In January, General Motors invested $500 million in ride-sharing company Lyft in order to develop self-driving cars. Last month, UPS led a $28 million funding round in Deliv, a startup that turns anyone with a car into a delivery person. In both cases, established companies are joining forces with their disruptors after realizing that technology is changing their worlds.
But companies like these might have preferred to have come up with those innovations themselves, rather than partner with the startups that got there first.
Most people think giant corporations and entrepreneurs operate at opposite ends of the spectrum, but that’s not entirely true. Big businesses can generate major innovations–usually by building new companies that live on their own yet still bring financial benefits to the mature company. In fact, many established companies need to build their own startups in order to survive.
Creating a startup isn’t as difficult as some executives might imagine. I’ve had the great fortune of doing this several times throughout my career.
The first startup I launched within a larger company was at Macromedia (now a part of Adobe Systems), where I helped head up the team that developed Shockwave.com (which was eventually sold to Viacom). At Creative Artists Agency (CAA), I’ve cofounded several companies, including Funny or Die and WhoSay. Both of those businesses exist because CAA plumbed its resources and relationships in the entertainment and sports industries in order to start ventures that could thrive outside of it.
In other words, those businesses wouldn’t have worked had they remained inside CAA’s corporate structure. They needed the freedom and agility that come with being a startup. Here are three lessons my experience building new businesses inside mature companies has taught me.
Any new business an established corporation sets up has to be its own entity–with its own office and infrastructure–and it needs to stand on its own two feet as quickly as possible. That might cost more than keeping it in-house, but the investment tends to pay off in short order.
Built inside CAA, WhoSay, which connects celebrities with their fans, could’ve easily wound up being just another social media agency. But with tech entrepreneur Steve Ellis, we were able to create a company that had a bigger vision. Without a high degree of independence from the get-go–and the responsibility that comes with it–WhoSay might never have been able to realize that vision.
Your new executives need to feel a sense of ownership and be invested in the new company’s success. But at the same time, the parent company, which provides crucial resources, needs to have a meaningful stake. That’s no easy balancing act, but it’s essential to get right. The way I’ve tried to achieve it is by putting both parties in the same position in terms of class of stock and dilution. That way, everyone feels the same sense of ownership over wins and setbacks alike.
And yes, those evenly distributed incentives extend to the exit, too. At CAA, I’ve tried to think about our new companies the way a venture capitalist might. We never expect the startup to eventually be folded into the larger business, and we don’t dictate the terms of the exit. But because of the alignment across management teams, everyone profits evenly when there is a successful exit.
Typically the initial idea and some amount of capital comes from the parent company in ventures like these. But if you can’t get a third party involved in some way or other, scrap the idea. Whether that’s an investor or some other kind of partner, that new player not only assumes some of the financial burden, but also validates the idea behind the startup and lends it credibility.
Greylock Partners is an important backer of WhoSay. Sequoia Capital, among others, is a partner in Funny or Die. When we first talked to Will Ferrell and Adam McKay about the idea for Funny or Die, it helped to have our third-party investor explain that there would be no money for production. It also helped distinguish the site as a real business, rather than just a vanity project or an ill-conceived vertical. And because CAA had Sequoia’s stamp of approval, the entertainment and investing communities took the new business more seriously than they might otherwise have.
These lessons don’t make setting up a new business at a mature company easy–launching a startup, under any circumstances, never is. The stars have to align just about perfectly. The idea has to be just right, and so does the timing. You also have to find the right talent to manage the new entity.
But in an age of disruption, this approach can be a great way for executives at companies that may not be as nimble as their disruptors to stay ahead of the curve–or at least not fall behind it. It can help push a corporation outside its comfort zone. After all, the most meaningful innovations seldom happen within it.
Michael Yanover is the head of business development at Creative Artists Agency (CAA), where he oversees its early-stage venture fund, CAA Ventures, and builds digital businesses on behalf of the agency and its clients.