Is there a proper method to create a startup? What is the framework for creating a new business? And how can Startup Studios utilize these concepts to more effectively build new ventures?
William B. Gartner, in a 1985 paper titled “A Conceptual Framework for Describing the Phenomenon of New Venture Creation,” studied the different factors that describe how new companies are created. He argues that this phenomenon is complex and multidimensional and that new businesses are “organizational entities,” consisting of different variables and dimensions. Gartner integrates the following four interacting perspectives of entrepreneurship into his framework to describe this phenomenon:
- Characteristics of the individual founder(s)
- Environment in which the new company12 is established
- Organization to be established
- Processes through which the new company is established
New companies are organizational units that change with time. Their structure can only be described comprehensively if all four dimensions are examined and, at the same time, it is shown how all variables of the individual dimensions interact with each other. The figure below shows Gartner’s framework, which illustrates the four dimensions and their interactions.
My research focused on the organizational structure, the process organization from the startup idea to the founding of the company, and supporting factors such as the financing structure, the success factors and the challenges faced by Company Builders. I studied over ten different Company Builders to understand the commonalities and differences in these different areas. Here are some of my findings
Company Builder Organizational Structure
All Company Builders analyzed either have a linear-functional organizational structure or are organized in a project matrix organization. The linear organizational structure is a hierarchical structure, in which positions or departments are related to each other. As the head count increases, so does the complexity and the associated communication and coordination effort. Thus, above a certain head count threshold, there is a transition from a linear-functional organization to a project matrix organization.
In several cases, it was explicitly pointed out that there are official departments within the Company Builder. On closer examination and during the work routine, however, these formal hierarchies do not play a role since they are very flat and form informal hierarchies. In the case of corporate and technology transfer Company Builders, there are, among other things, cross-company, cross-departmental functions which, in addition to management, function as an interface to the parent company.
All Company Builders have a management level consisting of at least two people with different competence profiles. And in the portfolio companies, personnel with different, often complementary skills are also put together to form the founding team.
Generally, it can be said that all Company Builders provide office buildings, infrastructure, financing, mentoring and coaching as well as administrative and mostly operational support. Both the number and intensity of resources shared between Company Builders and portfolio companies vary greatly.
On the whole, the following resources were identified as necessary within Company Builders:
Process for New Venture Building
From my analysis, the founding process within a Company Builder can be divided into seven steps:
- First, the business proposal is aligned to the focus of the Company Builder and the general conditions for the startup project are defined. Trends leading to potential opportunities are analyzed and goals defining the requirement level of the business proposal are compiled.
- After a kick-off event, potential customer problems are defined. Business model hypotheses are set up in a user-oriented manner, various pain points are identified with potential customers and ideas are melted together that could be implemented as new business ideas. Rough problem descriptions are written for all problem areas.
Before analyzing the hypotheses and problem areas in further detail, they must be vetted by a Quality Gate, which evaluates the following areas:
Proximity: How close is the business idea to the Company Builder’s strategy?
Feasibility: Can the business idea be implemented in the Company Builder? (technology, resources, know-how, market access)
Significance: Does the business idea solve significant customer problems that have not yet been solved?
Potential: Is the addressed market large enough to start a new company?
- Once the hypotheses and problem areas have passed the quality gate, the market exploration phase follows. Here, a profound understanding of the market is obtained, so that customer segments, suppliers, competitors, etc. and also analog markets are sufficiently known. Furthermore, the first hypothetical business ideas are developed and evaluated in a data-driven manner and the founding team is recruited.
- For the business idea developed, the underlying problem is now validated and described in detail. This requires detailed qualitative and quantitative analysis of the target groups. This is supported by various design thinking methods.
- As soon as the problem is validated, a suitable solution must be validated. Both the product concept and the business model hypotheses must be validated, first users convinced, and feedback obtained from partners and early adopters. At the end of the phase, the product market fit must be achieved, and a marketable product must be available.
- Once a marketable product has been developed, it is optimized, a new, independent company is founded, funds are secured, sales contracts are concluded with customers and sales channels are validated so that scale-up can begin.
- The last phase can be called the growth phase. The aim is to establish a fully functional and independent company. Structures and processes are created, the team is upsized and the business is scaled up.
The transitions between the solution validation, optimization and growth phases are also characterized by the lean startup cycle. It is important to consistently build, measure, and learn from it to create a valid and scalable business model.
As soon as the founding team is recruited, its responsibility increases with the progress of the process. The Company Builder gradually withdraws from the decisions and procedures of the portfolio company. Thus, cooperation continues as needed. However, a mentoring or coaching relationship continues to exist between the Company Builder and the portfolio company. Financial controlling also takes place, as the Company Builder is a shareholder. In most cases, the Company Builder also takes care of further financing rounds, as it has better access to investors.
All Company Builders analyzed pay a fixed salary to the founding team and additionally allocate equity shares. Both salary components vary greatly. Some Company Builders pay a standard market salary as they want to ensure that they attract suitable personnel. Others keep the fixed salary very low in order to check the commitment and risk affinity of the founding team. The distribution of equity capital between the Company Builder, founding team and other owners also varies greatly.
Success Factors and Challenges
When analyzing the success factors and challenges, it turns out that across all Company Builder archetypes, the appropriate team and access to capital or securing funds are the success factors. This also goes hand in hand with the challenges of securing funds and recruiting good founders.
In addition, scalable, disruptive and promising ideas, the fast and flexible validation of these ideas and their implementation play an important role.
Furthermore, certain archetypes have special success factors and challenges. The data collected indicate that the drafting of contracts and the corporate policy situation, which demands clarity with regard to intellectual property, compliance, etc., represent major challenges for corporate and technology transfer Company Builders. While experience in the enterprise environment is essential for success when agency Company Builders drive forward joint founding projects as services for companies as co-founders.
From my analysis, there are some general conclusions that can be made to help Startup Studios and Company Builders more effectively create an organizational structure and process to help them build new ventures.
- Company Builders with a low headcount tend to structure themselves in a linear-functional organization.But as soon as a threshold headcount is reached and the complexity of coordination increases, it is better for Company Builders to organize themselves into a project matrix organization.
- The Company Builder’s management team should consist of people with different competence profiles, as well as exchange resources between the Company Builders and their portfolio companies.
- The process from the initial idea to the spin-off should be structured so that the portfolio company’s responsibility increases with the progress of the founding process. Both startups and Company Builders can use the 7-step approach in this article to design their approach or venture creation projects.
- Company Builders’ financing structure should be set up so that the founding team receives a fixed salary and is incentivized by equity capital. However, the amount and distribution of the two salary components can vary depending on whether your Company Builder is financed either internally (by cash flow), externally (by investors or parent companies) or a mixture of both.
- It is important for Company Builders to have the right founding team, access to capital and securing funds. These are both the greatest success factors and the greatest challenges.
Hopefully, this provides a useful guide for both existing and new Company Builders to more effectively organize and build their ventures.
This article is a summary of a larger research report on Startup Studios by Dr. Tobias Gutmann. The full report has been translated from German into English. If you are interested in reading this report, you can download it here.
Köhler & Baumann 2015
Mocker & Murphy 2014
Szigeti 2016, p. 12
Funk 2015, p. 21
Drucker 1993, p. 161
ABOUT THE AUTHOR
Dr. Tobias Gutmann
Dr. Tobias Gutmann is a post-doctoral researcher at the Dr. Ing. h.c. F. Porsche AG Chair of Strategic Management and Digital Entrepreneurship at HHL Leipzig Graduate School of Management in Germany. His research interest is corporate entrepreneurship with a special focus on corporate venturing activities in established companies. He has extensive work experience in innovation management and corporate venture capital and holds degrees in electrical engineering and information technology and international management.