Startup studios are gaining traction as a tool for corporate business innovators. Is this simply the corporate innovation fad-du-jour? Or is this a viable solution for overcoming the challenges of driving entrepreneurial behavior and achieving successful innovation outcomes within the slow-moving, process-heavy, execution-focused enterprise?
Or is it something in between? Having delved into this with corporate innovators from around the world, in different industries, and at different levels of innovation maturity, it is clear that startup studios are emerging as a valuable arrow in the innovator’s quiver as:
- An alternative to the standard corporate venture capital model.
- A relatively low-risk, low-cost, and fast means by which enterprise leaders and innovation teams can get a hands-on sense of what is involved in new business creation, and what it means to use entrepreneurial tools and methods.
- A means of capacity extension when the right talent is not available or easily accessible within the enterprise.
What the startup studios are not, however, is a way to avoid installing the essential pillars of successful business innovation or avoiding the challenges of standing up a new, divergent business within a mature enterprise.
The Startup Studio
Although there are various instantiations of startup studios, there is a common set of elements in each: a core team of operational folks and a team (or virtual network) of entrepreneurs-in-residence; shared infrastructure, support services, and seed-level funding for ideas generated within the studio; and multiple startups being built in parallel. At its essence, the Startup Studio approach is a blending of (and an alternative to) standard accelerator, incubator, and VC funding approaches. Idealab in Pasadena, Calif. was one of the first groups to pioneer of this approach, beginning in 1996, as an independent entity, not part of a large company. Today there are a 200+ active startup studios around the globe.
Startup Studios Embrace the Enterprise
Feeling the pain of the innovator’s dilemma or lacking the talent or capabilities to drive business innovation internally, many large enterprises have turned toward some form of external innovation. This has taken several now well-trodden paths, including:
- Corporate Venture Investing (e.g., Intel Capital, Google Ventures, Salesforce Ventures, Samsung NEXT Ventures)
- Corporate Accelerators (e.g., Disney Accelerator, Oracle Startup Cloud Accelerator, Microsoft Scaleup)
- Open Innovation Challenges & Crowdsourcing (e.g. Cisco’s Hyperinnovation Living Labs – CHILL, Lego Ideas, Johnson & Johnson’s innovation challenges).
Entrepreneurial souls in the startup studio movement, having observed the Global 1000 club investing large amounts in the external innovation path, saw the opportunity to extend the studio business model to serve enterprise clients.
CVC Alternative: One startup studio approach has been to serve as an alternative to the standard corporate venture capital (CVC) model. Rather than scouring the earth for teams/startups and then investing as a VC would, the corporation establishes or co-invests in a startup studio as more of an arms-length investor to focus on specific areas of interest. The corporation’s intention is to generate viable new businesses that either help build out the ecosystem for the corporation’s solutions, fill a technology or go-to-market gap, and/or develop new potential revenue paths for the corporation. As with corporate venture investing, some of these newly created businesses may become acquisition opportunities down the road. A few notable examples of this are:
- AXA’s launch of Kamet to build insuretech companies, with a 100 Euro funding commitment.
- Jaguar LandRover’s launch of InMotion to build mobility startups.
- The corporate investors in InnohubMX, who seek to develop the startup ecosystem in Latin America and improve the odds of success for their small-medium-business customers by building solutions for that market segment.
- Twitter’s investment of $10 million in the startup studio BetaWorks to fund the development of companies that would contribute to building out the Twitter ecosystem and expand Twitter use.
- Founders Factory, a London-based group, which has a model in which corporate partners invest in a Founders Factory fund (vs. individual startups) to incubate businesses in specific areas of interest, with a later option to invest directly in the companies as they bear fruit; the group has teamed up with L’Oreal, Aviva, Easyjet, China’s CSC Group, Holtzbrinck, and Guardian Media Group to identify and build startups in beauty, fintech, travel, Artificial Intelligence, education, and media.
External Incubation: A second approach has been creating an outsourced business incubator capability, in which the studio follows some form of the design-thinking-meets-lean-innovation playbook to explore areas of interest for the corporate client. As with the CVC-like model, the startup studio enlists some combination of its full-time team and entrepreneurial talent from its network and leads the business innovation process from ideation to launch of a minimum viable product. Here, however, the enterprise client takes a more hands-on approach by defining the exploration brief, steering the effort, bringing in subject matter experts from the enterprise, and even investing in the secondment of one or more full-time corporate employees to the studio.
Startup studios that provide offerings in this vein include:
The business model for this work varies by startup studio. Some simply bill as a standard agency. Other studios, like Prehype, also contract for an upside interest in the opportunity, should it progress with enterprise backing (inside or outside the company) and have an option to carry forward the opportunity should the enterprise decide not to proceed. This potential to share in the upside and continue on with the effort has been an important tool for studios in attracting top-notch entrepreneurial talent to work on corporate projects.
Some corporate clients have found this model to be a fairly low-cost, low-risk way to dip their toe in the water and learn about a more entrepreneurial approach to new business creation. By participating in, or observing, a studio work on the enterprise’s project, corporate leaders and innovation teams gain a visceral understanding of how the startup approach differs from usual business. This can yield new results in quality, creative output, speed, and market validation.
More mature groups, like the American Family Insurance innovation team, have found the startup studio model to be a helpful “capacity extension” mechanism. (We’ll dive into their approach in a moment.) When the right talent for a particular opportunity does not exist within the enterprise, the company can turn to the studio for expertise. For example, a product-centric company exploring services businesses, or an athletic wear company exploring health and wellness opportunities. Or, a corporate team that is simply maxed out can use the studio model to go after unaddressed opportunities without having to identify, recruit, hire, and manage more people. This avoids new fixed costs, additional layers of management and bureaucracy, as well as corporate process creep.
Some Best Practices in Working with Startup Studios
Corporate venture capital has been around for decades, and there are a plethora of guides and conferences that address CVC best practices. These apply to the Startup Studio as a CVC alternative, so there is no need to belabor the subject here.
For the startup studio as an outsourced business incubator/capacity extension tool, savvy corporate innovation groups such as American Family Insurance point to a number of important best practices, in many ways similar to the basics in selecting any services vendor:
- Understand the Studio’s Track Record & Cultural Fit. Have they worked with enterprise clients in the past, and in what capacity? (Avoid the frustrations of having the studio use your business to cut its teeth on corporate engagements). Are they adept at identifying, building, and testing business models, as well as product concepts? Is the studio a one-size-fits-all shop or does it adapt its pricing and innovation work to the specifics of the situation? Does the studio have a flexible but systematic approach to move through business innovation from ideation to incubation to building/scaling? Has that approach yielded tangible market-tested results from which the enterprise can learn? How well do the studio teams take direction and productively incorporate corporate subject matter experts and innovators into the effort? Does the studio simply serve to please, or serve to help the enterprise confront the “commercial truth” in developing compelling new businesses?
- Understand the Studio’s Domain Expertise & Talent Network. With a generalist studio, the enterprise client is likely to spend a lot of their time and money educating the studio for its next client in your industry. The most successful startup studio engagements come when the studio has domain experience in an area of interest for the enterprise and/or can tap into an extensive talent network with the requisite experiences and capabilities required to explore and deliver solutions within that domain.
- Build a Stable of Studios. Having a set of trusted studios with which to work gives the corporate innovator a range of operating models, innovation approaches, areas of domain expertise, and talent networks from which to choose. Not only is this essential in selecting the best tool for the job at hand, it has the added benefit of giving one leverage in the contracting process—choice is negotiating power.
- Don’t Ignore the Four Pillars of Business Model Innovation. While leveraging startup studios can be great for exploring and beginning to build out new business opportunities, that work will be for naught without four key pillars in place: (i) leadership committed to writing the future, (ii) guided by a comprehensive innovation strategy, (iii) who have embraced an investor/entrepreneur mindset, and (iv) who support their innovation teams in using a full set of innovation and corporate development tools. There is no escaping this.
American Family Insurance Quietly Leading the Way
American Family Insurance (AmFam), a 90-year-old Madison, Wisconsin-based property and casualty insurance carrier, has developed a world-class business innovation capability. Recognizing both the opportunities and threats that new technologies and changing consumer preferences posed for the insurance industry, AmFam launched a multi-faceted innovation initiative in 2011, with broad leadership support from its Chairman and CEO, Jack Salzwedel, and Chief Business Development Officer, Peter Gunder. That has evolved into four closely-integrated, sophisticated capabilities reporting in to Gunder: (i) corporate development (M&A, JVs, strategic partnerships), (ii) corporate venture capital, (iii) data science, and (iv) business innovation and incubation.
Having all of these new business and innovation-related functions under one umbrella has allowed for a steady stream of wins that built momentum and established credibility for the group. When the data science team used natural language processing to solve an important problem for the claims operations, it not only demonstrated the group’s value, but the financial benefit it generated for AmFam more than offset the group’s budget. So too did the AmFam CVC team’s successful investment in Ring (acquired by Amazon for more than $1 billion in 2018).
The close-working relationship among these four teams also enhances the effectiveness of each. The CVC Team, for instance, looks at thousands of startups. This creates a rich set of insights that inform the Corporate Development Team’s acquisition and partnership strategies and helps in identifying potential partnerships and acquisition targets. The CVC Team likewise provides investor-savvy feedback on the Business Incubation Team’s portfolio of new business ventures, and helps that team avoid reinventing the wheel where there is already ample startup activity.
With this robust set of business innovation capabilities, AmFam principally turns to Startup Studios to extend the capacity of the Business Incubation Team to pursue new opportunities. The team consists of a full-time staff of experienced entrepreneurs-in-residence and functional experts (e.g., customer empathy, user experience design.) It often supplements that expertise with temporary internal personnel and contractors to address spikes in work volume, or fill in skill set gaps. From time to time, however, compelling new opportunities hit their radar that require extending the team’s capacity or more specialized domain expertise. It is then that AmFam turns to a set of pre-vetted startup studios.
Ryan Rist, who heads the business incubation team, tells me that AmFam has evolved in its use of startup studios:
At first, we let the startup studio drive the effort. We quickly realized that there was a danger of ending up with a business, albeit fundable, that had little-to-no link back to our core business. Instead, through trial and error, we developed a hybrid approach where we can harness the power of a Fortune 500 with the speed of a startup. Our in-house team of entrepreneurs and designers are doing significant prework before engaging a studio, working in the market gathering customer empathy insights and testing concepts. As soon as the studio is engaged, we have clear guardrails for where we should play, backed with hard data and strong alignment. The studio then brings in experienced founders who are seeking their next big thing. It’s as if we put the ball on the tee and the studio brings in the major league slugger. In a very short period of time we have a fundable business, built off real problems that we care about solving.
The team also selects a startup studio for a project based on the depth of the studio’s network and experience in the subject matter, domain, customer problem, or technology relevant to the specifics of the project. In employing these best practices, AmFam has effectively leveraged startup studios in supplementing their business innovation efforts.
The Verdict: a Helpful Arrow in the Quiver
While not a panacea, startup studios have emerged as an important tool for corporate innovation—either as an alternative to the standard corporate venturing approach; a way to test the business innovation waters; or a means by which to pursue opportunities beyond the current capabilities or resources of the enterprise. As with any innovation tool or approach, however, using a startup studio does not avoid the challenging necessities of securing senior leadership support and active engagement in the innovation effort, and putting in place a set of organizational behaviors and mechanisms that foster business innovation on an ongoing, sustainable, and scalable basis.
Rick Waldron is a Contributing Columnist, New Business Creation Architect, and Former VP of Innovation Strategy & Partnerships, Nike