Can You Do an Internal Startup Within a Large Corporation?

This is an interesting question. For the purposes of this article, we will define an internal startup as a new business unit which doesn’t fit neatly within the confines of larger, mature company’s existing business activities. The general answer seems like it should be “yes”! But in practice, there are many unique “gotchas” which can derail an internal startup effort. Full disclosure, I’ve led an internal startup – and don’t necessarily recommend it for everyone!

Relative to a typical startup, there are a number of advantages and disadvantages that you face in attempting to do an internal startup in a large company. We’ll go through these below, as well as lay out some best practices:

Internal Startup Advantages:

Money – In general, an internal startup should have less financial constraints then the typical “street” startup.

Comfort – It is likely that the early employees of the startup unit will be able to work in an environment of greater creature comforts than the typical startup – often equivalent to their large parent counterparts. This may make recruiting easier.

Infrastructure – Internal startups can often leverage existing, mature infrastructure and shared non-core resources from the parent company, including but not limited to HR, Payroll, IT systems, real estate, etc.

Brand – Depending upon the market fit, the internal startup may also be able to leverage a well known and powerful brand name, to get a head-start in the market.

Distribution Channels – Sometimes (but not always) there is sufficient fit with the existing business of the parent company to utilize some or all of the incumbent distribution network.

Internal Startup Disadvantages

Culture – If staffing primarily from internal resources, it may be hard to create a startup culture: urgency, hard work, eyes squarely on the end goal.

Excess process – Depending upon the freedom granted to operate independently from the parent, the internal startup may be burdened with bureaucracy/processes from the parent company which inappropriately hinders the startup effort.

Excess oversight – Especially when the internal startup is a “pet project” of a high level parent executive, it’s possible to get too much “attention” – no matter how well intended. I’ve found that in some cases a senior executive applying the “common business sense” from the parent company business can be quite damaging to a startup effort in a non-aligned market or technology.

Harder to move quickly – The excess process and oversight discussed above can make it difficult to move with the required startup speed, especially if strategy pivot is required.

It’s easier to waste money – When you have financial resources and are used to creature comforts, human nature can lead to the squandering of startup capital at an excessive rate.

Surprises – Both Negative and Positive

Positive: It’s actually possible to find and hire people with startup mentalities and work ethic without the normal startup equity rewards. It’s harder, but possible.

Negative: Even knowing intellectually the differences between startup and corporate cultures, it really hits you between the eyes when you run into it in reality. An example mentioned earlier: the “common business knowledge” practiced routinely in corporate parent may work against what is required in the startup.

It’s critical to understand how far an intrapreneur can push the existing corporate culture

When I led an internal corporate startup, I came in from the outside. That was both an advantage and a disadvantage. I had the skills needed for the task, but I also didn’t have a deep understanding of the existing culture nor the credibility gained from previously being part of it. Intellectually I knew going in that there were differences that I would face, but in practice things were much harder than expected. I started up a commercial IT software product business within a defense services contractor. The commercial and product culture best practices I was so accustomed to were foreign entities in the parent company.

As an example, in one pre-launch planning meeting I brought up the possibility of hiring an external PR firm to support the upcoming product launch. The answer was: “We don’t do PR here, next question”. Since the Parent was involved in a lot of “black” security activities in their government services contracting, they tended to keep a low public profile. This made sense for that business, but was the opposite of what you want for a commercial software startup launch.  In that same planning meeting I broached the subject of hiring our first sales rep. The response was: “What else can he or she do?”. While full-time sales reps are the norm in a commercial software product business, in the parent defense services contracting business, there were only two individuals doing “sales” full-time out of 500 employees – and they had “marketing” titles! Project managers did much of the “selling” to the government customer. The language and common business practices of the two businesses were in many ways polar opposites. This made things tough for my little startup, as every little normal commercial software product activity that I took for granted often required extensive explanation and justification.

These example items above were critical activities to our success, so we had to push for them. But I had to exhaust scarce political capital to make many things happen, which can hamper you in critical situations when that capital has been exhausted. So it’s important to know how far you can push, and evaluate every decision based on “can we do it the parent’s way and still get by”? Don’t do things differently “just because that’s the way you do them in a startup”! Remember it’s NOT exactly like a typical external startup, and you only get so many bullets. In hindsight, I didn’t do a good enough job doing this evaluation in many cases. I could have been more thoughtful and tried harder to fit in when it was possible, in areas that didn’t critically need to be done differently to be successful. If you’re interested in more information on this personal little case study, here’s a brief video of my corporate startup experience.

Best Practices for Internal Startup Success

Management Personnel – very important in a corporate startup. If the leaders come from inside the existing corporation, they may not have the skill set or startup mindset that is important in the success of any startup. If they are recruited from the outside, they may not understand the culture of the parent corporation well enough or be able to quickly develop the required political connections and credibility to obtain the resources and time required for startup success. So in either case, it’s important to allow for these “weaknesses” by compensating with complementary resources. In the case of appointing management from within, outside consultants with the appropriate domain expertise along with startup experience can be very helpful in advising the new internal startup management. In the case of management brought in from the outside, official or unofficial mentors from within the parent corporation, who possess strong internal networks and political capital, can be very helpful in guiding the new management employees in the early days.

Hire diversely, if possible.- in this case, by diversity I mean a good mix of incumbent personnel staffed from the parent company along with external hires brought in with new skill sets and perspective. This combination of inside and outside folks is a good idea in an internal startup. Of course, the more typical definition of business diversity is always beneficial as well!

Take the startup off-site, if possible – there are pros and cons to this, some of which are discussed above. But I believe that, in general, it’s helpful to attempt to escape the day-to-day scrutiny from the corporate parent that comes more naturally with co-location. The importance of this is directly proportional to how much misalignment there is with the startup unit and the corporate parent’s core business,

Try to create a separate – but compatible – “sub-corporate” culture –  in many cases, this is not easy. Physical distance, as discussed above, can help.

Manage the internal startup finances like a startup, not a corporate department -While the internal startup may begin with more resources, comfort and less pressure than a more typical startup, I’ve found that often these early days can be deceiving. Especially if money is spent at an excessive rate, the high burn rate can quickly garner the attention of the financial controllers and the parent’s senior management. In most cases, it’s better to be more conservative and keep a “lower financial profile” early on before you gain traction. This can extend your leash and the startup’s resulting runway to get to demonstrable traction and ultimate survival. Internal startups can be shut down just as quickly as independent startup companies.

Doing an internal startup from within a large corporation is definitely a different animal than a typical startup. There are similarities, but they probably are more like cousins than they are brothers or sisters. It typically ends up being a hybrid between the two very different business environments of startup and large corporate. Success will depend upon whether you build the BEST of both of these worlds – or the WORST.  I’ve tried to lay out above some knowledge to help you navigate this under-studied business scenario. Let us know if this is helpful and resonates with you, or if you have a different take. All views are welcome. Please post a comment or question to further the discussion of this interesting topic.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact PJM Consulting directly at info@pjmconsult.com