This article was initially published on The Future Shapers where I am a regular contributor.
With the increased need to diversify their innovation enabling vehicles, more and more corporations are drawn on the startup partnership path. Make no mistake, this is not a single-sided deal, chief executive officers of both corporates and start-ups share the common strategic goals of growing their respective company, improving its competitive positioning and generating revenue.
Some corporations even go as far as to partner with potential disruptors. Although it might sound counter-intuitive this can be beneficial because of the difficulty for an established business to disrupt from within and difficulty of the startup to understand the industry they so much desire to disrupt.
But working together — two companies of different sizes, cultures and strengths — comes with various potential pitfalls. Chief executive officers of start-ups often find themselves talking not to the chief executive officers of corporates, but to employees much further down the hierarchy. Making aligning expectations even more difficult. Complications also commonly arise from a clash of cultures: agile versus waterfall. Different work ethics and different risk appetites might, further down the line, spin the collaboration out of control.
Although the benefits of collaboration are different for each party, they are substantial enough to bring the two together and make them work through their differences.
For startups, revenue is often the primary incentive especially if the startup is an early-stage company. Big corporates can invest considerable amounts of money in a partnership. This capital infusion can free start-ups from the need to seek outside investments. Corporates can also have a long-term interest, which may stabilise a start-up and help it to reach break-even or even profits very early. Such an approach allows the start-up to achieve sustainable growth, independently from scarce venture capital.
Another benefit for startups to enter in a collaboration with a legacy company is riskless internationalisation. Working with a multinational established organisation offers a startup the possibility to expand into other countries by partnering with the corporate’s local subsidiaries. Furthermore, large corporates can be an ideal partner as they have enough brand recognition, marketing and distribution channels for a startup to use in the scale efforts. Moreover, large user bases may also help start-ups to refine and optimize their products.
The benefits for startups don’t stop here. Partnering with a corporation can also present some intangible benefits such as case studies/testimonials for future sales and intimate industry knowledge. A successful partnership substantially enhances the reputation of start-ups and serves as reference cases for future sales as — in most cases — corporate decision-makers look for references and companies with industry experience before signing on the dotted line.
For corporations, usually the most cited benefit is innovation. To protect their strategic position, corporations need to become aware of market shifts caused by new technology or innovation in their industry, or coming from adjacent ones. Startups, being free of corporate governance chains have more freedom to develop truly disruptive solutions. Corporates may discover value not only in increasing revenues and margins by using the solutions provided by startups, but also in the expansion to emerging business fields. Innovation is the antidote to disruption as it secures a future competitive advantage. As internal innovation initiatives usually gravitate around incremental innovation designed to protect the core cash cows, collaborations facilitate the necessary disruption of one’s own business model, which is difficult to achieve from within.
Although usually not the primary driving force behind a collaborative initiative from the corporate side, new revenues that result from a partnership can not be ignored.
Furthermore, start-ups tend to be more customer-centric as they are not as standard process-driven as established corporates. They can adapt and customise solutions more easily, allowing the corporation to serve and know its customers better. Working with customer-centric and innovative startups allows a corporation to better track changes in the market trends, purchasing behaviours and technology trends that can ultimately may bring about the disruption of the corporation’s industry.
On top of the tangible benefits described above, corporations are drawn to startups collaboration for some intangible benefits too. Working with start-ups can spark a more entrepreneurial culture in an otherwise hierarchical organisation.
Even if the benefits of a collaboration are clear for both sides, there are the challenges that need to be overcome.
The primary challenge for a startup is associated with sales cycle times. Sales cycles of corporations conflict with the start-up’s short-term need to generate revenue. As start-up teams are small, each bet on a corporate deal is a risk of running out of cash if the deal doesn’t come through. Shorter sales cycles equal to a higher survivability rate for the startup. Furthermore, start-ups often feel treated in a top-down way instead of at eye level. They find it challenging to be perceived as serious businesses, making them make compromises that they wouldn’t otherwise have made.
On the corporate side, the challenges for a collaboration revolve around internal issues. The not-invented-here syndrome is ever-present in innovation, even more so when the innovation comes from the outside. It can be difficult for a corporate to internally adopt inventions that were developed in collaboration with start-ups. There is also a risk of competition or cannibalisation of existing corporate solutions. Therefore corporates need to manage shareholder expectations, in particular the short term interest versus the long term benefit.
Furthermore, business units may not be aligned on the collaboration’s goal and its possible outcomes before its kickoff. Which can lead to conflicting requirements and delays further down the line.
Lastly, an important challenge to be overcome by corporations is a cultural one. The culture of corporates is one in which failure has a heavy cost for those involved, and thus, unlike what happens in start-ups, failures are both avoided from the outset and not openly acknowledged when they happen. It is, therefore, a key challenge for C-Level managers hoping to build an internal culture of innovation in their blue-chip company on the heels of the startup collaboration, to structure and sensitise their organization to take collaborative approaches seriously and give projects the support they need to become a success.
Collaborations can come in many shapes and sizes: incubation, acceleration, paid demos, joined ventures or free partnership. However, success stories are always rooted in each side being sensitive towards the interests, expectations, incentives, culture and work ethic of the other. Aside from clearly defining roles, rights and responsibilities, a collaboration also needs to consider the ever-present risks for both sides of the partnership.
For the startups, from our experience, the biggest risk represents getting engulfed by one single customer. Focusing on a single custom solution for a single large corporate client may distract a start-up from working towards their universal, scalable vision, and limit growth prospects in the long run. On the opposite end of the scale, some corporations may not pursue a strong collaboration with a startup, and rather consider the smaller company as a source of free consultancy. This practice by the corporation tends to gobble up a lot of the start-up’s resources.
Another risk on the startup side has to do with the followup from a collaboration: prematurely scaling the solution after successful proof of concept or the signing of the first deal. So a word of advice for entrepreneurs should be that successful sales to innovation departments or first clients do not mean that the solution should be scaled.
As corporations are complex organisations and collaborating with a startup might be interesting for several internal stakeholders, several corporate departments might start to formulate different requirements for the partnership. This often leads to delays, which eat into the startup’s financial runway.
Lastly, in case of collaboration getting too close and the dependency on corporate decision-making too strong, there is a high risk of the startup losing its agile spirit.
Corporations will not be protected from the risks of a collaboration by their size alone. Although different, corporations face risks too. The most cited one being reputation damage. When something goes wrong in a partnership, reputation damage has far greater consequences for the corporation than for the startup.
Depending on how much was invested in the collaboration, lost investment is also a risk, corporations need to consider. Many start-ups fail (about 80%), so the investment risk for corporates is high, compared to their usual incremental improvement projects.
Corporate employees are used to follow the beaten path, and tend to regard failure as jeopardizing for their careers. In a partnership with a startup they might feel threatened by the start-up’s unfamiliar culture and remain overly protective of the status quo without fully committing to the partnership’s goals.
When corporates engage — in particular — with high-tech start-ups that propose solutions that the corporate is not yet ready to adopt, the so-called maturity misalignment can occur. Therefore agreeing on a technology readiness scale similar to the one NASA has been using, ahead of the partnership’s kickoff is the most advisable thing.
As you have seen in the parts above, partnerships are complex undertakings with challenges and risks but also with benefits that make them so desirable. Mitigating the risk and starting to lay the foundation of a successful partnership starts with each of the two sides finding running through the following checklist:
- The first item on the startup’s checklist revolves around the target of the partnership: ‘What is the target of the partnership for them as a startup? What is the target of the corporate partner? Are the two targets achievable at the same time? Is the partnership, in its current state (eg.: paid demo), going to lead to both parties achieving their targets?’
- The second item on the list has to do with the way the success of the collaboration will be measured. ‘How will you as a startup measure the success of the collaboration? How will the corporate partner do that? Are the two measurements contradictory or not?’
- The third item on the startup’s checklist is budget: ‘Do you, as a startup, have enough run-way to deliver on the collaboration’s goals? Is the budget that’s being allocated on the corporation’s side (time, resources, other materials) sufficient to achieve the goal of the partnership?’
- The fourth and last item the startup needs to be aware of is the person they are in contact with on the corporate side: ‘What buyer persona are you speaking with? Is this the only person you are in contact with? Is the person the right one to achieve the goals of the partnership? (make sure you speak with at least two people. in case you are in contact with just one person from the corporation and this person changes jobs or leaves the company the collaboration is in jeopardy. At the very best, the collaboration might still happen, but you are going to spend countless hours figuring out who the new person in-charge of the deal is. This will impact your ‘runway’. This risk is greater at the beginning of the collaboration before any agreement is signed.) Does any of the people you are in contact with have enough influence to shield the collaboration in case priorities get reshuffled on the corporation’s side?’
Make no mistake, the startups are not the only ones needing a checklist for a collaboration, corporates need one as well. However, the corporate checklist is slightly different from the startup one and it can suffer even further changes depending on the type of collaboration with the person that will be in charge of it.
- The first item on the corporation’s checklist is similar to the first one on the startup’s checklist, the target of the collaboration. However the questions differ: ‘What are the goals of the collaboration? Are the goals of the collaboration aligned with our company’s (innovation) strategy? Is the startup’s target for the collaboration competing with our target?’
- The second item the corporations need to be aware before going into a partnership is the internal reasoning behind the collaboration. To get clarity on this the corporation needs to find answers to the following questions: ‘Does it make sense for us to collaborate with a startup to achieve our goals or can we achieve the same results using internal resources?’
- Thirdly the corporation needs to get clarity around the best way to collaborate (and consequently achieve their targets): ‘What form should the collaboration take in order for us to achieve our target (eg.: paid demo, joint venture, free demo etc.)? Is this form of collaboration going to help the startup achieve their goal too?’
- The fourth item on the corporation’s checklist revolves around resources and their allocation: ‘What resources are needed for this collaboration to succeed? Can we allocate the necessary results for the collaboration to succeed? Do we have the necessary resources at our disposal?’
- The next item on the list has to do with the way the success of the collaboration will be measured. ‘How will you as a startup measure the success of the collaboration? How will the corporate partner do that? Are the two measurements contradictory or not?’
- The fifth item on the list touches on the internal stakeholders from the corporate side: ‘Who will be the stakeholders responsible to drive the collaboration in our company? Are these people the right ones for the collaboration to succeed?’
Partnering between two different size companies will never be easy, regardless of how much they need each other. The success of a collaboration depends on one hand on mutual understanding (each side appreciating the risks and the differences the other faces in embarking on collaboration) and on the other hand on thoroughly preparing before signing on the proverbial dotted line.