Startups and Corporates – Part 1: The Necessary Friendship
By Early Metrics Team - 08 April 2017
In this series of articles, we cast some light on how two stakeholders with strikingly contrasting DNA, corporates and startups, 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 startups and corporates to work together?
Has the era of internal corporate innovation come to an end?
Nokia, Motorola or Kodak are familiar brands to the over 30, but far less known by younger generations. Why? These corporations died (or nearly did so) because of brutal technology shifts that they could not foresee, integrate, lead, or even accept:
- Distrust in digital photo led to Kodak’s decline
- Delays in implementing the 3G protocol led to Motorola’s decline
- Failure to adopt touchscreens led to Nokia’s decline
For large companies, new trends can thus have a dreadful impact. They need to be in tune with market changes and consumer needs if they are to survive innovation cataclysms.
Trend changes are increasingly speedy, challenging internal corporate departments to keep up. Until recently, innovation development was mostly carried out by R&D departments in large corporations, individual inventors and institutional players such as universities. However, it is now much easier for a 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 have had 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.
The emergence of a new approach to innovation
Large corporations aware of this shift have reacted by launching a new model: open innovation. This strategy encourages interactions with external innovation partners. If direct collaborations with startups is a part of it, crowdsourcing or intrapreneurship are also means of carrying open innovation.
An interesting consequence of the emergence of open innovation is the multiplication of innovation drivers. R&D departments of tech-heavy sectors such as IT, automotive, defence 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 also on an entrepreneurial mindset.
Corporates and startups, bringing different assets to the table
Now that the context is established, let’s move into the main topic: startups and corporates. What can they each offer? And how can they each balance their contributions to make the collaboration fair?
What startups bring to the table:
Startups can offer new skills, tech, consumer insights and a vision of what the world might be like in the future.
If we look at a very simple execution scheme, the input of startups when bringing an idea to reality can cover both short and long-term aspects.
Phase 1: Startup inputs on ideation, initial testing and customer validation, definition of the required technological skillset, etc.
Phase 2: Startup offers a vision of a globally deployed product/service, significantly different than the status quo.
What corporates bring to the table:
Large companies can share their distribution channels and global market understanding, investment capabilities, credibility and a vision of what the world is really like today.
Taking the same execution scheme and without real surprises, a corporate’s input mainly concerns Phase 2 of the collaboration with a startup.
Phase 3: Corporate input to refine the value proposition, widen the market testing scope, as well as give access to the 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 three stages of innovation by themselves. But when focusing on stage 2 and considering how resource intensive some of the steps are (scaling, internationalisation, access to large consumers markets…), it becomes clear that a young venture needs support to successfully manage this phase.
Until recently, receiving significant cash from investors such as venture capitalists was the only way to deploy. Partnering with corporates now is an alternative route that more and more entrepreneurs are adopting.
The rise of B2B2C in the startup ecosystem
Out of a sample of 1000 startups rated by Early Metrics:
- Around 70% were directly targeting large corporates as clients.
- Out of the nearly 30% targeting individuals, nearly a third were targeting corporates as distribution partners.
Let’s take a moment to look at startups that do not target large corporates as clients but seem to need them anyway. One example that most players in the startup ecosystem will be familiar with is that of large consumer-facing fintech (personal banking, C2C remittance, amateur trading, etc).
A basic P&L of these companies is…
[Customer lifetime value (CLV) – Cost of acquisition (CAC) – Cost of good / service provided (C)] * Number of customers
… and puts serious pressure on the CAC, as it can rise fast for most acquisition channels, especially digital ones. This is true of any business, but even more critical in the early years of the startup. Indeed, their CLV is usually low due to a higher churn rate, single monetisation channels, limited network effects… And their CAC is usually high because of non-optimised acquisition channels.
To overcome these issues, startups have two main choices:
– Raising a large amount of capital to be spent on acquisition, without real consideration on profitability.
– If raising millions through equity is not available, startups will rely on existing customer bases, thanks to B2B2C routes or distribution agreements.
Below some examples of common patterns in rated companies:
- Innovative health startups partnering with insurance firms
- Telematic startups partnering with automotive companies
- Social media companies partnering with media or publishers
- C2C fintech startups partnering with traditional banks
The rise of innovative routes to market for corporates
As presented in the previous point, market access is more often what corporates bring to startups than the other way round. But even this is changing.
If incumbents tend to have strong access to their traditional user base, it is not always the case in emerging segments or certain niches. Corporations can sometimes reach these audiences more easily by collaborating with startups. Such partnerships include:
- Large banks partnering with young remittance startups to offer light banking services to foreign workers;
- Leading insurance firms partnering with sharing economy startups to secure good / service exchanges between parties
- FMCG brands closely working with young social media ventures to access a specific niche or younger potential customers
More than corporate venturing, these B2B2C or B2B2B strategies are actually what makes the relationship between startups and corporates so central in today and tomorrow’s economy.