Chapter 1
Where is the value?
Identify proprietary and transformative value
Action
Start with the customer opportunity
The number-one regret of organizations that built new businesses is that they wished they’d had a better understanding of their customers’ needs, expectations, and pain points.¹ Too often, companies come up with an idea and then go looking for customers for that idea. That approach doesn’t work. Combine trend analysis, deep customer research, and ethnographic studies to identify what customers really want or need, and then develop a clear plan to meet it.
60%
Successful business builders use holistic customer-related metrics—such as customer surveys, feedback panels, diary studies, and ethnographic field studies—relating to customers’ experiences 60 percent of the time.²
Action
Start with the customer opportunity
The number-one regret of organizations that built new businesses is that they wished they’d had a better understanding of their customers’ needs, expectations, and pain points.¹ Too often, companies come up with an idea and then go looking for customers for that idea. That approach doesn’t work. Combine trend analysis, deep customer research, and ethnographic studies to identify what customers really want or need, and then develop a clear plan to meet it.
60%
Successful business builders use holistic customer-related metrics—such as customer surveys, feedback panels, diary studies, and ethnographic field studies—relating to customers’ experiences 60 percent of the time.²
Action
Find your unique advantage
When evaluating start-ups, venture capitalists will look for assets that are hard to replicate. Take a similar view by grounding your new businesses on an existing and proprietary advantage. Identify and assess your existing assets (such as data, processes, tools, intellectual property, and technology) to identify whether you have something valuable that your competitors don’t. The important element is having a mindset to think in terms of market value. Many companies have important assets they already use, but they just don’t understand how potential customers might value it.
Action
Find your unique advantage
When evaluating start-ups, venture capitalists will look for assets that are hard to replicate. Take a similar view by grounding your new businesses on an existing and proprietary advantage. Identify and assess your existing assets (such as data, processes, tools, intellectual property, and technology) to identify whether you have something valuable that your competitors don’t. The important element is having a mindset to think in terms of market value. Many companies have important assets they already use, but they just don’t understand how potential customers might value it.
Action
Go big
The new business should have the potential to generate transformational, not incremental, value. Don’t do it if you don’t think you’re building a unicorn. Understand whether the total addressable market (TAM) is big enough. Three sectors with annual revenues greater than $5 trillion—technology, media, and telecommunications; industrials; and healthcare—account for almost a third of the top 100 unicorns.³
2x
Companies need to increase their rate of business building more than two times over the next five years to meet their revenue growth expectations.⁴
Action
Go big
The new business should have the potential to generate transformational, not incremental, value. Don’t do it if you don’t think you’re building a unicorn. Understand whether the total addressable market (TAM) is big enough. Three sectors with annual revenues greater than $5 trillion—technology, media, and telecommunications; industrials; and healthcare—account for almost a third of the top 100 unicorns.³
2x
Companies need to increase their rate of business building more than two times over the next five years to meet their revenue growth expectations.⁴
Case example
An engineering company⁵ identified a fragmented market characterized by proprietary systems that was ripe for disruption.
It built an open IoT platform and, nine months after incubation, had more than 25 third-party software applications from the retail and transport industry running on cameras from multiple manufacturers.
Case example
An engineering company⁵ identified a fragmented market characterized by proprietary systems that was ripe for disruption.
It built an open IoT platform and, nine months after incubation, had more than 25 third-party software applications from the retail and transport industry running on cameras from multiple manufacturers.
Pitfalls
Lack of buy-in
Misaligned expectations, such as how long it will take for a new business to turn a profit or how to manage access to internal assets, create friction and can cripple the new business before it has a chance to succeed. The CEO has to ensure leaders in the incumbent company support the new business.
Lack of commitment
Building a business is a serious commitment that requires time and resources. Successful business builders allocate, on average, one-third of their organic-growth capital to business building—more than twice as much as the laggards do.⁶
Lack of a ‘why’
Ambitious goals but an unclear vision and incoherent strategy lead to poor decisions and long delays. Clear and consistent communication on purpose and goals is essential.
Chapter 2
How do I get started?
Invest in solid foundations
Action
Choose an approach that suits your situation
- 1. Internal incubator
- 2. Scale-up factory
- 3. Clean slate
Action
Choose an approach that suits your situation
- 1. Internal incubator
- 2. Scale-up factory
- 3. Clean slate
Approach 1
Internal incubator
Internal employees develop ideas from the bottom up and pitch them to an internal venture-capital board. Suitable for incumbents that have a clear overall sense of the future direction of their business and sector, as well as a strong pipeline of promising early-stage ideas.
Approach 1
Internal incubator
Internal employees develop ideas from the bottom up and pitch them to an internal venture-capital board. Suitable for incumbents that have a clear overall sense of the future direction of their business and sector, as well as a strong pipeline of promising early-stage ideas.
Approach 2
Scale-up factory
Parent company sets up a fully owned but separate subsidiary exclusively dedicated to business building. Suitable when an incumbent organization already has a strong pipeline of new-product and -business concepts that have been validated with early customers and partners but it lacks specialized resources, talent, and expertise.
Approach 2
Scale-up factory
Parent company sets up a fully owned but separate subsidiary exclusively dedicated to business building. Suitable when an incumbent organization already has a strong pipeline of new-product and -business concepts that have been validated with early customers and partners but it lacks specialized resources, talent, and expertise.
Approach 3
Clean slate
Incumbents set up a new, fully independent start-up. Suitable when executives have identified a big, promising idea for a new business well beyond their organization’s core focus.
Approach 3
Clean slate
Incumbents set up a new, fully independent start-up. Suitable when executives have identified a big, promising idea for a new business well beyond their organization’s core focus.
Action
Recruit a leader who is an entrepreneur
The best new-business leaders can come from inside or outside of the sponsoring business. They must have extraordinary drive and sales instincts, experience launching new ventures, an understanding of corporate concerns (as well as an interest in addressing them), and sufficient diplomatic skills to challenge corporate orthodoxy. Support for that leader should include an effective innovation board with a representative from the incumbent business, a venture capitalist, and necessary expertise that the incumbent lacks.
Action
Recruit a leader who is an entrepreneur
The best new-business leaders can come from inside or outside of the sponsoring business. They must have extraordinary drive and sales instincts, experience launching new ventures, an understanding of corporate concerns (as well as an interest in addressing them), and sufficient diplomatic skills to challenge corporate orthodoxy. Support for that leader should include an effective innovation board with a representative from the incumbent business, a venture capitalist, and necessary expertise that the incumbent lacks.
Action
Focus on developing a business-building muscle
Develop a portfolio of new businesses to build experience and increase the chances of a big winner emerging. To manage the portfolio, create a centralized capability that can support the new businesses. Crucial support mechanisms include standardizing best practices, instilling financial discipline, developing milestones, allocating talent and capital tied to those milestones, and providing specific capabilities such as M&A.
2x
Companies that have launched at least four new businesses in the past ten years are two times likelier than less frequent business builders to generate more than five times the returns on their investment.⁷
Action
Focus on developing a business-building muscle
Develop a portfolio of new businesses to build experience and increase the chances of a big winner emerging. To manage the portfolio, create a centralized capability that can support the new businesses. Crucial support mechanisms include standardizing best practices, instilling financial discipline, developing milestones, allocating talent and capital tied to those milestones, and providing specific capabilities such as M&A.
2x
Companies that have launched at least four new businesses in the past ten years are two times likelier than less frequent business builders to generate more than five times the returns on their investment.⁷
Case example
BP, the global energy company, set up Launchpad, a “factory” that builds new businesses that commercialize those innovations at scale.
The new businesses tap into the assets of BP by working with designated representatives of its functions, who use their relationships within the company to help its new businesses gain advantages (such as access to customers) from its scale.⁸
Case example
BP, the global energy company, set up Launchpad, a “factory” that builds new businesses that commercialize those innovations at scale.
The new businesses tap into the assets of BP by working with designated representatives of its functions, who use their relationships within the company to help its new businesses gain advantages (such as access to customers) from its scale.⁸
Pitfalls
False synergies
Incumbents often encourage the new business to use their existing systems and processes. These systems, however, are often expensive, complex, and slow. Allow the new business to determine which of the parent company’s assets will provide the greatest benefits and how to draw on them. New businesses should have their own leadership teams, technology environments and tools, governance mechanisms, management practices, and talent practices (including career paths and rewards).
Too much planning, too little execution
The only practical way to move ahead quickly and effectively is to test and adapt based on what is learned from customers. This requires a team made up of “doers” who have a bias for real-world testing and experimentation, look to data to guide decision making, bring both coding and design skills, are eager to learn from mistakes, and are comfortable with uncertainty.
Homogenous teams
Diverse teams bring different skills and perspectives, which help them perform better. That diversity spans gender, ethnicity, experience, and problem-solving capabilities. Top founding teams have backgrounds in technology (around 40 percent of founders), natural science (around 25 percent), and business (around 25 percent).
Chapter 3
How do I launch ASAP?
Launch a business that your customers value
Action
Build a minimal ‘lovable’ product
Don’t focus too much on technical feasibility. Focus on building a minimal lovable product by prioritizing “signature moments” that create an emotional connection with the customer.
Action
Build a minimal ‘lovable’ product
Don’t focus too much on technical feasibility. Focus on building a minimal lovable product by prioritizing “signature moments” that create an emotional connection with the customer.
Action
Grow through rapid learning cycles
Setbacks are inevitable, so maximize learning speed. Launch at least one experiment a day. Obsess over data, check it often, and make it transparent so anyone on the team can easily see the latest results. Test concepts and initial prototypes with actual customers, make decisions based on data, and be prepared to pivot based on what you learn.
70%
Successful new businesses are nearly 70 percent likelier than unsuccessful new businesses to make decisions based on data and tested hypotheses.
Action
Grow through rapid learning cycles
Setbacks are inevitable, so maximize learning speed. Launch at least one experiment a day. Obsess over data, check it often, and make it transparent so anyone on the team can easily see the latest results. Test concepts and initial prototypes with actual customers, make decisions based on data, and be prepared to pivot based on what you learn.
70%
Successful new businesses are nearly 70 percent likelier than unsuccessful new businesses to make decisions based on data and tested hypotheses.
Action
Develop true empathy with your customer
Observe customer preferences; don’t ask about them. Use social media to see how customers respond to pain points, value propositions, and calls to action. Invite customers into the design process from day one and continue to collect qualitative feedback. Build up a contact database of people involved in early rounds of testing. Use it to develop an active wait list or seed a customer beta program for rollout three to six months before the minimal viable product launch.
Action
Develop true empathy with your customer
Observe customer preferences; don’t ask about them. Use social media to see how customers respond to pain points, value propositions, and calls to action. Invite customers into the design process from day one and continue to collect qualitative feedback. Build up a contact database of people involved in early rounds of testing. Use it to develop an active wait list or seed a customer beta program for rollout three to six months before the minimal viable product launch.
Case example
A start-up in Singapore planned to launch a digital version of a stamp card to reward customers for frequenting their favorite shops and restaurants.
In assessing interest in this service, it took a low-fi approach and simply asked a single question of merchants that would be potential users of the service: “Do you know who your top ten customers are?” This simple exercise quickly revealed that the merchants had no reliable way to identify their best customers and no digital channel for interacting with them.
Case example
A start-up in Singapore planned to launch a digital version of a stamp card to reward customers for frequenting their favorite shops and restaurants.
In assessing interest in this service, it took a low-fi approach and simply asked a single question of merchants that would be potential users of the service: “Do you know who your top ten customers are?” This simple exercise quickly revealed that the merchants had no reliable way to identify their best customers and no digital channel for interacting with them.
Pitfalls
Vanity metrics
Companies often get excited about vanity metrics, such as share of voice or traffic. These do not reflect how a business is valued. Key metrics to track are the number of referrals per customer, the conversion rate of referrals per customer, the satisfaction rate per new customer, cost per acquisition, and churn rates.
Ignoring the incumbent
Keep key incumbent stakeholders involved through frequent check-ins and reviews. At the same time, ensure that those stakeholders have restricted decision rights so as not to slow down the new business.
Chapter 4
How do I grow my business?
Stay focused on the business so it can grow
Action
Fixate on the right KPI(s)
Review critical leading and lagging indicators every day. Look for annual recurring revenues (ARR) over one-off sales, and look for customers who buy more than one product and whether per-customer revenue increases over time. Successful new businesses fixate on a single “star metric” that is most indicative of success for their business. In many cases, that metric reflects some element of time related to how soon a customer experiences the product. Obsess over the first ten clicks.
2/3
Two-thirds of the value creation of a new business comes from successfully scaling.⁹
Action
Fixate on the right KPI(s)
Review critical leading and lagging indicators every day. Look for annual recurring revenues (ARR) over one-off sales, and look for customers who buy more than one product and whether per-customer revenue increases over time. Successful new businesses fixate on a single “star metric” that is most indicative of success for their business. In many cases, that metric reflects some element of time related to how soon a customer experiences the product. Obsess over the first ten clicks.
2/3
Two-thirds of the value creation of a new business comes from successfully scaling.⁹
Action
Acquire businesses
Successful business builders report making a small number of focused acquisitions early in the scaling of their new businesses. Choose acquisitions that deliver value immediately and thus help a business scale more quickly, rather than requiring precious time and effort to unlock value.
25%
Companies that make two acquisitions by the end of early scaling are 25 percent more likely to be successful than those who made none or more than two.¹⁰
Action
Acquire businesses
Successful business builders report making a small number of focused acquisitions early in the scaling of their new businesses. Choose acquisitions that deliver value immediately and thus help a business scale more quickly, rather than requiring precious time and effort to unlock value.
25%
Companies that make two acquisitions by the end of early scaling are 25 percent more likely to be successful than those who made none or more than two.¹⁰
Action
Stay close to the customer
Customer preferences evolve and change, especially as the business scales to new segments. Maintain a continuous focus on the customer, which means maintaining design and research intensity through the scale-up phase. Successful builders measure their customers’ holistic experience from concept development through to scaling.¹¹
Action
Stay close to the customer
Customer preferences evolve and change, especially as the business scales to new segments. Maintain a continuous focus on the customer, which means maintaining design and research intensity through the scale-up phase. Successful builders measure their customers’ holistic experience from concept development through to scaling.¹¹
Action
Build a learning buffer
Build in buffers at the budget and resource level to account for inevitable setbacks. This is necessary to prevent setbacks from becoming showstoppers. A learning buffer doesn’t mean, of course, providing the new business with infinite funding.
Action
Build a learning buffer
Build in buffers at the budget and resource level to account for inevitable setbacks. This is necessary to prevent setbacks from becoming showstoppers. A learning buffer doesn’t mean, of course, providing the new business with infinite funding.
Action
Build for scale from the beginning
When a business has a proven market and is ready to scale, it needs to be able to go from selling and supporting a hundred products to a million without breaking. Strong technology foundations, such as automation and software products, are critical to have in place before you need them. That means developing a modular tech stack built around microservices and APIs that create simple and well-defined interfaces to data, algorithms, and processes. Partnering with the right hyperscaler (cloud provider) to take advantage of platform as a service (PaaS) and infrastructure as a service (IaaS) enables scale.
Action
Build for scale from the beginning
When a business has a proven market and is ready to scale, it needs to be able to go from selling and supporting a hundred products to a million without breaking. Strong technology foundations, such as automation and software products, are critical to have in place before you need them. That means developing a modular tech stack built around microservices and APIs that create simple and well-defined interfaces to data, algorithms, and processes. Partnering with the right hyperscaler (cloud provider) to take advantage of platform as a service (PaaS) and infrastructure as a service (IaaS) enables scale.
Case example
When a Scandinavian asset-management firm launched a new business, it developed an AI-based lead-scoring engine built on more than 70 data points.
This made it possible for digital-marketing programs to target high-value customer segments and to focus sales teams on the most promising incoming leads.¹²
Case example
When a Scandinavian asset-management firm launched a new business, it developed an AI-based lead-scoring engine built on more than 70 data points.
This made it possible for digital-marketing programs to target high-value customer segments and to focus sales teams on the most promising incoming leads.¹²
Pitfalls
Paying for customers
Successful scale-ups develop a clear point of view about which customers are the most valuable at a segment level. One rule of thumb is that customer lifetime value should be greater than or equal to twice the cost of customer acquisition.
Feature overload
The tendency is to continually add features to products or services. But the burden of additional and unnecessary features will slowly suffocate a new product or service.
Pulling the plug too soon
Many enterprises expect hockey-stick growth in three months. In our experience, success can take 12 to 18 months. Successful business building requires the ability to pivot quickly and to adapt the product based on feedback and key metrics from the market.
Pulling the plug too late
While new businesses need time to grow, some of them just aren’t meant to be. Keep a close watch on the most important KPIs, set realistic targets (both time and growth), and put in place a mechanism to make final decisions to stop funding a business that has no chance of being profitable.
Footnotes
Chapter 1
Where is the value?
⁵
Leap References compendium version 3.0 (July 2021)
Chapter 2
How do I get started?