Scaling Start-ups

Hello and welcome to Leading Digital Transformation with Rob Llewellyn and the Digital Transformation People. In this podcast series, Rob interviews experienced practitioners, authors and thought leaders whose stories and experiences provide valuable insights for digital transformation success.

Hello and welcome. Today I'm joined by Frank Matters from Germany. Frank's a leading expert on scaling up corporate startups and he's written the first book on the subject together with his clients which are Fortune 10 to Fortune 200 companies and those companies are widely seen as innovation leaders. Let's jump into the interview with Frank. Frank, welcome to the podcast.

Thanks for having me. Rob, good morning to you.

Good morning. So Frank, before I kick off, I've got a lot of questions I want to ask you today. But you've written a book, it's a, it's called Scaling up Corporate Startups and I'm sure we'll touch on some of the concepts as we go through our conversation. But tell us about the book, why you wrote the book, how that came about.

Okay, so Rob, what I and the consulting company Innovation3 that I founded are doing is non incremental innovation. So it started off some years ago when open innovation became en vogue, so to say. And four years ago that open weren't digital, so to say companies were discussing blockchain and artificial intelligence and these kind of things. But so two years ago or so I noticed a common theme. So if you will heard the same song over and over again. And as an innovator you're interested in patterns, right? Because there might be opportunities. The song that I heard is, well, Frank, we do have our digital lab, our digital factories, our accelerators, incubators, innovation centers, etc. Etc. Smart people in there. We do not lack ideas, we kind of know how to validate them using a lean startup and these kind of methodologies. But where's the business impact? So after hearing that story over and over again across industries, the very large companies that are say single digit billion in size said, well, there seems to be problem worth to be solved and this is where the innovation journey starts. And I looked around and could not find any guidance for corporate practitioners how to address this problem. There's quite some stuff out there that deals with greenfield startups, like how do you found your company and how do you grow your greenfield startup and how to negotiate with venture capitalists. But that does not translate to corporate startups, startups which are kind of specific, so to say. Sure, that we'll touch on that later on. So what I did is I assembled a group of 15 companies and we spent three workshops and a couple of webexes to really define the problem and then some more workshops and webexs to work out the solution. And we all felt it might be a good idea to contribute to the body of knowledge by having that in the form of the book, so to say. So it's a summary, if you will, where next practice will be. Probably there is no best practice, there's only an emerging or next practice, if you will. But it's also an outlook into how to solve a big, big problem. Because there are statistics out there saying only one out of eight corporate startups make it to success. And another statistic saying, well, the Fortune 1000 spent in the last five year an amount of money that's comparable to the German gdp which is the fourth largest in the world. And actually the return on innovation is decreasing. So there's a massive, massive problem out there. And up so far there has not been a kind of guidance how to deal with that. We felt it might be really adding value to the discussion.

Okay, and Frank, the book is called Scaling Up Corporate Startups. Now we've got a lot of listeners out there and everybody's got their different views and perspectives on transformation and in terms of scaling up, what is scaling up in your definition and why should companies care about it?

Innovation is about creating business impact from something new. Let's put it out there for the time being like that. So it's the business impact that we're interested in. And if you look at an end to end innovation process, you start off with some insights, where things are going, the markets are going, the opportunities that digital is offering, some threats from new market entrants, these kind of things. Then you do drum out ideas on how to capitalize on these things and you check or validate as the experts say, which of those ideas generated do have problem, solution fit and later on product market fit. At the other end of the process you find that many companies know how to grow a, let's call it, sizable business. So imagine they buy a digital startup, or so to say, and the startup has some millions of revenues and some technology and the customer base, the corporates know how to take it from there. But in between those two corners, so to say there's a gap, A gap basically taking validated innovation concepts to a meaningful sizable business from which it can be picked up by quality corporate. And this is what we call scaling up. If you look at it, there's a couple of reasons why companies need to address that scaling up issue. First of all, as I Mentioned earlier, there are some statistics out there showing that companies are not good at it. So if only one out of eight corporate startups make it, you're talking about a failure rate of 87%. I mean, this is not to be accepted, right? Then secondly, if you have a closer look at it, the future company is basically shaped by two things. The one is the we call it adaptation of the core. This is where say the application of digital technologies play out. So think about the manufacturing company selling widgets. Until now they go for a widget as a service using remote monitoring and predictive maintenance plays, right? These kind of things. Or obviously you establish new levels of consumer customer insight using advanced analytics, these kind of things. So adapt the core. That's one part that makes up say building a future company. But the other thing is scaling up those ventures that were building on a new to the company technology, which is now industrialized. Think about changing to smart contracts on the blockchain and automating the full process might be in many instances completely new to the company and or establishing completely new business models which need to be scaled up. So if you take these two things, Rob, adapting the core with digital tools and then plus scaling up those radical digital innovations and digital enabled different business models, this is what makes up the future company. And hence companies need to be excellent in both of these things.

Frank, you kind of touched on the fact that not all companies are getting this right. In fact, a lot of companies are getting it quite wrong. What in general is the level of excellence in scaling up that you see in companies?

Please, working with clients. We do have some half of the German prime stock index on our client list. And then also working with large companies in say Core Europe, which is our client base, I would say that we can go only a quarter or so to be excellent in scaling up. There's a growing awareness out there and companies are feeling the pain point that they do not get the return on innovation, meaning non incremental innovation. But if you ask me for excellence, the journey has just started and I think that in the next one to two years we will see much more thinking going in how to solve that corporate scaling up problem.

And is there some kind of quick test that a company can do to assess where they're at in terms of they're scaling up excellence.

Frank, one thing that I can think of and might be also a discussion starter, so to say you ask the company, well, if you look at your non incremental innovation, meaning not the small stuff improvements, right, the incremental innovation if you look at your non incremental innovation, how much money did you invest? Some three to five years ago. And if you look at what you did three to five years ago, what's the return that you get out of there? Because say three to five years is a typical time to impact for non incremental innovation. If you're going fully radical, might even be five to 10 years. But most of the companies only have very few moonshots. The majority is played out in say an adjacent space. So to give you one figure, one client, obviously I cannot, and I mentioned that the client also cannot provide the real figures. But just to give you some idea on the size of the problem, three to five years ago they invested 100, right? And if they look at the return that they're getting from what they did three to five years ago, they are talking about seven. So huge money burned. And this is a typical example. Companies are only starting to wake up to that scaling up channel.

So do you think it's mandatory that companies become excellent in scaling up?

If I may revert back to what I said a couple of sentences ago, it's about shaping the company's future. One part of the story, besides adapting the core, it's about that financial dimension that we just spoke about. But I mean there's also a war for talent out there, isn't it? And if a company is not showing that it is able to scale up those great ideas, so to say, or the great concepts to be more precise, well, the best people might say my company doesn't get it, so they might be heading off for some other companies. Plus obviously there's also a stock market implication. If your company is publicly listed, there's only so much in organic growth that you can generate from the existing business model. So you need to look for other growth areas which will be adjacent or even completely radical. So yes, it is imperative.

And how should companies approach their challenge of getting better at doing this, Getting better at scaling up.

Okay, so first thing you need to do is to understand or first to acknowledge that there is a problem. Like what, 100 to 7, the two figures that I mentioned. And the second thing is to get a clearer understanding of where this problem comes from and what are say at least validated cornerstones for a solution. If I may just elaborate shortly on where the problem comes from. So many companies have quite rightly separated the non incremental innovation from the day to day business. So they built their digital labs, digital Factories, Accelerators, Incubators, etc. Etc. Which is good because you find that core company, the day to day business runs on a different paradigm than these explorative innovation units. Core business runs on process, zero mistakes, managing risk and top down planning and these kind of things. Whereas if you're in the explorative innovation space, you basically in an agile way develop on where you want to go and how to get there. And if you imagine that these two parts basically are under one roof, you find that you need to have some sort of gearbox that connects the engine of the day to day business with the engine of the explorative industry innovation units. If you don't do that, you will run into what we called areas of tension. You find at least 10 points where these two organizations, the day to day business and the corporate startup or so do not match. So you need to make it match. And here comes what we worked out. In that group of companies, which to a big deal has also been put into that book. You need to master three things. Firstly, you need to be much more rigorous in validating your innovation concept than you ever do for a greenfield startup. Why as a greenfield startup? Think of it as some digital startup trying to come up with the latest and greatest in blockchain, cryptocurrency or whatever it is, you have the right to pivot. So if you find at some point in time that the business model that you were up to was, does not work well, you might change that. And there are some famous stories out there like Twitter or Slack, they all started off somewhere else to where they are right now. As a corporate startup, you do not have these degrees of freedom to pivot. Why? Because you're working in a corporate context and you suppose there's a corporate startup to deliver one piece of the strategic innovation agenda. So number one, you have to be much more rigorous. And in the book you'll see what we've worked out in that cross industry group to be a solid, reliable, robust validation framework. Second piece of the solution is what we call dual leadership. Now leadership plays a crucial role in here since they need to balance the requirements of the day to day business, so to say optimizing the quality, optimizing the existing while at the same time creating the new. So balancing these two kind of companies that are running on different paradigms, as I just said, and making those tough decisions on what to fund and how much to fund and where to put key people in these kind of decisions puts a lot of challenge for leaders to get it right to invest. Establish what we call dual leadership is the second part and the third part, what it all boils down to is a new style of working and a new style of management. Because the trick is to leverage the corporate assets, which could be a customer base, production facilities, access to customers, access to industry influencer, a lot of in house experts, et cetera, et cetera, to leverage these assets while at the same time remain in speedboat mode, so to say. And there are some tangible points where you can build up that bridge or gearbox as I just called, by establishing the proper way of funding, by a clever design of that scaling up process, by establishing the right governance, by choosing the right KPIs and metrics, etc. Etc. To make that work. So to summarize, a very rigorous, even more more rigorous validation than you do for greenfield startups, plus the leadership plus new style of workingmanagement.

Frank, you touched on some of the success factors such as governance and other things just then, but you were to provide a short list of key factors for success in scaling up that leaders can keep their eye on. What would that list look like?

It starts off obviously with some assessment on where things are going. More and more companies emerging since industries are converging and many companies are not speaking about industries anymore, they're speaking about arenas where you find competitors that historically were in totally different industries. What I see emerging is that they say this is so complex that the traditional strategy processes do not work anymore. So what they do is they paint pictures of the future together also with external experts to understand where potential arenas for these type of non incremental innovation would be. Second is to encourage an agile way of exploring where value pools in these new arenas might be that are suitable for the company. Thirdly is encouraging that this thorough and rigorous validation is done. And this implies that some things will not work out in the first run, right? You have to go back and forth until you find problem solution fit or product market fit. But that requires from leaders to accept that this is not a process model that we're working in, this is an agile model. Next would be to set up for success when it comes to funding. A emerging practice that we have found is since funding is always an issue for these ventures, is to say the minute that we decide that this is a validated innovation concept that should be taken to scale, we earmark the whole funding for the whole process. And even if big corporate has two bad quarters, this funding is earmarked because there's no point in stopping along the way. So to say what you do in designing the process is you design it in A kind of VC type. So you define milestones, milestones that relate to how you get on with industrializing the product, making the market, growing the organization of the corporate corporate startup. And once you hit those milestones, then the next level of funding is released. Next thing is there are only a few critical experts typically in the company and it's a tough decision to make if they should be working into the day to day business or they should be seconded on a temporary basis to that corporate startup to leverage the unfair advantage. So these kind of decisions to be made and at the end of the day it's also about being aware and taking middle management along that this corporate startup is not just a fancy hobby but is about building a part of the future company. So getting alignment from the middle management ranks from current core, which will be reshaped in the three to five years dimension via scaling up these corporate startups and via adaptation of the core.

Frank, some of our listeners are going to be already involved in scaling up and others might be considering diving into this. What are some practical steps that people who want to get involved can take and people who are already involved can take to scale up in a better way?

Maybe the first thing is to convince yourself that if you're only say 25% of companies which are actually already excellent in scaling up, which we earlier said is mandatory for future proving the company, or if you're in the 75% bucket, so to say we found a good discussion starter in looking at say typical problems that companies are facing and basically aligning at the management level that these problems are out there. So let me just give you two examples. Typically you find that big corporate treats the corporate startup or the corporate scale up like it were an established business. That means by the time of the way they set up governance, they do the annual funding. And if big corporate has a bad quarter and costs need to be controlled, well, the corporate startup needs to deliver its share of the cost saving as well, which obviously doesn't work if you're in scaling up mode because then you are investing or another typical problem is that corporate startups are underfunded and under resourced. So the key people in the corporate corporate startup are not only fighting for funding to secure the next year, so to say for the promising startup, they are also trying to make ends meet with very few people and focus their attention to a big deal, not on industrializing the product or making the market, but on somehow muddling through, let's put it that way. And if you're more advanced on your journey. So if you think that your company belongs to the 25%, well, I suggest that you look into the book what leading companies like BP, Robert Bosch, Philips or Telefonica, etc. Do in validating their concepts and establishing dual leadership and in establishing that new style of workmanagement to kind of benchmark yourself. And pretty sure you'll find some people that you could, excuse me, some points that you can sign off. But I'm also pretty sure that's our experience with every client that they find some points when you think, well we didn't think about that or we know that we're not good at this point. So let's take it on our agenda.

Frank, I know you can share insights from hours and probably days, but we need to wrap it up there.

Certainly could do, Rob.

That's been terrific, Frank. But you know, if our listeners want to learn more about some of the concepts you've been talking about, where is one place you'd suggest they go to to find and to learn more?

So what I already put out there, Rob, if you will, synopsis of the insights and the knowledge that we generated in the group, you'll find that on LinkedIn. That's also been published on the Digital Transformation People. I highly recommend, not for short term purposes or to put some halo around my head, but I really suggest that you dive into that book because it captures and in the few of these companies also for the first time out there basically some elements on what will be best practice in some years now in scaling up. So by familiarizing yourself with the recipes for success, so to say that these fine companies are pursuing, you also improve in here. And I think we can provide the link on the Digital Transformation People platform so that you can have a look into the table of contents and some highlighted pieces of content in there.

Terrific. And just as a reminder for listeners, the book is called Scaling Up Corporate Startups. Frank, it's been a real pleasure. Thank you so much for coming on and sharing some of your insights.

The pleasure is mine, Rob. Thanks for having me.

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