Launching New Business Lines in Startups

30 Nov 2020

Venture capital backed startups are all about creating hyper-growth businesses. There is nearly no valuation upper bound for what we define as a startup as long as the company is sustaining its hockey stick growth trajectory. But what happens after a startup’s existing market is slowly saturated? Startups oftentimes rely on launching new business lines as a way to tap into new markets. This is different from rolling out a new product or feature since the new initiative is often operating as a separate legal entity with different business models. Think of Uber Eats at Uber or Stripe Atlas at Stripe - startups are essentially incubating new startups within themselves. These new lines not only leverage the existing strengths of the parent company, but also actively strengthen the core product offering by developing new channels for customers to gain value from the original product.

I became fascinated by this topic while helping to launch new business lines at Blend. Creating a new business line gives a company the freedom to innovate rapidly in a new market while leveraging existing distribution network and technical infrastructure. With sufficient resources and deliberate execution, there really is no ceiling to what a company can achieve. But companies generally face the hard economic trade-offs on investing in new business lines due to finite resources.

The fundamental challenge for companies to understand is what their competitive advantage is in the new market. Then it branches out into related follow-ups: Could you leverage existing distribution channels efficiently in the new market? How to utilize the current infrastructure for running new experiments economically? What does it mean to build cohesive branding across multiple business lines with underlying connectivity? How do developers build scalable software that is compatible with the current system? By and large, companies may start off deliberating on the following themes when pursuing a new business line:

1. Advantage: understand your unique competitive advantage in a new market
2. Cohesion: build a cohesive branding narrative across multiple business lines
3. Cross-sell: validate the opportunity to sell a new offering to your existing customer base
4. Experiment: prove the business hypothesis quickly and cheaply
5. Evolution: build your system as an evolving organism

There really is no one-size-fits-all formula for how to launch a new business line successfully. Even at Blend when two separate business lines are sharing the same overarching objective of making the home-buying process simpler for consumers, we had to reconstruct a new empirical model for each new business. I have seen few cases where we can simply “copy-and-paste” what is working in business line A to business line B without contextual changes. While it is useful to follow a guiding framework for the approaches and strategies, it is unavoidable to keep the execution details loose when dealing with growing business complexity.

There are an abundance of frameworks to cherry pick from, most with detailed explanations available on the Internet: establish a closed feedback loop, measure meaningful key metrics, move quickly and fail fast, talk to customers, build an MVP, and so on. If the new business hypothesis were proven by actual demand, the startup would then focus on scaling the new business mostly as an independent entity, transitioning into a multi-business line company. For internet businesses, it’s worth highlighting the importance of recognizing software systems as an evolving organism. An unusable piece of software is literally useless, regardless how great it is by design. Companies should always evolve their software systems to fit the business needs. It is nearly impossible to design a perfect system architecture at the outset mostly due to the fast changing nature of the business - always build incrementally. The business experiment might begin as a module in the monolith, then migrate out as a single service, and eventually extend and scale up as business-specific multi-services.

Launching a new business line generally has a higher chance of success, compared to launching a startup, because new startups have small runways and usually fewer competitive advantages. Those new lines of businesses are accelerating off the premade rails from the existing business and can spur new directions of growth for the parent company. If a company is capable of sustaining hyper-growth with emerging business lines, I don’t see why innovation would stop even as a company turns “corporate”, as innovation should always be the key driver for startups to create a better society.

Thanks to Jay Palekar and Rinko Shen for sharing their thoughts on the draft.