Three ways to innovate ‘with’ startups

Corporations have begun to adopt innovation methods and principles they observe in startups (having long forgotten their own entrepreneurial roots).   For example, GE’s FastWorks program is modeled upon Eric Ries’s Lean Startup philosophy, aiming to radically transform the way the 122+ year old company introduces new products and services to market.   GE deserves credit for its widespread approach to encouraging experimentation to deal with business uncertainty.   Most other corporations that have entertained startup-like approaches to new business development have done so within isolated corporate incubators (and/or corporate accelerators, which are essentially the same as a corporate incubator except supporting project teams in ‘batch’ vs. ‘continuous’ mode).

Innovating ‘like startups’ certainly fills a need in the corporate innovation agenda, but it is insufficient to avoid obsolescence from the role models themselves – the droves of startups looking to eat the larger corporation’s lunch.   Simply innovating ‘like startups’ misses the larger opportunity for open innovation, the biggest single lesson learned over the past couple of decades of what maximizes return on innovation activities – it’s not the strongest that survives, it’s the most connected.

Open Innovation has best been implemented and fittingly popularized by P&G’s famed “Connect & Develop” program.   By connecting with external entities to create new products, P&G greatly maximized its internal R&D and manufacturing investments. Most of the Connect & Develop efforts have been ‘upstream’ in nature, i.e., external substitutions for in-house inventions and intellectual property boosted by P&G’s downstream branding, marketing and distribution machines.     P&G uses the world as its lab to solve technical challenges better, faster and cheaper for product categories it already understands and has determined as strategic priorities.

But Open Innovation has yet to be widely used to solve ‘downstream’ problems, i.e. help reduce market uncertainty for risky initiatives trying to create a new consumption paradigm or new product category.   In this new day and age of hyper competition and uncertainty, modern corporations need Develop & Connect as much as they need Connect & Develop.   And no better vehicle for scouting the market unknown than startups – If only corporations could innovate ‘with’ them!   Here are three ways:

Oceanic whitetip shark among friends

1. Set up a ‘non-strategic’ Corporate Venture Capital fund

Startups primarily need three things: (1) Guidance (2) Connections & (3) Survival Capital – but nothing attracts them like Survival Capital!   Enter the resurgence of Corporate Venture Capital (CVC), noticing gaps in Crowd/Angel/ & VC investments.  Corporations have long experimented with corporate venture capital funds.  Sadly, few have managed to produce any real value (neither for the corporation nor the startups).  The CVC tool ‘should’ be a key addition of a corporations innovation shed, but it’s been grossly misused.   Most CVC funds have faltered for two reasons: They’ve either been trying to emulate the financial focus and performance of traditional VC’s (to the chagrin of the corporate treasury function that somehow turns a blind-eye), or worst yet, they’ve been trying to make ‘strategic’ investments, artificially creating customers, channels or partners for new, internal venture initiatives in need of a ‘jump start’ (What ever happened to surviving on deserved merits? …or for peace sake’s, pointing someone to a plethora of third-party funding sources including loans!).

Corporate Venture Capital funds should be ‘non-strategic’!   CVC funds should be trying to create ‘new growth choices’ for the parent company, not boosting existing, strategic choices and endeavors.  They should be operating in the realm of uncertainty, not certainty.   This includes investments in startups that may actually be threatening or competitive to the parent company.   Nothing like speeding up your own possible disruption or obsolescence, instead of ‘rent seeking’ your way to a prolonged, but inevitable, slow death.   Google seems to be the poster child for this CVC paradigm – Google Ventures also notes that startups need more than just survival capital, thus provides them with connections, mentoring and resources to succeed, independent of Google’s short-term P&L agenda.

2. Tell your corporate incubator teams to ‘Go to Market’ with Startups
As stated above, corporations have learned to adopt Open Innovation mainly as an efficient way to solve technical challenges, to shop for missing pieces of an envisioned product, if you will.   But the missing pieces of a product’s ultimate success may be beyond technical components. Especially when dealing with ‘new markets’, the missing pieces are the more common, strategic failure points such as product/market fit and the profitable scalability of the business model.

If they are doing their job right, Corporate Incubator teams often face highly uncertain market conditions (where the host corporation’s assets and experience may not be that helpful, and actually, detrimental).     Building MVP’s and pivoting quickly may not be enough to ultimately win in a turbulent new market opportunity (speed and agility won’t win if its being done within a local vs. a global maximum).

Corporations should certainly want to propose their own visions to market needs, but don’t necessarily need to follow a linear product development process to get there – they have the time and resources to innovate differently, specifically by hedging bets on the specific ‘how’s’ of product/market fit and scalable business model – After defining a certain ‘innovation thesis’, which may include an underlying ‘platform’ offering to a burgeoning new market arena, they can skip the traditional build or buy approach and instead partner with startups to pursue multiple go-to-market paths of success.   Some division of labor will be natural – startups can pursue different target customer segments, IP differentiation or even different channel strategies.   Startups can be supported through capital or other corporate resources – with no strings attached!

The corporation is by default buying ‘prime seating’ at the table of innovation and will be in a privileged position to make well-informed, bigger bets down the road (if any are indeed merited in the specific arena).   MAS Holdings follows this paradigm in its innovation efforts and its quickly becoming a ‘must partner’ for startups in the wearable garments and smart fabrics space.

3. Set up a physical ‘Colab’ Center
The world of innovation isn’t (yet) completely flat.   There are advantaged, regional pockets of innovation and innovators (worldwide).   Startups thrive on a good working environment and ease of connections – and they can’t get enough!   Corporations can directly or indirectly get involved with setting up innovation spaces where startups can work more effectively and efficiently as well as provide special services to perform technical and in-market experiments.   At a colab space, corporate emissaries can understand startup needs first hand and work to provide value through connections, mentoring and resources (If one cannot support or set-up a new colab space, one can at least provide ‘office hours’ to startups – such as Janssen (J&J) is doing through its regional innovation centers).

Colab spaces can be inside the actual corporation itself, through special ‘Entrepreneur in Residence’ programs, such as CISCO’s EIR program. Cisco truly provides an open invitation to co-innovate.

Finally, colab spaces can be multiplexed or shared: Either owned and operated by multiple (usually non-competing) corporations or shared between startups and internal innovation teams of the same company – best to learn to innovate like startups by innovating with (or at least alongside) startups.

Takeaways

  • Corporate innovation isn’t really innovative if it doesn’t pursue ‘new growth’
  • Corporations are advised to innovate ‘like’ and ‘with’ startups
  • The Open Innovation spectrum should expand to include ‘downstream hedging’, go-to-market activities, not simply spin-in of new technologies (outsourced R&D) or spin-off of failed projects (outlicensing)
  • Three complementary ways to innovate with startups include:
    • Start a ‘non-strategic’ corporate venture capital fund
    • Define an innovation focus, then pursue through startup partnerships
    • Open or join a corporate/startup colab space
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