Rapid Pace of Innovation in the Technology World and The Need for Corporate Startup Outreach Programs
This Analyst Note evaluates the need and current versions of Corporate Venture Funds and Startup Outreach programs and provides key recommendations to successfully establish and run them.
From a five-member team that worked on the developing the iconic RAZR within Motorola to the six-member team that worked on direct, internet-based streaming of movies at Netflix (while the company was still a big player in DVD rentals), small – five-to-eight member – teams comprising of professionals with varied and complimentary skills sets, and with relatively easy access to resources and autonomy, working in a startup mode within a large organization have managed to re-invent and re-invigorate the fates of companies and industries many times. There are many examples of such turnarounds and evolutions in the technology industry.
Innovation and Disruption is Coming From All Corners of the World
With emerging technologies (AI/ML, Blockchain, IoT, Robotics, 3D Printing, etc.,) evolving at a rapid pace, no single company, no matter how big, resourceful or holds a monopolistic market share, is equipped to lead the innovation on all fronts – be it technology, product, business models or go-to-market strategies.
While large, global technology companies are investing in advanced research in emerging technologies and integrating them into their own products and platforms, we, at Convergence Catalyst, have come across a number of small, young companies that are innovating and disrupting in this space:
- A one-member company that used the neural networks research in cancer genomics to develop an underwriting platform for insurance and financial services industries, raking in a million dollars in revenue from one client in one year
- A 2-member, US startup that vectorized a million pictures of food in less than two weeks using proprietary clustering algorithms and SVMs (Support Vector Machines) to build a “Shazam for Food” app
- A 3-member, Bangalore-based computer vision startup that cracked one-shot imitation learning technique to build a Video Analytics product for implementation in Retail industry… and, is using the same techniques and algorithm to develop a Sports Analytics platform
- A young, Bangalore-based company that is using advanced machine learning and “transfer learning” techniques to build and standardize machine-based local languages translation and transliteration in real-time
- An Indian fashion online marketplace that is working on GANs to design apparel for its house brand
- A young, Bangalore-based two-wheelers rental company that is cross-subsidizing its end-user rental costs through revenue generated from advanced analytics-based insights provided to insurance firms to help them design customized riding pattern-based insurance products and premiums
We are witnessing significant innovations and rapid advancements in emerging technologies from all parts of the world and companies of all sizes. This is being made possible due to the environment of open innovation and collaboration in the technology domain. For large corporates with global presence, a structured, well-funded Startup Outreach Program is a good platform to partake, accelerate and integrate the latest innovations into their portfolio of offerings.
Deriving the Best Out of Corporate Startup Outreach Programs
Typically, there exist two kinds of corporate startup outreach programs:
- Corporate Venture Funds and
- Startup Accelerators
Corporate venture funds invest the company’s funds in startups primarily for financial returns, and only in some cases, early strategic access to the technology or solution under development by that startup. The investment criteria ranges from access to interesting research and technology innovation to scalability potential and rate of growth, and even competition blocking in some cases.
Corporate startup accelerators engage with innovative startups at a more deeper level providing mentorship, technical product assistance, business development introductions, recruiting support, fundraising advice, etc. Corporate accelerators enhance and move forward the learning and execution process for the startup.
Notably, established companies own valuable resources such as a global infrastructure, strong brand reputation, business relationships, experience with regulators, scientific knowledge, process excellence and access to data. Startups and exponential organizations on the other hand, can offer corporations a flow of ideas, organizational agility, and the willingness to take risk and the drive to scale rapidly. And, a Corporate Startup Outreach program is a marriage of convenience and complimentary skill sets. However, in practice it is rarely so. From our experience, a number of criterion including varying speeds of decision-making process, mismatched expectations, evolving strategies both at the corporate and the startup level lead to sub-optimal output for both parties in the partnership.
From our experience, some key points to ensure the best is derived from the corporate startup outreach program include:
- Toning down the “Holier Than Thou” attitude: Almost every large corporate has its own worldview and that of the industry. And, most often than not, the company, its senior management and employees live in denial regarding the new and cutting-edge innovation happening outside their company and tend to belittle it. A large corporation is almost always proud of its size and believes it is untouchable. This attitude extends while dealing with young, innovative startups as a part of their outreach program as well. As much as there is intent to work collaboratively and integrate their technologies, products and solutions, one entity in the partnership believes that it is superior than the other, and this needs to be toned down for a successful partnership
- Hiring Professional(s): Typically startup outreach programs within corporates are initiated and led by an enthusiastic, mid-to-senior level employee with an entrepreneurial mindset (Intrapreneur). And, in most cases, Startup Outreach Programs are added responsibilities for this employee and not the sole one. And, once the initiative is kicked off, the outreach program champion and the team struggle to manage and cope with their regular corporate job responsibilities and the outreach program. Also, they lack the necessary objective industry experience to onboard, incubate and grow young and agile startups. Hiring professionals such as Investment Bankers (in case of corporate venture funds) or consulting firms/independent accelerator teams will ensure the successful setup and smooth operations of corporate startup outreach programs
- Startups need to be patient: Startups, especially young ones are agile in their technology and product development, and expect the same agility and speed with their corporate partners associated with them in the outreach programs. However, they need to understand that decision-making in large companies is most often than not democratic and they have their own processes and it will take time. This needs to be factored into the startups plan. The startups (especially, B2B & Enterprise) can use this experience as a prelude to their business development process when they eventually approach large corporates as potential clients
- Stage of growth matters the most: From our experience, one key criteria that matters the most when it comes to the success of both the large corporate and the startup through corporate startup outreach program is the “stage of growth of the startup”. We have observed that corporate startup outreach programs work best when the startup is in the early ideation, prototyping and development stage and figuring out the product-market fitment. For startups that are in the growth phase, the corporate programs might prove to be slow and decelerating. In a strategic investment deal we were involved in, a European technology giant’s venture team and management trying to invest in a growth stage startup took almost a year to decide on the valuation difference of USD 2 million (less than 30%). Eventually, the startup had to scrap the deal and move on, and within 3 months managed to raised 6x the amount with over 5x valuation (that was offered by the corporate) through institutional funding. Corporate managers need to understand that regardless of their deliverables in the short term, they will get their monthly paycheck, but startup entrepreneurs do not have that luxury
A corporate startup outreach program built to achieve economic benefit through integrating external startup innovation can yield additional benefits for the organization, namely building an experimental, risk-ready and entrepreneurial culture. To achieve this culture change, there needs to be a program in place which continuously teaches employees that there are opportunities for them to become intrapreneurs, as well as a program which brings the senior management of different business units in touch with the startups. The senior managers should learn to think of themselves as investors. This can be achieved by a regular internal demo day, creating several touch points between the startups and management, but most importantly, investments should be considered in the budgeting process in order for the management to be able to act immediately upon an opportunity through investing financial and/or human resources.
This Analyst Note has been published as an Op-Ed in the year-end Special Edition of APAC CIO Outlook magazine in December, 2018.