How Cisco Works with Startups to Drive the Innovation Pipeline

Major corporations don't need to be told to collaborate with startups and small firms to innovate – that message is being received loud and clear. But how they collaborate and what they learn from those collaborations can mean the difference between barely innovating enough to survive and being on the cutting edge of competitive innovation.

The multinational technology company Cisco has been around since the early 1980s. It's the largest networking company in the world, and in 2000 it was briefly the most valuable company in the world. There have been many times that Cisco has had to innovate to compete, but right now, the entire company is undergoing what might be the largest paradigm shift its ever seen.

“Cisco is transitioning from a full hardware company, which we're known for, into a software company," says Rick Tywoniak, senior director of Cisco's DevNet Community. “A lot of the intelligence that we had in our hardware has been put into a software layer and then we've released APIs to enable third parties to develop applications on that, to build more value on top of our platforms," he explains.

This transition is not a novel direction that the company decided to pursue; rather, it's a necessary change that's being demanded by the market.

“The days of proprietary software or hardware are going by the wayside, and Cisco is part of that trend that sees the value in opening up your software to third-party companies because that's what going to keep your product line innovative to others," Tywoniak says. “We can't do all that innovation ourselves – it's not possible. Having a vibrant ecosystem to develop the innovation on top of our platforms makes them that much more valuable."

Developing a Method for Collaboration

Because Cisco sees such a strong need to collaborate with third parties, it's developed a number of different ways to do so over the years. One avenue for Cisco to source third-party applications is Tywoniak's DevNet community, a network of developers — primarily from startups — who are using Cisco APIs to build on Cisco software. But DevNet doesn't just release the APIs and let the developers get to work; the community is about much more than that.

Cisco sources a lot of developers for DevNet through trade conferences, but sometimes the right startup drops into their lap. That's what happened with Belgian firm IP Trade, which came to Cisco with a financial trading solution.

“IP Trade started off integrating with our unified communication platforms," Tywoniak explains. “They developed a specialized application that focused on traders on the floor within brokerages, and they had a disrupted model in that most of that business was done through proprietary hardware and big systems and they went for a complete software model. They then integrated their software with some of our phone systems and hardware and took a lot of collaboration tools and integrated with them and set up an entire system. They started off very small, but they became very successful, taking over significant market share from legacy vendors."

This model is the essence of what Cisco hopes to get from these developer collaborations – startups that build applications that then help Cisco to sell its own products. And it's a system that works for both Cisco and its startup partners.

“Because their applications are innovative, the startups are driving more sales of Cisco products, and many times these products get on our price list and we take a share of what they're selling … so you not only make money as a company on the applications going through your core platforms but also there's a way to monetize the actual third-party applications. Then we have the brand, we have the access to customers and the access to channels and market that a lot of these third-party startup companies don't. And that's a value to them and a value to the customers," says Tywoniak.

Cisco Invests Heavily in Startups

DevNet is a big part of Cisco's innovation strategy, but it's far from the only way that the corporation works with startups.

Cisco Investments has more than a hundred active investments in startups globally, 42 limited partner positions in funds that invest in startups all over the world, and a portfolio of over $2 billion. While Cisco is also involved in accelerators and direct acquisitions, they no longer dominate Cisco's startup strategy; the outlook now is very different.

Alex Goryachev is the senior director of innovation strategy and programs, a unit that didn't even exist in its current form three years ago. Part of his job is to run Cisco's Grand Innovation Challenge, which last year focused on disruptive technologies and business models in five core areas of the Internet of Things (IoT). Cisco received over 5,500 submissions from startups; from that pool, it chose three winners to receive mentoring, workspace at Cisco Innovation Centers and a share of $250,000 to kickstart their venture.

The kind of startups that are submitting and winning startup competitions like these have come a long way in the last few years, according to Goryachev.

“Five years ago, most of the submissions were from someone with an idea, an inventor type. Now we're seeing true entrepreneurship, we're actually seeing people that have structured business ideas and legal entities. Five years ago this market wasn't mature and it was also very small — it primarily existed in the U.S. Now we're seeing innovation centers around the world, we're seeing that growth everywhere in the world. Startups are changing, they're really knocking on our doors. Historically, those knocks were primarily, 'Cisco, buy us.' But now they want to co-develop or write on top of our systems. As the market matures, they want to get involved with us," he adds.

Relationships Between Startups and Corporates Are Maturing

There are many factors contributing to the startup boom, but chief among them is the low cost of both capital and computers, which is allowing new companies to build and grow extremely quickly and then bail out without too much damage if the ideas don't working out.

“People always had dreams of starting their own business but for many years it was so difficult, you literally had to go and mortgage your house. It was just impossible," says Goryachev. “Now with technology, it's something you can do on the side, and taking that leap of faith doesn't cost as much money as it used to. And the risk of failure is so much less."

It's not just the startups that have matured; corporate attitudes toward co-innovation have matured too. Goraychev joined Cisco from Napster, so startup culture was already ingrained in him, but bringing Cisco around to being open to partnerships with startups took time.

“When we go and work with a startup and we incorporate their innovations with some of the products we're building — sometimes there's resistance to the fact that they're just a few years old," he says. The resistance isn't that odd, but it can be overcome. “When you think about large companies, they operate at scale but every time they engage with startups, it breaks their processes. From legal to procurement, the machine that works perfectly starts to break down. Maybe the startup isn't properly insured or doesn't have the right documentation. Yet we've managed to do it."

For Tywoniak and Goryachev, collaboration with startups is key to the future of Cisco. In the current environment, no one company can own all the software, innovate fast enough or disrupt well enough to dominate the market. Investment and acquisition still have to be part of the overall innovation strategy, but working together to build new technologies provides additional opportunities that will be increasingly critical to a large company's ability to compete — and thrive.