Startup as a service

How can big companies benefit from startup methodology?

The Lean Startup methodology is widely practiced in Silicon Valley and elsewhere, and by now, large companies are trying to use the method to drive new growth. However, the attempt to marry startups and big corporate is riddled with practical obstacles, and corporate innovation executives that have undertaken this challenge have typically had to figure out everything from scratch. Judging from anecdotal evidence, this has met with mixed results.

In the in-depth case study “Startup as a service: The Prehype model“, I describe how the venture development firm Prehype has pioneered a new, seemingly successful business model in the innovation space. The firm, headquartered in New York and with offices in London and Copenhagen, has created partnerships with companies like Lego, Mondelez, News Corp and Verizon to invent and develop new businesses that leverage the big company’s existing resources. Prehype doesn’t just come up with an idea or build a prototype – they build the actual startup as well, creating a very different value proposition compared to most offerings in the innovation industry.

The case details how Prehype’s business model and process works, and highlights a number of important design principles:

• Shared fate. Through an equity model, Prehype deliberately engineers their business model so they and the client company have shared long-term incentives and can focus on building a successful venture fast. This is an interesting contrast to many of the existing innovation agencies whose business model (centered on billable hours) arguably drives them to prioritize overly big projects.
• Structures define outcomes. In line with my research on innovation architecture, Prehype takes a very structurally focused approach to eliciting the right behaviors from both the client company and their own partners. For instance, Prehype uses a 100-day criterion to filter ideas: if they can’t build a first prototype of the product in 100 days, the idea is too big.
• Separate but connected. To circumvent corporate timelines, Prehype often creates a separate legal entity to allow them to ‘move fast and break things’. However, key executives from the client company are closely involved in the process, in order to minimize the risk that the projects become ‘orphaned’ and are not successfully reintegrated in the main company.
• Risk management. To reduce the risk for the client company, Prehype operates with a ‘clear cost of closure’ principle by which the client always know how much it will cost them to close down a Prehype project at any given time in the process. The model also allows the company to ‘buy out’ the venture from Prehype at a pre-determined cost.
• Attracting good entrepreneurs. Many companies struggle to attract top-tier entrepreneurial talent, with the result that in-house innovation units may end up being populated with people that don’t have sufficient expertise in building new ventures. Prehype’s business model is engineered to be attractive to the individual entrepreneurs as well, for instance by providing a way to reduce the personal risk of starting a business. This is an interesting contrast to the traditional insistence from venture capital firms that entrepreneurs go ‘all in’ and risk everything – something that serves the interests of the venture capitalists more than it serves the entrepreneurs, given the pretty unforgiving failure rates in the startup space (and, for that matter, the high rates of depression that entrepreneurs seem to suffer from).

Four specific Prehype projects are described in the case, including the language learning service NewSmart, the product sampling company BetaBox, and the internal Prehype startup BarkBox.

The Prehype case is available for purchase at Harvard’s case collection for USD 8.95 per copy. I can be contacted on thomas.wedell@gmail.com.