Five Ways BigCos Can Partner With Scrappy Startups

We are living in an entrepreneurial renaissance. Every day, thousands of creative business people bring new solutions to market, addressing an ever expanding set of problems and opportunities. Incumbent businesses can either view these insurgents as competitive threats, or they can view entrepreneurs as outsourced R&D.

But outsourcing R&D only works as a corporate strategy if an incumbent company can truly recapture that innovation. Very few BigCos are really good at finding nimble ways to recapture innovation. Those that fail will be left to fend off a whole host of new competitors. Here are a few ways to integrate corporate R&D and the startup ecosystem:

Acquisition

The high degree of risk associated with investing in early stage companies means investors expect out-sized returns for successful companies. That makes it hard for a BigCo to justify the cost of acquiring a highly successful start up. Only the MegaCos can write such blockbuster checks. A more realistic acquisition model for most companies is the “acqui-hire.” This occurs when a founding team realizes they are unlikely to reach escape velocity and accept an earn out instead. The acquiring company gets a sub-scale capability, but also a talented team that has deep knowledge in a relevant area. That model delivers value as long as the acquired team sticks around.

A good recent example is Capital One’s acquisition of Paribus to automatically offer card holders rebates on purchases when a competitor advertised a lower advertised price.

Investment

Making a corporate investment for an equity stake in a growing NewCo is another common avenue to get access to innovation. If the goal is to ultimately bring the new capability in house for competitive advantage, early investment is challenged because in order to succeed as a business, the NewCo generally has to sell its solution to the investors competitors. If the investor handcuffs the NewCo’s ability to work with their competitors it makes it harder for the investment to succeed.

A better approach is to view the investment as a way to garner insights on potentially disruptive forces for the incumbent business. During a recent NewCo Shift Dialog, Deborah Hopkins, CEO of Citi Ventures, described on how they make investments to help learn about disruptive forces in banking and then integrate into Citi’s business.

Co-Develop

BigCo’s with proud cultures, unique language, and a history of market success often create reality distortion fields that convince leaders any next generation solution must be hostage to their current business practices. In recognition of this institutional preference, many BigCos are working with entrepreneurs to co-create new solutions. There are various examples of programs trying to generate such solutions.

• The Coca-Cola Founders program borrows the approach of the entrepreneur in residence to embed talented entrepreneurs inside Coke’s network.
• Rocketspace is a San Francisco incubator partly funded by its corporate “members” who get to work with the entrepreneurs in the program.
• NewCo partner Cintrifuse is public + private partnership that works with NewCos, BigCos and government in Cincinnati to foster innovation in the Ohio River Valley. Cintrifuse CEO Wendy Lea has developed multiple templates for BigCos to work with NewCo’s including IP-protected co-development and Non-paid pilot programs in discreet sandboxes.

Pay for Services

A good old-fashioned vendor relationship can be an effective way to bring innovation in house. Most of what gets described these days as “Growth Hacking” are really creative business development deals where this some commission or quid pro quo compensation model.

Marketing and IT budgets are generally fixed as a percent of sales. Unfortunately, that means for some new technology to be licensed or a new brand experience to be commissioned, those funds must get shifted away from how they are currently allocated. No matter how compelling the new solution might be, the deal can be delayed due to these budget concerns. Companies that struggle to complete off-the-shelf partnerships will further struggle to evolve that relationship into some sort of proprietary advantage.

Joe Michaels, CRO for AxonVR and former Business Development lead for MSN advises “By choosing partnership, two parties can benefit from a rent-before-you-buy approach, maintaining their independence and driving greater scale and potential revenue. Creative partnering can be difficult for certain types of companies, however. Larger companies in established industries can be resistant to change; just getting non-standard deals through the approval matrix of teams and executives can be brutally challenging. Likewise, companies that need to scale up a stable of partners can’t be too flexible in modifying their deal terms; exceptions can kill a service bureau model. Extended delays can be a clear signal that a party is struggling to find a workable deal. Someone recently pointed to me out a clever, sobering formula: “time + the absence of a response = no.”

Solution Driven Initiatives

An emerging approach to nimbly recapture innovation is to approach a commercial relationship tangentially through shared purpose. NewCo’s are mission driven. Companies with aligned missions can find ways of attacking a common problem within their normal business operations. Because the initiative is working towards the core business purpose it does not inherently generate the friction of the methods described above.

This approach has worked in the non-profit sector and is now starting to bleed into the for-profit sector:

• Fast Forward is an accelerator that matches non-profit start ups with investors who can learn from their projects.
• The X-Prize Foundation has been successfully staging contests to solve problems that are “sponsored.”
• Non-profit National Democratic Institute and start BitFury have recently come together to launch the Blockchain Trust Accelerator to solicit entrepreneurial ideas of applying Blockchain to social issues.

There is no end in sight to our current wave of business innovation. Companies that can successfully partner and recapture outsourced innovation will have a competitive advantage. The companies that don’t learn how to creatively work with third party innovators are going to have a hell of fight on their hands.

This piece originally appeared in NewCo Shift.