Big companies starting new businesses has become a big deal. In many cases, these big bets create bigger movements, up and down, in a company’s stock price than its (more stable) core business.
For example, Google’s restructuring into Alphabet highlighted how much the company is spending on new businesses. Ford recently announced that a unit called Ford Smart Mobility, headquartered in Silicon Valley, will build new car-sharing and parking-locator apps. And last quarter, Amazon began publicizing financial results for Amazon Web Services, which generated 67% of Amazon’s operating income in the first quarter of this year. 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 startups?
Large companies that leverage the strengths of their strong core business have about a 1-in-8 chance of creating a viable, large-scale new business. Compare that to the typical entrepreneur incorporating a startup. Of all new businesses registered in the U.S., only about 1 in 500 will reach a size of $100 million — and a mere 1 in 17,000 will reach $500 million and also sustain a decade of profitable growth.
Of course, everyone can cite a favorite unicorn — SpaceX, Uber, Airbnb, Tesla — that is defying the odds and disrupting established industries. Still, your chances of success are much better if you can benefit from a strong existing business and the scale advantages of an established company.
Few companies have mastered this skill. But as traditional conglomerates decline, we may see the rise of a new type of multibusiness company: those that use their advantages of scale to start or acquire smaller businesses, grow them and perhaps even spin them off again.
For companies and investors deciding where to place their bets, here are three principles to improve their odds of success:
— PURSUE BUSINESSES THAT PROTECT THE CORE. Amazon Web Services’ success strengthens Amazon’s retail business by building scale and new 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. All are specialty retail, have complex supply chain restocking requirements, and are built around emotional customer appeal.
— LOOK FOR A FOUNDER’S MENTALITY. Finally, many of the companies named here had — or still have — strong founders who shaped their culture. Companies with the founder significantly involved in the business deliver returns to shareholders 3.1 times greater than those without. But even if they’re not led by founders, companies that maintain the “founder’s mentality” are four to five times more likely to be top performers.
