How Corporations Can Better Work With Startups

July 4, 2019 austinjosey1

Corporate venturing allows established companies to access forms of innovation that are difficult to produce internally.

Julia Prats | Harvard Business Review
Josemaria Siota | Harvard Business Review

One way that corporations spur innovation is by working with startups — through mechanisms such as corporate accelerators, venture builders and venture clients.

Since 2013, the number of corporate investments in startups has nearly tripled from 980 in 2013 to 2,795 in 2018, and their value has risen from $19 to $180 billion, according to GCV Analytics, a company that tracks corporate venturing deals.

Yet the success rate of these initiatives is low. Research we conducted with chief innovation officers (CINOs) and others in similar roles in the United States, Asia and Europe shows that around three quarters of corporate innovation initiatives fail to deliver the desired results.

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Around three quarters of corporate innovation initiatives fail to deliver the desired results.

Failed projects don’t help a company fend off hungry, agile competitors.

To discover the challenges that arise in these initiatives, we talked to more than 120 CINOs in 22 sectors. They shared the challenges that derailed (or threatened to derail) their projects and described the approaches they deployed to surmount them.

We found that three strategies are proving effective against 80 percent of the major issues.

Boost the value of venturing to the rest of the business

Emmanuel Lagarrigue, Schneider Electric’s CINO, shared with us how important it is to have not only the buy-in of the CEO but also the enthusiastic involvement of the business unit leaders responsible for profit and loss.

Often, directors of a company’s main business lines do not want to collaborate with the corporate venturing unit. They may be wedded to their traditional performance metrics and not appreciate the strategic value of working with a startup.

This can allow internal politics to undermine the unit’s efforts.

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Sharing in the costs of corporate venturing encourages other units to contribute to its success.

When this problem arose at one of the world’s top five healthcare companies, the CINO did two things. First, she elevated the value of the corporate venturing unit to the rest of the company by making it a market trends detector.

Along with developing new products, she required it to identify external threats, analyze solutions devised by rival companies and target growth opportunities for the firm’s main businesses. Second, she allocated the costs of developing proofs of concept equally between the parent company, the corporate venturing unit and the business unit that stood to benefit.

The CINO’s decisions won over the directors of the business lines. They realized they could devote more time to developing their products and services, knowing that the venturing unit was providing them with the latest marketplace intelligence.

Also, sharing in the costs of the corporate venturing encouraged other units to contribute to its success.

Look outside traditional business startups

With so many companies chasing startups, it can be hard to find partners. Adidas, the athletic clothing company, addressed this challenge by widening its search to encompass startups associated with universities and research institutions.

The journey began with a question from the firm’s global creative director, Paul Gaudio. He asked: “Can we make a working running shoe out of 3D-printing material?”

Adidas’ search for an answer led it to Joseph DeSimone, a professor of chemistry at the University of North Carolina, at Chapel Hill, and the founder of a digital 3D manufacturing startup called Carbon, a Silicon Valley-based company working at the intersection of hardware, software and molecular science.

Together, Adidas and Carbon created a 3D-printed solution using a photosensitive resin that hardens when exposed to light. That allows the sole of a training shoe to be made quickly and customized to fit an individual customer. The new product line is called Futurecraft 4D.

According to Mr. Gaudio, it is “going to change how we create and certainly how consumers experience products.”

Several companies routinely screen startups at universities and research institutions for opportunities to venture.

Eliminate conflicts of interest between the CV unit and the startup

Once a potential startup has been identified, two conflicts of interest commonly arise. First, the CEO wants to buy low, the startup’s owner wants to sell high, and the corporate venturing unit’s director is caught in the middle, leading the negotiation on behalf of her employer but knowing a large acquisition will be worth more to her career and compensation than a smaller one.

Second, while good corporate venturing directors are paid big salaries for their services — especially given the competition from private venture capital firms — they cannot be paid more than the CEO without breaking the company’s pay structure.

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Conflicts between a corporation and a startup often arise because of differences in performance measurement.

Faced with these dilemmas, the CINO of a major Japanese conglomerate did two things. First, he increased the director’s basic salary in return for her committing to a six-year term, thereby providing her with security and ensuring organizational continuity for target startups.

Second, he relieved her of responsibility for negotiating deals and integrating acquisitions and gave that to the M&A unit. Rewarded now solely for her success in identifying, attracting and collaborating with startups, she no longer had a personal stake in the value of each transaction.

The CINO’s remedies removed the perception of contradictory agendas and made it much easier for the company to attract and work with startups.

Conflicts of interest between a corporation and a startup often arise because of differences in the way performance is measured. It is best to anticipate and address them before they sour working relationships.

Corporate venturing allows established companies to access forms of innovation that are difficult or impossible to produce internally. There are challenges, but companies setting out on the journey today can benefit from the some of the lessons learned by those who have gone before.

This article first appeared on Harvard Business Review and was republished with permission.

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Julia Prats is Professor, Head of Entrepreneurship and holder of the Bertrán Foundation Chair at IESE Business School.

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Josemaria Siota is the Director of Research of the Entrepreneurship and Innovation Center at IESE Business School and an expert on corporate venturing at the European Commission.

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