Startups vs Corporations, and what happens in between

Why founders of startups get replaced by the board when the startup starts to grow fast? Why many startups fail to integrate into the parent company after the acquisition? And why big corporations struggle to launch a successful startup from within?

Concept of RPV

RPV stands for Resources, Processes and Valuves.

Resources

At the initial stage of a company, all you need are good and reliable people that can get the job done i.e resources. At this stage resources are crucial, if you have a web technology startup and happen to find a great coder and UX developer then you are in luck. On the other hand, if you happen to hire the wrong developer, you will have a tough time launching that MVP (minimum-viable-product) of yours. Similarly, if your lead developer leaves at this stage to a competitor startup, it can greatly affect your product and even your startup as a whole. But this is also the stage where it’s easiest to solve your company’s problems, because most of the problems will be related to resources and usually they can be settled by hiring a new guy or firing an existing employee.

Processes

When your startup is at the stage where it has a product or service that is selling like hot cakes, and you start hiring a lot more people to grow both your company and its revenue, that’s where the processes come in. That’s because you want your operations, customer service, support, billing etc to be run efficiently. That’s when you start to setup company wide processes, different processes for different teams and departments, KPIs (key-performance-indicators), SLAs (service-level-agreements), SOPs (standard-operating-procedures) etc. This is the stage when efficiency is most important to the company, because efficiency is directly related to company’s revenues.

rpv startup

Values

The final stage is when a particular startup has become an established corporation. At this stage “company values” are normally setup to guide the employees in their daily work, dealings and most importantly in decision making. Values are guiding principles that dictate how the company is run in all walks of its life. At this stage, while still important, resources won’t be as important as they were at the “resources stage”. Hiring and firing happens quite often. Individual opinions within the company doesn’t really have any weight unless the person is a c-level.

For example, Johnson & Johnson’s value is “to put the needs and well-being of the people first“. It’s J&J’s compass..

Answers..

Based on what is discussed above, the answers to the questions I asked in the beginning of this post is quite clear. Many young entrepreneurs are not capable of running high-growth companies. They may be good in idea generation and product development, but not experienced enough in managing people, leading people and establishing the necessary processes. Therefore, sometimes they get replaced by the board with a more seasoned CEOs who are up to the challenge of managing a high-growth company.

As for the failure of acquired companies into the parent company. Often times, it’s due to a mismatch in their processes. Startups normally get acquired by a larger corporations, and processes in larger corporations are extremely different from that of startups’. Startups normally have more flexible processes, whereas corporations have very stringent processes. This obviously stifles and chokes startups to quite literally to death. Startups live in a very fast paced environment, things change very fast in startup world. On the other hand, in corporations, things can take a very long time until the necessary approvals are obtained and decisions are made by the top management. It can take few months until a procurement decision is made or a key individual is hired to the team.. few months is like a decade in the startup world. When every single thing has to follow the main process of the parent company, be it procurement, HR, marketing, product strategy etc, it will be extremely difficult for the startup to stay relevant and to stay competitive in the highly competitive environment.

Third question is related to the second question as well, where larger corporations struggle to innovate in disruptive technologies and incubate startups successfully from within the corporation. The processes in large corporations have been setup with specific objectives in mind, they are there to:

  1. make organization’s day-to-day operations more efficient
  2. allocate resources in the products and services that bring the most revenue
  3. weed out the ideas from the product development pipeline that have vague objective, business model or ROI (return-on-investment)

So, based on this, having a startup within a large corporation is almost impossible without the change in its legacy processes. Because the whole eco-system of a corporation with its stringent processes are there to improve current products and services (i.e existing products) and avoid investing in something unsure (i.e new products/startups). Corporations are under tremendous pressure to keep revenues growing, year after year. Obviously the best strategy to do that would be to put maximum attention on the products that bring the highest margin of profit. And that’s what they do. All KPIs are set towards maximizing revenues and improving existing products. Also, all the rewards and bonuses are then tied to those KPIs. This in return, generates behavior in managers to avoid promoting and investing in disruptive technologies.

Conclusion

Making startups work within a large corporation is not impossible. It needs difficult decisions but it’s possible. Letting the acquired startup to run separately as an independent company, establishing separate processes and giving autonomy to the product team within the organization, JVs (join-ventures) with 3rd party companies are some of the options at hand for a potentially successful recipe. This will be a post of its own in the future.

Would be glad to hear your comments.