Corporate startup. How is it different from the typical ones?

By corporate startups (aka internal startups) they mean ventures, spun off a corporation as completely independent organizations, or else, ventures,  established from scratch but funded mostly by a corporation and being led by the corporation's former employees . Corporate startups are  sporadically mentioned in the startup literature and the blogosphere but there is a lack of materials focused on the corporate venturing, at least from a founder's perspective.

Not pretending to shed light on the topic in this blog and to shoot "10 do's and dont's for corporate startups" I'll instead try to create 10 questions one may be willing to answer when considering seeking funding from the company she's working for.

Before moving to the questions a short preamble. Maybe my understanding is not correct but I imply by corporate startup a company with two satisfied requirements:

1. It's a new and independent (to which extent is another question) company that isn't operated by the original enterprise. Otherwise, it's not a startup but just another internal project.
2. It's led by a group of former corporate employees.  Otherwise, it's just another venture that the corporation decided to invest to and the peculiarity of the topic vanishes when nothing links the founders to the VC.

I want not to mix the corporate startup with intrapreneurship because, again, the latter lives inside the company even if its management has an additional room for maneuver.

Now the questions. I hope that VC and entrepreneur gurus will come with their ideas and knowledge and help me find answers to the questions. Beneath each question I'll give a few hypothesis that sound logical for me to check but they're also the targets for your refutation.

1. What benefits does the corporation get from the venture or why the idea of its former employee should prevail over somebody else's who comes from outside?
   
   1. Trusted team. The "founders" are easily trackable and checkable.
   2. Providing some safety conditions for the founders it can get better conditions.
   3. Its VC division is very specialized and may not be attractive for "external" founders.
2. What benefits do the founders get from the company as their investing source?
   1. Easier to sell the idea (including the team and the track of records).
   2. Easier to roll out the product through the company's resources (customer base, brand, relationships, etc).
   3. "Dispersal field" in case of failure of the venture in a form of saved conditions in the company.
3. What disadvantages does the company get investing into an idea of its employees?
   
   1. Didn't come up with anything in case when it decides to invest.
4. What disadvantages do the founders get from the company as their investing source vs. independent investors?
   1. Potentially worse conditions.
   2. Lock out of the company's competitors as potential partners.
   3. Lock out of the company's competitor's customers.
5. What target does the company pursue from the venture (which defines the venture's degree of freedom for the product) and what is the exit strategy?
   
   1. Building disruptive model (product, service, etc) to later roll it out through the corporation (in this case the model is quite predefined and few variations in the plan are possible).
   2. Effective cash-out (probably not a first priority option for a corporate VC?) But in this case it allows to change and adjust the business model on the way.
6. How the venture is managed (operations and strategy)?
   1. Totally independent from the corporation but with its presence in the board.
   2. As a daughter enterprise (I excluded this case in the above but still want to hear how realistic it is).
7. When is good timing for the founders for asking money from the enterprise? Is there any difference in the approaches from the typical startups?
   1. The more model, prototype, product is ready the better - less dilution to expect.
   2. It's a "family" business and it doesn't really matter when to ask money - as soon as the idea can win the hearts and brains of the enterprise the founders should pitch it.
8. Should there be other VC and if yes on which phases?
   1. No. The corporate locks it out completely for others to join.
   2. Yes. The founders should be advocating for retaining such an option.
9. What other conditions should founders be aware of that are relevant only for internal ventures (both positive and negative)?
10. What other questions I forgot to ask?

What do you think?

Update: First Findings

Technorati tags: startup, corporate venture, internal startup

Comments

[Richard A D Jones]

What benefits does the corporation get from the venture or why the idea of its former employee should prevail over somebody else's who comes from outside?

RJ They don't do this deliberately. Corporate ventures typically have no real upside for outsiders to become interested in them. The company want's all the serious upside so rarely thinks to give 10% to an industry expert CEO.

What benefits do the founders get from the company as their investing source?

RJ It is an easy source of money compared to leaving and trying to source angel/VC funding. You don't tend to find risk lovers in corporate environments so the company's soft money is often as entrepreneurial as they will get.

Easier to roll out the product through the company's resources (customer base, brand, relationships, etc).

RJ In theory yes. In practice - it can be just as difficult as going it alone because although you might consider yourself independent - the venture has to meet all the internal legal, branding, quality etc. standards of the parent. This slows things down and can mean a venture misses the market window.

What disadvantages does the company get investing into an idea of its employees?

RJ They can lose good resources. The result is frequently that you don't get the best in the new ventures - just the 'available'.

What disadvantages do the founders get from the company as their investing source vs. independent investors?

RJ Massive bureaucracy. Inability to understand or care about the new venture. Delay in decision making.

What target does the company pursue from the venture (which defines the venture's degree of freedom for the product) and what is the exit strategy?

RJ One company defined that ventures must be $100 million revenue in three years. There is no exit strategy normally beyond helping the bottom line. Exit is far less explicit than for an independent company.

How the venture is managed (operations and strategy)?

Frequently with the worst of both worlds. A lack of independence from the partent company and constraints on action making the light fast moving venture act like it is stuck in treacle.

Should there be other VC and if yes on which phases?

RJ Very hard for VCs to invest as they cannot be sure there will be an exit for them unless the venture is completely independent and the parent company is sufficiently diluted. JV's are more probable.

What other conditions should founders be aware of that are relevant only for internal ventures (both positive and negative)?

RJ The founders will earn significantly less than in pure startups but can have the chance to do something that the harsher VC world might not allow them.

What other questions I forgot to ask?

RJ Hundreds ;) No actually this is a good set of questions Roman.

Regards
Richard

[Josh King]

There are a lot of differences between a "true" start-up and what you're describing. From the company's perspective, taking a minority position in a business operated by former employees will be done in almost all cases only for strategic reasons (as opposed to VCs or PE who are looking for return). From the entrepreneur's perspective, this probably means less oversight and less demand for quick financial results but at a potentially heavy cost in terms of strategic flexibility. In addition, most such founders overestimate the amount of benchmarking/infrastructure support they will get from the funding company.