Corporate venturing, the term used for when established firms collaborate with startups – whether through corporate venture capital, scouting missions, hackathons or excubators, to name just some examples – is not a new practice. Large companies such as Intel, Siemens, Xerox, General Electric, IBM, Lucent and Merck have employed them for years.
However, due to the explosion of technology in the past two decades, there has been a spike in firms starting and expanding their corporate venturing units to keep pace with the evolution of technology and its ubiquitous adoption across industries. Between 2010 and 2016 in fact, the use of corporate incubators and corporate accelerators among the 30 largest companies in the world rose from just 2% to 44%.
How should large firms best approach corporate venturing? Based on interviews conducted with chief innovation officers and related roles at 44 large firms for a new study, we identify the challenges, opportunities and best practices for how large corporations can innovate by collaborating with startups.
Why startups?
It is not surprising that more and more corporations are looking to work with startups. The business landscape is changing quickly, making it hard for large firms to innovate quickly enough to thrive in this new context.
Take hospitality company Hilton. It has been in existence for almost 100 years and it has around 850,000 rooms in 105 countries and a market capitalisation of $25.8bn. However, in just 10 years, starting from scratch, Airbnb has surpassed Hilton’s market cap, with four times the number of managed rooms. In parallel, without owning a single car, in nine years Uber has exceeded the market cap of BMW, which began 102 years ago.
Large corporations are like big slow ocean liners – difficult to steer at the pace the market requires when it comes to innovation. Standardised processes, bureaucratic management, risk aversion and lack of creativity are some of the reasons for this. In contrast, startups desire to challenge the status quo, have potential for rapid growth and the capacity for a continuous flow of new ideas. Corporate venturing is a promising solution for sourcing innovation opportunities at speed. In exchange for these innovation advantages, corporations can in turn offer startups what they lack – capital, workforce, facilities, network and so on.
Getting started in three steps
To kick off a corporate venturing endeavour, companies should, first, determine the strengths and weaknesses of their current internal innovation efforts, second, identify the areas of the company’s business that are more vulnerable to disruption, and last, define the nature of the opportunities the company is looking for and then select the areas that offer the most attractive growth.
Once the strategy is defined, the next move is to select the right mechanisms for collaboration, bearing in mind the desired level of innovation required at the firm, the time available, and the human and financial resources allocated. Typical mechanisms include:
- Scouting mission – the activity of seeking innovations through meetings with startups, inventors or university researchers in exchange for network and business opportunities.
- Hackathon – a workshop in which software developers collaborate to find technological solutions to a company’s challenge, in exchange for business opportunities and recognition.
- Sharing resources – a way of facilitating the exchange of data, work spaces, lessons and so on.
- Challenge prize – an open competition to solve a specific issue in exchange of monetary reward and outreach.
- Corporate accelerators – a highly-structured program established to speed up the business development process of a startup by a few months. It includes offering mentoring, training and investment, sometimes in exchange for a share of equity.
- Corporate incubators – similar to a corporate accelerator, this program aims to provide viability and commercialisation to promising innovation.
- Excubator – a corporation’s external venture builder aimed at generating a minimum viable product outside the regular structure of the corporation.
- Corporate venture capital – direct equity investment in startups of strategic interest beyond a purely financial return.
- Strategic partnerships – an alliance between corporations and startups to develop innovative solutions.
- Venture client – a specific type of strategic partnership in which corporations purchase the first unit of a startup’s product, becoming its first client, and learning from emerging developments.
- Acquisitions – the purchase of startups by corporations in order to access their commercial-ready products and talent.
It is crucial to take a mid to long-term view when deciding which opportunities to go for and also to make sure they align with the firm’s objectives and culture. This should not be taken as a given. When we asked chief innovation officers which factors they considered most important when choosing the corporate venturing mechanisms to launch, we found that 36% of them based their selection on the expected level of required innovation. However, when prioritising their opportunities in each mechanism, 40% of them were focused only on short-term returns, which could see them miss out on lucrative long-term gains.
Also, companies should consider that different mechanisms may be more appropriate depending on the different phases of the corporate venturing unit’s maturity. In the building phase, we found that the most-utilised mechanisms were scouting missions. When looking to scale, adding corporate incubators and corporate venturing capital were the most popular. Finally, when looking to consolidate, corporate accelerators were the most used.
By taking these factors into account, corporate venturing can allow corporations and startups to develop disruptive ideas at lower costs and at a higher speed.
This is an edited version of an article that appeared in Forbes magazine. Read the study published by IESE Business School and Opinno – Open innovation: Building, scaling and consolidating your firms’ corporate venturing unit.