Introduction
Startups and their Corporate prospects may seem to see perfectly eye to eye on their goals and objectives. Both sides leave meetings with heads nodding, excitement building about a future filled with innovation and promise. Then abruptly, things hit a brick wall, leaving both sides wondering what went wrong and what could have been done differently.
Through my many years in corporate life, I’ve seen partnerships frequently fall apart not because we disagree on the upside. Rather, it’s because Startups and Corporates, the entities and individuals within, had drastically different views on risk that we failed factor into the partnership.
A winning partnership is often about understanding each other’s risk profiles and managing the relationship accordingly. In this article, I’ll lay out three key steps that can boost the likelihood of Startup-Corporate Success.
Step 1: Assess the Risks
An Arthur D. Little study found that 50% of Startups see corporate culture as the greatest barrier to corporate-startup alliance success. 40% of Corporates cited cultural differences. No doubt they are talking about unequal risk tolerances. Further, the study also found that nearly 70% of startups attempt to collaborate with corporations in the seed/early stage with no success, because Corporates generally won’t take on the risk of working with an unproven company.
A startup’s primary concern is whether or not they hit sales and growth milestones before the cash runs out. Their employees typically will forsake a market salary (that they could earn in a Corporation) for the chance of a lucrative exit. For Corporates, risk profiles can be more complex. In order to manage risk, Corporates are purposely deliberate, taking their time to make critical decisions, weighing it from every angle with multiple cross-checks to insure no mistakes.
How a Corporate manages risk can change how you would approach a partnership. For example, I had one client who believes it is better to overpay for a proven growth company in a few years, rather than purchase or invest in a risky startup now for a fraction of the price. Another client had a venture fund yet found that its investments were far more likely to forge partnerships with its competitors than with the parent company.
Digital transformation is upending corporates’ views on risk and challenging their current risk management paradigms. Many are investing in innovation through standalone venture funds, incubators, dedicated innovation groups or other corporate programs, but these initiatives quickly face the reality that it’s still the business operators – the CIO, the Head of Product, the General Manager – that will determine the adoption and investment in innovation.
With this in mind, partners should assess each other’s risk profiles. With Startups, it may be as simple as understanding their funding and time horizons, and the personal motivations of the executive team. With Corporates, take a look at where they sit on an innovation maturity curve (see chart), and how they view innovation, partnerships, and their company’s future. Note that this will often mean a decent amount of introspection. Corporate innovation leads can ignite an opportunity, but their ultimate success will be tied to understanding and delivering on the needs of their internal customers.
Step 2: Plan to Manage the Risks
Startups and Corporates often think they are addressing their partner’s risks because they focus on the obvious and highly transparent business risks each other face. Many partnerships will depend on how well each party to understands and then addresses the hidden or unspoken risks.
More transparent, and traditional, risks are often tied to upside and are very measurable, and corporates have well-defined processes for dealing with them. These include corporate earnings stability, project-specific financial hurdles, such as IRR or NPV targets, cannibalization risk on existing businesses and budgetary tradeoffs
But you have to dig deeper to uncover the unspoken risks around innovation. First, there are risks coming from individuals: Is my job secure? Will I hit my numbers? Is innovation a personal threat? Who are the individuals involved, what are their risk profiles and hot buttons, and how can the threats they pose to a partnership best managed or avoided?
Second, in the new world, Corporates struggle to adapt to dynamics that can magnify traditional risks. Digital transformation adds risks that are existential, for example:
– Innovation speed
– Lower/non-existent barriers to entry
– Information overload
– Disruption v. Incrementalism
– Uneven Playing Fields
So, in essence, the very fact of the Startup’s existence can open up a Pandora’s box of new previously unknown risks and challenges that the Corporate isn’t yet prepared to handle.
For startups, time is the critical factor. Yes, they have a board and investors to report to, but in most cases the existential concern is whether or not it can it grow fast enough to keep up with its funding needs. Corporates need to recognize that their seemingly glacial pace can suck up so much time and resources from a Startup that the entire business could be put at risk. Again, I recommend full transparency from the Corporate on their process, time required, and success metrics so that the Startup can plan and allocate resources accordingly.
The bottom line is that a successful partnership will depend on both parties transparently discussing these risks and jointly developing a plan to address them proactively as they arise.
Step 3: Safely “Land and Expand”
Once the risk assessment is done, smart startups and their corporate innovation champions will strive to develop a personalized and relevant partnership glide path, starting with a proof of concept or pilot and ending with a longer term, larger relationship; a Land and Expand strategy.
First, successful dialogues focus on solving a pressing client need; however, too often startups will go in, demo their application, and think it will sell itself. I’ve recently attended a series of corporate-startup demo days, and after hearing the instant feedback from the corporates, I can say with certainty that this approach doesn’t work. Corporate business owners just don’t have the time, nor often the understanding of the technology, to connect the dots. They need someone to do that for them. The winning pitches I’ve seen were the ones that spelled out the prospect’s problem and then demonstrated how they were going to solve it. Simple, right? Yes, but it takes pre-work to find that unmet need. It may not be as obvious as it seems at first blush. Corporate innovation leaders need to help and guide their startup partners on selecting an approach that will work for their internal constituents.
Second, the relationship needs to find the sweet spot match with the company’s risk profile. On one hand, if the proposition is too small, meaning the upside is not big enough and the investment is too low or zero, then the partnership won’t get the focus it needs to thrive.
If the proposition is too big, the same is true. Asking a company to make a multimillion- dollar investment obviously will require jumping through multiple hoops. And, the more potentially disruptive the proposition, the more time and investment it will take on both sides to get agreement to move forward because the decision to do so potentially has great consequences on the long-term health of both businesses. A secret to a successful land and expand strategy is to find the Goldilocks solution – not to small and not too big (see chart).
Finally, make sure the Land and Expand strategy has a glide path that incrementally increases the cost and risk in a way that fits the Corporate tolerance, but is fast enough for the Startup. Many startups I’ve encountered try to go from zero to sixty between pilot and the subsequent phase. A Corporate may consider a $25K pilot an acceptable risk, but the risk associated with a $1M investment may seem through the roof. Make sure expectations are set, and the next step in the relationship is commensurate with the incremental risk.
Conclusion
To sum up, Corporate Innovators and Startups need to not only build out the upside case for a successful partnership, but equally important, they need to focus on the risk side of equation. Because their risk profiles can be so different, there is often misunderstanding and mistrust that can derail a partnership, often before it happens. Be sure to plan accordingly by doing proper risk assessments, risk mitigation planning and developing a partnership land and expand strategy that works for both parties.