Creating new lines of business in established companies - part 1: recommendations
On the way to building a hugely successful company, most startups will need to expand from their initial product-market fit to a portfolio of successful products. Building a new business in an established company is similar to building a brand-new startup, but has some unique nuances that can make or break the initiative.
Much of my career has centered around creating new lines of business - first with my startup, then in creating the “Do” line of products at IFTTT, and most recently in creating the Clever Library at Clever. Some of these were successful, others I look back and shake my head at the avoidable mistakes we made - reflecting on the highs and lows, I wanted to share some recommendations for how to set up these initiatives for success.
Train executives to think like VCs
By the time a company looks to branch out into new lines of business, the executives are typically experts in growing and operating a large business. This is a critically important set of skills for the company, but is a different set of skills than those employed by VCs to evaluate risk, decide when and how much to invest in a fledgling initiative, and advise on questions of persist vs. pivot. Some best practices from running a scaled business can actually be harmful to a new initiative searching for product-market fit, such as annual planning, revenue projections, and detailed hiring plans. It’s important for executive sponsors to recognize that a new set of skills is needed and make an active effort to learn these new skills.
Compare to typical startup trajectories, not to existing products
Companies start new lines of business when their core business has found product-market fit and reached scale. While the scale of the core business is an asset that can accelerate the growth of a new business, it also can serve as an unrealistic point of comparison. As a brand new startup, the first hundred dollars of revenue is a victory worth celebrating. But when the core business has $10mm in ARR, a new line of business might seem like a failure until it’s earning $1mm/year – a milestone that often takes a new startup years (and many pivots) to reach. This comparison often leads to either shutting down promising initiatives too early or rushing to scale a new initiative before its found product market fit. Rather than comparing to the core business, it is better to compare progress to “typical” startup trajectories, and to keep in mind that as a rule of thumb, you should not expect the advantage of existing market share/resources to reduce the time to $1mm in ARR by more than 50%.
Identify customer needs first, then match to company needs
In a perfect world, new business projects are started in response to a burning customer need that can’t be met with the existing products. But in practice, the motivation for creating a new business team is often a company need: a desire to diversify revenue, to explore an executive’s pet idea, to find a bigger market, to be more “innovative,” etc. No matter the initial motivation, a new business team isn’t going to find success unless they find a critical customer problem to solve, so they should first focus exclusively on finding customer needs. Once the team finds a burning customer need, they can then confirm that solving the customer need will also fulfill the business need before investing in a solution. This is further explored in this post.
Find achievable wins on the path to bigger goals
To tackle a big goal, teams should find a smaller goal that they can find success with and use as a jumping-off point for the next goal. They will provide more value to the company along the way, and these successes will provide learnings and assets that the team can leverage towards the next goal. For example, to build a marketplace, the team might start by building an asset of a bunch of engaged would-be buyers or sellers, then use that as a “base camp” to build out the other side of the market.
Give the team space and flexibility on process
New business teams have a very different rhythm than mature teams – they may change goals or pivot strategy on a daily basis rather than the quarterly or annual cycle for mature teams. They also generally require a different set of skills - while an established business unit might look to hire specialists who thrive in highly structured environments, a new business team will likely need extreme generalists who are comfortable creating their own structure. The best way to handle this difference is by creating space for new business teams to thrash their way towards product-market fit without disrupting the mature product teams. This space can take lots of forms - from a dedicated corner of the office (or a WeWork), to a set of “beta-friendly” customers that are open to experimentation, to exemption from company processes like quarterly goal setting. As new businesses mature and scale, you can gradually integrate them into the company systems, so they form lines of communication with functional teams and get appropriate structures to support mature growth.
Focus on a new market or new customer need, but not both
Companies can find success by solving a customer need they know well in a new market, or by solving a new customer need in a market they know well, but trying to jump to solving a new need in a new market is overly risky. In expanding to a new market, be careful not to assume that market has the same customer need, or that the need should be solved with the same product that worked for another market - it is very easy to fall prey to confirmation bias. For identifying new pain points in an existing customer base, be careful that your friendliest customers aren’t just telling you what they think you want to hear, and note that new products might need very different go-to-market or business models than existing business lines.
If you have perspectives or advice on building new lines of business in established companies that aren’t captured here, I’d love to hear from you - this is an important part of creating successful businesses, yet there are far fewer resources on the topic than on the early stages of building a startup. A big thank you to Dan Carroll for his help and advice in putting this post together.
In Part 2, I go over the typical lifecycle of a new business initiative.