This is a story about dating, failed lift-offs and an encounter with pirates. It’s about start-ups and corporates who are struggling to meaningfully engage with one another.
The situation: with the breakneck pace of change, corporates and start-ups both realize they need each other. However, the most direct route to these partnerships—open innovation—is largely broken. This article address why that’s so, and discuss possible ways to fix it. Industry experts say that almost 80 percent of financial institutions have entered into fintech partnerships, and 89 percent of start-ups believe that they're able to deliver business solutions that can scale. However, the reality is that typically it takes up to 12 months to close a deal, with a close rate of 10 to 25 percent. That’s for Series A companies with a product that is already on the market, and it assumes that the corporate partner has the necessary digital maturity and understanding of what’s involved when it comes to engaging with start-ups.
The Silicon Valley answer to this matchmaking conundrum is the accelerator, with the hope that these corporate-start-up partnerships achieve liftoff. But again, reality typically does not quite live up to the hope. Usually it looks more like a three-month-long all-nighter. Often, the stage is lit like a stadium and adorned with Steve Jobs-esque quotes (“Stay Hungry, Stay Foolish”), not to mention the odd bean bag. Show me a lonesome office space and I’ll show you a start-up accelerator.
When you declare your interest at the outset of a relationship, there can be a lot of awkwardness in the mix, and its current guise, most open innovation is just an expensive exercise in PR. Simply put, the current Silicon Valley model doesn’t work because thought and speed are usually at odds with each other. Successful startups such as AirBnB, DropBox and Uber all emerged from classic early-stage accelerators. The founders of these companies quit their jobs for a couple of months, hunkered down, and went hell-for-leather building and launching something that might attract investors at the end of Term Demo Day before a host of VCs.
Why doesn’t this model work for corporates?
The success to date of businesses such as Uber and Airbnb was built on their ability to quickly rack up tens of millions of consumers through their platforms. By contrast, the start-ups that banks and financial companies aim to develop and partner with through their accelerator programs will often have a much longer sales cycle, particularly on the B2B end of B2B2C. Rather than chalking up as many app downloads as possible, they are targeting large financial institutions and banks themselves, which move slowly and take a long time to pass decisions. So, notwithstanding the adrenaline rush of a three-month development blitz and five-minute pitch deck, all that hyperactivity isn’t going to get these types of businesses up and generating revenue. Furthermore, the “move fast and break things” approach of many early stage start-ups is not tolerated in financial services.
Many early-stage companies traditionally taken on by accelerators (note: the main identifying feature of this species is that they haven’t launched a product and still don’t have customers) are quite difficult for a corporate to work with in a meaningful way. There are two reasons for this.
First, a great user experience is no longer enough. Back when banks had cumbersome websites that didn’t render on mobile, it was easy for fintechs to win over customers by building a half-decent app with a great user experience. Today, most financial institutions have transformed their retail user experience, offering full mobile functionality with best-in-class design principles. As a result, great UX is now the norm.
Second, and this is just beginning to emerge, good execution and solid business models can now outdo exotic technology, making it difficult for start-ups to work with corporates. The most successful fintechs have evolved into execution machines that rapidly deliver innovative products, with dynamic digital marketing campaigns to match. Notably, winning startups often succeed without using completely new technology. Case in point, the money transfer fintech TransferWise is a digital business built on top of traditional payments rails, rather than a reinvention using the latest tech.
As the hype around fintech startups has gradually eased, business fundamentals are being scrutinized more carefully, and as a corollary, funding is getting more selective. More and more, investors and corporates worldwide are investing in proven, later-stage companies that promise to attain meaningful scale and profits.
Several well-known, well-capitalized fintechs have yet to develop a sustainable business model and will need to speed the path to meaningful revenues so that they can continue to attract capital. Most early stage companies face similar tasks—hiring, finding market fit and pitching to investors being typical issues. Indeed, given the commonality of these early-stage challenges, accelerators are able to offer a standard curriculum to all their members. Later stage start-ups, however, face far more unique challenges—thus, collaboration with them needs to move beyond the cookie-cutter approach of Silicon Valley-style accelerators.
So to sum up, corporates value later stage start-ups, but accelerators create little value for later stage start-ups.
How Will Cooperation Between Corporates and Startups Evolve?
Or, what will first dates with start-ups look like in the future?
Of the many different innovation (dating) models used by corporates, there are four basic archetypes:
1. Hunters place heavy emphasis on cooperation with start-ups, acquisitions, and corporate venturing.
2. Builders invest significantly in transforming their organization and building highly innovative departments and even internal spin-offs.
3. Explorers are still at the level of experimentation, and don’t orient their entire organization toward innovation.
4. Experimenters are generally just beginning their innovation journey, but they also have enough resources to build this capacity internally.
Even lower on this spectrum is tech tourism, which I would define as a largely ad-hoc, exploratory activity which lacks the ability to impact core business aims.
Here’s how it works: A corporate brand shows up in Silicon Valley, rides the Google slide, meets a couple of start-ups… at best, it can be inspirational. But bluntly put, it ends up being a waste of time. The main objective of these events—the “Theater of Innovation” if you will—is to generate publicity, not fan the fires of collaboration.
A bit higher on the evolutionary chain, structured corporate innovation programs are a more formal process based on mutually beneficial goals to drive business impact—meet-ups that are very focused on solving business challenges. Very few (perhaps 5 percent) of these programs actually achieve their potential. Though people are starting to develop best practices with them, most programs fail because of lack of decision maker buy-in at the executive level.
Closely watching the start-up dating game, I’ve observed how the archetypal innovation styles can typically interact and shift, creating patterns that lead to more successful partnerships. Here are a few of them:
Pattern 1: From Exploring to Hunting. In this pattern, companies move from simply discovering connections to meaningfully co-creating business solutions with external actors. Interaction with start-ups can act as a driver here for greater commitment.
Pattern 2: From Experimenting to Building. Companies following this pattern become more committed to internal innovation. An organization moves from simply having an interest in innovation to transforming its internal operations. They do this by standardizing tools, knowledge and language, for example.
Pattern 3: From One-Off to Balanced Activities. In this pattern, organizations move from either a mainly internal or mainly external focus to something more in the middle. Through experimenting, they notice that a completely internal or external approach isn’t a great fit for them, and they start to balance their actions and introduce measures that address both internal and external innovation.
Eventually we could see fewer corporate innovation programs. Too many people have been burned. But when corporates do invest in these programs, they will be more thoughtful and less speedy, and outcomes will be better.
As businesses look to achieve a more integrated approach to corporate-startup innovation, we will see more side-by-side working environments. This will enhance partnership opportunities on a number of levels, from providing improved navigation of a business and allowing better access to decision makers to transforming a corporate’s approach to innovation.
How Can You Gauge Interest from Both Sides?
Orderly though they may appear, all of these models are in essence nothing more than frameworks that largely exist on paper. In order to create meaningful engagement, we need to understand the softer side as well.
How do you tell if there’s interest from both corporate and start-up? First, the start-up will have to learn how to engage with a corporate, as they are different breeds.
Start-ups are like pirates—their ships are a bit rickety and they may not have a lot of money, but they are fleet of foot, and plunder and pillage where they can in search of the next treasure.
Big corporates, on the other hand, are like navies—they are well funded, their ships are big and in good repair, but they are slow and cumbersome and are largely interested in defending the status quo.
Nevertheless, as is often the case, opposites can attract, and despite their different outlooks they have a remarkably similar goal: the creation of new products and services that deliver value to customers in a manner that is supported by a sustainable and profitable business model.
So, without further ado, here are six tips for opening doors with corporates:
1. Establish roles clearly. If you are working together on a contract basis, make sure that each role, responsibility, and commitment is outlined in black and white. Even if you have a verbal, informal agreement (not recommended), hold a special meeting to detail the specifics.
2. Find out strengths and weaknesses, as they will let both parties know how to work best together. Highlighting more strengths in both parties can enhance the level of motivation and commitment in the workplace, leading to greater success.
3. Have a lot of patience. An entrepreneurial venture, as a smaller business than its potential partner, is most likely quicker on its feet. The start-up needs to consider the many levels of management and authorities that have to give their approval in order for the larger company to move forward. As long as they are not moving too slowly, patience is called for.
4. Share your vision. The start-up should prepare its mission statement for this partnership, and ask the other party to do the same. Of course, the motives for the start-up business and that of the larger business entity could be different. A corporate may want to improve customer engagement, while a start-up may wish to establish market presence. This is fine—both aims can be met—but both also must be prepared to walk away.
5. Insist on the written word. Many small companies rely on verbal agreement more than they should. In the world of business, especially when dealing with larger, more impersonal entities, do not count on a handshake. In order to keep the connection as professional and beneficial as possible, get everything in writing and signed.
6. Think about the exit. Even when just beginning your partnership, both parties should be thinking about the exit strategy—sort of like a pre-nup. This doesn’t mean they should always be pessimistic; it is simply an issue of practicality. Plan out how to handle the exit—your or your partner’s—from the contract, and prepare yourself for such situations.
As more models of collaboration appear, the spectrum has exploded to incorporate everything from casual opportunistic approaches designed to generate publicity, to schemes created to drive new revenue streams and solve problems at the core of the business with ideas that can scale. But as we have seen, many of them fail to deliver value. Knowing what we know now, it might be possible to move from a bad first date to a promising and fruitful partnership.
Martijn Moerbeek is group director of Digital Strategy & Innovation at Legal and General, a forward-looking, UK-based financial services and insurance firm managing over $1.4 trillion in assets. He can be reached at [email protected].
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