Many larger companies today want to work with startups. This is very positive. But whatever it is they want to achieve, there are 3 important things they must consider.
“We have worked with startups over the last 7 years, but didn’t really benefit from it, so now we’ve decided to focus on our own innovation department instead”. Hypothetically, this could be an interview with a CEO of a large company in 3 to 5 years. And that’s the conversation I fear the very most. Startups need corporates and corporates need startups. And the entire ecosystem needs close interaction between startups and established companies.
An increasing number of corporates have during the past few years begun to work systematically with startups. It’s very positive and for me, it’s a dream come true. Six years ago, I wrote a paper that Denmark would never succeed in building a strong ecosystem for startups unless the established companies were involved. Today many of them want to be a part of the startup ecosystem. That’s why we have a responsibility to keep up momentum and live up to their expectations by developing the right models for startups and larger companies to work together, so they can both gain value.
There are many different reasons for why big companies want to work with startups. They may be looking for new products, new ideas, new ways of self-innovation, CSR, training of employees and so on. But whatever it is they want to achieve, there are 3 important things they must consider.
#1: Innovation is about volume
Everyone knows that 80 per cent. of all innovations are not successful. This means that they do not provide the expected return. Even the very best venture investors have not over a period of many years managed to change those statistics. Venture investors who work professionally with selecting innovative projects and startups have not succeeded in getting a higher hit rate. It‘s still about 80 per cent of all investment in the venture capital industry, which only returns the capital between 0 and 1 time. This means that they don’t even return the capital invested. So even if you work fulltime with selecting startups and innovations, it’s quite difficult to select the winners.
If 80 per cent do not provide a return, then 20 per cent should be a success. But that’s not the reality either. Looking at venture investors, 20 per cent of all investments are returned, however only between 1 and 3 per cent. are returning the investor’s capital 5 times. So the number of successes is actually much lower.
The problem with the 80/20 rule is that it often leads to very wrong conclusions. If the 80/20 rule applied, then one would expect that if you worked with 10 startups, then one would get 2 successful startups. And if a corporate engages with startups, they just need to find 10 startups in order to get at least one success. And larger companies that attracts 100 startups per year would be quite well off.
This, however requires a few things. First and foremost, that the corporate company is capable of spotting and selecting successful startups i.e. “picking the winners”. Secondly that good startups are equally distributed in any batch. Both assumptions may prove to be false. As mentioned, even with the most trained eyes, it is difficult to identify the winners. And if you don’t actually do selection on a professional basis, the hit rate might be even lower.
When a venture investor makes investments, he or she typically views 1,000 cases to make just a few investments and of these, only between 1 and 3 per cent. will become large successes.
So in practice the success rate is below 1 percent. It’s actually much harder to raise money than to become an astronaut. So a large company that succeeds in attracting 100 startups will find that only 0.1 is successful. This is not a particularly good chance. And that requires a reasonably high quality of the 100 you see.
#2: Grab talent market share
Therefore, we must think differently. We must think in terms of market share i.e. how large a company’s share of startup talent is. If you have a large market share, all things considered you will be expected to perform better than with a smaller market share.
However, the notion of market share is rarely in focus. Instead the quantity is. If you look at 100 startups in a market, in which there actually is 1 million, then you have a small market share and an even smaller chance for finding the most successful startups. I haven’t yet seen the company who measure their market share among startups.
But it’s a must.
It’s not easy to get a large market share. For five or ten years ago, startups would queue up if a large company announced that it was looking for startups in its field of business. However, reality has changed. The number of offers for startups in the form of investors, business angels, crowdfunding platforms, accelerators and other offerings have exploded in the recent years.
It is of course very positive since it gives startups more and better opportunities to get the help and the funding that matches their needs. But it also increases competition for the best startups. Therefore, it’s no longer enough to have a strong corporate brand. It doesn’t necessarily attract startups in the same way as serial entrepreneurs or highly branded accelerators like Y-Combinator etc. If a startup, for example, must choose between working with Elon Musk or a large company, they would most likely chose Elon Musk due to his status as being one of the world’s most admired founders among startups.
#3: Focus on the value delivered to startups
So the world is upside down. It’s increasingly startups who choose their partner and not the other way around – especially among the best startups. Therefore, corporates should also focus on the value they deliver to the startups. What is it exactly they offer startups? And what value? Is it access to a market, access to infrastructure, access to specific skills, access to channels, to funding or something else.
This part needs to be taken into consideration even more so than in the past, if one is to be chosen by the best, and not only by those who have no other options.