Today's startups are a significant source of innovation, as they employ emerging technologies in inventing and reinventing products and business models. Corporations that are brave enough to embrace a more open innovation strategy, increasingly look to startups as a source of external innovation. It has been proven that this type of co-operation is mutually beneficial, although, sometimes a challenge.
Startups: Stirring Up The Competition
Studies have showed that virtually all new net job creation over the past three decades has come from new businesses that are less than a year old. New businesses create on average 3 million new jobs each year (USA) compared to older companies of any age, type or size that in aggregate, create a net average of 1 million jobs annually. In the UK entrepreneurs made a new record as 80 new companies were being born per hour in 2016. From these new businesses approximately half make it to their fifth year of operating. Data also shows that where the average life-span of a company used to be 75 years, it’s now estimated to be approximately 15 years. This means that the younger companies that are more agile and innovative, are taking over the markets, and the majority of the most successful companies in the world at the moment, have been founded after the 21st century. In order for the corporations to keep up with the markets and stick around for that 75 years, they need to collaborate with startups or change their working culture dramatically. More than often though, more mature corporations lack the business structures, time and the know-how to actually make the collaboration with startups happen. Everyone in the business and corporate world loves numbers, so it’s about time to take notice of them. Corporations need to realize the value startups can bring to their business. Startups spark innovation, speed and well, balls, that corporations often lack.
Why Corporations are Falling Behind
Central elements for an innovation process are considered to be the mobility of resources and the alignment of incentives. Innovations are the most disruptive for the existing markets in organizational structures and management processes, which makes implementing these innovations challenging for more mature corporations. These challenges stem from the decision-making processes. Corporations tend to favor decisions that fit the company’s timeframe and risk profiles, that are characteristic of its on-going business. When risks occur in product life cycles that are prolonged and difficult to predict, corporations tend to stick with their existing patterns. In a corporate setting, risk taking is not as encouraged as it is in a more entrepreneurial setting and this type of shortcoming in the incentives can lead to a slower innovation process.
Instead of hiring entrepreneurs, corporations are admitting the areas where they need help and are now pitching to startups and innovators. Many corporations are involved in hackathons and even have their own accelerator programs, but for some reason the implementation part is too often unfulfilled. Some corporations even have a department that takes care of investments in new businesses and is responsible for new business development and acquisitions. These companies are doing what they’re supposed to, but tend to do it inefficiently. The most common way of finding startups for their business development needs (or as we at Catapult say the scanning of startups) corporations attend different startup events all over the globe. This is a great way of networking, but not the most effective way to find the startups that actually have a well established product and already have market proof. In most cases these later stage startups are too busy to attend events like this, but they are the players corporations should want to side with. By attending startup events and organizing hackathons, the company is most likely to go through roughly 60-100 startups a year. Now, that’s a good amount of companies in general, but there is a more efficient and fool proof way of using your time and resources. Another way of finding startups is scanning services, like Startup Catapult’s service called Leaders Group. By outsourcing these types of services you can save money and time and find startups that are a perfect fit to the corporations business development needs. These automated platform services use a data-base of over 100 000 startups instead of the 60 or a 100 and only pick out the ones that are perfect for your defined business development needs. If the corporation wants to use innovations in its business development, then why not do it in a more modern and automated way that's effective and saves your valuable resources. It’s an easier and more efficient way to actually get the ball rolling.
Pitfalls, But Mostly Benefits of Working Together
One of the biggest pitfalls of corporation-startup collaboration involves issues with agility. Successful startups can be adamant on keeping their own identity, pace and their own way of doing things and can be reluctant to work with larger established companies. They like autonomy, ping pong tables and bars in their offices. Startups have in general, a risk-taking spirit that can seem intimidating and reckless to the slower-paced corporations, but really what new businesses are doing, is that they’re reacting to the markets faster. This doesn’t necessarily mean that new businesses are taking careless risks, they just have lighter structures which enable faster decision making and development. Of course taking risks doesn’t always lead to the best outcome, but that’s not the point. In the startup ecosystem making mistakes is allowed and encouraged even. Making mistakes allows startups to learn and implement what they have learned into practice, instead of wasting a year on product development and after launching it, realizing that it’s not at all what the customers are after. So, lighter business structures make the collaboration run a bit smoother, and so does not involving lawyers. Ask any startup entrepreneur and they will tell you that lawyers only come up with obstacles and risks and tend to slow things down to the point where innovation is killed.
If you have ever worked in a large company, you know that decisions take time between all the conference calls, rounds of approvals, and the view points and weigh-in different people with different goals and agendas. Corporations should utilize the risk-taking innovators, aka startups, and let them run the project. Startups get moving quickly without having to go through extensive protocols so the job gets done for the corporation. The product made by the startups does not risk the corporation’s financial security either, since they haven’t had to implement a new department, acquire new resources, or onboard any new employees.
A startup-corporate partnership gives freedom to both parties. Corporations can pursue their market opportunities quicker and startups have the freedom to execute on innovative ideas with less limited resources. In addition to the product itself, corporations can benefit from startups culturally as well. Studies show that companies that have less strict areas of responsibility are more innovative, because fresh views and ideas come up more often when stirred up and shifted in a group.
Startups shouldn’t feel like they’re “selling out” when teaming up with a bigger player. What startups, that are full of hype, innovative ideas and have the drive to change an industry by creating something new, usually lack is capital. Since a corporation typically has plenty of capital, it seems pretty obvious why startups would benefit from a relationship with a larger company. These types of connections not only provide startups the needed resources and large distribution channels, they can also provide startups branding and PR expertise, as well as give them visibility and what’s even more important: credibility. If partnerships between big companies and startups bud, the opportunity for acquisition can make sense for both parties. Combining the agility and nimbleness of startups with the resources and distribution channels of large companies can lead to very profitable partnerships and win-win situations.