Corporates in search of systematic innovation
How innovation managers are failing at scaling startup collaborations
(and how those who succeed are doing it)
Startups: made-up of the most daring and capable minds on the planet, radically new approaches and billions in VC funding, they are the resource European corporations underutilize most. And it isn’t necessarily for lack of trying. Corporates are ready to embrace open innovation as part of their R&D strategy and Innovation Managers across industries are now tasked with startup collaboration.
In Germany alone, Daimler’s StartupAutobahn, BMW’s Startupgarage, Viessmann’s Innovation Boiler or DBmindbox are evidence of a shifting tide. For corporate Innovation teams, collaborating with startups takes different forms: from CVC to Accelerators, a vast range of models has emerged. Yet, few are those corporations that truly succeed in capturing the value created by startups, systematically and at scale.
In this post, I review the models currently available to Innovation teams in search of the scalable solution to systematically and integrate startup tech into corporate value-chains. Having worked with a number of clients mentioned in this post, I share real-world insights with the aim of fast-tracking your team’s journey to open innovation.
Many corporations first approach the startup world by establishing a VC fund or by becoming an LP in one. Companies like Redstone even offer to establish and run CVCs as a service. Corporate Venture Capital funds (CVCs) are useful in mapping-out innovation and new technology developments, uncovering market opportunities, developing relationships with VCs and identifying acquisition targets. Owning feels natural and acquiring equity positions can be a great tool to unlock strategic value around the core business model, eg Walt Disney’s investment and subsequent acquisition of streaming platform Hulu, Allianz acquiring finanzen.de and Metro investing in the hospitality POS system Orderbird.
Why it fails
The hefty transaction costs of a CVCs do not foster an environment in which recurrent testing of startup technology can take place. Therefore, CVCs are unable to reap the full benefit of the growing startup ecosystem.The model also begs an important question: How could a corporation build a better VC than the private market? Most startups worth investing in are likely to come from a blind angle, suggesting that beyond highly strategic opportunities, the corporations should rather invest in VCs in the private market to hedge their bets.
Events, competitions and hackathons
For corporations in the early stages of their startup innovation journey, events, competitions and hackathons are an accessible and exciting window onto the startup ecosystem. Villeroy&Boch’s innovation team kicked-off their work with startups, by organizing a Pitch Day at their HQ. Others, like EIT Digital, have seen their competition becoming its own brand in the startup ecosystem. Personally getting to know the people who make-up the ecosystem helps to devise more impactful open innovation strategies. Innovation Managers can choose to simply sponsor one of the many existing events, making this format light and quick to set up. Well-produced experiences also boost employer branding, which is a bonus corporates, in constant need of talent, can appreciate.
Why it fails
Events as a process to source and integrate startup technology are not systematic enough to scale. Results are hard to track and measure. Business impact and real innovation, when they do occur, are mostly random.
Palo-Alto-based Y-Combinator created its accelerator in 2005, coining an alternative model for funding early-stage startups. Looking to gain visibility of the early-stage innovation landscape and to foster a more entrepreneurial culture in their organisation, corporations started to create their own versions. From Signals’ equity-free Pre-Seed Program, through PWC’s 20+ European programs for raising & scaling startups, to corporate joint ventures like APX by Axel Springer and Porsche, corporate Innovation teams have created infinite variations on the model. Here as well, companies like Techstars or Plug&Play offer corporate accelerators as a service. As the growing private market indicates, accelerators can mean great business.
Why it fails
The innovation value of accelerators for the corporations financing them is rather limited. Often, these programs are run independently of the main organisation and far-removed from the overall strategy and challenges on the agendas of the main organisation. The €20–150k in funding typical of this model appeals to startups whose products are generally not ready to be piloted. Beyond spill-over learnings from mentoring sessions, little impact on the corporation at large is generated.
Startup Partnering : Strategy to Success
Enter Startup Partnering — the one model that brings success to the Innovation teams that adopt it and shows promising signs of scalability. Startup Partnering (sometimes also called venture client) is the simple purchase of relevant startup products.
Buying startup products brings the transaction back to its core. It does not treat innovation like an abstract concept, like a problem that you can solve with pure intellect and models on slides.
It treats startup innovation as what it is: products and technologies that can be deployed and integrated profitably. Instead of a program and a rigid framework, Innovation teams find the most pressing problems and opportunities in the organisation and create an environment in which startup solutions can quickly be tested and, if successful, integrated. Instead of a date for a demo day for the whole organisation, corporations start with the problem they’d like to see solved.
Why it works
It starts with the Problem
Startup Partnering projects have a high chance of success and impact for the organisation at large because they address a real need or issue currently on the agenda. To ensure solutions have the necessary backing in the organisation, problems are typically defined either by a BU directly, or by a new management strategy.
The handful of corporations that have already understood Startup Partnering is the best way to capture value generated by startups measure their success through the number of rolled-out products. Others, like Wayra, consider sums spent on startup tech as a central KPI.
It’s lean & shows signs of scalability
The purchase of the startup’s product is a much simpler transaction than acquiring equity. In the early stages of a company, the customer arguably has more influence on the product roadmap than the investor. Just imagine a procurement process for startups — quite the scalable vision/possibility/future.
It’s empirically proven
Booking’s Booster, Startup Harbour Bosch, G4A by Bayer, Merck Accelerator and more have pivoted from accelerator programs to problem-driven startup partnering. In just the past three years, Daimler has run more than 120 pilots with startups. What3words’s navigation solution, for instance, was tested and integrated into production cars in under 12 months. Even pilots that do not bring the desired results are typically profitable for the corporation, as the learnings they generate represent millions in R&D savings. Miele’s Innovation team know this and makes a point out of explicitly formulating and accounting for learnings. Last but not least, buying from startups also lets corporations control billions in additional product development budgets — kindly provided by a thriving VC market.
Buying startup products is the one scalable solution to systematically integrate startup tech into corporate value-chains.
This mode of collaborating with startups changes the job of the Innovation Manager: finding and defining problems that can be solved by or with startups becomes the central task; more than ever before, systematic and granular ways of scouting startups must be found; a startup-friendly supplier environment which enables constant testing needs to be established. In my next post, I will develop on these requirements and how they can be successfully fulfilled by Innovation teams to unlock true impact, both on their organisation and on the world, by enabling a new generation of entrepreneurs.
I’m Fabian Dudek,
Co-Founder & CEO of GlassDollar, the startup scouting company.
We cluster and track millions of startups across the globe to help customers like Daimler, Henkel, Miele and Rabobank to integrate the most interesting startup technology into their value-chain.