacrifice some control as the price of expanding your forest.
Grow your forest
As the proverb says, “Mighty oaks from little acorns grow.” Your established company’s goal should be to expand outward instead of upward, growing from a single tall tree into a rich forest of complementary but distinct businesses. Each of your new oaks will contribute to the longevity and reach of the original.
The best way to fuel lateral growth is to build your strategy around the three components explored here: your business-building structure, your new opportunity, and the relationship between parent and child companies.
This trifecta is your key to limitless growth. Create a quasi-independent structure within your organization to launch new businesses, identify a compelling problem to solve for your customers, and maintain a strong relationship between your acorn and parent companies, and you’ll keep pace with even the most innovative start-ups.
– Henrik Werdelin is author of The Acorn Method, co-founder of BARK (makers of BarkBox), and founding partner of Prehype.