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

Most corporations that have missed the so-called digital revolution, try to medicate with startups. In many cases this is both silly and dangerous. Let’s try to be smarter about this widespread startup fever…

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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 has been isolated: startups. As it seems, six-month-old post-internet companies without cash-flow are deemed better than multi-billion global businesses are figuring out the market. Even if you might be very lucid about this foolishness, some of your executive committee is already victim of such startup fever. Let me offer one of the many ways to deal with that issue. And then maybe, you’ll find realreasons to work with startups.

Startup fever? Really?

A first reality check would be that if 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 own market because they are more culturally fit, but in my experience not very much so.

Consider that 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. Before they disappear less than 25% reach some form of growth stage (read: actually sell something). More than 40% try to enter the soft-belly of the consumer market with social apps, games… While less than 15% tackle hard problems such as biotech, fintech, AI or nanomaterials.

In term of talent diversity this gets even bleaker. Less than 15% of EU startups have female founders — UK being off charts with a pitiful record of 33% woman founders. And if you have millennial fantasy, note that the teams average age is of 36.5 years. Lastly, there’s only 30% of the teams from international origins. Most startups are regional ventures without cultural understanding of any other market than the 100 Km around them. And that’s a best case scenario.

Still with me? Not too depressed?

I can’t change reality and would recommend that you double check all this in the last European Startup Monitor report. It does try its best to make it look good.

The key message is this preambule is simple: 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, while they also have to deal with tons of clueless actors in their ecosystem that 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.

All that being said, if you’re a big corporation you might have solid reasons to work with startups. They’re not just the superficial trends that everyone are speaking of.

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 we’ve seen it works from time to time — with a few exceptions like France where the system has been broken by recent unnecessary governmental gate-keepers.

The real problems happen when corporations don’t just seek to externalize part of their research but search for their « next business model. »

Let me say first that yes, this is possible.

On paper a major company could acquire a newly-fanged startup, adopt its business model, scale it, and be successful ever after. Of course we don’t have an example of such a feat in the last twenty of thirty years… Just to be conservative (and because my business depends on actual proof of success) let me just say that “Finding your new business” would be my lowest priority if I was committed to work with startups.

I would rather consider six other possible targets (or ROIs) that would justify that your corporation plays with startups.

And, my first priority 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.

You have to understand the beauty of this approach: you don’t have to find the perfect startup. And by that, I mean that it’s not about finding a younger, more risk-taking version of your own corporation. 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? 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 learn from that, which is more ROI. Some others 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 practice an interesting autopsy. But also, once in a while, one of them will actually be directly interesting for your direct business. That will be a statistical odd event — to put it in another way, they’ll be more surprised than you will ever be — but having been among the first around the table you’ll have build a solid relationship. 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.

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