To succeed in business building, you need a common language

Leyash Pillay: Hi Frank, thanks for joining us. Can you please tell us a bit about your the Lean Scaleup and the book with the same title? What is it about and where did the ideas come from? 

Frank Mattes: Thanks for having me. Happy to share a couple of thoughts and insights with you and the audience.

Since 2010, I’ve been working in the open innovation space. Companies looking to the outside world, startups, universities etc. for getting ideas and concepts that will help to drive the innovation agenda. Some five years ago, an interesting thing happened.

My client base, which is some 50% of the German prime stock index DAX and European or even global champions such as Philips, bp, ING Bank, Bosch, etc., said to me: Frank, the real problem for us is not the front end. We are not short of ideas. These flow in from working with open innovation, from intrapreneurship programs and many other channels. But they do not translate into business impact. Can you help us?

Being an innovator, I get curious when I hear the same song played several times all over the place. At that time, there was nothing out there really to solve the question that my clients raised. Nothing, not from the large consulting companies, nothing from academia and corporate venture builders were not that prominent.

So, I assembled some 20 great companies. Some of them you find on the reference section on www.leanscaleup.com. And I said, guys, you all have the same problem. And apparently there is not a solution out there. So let’s work the problem and build a solution, with the wisdom of the crowd. Let’s understand where the business building problem comes from and how it can be solved. That’s where the whole story started.  

The Lean Scaleup in a nutshell is basically helping companies to solve one of the biggest problems in corporate innovation, which is how do I turn great ideas into a new real, sizable, and profitable business. 

Leyash Pillay: You also mentioned in your book that one of the most common hurdles is getting past the Minimum Viable Product (MVP) phase, where 85 to 90% corporate startups don’t get over it. What’s causing this inability to get towards a point where you can scale? 

Frank Mattes: Before we come to that, Leyash, let’s look at the stats. There are several studies out there from Bain, Strategy&, McKinsey, etc. They all center around that only 1 out of 8 make it beyond the MVP chasm to scale.  

But there’s even a sadder story behind that. One of the large consulting companies investigated how big those ventures become that make it past that threshold. They found that only 1 out of 4 makes it beyond USD 50 million annual revenues. In other words, if you launch a corporate startup to create new revenue streams and to deliver a piece of the transformation agenda, your chance to create a sizable business is 3 percent. One out of 30 make it. That is a sad story.  

The deeper reason is that under one corporate roof you have two systems. Both of them are needed. It’s not about being good or bad or being better or worse. But these systems are incompatible. When you make the decision to scale up, basically you force these two incompatible systems to work together.  

One of these systems is the day-to-day business – let’s call it the NOW system – and the other one the innovation system – let’s call it the NEW system.

In the NOW system, you have well-defined processes, process control in the sense of Six Sigma, etc. Obviously, this system shapes the people that are working in it. People are risk-averse in that kind of system. Because every mistake that you make, every corporate rule that you violate, that’s not good for collecting career points.  

In the NEW system, people look out for Blue Horizons. They work completely different. It’s about understanding and reducing the uncertainty.

You start with fundamental questions like who will be our customers? Is it B2B, is it direct-to-consumer, is it B2B2C? Then you do tons of validations to remove that uncertainty in a build-test-measure-learn-repeat kind of way. You do not have any processes in here. You do have a methodology how to approach things.  

Before MVP, there’s a peaceful co-existence between these systems. But when you say, now let’s inject a couple of millions into this concept to make it big, using the goodies that we have – the customers, the brand name, the access to channels, transactional data to get AI models up and running etc. – then these systems clash. There are areas of tension.  

The NOW business will always win. It generates the money that the NEW system spends. And because C-level, shareholders, the goals and KPIs, etc., force people to prioritize the short-term over the long-term, the less risky variant over the more risky and more uncertain option. 

Leyash Pillay: What I quite like about what you said is that it’s a very human-centered approach. It’s not theoretical, it’s not black and white and “here’s a methodology, here’s a system, implement it and go.”

Frank Mattes: Right, the solution is a multi-dimensional thing. There will not be any whatsoever sophisticated canvas solving that problem. You need to put in more to make these two systems cooperate. 

Leyash Pillay: You also mentioned the importance of language. Can you touch on this? I feel like it fits within these two teams understanding each other. 

Frank Mattes: Let’s look at the NOW system first. Typically, the companies, the large firms, my clients, etc. have decades of experience on how to exploit – so they say – their respective business model. Every year, they put in more oil and grease to fine-tune the system and have the machines fire on all cylinders. They make more distinctions, more sophistication in their process control, in their financial controlling systems, etc. They build up a language that relates to the day-to-day business. Obviously, the language depends on the industry that you are in. Financial Services have a different language than machinery.  

The innovators also have their kind of jargon. From the NOW people’s view, it’s almost like this Japanese dance drama Kabuki. They see people in different clothes. These people do fancy stuff with post-its and ‘canvases.’. They use a storage language with terms like problem/solution fit, product/market fit, traction, pirate metrics, etc.  

Then the NEW people tell the NEW people something about validation and experiments. This is the point where the NOW people shut down mentally. You do not experiment in the NOW system, right? You run your processes, that’s what you’re supposed to do.  

To make life easier for the innovators, to make that transition to align with the NOW people and go into Scaling-Up, I highly recommend finding a common language. That’s one of the big benefits of the Lean Scaleup: it makes out-of-the-box innovation understandable for NOW people.  

To give you one idea, reducing of the uncertainty that you do before you make that Scaling-Up decision is taken through defined stages of maturity. In the first stage you look, is there a business foundation? Do we have customers willing to switch and to pay and putting their skin into the game to co-create the MVP etc.?

Once you have found the business foundation comes the question, is there a winning strategy in here? Looking at the competitive situation, the market development in the three to five years that you need to think ahead, because that’s the time it will take you to create an impact.

Once you found a winning strategy comes the question, how do you design that business to execute at scale etc.?  

We found that this kind of language makes it easier to basically see the company as “One Company” – winning the NOW and creating the NEW – future-proofing the company, if you will. 

Leyash Pillay: My next question would simply be how and when then? Is this a two-year plan? Let’s say I’m a corporate entrepreneur and I have a mandate from the board. And they say we need to start finding new revenue streams, but they’re not having the same conversation with the business unit owners for the rest of the company. Me as the head of innovation, where do I go? How do I get the ball rolling? 

Frank Mattes: That’s a good question. I found that there are basically two approaches. Approach number one is that you go into top-down design mode. What are the problems that need to be solved or could be solutions to these problems? You do some tests, etc. And in a sandbox, you say, this is how our system should look like.  

And because this is the company that we are speaking about, this is the industry, this is the kind of challenge we’re thinking about. This is how the system that connects the two systems should be designed.

So, option one is more a top-down approach.  

But I also have some clients who prefer approach two, a more bottom-up way. They say we do have one or two ventures that are advanced on their journey and have a good level of maturity. Now let’s scale them up with a proper preparation. And let’s notice when and where they bump against the walls. This is how we recognize what we need to do to connect the NOW and the NEW system.

regulate to structure in the overarching sense between the NOW and the NEW.

So it’s a tough time for the first one or two of these ventures. But the good thing about this approach is that you only put in the energy where you really know it’s worth to put in the energy. Not over-engineering a complex system that might not be needed at all. 

Leyash Pillay: When looking at the relationship between the NOW system and the NEEW system, does the entity choice of the venture make a difference? For example, if we spin-off? If we take a spin-in approach I can understand that it applies. But if we’re creating a separate legal entity outside of the corporate brand or realm, is it still necessary to have that synergy? 

Frank Mattes: There are three pathways to Scaling-Up. You can do it inside a business unit. You can do it outside of the business units, but within the company, or outside of the company.  

There are a couple of criteria that you can apply to make the best decision. For instance, one of our clients designs new business models that rely heavily on the back-end transaction systems. These systems are highly regulated. For example, developers and third parties that work on these systems need to be certified and they’ve got data centers with the “Mission Impossible” kind of security provisions, such as retina scans, etc.

Being close to these assets is essential for creating new business models. So that would is a strong argument for saying that Scaling-Up needs to be inside the company.  

In general, I would recommend taking the scaleup outside of the operative business units. Why? Because operative business units have quarterly or annual horizons. And hence there’s a big tendency to chop down the big ambition so that it fits right into the existing business. So, the big ambition dies by a thousand cuts and you end up never creating something that is really new.  

Let’s take another example. Here’s a corporate startup from bp with few dependencies on what the NOW system currently does. They might want to tap into the global supplier base and the negotiation power of its corporate parent. But the extremely fancy stuff they are doing has only few touch points with oil & gas exploration, refinement, and distribution. So, for this reason (and some more) it was decided that the best way to scale up in hyper growth, is outside of the company. 

Leyash Pillay: I guess it makes a huge difference to have autonomy, speed, probably like your own decision-making power on direction, probably outside of reporting structures as well, like you mentioned. 

Frank Mattes: Yes, but keep in mind, the trick is you still need to be compliant. There’s another case, a corporate startup of a large logistical company. They grew their revenues by a factor of 400 in three years. They now make up for a few percentage points of the corporate revenue.  

They are fully on the corporate radar screen and corporate is telling them, we’ve got risk management in place, we’ve got some regulatory compliance that we need to take care of. And by the way, you’re so big now that we need to deploy some of our financial controlling mechanisms in here. It’s not a full autonomy. I like to say it’s a startup-ish autonomy in a corporate context. That’s the trick to solve it. 

Leyash Pillay: So once it gets to a certain level, where it’s contributing to the group’s revenue at some point, and people are starting to take notice, then I guess all those checks, balances and governance must be in place.  

We’ve also been noticing that and I think you just mentioned that of bp Launchpad. So many corporates have some sort of venturing arm of sorts, whether we call it an incubator, an accelerator or CVC fund, venture client models. How does that affect the relationship within the company to scale? Is it better to have a venturing unit that is rolling with ventures? Or are single ventures here and there a better option? But what would be the differences? 

Frank Mattes: A couple of thoughts on that question, because I think they you touched upon quite a number of aspects. Number one is how many corporate ventures should a corporate launch? It depends. It depends on the ambition; it depends on the resources. Scaling-Up is expensive, right? You need to pre-invest 10, 50, maybe even 100 million before that new business, when everything works well, achieves scale. For this reason, one of the leading German machinery makers scale only one corporate startup per year. 

But for bp, the situation was kind of different. bp said, we’re on a burning platform. In 10 years from now, we will not be selling hydrocarbons anymore. We will be selling electrons. We need to move, as they say, from an international oil company to an integrated energy company.  

If you look at a company this size, well, you need to scale up like a machine gun. You need to have 10, 15 concurrent scale-ups at any point in time. Obviously, then you look for a more industrial approach to Scaling-Up.  

The second thought that I heard is what’s the relationship between innovation and corporate venture capital? In my view, many corporates leave out a lot of opportunities by leaving the CVC game separated from the innovation game.  

And here again, I think bp with bp Launchpad made a good decision because they say, at the end of the day, it’s not important if we are talking about a corporate startup that came to life via some pirates in the navy, or from an investment into a greenfield startup.

Because at the end of the day, these investments only make sense if these are taken to scale and create sizable profitable businesses.

If you look at the portfolio of bp Launchpad, you’ll find corporate startups as well as corporate ventures. I would really pound the table for those CVC people out there in your audience to say, partner with these innovation guys. Because they’ve got the machine and the thinking to make it big to take it to scale. 

Leyash Pillay: I’ve seen a few examples of this, where we have a corporate startup that was both from within, and when the time came, they actually got funding from outside the corporate. Is that a common thing that you find? Is that a good thing to do as well? What are your thoughts on that?  

Frank Mattes: At the end of the day, you’re talking about two major dimensions, the one is value, and the second is the investment need, the resourcing need, etc. Again, if you make the decision what is the right pathway to Scaling-Up it’s also the question, what will happen if we are successful three, five years down the road? What’s the vision? Should it be reintegrated and become part of an existing business line? Should it become a new business unit or some separate legal entity in the corporate group? If you look at Scaling-Up from this perspective, you might decide that one part of the solution of how to make it big could be to take it outside.  

Let’s go back to bp Launchpad if you don’t mind. It was a deliberate decision to take bp Launchpad outside of bp. It’s a separate legal entity. Every one of the scaleups that you find on the portfolio part of their website is again a separate legal entity fully owned 100% by bp Launchpad.

That’s basically the ownership structure. Why? There are two major reasons. Firstly, be investable for external investors to reduce risk or to accelerate the journey. Secondly, set yourself up to attract top talent. If you are a venture leader in one of their ventures, you get a competitive salary and you have an upside there as well. If you just leave it inside the company, well, you do not have those two options. So, another set of criteria that you apply when you think about what is the right pathway to Scaling-Up. 

Leyash Pillay: Lots to think about. You have a wealth of experience. Corporate venturing has really taken a rise in the past few years. Have you seen a difference from pre-pandemic corporate venturing to post-pandemic corporate venturing and what are those? 

Frank Mattes: Yes, at least one very significant to me. Let me give you an example to illustrate the point.  

When I start to work with clients typically the question comes up, Frank, is there one (and only one) metric that we can use to make the case for becoming better in business building? I tell them: Look, the typical time to impact is three to five years. Why don’t you go back three to five years, list all the activities that you had back then that were aimed at building new businesses. And now fast forward again, to the present, how much revenues do these initiatives create?  

Let me give you two examples. Two companies from two different industries, to make them comparable, let’s index their innovation spend to 100.

Company A spent 100 three to five years ago, and when we did the math, they got back seven now. They’re burning massive money and all the transformation is basically not happening. Company B was even worse. 100 invested back then and now they collect 1.50 when we did the exercise. Some folks call this innovation theater.  

I like to put it bluntly for my clients. If you do not master Scaling-Up, everything that you do before is just a costly hobby. Period. All the people in the innovation centers, the post-its, the espresso machines, etc. – that’s all just a costly hobby.  

What I see post pandemic? Coming back to your question is less and less acceptance for that kind of innovation theater. More and more interest in cracking the code:  

How can we turn those great ideas into great businesses? I think there is more rigor. More closely monitoring performance management of the portfolio, of the individual venture, more alignment, more and more awareness that it’s not about NOW versus NEW. No, you need both to create a future proof company. 

Leyash Pillay: Perfect. Thank you for taking the time. Where can someone from the audience find your book? 

Frank Mattes: Please visit www.leanscaleup.com. There you also find some background about the framework that was co-created with leading companies and a page “book” where you can buy it or use the Amazon or whatever channels that you prefer. 

Leyash Pillay: Frank, thank you so much. I really enjoyed the chat. 

Frank Mattes: Thanks for having me, Leyash