90% of ventures fail sooner or later, and there’s no shame in that. Many things can go wrong when building and scaling a venture. Although a lot has been written on this topic by the brightest minds in the industry, many founders continue to fall for the same mistakes when building a venture. Where the articles on when to build, how to build, and how to scale should have given you a basic understanding of how to set up your venture (plans) for success, this article focuses on when things go wrong. Based on years of client experience, we’ll share what we see as common pitfalls and explain how to avoid them. Because, as they say, you never lose… You either win or you learn.
This is the fifth article in our series on corporate venturing.
- Building a product nobody wants
- Lack of strategic fit with core business
- Unfit team
- Keeping corporate governance standards in a venture team
- Scaling before the product works
Building a product nobody wants
Let’s start with a classic. In 1999, in the middle of the dot-com boom, US-based venture DigiScents developed the idea for the “iSmell”, a device that would allow users to “smell the internet”. In the following years, their team worked hard to build the technology, designing it to look as slick as possible, and investing in creating great buzz at launch. However, sales remained flat and not much later the company filed for bankruptcy. The invention was dubbed one of the “25 Worst Tech Products of All Time” and was written off as a failure.
What went wrong and how to avoid this
The iSmell failed because it did not meet a significant customer need. There was nothing wrong with the technology – it worked just as designed and had no technical issues. However, it was trying to solve a problem that wasn’t worth solving. DigiScents could have avoided this costly catastrophe by taking a radically different approach. Instead of creating a technically advanced and super slick product, the team should have started by first clearly defining the problem the idea should solve, followed by validating it with actual customers.
Client example (best practice)
Together with one of our clients in the food & beverage industry, we built a venture to give them direct access to the consumer and grow a specific category. The proposition revolved around a personalized subscription box containing a curated assortment of foods in this category. During the MVP phase, we extensively measured several relative KPIs, such as conversion and click-through rates, that gave us insight into whether we were really solving a customer need. We found low willingness to pay and painstakingly high acquisition costs – way off from our target benchmarks. Rather than continuing to invest time and resources in a proposition that nobody wanted, we decided to spend time further investigating how we could better serve the consumer. Based on qualitative insights, we did two pivots in the early stages of this venture. Once before the MVP phase, moving from a very small niche to a wider target audience. And again during the MVP phase, when the assortment was extended to fit consumers that were not interested in extensive personalization.
Lack of strategic fit with core business
When you’re considering launching a venture, we’ve established that it should really be a disruptive idea that doesn’t directly connect with your core business – otherwise you’d be better off optimizing or transforming your business. However, there should be a strategic fit. You’re not just a financial investor; you’re trying to strengthen your long-term strategic position by broadening your horizons and helping you stay ahead of the competition.
Venturing comes with difficult times, that’s a given. Almost every venture will at some point face opposition from high-level stakeholders, struggle within the team, need extra investment, extend timelines or even has to make a fundamental pivot and go almost back to square one. If there is no strategic link, the venture will get killed sooner or later when these challenges arise.
As an investor, you have to accept the inherently high level of uncertainty and face these challenges. Don’t spend all that time and effort on something that you’re not prepared to back up. Focus on ideas that matter to your business in the long run and that are worth overcoming the challenges that will certainly come.
Client example (best practice)
Together with our client, a large beverage brand, we launched a new D2C e-commerce platform to gain a share in a growing category within the market. While the platform was disruptive to the core business – even products of competing companies were sold on the platform – there was a strong strategic fit. Firstly, our client gained market share in a new category. Secondly, they gained thorough knowledge about their customers by establishing a more direct (D2C) relationship, and finally, they had a new channel to leverage for future innovation. This resulted in strong support from high-level stakeholders, which was a key asset. Before becoming the success story it is today, this venture also went through multiple pivots: among others, switching from single product to box sales, changing the customer segment, and making large assortment changes several times. Without a good strategic fit and stakeholder support, these were all checkpoints where the venture could have been killed.
Throughout the years, we have seen two common mistakes regarding team set-up at our clients. They find their venture does not have any traction, and blame the proposition or business model. That’s when they call us, and we discover it’s not the proposition or business model – it’s the team.
No team, only agencies
As a corporate executive, you may be inclined to work with agencies for things out of your comfort zone. And there are few things as far out of the comfort zone as building up a new disruptive venture in a world of untested promises and risks. Additional benefit of hiring an agency then is that you go to market quickly, so everyone is happy, right? Wrong.
Working with agencies may allow you to quickly get started, but they are not a suitable team for the long run. The speed that you gained in the beginning is quickly lost when they start rotating specialists. Suddenly you will need to onboard that new rookie developer onto your growing tech stack for which another agency forgot to create proper documentation. Moreover, all feeling of an entrepreneurial culture is lost when the only internal people you have are booking and coordinating agencies all day instead of actually doing work themselves.
A better solution is to gradually start insourcing from the start, beginning with those roles that are closest to the core of your business. For example, if your venture revolves around a web app that you will be iterating for your users continuously, you will want to start looking for an insourced development team from the start.
Lack of team diversity
No, this is not about gender ratios. Team diversity does not entail the shapes and sizes of your employees – real diversity is about their backgrounds and skills. We often see that corporate ventures are an unhealthily uniform group of either only corporate people, or only young intrapreneurial techies. Both set-ups are a recipe for failure.
When your team is made up of only corporate or industry people, you will face a lack of startup mindset and digital skills. All the right KPIs will be in place, but there will be no one to start hitting them properly. Numerous meetings about AI and data-driven marketing will be hosted, but no one will translate it into action without calling an agency to execute. It is no surprise that we usually see this set-up leading to missing key capabilities and ending up with agencies doing all the actual work. And those that do have the skills, obtained them in their previous role and will try to replicate them in their new situation, risking a lack of flexibility if that situation is not suited for that ‘trick’.
On the other hand, a team consisting of only young, tech & startup-minded people, is just as bound for failure. You will encounter a lack of leadership and P&L management experience, leading to judgement errors, penny-wise pound-foolish behavior, no trust from the board or corporate, et cetera. If your idea is worth investing in money-wise, then please also put in the right level of experience and leadership to give it a real chance of success.
To avoid these mistakes, you need to create a healthy mix of individuals with a wide range of skills and backgrounds. Always ensure a good balance between corporate people and ‘new blood’. This way, your team will be able to build that great digital product, while ensuring proper structure and corporate management.
To be fair, this is not easy. It’s way easier to hire a bunch of agencies. But your long-term chances of success will improve.
Keeping corporate governance standards in a venture team
This pitfall is painfully obvious once understood but unfortunately all-too common. We often see corporates making their ventures adhere to corporate standards like in their IT infrastructure, legal checks, and corporate hiring processes. While these standards make sense for the type of companies they are designed for – international corporates with 10,000s of employees – when building a venture you need speed and agility, and that is exactly what those standards fail to accommodate for.
No-go #1: “Can we do this in SAP?”
When you want to quickly create an MVP with some duct-taped tooling to validate your proposition, you need to have it ready yesterday. That does not rhyme with going through an IT risk assessment process where only approved tools (which are often terribly outdated) pass the tests. Some of our favorite quotes from out in the field:
- “Can’t we do this in SAP?”
- “Have you spoken to the domain / enterprise architect / security expert / GDPR consultant?”
- “We can’t do this until our ERP/PIM/CMS/… migration is done next year”
The solution is to create a shared understanding of what matters and how to manage the key risks (e.g. data privacy, security) in a way that fits the exposure and approach of the venture. And within those boundaries, give full freedom to the venture team.
No-go #2: Corporate legal checks for every tiny thing
Please don’t get us wrong: you should abide by the law. But once you do that, legal matters often become a matter of mitigating risks to the business. Corporates manage small risks, because their scale is huge. Covering all those small risks costs a lot of time and effort – and slows down your speed of innovation. And without speed of innovation, your corporate venture doesn’t stand a chance.
In ventures, you are willing to take on more risk, because your scale is tiny. This means you should judge costs and risks differently than you would for corporates. You don’t need 100 pages of corporate legal text to mitigate the risk of a venture that has <50 customers.
There’s no silver bullet, because often the legal challenges faced are specific to each industry. However, in our experience, there’s often plenty of room to speed up and come up with creative new solutions that are legally sound and still attractive to customers, once you accept that the risk in corporate venturing is fundamentally different.
No-go #3: 6-month hiring processes
In corporates it often takes weeks to draft a job profile. You need to put it in the right ‘job grade’ and ‘line management structure’ and must go through corporate timelines and processes for approval. This will take you 3-6 months, while in a venture you just want someone to start next week to fix the problem you’re having now. In the continuous war for talent, your competitor will already have given them a job offer (and dinner and a goodie bag), while you are still waiting for the approval from HR.
Having said all this: it’s important to note that all support functions add value to big international companies and are in place for a reason. The people working in these functions also take pride in their work and often do a very honest job in optimizing KPIs that matter for the corporate. But in corporate venturing, you have different intentions (explore vs. exploit) and different KPIs. Speed is of the essence, while costs and risks need to be judged differently. Your venture will only be successful in the long run, if you can successfully keep these corporate “no-go’s” at bay.
Scaling before the product works
Several years ago we worked on a client venture for an industrial manufacturer. The project started off well and had a promising lookout. However, while still running as an MVP and gradually improving the basic building blocks of the company there was a lot of stakeholder pressure to speed up the growth. While the small team was busy growing the customer base, further developing the product, improving profitability and building a strong(er) team and operational flow, the executives pushed for scale.
Hundreds of thousands were spent on marketing to quickly accelerate growth in this early stage and SparkOptimus decided to step away from the project. A year-and-a-half later the venture was killed with millions of wasted capital – it never succeeded to secure positive unit economics and the stakeholders lost trust in reaching that goal.
What went wrong and how to avoid this
While this promising venture could have become a success, senior stakeholders saw the business as fully grown too soon. They applied their horizon 1 and 2 thinking on the venture while it was still an MVP and wanted to quickly optimize and scale. Before scaling the venture, it might still have needed one or more pivots to make the business model sustainable. While the large marketing budget made sure the customer base was growing, each product was sold at a loss and customer satisfaction was not up to par.
As a rule of thumb, you should first fix the underlying unit economics or CLV over CAC ratio before you scale. This way, you scale a profitable business rather than a loss-making one. This may seem obvious, but in reality stakeholders are often all too eager to push the topline quickly, neglecting that you will need time to optimize the business model and underlying financial viability.
When strategy allows you to scale (too) soon
This last pitfall requires some nuance: in some situations, scaling fast may be a requirement for success. For instance, in a strongly competitive market, acting fast may be necessary to stay ahead of your competitors. Examples of this are the current ‘war’ between blitz grocery delivery companies and the similar wars between taxi-apps and similarly between food delivery companies. Every one of the competitors is ‘burning money’ at a high pace, in hopes to eventually win the race and claim a significant market share, while at the same time fighting issues with legislation, tech and their workforce.
Client example (best practice)
Together with a client in financial services, we launched a venture for a new B2B service proposition. Like in the previous example, senior management pushed the venture team to increase marketing and sales efforts at an early stage in order to quickly accelerate the growth.
Together with the core venture team, we managed to repeatedly push back and first focus on further de-risking the investments. Securing good product-solution and product-market fit, reaching positive unit-economics and managing customer satisfaction were priorities, before acceleration.
And don’t be fooled: it took a year-and-a-half after launching the MVP before the venture team decided that the venture was ready to ‘push the pedal to the metal’. Making this choice and saying no to earlier investments were key to this venture’s success. After operating at negative unit-economics for approximately two years, when scaling started every product was sold at operational profit. Now, another two years later the company is operating at a profit and starting to earn back investments.
Have you faced some of these common pitfalls in your venture? Need a hand in getting the venture moving again? Why not get in touch with our dedicated ventures team! Or for more insights to corporate venturing, check out our article series below.
THE VENTURE ARTICLE SERIES
We have learned a lot through helping our clients over the years, and we’ll be sharing our key insights with you in a number of publications. The topics we cover are:
Introduction to corporate venturing: This article is the first in our new series of articles on ventures and scale-ups in a corporate setting.
When to build (and when not to): Exploring further that ventures aren’t for everyone, as strategy dictates approach
How to build a venture: Drawing the journey of venture building with activities, deliverables, and team set-up for each phase
How to scale: Taking the right steps from start-up to a successfully scaled organization
Common pitfalls: What can go wrong and how to make sure to avoid it
Governance – set-up: How to govern ventures correctly with the right targets, reporting lines, financing, etc.
Governance – freedom balance: Finding the right balance between giving a venture freedom versus ensuring a strategic match
Manage (KPIs): Looking at the right KPIs based on the de-risking funnel, performance analytics, and reporting to corporate
Team: Solving key questions on venture teams and the importance of a great venture lead
Venture tooling: How to make the key choices and available options for MVP landscape tools, growth hacking tools, and collaboration tools
Customer validation best reads: Sharing our top picks in the literature on customer validation
We hope you’re as excited as we are and please let us know if you have specific topics or questions you would like us to share with you.