Growth and the Start-Up Business Model: The Idea Incubators

Start-ups have operated in the knowledge economy as technology or idea incubators, wherein a technology is tested and developed by a highly motivated, culturally aligned, and dedicated group of people. The trend has been to clone a start-up company somewhere in a garage until the technology has developed to a stage where it can be commercialized and marketed. Once that hap­pens, the start-up company can be offered publicly or becomes an interesting target for big, established companies looking for more IC to solidify their position.

There is no doubt that the rise in the number of high-tech start-ups is a phenomenon enabled by the IC dynamics of a group of entrepreneurs. The promise of such IC and what it can deliver have resulted in the rise of venture capital funds to a staggering $5 billion in 1999 . Despite the slowdown in funding Internet or dot-com companies, the funding of biotech, software, and com­puter chip companies continues at an increasing rate.

But why start-ups? Is it because of the old-time proposition that smaller companies are more innovative? Real-life situations have proven the contrary. The most innovative companies nowa­days are of the giant size, like 3M, IBM, Dow, DuPont, and Microsoft to name a few. What is it, then, in the structure of start-ups that makes them more attractive to innovators who prefer not to join one of the major companies instead? Is it that kindred innovative spirits prefer to choose whom to work with and to keep control over their project development? But most research labs in companies and universities provide considerable autonomy to their innovators. What then is so special about the start-up business model?

The answer may be in the fact that start-up businesses are less controlled by bureaucratic structures. Even an innovative company like IBM professes to be highly bureaucratic. David Snowden, the U.K. Director of IBM's Institute of Knowledge Management, explained how the United States and other governments like to work with IBM "because it makes them feel non-bureaucratic" in comparison. It is interesting that this bureaucracy stops at the research lab doors. Researchers at IBM are known to have a lot of time to play as well as work on assigned projects. When a group of IBM researchers wanted to see the effect of laser beams on a human wounded finger, their curiosity then led them to wonder about the effect of laser beams on dead cows' eyes. From this creative play, the application of lasers to eye surgery was discovered.

So start-ups are less bureaucratic, and innovation thrives in a liberal environment. But that's not all. Start-ups have a very loose and flat organizational structure. Idealab, like most start-ups, has a physical layout that reflects its organizational structure. Idealab employees work in an open space a 50,000-square-foot, one-level building with very few walls. The office of Bill Gross, the CEO, is in the center with concentric circles around it; the innermost circles represent early-phase start-ups. There is an egalitarian environment, with people actively interacting with each other. As businesses grow, those that reach a size of around 70 employees are spun off and moved to another building.

Above all, the start-up business model has relaxed financial objectives at least at the start-up and preliminary phases thus freeing intellectual and management resources to focus on inno­vation goals. The vision and mission statements of such companies are not like the ordinary "we want to be the best" or "the leader in the market" statements. Instead, they have a shared, some­times undeclared, vision/mission of "changing how people do things," and of "introducing new disruptive technologies." It is that vision the culture it creates, the loose structure, the dedication and teamwork it inspires, and the innovation that results that makes the start-up business model a success (or sometimes a failure). This is because breakthrough innovation is both a high-return and high-risk business.

Major organizations (companies and universities) adopt the start-up business model either inter­nally or externally to capitalize on the innovativeness of their people. 3M's45 model is an example of an internal application in which managers and technical employees are allowed 20 percent of their time and financial resources to experiment with new ideas. If successful, the same manager is allowed to establish, and possibly run, an independent business and have equity shares in it.

Other organizations adopted the model externally by creating venture capital units or companies with the goal of investing in noncore technologies developed by their own employees. Xerox and Lucent Technologies each formed venture capital companies, to finance start-ups coming out of research done at Xerox's Palo Alto Research Center (PARC) and Bell Labs, respectively. Both Xerox and Lucent learned the hard way that to develop core technologies alone is to drive out innovation and profit. Xerox lost its PC prototype to Steve Jobs of Apple Computer. Lucent drove a key researcher with his transistor technology out of the company. The researcher and his technology later formed the basis of Intel. Now both companies' venture capital funds spin out dozens of start-ups annually, some very successful .

This also explains why companies always spin parts of their business as separately traded enti­ties wherein a "child" has developed a distinct IC warranting its independence from the "parent." Companies are spinning off both business divisions and independent companies. Kodak spun off Eastman Chemical, which originally was a business division of Kodak producing film develop­ing chemicals. Getting better and better at it what it does, Eastman Chemical was spun off and expanded the offering of its products to customers other than Kodak.

The preceding section shows how business growth strategies have been triggered and affected by the need to acquire greater brainpower (or other types of IC), incubate, or spin off new forms of knowledge in a certain area. This not only affected growth strategies, but it transformed the art and science of strategic business management as a whole, by inducing the business community to recognize IC as the primary source of competitive advantage. This brings us closer to the the­sis of this book I CM is not a mere business practice or process, but an approach based on the core precepts of strategic management, with particular emphasis on the needs of organizations in the knowledge economy. The next section explains how, and proposes that to effectively compete in the knowledge economy organizations need to develop at least one ICM competency.