How To Structure Relationships Between A Corporation and A Start-Up:

Corporations Target Start-Ups

A trend that has been building among global corporations, both leading edge and the staid brick and mortar, is their involvement with start-up companies, many hardly a fraction of their size. The marriages are formed through investments, acquisitions, carve-outs and spin-offs, and they could dramatically shape the business landscape for the next few years. Dot-com mania was about first mover advantage to leverage the Internet. Corporate start-ups are about searching for, and possibly finding the elusive corporate fountain of youth: new product offerings, new channels of distribution, proprietary research and Internet-based services. It is all about bringing the start-up’s creativity, energy and speed inside the slumbering giants.

By Roger Sobkowiak, Adapted with permission from the Human Resources Planning Journal

When retail giant, Sears, created a dot-com to sell its merchandise over the net, it was actually creating another distribution channel. But it also caused a confrontation between the values of a one-hundred-year-old company and the X-generation that drove the dot-com. When GE took research out of its lab and created the printer business, it was starting a new stand-alone business. However, GE also had to coax key scientists to transfer out of the lab and work through the factory issues of a product launch. And when Praxair launched a B2B, it was creating an entirely new channel for its products and their competitors. Praxair also had to figure out how to convince their distributors that the new portal would not capture market share by shrinking the distributors’ current business.

What makes three start-ups interesting is that they all had to work their way through a complex set of organization dynamics to be successful, and this is equally true for the hundreds of other start-ups being courted by large corporations. In every case the start-up investment, acquisition or launch is not really starting from scratch, but instead is encumbered with the legacy culture, management processes, HR policies, organization structure, and governance protocol that are all deeply rooted in the parent company. This is the corporate DNA that can help a start-up or stop it in its tracks.

At the outset of a relationship between a corporation and a start-up, the discussion about organization dynamics takes the form of questions about how similar or how different should the start-up be relative to the parent company? If the difference is critical to success, how is it achieved? How exactly should the parent company behave toward the start-up? What degree of interdependence is warranted? Should a start-up be co-located and what are the implications? Should a start-up strive to have its own culture, and how is a different culture inside a greater one successfully formed? Should a start-up leverage the functional services of the parent company and what is the trade-off if they do everything on their own. What percentage should the parent own? Should the start-up have other investors and what are the implications?

These are not trivial issues. How the management teams of both the corporation and the start-up answer these questions will fashion the kind of start-up that is created and ultimately contribute to its success or failure. Answering these questions also begins to tease out how the parent company and the start-up must change.

A Useful Framework

Organization dynamics is a squishy term; often used and just as often misunderstood. In the simplest definition, organization dynamics is the interplay between business, processes and people. When they do not align, there are generally behavioral fireworks, critical energy dissipated and a lot of lost time. When they do align, the corporation or start-up is most effective. When a corporation invests in, acquires or launches a start-up, there are two sets of dynamics that have to be considered.

The presenting management question is how much of what is in “A”, labeled DNA, should be transferred into “B” and vice versa. A gut wrenching more fundamental second question is how much change has to occur in “A” and “B” for the relationship to be successful.

As an example, if a parent corporation has a policy of stock options only for the highest level executives, that is not a policy that its start-up should emulate. The start-up would most likely want to provide stock options for all employees. If the parent hired people who adhered to a specified dress code, again that is a policy that a hip start-up would shy away from. If the business plan of the parent company called for working through national distributors, the start-up with its direct sales approach would have to separate itself as it developed another delivery channel. Organizational friction is created inside either “A” or “B” when the elements are not aligned. Damage occurs when the wrong DNA is passed from “A” to the start-up “B”. As the misalignment or differences between corporate and start-up become greater, pressure builds on the parent corporation to re-examine its basic tenants of operation and the answers of what it must do will not come easily.

The important thing to realize is that because of its longevity, the parent company has continuous activities going on or existing in all three corners. The start-up, though, has to determine on the fly what should be in its three corners. The usefulness of the triangle is that it reminds the management teams that all three corners should always be aligned. Something in one corner will always affect what should happen in the other two corners.

Here are a few simple examples of alignment from the start-up perspective. If the start-up’s strategy is selling directly to retail stores, the process would have to include a regional sales organization, a competitive sales commission plan and people selected based on their retail sales experience. If a start-up’s product plan called for buying content or components, the process should include advisors or board of directors who could open doors to potential partners, while the people hired should be effective at building and maintaining vendor relationships.

Reality of a Start-Up

While the examples intuitively make sense and are easy to accept and relate to, here is the rub. Although the importance of aligning values and practices may seem obvious, there is always slippage between the parent corporation and the fast-growing start-ups. The problem generally arises because the management teams typically overlook the importance of organization dynamics in the early phase. It is often difficult to achieve alignment between the three corners in the best of circumstances, and it is almost impossible when the management teams have spent no time sorting out the content of the two distinct models, the parent and the start-up. This reality is what makes managing the dynamics between the start-up and the parent so difficult.

The more time and serious attention the parent company and the start-up spend upfront thinking about and discussing DNA, the easier they will find handling many of the tough questions about the business, process and people, and act wisely in the early stages of their new relationship to achieve the DNA transfers that will more likely lead to success.

In the sample as well as in real situations, there are always more differences than similarities. While there are many differences, the partners in this unusual relationship of corporate giant and still wet-behind-the-ears start-up should take advantage of all similarities. One similarity is that both the parent and the start-up require people with the same industry experience. They need sales engineers who know how customers, at both large corporations and small metal fabricators, buy and use steel. The expertise must be available to the start-up on a part- or full-time basis. Another significant similarity are the values common to both organizations. By recruiting some of the management talent from the parent company, the start-up will absorb the corporate values the management talent brings with them.

One difficulty, though, can occur when more management talent comes from the parent company, bringing with them more of the company DNA in the form of culture, management practices and governance. On the up side, they will bring some of the right values, integrity and teamwork; on the down side, they may bring work ethics and practices that can be counterproductive to a start-up that needs speed in decision making instead of plodding bureaucracy. This is an important trade-off to seriously examine and consider making. The more of anything that comes from the parent company, the more of its legacy, practices and thinking follow.

Guidelines for the Start-Up

Given the newest of this trend of corporations connecting to start-ups, the start-ups’ own management team would be wise to set into place some rules that will protect them from the corporate parent. These rules are necessary to enable their organization to field the required team and set the right processes in place so they can make good, reliable and correct decisions.

Create a one-page statement describing the model of both companies, and do it sooner rather than later; as soon as possible is better. Writing it down helps make it a responsibility management will remember.

Never take the start-up’s CEO from the parent company. The CEO cannot be encumbered with the old company’s attitudes and values, nor what might be the ancient and counterproductive practices of its legacy. Use a combination of key management positions, advisor roles and Board of Director seats to connect the start-up to the parent, and maintain the necessary bridges of trust and confidence.

Limit taking only one advisor and one board member from the parent company. There needs to be a link to the parent company, not a chain.

Teach every manager the concept of alignment (how the triangle has to be in balance) so that they understand how business, processes and people have to work together. Good executives work in all three dimensions. Lesser executives tend to be more narrow, and need more reminders.

Select staff, especially managers, who can do the full job that includes creating the start-up processes and selecting the right kind of people. It is important that they demonstrate interest for creating the right kind of company.

Reward and recognize the role models. Behavior change requires constant encouragement and reinforcement.

Wean the company from the parent company’s space and services as quickly as possible. Help from the parent company, while well intended, will inevitably pass along too much bad DNA.

Hold bi-weekly employee meetings and talk about the kind of company you want to be. Your management team should already have a vision it communicates to employees. Again, keep it top of mind.

Create a management team dashboard for tracking the progress made in all three corners of the model. Don’t let anyone off the hook for not owning the full implications of their decisions and actions.

Re-inspect the start-up model to make sure the three corners are aligned. Every start-up will have to go through permutations to find the right combination of business, process and people to match the evolving market.

Decisions in Practice, A Holistic View Required

The crux of the problem is that these ten rules are not foolproof. It is very difficult to see how the parent company positively or negatively impacts the start-up because there is so much going on at the same time. Furthermore, the well intended seem to address the issues from a different perspective.

With the framework as a backdrop, it is possible to see how easily decisions made with good intentions and the best information cause problems for the start-up. What follows are five examples of DNA transfers that go from okay to disastrous.

The start-up decides to move out of the parent company’s headquarters and into a major mid-western city. When its management talks to the leasing agent trying to secure office space, they are told that, being a start-up, they would have to pay three months advance on the rent. Here is where they leverage the parent company, which promises that they will make good on any default. The start-up gets the space they need with less cash used up front. There were no downsides in this maneuver.

When the start-up needs to order computer equipment to start building the web site, they automatically turn to the parent company’s purchasing department for help with developing the RFP’s and to scrutinize the vendor responses. It is good until, of course, the purchasing department works at its usual pace; the order languishes and bids arrive late. The purchasing department’s built-in processes, while considered world class, execute too slowly. The consequence is the start-up experiences a major set back that can potentially affect its long-term success.

The start-up requires help building marketing materials. When approached, the parent company’s marketing department says it is overextended and cannot support the start-up without additional resources and funding. The most they can provide is a list of marketing companies that can deliver the support the start-up requires. And by the way, they do want to review and approve any of the start-up’s marketing initiatives to ensure that they will not negatively impact on the parent company’s marketing programs. This significantly inhibits what the start-up can do. Worse still, its strategy is subordinated to the parent company.

The start-up determines that to attract initial customers they must offer a product discount. The parent company divisions that are supplying some of the product will not support or endorse a discount. Their management representatives argue that offering a discount will just cannibalize current customers who will log on to the Internet for the lower prices versus attracting new customers who will recognize an opportunity to try the products. The start-up management team must win over each contributing division, and the internal selling effort is long and arduous. There is no pressure from the CEO’s office for the divisions to see a compromise. The internal negotiations drag on and the strategy to create a B2B is revisited and revisited. The discount never occurs and the start-up turns to other suppliers, who gladly provide a price discount to be part of the initial site offering.

As the start-up builds its management team, two senior executives opt to transfer from the parent company. They bring the right industry experience and are highly respected and trusted by the Chairman and Board of Directors. However, they ask for a special deal concerning their parent company pension and job guarantee if the start-up should fail. Special accommodations are made. This sets up a two-tiered pay system for the start-up.

In the five examples the initial requests seem straightforward enough. The parent corporation responded. But it didn’t take very long before the “help” caused more damage than good. Good intentions do not always result in good results.

The ten rules were predicated on the belief that the parent company would do very little, if anything, to accommodate the start-up. For its own safety the start-up has to enter into the relationship almost as if it is a foreign body part that the corporate body will try to reject.

Start-Up Watchfulness

While it is everyone’s concern, it is no one’s job. Enabling the start-up and the corporation to work together is much harder than it appears. That is why so many acquired or launched start-ups never produced the desired payback. The difference between a start-up and a corporate parent are too great to be smoothed over by an exchange of money, an offering of services or a transfer of executives. The whole value of the start-up is embedded in its smallness, lack of structure, speed of decision making, “connected-ness” of the executives and ability to manage change and self-correct. When and if it loses any of these attributes, it diminishes its value to the parent corporation. The secret is being aware of and managing the organization dynamics. This has to become a regular agenda item.

About The Author:

Roger T. Sobkowiak, located in Westport, CT, is a HR Consultant specializing in organization and executive assessment. He has extensive experience in working globally with corporations that have invested in, acquired or launched start-ups. He can be reached at [email protected].

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