If you can’t beat them, join them. As technology disrupts business models, fragments markets and breaks down silos, most large corporations no longer view start-ups as transient upstarts, and are finding ways of working with them. In India, a multinational company such as Bosch runs its DNA Start-up Alliance, having partnered with 70 ventures, Cisco Launchpad has accelerated 54 start-ups and Shell has partnered with 40 start-ups, and these are just a few examples that are symbolic of a growing trend.
Start-ups require funding, resources, and customer access, while corporates need to innovate to stay ahead of competitors and to access new technology. In fact, repeated studies have shown that financing is not the main reason why start-ups seek out large firms; rather, it is to secure access to larger markets. Likewise, established corporates are seeking to team up with start-ups to speed up the pace of innovation and product development.
Start-ups are typically adept at quickly concretizing their ideas. They deliver “proof of concept” on a budget while prising open new markets and sussing out new demand. Also, as most start-ups harness and hardwire technology ubiquitously, this can be achieved with efficiency levels that established firms find hard to match.
Yet creating is not the same as scaling. Start-ups often stumble while climbing higher up the ladder. Inadequate experience makes it difficult to cascade the proof of concept; the transition from concept to scale requires a level of insight and understanding which many young founders lack, initially at least.
Conversely, established companies typically struggle to create new products from scratch, because they aren’t used to thinking outside the box; yet they are much better at increasing scale and getting proof of concepts off the ground as they enjoy huge advantages in procurement, distribution, and manufacturing; they have large sales and marketing teams, with well-established networks and contacts. So when start-ups tie up with large companies to scale their established proof of concept, there is a natural fit, and often a strong business case emerges.
In earlier decades, most large companies relied on internal resources to generate new ideas, but this approach is now less optimal because technology is evolving at the speed of thought. Large companies are thus being forced to seek out open innovation, and this is available in the start-up ecosystem.
Nevertheless, engaging with a diverse range of early-stage companies isn’t always easy which is why relationships, once established, mustn’t merely be financial, transactional, or one-offs. Leaderships of both groups must find common ground, be equally passionate, ready to understand each other and be prepared for the long haul.
A process of relearning and unlearning on all sides is critical. Start-up managements must wean themselves away from scarce venture capital and be able to use a corporate’s assets wisely and productively to create new business opportunities. They must also be ready to be mentored in a way that they are able to absorb the corporate lessons and best practices gleaned over decades.
Finally, start-ups must be able to refine and optimize their products as per global standards and scale the customer base. Likewise, large companies must be able to ingrain an agile mindset that is receptive to disruption and innovation while being open about altering business models and exploring alternative revenue streams.
When start-ups and large companies come together, it is equally important to also appreciate the associated downside risks, and factor in the uncertain business dynamics.
For example, certain start-ups might get distracted from developing a universal and scalable product or solution if they get bogged down in their quest to find a custom solution for a single corporate; projects could also get delayed as large corporates tend to formulate different requirements.
Also, start-ups run the real risk of losing their agile and entrepreneurial spirit, because of a growing dependence on a decision-making process which is often bureaucratic. Large companies too incur their own set of risks; these include branding and reputation risks, investment risks and risks relating to a cultural fit.
Nevertheless, when Davids and Goliaths find a fit and agree to collaborate, the gains far outweigh the risks, and the jugalbandi between start-ups and established companies could well emerge as the megatrend of the 2020s, because of the incredible capacity to complement and create value in a world being powered by technology, changing customer preferences and unconventional thinking.
The article by Sunil Kant Munjal, Past President, CII & Chairman, CII National Start-up Council and Chairman, Hero Enterprise, first appeared in the October 2021 issue of CII Policy Watch. Click here to read.