Innovation for the core business: corporate start-ups

A company within a company. Or several. In order to drive their own innovation forward, more and more established companies are relying on corporate start-ups. In Germany today, 70% of the large DAX corporations operate their own accelerators for internal start-ups. The Otto Group is one of them. With its corporate company builder Otto Group Digital Solutions GmbH, the corporate giant has set itself the goal of developing new business models in the retail-related service sector and establishing them on the market. We spoke with the two managing directors, Frauke Mispagel and Björn Schäfer, about their experiences, challenges and processes.

DMEXCO: Otto Group Digital Solutions (OGDS) was launched just over a year ago. What is your experience thus far? What has worked best for you?

Björn: We firmly believe that the ability to collect, process, analyze and draw the right conclusions from data is particularly important in this day and age. At OGDS, all our business models are based on this core competence. Whether in the areas of fraud prevention, online marketing, sales forecasts, visual image search, customer-centered payment reminders or performance marketing optimization, all Otto Group Digital Solutions companies are characterized by “data passion”. This is also an essential building block for the success of all OGDS concepts, as we intend to build more intelligent and high-performance data-based products for our customers than our competitors.

DMEXCO: What is the start-up formation process like in your company? Does someone just come up with an idea, find the right team and submit an application?

Frauke: It always begins with a good idea. To this end, we identify global trends and changes in our B2B markets. These include the areas of e-commerce, fintech and logistics—basically everything covered by Otto Group’s value chain. In addition, we use our own network for Project A and eVentures, as well as the know-how from within the company group.
If an idea matches our criteria, new products and solutions are developed in a rapid prototyping process. This enables us to test the potential of our ideas both on the market and on the product side very quickly and cost-effectively. We use assets like customer knowledge, our website reach and the logistics infrastructure of the Otto Group as strategic levers. The subsequent growth phase includes spin-off and the projects become companies. Here, too, the interfaces with the Otto Group are used to develop partnerships. In addition, the start-ups are expanded step by step to include new product features, extended sales structures and KPIs. The start-ups then continue to be managed by OGDS. Our goal consists of developing a powerful portfolio of companies that will help shape the digital future of the Otto Group.

DMEXCO: Who decides whether an idea has the potential to become a start-up? Are there decisive factors that must always be in place?

Björn: The first decision about this takes place in the ideation phase. We ask the classic questions used in pitch decks such as “Which problem is solved?”, “Which market potentials and barriers to market entry are there?” and “What is the business case?”, i.e. “What are the possible revenue streams?”. Another decisive criterion for our start-ups is the use of an “unfair advantage” – i.e. one of the above-mentioned assets from the Otto Group, which we can leverage strategically to be faster than the market. We see this as a major competitive edge.
One example of this is our portfolio company Risk Ident, which provides software for fraud prevention. When the company was founded, we were able to access the company group’s trove of data to train the software’s artificial intelligence. An external start-up would never have had access to these millions of bits of data. Risk Ident is now the market leader in the DACH region. As part of our build process, there are further milestones such as the construction of a prototype and then an MVP (Minimum Viable Product). Only once our hypotheses have been confirmed, does a spin-off usually follow.

DMEXCO: You generally develop internal start-ups. Can external founders also submit applications to benefit from your infrastructure and your financing possibilities? What do applicants need to bring to the table?

Frauke: Yes, as a corporate company builder, we focus on developing our own ideas and do not invest in external start-ups like a classic VC. For this we have other contact points in the company group including Project A and eVentures. What we do not rule out, however, is acqui-hiring. This consists of acquiring entire start-up teams with qualified employees and a business model with a strategic fit. The founders can then further expand their company with us as venture leads and use the financial and organizational possibilities of the company group environment to tap into new markets and target groups.
In general, we are always on the lookout for potential venture leads that either have an idea they can bring to the table or have the desire to implement one of our own ideas. It helps if you have both corporate and start-up experience. This is because both organizational forms have their own dynamics and it helps if you can maneuver well in both.

DMEXCO: You launch start-ups on a regular basis. Are there certain steps along the way that prove to be challenging every time? Are there recurring reasons why start-ups fail?

Björn: Every phase of developing a start-up has its own set of challenges. This applies to the validation of ideas, the prototype phase or the later growth phase. In each phase it helps to define concrete goals or milestones as a basis for determining success or failure.
A lot generally depends on the willingness to continuously develop products and processes. This is only possible if you have an in-depth understanding of customer challenges and the required agility and culture within one’s own company, which in turn enables continuous improvement.
External founders often have to manage strenuous financing rounds, while at the same time developing and managing the operative business. In our companies, the founders can fully concentrate on their idea and growth.

DMEXCO: Are the start-ups accompanied by your parent company? How independent are the companies within your company group?

Frauke: After spin-off, we continue to support and manage our start-ups. We form the interface to the company group for them, so they can focus on their core business. In addition, we can open doors for them and they benefit from our know-how.

DMEXCO: In your jobs as managing directors, you have probably gained quite a bit of insight into how founders think. Are there characteristics that they all have in common? And what do you think founders should bring to the table to be successful?

Frauke: Faith in oneself and one’s own vision is important. In the beginning an idea only exists on paper. Passion and persuasiveness are therefore fundamental. This applies both in relation to customers and to the company’s own employees, who must be won over and retained.

Björn: As mentioned earlier, curiosity and a willingness to constantly improve are other important characteristic for founders to have. Later on it is important for founders to be able to let go and allow others to assume responsibility. This requires trust in your own team. Those who want to check every single Facebook post themselves, for example, risk micro-managing and thus losing sight of the big picture!