The Art of the Intrastart

November 19, 2015

technology, digital, digital transformation, future of work

(with due apologies to Guy Kawasaki)

A lot of large companies, both the ones which are Born Digital, as well as those which want to Become Digital, are venturing into an uncharted territory: incubate a start-up, or a series of start-ups, within their fold. While this is one of the best methods to foster digital innovation and transformation in a brick-and-mortar business, the right model to do this is a bit of an unknown. Multiple companies and conglomerates around the world are attempting this; in fact, there are several Mahindra companies invested in this effort too. Since this is relatively atypical way to grow and innovate, it sometimes results in disrupting existing profitable businesses, and almost always leads to disturbing existing organization structures. The jury is out on the validity of these efforts – only very few of these intrastarts succeed, and unfortunately many more of them fail to scale up.

I call these startups Intrastarts – a portmanteau of the terms intrapreneur and startup, as opposed to ‘pure’ startups, which are founded by entrepreneurs outside a company’s protective embrace.

There is no one right way or formula to successfully seed and grow an intrastart within an existing, large company. There are many dependencies: the company, the sector, the market and the existing company culture. What I have attempted to do is to take learnings from successful pure startups, and try to adapt their best practices to an intra-company environment. I do believe that if these are followed faithfully, the probability of success of an intrastart will be higher than the average.

1. Have founders, not employees

Every successful startup has a passionate, and sometimes, obsessed founder. Only an owner-founder, who has ownership in the company, will be committed enough to work day and night against huge odds to make the company work, and scale. So, have founders starting a startup, and not employees who might this as just another 9-to-5 job. Preferably, have more than one founder – it is a lonely and tough job, and it is always better to have two, three or four co-founders sharing the burden. In fact, in the Valley, most VCs refuse to fund single founder startups.

Give them substantial ownership. Let the founders be young; and a little foolish. You will find that it is the rebels and the iconoclasts within your company who will be the best intrastartupers.

2. The non-negotiable CTO

This, to me, is perhaps the most important of the tenets listed here. One of the co-founders needs to be a Tech or Product guy – a CTO or CPO. He can even double up as the CEO, but the CEO cannot double up as the CTO. All digital startups will have a digital business model, but at the heart of it will be a technology product (an app, or an analytics engine, or an ecommerce site). The first and the most important task for the startup will be to create this product; and for that, you need an owner, who will be the CPO/CTO.

Most companies believe that internal IT can double-hat and do this, or an external tech shop can do this. Sure, they can code it and build it; but the architecting, the road-map, the platform aspects, the business linkages, and, above all, the ownership cannot be outsourced. One hundred percent of pure digital startups have a tech founder or a co-founder; else they do not get funded, and do not scale. A digital startup without a tech/product cofounder has a success probability, close to zero. So have the CTO, right up front.

3. Product-Market Fit

It is very important to achieve a product-market fit within the first one year of existence of a startup. Legacy product development is about creating as perfect a product as possible for the chosen market, and then launching it in a grand manner. If it succeeds, great. If not, live with it; and go back to the drawing board to create another product over the next few months or years.

Digital products work differently. You create an MVP (Minimum Viable Product), which just works, for the chosen market. You release it. You collect customer feedback on a real-time basis, and keep on tweaking the product on a daily and weekly basis, until you achieve the right product-market fit. The beauty with digital is that this is possible to do; only that you have to be flexible, agile and committed enough to do it. If you achieve the perfect product-market fit, you do not need to market the product; it sells itself. Gmail was in Beta for 5 years, until they achieved the perfect fit; most apps you see out there are going through furious, multiple iterations to achieve the fit. The ones that do, strike gold. This point feeds into the CTO point above; this only happens if you have a founder who is the product owner.

4. Lean, mean, hungry

Most times, intra-company founders continue working at their existing, or sometimes higher salaries, while they build the startup. The high salaries tend to co-relate with low ownerships.

This is the exact opposite of what should happen. Pure startup founders have zero salaries, and 100% ownership. As they dilute their ownerships, their compensation increases. My strong recommendation is to at least halve the salaries of the internal co-founders, and give them more ownership than you thought. Put in a seed-funding of Rs. 1 to 3 crore (not more, not less) for a typical digital startup, a co-founder team of 2-3 people, for 6 months to one year. This is the seed or angel round. If one, or all, of the founders want to put in their own money, let them do so and give them disproportionately higher equity in return; nothing like skin in the game.

When a Series A or a bridge-to-Series A gets raised, increase the salaries, along with diluting founder equity. In Series B, let it reach market compensation. Typically, after seed, founders in pure startups are paid between Rs. 12L to 24 L per year; this gets doubled at Series A, and then reaches market at Series B, and continues increasing post that. Replicate this internally, as far as possible.

5. Geography is important

It is important to be in a city which has the right tech talent, market depth and startup ecosystem. These places have many networking opportunities:Startup Saturdays, Mobile Mondays, Funding Fridays – many such events and meetups where startup founders and employees congregate. It gives an environment and ecosystem of like-minded people. VCs tend to frequent these places; mentors are aplenty.

In India, the most preferred location is Bangalore. Followed by Delhi NCR. Mumbai is a third, though a slightly distant one. Even within these cities there are clusters where startups thrive: Koramangala in Bangalore, Gurgaon in NCR and Powai in Mumbai. It is recommended that the startup actually move to one of these places, within an year or so of its starting up

6. So is location

There are great advantages of a startup being co-located with the company that has incubated it – free office space, mentorship, many support functions and facilities. What is missing, however, are the intangibles: the culture, the freedom, the youth, and the sense of bravado and adventure. So, while it sometimes make sense to be co-located early in the game; going further, it makes sense to go elsewhere. The best place for that is an accelerator/incubator/startup-coworking space. There are many of these in the three cities; another option is for the company/Group to have its own co-working space, with the right culture and inputs and governance.

7. Light touch governance

And that brings us to governance, and this is a very tricky one. Most times, too much governance tends to throttle an intrastart, and the founding team spends an inordinate time running around, satisfying various reporting and format requirements, than doing actual work. A pure startup has very light governance, especially at the pre-seed and seed stage – a couple of mentors / advisory board, sometimes (and only sometimes) a formal board of a couple of people; that is it. One VC capital gets raised, it is time for Boards and governance, etc. But before that, keep it light: some mentorship and advise when required by the founding team, very few structured meetings, and full accountability and empowerment to the founding team.

8. Where will the money come from?

The money question is the one most asked – after an initial seed by the corporate, where will the further rounds of money come from? Usually, the assumption is that the corporate will fund a couple of million dollars to kick-start the venture and hold some equity. Going forward, the venture will raise VC or PE money, and the corporate might or might not co-invest.

However, this is easier said than done. VCs will put in money only if they see an exit, which implies that the venture needs to be decoupled from the corporate to the maximum extent. No corporate mother brand name, minimal Board involvement, different location, no preference to the Corporate’s products and brands, etc. Even if this was to be satisfied, a VC will definitely prefer to fund a pure startup, rather than a corporate incubated startup. A PE might be more comfortable, but it comes at a much later stage (usually Series C and later).

Therefore, the corporate needs to be comfortable to fund the entity until Series B at least, and not only seed funding. Another option is to tie up with a fund, or funds, earlier in the game so that they jointly select, govern and fund the startup – seed, Series A and maybe even later. A third option is to tie up with an accelerator-cum-fund (YCombinator, TechStars, VillCap, 500Startups, etc.), so that the entire incubation and funding process is better managed, and there is more neutrality built in.

9. Celebrating failure

Founders do not fail, companies do.

The success rate of startups is around 5%; founders almost always succeed: either in subsequent startups, or in jobs that they do afterwards, because they go through a crash course in general management, risk-taking, operating under constraints, and people management.

An internal startup which does not succeed, should not be treated as an embarrassment or a failure. The founders should have as much, or better, chance to get a job back in the investee company, if they want to, and a role is available. However, it should not be a God-given right also. If the founders know that they have a built-in safety net, they will not give their 110%, which is what a startup needs. However, if the startup fails, they should never be stigmatized for it. Progressive companies, today, go out of their way to attracted ‘failed entrepreneurs’; we should too.

As I mentioned at the start of this note, there is no surefire formula for startup success – whether it be a ‘pure’ startup, or an intrastart. For an intrastart, especially, there is the additional task of finding the right balance between the mother-company’s protective embrace and a choke throttle. What I have tried to do is to adapt some tenets of successful pure startups to intrastarts. Some of them are more important than the others, but all of them should be considered and followed as much as possible. Not only will that help an internal startup to succeed and become a large business, it will serve as a seed and a catalyst for transformational change for the entire mother-company itself.