Big companies starting businesses from scratch has
become a big deal. In many cases, these volatile big bets create bigger
movements, up and down, in the stock price of a company than its (more stable)
core business.
For example, Google’s
restructuring into Alphabet highlighted just how much the company is spending
on new businesses, from self-driving cars to space exploration and more. Ford
recently announced that a unit called Ford Smart Mobility, headquartered in
Silicon Valley, will build new businesses like car-sharing and parking-locator
apps.
David Kenny, the new head of IBM’s Watson, defines that business as “AI
(artificial intelligence) as a service,” a central part of the data analytics
market that IBM CEO Virginia Rometty says is a $2 trillion opportunity. And
last quarter, Amazon began publicizing financial results for Amazon Web
Services, which generated an amazing 67% of Amazon’s operating income in the
first quarter of this year although it represents less than one-tenth of
Amazon’s total revenue. In each case, we see large companies creating new core
businesses instead of incrementally expanding their existing core or
diversifying through acquisition.
But what are their odds
of success — and how do those odds compare to start-ups?
My research over the past decade at Bain & Company has focused
on how large companies find their next wave of profitable growth. Bain’s
analysis shows that large companies that leverage the strengths of their strong
core business have on average about a 1-in-8 chance of creating a viable,
large-scale new business.
Compare that to the
typical entrepreneur incorporating a start-up. Bain’s research concludes that of all new businesses registered in the
US, only about 1 in 500 will reach a size of $100 million—and a mere 1 in
17,000 will attain $500 million in size and also sustain a decade of profitable
growth.
Of course, everyone can
cite a favorite unicorn—SpaceX, Uber, Airbnb, or Tesla, for example—that is
defying the odds and successfully disrupting established industries.
Still, statistically
your chances of success are much better—based on the numbers above, roughly
1,700 times better—if you can benefit from a strong existing business and the
scale advantages of an established company. One might even say that an
increasing advantage of the U.S. economy is not just the opportunity for raw
innovation, but the ability to scale new technologies within large global
companies.
To date, few companies
have mastered this skill. But even as traditional conglomerates decline, we may
be seeing the rise of a new type of multi-business company: those that use
their advantages of scale to start or acquire smaller businesses, grow them in
size and perhaps even spin them off again. That’s precisely the goal of General
Electric’s GE Ventures unit: foster and scale businesses with a billion-dollar
potential.
For companies and
investors deciding where to place their bets, three principles improve the odds
of success:
Pursue businesses that protect and
defend the core. Amazon Web Services’ success strengthens Amazon’s
retail business by building scale and world-class abilities in computing and
large data management.
Establish a repeatable formula. LBrands’ Les
Wexner, founder of The Limited, built seven other large companies, including
Victoria’s Secret, Bath & Body Works and White Barn. All are specialty
retail, all have complex supply chain restocking requirements of a rapidly
changing product line and all, at their core, are businesses built around
emotional customer appeal.
Look for a founder’s mentality. Finally, it’s not
surprising that many of the companies named here had—or still have—strong
founders who shaped their culture. In research for our latest book, The Founder’s Mentality, my colleague James Allen and I found that companies
with the founder significantly involved in the business deliver returns to
shareholders 3.1 times greater than those without.
Even if they’re not
founder-led, companies that maintain what we call the “founder’s mentality” are four to five times more likely to be top performers. That’s because these companies retain the very traits that most companies lose as they grow and allow
bureaucracy to swell: an insurgent
mission that
gives their business a sense of special purpose, an obsession with frontline detail and
the people serving the customers, and an owner’s mindset that
responds to problems with almost paranoid speed and manages cash tightly.
Only
about 7% to 8% of companies retain the strengths
of the founder’s mentality as they grow to industry leadership. But those that
do account for half of the net value created in the global stock market in a
given year.
Conventional wisdom says
that start-ups are better at launching and growing a new business than large
companies. But the evidence shows that companies with a strong core business, a
repeatable formula, and a founder’s mentality are ideal places to found a new
business. In fact, they are much more likely than a start-up to produce profitable
growth.
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