Corporations are establishing incubators, e.g., Samsung, and accelerators, e.g., Orange, in order to advance their disruptive innovation initiatives. They are doing so on their own, e.g., Samsung, Swisscom, or in partnership with independent accelerators, e.g., Disney, Microsoft, and Barclays have partnered with Techstars. The terms “incubator” and “accelerator” are frequently used interchangeably to denote an organization that aims at helping very early stage startups, or even just teams in the process of considering the creation of a startup, get off the ground successfully. They do that typically in exchange for a small equity percentage in each startup. This blog addresses the role of corporate incubators and accelerators in disruptive innovation, rather than the general topic of startup incubation that has been covered extensively elsewhere. It presents:
- Four different corporate incubation/acceleration models.
- The steps necessary for establishing and maintaining one of these organizations.
- A process to help corporations increase the value and success rate they derive from their incubation/acceleration initiatives.
Defining Incubators and Accelerators
Incubators and accelerators are organizations that are ideally suited for helping corporations identify and explore open-ended and ill-defined ideas that are associated with long-term timelines to ROI. I underlined “ideas” because incubators are excellent as one of the sources for innovative ideas (see also open innovation). In addition, corporate accelerators are organizations through which to create solution prototypes and mockups, as well as for recruiting entrepreneurs and training intrapreneurs. The incubation/acceleration model, when done correctly and associated with long term innovation timelines to ROI, e.g., 7+ years, can have important impact to disruptive innovation. But corporate incubators and accelerators must also work in collaboration with other corporate innovation-enabling groups.
Corporate incubators and accelerators provide entrepreneurs with training(typically in Lean Startup methods, and the Innovation Process), idea prototyping, mentorship particularly during the development phase (including specific vertical industry expertise), partner networks (including VCs) and facilities. They typically follow a particular process of accepting teams, training them, helping them ideate and prototype, and develop their prototyped ideas. Figure 1 shows the ideal structure and high level process of a corporate incubator and accelerator.
Figure 1: The ideal structure and high level process of a corporate incubator and accelerator
However, the two models different in two important ways. First, accelerators investin their startups, typically $20-100K in each company, whereas incubators don’t. Second, accelerators support startups in groups, also referred to as cohorts, and classes, whereas incubators do so on-demand. A corporation can start with a startup incubation model and progress to an acceleration model.
Only a few of the corporations that have created, or are working with, incubators and accelerators realize the true utility of these organizations in the set of options for generating innovations. Most of them don’t yet. Corporations expecting incubators/accelerators to provide them with working solutions that can be transferred directly to their business units will be disappointed by the results. Corporations that need working solutions are better off working with their venture group to identify them and invest in them. For example, GE Capital invested in Mocana that has developed a mobile application security platform that is well suited for the Internet of Things, Intel Capital invested in Cloudera for its big data infrastructure software, and Visa invested in Square for its mobile payments platform.
Many corporate incubators and accelerators are established in Silicon Valley, but not all. For example, Pitney Bowes established an incubator in India whereas Allianz established theirs in Munich, and Bayer in Berlin.
Corporate Incubator and Accelerator Models
Corporations use different incubation/acceleration models as they are trying to achieve their objectives. We have identified the following four:
- A step in the innovation process:
- Model: The incubator/accelerator works with both intrapreneurs and entrepreneurs that propose disruptive solutions to existing problems, or work on potential disruptions that the company cannot otherwise pursue. The broad incubation lasts 4-18 months. The best teams are given the opportunity to continue developing their innovation by being: a) invited to join the corporation (spin in), b) fenced off for some additional period during which the corporation makes an additional investment to keep them going, c) asked to continue working outside the corporation (spin out) and are offered an investment either by corporation’s business units or its corporate VC arm (with or without additional investments from institutional VCs), or are left on their own to raise money from institutional VCs or other funding sources.
- Examples: Samsung, Telefonica.
- When to use the model: When the corporation a) wants access to early stage innovations, b) has developed a long term strategy for disruptive innovation with the appropriate timelines (need to be thinking 7-10 years out for realizing a return on this type of investment), c) has established the appropriate KPIs for measuring the performance of the incubation/acceleration effort, and d) is ready to commit resources to work closely with very early stage startup teams, see them through their ups and downs and tolerate their risk-taking and failures.
- Benefits to the corporation: The corporation commits long term to disruptive innovation. It is able to attract entrepreneurs that can eventually join one of the business units. Its intrapreneurs get to work side by side with these entrepreneurs and learn from one another. The incubation/acceleration and the corporate venturing groups are able to collaborate around the incubated teams. The corporate incubator/accelerator enables the corporation to connect with the broader startup ecosystem.
- Pay it forward:
- Model: The corporate incubator works with outside teams of entrepreneurs offering them facilities and training. Most importantly it exposes exposing them to real industry and company problems, and making available experts to help them understand the issues. The corporation does not receive any equity in exchange for these services. The incubation lasts 6-12 months.
- Examples: Allianz, Turner.
- When to use the model: When the corporation wants to a) start exposing its executives to startup thinking and practices, b) attract entrepreneurial talent, and c) elicit new ideas and early stage innovations from outside its four walls on how to solve important problems.
- Benefit to the corporation: Creates goodwill with entrepreneurs while accessing talent, ideas and potential solutions to problems of interest. In the process it exposes its executives to startup teams, processes and thinking.
- Develop intrapreneurs:
- Model: Teams of entrepreneurial employees use the incubator to create innovative solutions and test business models that cannot normally be pursued by the business units.
- Examples: LinkedIn, Google, Starbucks.
- When to use the model: When the corporation has a strong innovation culture and long-term commitment to disruptive innovation.
- Benefit to corporation: Promote and strengthen intrapreneurship, risk-taking, and out of the box thinking. Rapidly develop new products and business models.
- Test new work environments:
- Model: The incubator becomes a place where the corporation creates and tests new work environments that are based on core startup characteristics: openness, rapid prototyping, experimentation, risk-taking, working with uncertainty, and collaboration over distributed environments.
- Examples: ATT Foundry, Standard Chartered Bank (SC Studio).
- When to use the model: When the corporation wants to test startup-like environments but is not prepared to take on the risks associated with external startup teams.
- Benefit to the corporation: Experiment with startup approaches, organize and manage internal groups using startup company structures (flat management, open communication) in an effort to create high performance organizations.
Setting up a Corporate Accelerator
For any corporation, the learning curve for establishing and maintaining a successful startup incubator or accelerator is steep because it involves performing many tasks, several of which are new and “unnatural” to the corporation. Moreover, most of these tasks must be performed simultaneously. Setting up an incubator or an accelerator involves:
- Selecting the right founder teams to incubate. This selection extends to the intrapreneurs as well. The right teams are characterized by their passion, ambition to solve a big problem and in the process create billion dollar businesses, intelligence, true willingness to learn, (including learning from their mistakes), and desire to takes risks that are not always fully aligned with corporate culture. Selecting the right teams also implies selecting the right projects to incubate. That often involves taking into account corporate priorities, as well as understanding how the efforts of the corporate venturing, corporate development and business development groups are trying to address these priorities. My suggestion is for corporations to focus on opportunities where they have a competitive advantage over any independent startup. For example, specific vertical industry expertise. A viable way for selecting candidate teams is through hackathons.
- Training the teams on Lean Methods and Agile Startup Models, Minimum Viable Product, Customer Development and Design Thinking, as well as providing them with vertical knowledge they could use in the solution they will be developing.
- Mentoring the incubated teams on how to develop their idea into an initial prototype, helping them solve problems as they arise, rapidly iterating through successive versions in an effort to find the right product/market fit.
- Establishing the right culture across the teams being incubated but also helping each founding team forge the culture of the company it is creating. For intrapreneurs this implies establishing a culture that is very different from the corporation’s existing culture. This in itself may make difficult, if not impossible, for each incubated team of intrapreneurs to re-enter the company.
- Pruning out the startups that cannot translate their idea into a product, cannot find the right market fit for their product, and those that have team issues. It is well accepted that 9 in 10 startups fail. While incubation and acceleration aim at improving the startup failure rate, they do not eliminate it.
- Exiting the successful companies either as independent, self-sustaining entities that are able to attract new capital, or by spinning them in to a new or an existing business unit.
Increasing the Value Derived from Corporate Accelerator
Because of our experience in dealing with startups in general and many of the issues above in particular, corporations are starting to collaborate with VCs on how to best set up their incubation/acceleration efforts in way that will make them successful. Let me now propose a process that can help corporations increase the value and success rate they derive from their startup incubation and acceleration efforts:
- Determine whether you need an incubator or an accelerator, select which of the four models you will employ, (you may even decide to use a model that is a hybrid of the four presented above).
- Decide whether to establish an independent incubator or create one in partnership with a third-party, e.g., Techstars. Incubators/accelerators created in partnership with third parties allow for faster time to market but can be expensive propositions and may ultimately limit the amount of knowledge transfer that will enable the corporation to ultimately run its own incubator. Once the corporation decides to establish its own incubator or accelerator it must try to remain consistent to its goal and model in order to develop credibility with entrepreneurs. Decisions such as Vodafone’s which recently closed down its Silicon Valley incubator don’t help. Telefonica, on the other hand, opened several of its Wayra incubators after the initial launch.
- Master the steps of maintaining a successful corporate incubator/accelerator, described above.
- Obtain and maintain executive sponsorship and funding, preferably from the CEO.
- Set up dedicated funding for the accelerator and ensure that it will not be connected to the annual corporate budgeting cycle. First, setting up a corporate incubator/accelerator requires a significant monetary and people investment. The high cost comes from identifying, recruiting and retaining the right people to staff the incubator/accelerator. Working with a third-party incubator, like Techstars, could alleviate some of these costs but the corporate investment remains high. Second, seed-stage investments to the incubated teams should not be treated as though they were just another investment in the annual budgeting cycle that is subject to the same rules and rigor as an investment in an existing product.
- Recruit the right mentors. Create a network of mentors that includes both corporate employees, including executives, and outsiders with startup experience. These mentors are not just helpful to the entrepreneurs, but can provide invaluable advice even the business leaders within the core business. Evaluate the mentors as rigorously as the incubated teams, keep the ones that are being effective and replace the others. Work hard to keep the ones that are effective, particularly the corporate executives.
- Introduce business unit employees into successfully incubated projects in order to prepare the business unit for taking ownership of the solution being created.
- Provide the right incentives for the entrepreneurs, including the intrapreneurs, with the best of the incubated companies so that they will continue their effort after the acceleration phase and allow the corporation to achieve maximum benefit.
- Embed the incubator/accelerator in the ecosystem it is operating in, e.g., Silicon Valley, rather than simply locating it there. This means that the incubator’s leadership must network extensively in the ecosystem. Startup teams must be able to learn from their peers, identify and recruit talent from local networks, and quickly experiment with and embrace or discard new processes and tools as they become available in the ecosystem.
- Create simple contracts that define the relationship between the startup and the incubator/accelerator. This is even more important when an accelerator model is used since that model involves the corporation making an investment and taking an equity position in the startup.
The current corporate incubator/accelerator movement is very real; and like other corporate initiatives, can show meaningful results if done properly. There is no single recipe or “best practice” for setting up an incubator or an accelerator. The type of organization the corporation establishes and the model it chooses depend on the corporation’s unique objectives, capabilities, time line and competitive threats/opportunities. The best corporate incubators accelerate corporate insight and corporate learning on a broad scale. Learning faster than the competition is perhaps the only remaining true method of sustained competitive advantage.
Criteria for Starting a Corporate Incubator or Accelerator
In order to decide whether to start an incubator or accelerator, the corporation must first define its innovation objectives and associate with each objective an innovation timeline for achieving it and the corresponding innovation KPIs for monitoring its progress. For example, one of Amazon’s long-term innovation objectives is to maintain AWS’ leadership through technology innovations that enable it to continue cutting costs on its existing cloud solutions while increasing the scalability of these solutions. On the other hand, Microsoft short-term innovation objective is for Azure to become a successful fast-follower to AWS, and within a yearoffer capabilities that are on par with AWS’ capabilities today. The innovation objectives, combined with the timelines (long-term vs. short-term) ultimately help determine the need for establishing an incubator. It is unlikely that incubators would help a corporation achieve its short-term innovation objectives but can contribute towards the achievement of long-term ones.
To better understand the role incubators can play in achieving long-term innovation objectives let me relate a story. A couple of weeks ago I was speaking with an automotive executive about the impact of Tesla, Uber, and Google’s Self-Driving Car to the automotive industry. We spoke about the innovations each of these companies has introduced, their differing visions of transportation’s future and the threats they pose to the traditional automotive industry and its value chain. The executive indicated that his company had recently introduced an electric car so they felt less threatened by Tesla. I pointed that Tesla’s innovations went beyond the electric vehicle and included: sales model, user experience and automatic software updates, battery technology and fueling stations. These innovations pose an existential threat to the traditional automotive industry’s entire value chain including the car dealers, the gas stations, and the car repair shops to name a few. Addressing these existential threats requires the establishment of long-term innovation objectives. To address such long-term objectives in 2010 GM established its venture fund, and in 2011 BMW established its iVentures fund and incubator, whereas in 2014 Nokia created its Connected Car venture fund.
Our conversation then turned to Uber’s and Google’s transportation vision that is even scarier to automotive manufacturers because it calls for a shift away from individual car ownership and towards the adoption of transportation networks. If it succeeds it will lead to a radically reduced demand for new cars negatively impacting even more industries including automotive manufacturers, insurance, oil and gas, as well as governments that will see reduced revenue from parking, taxes, traffic violations and tolls. Google’s self-driving car will take transportation networks one step further by eliminating the drivers altogether, and through big data analytics offer dynamic pricing, like Uber, but also optimization of the number of vehicles that will be needed to serve a population. The conclusion from this conversation is: a short-term response to a market challenge does not require an incubator but a long-term one can benefit from project incubation. In fact, Google’s did; the self-driving car was conceived at Google X, the company’s internal incubator (model 3 in my taxonomy of incubator/accelerator models).
As I mentioned in the previous post, incubators and accelerators are organizations that are ideally suited for helping corporations identify and explore open-ended and ill-defined ideas that are associated with long-term timelines to ROI. Which brings us to the question on when a corporation should consider establishing an incubator or accelerator either on its own or in partnership with a third-party. Many corporations have already created incubators and accelerators (see Table 1 organized by incubation model).
For a comprehensive list of corporate innovation labs see. I would like to thank those who contributed to the above list and am looking forward to receiving the names of additional corporate incubators and accelerators. Table 1: Partial list of corporate incubators/accelerators
Corporate Objectives for Establishing an Accelerator
I recommend establishing an incubator/accelerator when the corporation wants to:
- Access outside talent and innovative ideas around an open-ended objective with fast-paced innovation and long-term timelines to ROI. The established incubator/accelerator can be based on any of the four models discussed. Samsung’s Incubator is an example of this.
- Train intrapreneurs by placing them in an immersive environment where they can be educated on entrepreneurship models and have daily interactions with entrepreneurs. The established incubator/accelerator can be based on the third and fourth of the models discussed. TCS, Standard Chartered Studio, Mastercard Labs are good examples.
- Stimulate startup activity around a new platform, e.g., IBM Watson, Amazon AWS. The established incubator/accelerator can be based on the first three of the models discussed. Microsoft’s Kinect Incubator is an example.
- Spur innovation in an area (industry, sector) where little is happening, e.g., utility industry. The established incubator/accelerator can be based on the first three of the models discussed. The Nupharo Park environmental technology incubator is an example.
Teams Required for Establishing a Corporate Accelerator
Establishing an incubator or accelerator requires the formation of the following teams:
- Incubation selection, project selection, and final evaluation team. This team should consist of both corporate employees and outside experts. They evaluate the ideas submitted by the teams that want to be incubated and select which teams to admit in each cohort. After the ideation phase they evaluate the performance of each team in the cohort and may prune some of the teams, selecting which teams move forward with prototyping and development. At the end of each cycle they evaluate the incubated projects and typically select the top 1-3 projects.
- Mentors team. A mentor works closely with each team being incubated and helps its members work cohesively, shape their idea, explore alternatives, recruit additional members and connect with customers, potential partners and even investors. Each mentor typically works with 3-4 teams.
- Education team. This team is responsible for providing the basic concepts about startups and entrepreneurship, and present models such as lean startup and agile development. This team may consist entirely of outside speakers.
- Operations team. The members of this team include the executive managing the incubator, business development and marketing managers, the individuals supporting for incubator’s back office, and a few relationship managers whose goal is to act as liaisons between the projects being incubated and the business units, keeping them informed on the projects’ progress but, most importantly, of each project’s relevance to each business unit’s long term goals and priorities. The managing executive, along with business development managers, recruit candidate teams, and network in the incubator’s broader ecosystem, e.g., Silicon Valley, with the appropriate constituencies, e.g., venture investors, IP lawyers, etc. The back office group supports the teams being incubated (IT, financials, facilities), generally manages the incubator’s operations, and manages the joint development agreements, licensing agreements, and OEM deals with the incubated companies.
As I had also mentioned, for these efforts to succeed long term, they always need to have a strong executive sponsor within the corporation.
Whether from within the corporation or outside, recruiting the members for these teams is not easy because they are in high demand and must have a particular temperament for working with early stage entrepreneurs and their ideas. The outside members of these teams typically come from the management teams of mature or exited startups, venture firms, consulting companies, and entrepreneurs that remain involved with the startup ecosystem because they desire to give back or are looking for their next opportunity. The members that come from within the corporation ideally should come from the business units. Oftentimes they come from the financial organizations in the corporate headquarters. I have two recommendations regarding corporate employees becoming associated with the incubators:
- Recommendation 1: Corporate employees should staff the project selection and final evaluation team, as well the mentors and operations teams, particularly as relationship managers.
- Recommendation 2: Assign to the incubator/accelerator employees who are entrepreneurial, feel passionate about innovation and don’t see this assignment as a means of building large and complex corporate organizations.
As one can easily conclude, setting up a corporate incubator/accelerator requires a significant monetary and people investment. The high cost does not come from real estate, even though real estate prices in areas such as Silicon Valley are extremely high, but from identifying, recruiting and retaining the right people to staff the incubator/accelerator. Working with a third-party incubator, like Techstars, could alleviate some of these costs but the corporate investment remains high. Before starting the incubator/accelerator the corporation must determine the budget(s) that will be funding it (office of the Treasury, the corporate venture fund, or the corporate development organization) and must have a long-term and strong commitment to the organization in order to realize significant ROI during the established timeline.
Graduating from the Corporate Accelerator Program
Let’s assume that the corporation established an incubator or accelerator and out of each class of accepted teams 1-2 are selected as the best and most promising for further development. How should the corporation approach the selected startup teams, what are the issues that warrant particular attention and what are the benefits of each approach? I have identified four different options (shown in Figure 1) that relate to the first and second incubation models that were presented here. The other two models are not relevant to this analysis because they refer to internal organizations.
Figure 1: Corporate options for successfully incubated startups
The issues and benefits associated with options 1-4 are shown in Table 2. Issues relate to intellectual property, employee recruitment and retention, ownership structure, governance, identifying additional funding sources if the corporation does not want to be the sole investor in the startup, and establishing operations, when the corporation acquires the startup after its incubation period.
| ① |
② |
③ |
④ |
Issues:
- Determine Acquisition Structure
- Determine the best BU to acquire the incubated team
- Assign the right BU members to work with the acquired team
- Transfer to corporation all IP created during incubation
- Retain Employees
- Stock options
- Cash bonus
- Benefits
- Establish Ongoing Operations
- Determine scope of future work
- Identify the funding requirements for the scoped work
- Identify or establish the budget(s) that will fund the scoped work
|
Issues:
- Determine Acquisition Structure
- Determine the best BU to acquire the incubated team
- Assign the right BU members to work with the acquired team
- Transfer to corporation all IP created during incubation
- Retain Employees
- Stock options & cash bonus for startup and BU employees
- Benefits
- Establish Ongoing Operations
- Determine scope of future work
- Identify the funding requirements for the scoped work
- Determine the P&L structure
|
Issues:
- Establish IP Rights
- Determine ownership of IP developed during the incubation between corporation and incubated team members
- Determine ownership of derivative IP to be developed after outside funding is received
- Identify Funding Sources
- VCs
- Establish Ownership Structure
- Incorporate startup
- Establish ownership structure between founders, employees, and investors
- Establish Governance
- Board structure
- Board representation from the corporation
- Retain Employees
- Stock options
- Benefits
- Determine if any corporate employees will move to the startup
|
Issues:
- Establish IP Rights
- Determine ownership of IP developed during the incubation between corporation and incubated team members
- Determine ownership of derivative IP to be developed after outside funding is received
- Identify Funding Sources
- Institutional VCs
- Corporate VCs (?)
- Other corporations, as strategic investors (?)
- Establish Ownership Structure
- Incorporate startup
- Establish ownership structure between founders, employees, and new outside investors
- Establish Governance
- Board structure
- Board representation from the corporate incubator (?)
- Retain Employees
- Stock options
- Benefits
|
Benefits:
- Easier to transfer BU employees to startup
- Faster product development
- The corporation gains experience with startup acquisitions
|
Benefits:
- Easier to retain existing employees
- Easier to attract new employees
- The corporation gains experience with startup acquisitions and the startup ecosystem
|
Benefits:
- Easier to retain existing employees
- Easier to attract new employees
- Faster product development
- The corporation gains expertise incubating & spinning out startups
- The corporation gains credibility with startups
|
Benefits:
- Improved existing and new employee retention
- Easier to attract new employees
- Faster product development
- The corporation gains credibility and experience with the startup ecosystem
|
Table 2: Issues and benefits for each selected post-incubation option
With the post I tried to provide an in-depth perspective on corporate incubators and accelerators. At a time when everything related to startups appears easy, particularly here in Silicon Valley, incubators and accelerators are not recommended for every corporation. Incubators are appropriate for exploring open-ended and ill-defined ideas that are associated with long-term innovation timelines and ROI. However, they can play an important role in the set of options that enable a corporation to achieve its innovation goals, access entrepreneurial talent and even develop its own intrapreneurs. For this reason I offered the criteria and guidelines corporation should use when establishing an incubator or an accelerator. I proposed four incubator models and a process that can help corporations increase the value and success they derive from their incubators or accelerators. The biggest challenge is how to deal with successfully incubated projects since that is the time when the corporate processes and bureaucracy will need to full engage. To help with this issue I provided a methodology on what the corporation could do with such projects. All these points to the fact that working with incubators and accelerators requires that a corporation has a long-term horizon and strong commitment in order to achieve the significant innovation ROI that is possible.
Source: The Corporate Innovation Blog by Evangelos Simoudis is a seasoned venture investor and senior advisor to global corporations. His investing career started 15 years ago at Apax Partners and continued with Trident Capital. Today Evangelos is co-founder and Managing Director at Synapse Partners
