Podcast EP 101 - How to Build a Successful Corporate Startup - Markus Anding, Managing Partner, Excubate

EP 101 - How to Build a Successful Corporate Startup - Markus Anding, Managing Partner, Excubate

Sep 03, 2021

In this episode, we discuss different strategies for developing innovative new business ventures outside of the traditional organization. We also explore the corporate innovation valleys of death that good ideas must overcome in order to mature into viable long term businesses, and why sometimes being successful is as risky as failing. 

Our guest today is Markus Anding, Managing Partner of Excubate. Excubate is a management consultancy and company builder that works with clients to digitally transform and innovate their business models by combining the best of the corporate and start-up worlds.

IoT ONE is an IoT focused research and advisory firm. We provide research to enable you to grow in the digital age. Our services include market research, competitor information, customer research, market entry, partner scouting, and innovation programs. For more information, please visit iotone.com

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Erik: Welcome to the Industrial IoT Spotlight, your number one spot for insight from industrial IoT thought leaders who are transforming businesses today with your host, Erik Walenza.

Welcome back to the Industrial IoT Spotlight podcast. I'm your host, Erik Walenza, CEO of IoT ONE, the consultancy that specializes in supporting digital transformation of operations and businesses. Our guest today is Markus Anding, Managing Partner of Excubate. Excubate is a management consultancy and company builder that works with clients to digitally transform and innovate their business models by combining the best of the corporate and the startup worlds.

In this talk, we discuss different strategies for developing innovative new business ventures outside of the traditional organization. We also explored the corporate innovation, valleys of death that good ideas must overcome in order to mature into viable long-term business models, and why sometimes being successful is as risky as failing.

If you find these conversations valuable, please leave us a comment and a five-star review. And if you'd like to share your company's story, or recommend a speaker, please email us at team@IoTone.com. Finally, if you have an IoT research strategy or training initiative that you'd like to discuss, you can email me directly at erik.walenza@IoTone.com. Thank you.

Markus, thank you for joining us today.

Markus: Thank you, Erik. Very happy to be here.

Erik: So Markus, we're getting into a topic that's a little bit side outside the typical scope of podcast, which is venture building, but I think still a topic that's very relevant to many of the listeners who are trying to build new solutions and new business models within their organizations. But before we get into the topic, I'd love to understand a little bit more how you got into this particular niche at Excubate. Can you share with us some of the milestones on your path to founding Excubate?

Markus: Yeah, very happy to. And it is indeed an interesting path that led me eventually to found and now run Excubate. Originally, I'm also a tech person. So I did a lot of work and studies in Information Systems. I also founded the first software startup like 20 years ago and did a lot of software development myself, ran that as a small firm, gain first experience in what it means to build and run a startup. But also, at the same time started working at Bain and company, large management consulting firm, which was focused on supporting large scale clients and all kinds of different strategic questions.

And in parallel, running these two things, I realized that helping large corporates solve tough problems, at the same time running something in the startup way could be very interestingly combined. And when that hits the point of digitalization, and this very strong growth in digital topics and technologies, a friend and I had the idea of bringing that together and basically helping large corporates innovate and create new digitally enabled ventures in a way that startups do that.

So we found it Excubate about six years ago with the dedicated objective to do exactly that, work for large companies, and help them innovate like startups. The difficulty, however, to start this was to get to this point where we do this venture building, also larger scale venture building right away. And as you can imagine, starting something with two people, it's not too easy to get your foot on the ground there.

So we actually started in the beginning with a lot of consulting type assignments; so classical consulting work in the field of digitalization and innovation. And now after this timeframe with now about 30 people in Excubate, we are at this point where we can and are running those larger venture building projects for big companies and help them really found new legal entities with dedicated objective to build and run a certain business model.

Very often again, as it is the foundation of my startup back in the day very much in the field of software and technology, or platforms that we are building. So that was a little bit the genesis to get there. And I'm very happy about where we are right now with the firm and with the ability to run those projects and work for large companies and helping them innovate like startups

Erik: And what is the role of Excubate here? Are you guide, so playing a consulting role? Are you a partner on a team that includes people from your client and also from your team? Or are they, to some, extent handing off a certain stage of development to you and then taking it back once it arrives at a particular level of maturity? What are the different configurations?

Markus: It's a bit of a mix. And I think one strength that we bring to the table is this combination of understanding how a large corporate works also politically, the understanding of how to build something from scratch as a startup, and there is nothing at the beginning. And there's a third element in understanding of how to be a good consultant and somebody who runs the process very well and brings in respect of know-hows. We are combining these three things.

And our role is a bit of a midwifing role at the beginning where Excubate helps, maybe even figuring out what the business should be that should be built. So we sometimes even start very, very early before the corporate even knows what kind of business they want to build. So we run ideation processes, we figure out what the industry is doing, and where well you can be created.

And then we also help getting this started, maybe even starting with hiring the leadership team to see CTO for this venture, which is the first real employee. And then typically, an Excubate team comes in and plays a bit of an interim startup founding team where we cover all the necessary often and mostly very operational topics from getting the company operationally up and running, setting up bank accounts, doing really very simple basic things, building the product, developing the product, which often is also done by Excubate or at least guided by Excubate where when it comes to software development, we often also work with third party companies that do the development itself, but we steer and guide that.

And also, most importantly, our role often is a go-to market role. So we build the go-to market muscle, we build the brand, we build the marketing approach, we built the sales approach and the sales team to help this new business actually go to market and be successful. So that's our role at the beginning where we bring a lot of the muscle to the table and in a situation where the startup doesn't have anybody yet, except for maybe the CEO and CTO. And that role evolves over time.

And we typically look at a 12 month assignment or 12 month time frame, during which we also have recruit the future venture team that will be the standing team. And at the end of this, our role goes a little bit more into an advisory role, where we take off our hands from the operational doing and supportive leadership team in the venture by guiding them and then ultimately also phasing out. That's mostly the role that we play sometimes. And that's also a very interesting aspect sometimes combined with a cofounder role in the sense that we also become an equity stake holder in those ventures together with the corporate founder.

We have a certain relationship between our equity stake and the corporate equity stake. So we have even more “skin” in the game here by owning a part of this venture that then eventually after a certain time will then be sold back to the corporate who often wants to be the strategic long-term 100% owner of that.

Erik: Just to dive into that last point a little bit more, how do you determine the valuation of that? Because then you have, to some extent, a market of one, so I suppose you have to set that in advance, no negotiation, or limited room for negotiation?

Markus: Very good point. And that's often a negotiation that takes quite a bit of time, although there are some standard mechanisms for valuing venture activity. So we typically orient ourselves in market terms. We take EBITDA multiples, for example, with the estimated EBITDA that we want to achieve after three years, five years, seven years in that venture, and then assume what a real market valuation could be, if you would buy or sell a startup like that in the market, and then find a mutually beneficial point together with our corporate partner that typically is way below this estimated market pricing so that they have a bit of a beneficial situation to acquire this whole venture below market.

And we have a beneficial situation to not only get paid, maybe a little bit less than for our work that we do at the beginning, but also at the end have the chance to exit this part of the venture for a price point that is also valuable for us. And of course, there are a lot of detailed regulations that you typically put into those contracts. If the corporate is not willing to take over, what happens then? If you're not happy with the ultimate price point that you will arrive at what will happen then? So there are a few clauses that are typically discussed there.

But what we would also try to find always is a situation with a corporate partner that's a little bit more pragmatic and risk taking, because you can, of course, clarify everything in very high level of detail in the beginning, because then you only make lawyers happy, who designed the contracts. So it's a bit also a trust based relationship that we need to enter where in the end we just need to also trust that there are people coming together to do the right thing and in the end, we'll also find a pragmatic way to finalize this deal.

And this what a lot of corporates are now at the point of more and more understanding from where they're coming from in the past making sure they replan, and detail everything out such that there is no way of something failing, and now moving a little bit more into a risk taker mode, and understanding that things are also to be done in an agile way, and you can't really plan everything ahead in detail. So it's a bit of a cultural change approach as well that we typically help our corporates go through.

And very often, many of the ventures we are building, they are also the first or maybe the second one that a large corporate is doing. So they are also on a learning path very much with us, which we need to consider. So it's a bit of we need to be patient and we need to explain a lot and we need to bring in a lot of external experience and examples to help our corporate partners on that path to get familiar and a bit easy with those things.

Erik: Well, maybe that's a good entry to the question of why is Excubate necessary? Why is this approach useful, and in many cases necessary? So one of the variables that make it difficult for a corporate to innovate in the way that the startup is, so certainly, I think it's maybe a little bit overhyped that corporates can't innovate, they certainly put out a lot of new products and even business models every year. So there is a lot of really legitimate innovation coming out of corporates.

But nonetheless, there seem to be certain types of innovation that are very challenging for corporates to do in certain situations where it's very challenging for them to be as quick as startups and then you see younger companies winning new categories because of that. So from your perspective, what are the primary reasons why a company because they have the ability to do all of the things that you do, in many cases, they have software resources in business, smart people that understand the business, and so forth, so it's not really often for a lack of resources. What are the challenges that typical corporate might encounter when trying to be innovating outside of their comfort zone?

Markus: Yeah, very good question, and it's actually really at the core of how this could be successful. Maybe let me reiterate a point that you already made, which is corporates, and it's our strong belief do have almost everything it takes to be successful, the resources, the experience, very smart people, very educated people.

I think there are about three points that we typically encountered, three reasons why this is still difficult for existing companies. One is that very often we are dealing with a business model change. And let me give you an example. We work a lot for industry companies that are used in the past to sell machinery for a certain price point, and then maybe at some service later on to those machines, that's a typical business model.

And now they are all moving into providing software on top of those machines, or even providing those machines in a, what we call, equipment as a service mode, where you don't sell the machine anymore for a half a million dollars, but you provide the machine to your customers, and then charge not necessarily even per month or per hour, but rather per outcome, per individual piece that's being handled in this machine. And that requires a very different way of running that business model.

And that already is a very difficult thing for existing companies to get their head around, because that's something that they have difficulties understanding. How will that really work? How many risks are we running when we try to provide something like that to our customers? Will they understand it? Will our internal people understand it? So there's a lot of hesitation when you move into something that's basically new. And it's a very different innovation from just evolving the machine to a higher performing machine, which is the innovation that has happened in the past a lot. So that's something that existing organizations have difficulties with.

The second thing, once you have such a model developed, and you're providing that to your customers, the internal existing business, which is still the classical machine business, and that's typically still 99% of the revenues in this classical way, that acts or reacts a little bit adversely to that new type of business, for example, driven by such profane things like incentivization models for salespeople. Existing salespeople are motivated to sell their current business. This is where their bonus comes from. This is where their reputation comes from.

And they have a hard time now saying, well, look, I don't sell you the machine anymore in the classical way. I try this new model, dear customer and give you this new way of providing that service to you. So that's something where again, such profound things like incentivization models need to be looked at in order to make the existing salesforce enable them to even sell that.

And the third aspect that we often see is indeed a bit of a lack of technical capabilities. Again, machinery, hardware versus software, a lot of existing machinery companies really lack the capability and the capacity in software development. So they’re typically use their classical internal IT teams to develop those new types of software products. And that doesn't really often work out because you have different technologies, you leverage also different delivery models when it comes to cloud, and so on, or also data experts, data specialists that you need for many of those new models.

So companies just often really lack the capacities there. And this is also where they need to rely on external parties that also have different and maybe a little bit more agile ways of developing their technology and trying out the business model with customers. So this is where third party like we typically are quite helpful, and that's why we are called Excubate and not Incubate: we take these ideas and the technologies and the customer access and take it a bit out of the existing company, and build something that is able to do this a little bit on its own with own resources. with sometimes expert source from the market with a new and different go-to market approach, maybe an own even incentivization model for the whole team to give this thing a chance to perform at least a little bit like an external startup that does not have the corporate background, maybe just a high level of financing. And this is the basic idea.

And at the same time, that's why we call this approach the best of both worlds. At the same time, we don't want to go too far away from the corporate with this approach, but still tap into the internal resources, into the capabilities, into the existing technologies. Because very often, if you transform an existing hardware based business model, you can't do that without the existing business model: you need to access to the hardware. You also need those machinery, for example, that you then deploy on your customer site.

So there is a very important linkage back into the organization that we need to play here too, which is why this kind of venture building is very different from building a very Greenfield venture where the corporate basically just gives you money and nothing else, and then sees how you can go and run with that. So that's the typical hindrance reasons in the way we try to address those.

Erik: So you create some separation so that you can get this up to a revenue level where the core business looks at it and says that's a viable business, and you are then maybe also able to support a team from the revenue generated so you then are not reliant on a team that's sales team, for example, that's being paid through the traditional business model?

Markus, what about these issues, IT, legal, regulatory? One of the big advantages of a startup is that they're able to take risks, do things that are stupid, that are maybe a little bit illegal, and they don't have so much to risk because end of the day, if things don't go right, they can go bankrupt, and they can start up a new company. I mean, that's not an ideal scenario. But that's one of the reasons that startups are able to do things a bit more radically. How does this operate for an Excubated company?

Markus: That is very true and again a very relevant and important point, and also a fine line to manage here, because it can go both ways. As a corporate venture, you can, for example, or potentially benefit a lot from the fact that you are part of a large corporate. Right now, for example, we build the venture for a large global industrial conglomerate in the field of software that has to do with a bit mobility topic. And they are explicitly building upon the name of their corporate mother, because that gives them credibility in the market, that gives them a head start over a startup that is really just greenfield, nobody knows it.

So there is some tying to the brand that often is very helpful. At the same time, what you are describing what a typical startup needs to do to be a bit more flexible pushing the envelope, doing something sometimes on the edge is really limited in that case, because the mother brand is really, really very careful to say, well, if you go out, and have some ties to our brand, be careful that you really don't do anything that could risk that and that really hinders the startup in being very flexible.

On the other end of the spectrum, some startups or corporate startups would actually benefit from not being tied to the mother brand. Because it is such a different model, it will explicitly separate itself from the market perception of the mother brand, which may be a bit slow, it may be a bit historical so then you maybe go out with an explicitly different brand, and that may also make it a bit easier for you because the mother brand is not necessarily directly negatively influenced by some issue that you may produce.

At the same time, there's this market perception, but there's also the actual legal responsibility. And that's often very much tied to ownership. If you as a large corporate built adventure, even if it's called in a different name, and you still own 100% of it, you are also more or less responsible for what's happening there.

So one solution if you're in a field, especially when it comes to handling data or managing customer data, where very often you run that risk that you described, where you do something that's legally maybe a little bit shady, one opportunity to solve that is by having the corporate own only a minority equity stake into found something already in the beginning where the corporate just maybe has 40%, and the other 60% of equity are either owned partly by us or maybe even by another third party external investor, either financial investor and/or something we always also advise, partly by the actual leadership and founding team in the venture.

For corporates, that's very difficult to stomach because they typically say, well, I'm not founding something where I don't own 100%, or especially when I only own a minority stake. However, we see that often as a legal or we call that legal firewall between what the venture is doing, and then the corporate that owns part of the venture, where if you do have a minority stake and you don't consolidate, then you actually don't really have that big of risk if there's something going wrong in adventure.

So we try to find models to balance this, also, often depending on the actual business model into risk associated with it to build this lever firewall, and the startup have sufficient flexibility to try things out, while the corporate is still protected from their reputation and brand perspective.

A very often one example is for example, again, I made a data point already, the data handling topic in companies like telcos that handle and have a lot of customer data, but at the same time a huge reputation risk for when something goes wrong with a data. So, there are some industries and business models where this is much more relevant than in others maybe.

Erik: And there's some models, you already gave an example. But let's say a platform model where a company wants to also service equipment that's produced by their competitors, and for that reason, it would have to have a degree of separation. So there's some areas where this logically might be almost a requirement. And I'm curious from the VC perspective, whether you see appetite here.

Because on the one hand, you could say a company that's coming from the industry would have a right to win this market, they certainly have the domain expertise in the market know-how, on the other hand, because they have that strategic skin in the game, they might be biased towards their own products, and so forth and behave in a way that the financial, the motivated VC is not going to be very comfortable. So what is your perception of VC appetite for investing in these corporate backed ventures?

Markus: Again, a very relevant question, we just recently also had exactly that conversation with one of our large corporate clients that want to build a venture in the NBN-assisted living space. And they also said, look, we have the idea, we have access to potential B2B market off-takers. And what about an external venture fund or VC to help us fund this and create this? From our perspective, we would have been the third party in that game to play the Excubation role, as I described earlier, the venture builder.

When we talk to a lot of VCs or financial investors about this opportunity, it was a big German brand, very well-known, very reputable. Interestingly, the feedback that came from a lot of these VCs was quite negative in the sense that, no, we would never ever do something like that with a corporate because of all those also initially touch issues that corporate wants to steer too much themselves, they don't want to let go, they are very risk-avoiding, there may be stuff the wrong resources.

So there's a lot of negative perception from the VC perspective, when it comes to doing anything together with a corporate. So they'd much rather go after greenfield startups without any corporate backing, and even invest maybe more money at a higher risk than doing something with the corporate of which we as Excubate and at somewhat the business model experts, something that we are actually quite confident about for making that successful. And especially our role also is to create a higher likelihood of success by coming in as an expert company builder to build something that has a higher probability of being successful in the end.

The VCs and we also talked about what their requirements would be to do anything together with a corporate like that. And they have the first and biggest topics that always comes up is that the equity stake or the steering power that a corporate gets must be much, much limited or much more limited than they actually would want it.

So a minority stake, very limited ability to influence the strategic direction of the adventure, very limited influence to maybe also shut the venture down, so the corporate really needs to take a backseat, the leadership team, that's what the VCs also say, the venture CEO, venture CTO, they need to take the front seat, they need to be in the driving role, they need to be incentivized also in a very entrepreneurial role. You also hear from VCs very often that they would never invest into something where the CEO does not have a substantial equity stake for them to be incentivized the right way and play real entrepreneurial roles.

So there's a lot of hesitation at the beginning. There's a lot of requirements that VCs have. But I believe that's also solvable and there can be ways to bring that together, the corporate needs the venture success requirements and then also the VCs needs to get their money back and also multiply it.

And I believe in the next few years, we will see more of those combinations, because VCs they will necessarily need to go into that space, because in the other greenfield VC area, it's much harder now to find the right and valuable startups to really make a lot of money with that, because there's much, much more money in the market than it was years ago. So they need to tap into new ways of creating that. And also corporates also are in the need to open these channels up because as much as they have investment resources, and a lot of cash in the bank, they are more and more competing with the finances that go into greenfield startups.

And we often see a situation where corporate says look, great idea, we validated it together with Excubate, now let's build it and we maybe put 2 million into it. And for a venture that's in the software space, that's really nothing, because in the greenfield’s space, they get double, maybe even triple digit funding rounds, and the corporate can compete with that. So they need to tap into external sources of money as well to build their corporate ventures, and also need to give way in some form to the VCs’ needs.

So that's a bit the situation that we are in right now. We don't see many of those deals yet, but we are in a lot of conversations, and hope to be building some of those. And there are also a few VCs right now that have understood that more than others and are actively looking for those corporate backed venture deals, where they also see the value more and more now from investing into that field.

Erik: And I suppose naturally, for B2B, this would be a little bit more probable so B2B, it's much harder for a new entrant to get into the market because of the sales cycles and just the domain expertise and the ecosystem relationships required there. And there's also probably a different exit expectation. So somehow, you would expect a higher proportion of companies to survive because you don't have such monopolistic market dynamics. But you would expect lower multiples. And so that's maybe a different perspective that the VC would have to take that instead of 10% surviving, or exiting, maybe 20-30% level will exit successfully, but at a lower multiple.

I think this exit topic is maybe an interesting one, both for this discussion, but more generally, for the question of Excubation. So, I guess from the corporate perspective, in the majority of cases, they would eventually like to wrap this into one of their existing BUs, or maybe set up a new BU but basically wrap it into the organization? Do you see appetite for whether it's with external investors or not for going IPO for building something up and taking an M&A path or any other creative exit mechanisms aside from internalizing?

Markus: It's interesting, what you're describing, we also see a lot that corporates typically say, if not at the beginning already, at least later in two to three, four years, we want to own everything. So we want to be the strategic investor who owns the whole thing and that makes Of course, the exit path also for VC a bit difficult.

At the same time, the very same corporates, they take existing businesses that have been part of their portfolio for years, and spin them off and IPO them, and take them out to say, look, we take it out of our [inaudible 28:22] here to give that a little bit more growth opportunity. I mean, Siemens has been a good example for spinning out a lot of their existing businesses in the past. They still own steaks in Healthineers and in the energy business, but they have gone this path and spun it out or IPO-ed it.

And I'm wondering why they don't see the same logic for the startup investments or the venture building and activities that they have. It's a little bit of psychological topic, where they say we want to own that and we want to build it on our own and also I as a CEO want to have a successful story here building something substantial for us as a business.

But at the same time, we see more and more situations where corporate say, look, we want to build a venture based on that technology, or based on that software that we have built for ourselves, and we just want to see if there's any additional value that can be generated. So we spin it out, or we give away a few parts of that and are happy if we continue owning a stake that will just be more valuable. And if companies understand that, and also the type of value that can be generated by running it like that, maybe just really as a financial investment, then I think they can tap into many more opportunities to do actually some of that value creation.

Just recently, where we had discussions with a real estate asset managing company that has developed a software for themselves to manage their process a bit better and they said look, this was a great software that could also be helpful for other players, let's build a venture to bring that to the market and we don't need to own a lot of stakes there. We also can take a minority stake. We just want to see if there's some additional value that can come from this. And we see that here in there more and more often, and I actually hope that companies are a bit more flexible in their approach to that. Because in the startup space, better owning, it's a 30% of something that's really, really big than 100% of something that's never getting off the ground.

Erik: Yeah, I mean, there's another avenue of innovation here that if you're touching on this much. But so you're building primarily software solutions that are somehow tied to the core business and often probably supporting somehow we're building on top of the core business. I think there's another situation for corporates where they're sitting on a lot of IP, and a lot of that IP is multiple use. So they're using it for their core business, but it might have applications for industries that they have no stake in whatsoever.

So you could also make a case for spinning companies off that basically monetize IP that's not being properly monetized right now. And there, there's often potentially no direct connection to the core business. It might be, we do automotive, and we have something that's useful for healthcare, and so we just want to monetize this IP. Do you get involved in situations like this? Or is this just outside of your areas of operation?

Markus: It's also a very relevant topic that we touch upon quite often actually. And it's the counter perspective to this classical innovation perspective, where you say, let's go to the market, understand the customer requirements, the jobs to be done, and find ways to solve those jobs to be done. What you're describing is a bit more, I would call it, not a design thinking approach, but rather, let's say a resource thinking approach. We have a certain set of resources via patents, via technologies, and let's see what we can do with them in different markets, and let's find the problems that we can solve that.

The innovation communities actually quite negative about this approach, because they say, no, no, no, this is not how you do it; you go to the customer and ask them. But I truly believe that this resource based approach is also quite valuable. Because as you say, there are a lot of patents, there's a lot of resources and technologies there that can really be applied if you just find the right problems for them.

And a few years back, we actually did exactly that for a large semiconductor manufacturer that has built a certain camera technology, and invented that and had patents for that and had the technology ready, but they just didn't know what to do with it, and where to use it, and in which industry to apply it.

So we had a small Excubate project for them, where we took the technology, understood what is capable to do, and then looked very thoroughly on very different markets in which that could be applied, the potentials of those markets, the needs and the jobs to be done in these markets, and then came up with three focus industries, one was in healthcare, one was in personalized cosmetics, and one was in the agriculture space, where then we talked with specific companies in those areas to see is there a cooperation potential or corporation intention to bring these two corporates together in A. what we then would call cross industry innovation approach to reuse their technology and their need in the market and then do something with each other.

And I believe in this being a very valuable approach if both sides are sufficiently open, anecdotally, this back then didn't really go forward. Why? Because the NDA negotiations between these big corporates already hit the wall, when the lawyers actually on both sides came in and said, okay, you’re the corporate have an NDA, we’re big corporate have an NDA, let's find a way to put that together so that we can even start figuring this out. And this is where they actually clashed with each other and couldn't find a mutual way, and this thing didn't go forward, although I really believe in the potential of that.

And this is also where we learned that, again, Excubate as a third party and as what I would call clean team could come in and see and say, look, we understand one side, we also understand the other side, what they have, what they can do, what they want to share. Their last take this delete of building this cross industry innovation for you, maybe in joint venture setup, and in whatever kind of Excubation mold is possible, but that let’s drives that forward before you to big corporates, the strategy departments of these big corporates try to do something with each other, which most of the time doesn't really continue in any productive way.

So yes, it's a very relevant point. And I think there can be a lot of value created. And there's also a lot of mistakes that can be made there.

Erik: Well, Markus, that's a great lead into my next question. I wanted to talk to you about the valleys of death for corporates versus for startups. This is obviously a valley of death, the NDA signing for a corporate idea. What are the other areas where you see a corporate project typically dying, whether in infancy or in a later stage?

Markus: Yeah. I think there are multiple valleys of death and maybe there are even more in corporate innovation or corporate venturing than there are in greenfield's startup build up. I think there is a lot of honeymoon feeling in the beginning when the corporate sees oh, there's an interesting idea and Excubate help us validate that so we also run classical consulting projects validating business ideas up to the point where we can then say, look, it's a valuable idea, there's a need in the market, customers have positive feedback, we can do this, let's build it.

And that often is the sort of the first way of that, because then the corporate realizes now we can do it with another few 100k consulting money, but we do need to invest a little bit really now to get this off the ground. We need to hire some people. We need to found a separate entity. We need to put some money down to get this going. And that is rather lower to middle single digit million number, then it is like 200k. That's the first point where often these things die or get dragged out for 6-12 months until the board eventually decides to do that. And very often they don't, because nobody sees the freeze up the funds. And the funds rather go into the core business.

I had this conversation with a telco recently, where they say, we have a lot of great ideas, but every single million that we have, and we would want to invest into a venture idea, we rather put into our core network, because we need to build 5G, we need to improve the bandwidth. So it gets sucked back into the core business. That's the first value of that.

The second is once they actually decide to do that, and then go forward and something is being built and it's 12 months, 18 months old, there may be a second funding round or a second growth stage, which then sometimes doesn't happen because the venture is maybe not yet delivering the revenues and the break even that has originally been anticipated or expected. So then they say, well, we have invested a lot now, but now we get cold feet and now we actually stop it here.

And I've seen it very often where just at the brink of success, the intervention could really then hit revenue and maybe break even already. The corporate just pull the plug, and then everything that has been invested so far is also sunk. That's another valley of death that I've seen often happening and where a lot of good value has actually not been generated than later on.

And then there's another one that we see often when the thing is successful, and suddenly, everybody jumps in and says, well, wonderful, this is a great success in this venture is really going well. Now let's bring it back into our corporate environment and maybe fold it into a certain business unit or fold it into a certain area. First thing is that people then start fighting about who owns it, and who should have it, because it's a successful thing, and everybody wants to be associated with it. So that's a political discussion that often stalls this.

If that is clarified, and somebody then gets it and puts it into their own reality, often things are slowed down so much massively, and then the venture is really fold it back into the standard processes, into the legal and HR processes, into the sales processes, and then speed goes away, momentum goes away, the venture team gets frustrated and the whole thing breaks apart. And that's the saddest point, because then you have actually had a proof point that something works out and you had some success in the market, and then you actually break it by folding it back into your corporate processes.

So these are the typical things that we see. And we are also something that we had discussed on a separate occasion already, Erik, this information action fallacy hits, where logically everybody understands this. And what I'm saying is not rocket science, everybody can follow that, and also the corporates understand that. Still, it happens and still they have no way to avoid these things and still have those political fights and still have these strange needs towards the venture. And that's something where again, and again, gaining those experiences and helping them through that process is very important to avoid those valleys of death for them.

Erik: So that's a bit depressing for the aspiring venture builders that are listening to us. Maybe Markus, we can wrap up here by sharing one or two success cases. Are there any cases recently where you've seen something either really take off and gain new market share or significant market share, or where you're really quite enthusiastic about the potential?

Markus: Yeah, there is one venture that we are currently involved in building and I mentioned that earlier already. We are building a software venture for a large industry conglomerate that is active in the field of electrification and electric charging, and we are helping a venture being built up in the mobility and immobility space.

We've been active now from the start with them for about 10-11 months now, so almost a year, in which based on a relatively difficult question around where's really the value creation potential here in the market that’s just evolving and we all know EV is really growing strongly, but still at the early stages. And where is the value really coming from building a B2B software for that?

So it was a bit of a difficult starting point. We are together with the venture founding team, CEO and CTO, we spend a lot of time really figuring that out, interacting a lot with customers really building a vision for the product and the good understanding how and where will we create a value here always in conjunction with the expectation from the corporate side that said, okay, we want to build a B2B software venture, this is what we want to do.

And I think we all together with the growing venture team did a great job in really nailing that together with a set of co-innovation customers in the market. It's very crucial when you build a B2B software business, that you work very closely with a few customers that co-innovate with you and where you also really design this product specifically to their needs at the same time in a way that you can standardize and roll it out to more customers.

So I think we did a good job in finding those and working with them, and by now hired also a double digit number of people into that venture that is now taking over the roles that we had played in the beginning: sales role, the product ownership role, the marketing role, the HR role. And where we see now that the venture is more and more able to walk on its own and run on its own and gaining traction with customers in the market, with their first version of the product that's already being deployed and tested with customers, and we have a high confidence that this is now really stable enough to grow on its own, where we can now start pulling out which we will do within the next few weeks to have this venture go on its own.

And I think part of the big success here for this venture and the corporate itself is that in a relatively short timeframe, now 10-11 months, they have managed to really create a certain presence in the market in an area where they have not at all been active before. Now really saying look, here we are, we have a very strong vision to disrupt this market or to bring something to the market that will really create a lot of value going forward. Customers are very eager to work with the venture. The competition is interestingly very cooperative also, because they also see it's maybe good also to exchange know-how here and maybe to work together in some form, so created a lot of positive presence and momentum.

And I'm very confident that the revenue objectives and the desire to grow this into a strong and profitable business can be achieved; now going forward with a strong venture leadership team, and also based on good understanding for what this product will look like and what it will really deliver. Again, it's 12 months in our 10 months in and as with other ventures, it's hard to say at this point it will definitely be successful. But we will see in two or three years how it evolves.

And many of those corporate venture building projects or venture building activities are still in very early stages. So it's a thing that's relatively young still. And I think the [inaudible 42:46] is still out on how much higher the success rate really is in corporate venturing versus greenfield ventures. And then what the value creation potential really is, we will need to look at that closely over the next 5-10 years to see how effective this really is. I strongly believe that and when we see a lot of positive effects, but there will also of course be corporate ventures that will fail.

And where things don't work out, I think the critical thing, however, is for corporates that have a failure here, and it may not be successful with the first one, don't stop doing it and don't say now we don't touch it anymore and we can build ventures. But use it as a learning opportunity to do it better the next time. It's completely normal that things don't work out, but It should also be normal to learn from them and do it better the next time. And that's what we experienced also with a lot of our corporate times.

Erik: Well, that's a good point. I mean, it's interesting, corporates are quite accepting of failure in many areas. So, if you look at the return on marketing campaigns could be great, but in many cases, it's kind of lost money. But it's an accepted return, and people don't really think about it, they just accept that we have to do this, so we're going to do it and to some extent, hope for the best.

So maybe last question, and Markus, from my side, I think most people in our audience will either not be doing something like this today, or there'll be in the relatively early stages, like you said, this is overall this is a fairly young approach to innovation. For somebody that may be frustrated with their organization's ability to bring more radical innovation to market in the past, what would be your recommendations for the first steps that somebody might take, whether they're in middle management or in senior management?

Markus: I think most organizations, what I've seen is they react very positively to first successes somehow. And if you manage to do something that may not need a lot of top management support, that may not need a lot of budget, that may not need a lot of people involvement.

But where you say look, I find a manager that is somewhat risk-taking and somewhat supportive of my idea to maybe use this technology and try something thing out, and lets me do it and I invest a bit of additional time, and maybe I take a week and interview a few customers and try to get some understanding of the market for this very new technology that I'm inventing here, then try to do something and create a first visible proof point, a visible prototype, visible customer feedback, something where you show, look, there's something to it here, and it has a potential to create value. Don't do that just on paper or on PowerPoint level, or on the level of talking to people, but try to create something real.

And the funny thing is, corporates often have this feeling for or this idea that if I do something, if I build something, if I want to develop a software product, it's always millions that I need to invest, and it's already the blocker in the beginning. They would be surprised to see how far you get already with a 10k, 20k investment in building a prototype having a designer build some visuals for how a software product could look like, especially in software space, it's really easy to do. And take a bit of money, a bit of resources and do something within the realms of you and your manager, maybe of what you can do there, and then show that, and then show people that customers are interested and that you can do something with it.

And then I think that gets and own dynamic, people get interested, you may very quickly get in front of more senior management, and then they could start supporting you with that. So that's something that I saw work quite well if you're brave enough and want to invest some time in doing that.

The other activity that we see quite often is a bit more driven by the company itself, where they say, look, we understand that there is a lot of smart people in the company with a lot of ideas and a lot of entrepreneurial thinking, let’s gives them an opportunity to bring forward their ideas, let us look at them and give them also some budget and some chance to validate them and maybe we need to drive them to a point where they could be incubated or excubated.

And we are just doing that right now also with a large industry client here in Germany that understood that quite well. And we have sourced more than 50 ideas from the organization, very smart, very good idea, some very technical also, and are now running through a process of pitching them. They also training how to pitch that to my management team to sell my idea internally, and then get onto a path to validate that and in the end even excubated.

I think one specific guidance point here as well since we are talking to people that are coming from the technology, space, IoT space, tech savvy people, don't underestimate the importance of being able to tell a good story and have a business market value creation perspective. Your technology is often great, and it's very well thought out and it's highly sophisticated. But find a way to sell that to somebody who doesn't understand the technology so much, but really reacts to business impacts, business benefits, customer value creation, and create that skill for yourself to be able to sell that internally, and then you can get management behind that.

Erik: Yeah, that's great advice. We're working with a company right now that's very technical, very engineering-led. And everybody's focused on we need to get the POC out, we need to install it, we need to get data, and then based on that data, we'll decide what's possible. But you said, well, you could actually talk to people right now. You could do both at the same time. If you want to do that, that's fine. But the status quo attitude is, first we'll get the data, and then we'll have conversations nine months into the future once we have a pilot, because we can't talk to people until we have the data and the working pilot.

Markus: Exactly. And one skill, I think, to hone as well is the skill of accepting negative feedback. So if you go to the customer with something that's not really thought through yet, and that's maybe only 80% there and where the data is not perfect, the customer will give you feedback on that and will say, ah, this is not good enough, and here we need more. But digest this feedback and use it in a positive way to further evolve that, not get go back from the client say, oh my God, we did something very bad and it's not working and get frustrated.

This is a typical technical reaction. I had the same thing when I developed software many years ago, and I was also very technically driven. I couldn't have a hard time handling any negative feedback of somebody having my product. But this is something to get over and get out quickly, not after 12 months, but after like a few weeks when you have a first prototype running, and get that feedback early. And it's also fun doing that. It's not necessarily just negative when the customer says this is not good enough yet It's good to hear that and then to improve.

Erik: Yeah, good perspective. Markus, what's the best way for somebody to reach out to Excubate if they're interested in learning more about this process?

Markus: Well, I think we are active on LinkedIn, active on the internet per se with our website. excubate.de, of course, also via email, we are reachable and we are very happy to enter conversations with interested people that have an idea, they want to drive the idea forward or maybe want to get some additional examples from our side. So you can reach me personally with my email address, Markus.anding@excubate.de or again via the internet or LinkedIn where you can find us. And I would love to have a few conversations, see what your audience is doing in terms of technology, innovation, and ideas, and maybe discuss how we can help.

Erik: Great, Markus, thanks for your time.

Markus: Thanks, Erik. It was fun. Thank you very much.

Erik: Thanks for tuning into another edition of the IoT Spotlight podcast. If you find these conversations valuable, please leave us a comment and a five-star review. And if you'd like to share your company's story or recommend a speaker, please email us at team@IoTone.com. Finally, if you have an IoT research, strategy, or training initiative that you would like to discuss, you can email me directly at erik.walenza@IoTone.com. Thank you.

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