AUCKLAND: Are you the CEO a large corporate planning to start an innovation unit in your organization by integrating with startups? If the answer is yes, then Arthur D Little’s strategy might help your company in integrating with innovation without hurting its own bottom line.
Entrepreneurial startups are one of the main driving forces for this acceleration in disruption of large businesses.
Take for example, the disruption of telecom businesses by apps such as Whatsapp and Facebook messenger, the disruption of gasoline fueled cars by electric vehicle startups such as Tesla, and the disruption of on-premise CRM solution companies such as Oracle and SAP with cloud based startups.
In a recent survey, Arthur D Little found through its partner Match-Maker Ventures (MMV), that 79% of corporates in the world have already collaborated with startups in some way, and 85% of those who haven’t yet are interested in doing so.
Most are now using a variety of models to engage with startups.
Some such as Intel have established venture capital funds, others such as Microsoft, Walmart, Tesco prefer to run incubator programs to test out the relationship with start-ups in the first place, whilst others adopt an accelerator approach to offer grow-on support.
Typically, they will offer funding – often for a “Phase 0” pilot with defined goals and bounds to reach a minimum viable product, and if things go well, they increase their exposure, offering training, coaching, and potentially, acquisition.
Telefonica’s Wayra initiative has over 420 startups with a portfolio value of €155m; Coca Cola, Cisco, Unilever and Qualcomm Ventures are other examples amongst hundreds across different sectors which partner with startups.
The most commonly-cited reasons for corporates to engage with start-ups are that it gets a corporate ahead in disruption, build new capabilities, refreshes corporate culture and improves external perception of the brand.
However most corporates and entrepreneurs are confused on how to embark on this journey.
Boston based internal management consulting firm Arthur D Little offers some insights in how large corporates should integrate with startups. Excerpts from its report:
1.Be clear about your strategy and where you are the most likely to be disrupted: Before deciding on which startups to work with, larger companies must form a very clear vision of what their aims are and how the collaboration fits within their business strategy.
A valuable way to start thinking about who to target is to focus on startups with the greatest potential for threatening and disrupting the parent companies’ business models and strategies – and that includes those from adjacent industries.
Once the strategic aims are clear, ensure that you have the right KPIs to track and communicate progress, covering both leading and lagging indicators.
2. Get your internal arrangements sorted out: Make sure you have the right organization, resources, capabilities and processes to engage with startups, considering the whole life-cycle not just the initial phases.Be prepared to consider different forms of engagement, and consider different roles such as mentor, manager, net-worker and C-level sponsor.
3. Find the right startups in the first place: This is not easy, as firms might lack the required expertise or connections.Moreover, the startups which are around (location or network) might be limited in number or not the ideal ones.
One approach is to employ specialized firms or individual brokers who exclusively focus on matching promising start-ups with corporations interested in investing. ADL’s partner Match-Maker Ventures, for instance, is an agency dedicated to creating a portfolio of leading-edge start-ups, providing them with business development and sales knowledge,and then matching them with corporations interested in investing.
Another approach is to recruit well-networked individuals in startup hotspots such as Silicon Valley, an approach used by Johnson & Johnson
4. Separate the vehicle at arms’ length from the corporate:
Cultural and procedural clashes between the corporate body and the start-up are common, and often ultimately lead to “tissue rejection”.
Many corporates therefore create a separate vehicle to engage with startups, insulated in some way from normal mainstream procedures.
However, even this may not be enough. Some large companies are now taking the option of using an independent partner, such as a consultancy specialized in innovation, to run the whole vehicle and be held accountable for delivery of new, de-risked, launched and tested businesses – this is the model that we at Arthur D. Little use in our Breakthrough Incubator.
This is especially effective when a corporate has a clear need to rapidly develop a new step-out business of scale in a specific area, for which a strategy based on developing one or more startups may be too risky
5. Fund agile pilots in an accelerator: The success of many venture capital funds and large corporates like Cisco investing in startups is based on creating the right incentives for entrepreneurs.
Usually, the method they use is to incentivize them by supporting a paid pilot (Phase 0) with limited funds from the parent company. Startups are then enticed with promises of long term contracts, investments or relationships if initial trials work.
Moreover, to attract the best potential candidates, it is beneficial not to require investor exclusivity at this stage. Since investment amounts are initially limited, this strategy allows corporations to place bets in multiple areas.
6.Incubate and develop relationships further: If the pilot stage proves successful, accelerating the cooperation into more systematic partnerships, such as joint ventures, is an effective next step.
Corporates should provide not only financial backing, but also access to training, skills, resources, customers and networks to grow their businesses. The degree of support should increase in line with the increasing value and decreasing risk of the new Business.
7. Encourage entrepreneurship in the corporate: It is key to find influential internal sponsors (entrepreneurs) within the corporation whose activities are closely aligned with those of the startups, and who can effectively connect with ‘problem owners’ within the core operations.
This is vital for helping to build a internal platform of enthusiasm for the new business, which leads to more support from internal staff, better inter-departmental collaboration, and more willingness to continue investment.
8. Showcase examples of success: Create an atmosphere of optimism regarding startups’ progress, both within organizations and to the rest of the world. Every step of progress and every quick win should be positively and effectively communicated.
Rapid prototyping and Minimum Viable Product approaches are vital in the early stages -‘show me’ has much more impact than ‘tell me’.
At the same time a sense of realism needs to maintained within the team to ensure feet are kept on the ground.
9. Know when to part with the company: Given that investing in early stage start-ups is a high-risk activity, corporations should have a robust review process in place to make rapid and informed decisions about when to pull out – and conversely when to persevere.
In this sense Phase 0 pilots are very valuable. Unsuccessful investments should not be considered as failures, but rather as an opportunity to learn from achievements and mistakes.
Authors: Rick Eagar, Philip Webster, Gonzalo Libano with Nicolai Schaettgen
About Arthur D. Little: Founded in 1886 in Boston, by MIT Chemist Arthur D Little, the management consulting firm enables clients to build innovation capabilities and transform their organizations.