How to deal with startup fever in your company, part 1

Startup fever - innovation copilots

While the first wave of the digital revolution is now well over, most corporations are victims of some level of rude awakening. Surprisingly enough for me, the sovereign cure for their lack of strategic vision and their risk-aversion has been isolated: startups. The common belief is if you look well enough, a six-month-old post-internet company in dire lack of funding is already building what will replace your multi billion global business. Even if you might be very lucid about the sheer foolishness of this trend, there are probably already many senior members of your executive committees who are victims of this startup fever. Let me offer one of the many ways to deal with that issue (and then maybe, have good reasons to work with startups).

Startup fever? Really?

The first reality check is probably this one: if you think (deep inside) that your multinational is clueless on what to do next in your market, there’s not a lot of reasons to believe that startups will be better than you. They might take way more risk than you do, they might benefit from beginner’s luck, and be more in sync with your market because they are more culturally fit, but in my experience not very much so.

In Europe, the average startup shelf life is less than 2.5 years, after which they die from lack of business model (and in my opinion, of too much public money without proof of market potential). Before they disappear, less than 25% reach some form of growth stage (read: actually selling something). More than 40% try to enter the soft-belly of the consumer market with social apps, games and such; while less than 15% tackle hard problems (biotech, fintech, AI).

In term of diversity, this gets even bleaker with less than 15% of female founders (UK being off charts with 33% of women, which is still pitifully low), and an average age of 36.5 years (here goes the Millennial fantasy). Lastly, in EU more than 70% of the startup teams are non-international (including other EU countries), while they expect at some point to “export” their innovation.

Still with me? Not too depressed? Well, I can’t change reality and you can double check all this in the last European Startup Monitor report as long as you want.

The key message is this: Are startups doing interesting things? On average: no, they aren’t.

And yet, I’ve been working with them for a decade and as a professional dedicated to understanding something about innovation, I enjoy it. Every day. I’m just not delusional and know that the odds are stacked against them, and that they have to deal with tons and tons of actors in their ecosystem who are clueless. And yet, these actors don’t hesitate for a second to “advise” them on what to do next because they need to spend public money, get tax breaks, sell their product to entrepreneurs, and many other things that don’t require the startup to succeed or even survive.

Now, if you’re a big corporation you might have solid reasons to work with startups. What could they be, now that I’ve painted such a picture?

Paint precise and realistic targets

Corporations getting startup fever, are usually pushed by small venture funds (or worst, business angel clubs) and public organisations to co-invest as minority shareholders in early-stage tech companies.

I mean, why not? Enough tech transfer professionals have been around to know how to mitigate risks, help build-up technology around public research, and so forth. All in all, not a very efficient endeavor, but it works (with a few exceptions like in France, where the system has been broken by the apparition of unnecessary governmental gate-keepers).

The real issues are when corporations don’t just seek to externalize part of their research, but “find their next business model”.

Let me say first, that yes, this is possible.

Of course, we don’t have examples in the last twenty of thirty years of major companies that acquired a newly-fanged startup, adopted its business model at scale, and was successful ever after, but yes… on paper, this is possible.

Just to be conservative, and because my business depends on actual proof of success, let me just say that “Finding our new business” would be my lowest priority.

All in all, I would consider six possible targets (or ROIs) that would justify that your corporation gets in touch with startups.

My priority target would be:

Target 1. Scouting the market ahead of competitors

That’s the really big one. It works, it’s not too tricky to set up, and doesn’t require tons of investment. Seriously, what’s not to like?

The key idea is to consider a portfolio of startups that will scout for you some of the weak signals, trends, new opportunities, or key hypothesis that could elucidate your next business model. See? I phrase it as a lawyer would do, because I want to set your expectations right: you’ll have to work about it and have a plan. This won’t be a fire and forget solution. Still, it’s tremendously powerful when used right.

The beauty is that you don’t have to find the perfect startup that would do exactly what you would yourself as a corporation if you would dare do it (which, of course, you don’t). It’s about finding a startup that will test something key for your future.

Say for example, that you’re in public transportation all over Europe. Things that you need to test urgently are: how and where mobile payment will pragmatically start in EU? How could mobility as a service be integrated in cities’ current infrastructures? How could people let go of their personal vehicle? Etc. This is you thinking about the next step for your business. And, these are very precise, but also very big questions. If you’re running bus lines, you’re not literally looking for a startup trying to launch connected buses, or self-driving buses… You’re exploring the big picture and how to crack a dozen of new societal, political, economical, technological, environmental, and legal problems.

Your strategy is as follow:

  • Map your key incertitudes for the next five years;
  • Find startups that depend on resolving them, even with other products, or even in other markets (innovation ecosystems won’t be too bad at helping you out on this one, because they are eager to get your money);
  • (Don’t give money for that);
  • Weed out startups that don’t have a solid team (you’ll be a good judge, don’t be fooled by us, innovation experts);
  • Have a roadmap of questions to be addressed, and hypothesis to be put to the test by the startup along the way (this is your ROI);
  • Invest as lightly as possible, as many times as possible (don’t aim for majority shares, or even significative minority stake, you just need a seat at the table and to be able to look under the hood).

Ready to spend 20-50K per startup over 24 months? In exchange you could have a map of the pitfalls that you’re facing in the future of your market, of smart positioning to avoid them, and maybe see solid openings before Gartner or Deloitte start to explain what you should do, because all of your competitors have already done it.

Given the size of your business, this is sweet, sweet ROI.

Along the way, most of the startup you’ll be working with will fail (you’ll also learn from that, which is more ROI); some will succeed after pivoting away from what you expected them to do (it’s fair, you’ve only invested so much and can’t force them to die so that you get to do an interesting autopsy); and once in while, one of them will actually be even directly interesting for your direct business (that will be a surprise, but being among the first around the table, you’d have built a solid relationship and they could be happy to see you acquire them).

I’m not shy of saying that scouting is the most realistic, achievable, and reasonable reason to work with startups. But there are other reasons and other targets.

We will explore them in the next parts.

Author: Philippe

Philippe has been training 200-300 startups a year since 2007, consulted for dozens of multinationals on rupture innovation or corporate incubation, and was directly involved in more than 150 startups building their market fit and scaling up their business. He also teaches business model innovation in key MBA programs whether they are in Paris or Shanghai. And since 2017, Philippe is now living in Amsterdam, one of the best European business hub around.