After 3 years and nearly 1 000 start-ups rated for more than a hundred corporate clients, it was time for Early Metrics to share some key learnings about the collaboration between large corporates and start-ups, arguably one the most important economical relationships in the 21st century.
In the next four months, Early Metrics will publish a series of articles about one specific aspect of the collaboration between corporates and start-ups, in order to cast some light on how two stakeholders with strikingly contrasting DNA can work together successfully.
Before focusing on the Rules of the game (Part 2), Corporate Venturing (Part 3), and Co-development (Part 4), let’s go back to the starting point and answer the question: Why is it so crucial for both start-ups and corporates to work together?
1. The era of internal corporate innovation has come to an end
Nokia, Motorola or Kodak are extremely well known to 30 + year olds but far less to anyone under thirties. Why? These corporations died (or nearly did so) because of extremely brutal technology shifts that they could not foresee, integrate, lead, or even accept: for Kodak, distrust in digital photo, for Motorola, non consideration of the 3G protocol, for Nokia, the rise of touch screens. For tech companies, a unique technological change can therefore have a dreadful impact, which is why they need to be as perceptive to market trends and consumers’ needs as possible if they are to survive innovation cataclysms.
Trend changes are increasingly speedy, challenging internal corporate departments to keep up. Furthermore, while innovation development was once limited to R&D departments of large corporations, individual inventors and institutional players such as universities and their research centres, it is now much easier for lean structure to access the resources needed to create innovation. The move from hardware focused tech to mostly dematerialised technologies alongside the rise of the Internet and its wide broadcast of knowledge have one main impact:
Expertise and tech skill sets are not exclusive to large and established organisations anymore but moving more and more to smaller entities.
Large corporations aware of this trend have reacted by launching a new model: open innovation, where interactions with other sources of innovation are promoted. If direct collaborations with start-ups is an obvious part of it, we can also mention crowdsourcing / engineering or intrapreneurship.
An interesting consequence of Open innovation is the multiplication of innovation drivers. Whereas R&D departments of tech heavy sectors such as IT, Automotive, Defense used to be the sole innovation leaders, nowadays, industries such as FMCG, luxury or tourism also come up with disruptive innovation. This is because today’s innovation does not depend only on internal tech skills, but more on an entrepreneurial mindset.
2. Different assets on the table
Now that the context is established, let’s move into the main topic: Start-ups and Corporates. What do they respectively bring to the table, and how these contributions could be balanced to make the partnership as fair as possible for both sides? Let’s get into more details:
What start-ups bring to the table: skills, tech, consumer insights and a vision of what the world might be in the future.
If we look at a very simple execution scheme, the input of startups when bringing an idea to reality could be compared to a gymnastic split.
Phase 1: Startup input with ideation, initial testing and customer validation, determined technological skill set, etc…
Phase 3: Startup input, vision of a globally deployed product / service, significantly different than the state of the existing world.
What corporates bring to the table: distribution channels and global market understanding, investment capabilities, credibility and a vision of what the world is today.
Taking the same execution scheme and without real surprises, traditional inputs of corporates in their relationship with startups are mainly focused on Phase 2.
Phase 2: Corporate input with refined of the value proposition, wider marker testing, access to market, industrial capacities, and credibility.
There are of course examples of one-player-only execution success whereby a startup, or a corporate, go through the 3 stages of innovation by themselves. But when focusing on stage 2 and considering how resource intensive some of the steps (industrialisation, internationalisation, access to large consumers markets, etc) are, it becomes clear that a young venture needs support to successfully manage this second phase.
Until recent days, receiving significant cash from investors such as venture capitalists was the only way to deploy. Strong partnerships with corporates now seem to be an alternative route more and more entrepreneurs are adopting, knowing it has pros and cons.
3. The raise of B2B2C for startups
As we can see on the graph below, out of the 1000 start-ups rated by Early Metrics:
- Around 70% where directly targeting large corporates as clients;
- Out of the nearly 30% targeting individuals, nearly a third was targeting corporates as distribution partners.
Business orientation of a portfolio of nearly 1000 rated companies
The main sectors targeting large corporates as clients or partners
Quick focus to understand these start-ups that do not target large corporates as clients but seem to need them anyway…
One example that any start-up professional is seeing more and more: the large consumer facing fintech (personal banking and finance, C2C remittance, amateur trading, etc).
A basic P&L of these companies is…
[Customer life time value (CLV) – Cost of acquisition (CAC) – Cost of good / service provided (C)] * Number of customers.
… and puts a serious pressure on the CAC, unfortunately growing fastly on most of the acquisition channel, especially online. This is always true but even more critical on the early years of the start-up where the CLV is low (unproved fidelity of the users, single monetisation activated, no network effect due to large quantities of users…) and the CAC is high (non optimised acquisition channels).
To overcome the issue, start-ups have two main choices:
– The route of raising a large amount of capital to be spent in acquisition without real consideration on profitability. Uber, Transferwise and Cie.
– But as raising XX(X) millions of equity is not always possible, many emerging companies are trying to rely on existing bases of customers, thanks to B2B2C routes or distribution agreements. Below some examples of common patterns and rated companies:
- The innovative health startup partnering with an Insurance firm
- The telematic startup partnering with an Insurance firm or an automotive firm
- The social media company partnering with a media or a publisher
- The C2C fintech startup partnering with a traditional bank
4. The raise of innovative routes to market for Corporates
As presented in the previous point, market access is more often what corporates bring to start-ups than the other way round, but even this trend fast changing.
If established corporations tend to have strong access to their traditional user base, it is not always the case in emerging segments or specific niches. Millennials or foreign workers are excellent examples of market segments where large corporations can actually reach out to more easily via collaborating with a startup. Recent partnerships between the two parties include:
- T1 banks partnering with young remittance startups to offer light banking services to foreign workers;
- Leading insurance firms partnering with sharing economy startups to secure the good / service exchange between parties
- FMCG brands closely working with young social media ventures to access to a specific audience, usually Millennials
More than corporate venturing, these B2B2C or B2B2B strategies, highlighted in these two last sections are actually what make the corporate/startup relationship so central in today’s and tomorrow’s economy.