Structure, funding, governance

This article is the fifth installment in our series focusing on achieving excellence in the early stages of new-business building. If you haven't already, be sure to check out

• the first part, where I introduce our mission and ourselves here,
• the second part, which outlines the key components of our success formula and the 6 Big Ideas of the Lean Scaleup, that helps companies to become better in new-business building here,
• the third part which guides you on how to define 'meaningful search fields' and how navigate the corporate context here, and
• the fourth part which was about finding 'meaningful ideas' in the defined search fields and how to ensure a solid business foundation here.

This article is about issues that relate to structure, funding and governance.

Structure depends on the company category

Offering a one-size-fits-all recommendation for the right structure in a general article like this one would certainly be not possible. Consequently, this article aims to provide some high-level recommendations to companies with defined profiles.

Hüseyin and I identified three categories of companies which would benefit most from our thinking about early-stage excellence in out-of-the-box innovation, in especially when building new businesses.

Category 1 comprises companies with intrapreneurship programs and business model incubators or accelerators. There are ca. 10 such companies in Türkiye.

Category 2 consists of companies with corporate venture capital (CVC) units. In Türkiye, there are around 40 of these companies.

Category 3 refers to companies that have strong technology bases. There are over 1,200 R&D centers in Türkiye. But in this group, R&D and marketing are often not aligned or there is a lack of expertise in building new technology-based businesses."

Category 1 companies have a structure in place. What they often miss is the organizational home beyond the Business Strategy stage (post-MVP). Case evidence tells me that the first Scaling-Up stage is particularly challenging. In this stage, the mission is not only to grow the number of customers by an order of magnitude ('from 3 to 30 customers'), but also to make the scaleup's operations (Go-to-market, Procurement, Supply Chain, etc.) compatible with Core's process-driven operations so that the collaboration scaleup/Core is more effective and more efficient in the next Scaling-Up stages.

Because of the challenge, my recommendation for companies in this category is to extend the scope of their existing structure to include the first stage of Scaling-Up. In other words, Scaling-Up stage 1 should be a part of their new-business building structure.

The cartoon at www.leanscaleup.com illustrates how many companies in category 2 struggle to get beyond the MVP stage. I see two reasons for that:

• CVC units tend to be more transactional-minded and less innovation/scaling-minded. Hence, the external startup often loses an important stakeholder after the deal is signed
• This marks the point when the agile operating model of a greenfield startup bumps into the process-driven model of Core.

My recommendation for companies from this category is to set up an organizational home for post-MVP stages and arrange the corporate context according to Lean Scaleup principles.

CEOs of companies in category 3 are typically reluctant to take the inherent risks associated with ventures into new businesses. Since in these companies there is only a small number of new-business initiatives per year, they will often be able to operate with a small structure, for example, a unit that reports directly to the CEO. Taking a step-by-step approach with a defined business graduation scheme and metered funding, as explained below, is essential to ensure that the new-business potentials align with the CEO's risk appetite.

A defined business graduation scheme

Best-in-class companies use defined, end-to-end maturity stages to align the new-business initiative with the corporate context, especially with respect to risk profile and funding. Each of these stages should have its won playbooks that ensure that stakeholders and the new-business teams are on the same page.

The Lean Scaleup comes with generic scheme that fits with many situations. Things are different if, for example, the new-business requires massive capital investments before the first product is sold (e.g., investments into chemical manufacturing capacities) or if the customer places its first order after a multi-year engineering process, such as in the Automotive industry.

The Lean Scaleup's business graduation scheme is as follows:

• Discovery (Major deliverables: Meaningful ideas)
• Business Foundation (basic validation of key assumptions In all four tracks)
• Business Strategy (Validation of a Sustainable Competitive Edge in an attractive future market + validated growth strategy + validation of all four tracks + MVP)
• Business Design (Minimum Marketable Product with first customers and a scalable Business design)
• Transition-to-Scaling-Up (operational alignment between Core and the scaleup)
• Scaling-Up 1 (10x growth in number of customers + scaleup operations compatible with Core's process logic)
• Scaling-Up 2 and 3 (at least 3x revenue growth per stage)
• Scaling-Up 4 and 5 (at least 2x revenue growth per stage)

Metered funding

All of these stages, in particular the pre-Scaling stages, come with a defined funding that is only released when defined deliverables have been met (see the last post for a more detailed explanation).

This staged funding (some call it 'metered funding') is crucial to deal with the inherent uncertainties of new-business building. It also makes the lives of CEOs easier because they know that every subsequent stage in the business graduation scheme rests on validated assumptions.

Lean governance

You want to minimize the number of people in the board that overlooks the new-business building team yet have enough people in the board that there is effective decision-making. The worst what I have seen so far was a board with 21 people. Of course, there will always be one person in such a board who is not convinced and decisions will never be clear and fast.

You also want to make sure that the board has in-depth understanding about the context of the innovation. Consider external experts in an advisory role that have in-depth understanding about technology and/or the target market.

Here are some principles that help to put lean governance into action:

• There is a clear differentiation between what is 'inside the box' and what is 'outside the box' (box = existing business / operating / mental model) innovation. The operative business units are responsible for 'inside the box'. Dedicated resources are working full-time on 'outside of the box'. If the new business should be re-integrated into the operative units and/or if the operative units are supposed to provide human and financial resources, they have a seat on the governance board.
• The CEO is kept up-to-date about 'outside of the box' activities and sits on the governance board as well.
• The governance board is committed to data-driven decision-making. They ask for validation points and the new-business team is supposed to deliver these.
• Decisions of the governance board cannot be overruled by heads of operative units and corporate functions. 'Benign neglect' or politicking is not accepted.
• The governance board practices the 'art of killing.' It expects 80-90 percent of 'meaningful ideas' to be killed after the Business Foundation stage since the validation could not provide solid proof points.
• If an idea is killed, it is NOT the failure of the team. It simply means that the idea was not as good as originally expected and the team should work on other ideas.
• All funding is metered, i.e., linked to validation data and decisions to move the emerging business opportunity to the next stage.
• There are at least 10 'meaningful ideas' per year which are admitted to the Business Foundation stage (because only then you can build up a portfolio of emerging business opportunities - keep in mind that 80-90% of them will be killed at the end of the stage).
• There is sufficient funding (e.g., EUR 25k per idea in the Business Foundation stage) and enough capacities for doing the work in Discovery and Business Foundation. (Note: Amazon's Jeff Bezos once said, "the best way to fail in innovation is to make it someone's part-time job.")

What comes next

This 8-part series designed to offer you valuable insights into achieving excellence in early-stage new-business building. Upcoming topics include:

• What exactly is the role of Leadership in the new-business context?
• How could the innovators handle the main objections when we call for a change?

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