Are mid-market companies perfectly positioned to innovate and thrive today?

Jack’s Journal 001

TL;DR

1. Wise companies have begun engaging with entrepreneurs and startup studios to innovate properly, quickly, and efficiently, leveraging their R&D and Corporate Venture Capital dollars to become more profitable and resilient on the other side of COVID by building new startups from scratch.
2. When startups launch on their own without corporate support, fewer than 10% succeed. When enterprises partner with entrepreneurs and take a structured approach to building and investing in startups, the success rate jumps to 67%.
3. Entrepreneurs and corporations have always spoken different languages due to size, culture, and speed, so it is crucial for this gap to be bridged.
4. Mid-market companies are small enough to move quickly and attract entrepreneurs, but big enough to have tangible resources to make a dent. They are in the perfect position to be healthy enough to stick around for the long haul, but not too big to become a dinosaur.

Humanity needs massive innovative solutions — immediately. Many experts would say that this has been coming for a long time and that COVID-19 has only been a forcing function to push society forward. One only needs to look as far as the racial and social injustices bursting at the seams right now to see that a lot needs to change.

Problems that we have had for generations, like the justice system, supply chain vulnerabilities, and mental health are now boiling over. With new issues, like figuring out the economics of a restaurant surviving that is only allowed 25% occupancy in the post-COVID world, are compounding on the weight of the moment.

Across the board, the spirit of innovation is essential and is beginning to fill the air.

On one side, entrepreneurs mobilized immediately when the virus began to spread, taking matters into their hands by quickly pivoting their businesses, foregoing salaries, and launching new projects. It was and still is inspiring.

On the other, large corporations were quick to send off letters from the CEO to everyone on their mailing list, and are now beginning to mobilize the troops to explore new innovative directions. We will surely see some incredible things launch in the next year.

But these are not ordinary times, as we have never been through something like this before in our lifetime.

So one might ask, who is the best positioned to lead this new wave of innovation, and how should we go about achieving it?

Over the last decade, idealistic entrepreneurial college students and recent graduates were quintessential startup founders. However, these individuals are no longer the best suited to solve many of the problems that humanity faces. It takes teams of seasoned experts with deep resources to mobilize and move quickly.

Wise companies have begun engaging with entrepreneurs and startup studios to innovate properly, quickly, and efficiently, leveraging their R&D and Corporate Venture Capital, or ‘CVC’ dollars, to become more profitable and resilient on the other side of COVID by building new startups from scratch.

McKinsey explained why this method of innovation is brilliant:

“Established companies possess talent, funds, market insights, intellectual property, data, and other assets that can give their new businesses a decisive edge over stand-alone start-ups. Providing access to an existing customer base, for example, can lower the cost of acquiring customers and speed their uptake, thereby putting the new business on a faster growth trajectory. When established companies develop the ability to integrate their assets with tech-enabled business models, they can continually generate new businesses.”

When startups launch on their own without corporate support, fewer than 10% succeed. However, when entrepreneurs and enterprises partner together and take a structured approach to build and investing in startups, the success rate jumps to 67%.

This method is never a guaranteed success unless corporations can successfully alter their DNA (slightly). This is because entrepreneurs and corporations have always spoken different languages.

Why have they always spoken different languages? According to Bain’s Thomas Wendt:

1. Corporations typically avoid taking risks. Entrepreneurs and VC’s have built their business models around taking enormous amounts of risk.
2. Corporate innovation labs and CVC funds typically seek returns in two years. Entrepreneurs and VC’s expect returns in five-to-seven years.
3. Digital and cultural transformation often takes years to move through the entire organization, but humanity no longer has that kind of time to spare.
4. Entrepreneurs and VC’s operate and thrive in unproven territories, investing in and building technologies that do not yet exist. This is a hard sell within corporations that measure profit-and-loss on a quarterly basis.
5. Corporations often enter the startup world thinking that their brand, experience, resources, and scale will get them a warm welcome amongst entrepreneurs and VC’s. However, entrepreneurs can choose who they accept money from, and they prefer investors who can provide a substantial amount of company-building expertise. Corporations have a hard time competing here.
6. Most corporations have gone “all-in” on a few long-term investments already, and are thus unable to make quick pivots and evolve in times of crisis.

So, if corporations may find themselves struggling to adapt quickly, perhaps mid-market companies may be a great fit to take innovative efforts into their hands. We define mid-market as companies earning between $100 million and $1 billion in annual revenue.

Here’s why:

1. Mid-market businesses are inherently smaller than corporations, allowing them to move fast and make decisions efficiently.
2. Mid-market businesses typically are able to take bigger risks than corporations have typically been comfortable with and can meet the entrepreneurs and VC’s somewhere in the middle.
3. Mid-market businesses have more flexibility and comfort realizing returns in a five-to-seven year period, rather than a two-year period.
4. Digital and cultural transformation can transform a mid-market business rather quickly. Plus, they can remain healthy in the next few years while returns are still unrealized.
5. Leaders at mid-market companies are often able to provide entrepreneurs with significant company-building expertise, so their capital can go much further.

But how does it all work?

One model that is proving to work very well is for mid-market businesses to engage with startup studios whose teams have proven track records of building startups from scratch.

Rather than trying to build new products and solutions themselves, or investing in startups that already exist for minimal equity, they can collaborate with and invest in teams of visionaries, entrepreneurs, investors, and builders to create new startups — quickly — and own significant equity.

Let’s run through some back-of-the-napkin figures.

In one year, an efficient startup studio can easily validate, build, and launch four startups. With a corporate investment of $250k each (a generous amount of seed capital for a tech startup) and another $500k for studio fees, a mid-market company can build and launch a healthy portfolio of new products and solutions for only $1.5million.

The mid-market company could own roughly 50% of each startup. This is an enormous amount of equity that they could never get by investing in scaling startups.

Plus, on top of the potential for financial returns, a mid-market company receives:

1. Access to innovative new ideas
2. A vetted and repeatable process to build startups
3. Lightweight product testing
4. New revenue streams
5. Increased sales from existing assets
6. Cost-reduction strategies and tools
7. New entrepreneurial talent attracted to working with the organization
8. The opportunity to enter new markets
9. Much, much more

All in all, this de-risks the process for everyone involved and poses a significant upside in the long-run.

It is crucial for companies to come out stronger on the other side of COVID, and more resilient against inevitable, future catastrophes. Moving quickly, efficiently, and safely is the best approach to improving and creating impactful and profitable companies.