Why do internal startups often struggle in large corporates? Anti-patterns in corporate innovation groups and internal startups. Part 1.

Internal startups face many challenges

I’ve seen enough underperforming companies and products that it’s hard to avoid identifying common anti-patterns. But internal startups[^1] and corporate innovation groups are a special category. They face structural and organisational challenges — common to corporate innovation — which can be exceptionally difficult to avoid or overcome. Worse, it’s rare to witness one of these issues in isolation. Too many internal startups are saddled with several of these problems simultaneously.

This is the first in a series of posts about those challenges. This can’t and won’t be an exhaustive list. Rather, I’ll focus on the ones I’ve seen myself through my work. First up: how one of the most powerful benefits a corporate could bestow on an internal startup can actually turn into a huge problem.

The curse of the mothership’s brand advantage

VCs often look for an “unfair advantage” when considering an investment. They search for factors which help the company play on an uneven playing field. What does the company have which would enable them to acquire customers, or compete more effectively with other companies in the space? How will they defeat bigger rivals & incumbents, or companies offering substitute solutions? If they’re going into a fight, how will they fix it in their favour from the start?

A powerful unfair advantage which motherships can, in theory, offer to their internal startups is brand. The startup launches out of the gate not as an unknown name with no points of external validation, but rather a new proposition supported and validated by a widely recognised name brand with positive associations.
It’s not hard to see how this would be advantageous in many situations. In some cases, it can be spectacularly helpful. For example, in highly regulated industries or verticals (e.g. banking, payments) where many potential customers may hesitate to trust an unknown company.

The problem is the mothership rightly tends to guard their brand quite carefully. It tries to avoid negative publicity and seeks to publicly align itself only with other entities and initiatives which are likely to enhance its image.

As ever, it’s worth keeping incentives in mind here: the employees responsible (directly or indirectly) for the guarding the brand may gain nothing at all from their brand’s association with the mothership’s startup. The potential benefits — at least in the short to medium term — may accrue entirely in one direction i.e. to the startup.

On a practical level, this has many implications for how the mothership and the startup are likely to work together, even on a day-to-day basis. Those mothership employees may perceive no opportunity for themselves personally nor the mothership’s brand by publicly aligning with the startup. But they will see plenty of risk.

This can drive a regulator : regulatee relationship, in which the mothership’s employees involve themselves in all kinds of startup activities with the objective of protecting the mothership from potential damage further down the road. A few examples:

• Advising on the startup’s logo, name, or website design;
• Pushing the startup to stick to a house-style for all customer-facing copy;
• Insisting the startup abides by identical levels of gold-plated regulatory compliance[^2] as the mothership (e.g. around data protection, privacy etc);
• Insisting the startup abides by identical levels of expensive CSR & environmental standards as the mothership (e.g. net zero, recycling, donating employee days to charitable causes etc);
• Involving its in-house lawyers in the negotiation of contracts and legal questions;
• Forcing the startup to use only the mothership’s approved third-party vendors and suppliers;
• Impeding its own employees from promoting the startup’s proposition.

These are just a few examples. The reality is that parts of the mothership may feel strongly incentivised to interfere in ways which slow down, constrain or damage the startup. This interference may be well-intentioned (from the mothership’s perspective) but that doesn’t make it any less damaging for the startup. A startup CEO who should be hiring, building or selling, is instead locked in interminable three-way fights between the mothership’s guardians, the startup’s internal corporate sponsors, and the startup itself.

The presence of the internal sponsors here is worth noting. If they are unabashedly on the ‘side’ of the startup, they will be untrusted by the mothership’s guardians, and treated as such. If they take the mothership’s ‘side’ then the startup is damaged and the founder will no longer regard them as allies. If they try to position themselves as a neutral third party, then they’re perpetually caught in the middle, forging compromises which rarely make anyone happy. The consequence is that it’s difficult for the startup to ‘win’.

And so, instead of benefiting from the association with a bigger and trusted brand, the startup is perpetually delayed, restricted and coerced. Instead of using the mothership’s brand as a combination of battering ram & shield — to compete with other vendors and dealing with real third-party threats — the startup expends its energy fighting the mothership, and navigating internal political intrigues. This is why I call it the curse of the mothership’s brand advantage.

[^1]: My terminology

Corporate innovation group. I’m referring to teams with expressly assigned responsibility for overseeing internal startups or innovation initiatives. Sometimes their members personally lead specific initiatives themselves. Often, they take an oversight, managerial or quasi-Board role over internal startups and initiatives.

Internal startup. A substantial new proposition or service which enjoys ‘special’ or quasi-independent status inside the organisation. Often (but not always) its stakeholders are keen to describe it as “a startup inside a big company”. Sometimes these startups are registered as Limited companies - but the mothership retains majority or full ownership. Sometimes they are expressly not referred to as startups, but come under an umbrella of “innovation initiatives” or similar. For the sake of concision, I will elide differences between “internal startups” and “innovation initiatives” because the challenges are shared, and the specific differences are often semantic or context-dependent.

Mothership. The “big corp”. The source of the funding for the internal startup and the corporate innovation group.

Internal sponsors. These are senior people from the mothership who actively support internal startups through a mixture of budget power and internal influence. Internal sponsors can be part of the corporate innovation group or sit outside it. Internal sponsors may have a role in determining budget for specific internal startups and initiatives, or simply funnel money into the corporate innovation group - which then decides who gets what.

[^2]: In regulated industries, this may be difficult or impossible to avoid regardless. But in less regulated or unregulated industries, it can have a dreadful impact measurable in direct costs and delay, but also in product development which is needlessly blocked by application of the precautionary principle or generally excessive caution around regulatory issues.