Secret powers of corporate incubators (and lack thereof)
Updated: Jul 24
Corporate incubators are like the Xavier Institute (for you X-Men fans). They find younglings with secret powers, protect and guide them through adolescence, then transition them back into everyday society.
Almost every Fortune 500 firm has at least one internal incubator like this, and whether you’re in high-tech or no-tech, incubators tend to have a lot in common. The prototypical corporate incubator gathers up great ideas, picks those most likely to be huge blockbuster growth engines for the company, and provides some funding plus protection from the mainstream bureaucracy. A few years later, as powerful mutant businesses rise up from the portfolio they’re transitioned out of incubation, into one of the company’s mainstream business units for long-term management. At least that’s the idea.
Problem is… it almost never works this way.
Having done empirical analyses of corporate incubators across companies, industries and geographies, here are 5 top things we’d like to share about their powers, and lack thereof. We know there are variations and exceptions to all the rules on our list, but let’s start with the rules themselves:
1. 70% – 90% of corporate incubation projects fail. This isn’t surprising because most businesses die, period. Yet it should be a little eyebrow-raising that the mortality rate of internal corporate ventures – even amongst the Fortune 500 – is basically the same as it is for micro-businesses (ex. your local dry cleaner), startups and venture-capital backed companies. There may be benefits of innovating inside a corporate giant, but it seems those advantages are neutralized by countervailing forces.
2. Corporate incubators are created for home runs, but mostly deliver base hits. Despite the usual rah-rah about breaking the mold, being disruptive, outside the box and all that, those few businesses that survive tend to be incremental extensions of the parent company’s preexisting core business that result in moderate growth – not the breakthroughs the incubator was created to deliver.
3. Executives think incubators have lots of autonomy, but in reality they usually don’t. A driving force behind incubation groups is the idea of separating breakthrough projects from the crushing weight of the mothership’s bureaucracy. It’s supposed to be “the best of both worlds,” where you have the freedom and agility of a startup, with the strengths and security of a big company behind you.
Reality is different. When asked, most executives say their incubating projects can do “anything they want.” But as soon as one of those projects wants to… say… get a website, odds are it will still have to get buy-in and internal approvals from multiple corporate groups. That’s like telling kids they can eat anything they want… anything… as long as you approve.
4. Corporate incubators tend to be bad at entering new markets. Most incubators are created to help companies penetrate new markets, not just keep the drumbeat going for markets they’re already in. However when targeting new markets (new for the parent company, that is), only around 15% of incubated businesses survive. Meanwhile the survivorship is much higher (around 66%) when targeting markets the parent company is already a dominant player in – but that isn’t why incubators are started in the first place.
5. Corporate incubators are good at one, critical thing – providing temporary autonomy for projects that are the future of the mothership, but a big leap forward. Thankfully there’s one very, very important problem corporate incubation groups solve, although it isn’t the problem most were created for. Big companies are great at incrementally improving their core products every business cycle (ex. iPhone 4 was followed by iPhone 5, followed by iPhone 6). However they can struggle, in the short-term, with radical core shifts that play out in the mid-term.
For example, audiocassette tape companies (80s flashback) like Memorex, Maxell, TDK and the cassette division of Sony were market leaders in their heyday. When CDs came along, CDs were a radical leap ahead of magnetic tape – different components, architectures, underlying technologies. Surviving the shift from tapes to CDs is exactly the kind of thing corporate incubators are great for. Incubators let special teams work on the new technology (ex. CDs) in quasi-isolation for a while, before bringing the technology back into the mainstream as part of the core’s future. They aren’t expansions into new markets, they’re about radical shifts in existing markets.
In case you’re wondering, Memorex, Maxell, TDK and Sony used special incubated teams to bridge the transition from tapes to CDs, and remained significant players in the huge CD market that followed (90s flashback). By our data, incumbents using incubation this way are more likely to survive big industry phase-changes than incumbents that don’t.
Secret Powers (and Lack Thereof)
It’s important to realize what corporate incubators are good at, and bad at. Unfortunately they tend to be bad at the very things they’re created for, and really good at something quite important nobody had in mind or even realizes. Most people don’t know what incubators are good at (you know now, because we just told you), and we only know because we’ve analyzed corporate incubators for years. This isn’t the kind of data you get from experiencing one or two incubators, but from tediously measuring lots of them.
The takeaway is this – corporate incubators need to be re-understood. They’re great at helping the core anticipate and survive big shifts that mainstream business units aren’t set up for. Meanwhile they don’t adequately solve the problem of penetrating new markets. It isn’t that they “can’t” do new market innovation per se, but the corporate incubation model doesn’t tend to produce these outputs unless it undergoes a litany of specific changes.
But that’s another story. For today, just remember corporate incubators are like the Xavier Institute. They find young mutants, protect and guide them through adolescence, then transition them back into everyday society. However this only works for things that are already “core,” and it becomes especially crucial when the core is about to experience radical change. Everything else needs a different approach. More than half the battle is won by simply knowing what your secret powers are, and especially what they aren’t.