How Your Organization Should Partner With Startups and Scale-Ups

How Your Organization Should Partner With Startups and Scale-Ups

How Your Organization Should Partner With Startups and Scale-Ups

 

Why Your Organization Should Partner with Startups

You might already know that more than 50% of today’s S&P500 faces replacement in the next 10 years. A lesser known fact is that one in three listed companies are at risk of being de-listed in the next five years alone.

20th Century management theories might have worked at a time when the rate of change was slow, but many of them are redundant today — yet the majority of organizations still rely on them.

Throughout the 1990s, Moore’s Law took the transistor count per microchip from one million to over one hundred million — a 100X increase.

However, from 2010 to 2016 alone, we added over 10 billion transistors —  a 10,000X increase.

And the rate is accelerating.

This exponential growth in technology has brought us to an inflection point.

A delightful representation of this inflection point by Tim Urban of Wait But Why

We’re seeing the convergence of technologies such as AI, IoT, nanotech, robotics, autonomous vehicles, VR and AR, genomic sequencing and blockchain, among others, along with changing geopolitical, economic and social realities across the globe.

This means that today’s corporate executives are facing more change and uncertainty than ever before.

Corporate Innovation is Really Hard

Most large organizations have developed systems that make them adept at delivery at the expense of discovery, adept at execution at the expense of exploration.

In a fast-changing world, doing what we’ve always done won’t cut it.

But changing the way things work in a large organization takes time…a lot of time, and it is plagued by proverbial landmines.

Cultural inertia, inhibiting processes, policies and systems, competing priorities, politics, and difficult people all stand in the way. This is why meaningful change to support corporate innovation is a marathon, not a sprint.

Fortunately, there is a faster and better way.

Enter the Startups (and Scale-Ups)

Successful startups are all about thriving under conditions of ambiguity and uncertainty.

‍Over US$330 billion in venture capital was pumped into almost 35,000 deals across the globe in 2018 alone, a record year for startup investment.

This investment reflects growing optimism and investor confidence in the startup growth curve. Startups are better placed than their corporate peers to navigate change and capitalize on low barriers to entry, emerging technologies, and business models because they are far more nimble.

What large organizations lack, startups bring in droves… most significantly, startups bring speed.

By combining the speed, talent, tech, and enthusiasm of startups with the domain expertise, assets, brand, and resources of incumbents, real innovation can happen.

Many corporate executives are trying to take advantage by exploring one or more of four startup partnership models:

  • Corporate startup accelerators
  • Startup solution matching
  • Corporate venture capital
  • Limited partnership in VC funds

We’ll unpack the pros and cons of each shortly.

But first…

Startup Challenges

Startups have challenges of their own. Huge challenges.

Playing in murky, uncertain waters, and taking fundamentally new ideas to market, it’s no surprise that 95% of them fail. This is precisely why venture capitalists cast a very wide net when prospecting and investing in startups (below).

Source: CBInsights

In fact, for every 6,000 startups that a venture firm tracks each year, they will meet with 2,000 and invest in….wait for it…20. Not only that, but only about two of the twenty go on to become a proverbial home run — that’s just 0.03% of the initial pool of startups tracked each year.

Challenges for Large Organizations

The high failure rates and due diligence required is precisely why most corporate startup programs fail.

If only 10% of VC investments succeed, and they are drawn from a global pool of thousands, then you can imagine what happens when a corporation instead chooses to rely on a local pool of 50 startups, or a readily available directory of startups, to satisfy their partnership goals.

Effectively finding, targeting, recruiting, evaluating and partnering with the right startups is incredibly time-consuming, expensive and difficult for traditional organizations to do properly, or even remotely well.

Below we elaborate on the four most common ways that corporations partner with startups and outline the pros and cons of each, why they fail (so you can avoid making the same mistakes), and ultimately when you should engage the respective model.

Option 1 — Corporate Startup Accelerators

Cute intent, but I’m not sure about the execution

Accelerator programs pair a group of industry-aligned startups with a corporation, typically for a period of 12 to 13 weeks. During this time, the startups will receive access to office space, mentorship, coaching, and educational workshops —  they might also receive some initial funding.  

All of this is geared towards helping them hone their ideas, business models, marketing and sales strategies. As such, accelerator programs tend to attract very early-stage companies.

At the culmination of the program, startups typically pitch for additional investment or partnership opportunities with the corporate partner.

 

Accelerator Pitfalls

But there are hundreds of corporate accelerators around the world now, and most of them fail to deliver any form of tangible value to both the corporate sponsor and the participating startups — usually because of a gross misalignment of interests.

Startups who apply for such programs — particularly when capital is being offered for a piece of the business — tend to be super early stage, because more mature, cash-flow generating startups typically won’t want to give away any piece of their business for anything less than a US$3 million valuation — at the very least —  which flies in the face of what corporate accelerators usually offer; about $50,000 for 5 to 10 percent of the startup.

You do the math.

Oftentimes, these early-stage startups don’t have a product in the market yet, so you can imagine what typically happens when these programs come to an end. Whilst accelerator programs might give a corporation exposure to a large pool of early-stage startups in a given industry, they typically don’t result in a measurable financial or operational benefit to the sponsor organization.

Pros

  • Brand building
  • Employee acquisition
  • Intelligence gathering
  • Cheaper to invest and diversify

Cons

  • Expensive
  • Super early stage (high risk and unlikely to generate value)
  • Saturated
  • Limited tangible value generation

Common Pitfalls 😵

  • Misaligned priorities
  • Not making corporate time or resources available to startups
  • Poor evaluation and selection processes
  • Not casting a wide enough net
  • Not supporting startups post the program

When to Use

  • Diversifying across a pool of early-stage startups
  • Brand building

Target Startups

Typically, seed-stage, pre-revenue (unless your organization can provide an exceptionally compelling reason for more mature and promising startups to apply)

Example Programs

Price 🚀🚀🚀

Option 2 — Startup Solution Matching

Solution matching programs are about adding missing, but potent, ingredients to an organization

Solution matching programs essentially scout the globe looking for startups and scale-ups that solve a specific problem or tackle a specific opportunity area that a corporation needs help with —  as opposed to a pool of broadly aligned startups (as with an accelerator program.

This essentially means that real problems or a real opportunity is paired with a real solution that an organization can embed in a relatively short amount of time, in order to generate financial or operational gains.

At the culmination of this search, corporations work with selected startups to determine the best way to work together, whether that be becoming a customer, white-labeling a product, investing in or acquiring the startup.

The most effective solution matching programs ensure that there is sufficient diligence over the definition of problem or opportunity area, as well as the approach to working with the selected startups, and embedding their solutions into the organization.

Startup Directories Don’t Cut It

Directories are like job boards.

High caliber candidates are headhunted for great jobs. Most of what you find on job boards tend to be the rabble, and the majority of people responding to job ads aren’t A-players.

Finding a great startup is a little like finding a great life partner —  you’ve got to do the chasing. It’s not as if your ideal mate is just sitting around and waiting for you? They’re no doubt immersed in their own business— much like worthwhile startups and scale-ups.

Pros

  • Solve real problems and generate real value
  • Work with more mature, more likely to succeed, startups
  • Secure and build additional buy-in from executives and intrapreneurs
  • Quick wins, support ongoing efforts
  • Cheaper

Cons

  • More expensive to invest (if desired)
  • Not a diversified investment play with longterm term returns

Common Pitfalls 😵

  • Poor definition of problem or opportunity area
  • Poor evaluation and selection processes
  • Not knowing how to effectively work with startups after selecting them
  • Over-reliance on startup directories

When to Use

  • Seeking to solve a specific problem or tackle an opportunity area
  • Seeking specific financial or operational value creation
  • Seeking short-term wins and stories to share
  • Seeking to solidify executive buy-in

Target Startups

Typically, post-revenue scale-ups, with a product in the market that can be tailored to meet an organization’s objectives.

Example Programs

Price 🚀

Corporate Venture Capital (CVC)

The venture arm of an established organization, established to find and invest in startups that align with the financial and/or strategic objectives of said organization.

CVC Failures

Numerous large organizations have launched corporate venture capital (CVC) arms to invest in startups. But the cost of just getting off the ground can be upwards of US$1 million in the first year alone. Many CVC arms ultimately invest in undiversified, underperforming portfolios and go on to shut their gates not long after launching (see AMP New Ventures, Warner Media, BBVA), sometimes choosing to become limited partners in existing funds instead — more on that later.

Pros

  • Influence startup direction
  • Seek objective-aligned startups
  • Provide startups with support by way of the organization’s business model, distribution channels and other assets, increasing their likelihood of success and a return on investment

Cons

  • Expensive

Common Pitfalls 😵

  • Undiversified
  • Expensive
  • Poorly managed

When to Use

If wanting to get financial exposure to lots of startups aligned with the company’s goals.

Target Startups

Typically early seed-stage startups through to Series A and B (raising US$1.5 to $20M).

Example CVCs

JLL Spark

Intel Capital

Price 🚀🚀🚀🚀🚀

Limited Partnership (VC)

When you’re an LP, you essentially contribute to a pool of funds and share in the spoils.

Organizations such as BBVA shut down their CVC arm, instead opting to pour money into venture funds as a limited partner (that is, becoming one of many investors in a venture capital fund). Limited partners get exposure to startups and (hopefully) sound management, without the burden of time and money required to run a CVC of their own. However, in most cases, unless organizations are coming on as a cornerstone investor and fronting up with a significant multi-million dollar investment (at least), they typically won’t be rewarded with a board seat, they will have limited say in the direction of the fund, and little influence over the investee startups.

Pros

  • More economical than CVC
  • Exposure to a large pool of startups
  • Limited management or oversight required

Cons

  • Limited influence over fund management and startups
  • Expensive to buy in, especially as a cornerstone investor
  • Startups focused on scale, not your organization’s problems or opportunities

Common Pitfalls 😵

  • Misaligned with goals of the VC
  • VC fund is mismanaged

When to Use

If wanting to get financial exposure to lots of startups, without the management effort.

Target Startups

Typically early seed-stage startups through to Series G (raising US$1.5 to $100M).

Price 🚀🚀🚀🚀

In summary:

How We Can Help

At Collective Campus, our mission is to unlock the latent potential of organizations to create impact for the world. We operate at the intersection of corporate innovation and startups, having worked with numerous Fortune 500 companies globally, and having incubated almost 100 early-stage startups that have collectively raised US$25 million.

When it comes to startups, we can help you:

  • Run corporate startup matching programs that work
  • Run corporate accelerator programs that work
FREE EBOOK

Innovation in Insurance 2019

In this ebook, we provide an overview of how  customer expectations are changing, what technology and business models are disrupting insurance, and how incumbents can drive internal and external innovation to best prepare for the disruption.

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Steve Glaveski

Steve Glaveski is the CEO and Co-Founder of Collective Campus which he established to help companies and their employees to create a more meaningful impact in the world in an age of rapid change and increasing uncertainty. Steve also founded Lemonade Stand - a children's entrepreneurship program, author of Wiley book, Employee to Entrepreneur: How to Earn Your Freedom and do Work That Matters, Harvard Business Review contributor, author of the Innovation Manager's Handbook vol 1 and 2, host of the Future Squared podcast, and keynote speaker. He previously founded HOTDESK, an office sharing platform and has worked for the likes of Westpac, Dun & Bradstreet, the Victorian Auditor General's Office, Ernst & Young, KPMG and Macquarie Bank. Follow him at @steveglaveski

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