Corporate collaboration with startups was once only for the brave few, but in no time at all, working with startups through mentoring, partnerships, investments or acquisitions has become mission-critical for large companies.
Corporations have come to realize they need to work with startups to stay on the cutting edge of their industry and avoid being disrupted by smaller, more agile startups. And for those reasons and more, corporations are also keener than ever to work with startups.
According to The State of Startup/Corporate Collaboration 2016, a study that surveyed over a hundred corporates and more than two hundred startups, 67 percent of corporations now prefer working with startups at earlier stages, primarily to “explore new technologies and business models."
“Corporations and startups have begun working together in fundamentally new ways, with a focus on flexible, early-stage, open-ended partnerships," according to the study conducted by innovation firm Imaginatik and not-for-profit accelerator MassChallenge.
“Most corporations are well-versed in acquiring startups (once the startup has already built and proven its value to the acquirer); yet, times are changing. A growing proportion of corporations now also seek flexible upstream partnerships with startups, in which both sides take risk and share in the rewards."
Raja Mukerji, co-founder of data analytics firm ExtraHop, sees the same trend. His startup has used partnerships with large corporations to grow since it set up in 2007.
“Early-stage partnerships are appealing because of mindshare and the ability to influence the early-stage company's roadmap," he said. “As companies mature and find their product/market fit, larger companies will find themselves buying into the smaller company's roadmap rather than driving it. And the now-matured company may likely have a different early-stage large partner."
Professional services firm EY (formerly Ernst & Young) runs a number of accelerators and partners with startups at many stages. Jamie Qiu, founder and lead of the EY Startup Challenge in London said that both corporations and startups benefit when they form a partnership early on.
"What startups really need at the early stage is validation [showing] that there is money behind it, that people are willing to pay into them, and that they can actually create relationships to sell. That works out quite well with large corporations that want to learn because they can give validation, they can give the testimony and real-life information and management to these entrepreneurs," he said.
“The value for them is that there's a better chance the startup will create something more bespoke to that corporation, rather than coming in at a later stage when their product is formed and there's not so much interest in altering it. There is mutual value in coming in at an early stage."
A Mandate From On High
Another reason that corporations are coming in at an early stage is that the executives in charge of partnering with or investing in startups are being given more leeway from the board to take risks, allowing them to work with these entrepreneurs.
“There is a growing trend within large corporates, a mandate coming from on high for people in strategic roles to invest more of their time in having their ears to the ground for emerging technologies and what impact they may have on their industry. This is becoming a bigger part of where business execs devote their time," Qiu said.
He added that the startup ecosystem was more mature as well, with better formal incubation for new businesses, so the signals of whether a startup was a good bet or not were stronger and more easily identifiable.
Anthony Consoli, founding partner at law firm Massumi + Consoli, represents investors and large corporations investing into startups and he also sees that the C-suite is giving more discretion to their strategic investment arms.
“They're saying that to further our position in this market or further ancillary services along this part of our business or focus on technology in this core area, the investment arms are given more flexibility," he said.
With greater discretion in how they pursue innovation, corporations can come in earlier and build relationships with startups that often result in products developed together. This has a number of benefits for the corporation – getting access to the latest technology, stopping the development of a product that will ultimately compete against them, and preventing the competition from getting access to new innovations.
But product development isn't the only reason that large companies want to work with early-stage startups, Mukerji said, and if it is, they often can't build a successful partnership.
“Many smaller companies make the mistake of thinking that 'development' is exclusively product development, and that corporations buy their technology to the exclusion of all-else. That's not the case anymore: smaller companies that focus on customer development in addition to product development are the ones that are going to be successful in partnering with larger companies," he said.
“Innovation in technology makes the desired outcome more easily realizable, but the larger company is buying an accelerated path to the outcome they desire and a superior experience - not solely the technology underpinning it.
“As an example, ask yourself, when you buy an iPhone, are you buying a polished and seamless experience with an ecosystem of partners who won't leave you in the lurch, or are you buying an A10 microprocessor with 3GB of RAM? Many smaller innovative companies think they're selling the latter. The successful ones are able to articulate how their offering will help improve their larger partner's strategic advantage, and are able to execute to deliver it. The corporations that are successful in their collaboration attempts seek out customer-centric startups."
The Latest and Greatest Tech
Consoli also names core business support as a top reason to get in on the ground floor of startups. Technology startups are disrupting industries so corporate strategic investors want to get in early and get their hands on the latest and greatest tech. But it's not always obvious where the disruption is going to come from. For that reason, large companies need to cast their net wide when thinking about what kinds of technology might support their core business.
For example, ExxonMobil might notice that a startup is making a new piece of technology that could work really well in oil tankers. The startup's focus might not be on oil tankers, in fact, the thought of oil tankers might never have crossed the entrepreneur's mind. It's ExxonMobil that has to notice that this technology could be applicable to oil tankers and partner early with the startup to develop the product in the direction that supports its core business.
“Because of the amount of major disruptive tech we've seen in the last 10 or 15 years, it's definitely a great offensive and defensive strategy – you want to further your own business and you want to make sure that your competitors aren't wiping you out with something they got from a $2 million dollar acquisition," he said.
The resources and support are there for corporations to work with early-stage startups and there are multiple business objectives to be achieved by doing so, but are corporations achieving these goals with startup partnerships?
Corporations Still Have Work to Do
EY's Qiu believes that corporations still have a way to go before getting the best out of their partnerships with startups.
“We're only really at the stage where people are learning to walk — large corporates are realizing they need to engage on a formal basis and have someone at the organization whose job or part of their job is to engage with emerging tech and startups.
“To run is when there's enough experience to understand the kind of tech they want to work with and what they're willing to give away to help these startups work with them. Learning where that line is drawn only happens with experience and that experience only comes with more interactions over time," he said.
Corporates across industries are busily building up this kind of experience. The State of Startup/Corporate Collaboration 2016 survey found that 82 percent of corporations now view interactions with startups as important for their business. More and more, they're engaging with startups and finding the right fit with how they want to work with them. And more and more, that engagement is coming right at the beginning of the startup's lifecycle.
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