Millennial Corporations and Their Symbiotic Relationship to Startups

In 2004, at its peak, Blockbuster had 60,000 employees and over 9,000 stores. Just 6 years later it filed for bankruptcy and after massive fire sales and closures, in 3 years it was completely defunct. How did this happen? You need to look no further than the rise of Netflix and Redbox. Blockbuster’s failure to adapt to a fast evolving landscape and disrupt itself meant it had its lunch completely eaten.

This story has been repeating itself at a faster pace and it is being heard. Whether it is Tesla disrupting traditional car makers or Uber threatening taxi companies, corporations increasingly recognize the only defensibility is continuous innovation. That means investing in their own R&D for sure but appreciating that innovation can come from beyond their borders. Indeed, there are many ways in which startups and corporates can work together to create a symbiotic ecosystem. Below are 4 key ways that “millennial” corporations are engaging in open innovation.

1) Acquisitions

Create or buy? A corporate will buy typically in two scenarios, in reality often times both happen. One is if creating will take too many resources / time. Two is to prevent competitors from gaining grounds by working or acquiring the startup themselves.

The second question then is to buy the entire machine or just the parts? The challenge of the whole machine is obviously integrating it into the existing corporate framework, the tradeoff of getting only the patents or the team is a cheaper price weighed against having to develop the product anew. There are more acquisitions now than ever before. And with technology increasingly permeating every sector, the trend is increasingly for non tech companies to acquire tech startups.

Case in point, Walmart has been buying various startups over the years including Kosmix, VUDU and OneRiot, often merging them within Walmart Labs. Increasing their online presence is one goal, the other major application of the technologies is help them analyze data and understand better their core business.

2) Partnerships

Many small businesses may be able sustain themselves funded by their own revenues but it is rare for them to scale. To really grow startups must partner with other companies — and corporates provide the most amount of resources to do so. This can take various forms, from technology licensing to business agreements, and can obviously be accelerated by an investment or evolve into an acquisition. For a startup, the asymmetry of power with a corporate means choosing the right partner can be the difference between success and non-existence.

The partnerships struck by E Ink Corporation are perhaps most telling. The company was founded in 1997 out of technology developed in MIT. In a decade-long journey they signed contracts with various large companies including Sony, Motorola and Amazon, which has resulted in a plethora of products many of us use, the Kindle perhaps being the most visible example. In a well crafted partnership the startup can indeed leverage the distribution network, salesforce, contacts, brand/reliability, and operational capacity of the corporate and go much further.

3) Investments

Call it any by other similar name, corporate venture capital is more salient now than ever before. According to Global Corporate Venturing, during the past four years more than 475 corporate venture funds have started, bringing the worldwide total to more than 1,100. By many measures, corporate ventures comprise now 20 percent of all deals and 40 percent of transaction value worldwide.

For a startup the advantages of a corporate VC are patient, long-term capital rather than an investor with a 7-year fund cycle and expectations around IRR. For a corporate VC the goal is typically to have access to breakthrough innovations that could help the company improve its existing products or branch into new markets. For example, Visa’s investment in Square is an example of a larger company embracing a new way, in this case of acquiring merchants.

4) Incubations

Many variations to this theme, from incubators to accelerators to coworking spaces. The key is autonomy, in other words, that the startups being incubated can leverage the infrastructure from the corporate but have the freedom to create independently.

An example — when Disney decided to launch its LA accelerator they actually hired an experienced player in the form of TechStars to run it for them. Companies get $120K to develop their ideas and access to the Disney leadership, but are kept separate from the parent company.

SAP has recently taken that idea to another level by opening up its inaugural Hana Cafe in downtown Palo Alto, with the goal of creating a worldwide network. The goal here is to be a meeting point for anyone so the company can be part of the entrepreneurial conversations.

“Millennial” corporations, which embrace working with startups, are evolving rapidly. What else have you seen them do when it comes to open innovation?

Thanks to Subha Srinivas Townsend for sharing her invaluable expertise and experience at Google, McKinsey, Pearson and beyond towards writing this article.