When Large Companies Are Better at Entrepreneurship than Startups

When Large Companies Are Better at Entrepreneurship than Startups

When Large Companies Are Better at Entrepreneurship than Startups

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.

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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.

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To date, few companies have mastered this skill.

 



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