How $21 billion industrial tech giant Fortive is exploring a new way to speed up innovation: Spin out independent startups with their own missions, and reserve the right to buy them later under pre-agreed terms

  • Industrial technology giant Fortive partnered with Pioneer Square Labs, a Seattle-based startup studio, to create a new "joint innovation lab" to launch startups.
  • PSL and Fortive teamed up, and launched the lab's first company in May — a startup called TeamSense that builds software to help employers track employee's COVID symptoms at work. It already has thousands of customers.
  • The innovation lab has already spun out a second company and is close to spinning out a third. Pioneer Square Labs is also in talks with at least two companies other than Fortive to replicate the joint innovation lab model. 
  • The way it works is that TeamSense is completely independent — but when it comes time to look for an outside venture capital round, Fortive reserves the right to buy it wholesale at a previously-agreed upon price instead.
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Industrial technology giant Fortive – based about 30 miles north of Seattle in Everett, Washington – is a holding company that owns several handfuls of smaller firms, mainly serving the industrial manufacturing sector.

While Fortive has historically acquired companies to grow its corporate umbrella ever larger, the company has started looking for ways to incubate its next big thing itself, to complement its M&A strategy.

"We believe in learning from different models," Fortive VP Kirsten Paust said. "We wanted to ensure that we are searching out there for the best ideas and think about how to bring ideas to market."

So the nearly $21 billion company teamed up with Pioneer Square Labs, a Seattle-based startup studio with a venture capital arm.

Together, they developed a new "joint innovation lab" concept. Unlike some corporate startup accelerator efforts or so-called "intrapreneur" models, however, the joint innovation lab model does things a little differently. PSL brainstorms ideas for companies Fortive might like – meaning something that fits into, but doesn't compete with, the company's existing portfolio – and then finds people to run them, usually from within Fortive.

When it comes time for a startup founded under the program to go out and raise outside venture capital funding of its own, Fortive reserves the right to acquire the company instead, at a price and terms that were pre-set at the very beginning of the process. 

The idea is to create new companies, give them lots of room to explore new markets, concepts, and products faster than a giant like Fortive could ordinarily manage — but then keep the option open to bring these startups back into the Fortive mothership if and when it makes strategic sense to do so. 

The innovation lab has already spun out two companies and is close to spinning out a third. Meanwhile, Pioneer Square Labs is in talks with at least two companies other than Fortive to replicate the innovation lab model. 

How it works

TeamSense, which builds software to help employers track their workers' COVID symptoms, was the first company launched out of the lab. It was incorporated on May 14, and signed its first customers on June 8.

Founder Sheila Stafford used to work directly to Fortive, but now runs the company as CEO. Fortive and advisers from PSL act as TeamSense's board. 

The way PSL typically works is that it invests approximately $300,000 in the very youngest of startups, with the money coming from its $80 million venture fund. For this joint innovation lab, it's actually Fortive that writes the check, with PSL acting as adviser. Fortive declined to share how much it invests in joint innovation lab companies, but suggested that the amounts are in line with PSL's usual approach.

When TeamSense gets to the point where it is ready to raise Series A venture financing, Fortive will get the first right of refusal to decide whether to acquire the company for a set price, or allow the company to move on and seek outside venture capital. Fortive and PSL agreed on an acquisition price and other terms before the company launched. 

The model behind the innovation lab is that Fortive gets to potentially acquire a company like TeamSense at a better price than it would pay on the open market, and PSL owns equity and would make money from the sale. 

'You're purely just competing off of whether this business makes sense'

The lab is having its desired effect of pushing innovation forward, the people involved said.

Stafford, the TeamSense CEO, said the biggest difference between launching a new product or service within a company like Fortive and turning that idea into a startup is the speed with which you can operate.

"You're purely just competing off of whether this business makes sense," she said. "You're simply in a flat-out sprint. There's no posturing, no politics."

And some of PSL's methods are trickling up to Fortive, too. PSL asked Stafford to write a biweekly update for the board and Fortive's CEO about the company's product, customers, and market. Fortive's CEO liked the format so much, he asked others in the company to adopt the process.

T.A. McCann, Pioneer Square Labs managing director, believes the joint innovation lab model is more effective than what's sometimes called "intrapreneurship." The goal of that particular model is similar to what Fortive is trying to achieve with its joint innovation lab, but the new team or division, sometimes called an "internal startup," is kept squarely within the existing corporate structure.

The benefit of the intrapreneurship is increased access to resources, including capital, as well as fewer risks and a more robust support system. But critics like McCann argue that this model is counterproductive, because the increased safety also comes with a diminished appetite for risk. An employee might have a great idea, he said, but they won't necessarily be able to make decisions in the best interest of the new business or concept.

"For a person like Sheila, if you're living inside of a company, you're almost always under some VP," McCann said, meaning it's harder to protect an idea because you can't call the shots. "Companies end up killing a project because the 'leader' is just a leader, not a CEO, and doesn't have enough autonomy."

In one famous example, Steven Sasson, an engineer within Kodak created the first digital camera, but Kodak declined to sell it because it could harm film sales. It's now considered a massive missed opportunity for Kodak and a case of what Harvard Business Review called the "Myth of the Intrapreneuer."

'I don't have outside opinions trying to put up blockers'

For Stafford's part, she's familiar with trying to make change at a large corporation: She was the first employee at appliance manufacturer Whirlpool's WLabs corporate innovation arm. From there, she went to Fluke, a Fortive subsidiary, where she had success developing a new tool that helps manufacturers find air leaks. 

The difference between running TeamSense and trying to innovate within a large corporation in general is she doesn't have to deal with corporate bureaucracy, hundreds of opinions about how something might affect a corporation's brand, or sudden changes in budget or priorities. 

A corporation might cut a project's budget for the sake of its core business, but when it comes to the innovation lab, TeamSense is a separate company and Fortive is an investor, so it can't reallocate or revoke the funding. That frees her, as a CEO, to chase what's right for the company, even if it's not strictly for Fortive's short-term benefit.

"I don't have outside opinions trying to put up blockers," she said. 

Are you a tech-industry employee? Contact this reporter via email at [email protected], message her on Twitter @ashannstew, or send her a secure message through Signal at 425-344-8242.

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