The 5 Corporate Entrepreneurship Challenges

Over the last couple of years we have seen an increasing interest among corporate companies to work with startups. There has been a rise in corporate accelerators, where big corporations are sponsoring accelerator programs that attract startups in their field of interest.

To me this development makes completely sense. I really believe that corporate companies can actually boost their long-term competitiveness by working with startups. I am also confident that this model can be extremely cost efficient and even when it comes to non-core innovations be 6 to 10 times more efficient than investing in an internal R&D or innovation department.
However, there is an upper limit to everything. Even though the corporate accelerator model seems to have great potential, the actual results are still yet to be seen. I haven’t heard of a corporate company, which by running an accelerator program struck gold in the form of a startup that became part of the corporate business and boosted revenue with high numbers.
And why is that? I think there are at least 5 major reasons to why corporate companies are not getting the expected results.

Deal flow is everything. Running a successful accelerator is a lot about numbers. From venture cases we know that only one out of 1,000 succeed. In order to run a successful accelerator you therefore need thousands of applicants to be able to select a small number of qualified participants and out of those only a few will succeed. It is about gaining market share on the scene of talented entrepreneurs in a specific technology field. And market shares below 10-20 percent will not bring you any success. Corporate companies seem to be missing this point by thinking that entrepreneurs will line up in numbers as long as the companies participate.

Strategic fit is rare. When corporate companies are working with startups they have an idea of the type of innovation they are looking for i.e. the type of business model that matches their business strategy. Finding a startup with that exactly fit is rare – it has to be developed. So my advice is that you should never look for the perfect match, but for the innovation with the right potential that can be developed over time. This is a process that demands a lot of work both from the startups and the corporate Company.

No long term perspective. Corporate companies usually fund an accelerator for three years and then leave the scene if the results do not match their expectations. However, it takes time to build successful accelerators and to build trust and relations in the startup world. Building a successful venture takes 8 to 10 years and the same applies to accelerators. Corporate companies rarely have this long-term perspective but instead they are looking for short-term success.

Spending too much or too little. Corporate companies are often willing to invest quite a bit in startups and accelerators. However, money does not cut it alone. What startups need is not just money but the insight and market access that the companies can provide. Especially in the initial stage with rapid testing and assumptions it’s essential that startups have easy and affordable access to skills and the market. Unfortunately corporate companies in many cases rather provide money than time and resources.

Uclear KPI’s. A lot of corporate companies do not have a clear picture of what they want to achieve by engaging with startups and how they will measure success. This leads to a lot of misunderstandings and a hard time evaluating the investment in the startup engagement compared to other investments.

In Accelerace, we have taken a different approach to corporate entrepreneurship, in order to deal with the above-mentioned challenges.

Right now, we are collaborating with an energy utility company on a project called “Next Step Challenge”. They are looking for new innovation in the smart energy area and are investing 400,000 Euro a year, attracting 10 startups to Esbjerg a year with an average team size of 3-4 peeople. In other words the energy company is getting 30 to 40 development resources for 400.000 Euros. The cost of recruiting 30-40 people to an internal innovation department is probably 3 to 4 mill Euro in salary alone. If we expect that the likelihood of these startups succeeding is the same as the internal innovation department, the efficiency is nearly 10 times as high.

Moreover, pairing up with an accelerator like Accelerace who have many years of experience in working with startups, makes very good sense. Accelerace is thus providing skills, knowledge and resources while the utility company is providing free market access to272,000 households and office space. Together with investments and prize-money the startups should have a very good chance to succeed. Maybe the likelihood of success is not the same for startups as for the internal innovation department, but it leaves plenty of room for many experiments and thereby building portfolios of innovation opportunities.

In conclusion, my point is that corporate companies can definitely play a role in the startup scene, however we still need to figure out the various and right engagement models that will benefit both the startups and the larger companies. My hope is that we are getting closer to this model with Next Step Challenge…

How do we test for great investors?

Back in June 2014 we took time out of the program at Accelerace Investor Day to debate how the government can help strengthen entrepreneurship in Denmark. One of the favorite subjects in these types of debates is about capital. Should government play a role in providing capital to start-ups? How much should government invest? And who should invest government money?

Investments go where the returns are
If we start by taking a step back, the discussion usually starts with an example of a strong company that couldn’t raise capital in Denmark. This leads to the opinion that there isn’t sufficient money to finance companies with great ideas. However, if you believe in free markets, one must assume that money go where they get the greatest return. This means that if it’s possible to make a return on start-up companies that is larger than when investing in property, selling shares on the stock exchange or the like, there should be plenty of capital. But the problem today may be that the return when investing in startups does not meet our expectations and is not good enough compared to alternative investment opportunities.
The more interesting question is therefore: Why is it still such a bad deal to invest in startups?

A learning curve for investing
One explanation could very likely be that we investors are not skilled enough at spotting, attracting and developing the right companies that pay the right return. If we look at entrepreneurship, we know today that it takes a long time to become an accomplished entrepreneur. At least 10,000 hours of quality training and typically several attempts before you are an accomplished entrepreneur with a higher probability of success.
Maybe it’s exactly the same with investors? Maybe it requires a very long time and many attempts to become a good investor? Unfortunately, there is today no guarantee that you learn to make good investments, just because you’ve had many attempts. Because there is such a long distance between cause (when you make an investment) and effect (when that investment either pays back or doesn’t) it’s hard to identify key metrics, associate them to the individual investor and course correct in small iterations.

Lean Investing
So how do we know if an investor is on the right learning track meaning that he or she may eventually become a great investor? In the start-up world we are inspired by the Lean Startup methodology where the purpose is to find a way to increase the likelihood of success for a given business idea or technology. Or at least a method that’s cheaper and more efficient, which can help us figure out if we are working on a business that never will be a success.  Maybe the counterpart to Lean Startup is Lean Investing? How can we make cheaper and faster experiments with investing that provides a picture of whether an investor is on the right learning track, have the right talents and the right patience to become a skilled investor, who will eventually generate a return? And how do we measure it, so we don’t just have to sit and wait to see if there will be a return or not. I think THAT is an interesting discussion.

In regards to the government’s role, their role could then be to:
• Help meet the costs to train and develop the right investors, which could ultimately generate a return.
• Help develop ways to measure and design experiments that help us discover if an investor is on the right learning track.
• Contribute to developing a methodology for Lean Investing

We know today that the number of serial entrepreneurs within an ecosystem is of great importance to the number of emerging growth companies, we create. But I also believe that the number of skilled investors have an impact on how many new growth businesses we create. Therefore I believe it matters how fast and efficient, we develop a solid number of great investors.

But to stay within the Lean Startup world: this is an assumption that we would need to test.

Stop investing in companies!

Ask any investor in the world what they look for when investing and I guarantee they’ll say team, team and team. The mantra when investing in early stage companies has always been that “we rather invest in a great team with a bad idea, than a bad team with a great idea”. At Accelerace we totally agree by the way – but why do we keep investing in companies when what we really want is to invest in the entrepreneurs?

In early stage start-ups there is no difference between the company and the founder team. The founder team is the company. As the company grows it starts to build culture, processes, best practice, etc. and in this development the company becomes less dependent on the founder, and can even start making changes in senior management. This point is usually reached when the scalable business model has been found and at that point taking a risk on the company makes sense, but – in my mind – not before.

Most accelerators today invest small stakes (15,000-30,000 US dollars) in their portfolio of early stage companies alongside the help they provide the team during the accelerator program. In exchange they require an ownership share of the company (6-15%). This model means running a risk on the company (disclosure: Accelerace has a different model, but also focused on the company http://accelerace.dk/accelerator/the-deal/).

Shifting to an entrepreneur based investment model
Accelerators should be about learning – about designing a process that maximizes the skill set of the founder team. The end result of any accelerator is then two things; 1) an increase in the company’s chance of success, and 2) entrepreneurs with better skills making them more likely to succeed. Better skills normally translate into higher life-long income, which is why people are willing to pay tuition fees at universities and society invests so heavily in education. If accelerators actually do develop the skills of the individuals in the founder team we would expect a higher life-long income no matter whether they succeed with their current venture or not. Following this logic, investments should be made in the individual entrepreneur and not their company.
There are plenty of models for investing in individuals. One way is to provide personal loans with an upside on the expected life income – an income which is expected to be higher due to better learning. This could be a loan with an interest rate of 10 percent as long as the company is alive and a decreased interest rate if the company does not develop as expected. The decreased interest rate should be calculated as the difference between expected income and actual income.

A win-win situation

If an accelerator has truly taught the entrepreneur something, this person will have a higher life income which translates into a bigger return for the accelerator. If the accelerator fails the entrepreneur will have a lower income and therefore pay a lower interest – if anything at all. This model of funding learning is widely used in the educational sector.
Seen from the perspective of the entrepreneur this model makes a lot of sense. The entrepreneur gets to keep a bigger control of his company and therefore a bigger incentive to succeed. He also reserves equity stakes for later investors avoiding too big a dilution at an early stage and we establish a very close relationship between what should be the focus of an accelerator and the investments done. Because after all – If you do not believe that an accelerator can increase your skills why participate and why hand over part of the company?

First rule of entrepreneurship: Don’t raise money!

MoneyI recently met up with a start-up that just closed their first VC investment and who were naturally really excited.

My initial comment threw them a bit off.

I said: “Congratulations – you’ve just decreased your chances of success to about 10 percent”.

I am sure this was not the answer they were hoping for, but if you look at the statistics this is nevertheless the truth.

When you sign up with an investor you have to remember that investors expect to have one or two really big successes in an entire fund.
The remaining investments will – at best – pay back the investment or go bankrupt.

The sad story is that in Europe around 45 percent of all capital in a venture fund ends up in companies not paying a dime back to the investors.  And when you look at it this way, you could say that raising money basically increases your venture’s risk of failing.

There is a very logical explanation to this.

Getting money onboard usually means that you are expected to do more and faster, so you start hiring new people which increases your burn rate significantly. But if your results in terms of customers and revenue do not follow your expectations, it will take time to slow down and you run out of cash with little chance to get to a lower burn rate. In most cases your investor will also be pressuring you to maintain the burn rate and just perform better.

There is a tendency to focus a lot on raising money and getting investments onboard. But remember that money is not the goal in itself – it is the means to an end, whether that is developing your product, increasing marketing, sales activities, etc. There are other ways to get all of those things.

Before a startup gets an investment they do a lot of things: Assemble a founders team, build a first version of the product, get the first customers onboard, etc. And most companies can get to the next level by doing the same – get commitments from people who think the company or product is exciting and wants to add a bit of resources, first customers willing to pay upfront, etc. And these commitments are usually of much higher value than money in itself because they drive learning, insight and understanding.

I am not saying that you should never go for the money – I am only saying that you should think of your startup as series of small experiments that you are testing. Experiments that will either be successful or not and experiments that you can abandon if they turn out to be less promising than expected. Experiments that can be abandoned fast which will get you back to a lower burn rate and get you ready for the next set of experiments.

Do not bet all of your money on one strategy but think of your startup as series of options that you can pursue with little knowledge as to which of them will be the right one. And reserve cash for the next experiment and the next learning cycle.

In my mind startups do not fail due to lack of cash but lack of learning and lack of speed in learning. Not all your experiments will be successful but if they increase your learning and understanding on what to do next, they have increased the value of your company because risk has been reduced.

I know it is hard to convince an investor that you would like one million and that you will spend it on designing experiments and obtaining learning in order to deliver the promised results. On the other hand it is so much more credible to talk about your assumptions, how you will test them and what you will do next if the results are not as expected. The smart investors will get that.

And always remember: In Europe only 17 percent of all fast growing companies are based on venture capital.

Why you should take nonsense seriously

Leonardo Da Vinci once said that “simplicity is the ultimate sophistication”.simplicity-is-the-ultimate-sophistication2

This is one of my favorite quotes.

Maybe there is a simple formula for building a successful venture. In my opinion the chances of succeeding as a startup is a function of four things 1) the number of input that you are able to obtain in your search for a scalable business model, 2) the quality of these input,
3) your team’s ability to transform input into actions and 4) the size of the opportunity that you are working on – meaning the quality of your idea and the size of the market you are trying to address:

P(success) = ∫(∑Input*Qinput)*∆transform input to action
                                             Size of opportunity

Entrepreneurship is about handling uncertainty and turning uncertainty into real proofs in terms of people committing resources into your venture – either by being willing to try out your service or product, by being willing to commit resources to develop your solution further or by investing money in your venture.

I believe you should focus on the top line of the formula. Focus on the top line will slowly but securely shape the size of your opportunity. The first part you should focus on is simply to get a lot of input – so start talking to people and ask them about their opinion. No matter if you think what they’re saying is nonsense. If 10 people are saying the same “nonsense” – there may be some truth to this.

A simple way to work is to make your own input index.

The first part of your input index is to make a list of how many people you have talked to about your venture, how many people who have tried your solution etc.

The second part is rating the quality of all input. Make a rating system e.g. give 5 to people who have tried your solution and gave you feedback and 0,5 to people with whom you have only talked to about your solution, and who gave you very little feedback.  You can do your own rating on how you see different kind of input as validation or not. But be careful – always rate input where people have committed resources higher than people who were just willing to spend an hour of their time. Then simply multiply each of the interaction with the quality of that interaction based on your own rating. Then sum up the whole thing. If your input index is below 200 you still have some road to cover.

Start-ups do not die due to lack of capital they die due to lack of speed in obtaining input and turning them into action.

Therefore: do not waste a day without getting external input.

Entrepreneurial practice makes perfect

You will have to bear with me – I love sports and I am going to use a lot of sports metaphors in trying to explain my philosophy around Startblokentrepreneurship.

For more than 50 years, sports professionals have been working systematically to spot talent, develop talent and financially support talent in order to create world champions. From sports we know it takes a bit of talent and a lot of practice to become a star or even be in top ten. We also know that the main driver of success is the amount and the quality of practice.

We would never expect anyone to win an Olympic medal without a lot practice. In sports there is a rule of thumb saying that you have to practice at least 10.000 hours to become good and have chance to succeed. 10.000 hours of systematic practice. 10.000 hours equals approximately five years full time. What if entrepreneurship is exactly the same? What if the dominant driver for success is the amount and the quality of practice. This would raise a couple of questions. How much should entrepreneurs practice, what are the skills they have to develop and how could those skills be practiced most efficiently?

We do not today know the exact answers to those questions but finding them could fundamentally change the way we look at entrepreneurship and the way we build businesses. When for example a football team loses a match and you ask the coach what he or she intend to do, the typical answer is that we have to practice some more. I have never heard an entrepreneur losing a customer, missing a milestone or getting a rejection on an investment saying I have to go back and practice some more. I know a lot are doing it but practice and learning is not part of the mindset of many entrepreneurs.

I do not believe that you practice entrepreneurship in a classroom – I believe you practice it by running a business, developing your product, getting customers on board etc. But I also believe that practice can be more or less systematic and that can be of great influence on whether you succeed or not. Let us for a moment look at how you practice in sports.

Usually practice consists of four things: physical training, technical training, tactical training and then a lot of practice matches where you try to apply your physical, technical and tactical skills to real situation. The focus is constantly on how you build automatics into your actions at competitions or in the game and therefore elite athletes are extremely focused on details. If we apply the analogy to entrepreneurship, the physical training in sports equals your cash and your cost in your venture. What you want to focus on is how long you can run because you know that you have to learn and because you know you have to iterate your business and you are going to lose more in the beginning than you win. The technical training in entrepreneurship is in my mind four things:

  • Your ability to formulate actionable assumptions and the precision of your assumptions
  • Your ability to prioritize these assumptions so you focus on the ones that drive value
  • Your ability to design experiments that can give you data on whether your assumptions are right or wrong
  • Your ability to interpret the data you get from experiments and the input that you get and turn that into new actions and new assumptions

The tactical part is who you experiment with and interact with in which order, how you design equity, who you bring on as partners etc. Then you run a lot of practice matches, interacting with potential customers, partners, investors etc. Like in sport there is a lot repetition. I strongly believe that entrepreneurship can be learned but I also believe that it takes time – the 10.000 hours. I strongly believe that the way entrepreneurship is practiced can be even more systematic. My ambition is to figure out exactly how to practice entrepreneurship, what to practice and how to do it efficiently and I will use this blog to explore this idea and as a call for your insight…