Can Corporate Incumbents Innovate With Startups Without Killing Them?

Robert P. Mollen, Counsel at Fried, Frank, Harris, Shriver & Jacobson (London) LLP.

Most of my blogs are aimed at startups. This one, though, is primarily aimed at incumbent corporations, although hopefully startups may also find it useful.

Incumbent corporations face major challenges in dealing with the current pace of innovation. Product cycles, even in non-tech industries, are much shorter than they were even five years ago. This puts pressure on incumbents to be open to external as well as internal sources of innovation. 

However, institutional and technical barriers, such as corporate cultures, decision-making processes and legacy systems, may make it difficult for incumbents to innovate.  

Finally, given the faster pace of change and the global footprint of innovation, it may be difficult for incumbents to stay on top of innovations that may be relevant to them.

This blog focuses on how incumbent corporations can best engage with startups.

A.         Non-Traditional Approaches to Innovation

Corporations have tried to address the need to innovate more quickly in a variety of non-traditional ways.  Some have set up “intrapreneurial” units with specific innovation objectives. Some have established separate innovation centers with the specific task of hunting out and nurturing innovations developed by others, whether in startups, at universities or otherwise. Some have hired special external SWAT teams to address a particular area of interest. Some have set up corporate venture units with a view to investing in startups with relevant technology. Some have sponsored accelerators, which may be co-managed by a third party accelerator group, with a view to engaging with startups and, perhaps, introducing more of a startup culture into their own organizations. Some have set up special points of entry, avoiding over-long corporate procurement paths, for startups that are interested in providing proof of concept demonstrations of their technologies.  Some have established special units to seek out startups to acquire or with which to partner.  Some have done many or all of the above.

B.        Problem one – Separating the wheat from the chaff and identifying relevant innovations

There are lots of startups, in many different geographies, at different stages of development, and of differing quality. A key first problem for corporates is identifying the serious innovators that are engaged in matters of current interest to the corporation, while also keeping track of others whose activities may become relevant.

The process of identifying the key innovators, and becoming embedded in the ecosystems where the innovation is taking place, is a full-time job -- not something that a busy executive with line responsibilities can do between 8pm and 9pm at night. A senior executive recently reported that he had given a talk and been inundated with over 100 proposals from startups. Needless to say, he was not able to give them due consideration.

While all of the models discussed above can play a role in tracking innovation, curation is a key element of the process. Even though corporations need to keep an eye out for innovations that come out of nowhere, it certainly makes sense to use the curation tools available. 

In particular, leading accelerators and venture capital firms are key curators, since they have sifted through large numbers of companies in determining the startups to admit or in which to invest. Similarly, key thought leaders and other advisors in relevant verticals can, as consultants, provide a very useful role in curation.

On-line tools also have a role to play. For example, databases like Leading Edge Only https://www.leadingedgeonly.com/, Beauhurst (UK only)http://about.beauhurst.com/ ,  CB Insights https://www.cbinsights.com/ and Dealroom (Europe only) https://dealroom.co/ may provide relevant information as to innovative technologies under development. These tools will only improve as their data bases expand and as artificial intelligence plays an increasing role in the sifting of the data.

Start-ups face the same problem from the opposite side. It is very difficult for them to determine how best to address a corporate incumbent whom they think might be interested in what they are doing, or even to determine what areas of innovation are most likely to be of interest to the corporation. Most incumbent corporations do not make it easy for startups to figure out how best to approach them, and most do not flag their areas of particular interest (either because of competitive concerns or because they don’t want to be inundated by startup proposals).       

C.        Problem two – determining how best to engage with start-ups

Experience shows that efforts by incumbent corporations to engage with external innovators will fail unless those involved in the efforts have continuing high level management support and access. That support is required to cut through internal barriers to innovation. In the absence of significant ongoing senior commitment, a lot of money can be spent with little to show for it. This is the case regardless of the mechanism/s that the corporation uses to engage with startups.

Perhaps the biggest tragedy is the tendency of many corporations to acquire startups and kill them, with the key innovators leaving within months of the acquisition.

Corporate venture and innovation units. Corporate venture and innovation units are playing an increasingly large role in financing and otherwise supporting early stage tech startups. Additionally, in 2016 and the first half of 2017, a large number of these relationships were entered into by corporations that are not classic tech industry members.

These units operate based on a wide variety of models. Some are focused on specific problems or technologies, some seek to achieve business unit objectives, and some have a wider remit and, indeed, may play in role in expanding the business into new areas.

However, these units can only achieve their objectives if, with high level support, they are integrated with specific innovation objectives of the corporate group. Otherwise, the startups in which they invest money and time are, at best, simply portfolio investments. The innovation labs models, in particular, take this into account, and contemplate a high level of ongoing collaboration between the corporate incumbent and the startup.

Corporate-sponsored accelerators. Similarly, corporate-sponsored accelerators, if properly structured, can provide a mechanism for corporations to connect with startups of particular interest. For this to work, however, the corporate needs to be actively engaged in the accelerator – in particular, by providing mentors who help to integrate the startups with the corporation. These mentors can provide key guidance and experience to help the startups shape their business propositions, although the mentors need some humility -- their big company experience does not necessarily translate into appropriate advice for startups.

However, from the sponsor’s standpoint, the more important mentor role may be to help cut procurement and other obstacles to the sponsor’s quick implementation of the startup’s innovations, whether through proof of concept trials or otherwise.   As a side benefit, mentor engagement with the accelerator can be used to enhance the innovation culture of the sponsor.

One use of a corporate accelerator that seems particularly clever is Amazon’s sponsorship of an Alexa accelerator, to be managed by Techstars, a leading accelerator group. That accelerator is actively recruiting startups with applications that can be integrated with Alexa, thereby accelerating Alexa’s development as a hub platform in the home.

Protocol for engagement

At a minimum, an incumbent corporation that is looking for innovations from startups needs to provide a mechanism for startups to submit responsive proposals. Incumbents may be reluctant to do this publicly to avoid an avalanche of proposals, but query if there are alternative means that could address this concern while accomplishing the objective. For example, the corporation could flag its areas of interest to appropriate curating intermediaries, sponsor relevant competitions, or use some AI-based screening process. Any public mechanism needs to be sufficiently welcoming, backed by enough public outreach, that the startup is not left with the feeling that it is wasting its time.

D.       Mutual benefits

It goes without saying that a relationship between a corporate incumbent and a startup can only work if it generates mutual benefit.

Incumbent benefits. So what benefits can an incumbent obtain from close engagement with startups? At a minimum, the corporate should be able to secure a window on developing technology. It may be able to work with the startup to develop products and services on a much faster basis than it could do so internally. It may be able to use the products and services developed by the startup to extend and enhance its engagement with existing customers. And, as noted above, with appropriate management commitment, it may also be able to use the relationship with startups to infuse an entrepreneurial spirit into its core businesses.

Start-up benefits. For the startup, the relationship with the large corporation may provide it with a level of credibility that it would not otherwise enjoy. Effectively, the startup may be able to piggyback on the brand of the corporate partner. This may help the startup to secure customer or other relationships with businesses that may be concerned about the risks of doing business with the startup. Additionally, the startup may gain insights into the specific problems and needs of the corporation that may help it to fine-tune its products and services.

E.        Three key factors

 What factors should both incumbent corporations and startups consider in entering into a relationship? I would suggest that they include the following:

What is the specific nature of the proposed relationship?  

What do each of the corporation and the startup expect to get out of it, and how do they seek to secure those benefits? Is the corporation seeking exclusivity?  What resource/investment is the corporation promising to provide? What relationship will the startup have with the incumbent’s core business and business objectives? Who are the corporate personnel who will be involved in the relationship with the startup, and how senior are they? To whom will problems be communicated, and how will issues be resolved? 

What effect will the relationship have on the startup’s ability to attract business from other incumbent corporations?

The broader success of the startup is as important to the incumbent as it is to the startup, since the startup is unlikely to continue in business and retain its team if the incumbent is its only customer.

In some cases, the startup’s relationship with the incumbent can be highly positive for the startup’s business development, particularly with corporates in the same line of business that are not direct competitors of the corporation in question (for example, telecoms in different geographic markets).  These benefits may be particularly pronounced if the corporation in question is seen as a leader in dealing with the kind of problem that the startup is addressing. 

In other cases, however, the relationship may make it very difficult for the startup to do business with direct competitors of the corporation (i.e., if the startup has a relationship with Coca-Cola, it should be realistic about its chances to get business from PepsiCo).

Will the relationship with the corporation help the startup to enter into new markets, or navigate obstacles to expansion (geographical, business vertical, or otherwise) that it would find difficult to navigate on its own?

What are the future expectations of both parties?  

Both the large corporation and the startup will want to understand how the relationship is likely to develop over time. Is the corporation likely to contract significantly with the startup and implement its innovation? Does the corporation usually like to make follow- on investments? Is it customary for the corporation ultimately to acquire the startups with which it enters into such relationships?  If so, what happens after those acquisitions? What happens to those startups that the corporation does not acquire? What is the risk that the corporation will lose interest in the startup, or in the idea of investing in or working with it?

Do the corporation and the startup contemplate that the corporation will play a continuing role in helping the startup to scale its business? Is there reason to believe that this will deliver value to both parties? (If not, it is unlikely to happen.)

This list is not exhaustive, but it hopefully provides a basis for both incumbent corporations and startups to consider what relationships are likely to make sense.

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 This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact [email protected].

You will find a listing of Bob’s weekly startup blogs on US and international expansion and early stage financing here: http://bit.ly/StartupGuidesIndex