Over the past few years, it’s become increasingly common for corporates to work with startups. These collaborations take many shapes, from licensing technologies to co-developing new solutions.
Even all the way back in 2014, KPMG research showed that nearly 90% of corporates believed collaboration is essential in promoting innovation. This sentiment has continued to gain traction over the years, as corporates are increasingly advised to develop an open innovation strategy. Open innovation, which at its core promotes collaboration with external parties, provides benefits not only to corporates, but also its business units.
The increasing amount of corporate venture capital funds further highlights the growing popularity of startup-corporate collaborations. According to CB Insights, there was a 35% increase in CVC investors between 2017 and 2018. In 2018, CVC groups participated in $53 billion of funding dispersed through 2,740 deals.
“Collaboration can no longer be viewed as an optional extra, it’s a strategic imperative. Startups are now widely recognised as invaluable sources of innovation, fuelling growth and providing pioneering business solutions.” — Aline Santos, Unilever EVP Global Marketing
Nevertheless, some corporates are still reticent. They prefer to internalise their development and maintain secrecy around their strategic developments. The Covid-19 pandemic has added an extra hurdle to forming startup-corporate collaborations, as corporates are pressured to reallocate budgets internally to face the crisis. However, in the long term, this could negatively impact their efforts to stay competitive and innovative.
Before we look into the reasons why corporates should work with startups, let’s briefly define what a startup is. A startup is a young venture, typically focused on launching one product or solution, with funding from a few entrepreneurs and their friends or family. Most startups aim to create an innovative solution or business model that challenges the status quo and addresses market needs with a fresh approach. They typically rely on the innovation and added-value of their offering to attract investors that will help them grow their project. In their early years, startups will have small teams, low amounts of revenue and significant technical and commercial roadmaps to tackle. They often attract younger generations of employees, who help contribute innovative ideas and foster a more flexible working environment than corporates typically do.
Customer demand changes at an increasingly faster pace and to stay competitive, corporates need to ramp up their digital transformation. Startups often partake in creating or perfecting emerging technologies before corporates. Therefore, startup-corporate collaborations can help save time and resources.
The technology market is evolving fast too, with impressive adoption numbers illustrating the world’s recognition of its potential. There are over 1 million tech startups worldwide and global spending on technology was $3.7 trillion in 2019. Adopting new technologies has helped corporates lower costs and increase revenue. For example, Netflix claims to have saved $1 billion per year thanks to its use of machine learning algorithms.
Reducing costs is arguably the number one reason behind outsourcing. However, beyond a matter of costs, working with startups also provides solutions in terms of access. If your business doesn’t already have access to experts in certain fields, which is often the case for innovative technologies, partnering with a startup is an easy solve. Indeed, it’s estimated that tech job vacancies cost the UK economy £63 billion a year. Over half of employers have been forced to leave a job vacancy open indefinitely because they couldn’t find a suitable candidate. Instead of trying to hire experts, working with a startup that already has that expertise in-house is a viable solution.
Coming up with innovative products or services can be challenging and lead to high R&D costs. Corporates can mitigate these costs by working with startups who will share the financial burden - through co-development, for instance. Many factors such as their smaller size, niche focus and lack of bureaucracy, leads startups to conduct R&D at a faster pace than corporates. Faster R&D is key both in terms of costs and time-to-market.
Startups are at the source of some of the most disruptive innovations not only in terms of technology and products but also in terms of business models and market entry strategies. Partnering with startups can help corporates find new potential markets to approach and benefit from new strategies to enter them. Indeed, in a survey by OpenAxel, 66% of corporate respondents felt entering new markets was an important driver of corporate startup engagement.
Startup culture can include notions like:
The general thought process is that startups nurture their teams more than corporates tend to. Through their flexible and open-minded work culture, they can also attract talents corporates might not. A 2016 survey by Deloitte showed millennials prefer working in creative and inclusive cultures.
Overall, younger generations tend to favour work environments that value employee wellbeing and meaningful work. This includes factors like flexibility in work hours, the option for remote working, diversity in the workforce, opportunities to move up the ladder, being part of a company that has the same values as you and working for a company that has a positive impact on the world.
So by working alongside startups, corporate groups can learn how to make their own work culture evolve in line with new expectations. This shift in culture can then result in better employee retention, more internal innovation and stronger team performance.
Closely linked to points 5, attracting young and dynamic talent can come from working with startups. Surveys have shown millennials would leave their job not only for more money but also for a more innovative environment. According to an Accenture survey, they’re also keener to work in startups or small companies, rather than corporates. Corporates that work with startups are often more appealing to younger generations. Indeed, these younger generations are often looking to be part of an exciting project that is staying on top of innovation.
Beyond attracting younger generations that have unique insights and ideas, working with startups can be an enabler to attract new clientele and increase customer loyalty. By adopting innovative solutions and technologies, corporates can change or revamp their image. Staying on top of cutting-edge technology and developing creative solutions can help restore interest and confidence in a company.
Surveys have shown that consumers find it important to purchase from innovative companies. Furthermore, 45% said they’re very likely to remember the advertising for a product or brand that they feel is innovative. Marketing efforts can leverage innovation to strengthen a brand’s image in the public. Ultimately, marketing teams can leverage the collaboration with a young innovative startup as a way to attract new eyes onto a company.
When you work with startups you gain a better understanding of their products and how they fit with your company’s strategic goals. Oftentimes, startup-corporate collaborations can lead to acquisitions. One of the main reasons corporates have been launching accelerator programmes and CVC arms is to find the right startups to work with, invest in and eventually acquire. Indeed, startup acquisitions by large groups have become a common practice. For example, over the past two decades, Amazon has reportedly invested in or acquired at least 128 startups.
Staying on top of innovation is key for incumbents, especially in highly disrupted markets such as media and retail. Accessing the latest tech and innovation constitutes an important competitive advantage. Furthermore, working with startups can help streamline and speed up innovation processes, which can mean coming out with products before competitors.
By building a network of innovative partners, corporates have access to additional resources in times of crisis. For example, there have been many success stories emerging from the Covid-19 pandemic. Back in 2015, Salesforce had partnered with Zoom. This was initially to integrate cloud video into the site. Once Covid-19 hit, Salesforce was able to quickly design tailored video call and remote working capabilities for its workers with Zoom. Startups have also been entering the vaccine market to assist pharmaceutical groups and governments in the development and deployment of vaccines.
While it’s clear that startup-corporate collaborations have many benefits, the success of these collaborations depends on their proper implementation. Corporates need to define a clear and coherent open innovation strategy. They need to liaise with business units in order to garner the results of these collaborations. Partnering with third-party entities like ScaleX can allow corporates to pick the right startup for their needs and launch successful collaborations.