Incubating a New Company within the One You’ve Got

Companies aim to create value by solving a problem. Founders, to increase their chances of creating a solution that has value—i.e., that customers will pay for—should have a deep understanding of the problem. An interesting approach to this goal is incubating a company inside another company: A company has a problem. It builds something to solve it. Management realizes others have the same problem. The company begins selling its solution. The solution grows so quickly that it’s separated from the parent company to become a stand-alone entity. I know a few founders who’ve successfully incubated companies this way—and the new companies became massive over time.

I’ve noticed a few things about this approach. If the parent organization has ample resources (usually money and people), this can be a great way to get something off the ground without raising capital. If not, it can drain and burden the parent company. The legacy company’s leaders often are attracted to the new growth company because it has great potential. But managing both companies can become challenging. I’ve seen leaders put someone in place to run the legacy company while they focus on the growth company. This works well—if the right person can be found, which isn’t easy.  

I like this approach. It isn’t realistic in most companies, but when it is, it can lead to something big.