Startup Factory

What do you do if your business succeeds? If you make up a startup, struggle for 7 years, and become the overnight success – suddenly exploding to a hundred people – what do you do?

You’re by no means Microsoft, and you’re most likely not Mint.com either. You’re probably in some niche business, and your customers love you – but you aren’t about to go public or be acquired by Google for $6B. You are, however, in a pretty good place – you’re no longer worried about making payroll or paying rent.

A new worry then enters your mind – I already have a golden egg; how do I make another golden egg and grow my business?

Or, look at another situation: imagine that you’re a successful company like Oracle. You have an entrenched position in a couple markets; you have established businesses that are bringing in over a billion dollars. Those are your “golden eggs.” The question again is, how do I make more of those golden eggs? How do I grow my business?

I’ll argue that by searching for golden eggs, you’re making a mistake already. You need to be looking for a goose that will lay those golden eggs. That goose is a framework for generating, vetting, and incubating ideas. That goose is an internal “startup factory.”

Let’s look at a standard way of going into new businesses.  You get together with your executives, brainstorm, and based on your gut – and, hopefully, a little bit of solid data – make a call on where you’ll go next. You then bet your farm on that idea – investing half of your company’s resources over the next product cycle into that idea.

But what if the idea was, ahem, dumb?.. What if you were wrong? Do you have a plan B?

Allow me to offer you an alternative – a framework of innovation I’ll call the “startup factory.” Here’s how it works:

1. Start with idea generation.

Once a quarter, have your engineers, product managers, and marketers drop whatever they are doing for ONE day. Obviously, don’t drop the ball on the urgent customer matters. Instead, plan for this “hack day” in advance and include it into your schedules. During the hack day, everyone is free to work on whatever they want. There are no management chains there; people are encouraged to self-organize by interest. The only requirement is that at the end of the day, they get to present their work at an informal all-hands – ideally, over beer.

You will be SHOCKED to see the kind of ideas that get presented. Your people WANT to innovate; they HAVE ideas, you just need to get out of their way for a day. They are so booked up with fires that they have no time to try out some of the bold ideas they’ve brewing. Some of those ideas will be truly revolutionary – unlike the “faster horse” asks you get from your clients, some of the ideas from your staff will be in the “build a car” realm.

I’m by no means an inventor of the “hack day” concept. It’s been mentioned in my favorite Autonomy, Mastery, and Purpose TED talk. Microsoft Live Labs called this exact concept an “out of the box week” (it was actually a week-long engagement there). Google’s 20% time is essentially the same thing – except that its ongoing nature makes it a lower priority for participants, thus reducing its effectiveness.

2. Create a funnel for ideas.

At the end of your Hack Day, have a committee of senior folks select three projects that will get “funded” to be incubated. Let the person who presented the idea run the effort – they’re by definition most excited about it. Give them some extra resources – one other person to bounce ideas off of. Then, allow them to leave their current job responsibilities – completely – for three months, so that they can incubate the idea.

WHAT? LET THEM LEAVE THEIR JOB FOR THREE MONTHS???… ARE YOU F#@ING CRAZY?!?!

Yeah, that’s exactly what I said. If your organization has such a strong tactical dependencies on any individual contributor that you can’t have them work on a strategic incubation for three months, you’re in trouble and long-term success should be at the end of your list. You’re about to see short-term failure when that person leaves.

3. Create accountability and an evaluation framework.

Your 2-person, shielded incubations have been running for 3 months. They’ve built some prototypes and demos. They’ve done some market research. They might have talked to some customers. They’ve been RUNNING THEIR OWN STARTUP within your company – a startup that’s on a short leash, a startup made out of the people that know your marketplace and are working on ideas that YOU have hand-picked.

Now it’s time to decide whether it makes sense to continue investment in any of these incubations.

Create an evaluation framework for your decision making. Try to be as specific as possible: Are we convinced in the market value enough? Do we think the roadblocks that were obvious have been researched enough? Before any of the projects are funded for this 3-month stint, make sure to advertise your decision-making framework broadly.

4. Make decisions on what to do with your incubations next.

I bet you anything that most of your incubations are going to fail for one reason or another. Why? Because luck was a HUGE factor in the initial success of your enterprise. Because 99% of the startups fail. Because most ideas turn out to be crap for one reason or the other.

Here are the good news: if at the end of these 3 months, you decide to kill an idea, it’s a GREAT THING. This means that you were convinced that something will work, ready to put a ton of money behind it, but you didn’t bet the farm on it – instead, you put something like 2% of your company’s resources behind it for 3 months. So now that the idea failed, your company’s existence is not in danger in any way.

Moreover, now, you have a plan B. You have 2 other ideas that you were pursuing in parallel. One of them might be the next big thing – all pieces of the puzzle will add up, and you’ll be so excited to finally throw all your company’s might behind it. AWESOME.

Let me recap the key benefits of the Startup Factory approach:

  • Generate groundbreaking ideas.
  • Incubate the most promising ones – without risking your entire business – and evaluate these incubations.
  • Build up internal expertise before major resources get assigned to the new idea, so that roadblocks can be discovered early, and tackled by a surgical team – instead of blocking progress for a bigger group.
  • Amazing effect on the morale. I won’t get tired of preaching Autonomy, Mastery, and Purpose. This framework hits on all three.
  • Entrepreneurial growth of your employees. When running a 3-month incubation, your employees get to wear many hats – working as mini-CEO’s for that project. Don’t be surprised when an engineer starts understanding marketing much better after this 3-month stint.

A couple other intuitive ways to look at this framework:

  • Startup factory is really about diversification of seed investment – something that VC’s have been doing forever.
  • It’s an insurance policy that lowers your risk exposure by gradually increasing the investment over time – instead of the binary 0 to 1 change, you slowly move the dial from 0 to 0.1 to 0.5 to 1. Like any insurance policy, you pay a little upfront to get its benefits.

Go create a golden goose in your own organization and watch it lay golden eggs for you.

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