Startup's are not enterprises as if they where it would be impossible to innovate or disrupt entire sectors, as we witnessed numerous times in the last decades.
While is it true from the other direction as well, enterprises are not startups as they need to maintain extremely complex products in an extremely complex world within extremely competitive environment, progressing fast doing it quick & dirty will cause to failure mainly since those enterprises are living in the red water zone, often protected by regularity they need to serve, or under other enforced constraints, the main point is that those enterprises can't behave like startups.
Startups tend to embrace enterprise behavior while enterprises tend to embrace startups behavior. The big dilemma is how much is good, when and how.
This post presents my own opinion from my experience and perspective, mainly by working with numerous startups of all type and sizes, as well as number of enterprise companies.
For enterprise, adopting startup behavior comes with cost it means that there is a need to hire certain type of personnel as well as isolate them in relevant environment, as an example I can share my own experience from 'Bank Leumi', while they wanted to develop new digital banking technologies.
For an enterprise such as a bank in Israel it's about impossible, first the HR are below any standard, any one of them will argue for hours that the current bank application is the solution, as for API and backend, it is not less than a nightmare, the API is a total mess any change takes month to generate, the whole process involve tens of employees to make, and the worst part is that any one, but any one can interfere and claim that you need his approval for any thing, and if you oppose you'll have to deal with the union! oh no just not the union!!
So, they rented a new open space in the middle of Tel-Aviv, designed according to the latest design trends as all the startups around, having the better coffee than the bank standard, but above all employing all the cool startup guys, and the worked (almost) like a startup, generating the new, limping yet production ready, digital bank. But it came with a cost, first the price tag was about $150M, can you think of a startup that burns $40-60M a year in his first three years? second, was the quality been damaged by other parties insist to take a look, telling you what they think and how you should do it, and third is that the product was not successful (Bank Leumi don't admit it, yet the numbers are hidden from public eyes for a reason) mainly since it wasn't a real startup, it didn't live or die by the hands of the market needs, it wasn't the lean startup way.
But they did it, they went to the startup side, not as should, not completely, it is still a bank right. I and many financial analysts consider it a failure, from my perspective it is a huge technological and software development failure.
Before I will tell you how to do it right, I would like to show the other side as a startup that tries to adopt enterprise culture.
In fact I have two stories to tell you about this dilemma, the other one is the story of Aladdin an Israeli startup in the DRM field, this startup literally invented the eToken, a small device that contains a key that unlock a software or any other resource using asymmetric encryption, it was a big issue at the time and they sell millions of units, they been doing it the startup way, flat development hierarchy, fast development, rapid movements and above all strong market feeling.
one day on the end of Aug-2008 Aladdin decided to do some acquisition, we starting to think like an enterprise they thought, we will buy businesses and revenue, and they did, Aladdin found a nice company that had a market in the US, they sold tokens, not Aladdin's eToken but rather some cheap manufactured one, no real service no real application around that but they had some market share, and they were losing money operation wise, Aladdin management decided to buy them, chief of business development gathered all 200 employees in the conference room and told all of us that Aladdin is buying this company for the price of $4M, then he asked, any questions? and only I asked one question: “Is it worth it? do you know how many startups we can start with this amount?” but he didn't fall for the question he explained that they made
calculations "how much it costs - their profit time 5-10 year Yada Yada Yada, it made perfect sense, the revenue will return the investment over time" they paid $4M for this piece of nothing, remained with only $1.5M in the bank account, We are enterprise, yeh!
But three weeks later on the market fell down Lehman Brothers where history, and so Aladdin the nice startup
who though is an enterprise, had to face a strong shortage in cash, and sold a few months later for only $4M.
I could tell you stories of startups that fell into bureaucracy, politics, leaving waves of key stakeholders, yet all may fall unto the standard startups mistakes, Aladdin's story strongly explained the startup that wanted to be an enterprise.
The dilemma solution
In my humble opinion there is of course a better way for this dilemma, a total separation between the two ways of thinking or approaches must be complete, you can not be both an enterprise and a startup, believe me you will definitely fail, it is almost inherently embedded in the quest.
If you think and managed according to the roles of enterprise you will not be able to start thinking like a startup, you can try but it will not totally be a startup way of thinking, you must understands that one key part will always be missing is the hunger for success the ability to improvise the ability to report to none, no CE-fucken-O (hey its my blog) no chairman of the board, no union nothing, free of any obligations, only than you can be a startup, so what Bank leumi should have done with Pepper - the digital bank? they should do one of the two things, either develop it as internal banking application, or hire an entrepreneur, one who
have almost succeeded, one that is still hungry for more, put the budget, not upfront, but according to milestones, the entrepreneurs in the leading team work should not work for engineering salary but for the expected bonus only according to business milestones.
Ho and one more thing, there should be absolute separation between the traditional bank and the new digital bank, nothing at all! OK maybe a bit of reporting and ability to access some resources. but it should work by the roles of startups, live or die by the ability to perform.
On the other side of the river, total separation between the enterprise way of thinking would end up with exactly the same results, a total separation in Aladdin’s case could and should look as follows. Aladdin, the startup, would have a separate 'enterprise' who has nothing to do with the underline startup, we agreed for a bit, right? so experts can consult technically or do evaluation of technologies or any other kind of advice, but that's all, Aladdin's startup management is not shared, it means that SU management is not reporting to any of the managers on the enterprise management, and vice versa, furthermore, the enterprise management works on its own budget and pre allocated stocks of the startup company.
How would the purchase would look like in this case? the SU management with $4M will define that there is a need to keep least $3M (Just for the argument) and sends the Enterprise management to seek for funds elsewhere, and so they have only $1M, either they would sell stocks in the free market for funding or do business with the remaining $1M, from the point of view of this roles of operation the purchase would not take place, since the separation would enforce the enterprise management to buy services from the startup side, now selling cost money and contracts and values looks different now. I guess that if the enterprise management was really keen on purchasing something it would take a loan backed by the newly purchased companies stocks, so in case of market failure you keep the SU and the flow positive.
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