A successful flagship product is the dream of every technology organization (and in general), but it also raises the following question: How do you continue to grow, innovate, and meet the next significant achievement? As a company grows and matures, work processes become more organized and quality-focused. This is a good thing, but at the same time there’s a risk of stagnation and overreliance on what worked in the past. Even if you have a winning product in hand, the technological world doesn’t stand still, and you have to constantly look for the next big thing.
In our case, after a decade of organic growth from established products, we realized that if we didn’t invest in new initiatives, we might miss out on future opportunities. We decided to establish an internal entrepreneurship mechanism — a startup engine within the company — that would allow us to nurture new products as if they were startups, but within the company’s boundaries, with no intention of spinning them off.
In this article, I’ll share the methodology and key lessons we learned from this process, in the hope that other companies will be able to implement a similar model on their own.
To ensure that new initiatives are given a place of honor without jeopardizing the core business, we’ve decided on a clear division of resources according to the “85/15” principle. This means that 85% of the company’s resources (human resources and budgets) will continue to be invested in the growth and success of existing products, in order to maintain a healthy and profitable business, while at the same time 15% of the resources will be allocated to new initiatives and the development of future growth engines.
It was a conscious commitment to invest in “what’s next” without neglecting the “here and now.” For a company accustomed to success thanks to established products, this is a nontrivial step — especially when it comes to a bootstrap company (without external investment) accustomed to profitable and cautious management. But we knew that if we did not allocate resources to entrepreneurship, it would be very easy to get sucked into the current and postpone the future for an unknown time. This principle created a framework that, on the one hand, limits the “burning of resources” on adventures, and on the other hand ensures that at least a defined part of our strength is working on the next products in the portfolio.
The next step was to define a new organizational structure for the initiatives. We decided to establish several small teams, each of which would function as an independent mini-startup within the company. We call them “pods.” Each pod is dedicated to one new product idea, and consists of a heterogeneous team with all the functions necessary for the product’s success: development, product, design, marketing, and so on, all under one manager. This manager serves as the entrepreneur/CEO of the internal mini-startup (we called them GM, General Manager).
Why did we choose the pod structure? Because for a new product to quickly find Product-Market Fit, it needs several things: independence, fast and focused communication, and full focus. A team that operates as an autonomous unit can make decisions quickly without depending on the bureaucracy of a large organization, reduce delays in transferring information between departments, and most importantly — focus only on the new product without “jumping between tasks” and other projects. The large organization structure is suitable for our mature products, but it is simply too slow and cumbersome for the uncertain environment of a new venture. Therefore, we had to adopt a more flexible “organic” structure: each pod is like a small startup for which all of us at Cloudinary serve as a kind of incubator: We provide resources and support, but leave it maximum freedom of maneuver.
It’s important to emphasize: Although the pods operate independently, they’re still part of the company. One of the challenges we identified in advance was the danger of the pods becoming an isolated “silo” and disconnected from the rest of the organization. To prevent this, we did three things:
- We maintained a two-way connection between the pods and the company. All pod staff are still professionally associated with their professional department (development, product, etc.) through a “dashed line” to a senior professional manager in the field, so that they can continue to develop professionally and receive mentoring outside of the pod.
- We established an Advisory Board with key stakeholders from across the company, which meets regularly with each pod. This forum isn’t designed to manage the teams on a day-to-day basis, but rather to provide them with advice, resolve obstacles, and ensure that their direction remains anchored to the company’s larger strategy. This way, the pods enjoy both the independence to make agile decisions, as well as management support and a connection to the big picture. This concept was so successful that it was adopted outside the group.
- We discovered that we need to carefully balance giving the pods freedom of action with oversight and guidance. One of our lessons was to clarify the boundaries between advice and binding decisions. In effect, we created a board forum, separate from the advisory forum, that functions like a “fund management” that invests in pods — so that pod managers know when they are receiving friendly feedback and when these are binding instructions from the company’s management.
As part of our initiative management, we chose to adopt a venture capital fund mentality within the company. This means accepting the fact that most initiatives will fail, and planning the business model accordingly. We estimated in advance that only about 25% of pods would succeed in reaching their goal in the long term — so that three out of four would close. This may sound pessimistic, but it’s actually a much higher success rate than what is seen in startups “outside,” and we hoped to achieve it thanks to our internal advantages. Pods within a company have several “wild cards” that a regular startup doesn’t have: financing without running around between investors, ready-made infrastructure and services (offices, IT, legal advice, etc.), free access to the company’s developed technological platform, an existing customer and user base that can be turned to, and the trust of large brands that are already working with the company.
All of this constitutes a huge leap forward, but we knew that statistically not every idea would take off. So, we needed to design a decision-making and funding continuation mechanism that would support promising projects, while simultaneously stopping projects that weren’t progressing in time. Instead of funding an innovative project indefinitely “as long as there was no disaster,” we adopted a model of internal “funding rounds.” In other words, the pod is allocated an initial budget and time (a sort of runway) to achieve clear milestones, and when it approaches the exhaustion of resources, it must “convince” the board of directors of Emerging Business (EB, which serves as a sort of investor) to invest in a follow-up round based on the results achieved. If it was able to demonstrate significant progress, it would receive more fuel to continue; if not, we may not approve additional funding, and the project will be closed (“sunset”).
This approach instills alertness and focus in the team: everyone knows they are in a race to achieve a business/technical goal before “running out of money,” just like a startup that needs to impress investors in the next round. This also avoids a common situation in large companies where a new project drags on for years simply because they continue to budget for it without stopping and asking if it’s time to finish.
To gauge a pod’s success, we also had to adjust the way we measured it: It’s clear that in the early stages of a new product, you can’t measure it by profitability or large revenues, so instead the metrics are progress in finding value for the customer, technical milestones, user feedback, and so on. In other words, we adopted an investment fund mindset:
- In the first stage, we measure learning and convergence to Product Market Fit more than direct financial profit. If necessary, we changed direction based on what we learned from the field.
- This approach also requires a degree of mental toughness from the teams and the entire organization. Knowing that most projects will fail can be depressing, especially for a team that invests its energy in a product that may eventually be discarded. So, the organization’s culture should frame the failure of a new product not as the end of the road, but as a step on the path to success. We communicate in advance to employees that a pod breakup isn’t a personal failure.
- Then, we’ll immediately look for ways to involve team members in new and exciting projects from our backlog of ideas.
In addition, we try to use the fruits of the venture even if it didn’t take off. For example, a technological component we developed for an experimental product that didn’t succeed will be integrated into Cloudinary’s existing platform to strengthen other products. In this way, the work of a closed pod doesn’t go to waste, and the team feels that its investment has generated value for the company in some way. Our approach was: It’s better to try, fail quickly, and learn, than to avoid taking risks. That’s the only way to reach the next home run.
As any intrapreneur knows, you can’t set up such a mechanism without full support from senior management. The group has a mandate to push the process forward — including a budget, the authority to recruit people for new projects, and the freedom to do whatever it sees fit (within the confines of its department) to advance the initiatives. I believe any large company that wants to act like a startup should appoint a dedicated executive or team at the executive level to lead the internal entrepreneurship process. Without them, the efforts will quickly run aground and lose momentum.
In our case, in addition to the pod structure, we also established cross-functional support mechanisms. I mentioned earlier the multidisciplinary advisory forum, which helped us keep the initiatives on the agenda of all units in the company. Also, we made sure to integrate the fruits of success back into the company smoothly. For example, when we had a project from EB that showed initial signs of success, we shared it with the entire company in Town Hall meetings, which created internal enthusiasm and also signaled to all employees that something new and promising was coming from the pods’ hard work.
At the same time, we built a gradual process in advance for integrating successful ventures back into the company’s mature arm: Instead of moving them all at once and risking them being suffocated within the large structure, we defined an intermediate stage in which a promising product enters a Growth period — a year of accelerated growth with slightly greater support from existing departments (additional staff members who partially join the venture). The goal of this stage is to bring the new product to Escape Velocity (e.g, to reach from modest revenues to annual revenues of $1 million or more) so that when it’s finally added to the main product portfolio, it will be large and mature enough and won’t lose momentum due to the transition. This organizational support ensures that whoever leads a new initiative isn’t operating in a vacuum, but knows they have a safety net for the day after the initial success.
This is also the place to talk about organizational culture. For internal entrepreneurship to flourish, all parties in the company need to know and understand the goals and methods. We explained to all employees why we were doing this move — that we would all enjoy the fruits of it if we succeeded — and that it also involved attempts that would not succeed. We encouraged a culture of learning and curiosity: We treated each pod as an experiment that the rest of the company could learn from.
For example, one of our pods decided to specifically approach large enterprise customers, contrary to our initial perception that it would be better to start with small customers in a beta version. This decision came from the field. They discovered that the value they were offering was suited to a specific large organization that collaborated with them, so they seized the opportunity instead of insisting on the original plan. Our conclusion was that there’s no single correct template for launching a new product. It’s true that in many cases it’s better to start small and grow gradually (to get quick feedback and not risk reputation with large customers), but we need to be open and flexible to change strategy according to what we learn. True entrepreneurship requires trial and error, and sometimes even breaking paradigms from the original plan.
After two and a half years of operating this mechanism, we’re seeing results. We’ve launched several pods — some of which we had to close after not reaching our goals, one of which was merged into an existing product line in the company after proving its value in a tangential area, and others are still in the race and trying to reach their breakthrough. One of the products, MediaFlows, has already been purchased by dozens of enterprise customers, including some of Cloudinary’s most strategic customers, and is on track to increase last year’s revenue 5x. Overall, the investment in Emerging Business has expanded the portfolio, helped close large deals, and generated new revenue, both from the new products and from existing Cloudinary products with which they interface. This is proof that with the right approach, new organic growth can be generated alongside the established business.
We learned some important lessons along the way:
- Entrepreneurship needs a framework to flourish. Without the allocation of resources and support from management, it remains a slogan.
- Not everything that works in a startup will work the same way in a company. The structure and processes need to be adapted to the culture and existing systems (e.g., maintaining communication between the entrepreneurial teams and the rest of the organization).
- Failures are an integral part of the journey. The test is what an organization learns from each failure and how it leverages it for the next experiment.
My main message to companies considering establishing an internal entrepreneurship mechanism is that entrepreneurship can and should be treated as an investment portfolio. Determine in advance how much of the resources are invested in the future, build dedicated teams with freedom of action and a clear mandate, and be prepared for the fact that not everything will work, and that’s OK. One big success can justify several failed attempts. The way you do it will greatly affect the results. If you give a new venture the conditions of a startup, such as focus, independence, push from management, and a culture that encourages creativity and isn’t afraid of mistakes, its chances of breaking through increase significantly. As far as I’m concerned, our path is still ongoing, and every day I learn something new about organizational entrepreneurship.
Despite the difficulties along the way, I see this as a vital investment in the present to ensure that our company has a future. If you, too, want to preserve the magic of a startup within a large company, know that it’s possible. With a lot of determination, support, and patience, you can replicate some of this magic in yours as well. Good luck!
