Founders with one foot in and one foot out
This is part 2 in a series about how & why internal startups struggle inside corporates and corporate innovation groups. The posts are inspired by my consulting engagements, and the problems I’ve witnessed first hand.
Part 1 discussed how a corporate can turn the notional benefits conferred by their brand’s power into a huge problem for their internal startups. And, to be fair, it is a tricky issue which is hard to avoid or tackle pre-emptively.
In contrast, today’s issue is less subtle and more predictable, but just as damaging. And it continues the theme of control (both actual and perceived) as an over-arching source of drag on internal startups’ development & success.
Internal startups often suffer contractual, practical, cultural and emotional ambiguity regarding which company the founding team and employees actually work for. This has so many apparently small details, which then ripple out to a cumulatively big impact. Just a few examples to get started:
Is their employment contract with the mothership or the startup? Who does their payroll? Are their emails @mothership.com or @startup.com? Are their laptops locked down by mothership IT? Who decides if/when they can WFH? Can they do their own off-sites? Are some employees (or even the founders!) working part-time for the mothership and part-time for the startup? Do the founders have freedom to hire and fire? Can the mothership ‘impose’ staff from elsewhere in the org?
As long as the founding team and employees are (or perceive they are) in some way employed and controlled by the mothership, they are disincentivized to focus fully on the startup’s success, and it’s hard to develop their own company culture.
I’ve sometimes found cultural differences between different early-stage startups overstated. Of course there are differences, and there are certainly some distinctive early-stage companies, but I think it’s possible to become excessively fixated on developing a “unique” company culture early on. There just aren’t that many highly differentiated company cultures to inculcate among a group of, say, fewer than 20 people.
However, there is a chasm between the culture of almost any early-stage startup and corporates[^1]. Working in an early-stage startup feels nothing like working in a large company. This is manifested in superficial-but-obvious ways: office décor, facilities and office-wear are clichéd examples. But there are fundamental differences in how the companies operate. For example, how is risk perceived and dealt with? How long is the decision-to-action cycle or OODA loop? How much time do employees spend each week on activities which they believe are unimportant to the company’s success? How quickly can the company manoeuvre when confronted with strategic threats? How much does hierarchy matter? How much time is spent on customer development? To what extent can a mediocre or under-performing employee stay in position without action being taken? (or even noticed?!) It’s not that startup or corporate is “better” or “worse”, but they are undeniably different.
When founders & employees have one foot in and one foot out, the startup is unable to develop its own company culture, and it will struggle to actualise the operational benefits which startups tend to enjoy. These benefits are essential, not nice-to-haves.
A further problem is the degree to which the stakes are lowered for the founding team and the employees. If they still have one foot inside the mothership then they’re never fully committed. Employees may feel they can be easily swapped out at their own or the mothership’s behest. This has an obvious impact on the commitment they’re prepared to make, the loyalty they feel to the founding team’s vision, and the enthusiasm they’re likely to bring to their day-to-day work. Even the founders may perceive a guaranteed “soft landing” which materially weakens the lengths to which they’re prepared to go in order to succeed.
Founders and employees are incorrectly incentivised
In bootstrapped and early-stage venture-backed startups, the founding team are typically the majority shareholders. They are powerfully incentivised to work hard, take risks, and often pay themselves a below-market salary. They own the outcome and believe a big pay-day will one day be theirs. The founding team’s personal success, prestige, and financial future is tied to their startup’s performance. Moreover, their employees are also incentivised via an option scheme.
But those incentives are often missing or watered-down in corporate startups. There, the founding team may have little or no ownership of the startup. Any share-based compensation (if they have it at all) is more likely to come in the form of the mothership’s shares. The connection between the founding team’s efforts and their future financial success is weak or severed. There is little they or their team can do to materially affect the mothership’s share-price, not least because the performance of the mothership’s core business(es) are likely to be primary determinants of that share-price, at least in the short/medium term. Even if they have options or shares in the startup (rather than the mothership), there may be no plausible route to a liquidity event if the mothership plans to retain majority ownership.
Moreover, the founding team may be inadequately incentivised if their salaries remain at their comfortable pre-startup levels, and disconnected from the startup’s performance for too long. In these situations, the founding team effectively trade away the possibility of a future liquidity event in exchange for a comfortable living today. Their total remuneration — including bonuses and perks — will be higher (and potentially much higher) than the salary they’d pay themselves if the startup was venture-backed. To be clear, this is not a call for corporate employees to necessarily or immediately take a pay-cut the minute they cross over to an internal startup. But the founders, employees and corporate innovation sponsors should carefully consider how people are incentivised inside these internal startups, and how incorrect incentives and ambiguous power-structures will lead to sub-optimal results or failure.
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1 Jeff Bezos on “Day 1” is an effective reminder.https://www.aboutamazon.com/news/company-news/2016-letter-to-shareholders
