Ten Risk Factors for Corporate New Ventures
I love the list of 11 risks VCs use to assess a business opportunity (see Tomasz Tunguz’s), and I’ve adapted it to a list of 10 for corporate venturing, as the corporate context necessitates some tweaks. Why differentiate? Two reasons. First, corporate ventures come under more pressure earlier and early success is all about asking the right questions — the unique qualities of corporate innovation can be slow to reveal themselves at times. Second, corporate ventures have only one exit strategy — to the core business — so they have fewer degrees of freedom to pivot. Thus, I felt the list needed to tee up intrapreneurs to act on proving or disproving these risk factors more as hypotheses than as a do-or-die check list, so I’m hoping this gets us closer to there.
In line with that point, I’m wary of having this come across as an anytime tool — it is relevant throughout, but the relevance of individual risk factors shrinks or swells as you progress. You can’t and shouldn’t be subjecting an opportunity to all 10 of these at any given moment (until maybe you’re at true commercial launch). Rather, you should prioritize certain risk factors for specific points in time in the evolutionary journey of a new venture. As the venture evolves, your answers to each of those will need to be successively more detailed.
I like using this list once you’ve entered what can be characterized as the Seed stage. Before that, when the idea has just barely formed, it’s actually much simpler. You should be able to say with high confidence (since definitive proof is impossible): I believe (1) there is a real pain we are solving for, and (2) it makes sense for our organization to try to solve for it. Then you begin testing your concepts in the market, and as you hone in, the evidence will need to be even more compelling. That’s where this list comes in.
The ten risk factors:
1. Market Timing Risk – does it make sense to pursue this now?
- For corporate innovation, this one could be characterized as, “Are we too late to the party?” or “Will we gain a defensible advantage by getting into this market first/early?” This is actually more flexible for large organizations who have more force to apply as needed, whereas startups are as strapped for market muscle as they are cash.
2. Market Adoption Risk – is the market accessible?
- Two dimensions here: (1) Can we enter the market? And, if so, can we acquire customers (affordably and in a timely manner)? (2) If the market does not yet exist, are we confident that it will form and why? Market access for a startup is largely about boosting visibility. For a large organization, it’s more about explaining why you’re in this new space and that you will treat it as seriously as your core business.
3. Market Size Risk – is the market big enough to provide the returns we need?
- Multidimensional as above, but what does the market landscape (current or future) look like — How big? How many players? How many tiers? Any majority owners? Understanding what a new venture has to accomplish by when will spare you from wasting time and money on something that doesn’t have the potential scale behind it.
4. Execution Risk – can we deliver this experience to users? can we staff adequately?
- New ventures require new skills, from sales to delivery, so we have to be realistic about the layered costs of acquiring those new skills to provide a consistent customer experience. Corporations have many resources already to potentially bring to bear, but there is a risk of transplant rejection if new resources are necessary for delivery.
5. Technology Risk – is the technology accessible and customizable? if not in-house, can we partner favorably to get it?
- If the technology is new to your business then incorporating it into your new venture means partnering with someone (PLEASE explore partnering first before merging/acquiring) who has close to what you’re looking for, and customizing their offering; if nothing exists, then you have to build it, and you better be a special tech firm with large cash hoards to satisfy that R&D effort (if not, time to move on to the next venture). At Peer Insight, we lay out a “Make vs Stake” rationale to determine whether partnering is the right approach, and, if so, to what extent (e.g. with a small startup, or a large multi-national).
6. Business Model Risk – do the economics seem favorable?
- Early in an innovation project, it’s impossible to get quantitatively definitive, but you can start to size up costs to deliver the new offering, as well as create high-potential revenue models that maximize the future value to customers, partners and your organization. If you can see win-win-win potential, then you should proceed. I think many new ventures get this wrong, whether startup or corporate innovation.
7. Platform (Strategy) Risk – is it complementary or competitive to the core business?
- There’s no wrong answer here, but your organization needs to be aware of the consequences of whichever answer it gets; knowing the core will lose ground to an internal offering is hard to stomach, though it’s sometimes the best option (especially in established businesses where the core is shrinking), so make sure this aligns with your corporate growth strategy. Furthermore, a new offering can extend a line of business, or it can open up a completely new one. Handling these two scenarios differs dramatically, so be realistic about how stretchy you’ll ultimately be asking your company to be.
8. Venture Leadership Risk – are leaders open to feedback? are they candid about the state of the venture?
- Knowing when pivoting is necessary (or shelving, or even *gulp* killing) is really hard. You get so focused on a path and commit fully to it, but venture management has to recognize when change is necessary and how to handle it if it is. Is leadership willing to accept failure as learning?
9. Financial Risk – how much will it cost to achieve our learning goals?
- Having line of sight to your next round of funding is critical in the corporate world too; if you spend everything you’ve got before or right at the next funding milestone then you run the risk of dying in the decision-making lag (which can be even more severe in the corporate context). Thus, you need to know your organization’s willingness to spend on getting you from seed to commercialization, and how you’re tracking against those expectations.
10. Defensibility Risk – do we have favorable control points? likelihood of lawsuits? other regulatory challenges?
- If your organization doesn’t have a defensible position (often by contract, patent or concealment) then your right to play is no different than any other organization – small or large. Find what uniquely advantageous position your company can take and make sure nothing compromises it as you make your way to market. The regulatory part is obvious, just be aware of the potential trouble you can get in entering uncharted territory.
Another reason I love this list is because it aligns so cleanly with our method of tracking key assumptions that threaten to make-or-break a growth project. Laying out key assumptions against each of the above risk factors is the best way to set your experimentation strategy and get your venture to market most efficiently. A successful venture of any kind will pass each of the value, execution, scale and defensibility tests. So, think of this as an AND to key assumptions, a front-end assessment tool to pick the places to explore further.
What do you think? If you’re an Intrapreneur, which do you find most helpful? What’s missing from the list? Let me know!
- Clay Maxwell (@bizinovationist)