One of the difficulties the "Bigs" have in adapting to change is their organizational and structural bias to pursue scale today over growth potential tomorrow.
Short of finding a privately held strategic buyer for yourself and going private like Panera did last year, it's exceedingly hard for Big CPG to create enough runway for the kind of change needed to take some transformational risks, and act smaller. The demands of meeting quarterly growth and earnings forecasts on an enormous base business means eternal bias toward sustaining intiatives that can generate returns on invested capital and pump up marketing returns on big brand equities.
That's one of the reasons why Big CPG has amped up the dollars flowing from their equity pools into startup brands. It's simply lower friction than trying to internally advance breakthrough Innovation and develop their own disruptive brands. So let the thousands of lean startups spot rising trends and do the dirty work building the next wave of authentic brands, right?
I'm not so sure. The Strategics have considerable advantages when it comes to identifying and activating consumer insights through product development, brand strategy, communication, quality, regulatory, and so on... I've worked for a few of these companies, and would have a hard time imagining the accumulated value of the hundreds of passed over projects gathering dust in R&D or wilting in Marketing Power Point archives. I'm talking about market-ready, consumer validated, professionally crafted brands and fully vetted product platforms.
These zombie projects got "hibernated" at a final Stage Gate because the forecast wasn't huge enough. Or maybe they launched but were shuttered because they burned too hot chasing scale without enough patience. Some were killer products forced into billion dollar strategic brand architectures to find an easier path to shelf, but lost their authentic appeal among the fewer consumers who could've truly driven the brand. And a few were too good to last - just a little too far ahead of emerging trends to buy enough time for consumers to catch on before being pushed aside by the next launch in the pipeline. These corporate Innovation graveyards share a common epitaph: "Not big enough to merit further investment - Rest in Peace".
But scads of entrepreneurs and angels out there would love the kind of start these zombie projects got. A $10-$20M "pass" for a Big represents an awesome business proposition for an entrepreneurial management team. And those folks excel at inventing clever and efficient ways to unlock a brand's potential at a fraction of the investment. Instead of investing equity to source innovation from entrepreneurs with a path to ownership, what if Big CPG reversed that equation to source innovation from their own shelves, and gave up ownership to attract outside investment? This is the idea behind a Reverse Equity Portfolio.
Raise the dead. While big CPG venture portfolios search for which startup to fund next, they sit on pure gold. A Reverse Equity Portfolio is cobbled together from the best entombed IP and trademarks in the catacombs of R&D and Marketing departments that didn't make the cut. Not because those ideas was crappy, but because their outlook was too small. "Yeah, yeah... We tried the incubator thing. Why throw another $1-$2M dollars at commercializing projects that already didn't pass our hurdles?"
Try zero cash. It shouldn't cost a penny to build a Reverse Equity Portfolio. And if you lead a Marketing or R&D function at a Big, you should love this idea because we're talking about monetizing sunk costs in insight, R&D, and Innovation, without any incremental investment – and this is one of the core principals behind Mission Field’s Moving Front™ service offering… our unique model of both external portfolio pools and entrepreneurial launches
Here's how it works:
1) Audit the stranded IP in your org for the most promising opportunities that were fully validated for consumer acceptance and commercialization, but passed over because "not big enough". Include launches that showed market potential, but just couldn't achieve scale fast enough and were killed. The audit should be 3rd party - preferably an outsider with operating experience who will look at your products, consumer research, business plans, and brands from a fresh, entrepreneurial perspective. The business plan they write may look very different from the one your Innovation teams put together, and your Marketing leaders passed on.
2) Source an external management team from entrepreneurial leaders who are structurally and legally insulated from the BigCo. Ideally the new operating company is its own entity. Serial entrepreneurs who have taken 1 or 2 laps without a major exit event would be perfect candidates to match with Reverse Equity Portfolio IP. If it seems counter-intuitive to hire people who have failed, think again. These are the corps of scrappy general managers who understand the urgency of building a growth story and authentic brands fast - without burning through cash quickly. And they are more likely willing to ride along on a project with BigCo support for the added security, and a bit less equity than the "rock star" founder who has already benefited from a few significant exit events.
3) Write business plans for the best looking zombies with your entrepreneurs, and pitch to a network of external early-stage investors. Get creative, if you're targeting the potential $10's and $20's, the business model doesn't have to be viable in Walmart's planogram from day one.
4) Trade your IP for equity. You don't need to own the business. In fact, you don't want to own the business, or you would have already commercialized it yourself... Out-license your IP to the external management team and then be there as an advisor lending your expertise and infrastructure to help accelerate their progress. But don't force them into your systems and process unless you want their progress to be slow! Remember, as a Big, you want to take advantage of the adaptability and flexibility of the lean startup to rapidly commercially validate the business - at small scale. Forcing them to act big too soon will just impede their progress and ability to optimize in-market.
5) Be generous with your terms. You may believe your zombie IP has potential value down the road, but if you take an honest look at every project passed over in the last 5 years of your Innovation pipeline, how many has the company monetized or re-purposed for a business that is in-market today? The opportunity cost equals $0 for almost everyone inside a Big who I've asked this question. And don't get hung up on the argument that this IP could disrupt your legacy brands and businesses. If you believed that was true, you should have already launched it, because disruption is coming either way. You'll pay a significant discount to acquire that breakthrough disruptive brand if it comes from your Reverse Equity Portfolio instead of your Venture Capital equity portfolio!
If a Big could commercialize 5 or 10 opportunities over a few years through a Reverse Equity Portfolio, it's conceivable that would yield a meaningful growth story, particularly if 10-15% of your tries successfully scale beyond $10-$20M. I like the idea of monetizing IP that would otherwise have stayed dead for no cash - don't you? Something is better than nothing after all.
If you are interested in how this model can become applicable to you and your business, let us know, we’d be happy to help you craft your own unique model that bests fits your operation.