My experience tells me, that a considerable number of corporates (close to 2/3) haven’t got the faintest idea of why they start looking towards startups, writes Michael Bak. Foto: Tom Lindboe

Why Work With Startups – A Corporate’s Guide to The Galaxy

Having spent over a decade building startups and ecosystems and subsequently connecting corporates with startups, I’ve repeatedly found myself scribbling notes with the intention of passing on some of these experiences. But like most other curious beings new projects take over quickly, and thoughts remain unstructured bits of information. This is my attempt to gather some of the more relevant bits on the topic of Corporate-Startup-Engagement (CSE).

Why do it?

I want to start out by challenging the obvious. Why would a corporate even consider working with startups?

As a big corporate entity with decades of market knowledge and profit, vast resources, a smart work force, well established sales and distribution channels, brand recognition and bargaining power – what would be the reason to want to try to engage with smaller companies of 5,10 even 50 employees?

I know everybody is talking about startups, and everybody is hyped about all these small players, racing at speed and pushing out new untested solutions seemly at random. And I know just months ago, you couldn’t glance at a financial news site without the word ‘disruption’ being thrown at you. And I know their famous founders are considered rock stars. But why are you actually considering working with them?

My experience tells me, that a considerable number of corporates (close to 2/3) haven’t got the faintest idea of why they start looking towards startups. And an even larger number does not know what they stand to gain from doing it. Or just how difficult it will be to unlock the potential.

This is why

Simply put: You should consider it because this Industrial Revolution 4.0 (and 5.0) that everybody is also talking about, has some very real challenges that comes with it. Some are big and obvious, and people are already starting to see and act on these quite clearly. But most of the changes that poses significant challenges for corporates are in fact much smaller – and in many cases unnoticeable – and have already started happening at a much larger pace than most of us realise.

These small but significant changes are the ones that allows a small drone company from Malaysia to directly influence the enzyme market in Europe. Or a pure digital company from Eastern Europe to challenge how a concrete production facility is established in South America.

When I was at Rainmaking, we used to talk about ‘death by a thousand cuts’, a beautiful albeit cruel analogy to the Chinese imperial torture method, where death (or bankruptcy) doesn’t come by one big new strong blow (e.g. the Blockbuster vs Netflix case), but instead through a series of smaller ‘cuts’ from much smaller competitors, who slowly but surely challenges your margins by changing the rules by which the game is played.

A very befitting analogy, and something I am sure all corporates – if they start looking for it – could find numerous examples of in their own business. And this will only accelerate and accumulate in the coming period.

The problem

This would not automatically pose a big problem. Small players have always tried to slice a piece of the pie. The problem this time around is that for the first time in history, speed (and therefore time) is becoming a real and critical factor. And big companies are not fast.

Because of the exponential development in technological advances as well as means and channels of communication, corporates today find themselves in a situation, where change happens quicker than they are capable of making sometimes even simple decisions. CB Insights recently published a report stating that 60% of corporates claim to spend more than one year from first idea iteration to first release as new digital product. 25% says it takes more than two. Years. More than 24 months(!).

In this time, most startups have released and updated most likely a dozen times, iterating their product(s) and service(s) in direct contact with and using feedback from their customers.

The problem therefore lies in the nature of the big corporation and the underlying premise that holds it together:

Corporates have for decades aimed at minimising risks, and have built an army of departments, rules, logics and controls that support this self-sustaining system. And it is a system that has been highly effective in building a machine that works, produces, scales and makes huge profits. It is a system that survives by finding answers, by analysing and planing ahead, and a system that incentives growth and continuity. As long as it fits in the world of predictability.

For any foreseeable future you will NOT be able to rapidly enough change your organisation to adapt to this new age of speed and uncertainty.

And this is again why you as a corporate should work with startups.

For any foreseeable future you will NOT be able to rapidly enough change your organisation to adapt to this new age of speed and uncertainty. The change that is needed is simply too big and too important for you to rely solely on this type of internal transformation.

Disclaimer: I am not saying you shouldn’t go for transformation or for moonshot initiatives – quite on the contrary – but in the meantime, you should ALSO start working with startups. Look at it from a portfolio perspective. Innovation should be a thought through structured process with many initiatives depending upon capabilities and desired outcome. And so should the effort you put into working with startups and the level of engagement in these ‘external’ efforts.

Survival of the speediest

Startups are built with the sole purpose of living with and taking risks. The seek out high risk high reward scenarios. They attract high risk investors. They test their riskiest assumptions up front.

Yes, that is right. Where corporates seek to minimise risks by focusing on answers and plan a roadmap to try to predict the future, startups constantly ask questions deliberately without the urge to establish certainty. In a weird way, they do not try to succeed as fast as possible. They try hard to fail less every time. The first approach causes you to obtain certainty before even beginning. The other one uses failure as a means to get closer to what works. Get it?

This also means, that they are highly adaptable to utilising the right technology, the right communication channel, the right price, the right business model – in order to maximise engagement and eventually profit. They simply are more likely to hit the right combination of product and market eventually – or they will instead shut it down quickly without having spent too many resources chasing a dead end.

This is key to understanding why it can be a good or even a great idea to start working with and partnering with startups. To choose other companies than the standard big four as a supplier. Establish sales partnerships leveraging on existing funnels or even co-owned product development projects for potential new revenue streams.

By doing so you as a corporate could get unparalleled access to technological forefront development and much deeper knowledge of existing or future target groups, better understanding of your data and a more agile mindset to perhaps even affect the rest of your organisation, and the way you develop, work and hire.

And this can in turn result in significantly better customer understanding in general, understanding the importance of service vs. product, faster adaptation of new communication channels, higher revenue and so on.

There are many opportunities; but it all starts with you.

It all depends on your approach, the reason why you are doing it, what you aim to get out of it, and the resources you dedicate to make it happen. There are many opportunities; but it all starts with you.

How do we make this happen?

Yes, this is the next and even more critical question. My next article will be focusing on the difficult art of making it work – which incidentally also starts with the question on ‘why’ – and quickly transitions into the question of ‘when’.

Let me know in the meantime if you would like a coffee and a discussion on these topics above. I’m always eager to learn – and I love a good challenge.

About the author:

I started his first company 17 years ago, and have helped others launch theirs ever since. I have worked in more than 10 industries, and have built ecosystems, business plan competitions, accelerators and co-working spaces. Subsequently, I have connected startups and corporates for more than a decade. Latest I’ve helped build Rainmaking at Pier47 in Copenhagen, the largest co-working space with Corporate-Startup-Engagement focus in the region.