Evangelos Simoudis, senior adviser, Trident Capital examines corporate accelerators and incubators.

In my article published in last month’s issue I wrote about corporate incubation and acceleration models, presenting four distinct ones, discussed how to start one of these organisations, and how to increase the value derived from them. In this article I provide additional details on the topic by:

  • Presenting the criteria and guidelines a corporation should use to start an incubator or accelerator. This is particularly appropriate for corporations that are thinking about starting an incubator or accelerator, or have just started one.
  • Discussing what the corporation could do with successfully incubated projects, for example whether to integrate them with a business unit or let them operate independently. This is particularly appropriate for corporations that have started an incubator or accelerator and now considering how to be utilise the incubated efforts.
In order to decide whether to start an incubator or accelerator, the corporation must first define its innovation objectives and associate with each objective an innovation timeline for achieving it and the corresponding innovation key performance indicators for monitoring its progress. For example, one of Amazon’s long-term innovation objectives is to maintain Amazon Web Services’ (AWS’s) leadership through technology innovations that enable it to continue cutting costs on its existing cloud solutions while increasing the scalability of these solutions. On the other hand, Microsoft’s short-term innovation objective is for Azure to become a successful fast-follower to AWS, and within a year offer capabilities that are on par with AWS’s capabilities today. The innovation objectives, combined with the timelines – long term versus short term – ultimately help determine the need for establishing an incubator. It is unlikely that incubators would help a corporation achieve its short-term innovation objectives but can contribute towards the achievement of long-term goals.

To understand better what role incubators can play in achieving long-term innovation objectives, let me relate a story. A couple of weeks ago I was speaking with an automotive executive about the impact of Tesla, Uber and Google’s Self-Driving Car to the automotive industry. We spoke about the innovations each of these companies has introduced, their differing visions of transportation’s future and the threats they pose to the traditional automotive industry and its value chain. The executive indicated that his company had recently introduced an electric car so they felt less threatened by Tesla. I pointed out that Tesla’s innovations went beyond the electric vehicle and included sales model, user experience and automatic software updates, battery technology and fuelling stations. These innovations pose an existential threat to the traditional automotive industry’s entire value chain, including the car dealers, the gas stations, and the car repair shops to name a few. Addressing these existential threats requires the establishment of long-term innovation objectives. To address such long-term objectives in 2010, General Motors established its venture fund, and in 2011 BMW established its iVentures fund and incubator, while this year Nokia created its Connected Car venture fund.

Our conversation then turned to Uber’s and Google’s transportation vision, which is even scarier to automotive manufacturers because it calls for a shift away from individual car ownership and towards the adoption of transportation networks. If it succeeds it will lead to a radically reduced demand for new cars, negatively impacting even more industries including automotive manufacturers, insurance, oil and gas, as well as governments that will see reduced revenue from parking, taxes, traffic violations and tolls. Google’s self-driving car will take transportation networks one step further byeliminating the drivers altogether, and through big data analytics offer dynamic pricing, like Uber, but also optimisation of the number of vehicles that will be needed to serve a population. The conclusion from this conversation is that a short-term response to a market challenge does not require an incubator but a long-term one can benefit from project incubation. In fact, Google’s did – the self-driving car was conceived at Google X, the company’s internal incubator – model 3 in my taxonomy of incubator and accelerator models.

Incubators and accelerators are organisations that are ideally suited to helping corporations identify and explore open-ended and ill-defined ideas that are associated with long-term timelines to return on investment (ROI). I emphasise “ideas” because incubators are excellent as a sources for innovative ideas. Corporations must recognise that fact and understand that even for ideas they should not rely solely on incubators and accelerators. Incubators and accelerators are excellent sources for prototypes and mock-ups. Only a few of the corporations that have created or are working with incubators and accelerators realise their utility as sources of ideas and prototypes, as well as ways to improve their market intelligence. Most of them do not yet.

Corporations expecting incubators and accelerators to generate solutions that can be transferred directly to their business units will be disappointed. If they need working solutions then they are better off working with their venture group to identify them and invest in them. For example, GE Capital invested in Mocana, which has developed a mobile application security platform that is well suited for the internet of things, Intel Capital invested in Cloudera for its big data infrastructure software, and Visa invested in Square for its mobile payments platform.

Which brings us to the question of when a corporation should consider establishing an incubator or accelerator either on its own or in partnership with a third party. Many corporations have already created incubators and accelerators.

Corporate objectives for establishing an incubator or accelerator

I recommend establishing an incubator or accelerator when the corporation wants to:

  1. Access outside talent and innovative ideas around an open-ended objective with fast-paced innovation and long-term timelines to ROI. The established incubator or accelerator can be based on any of the four models discussed. Samsung’s incubator is an example.
  2. Train intrapreneurs by placing them in an immersive environment where they can be educated on entrepreneurship models and have daily interactions with entrepreneurs. The established incubator or accelerator can be based on the third and fourth of the models discussed. TCS, Standard Chartered Studio, Mastercard Labs are good examples.
  3. Stimulate startup activity around a new platform, for example IBM Watson and Amazon AWS. The established incubator or accelerator can be based on the first three of the models discussed. Microsoft’s Kinect incubator is an example.
  4. Spur innovation in an area – industry or sector – where little is happening, for example the utility industry. The established incubator or accelerator can be based on the first three of the models discussed. The Nupharo Park environmental technology incubator is an example.

Teams required for establishing an incubator or accelerator

Establishing an incubator or accelerator requires the formation of the following teams:

  1. Project selection and final evaluation team: This team may consist of both corporate employees and outside experts. They evaluate the ideas submitted by the teams that want to be incubated and select which teams to admit in each class. At the end of each cycle they evaluate the incubated projects and typically select the top one to three projects.
  2. Mentors team: A mentor works closely with each team being incubated and helps its members work cohesively, shape their idea, explore alternatives, recruit additional members and connect with customers, potential partners and even investors. Each mentor typically works with three or four teams.
  3. Education team: This team is responsible for providing the basic concepts about startups and entrepreneurship, and present models such as lean startup and agile development. This team may consist entirely of outside speakers.
  4. Operations team: The members of this team include the executive managing the incubator, business development and marketing managers, the individuals supporting the incubator’s back office, and a few relationship managers whose goal is to act as liaisons between the projects being incubated and the business units, keeping them informed on the projects’ progress but, most importantly, of each project’s relevance to each business unit’s long-term goals and priorities. The managing executive, along with business development managers, recruit candidate teams, and network in the incubator’s broader ecosystem, for example Silicon Valley, with the appropriate constituencies, for example venture investors and intellectual property (IP) lawyers. The back-office group supports the teams being incubated – IT, financials and facilities – generally manages the incubator’s operations, and manages the joint development agreements, licensing agreements, and original equipment manufacturer deals with the incubated companies.

As I had also mentioned, for these efforts to succeed long term, they always need to have a strong executive sponsor within the corporation.

Whether from within the corporation or outside, recruiting the members for these teams is not easy because they are in high demand and must have a particular temperament for working with early-stage entrepreneurs and their ideas. The outside members of these teams typically come from the management teams of mature or exited startups, venture firms, consulting companies and entrepreneurs that remain involved with the startup ecosystem because they desire to give back or are looking for their next opportunity.

The members that come from within the corporation ideally should come from the business units. Often they come from the financial organisations in the corporate headquarters. I have two recommendations regarding corporate employees becoming associated with the incubators:

  1. Corporate employees should staff the project selection and final evaluation team, as well the mentors and operations teams, particularly as relationship managers.
  2. Assign to the incubator or accelerator employees who are entrepreneurial, feel passionate about innovation and do not see this assignment as a means of building large and complex corporate organisations.

As one can easily conclude, setting up a corporate incubator or accelerator requires a significant monetary and people investment. The high cost does not come from real estate, even though real estate prices in areas such as Silicon Valley are extremely high, but from identifying, recruiting and retaining the right people to staff the incubator or accelerator. Working with a third-party incubator, like Techstars, could alleviate some of these costs but the corporate investment remains high. Before starting the incubator or accelerator the corporation must determine the budget that will be funding it – office of the Treasury, the corporate venture fund or the corporate development organisation – and must have a long-term and strong commitment to the organisation in order to realise significant ROI during the established timeline. 

Let us assume that a corporation has established an incubator or accelerator and out of each class of accepted teams one or two are selected as the best and most promising for further development. How should the corporation approach the selected startup teams, what are the issues that warrant particular attention and what are the benefits of each approach? I have identified four different options – shown in the illustration on the next page – that relate to the first and second incubation models that were pre–sented here. The other two models do not apply because they refer to internal organisations.

The issues and benefits associated with options 1 to 4 are shown below the illustration. Issues relate to intellectual property, employee recruitment and retention, ownership structure, governance, identifying additional funding sources if the corporation does not want to be the sole investor in the startup, and establishing operations when the corporation acquires the startup after its incubation period.

In previous articles I tried to provide an in-depth perspective on corporate incubators and accelerators. At a time when everything related to startups appears easy, particularly in Silicon Valley, incubators and accelerators are not recommended for every corporation. However, they can play an important role in the set of options that enable a corporation to achieve its innovation objectives. For this reason I offer the criteria and guidelines corporation should use when establishing an incubator or an accelerator.

I have proposed four incubator models and a process that can help corporations increase the value and success they derive from their incubators or accelerators. The biggest challenge is how to deal with successfully incubated projects since that is the time when the corporate processes and bureaucracy will need to engage fully. To help with this issue I have provided a methodology on what the corporation could do with such projects.

All these point to the fact that work–ing with incubators and accelerators requires that a corporation has a long-term horizon and strong commitment in order to achieve the significant innovation ROI that is possible.

This article originally appeared on Simoud is’s blog: corporate-innovation.co/2014/09/08/additional-considerations-for-corporate-incubators-and-accelerators/