Building internal startups vs corporate venturing

Build internal startups? Invest in startups outside your company? Either way, you’ll need to play the game like a VC to win.

Person in white sneakers standing next to 2-way arrows.
Photo by Leih Quimson

How VCs win at innovation

Venture capitalists (VCs) win by playing the odds. It’s called the 2-6-2 Rule. 2 of every 10 investments lose money. 6 of 10 break even. 2 of 10 make money. Every once in a while, they invest in a Google or a Facebook, which makes the whole game worth playing.

But that’s not the whole story. VCs never invest in ideas. They invest in teams that already have traction in a promising new market.

The startup team has created a new vision for the future. Gone out and proven that a market exists by getting customers, and revenue. Demonstrated a repeatable and scalable business model with strong, early growth. Then they can start pitching VCs.

Only 1 in 100 startups get far enough along to pitch VCs. Only 5 in 100 startups that pitch VCs receive Series A funding. So only 1 in 2,000 startups go from promising startup idea to VC funded startup.

Yet VCs haven’t funded any of this. The entrepreneurs have done most of the work for free. They may have raised some angel funding along the way. But the early work was all “sweat equity.” VCs plug into a vibrant entrepreneurial ecosystem that they have no role in creating. It’s quite a gift.

Even then, VCs fail 80% of the time. They only make money on 20% of their investments. Most returns come from a mere 7.5% of investments. Yet this model lets VCs reliably create successful ventures.

Playbook #1: Play the game like a VC, and win

Corporate venturing is the most obvious way to play the game like a VC and win. 

You secure $50M+ in funding. Hire a few experienced venture capitalists. Look at 400 startups for every startup you invest in. Invest in 20+ startups. 

Then hope your VCs succeed in hitting the 2-6-2 Rule. This will let you reliably create successful ventures. You won’t likely get any unicorns. But you’ll create a few new growth engines for the company.

Playbook #2: Play the game like a VC, and win

Building internal startups is more work. But the returns tend to be better, and it’s faster.

This is a game you can win. And it has significant advantages. But only if you play the game like a VC.

Most companies think they can outsmart the laws of innovation.

  • Trust the “experts”
  • Pick the “winners”

There is zero evidence this works. Countless corporate innovation teams take this approach. Year after year. Not a single billion-dollar breakthrough.

Most breakthroughs come from people and places the “experts” least expect. To win at innovation, you need to let the winners emerge. The same way VCs do. This means you need to create a vibrant ecosystem of innovators right inside the company. It’s the only way it works.

Established companies have significant advantages in launching internal startups. So the odds of success are much better than for external startups. But only if you play the game like a VC. You will not win if you try to predict the winners. You need to let the winners emerge.

Think beyond internal startups

Don’t limit yourself by thinking only in terms of startups. This type of thinking tends to wall off your best opportunities.

Instead, think in terms of creating new growth engines. Creating the breakthroughs that drive growth.

Not every breakthrough can be launched as a startup. In most cases, breakthroughs only make sense in the context of the company that creates the breakthrough. 

Toyota Production System (TPS) is a good example. TPS gave Toyota an unassailable competitive advantage for decades. But TPS wasn’t something you could launch as a startup. It only made sense in the context of an automaker like Toyota.

BlackBerry Messenger (BBM) is another example. BBM supercharged the growth of BlackBerry for years. Even after Apple introduced the iPhone. But at the time, there was no App Store that would have let someone launch BBM as a startup. BBM only made sense in the context of a smartphone company like BlackBerry.

When you focus on creating new growth engines, you can better leverage the talent and resources inside your company. You have an incredible pool of talent. Talent that is eager to help. You have easy access to customers. Customers who already do business with you.

These are significant advantages. They make success easier and faster.

This lets you play the game like a VC. But with dramatically better odds.

Focus on creating the breakthroughs that drive growth. Not just creating internal startups. You’ll be more likely to succeed.

Conclusion

Build internal startups? Invest in startups outside your company? Either way, you’ll need to play the game like a VC to win.

Thanks for reading

This series explores the corporate rebel model, and what the history of breakthroughs is trying to teach us.

I’d love you to join in the discussion below.

Kind regards,

Jim Verquist

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