Act Like a Startup: 5 Lessons Bigger-Company CEOs Can Learn From Entrepreneurs

But it’s easier to say than implement for established, mature companies, which often have hundreds—if not thousands—of employees in multiple offices regionally, nationally and globally. CEOs of mature companies have more risk to manage, more silos to cope with and fewer direct communication lines to customer-facing employees. They have investors and other stakeholders hovering, ready to cry foul if quarterly earnings targets are missed or if revenue fails to continue on an upward trend. At the same time, however, competition from smaller, more nimble players along with a globally driven, exponentially faster pace of business and technological change has made it necessary for larger companies to think differently.

Obsolescence is perennially just a product release away, and those CEOs who do not operate with a healthy sense of paranoia (à la Andy Grove) and who don’t find new ways to innovate, as well as the best startup, will be left bobbing in the wake. Fortunately, there are pages from the startup playbook that CEOs of midsize and large companies can realistically borrow. The following are five lessons startups can teach any established company.

“You have to be willing to eat your young
because if you don’t do it, someone else will,
and you’ll just lose the customer.”

1. Kill your babies
A look at the Fortune 100 circa 1990 and then again in 2010 reveals what can happen to powerful companies that refuse to cannibalize their existing products and services to gain competitive edge in the future. “You see an incredible number of people who have disappeared because of global competition and because they stuck with what they thought were their cash cows, only to find that those things became commodities,” says John Ryan, CEO of the Center for Creative Leadership. Kodak, for example, had world-class research and talent, huge market share and was among the first to understand digital photography. But the company failed to adapt, refused to give up its traditional film business and is now just a thin shell of its former self following a two-year bankruptcy restructuring.

Dennis LeStrange has no intention of following suit. The CEO of Neopost USA, a 90-year-old company that made its name in postage-meter equipment, is helping Neopost reinvent itself by encouraging employees not about the products it offers, but about the services customers actually want. “What our customers really want is help communicating with their customers,” says LeStrange. “We used to do that with postage meters; but in the future, we’re going to do it with digital alternatives, as well—with sophisticated document management solutions and other innovative products. You have to be willing to eat your young because if you don’t do it, someone else will, and you’ll just lose the customer.”

To get the kind of innovation that has helped him steal 4 percent market share from Goliath competitor Pitney Bowes over the past two years, LeStrange has developed a multipart strategy that includes new product innovation, process improvement, entry into new business arenas and strategic acquisitions. “When we make an acquisition, we set very aggressive targets to ensure we’ll get growth from those. And we don’t blend them in because when you do that, they
lose their identity and get gobbled up culturally.”

2. Lower your center of gravity
A small startup with just 25 employees can execute ideas swiftly. Getting approval on a decision is as simple as a walk down the hall or a shout over the cubicle wall. But for larger companies, bureaucracy is almost an inevitable byproduct of growth and success. That’s why CEOs actively have to combat the chain-of-command syndrome by empowering middle managers to make strategic decisions—one of the principles of CEO Ron Hovsepian’s agile development strategy at IntraLinks, a provider of secure collaboration solutions for 99 percent of the global Fortune 1000. The agile framework emphasizes a collaborative approach to development, with small teams of developers, designers and testers working together in short-duration “sprints,” delivering fully released code at the end of that time.

“This allows us to engage our customers early in the design process and often throughout the development and test lifecycle,” he says. “That enables us to build the right product to meet customer needs and allows us to validate our direction constantly throughout the development process.”

Because developers are building software in time-boxed sprints, the company can stay nimble, pivoting with changes to market needs. Empowering these small teams encourages savvy and quick decision-making—with real accountability. “Senior leadership has to set the table. We’re still there to drive it, bring energy to it, add vision and guidance; but as you scale, you need to lower of the center of gravity so you can move quickly.”

That’s a lesson Hovsepian learned as CEO of Novell from 2005 to 2011. He was tasked with turning around a company that had once dominated its industry but whose primary product, Netware, had been declining at a 12-percent clip. “Within two years, we had slowed that decline down to 6 percent,” he recalls. “But the big learning there was that you have got to grow the other part of your business faster.”

Hovsepian invested heavily in SUSE Linux, an operating system platform that Novell had acquired in 2003. “It was a $30 million business; and within three years, we had that up to a $270 million business.” When Attachmate agreed to acquire Novell in 2010, the SUSE growth was a big part of the value proposition.

“The lesson there for me is you have to take risks in growing your company when you have a declining business. You have to be even more aggressive about your execution and risk taking.”

3. Convince your board to let you take risks
When Hovsepian took over at IntraLinks, he immediately ramped up investment into research and development, now topping $40 million, with the long-term goal of being a 15-20 percent growth company. Investing more in R&D meant temporarily lowering the profitability of the company—something not all boards are keen on. “You’re in a constant pressure cooker to deliver more growth and more profitability,” Hovsepian explains. “What you have to do is step back at points in time and say, ‘Look it, this market we’re in is getting into a next-generation growth phase. We need to invest.’”

The numbers suggest that it was the right call. Where historically, IntraLinks has had only a handful of patents, it now has hundreds of innovations for which patents will be filed over the next 18 months. The company’s market cap has climbed from $325 million in 2011 to $500 million today. He credits the board with giving him the right amount of leeway. “The board let us fail. Version 1.0 was not perfect. Agile development methodology is all about fast learning, and I want our company to be a fast learner. You want always to be learning and improving while knowing that you’ll never reach perfection, you’re always still striving for it.”

4. Take it outside
One way to imitate startups is to hire their people away. But mature companies need more than gimmicks to attract entrepreneurial innovators to the mother ship. For starters, entrepreneurs like to have a lot of skin in the game—more than what a few hundred stock options can provide, says Trevor Owens, co-author of The Lean Enterprise: How Corporations Can Innovate Like Startups. “When you’re starting something from nothing, you very closely identify with what you create. Ownership is the reason you stay up all night thinking about a product, and stock options in a huge company are just not going to feel like ownership.” That’s one of the reasons some companies have only limited success with “innovation labs” inside the company. “It sounds like something that’s in the basement,” says Owens. “A lot of these innovation labs look like projects just for corporations to show how cool they are. ‘It’s there and it’s ours and it’s in service of us.’ But the innovators don’t have the autonomy and they can’t move fast enough through the bureaucracy.”

Instead, Owens says, companies need to set up an environment that essentially is a startup, independent of the company providing its seed money. “When doing disruptive innovation, that type of work has to have different rules. There needs to be autonomy and employees need to be compensated with equity. The rules of engagement are different—it’s the Wild West.”

He recommends the concept of the innovation colony, where the innovation is happening entirely apart from the company. One model is to set the colony up as a limited liability corporation with the parent company taking just a limited partner role. The LLC employees are tasked with creating something that the market wants, and the parent company hopes it is something that will fit its portfolio of products and services.

But there are no guarantees. The LLC can raise capital from outside investors, including venture capitalists, who may eventually make a bid for the company. “It happens all the time that a venture capitalist takes the project away from the company. But a lot of the projects aren’t really good fits.” The bottom line, says Owens, is that you can’t start with the task of creating a product that fits with the company’s portfolio; to really succeed, the team has to start by designing products the market wants. “And when one of them fits into your strategy, then you can bring it back inside.”

5. Keep it personal
One advantage of the small company culture is familiarity. Everybody knows the CEO by first name and nobody thinks twice about sending him or her an email or stopping by the office for a chat. Bill Raveis remembers that time well. He founded the William Raveis Real Estate, Mortgage & Insurance company 40 years ago in a 10×10 office above a grocery store on a busy street in Fairfield, Conn.

“I thought if I had a big desk, I’d look important,” Raveis recalls. “My desk was almost as big as the office, so nobody could come in.” Four decades later, he still hasn’t forgotten why he went out on his own: he’d been working as a systems analyst for a large company in Manhattan’s Pan Am building. The company threw a dinner at the Biltmore to celebrate an IT system that Raveis’ team had built for a client, Westinghouse. “They recognized everybody but us for doing it,” he says.

So Raveis left. Today, his soup-to-nuts home homeownership company is the third-largest, family-owned real estate firm in the U.S., with more than 3,000 sales professionals in 100 offices across seven states in the Northeast. “One of the things we do here is [to] recognize the work people do. We look at our salesforce, rather than the end client, as our customer. Because if we can support the sales force, they will gather the business.”

Corporate America is filled with silos, a situation which creates a culture of distance and apathy, he adds. “There’s no organizational chart here. We’re all on the same level. I’m equal to the receptionist—we just have different responsibilities.”

Raveis’ goal continues to be treating every employee like family. If someone has an illness in the family or a new baby, the company’s senior management reaches out to them. The key, as a company grows, is to maintain communication, whether it’s by phone, by email or, when possible, in person, he says. “You have to pick up the phone and call people. Let them know they can call you any time. It can’t be a mindset of, I’m a big shot and they’re a little shot. We’re all just helping each other succeed.”

One more thing to learn from startups? “They have fun,” says CCL’s Ryan. “They have a sense of humor. I’m struck by how seriously we take ourselves on boards and in senior management. I know we have scale, complexity and regulations—all that stuff, and we do need to take our jobs seriously—but not ourselves. We should make fun of ourselves much more often.”

C.J. Prince: C.J. Prince is a regular contributor to Chief Executive and other business publications.