When An Established Company Should Run An Internal Startup

Nimble. Agile. Innovative. These buzzwords tend to apply to startups, not big companies. Though studies from MIT show that the key to transformation is acting like a startup, that’s often not possible. The larger and more established the company, the harder it is to focus on a single challenge and get creative about solving it.

Established companies have everything startups need, including capital, skilled employees, and office space. Lifting those pressures by creating a separate intrapreneurship division, or even a company within a company, gives an internal startup even more freedom to innovate than a startup without a parent company.

But for every internal startup success story, nearly twice as many are failures. Google famously encourages innovation with its “20 percent rule,” which enables employees to spend 20 percent of their time developing Google-related passion projects. The successes are legendary: Gmail, Google Maps, AdSense. In recent years, the company has taken it a step further by creating Area 120, an internal startup incubator that puts a full-time focus on select “20 percent” projects. As part of the premise, Google recognizes that most of the projects won’t make it past the initial exploration. In fact, internal startups have a similar fail rate — 50 to 90 percent — as standalone startups.

In addition to the typical challenges of launching a business — not a big enough market, not enough money, or getting beaten to the punch by a competitor — internal startups face the challenge of being tied to the parent company. For example, a startup must operate on a fast track, making quick decisions with the freedom to fail. That’s often the opposite of how its parent company operates. True innovation can’t happen if a startup is constrained by the bigger company.

When internal startups make sense — and when they don’t

An internal startup can break through institutional structures to take a fresh approach to addressing business challenges or embracing new market opportunities. But it’s not a cure-all for business woes, and it definitely shouldn’t be used to make only incremental business improvements.

Instead, intrapreneurship must be about pursuing big ideas that can stand on their own. Even if the internal startup will never be a standalone business, its business case should be judged on whether it could secure funding on its own.

Back in 2004, TripAdvisor became a prototype of intrapreneurship when it reimagined the traditional travel agency model. Launched from within Expedia, TripAdvisor was a pioneer of user-generated content, building a digital platform that let travelers advise one another. Spun off in 2011, the platform is now also used by a range of suppliers such as Booking.com and Hotels.com.

Similarly, my company saw an opportunity to improve its service and took a startup approach that allowed our intrapreneurs to put aside our preconceptions, push beyond what our parent company needed, and consult other industries and online experiences for inspiration. We didn’t necessarily set out to launch a standalone product, but we quickly saw additional use cases and eventually uncoupled the platform so that it could serve a wider constituency.

Scope and scale

For true innovation to be possible, the parent company must recognize the differences and fully commit to enabling a startup culture that’s distinct from its own. Take these steps to give your internal startups the best chance of success:

1. Set parameters. Outlining a clear, comprehensive scope for the internal startup along with agreed-upon governance is essential for the success of both entities. While excessive oversight or process requirements from the parent company can hinder innovation, some structure, especially around how the startup can effectively leverage resources and expertise, offers it a clear advantage over standalone startups.

2. Add to the team. Removing a large company’s constraints in order to spark innovation is a good first step, but it’s not always enough. To achieve the culture that’s needed, bring in outside talent with a startup mentality. These newcomers will add fresh perspectives and a sense of urgency, while employees from the existing company can offer established internal networks and valuable insights about how the parent company operates.

3. Make it a two-way street. Just as the internal startup leverages elements of the established company to its advantage, intrapreneurial attributes can positively influence the parent company. In our case, we’ve found new agility for our company’s production release cycles. Our internal startup’s biweekly improvement release schedule has impacted how the parent company approaches product development overall. Our release cycles have accelerated from twice annually to quarterly, with some platforms now operating with 60-day release cycles.

For established companies, the biggest benefit of intrapreneurship is the freedom to explore solutions. Done well, internal startups find the right balance between creating enough separation and fully leveraging the parent company connection to become more nimble, agile, and innovative.

Read more: To Boost Innovation, Manufacturers Launching Small-Company Accelerators, Incubators

" Dave Falter : Dave Falter is the president of RoomIt by CWT, an intelligent B2B hotel solution that gives travelers access to the best hotel accommodations, rates, amenities, and incentives in order to increase travel program compliance, safety, and savings.."