Why start-ups can be good for your business

Author — Jackie Kahle

It can be bewildering. You wake up one day and find that a year-old start-up created by three people in someone’s living room has released an app that your customers are paying attention to―and which is threatening to upend your own business model.

You wonder what to do next―adopt a completely new approach or stay the course? One smart move might be to reassess your assumptions about what customers consider valuable and what they are willing to pay for. After all, they’re choosing an untested solution for a reason.

App Nations: Start-ups, States and Enterprises, a new research report from The Economist Intelligence Unit (EIU), sponsored by CA Technologies, surveyed both start-up and enterprise executives about the app economy. Not surprisingly, enterprise execs enumerated many fears about how start-ups would negatively impact their businesses (see Figure 1).

Figure 1: What are the biggest threats start-ups pose to your growth in the app economy?

Despite the obvious role that start-ups play as major competitors to established businesses, the research shows some surprising results about ways enterprises can advance their objectives by partnering with start-ups.

Researchers asked enterprises if they partner with or plan to partner with app start-ups and a full one-third reported that they do, in areas such as backend or performance-related technology improvements, front-end or design-related technology improvement (e.g. improvements in user experience, adding new features) and reaching new customers and markets.

Partnering with start-ups on technology shouldn’t be surprising, as start-ups often focus on niche technologies that could complement or augment solutions provided by larger firms and this often leads to outright acquisitions. An earlier study by Oxford Economics showed that buying a start-up to acquire technology or talent is increasingly used to jump-start digital initiatives.

But it’s interesting to consider why a large enterprise might want to partner with a start-up to reach new customers or markets. In some sectors, start-ups are achieving success with apps that appeal to young, digital-savvy consumers, that traditional businesses have trouble reaching. Also, enterprises may be looking to expand internationally by partnering with a start-ups that have built a presence in other territories.

Overall, enterprises that choose to partner with start-ups are quite pleased with their collaborations. A full 65 percent reported that they found their partnerships helpful and only 23 percent thought partnerships hindered their growth (see Figure 2).

Figure 2: What effect did your work with start-ups have on your company’s growth?

Looking forward―it’s all about the talent

Still, large enterprises recognize that they will continue to face challenges from start-ups in the fight to gain traction in the app economy. The researchers asked enterprises what they believed were the major competitive advantages that start-ups held (see Figure 3). High on the list was attractiveness to new talent―not just technical talent but business talent too.

The Oxford Economics study mentioned earlier highlighted some of the steps enterprises are taking to attract and retain talent as they compete in the app economy, which include changing culture, enhancing benefits and compensation, establishing technology centers in talent-rich geographic regions and acquiring companies to gain tech talent.

Figure 3: Which describes start-ups’ main competitive advantages?

There is a quote sometimes attributed to Sun Tzu and sometimes to Machiavelli but which became widely known when used by Michael Corleone in The Godfather, Part II: “Keep your friends close but your enemies closer”. Enterprises looking to compete more effectively in the app economy would be wise to explore ways in which they could partner with start-ups to achieve their goals and perhaps turbo-charge their digital transformation efforts.

For full details on this new research, download App Nations: Start-ups, States and Enterprises.