Partnering with Startups to Drive Innovation€¦ · Welch’s rules from GE in the 20th century...
Transcript of Partnering with Startups to Drive Innovation€¦ · Welch’s rules from GE in the 20th century...
Partnering with Startups to Drive Innovation
An Overview and Framework
How Important is Startup Collaboration?
2Copyright © 2018 The Inovo Group, LLC
Corporate Interest in Collaborating With Startups is Now at
an All-Time High
• Many corporations are now realizing that the startup ecosystem represents an
unprecedented growth opportunity (as well as a potential existential threat
• New modes of collaboration are evolving and M&A or corporate venture
capital (CVC) are no longer the only or the best pathway for corporations
• Five factors are driving this heightened level of interest in collaboration
1. Large cash reserves
2. Takeover pressure from private equity funds and corporate raiders
3. Traditional M&A and CVC now very expensive due to high valuations
4. Low confidence in internal R&D in driving strategic innovation outside the core
5. …and especially in digital technologies for companies with non-digital offerings
• Startups are now recognizing the benefits of collaborating with corporations
and are seeking these relationships
3Copyright © 2018 The Inovo Group, LLC
Source: Venture Pulse, Q2'18. Global Analysis of Venture Funding, KPMG Enterprise. Data provided by PitchBook, July 12, 2018
Venture Capital Deals with Corporate Participation has More
than Quadrupled in Dollars Invested Since 2010 (U.S.)
• Corporations participated in deals
worth $8B in 2010 and $37B in 2017
− This represents 27% of total VC
funding in 2010 and 46% in 2017
− Could exceed $50B in 2018 based
on Q1/Q2 data
• Growth in “% of deals” less dramatic,
increasing from 11% to 16% in 7 years
• This difference reflects a shift to larger
deals and later stage participation
• The number of active corporate VC
funds has more than doubled in five
years (~200)
NOTE: The capital invested is the sum of all the round values in which corporate venture capital investors participated, not the amount of corporate venture capital invested. Likewise, the percentage of deals is calculated by taking the number of rounds in which corporate venture firms participated over total deals. 4
Corporate/Startup Collaboration Conference in Paris in
May 2018 is Indicative of the Level of Interest
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In 2016, 64% of Companies Reported Startup Collaboration as
Important (41%) or Mission Critical (23%)
Source: The State of Startup/Corporate Collaboration, 2016; joint research study by Imaginatik and MassChallenge; 2016 6
Verbatims from Thought Leaders
“Large companies, who had always ignored startups with an attitude of “that’s nice, but we
don’t do that”, realized that they needed to act... Corporations that would have followed Jack
Welch’s rules from GE in the 20th century don’t follow them now. Follow those rules today and
you will be out of business, not because Jack Welch was stupid, but because the environment
has changed so radically for a large corporation.”
Steve Blank; serial entrepreneur, author and academic; interview in CoFounder; Mar 13, 2018
“…our analysis shows that the median U.S. corporation with an active venture capital unit grew
its share price approximately 30% faster than its respective market index, over a decade.”
Buden, Troesch; Lenet; The Curious Case of the Corporate Capital Correlation; Jan 27, 2017
“From 2011 to 2016, the number of global active corporate investors has tripled to 965. Today,
75 of the Fortune 100 are active in corporate venturing, and 41 have a dedicated CVC team.”
Teddy Himler; Comcast Ventures; Corporate VC Is On The Rise: Here's What To Know;
Forbes; February 14, 2017
“Collaboration can no longer be viewed as an optional extra, it’s a strategic imperative. Startups
are now widely recognized as invaluable sources of innovation, fueling growth and providing
pioneering business solutions.”
Aline Santos, Unilever EVP Global Marketing; Unilever press release; September 14, 2017
7Copyright © 2018 The Inovo Group, LLC
Cisco is a Testament to the Degree to Which Some Companies
are Committed to Collaboration
Corporate VCCisco Investments
• More than a hundred active
investments globally
• 42 limited partner positions in
funds that invest in startups
• Portfolio of over $2 billion
Competitions & PrizesGrand Innovation Challenge
• Focused on disruptive IoT
technologies
• Winners receive share of $250K
and Innovation Center space
and technical support
Software PlatformDevNet Community
• Network of startups using APIs
to build on Cisco platform
• Apps help Cisco sell platform
and Cisco gets share of app
revenue
IncubatorCisco Innovation Centers
• Ten centers on five continents
• Focused on IoT and digital
transformation
• Invest/partner with startups,
accelerators, and universities
Peer CollaborationCisco Hyper-Innovation
Living Labs (CHILL)
• Tackles large industry problems
• X-section of industry customers,
vendors, designers, and hackers
• Builds new startups from scratch
Internal AcceleratorCisco Entrepreneurs in
Residence (EIR) Program
• Currently on third cohort
• 6-month cohort sessions
• Since 2013, 20% of 33 startups
have already made exits
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An Entire Support Ecosystem is Available to Companies Today
Accelerators
Corporate Services
Scouting Tools
Funding
AngelList
Enterprise Software
Startup Studios
eFounders
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VC Investment is the Fuel Behind the Startup Ecosystem and
It is Now in Rough Parity With the R in Corporate R&D
(1) National Science Foundation InfoBrief; survey data for 2014 and 2015; August 2017(2) KPMG Enterprise; Venture Pulse Q3 2017 – Global Analysis of Venture Funding
0
50
100
150
200
250
300
350
400
Corporate R&D Venture Capital
An
nu
al S
pe
nd
/In
vest
me
nt
in $
B
Corporate R&D Spend vs VC Investments
Basic & Applied
Research (R)
ProductDevelopment
(D)
Rough parity at ~$80B annually
• This is an apples-to-oranges
comparison, however…
− Both are aimed at new business
formation and/or long-term business
growth
− The majority of corporate R&D spend
on development (D) is to sustain the
business with incremental
improvements in their offerings
• If you had $80B to invest, which growth
engine would you bet on?
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But It Very Much Depends on Which Industry You Work In
Source: Venture Pulse, Q2'18. Global Analysis of Venture Funding, KPMG Enterprise. Data provided by PitchBook, July 12, 2018
• Software attracts ~40% of all VC
financing
• “Healthcare” (pharma/biotech,
medical devices, services, etc.)
adds up to about ~25%
• IT hardware, consumer goods,
energy, commercial services and
media are at ~1-3% each
• All “other” comprise only ~20%
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However, Companies Outside Software and Healthcare are
Realizing the Need to Be Active in the Digital Startup Space
Source: Inovo Corporate/Startup Collaboration Roundtable; 2018
• Disruption can come from digital startups (media, taxis, hotels, etc.)
• Digital enhancement of physical products and services (smart
devices, machine learning, virtual/augmented reality, etc.)
• Competitive advantage thru digital transformation of business
process and operations (3D printing, SaaS, industrial IoT, etc.)
There is Some FOMO Going On But Also a Real Sense of the Need to
Augment Internal R&D for Strategic Innovation
12Copyright © 2018 The Inovo Group, LLC
Will It Last?
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Traditional and Corporate VC Investments are the Bellwether of
the Startup Ecosystem; History Shows a Boom & Bust Dynamic
(1) Corporations and the Financing of Innovation: the Corporate Venturing Experience; Paul Gompers; Federal Reserve Bank of Atlanta Economic Review; 4Q 2002
(2) The History Of CVC: From Exxon And DuPont To Xerox And Microsoft, How Corporates Began Chasing ‘The Future’; CB Insights Research Report; 2017
1960 Today1977 20031994
Highlights
• Strict anti-trust enforcement
• Companies flush with cash
• Age of lateral conglomeration
• More than 25% of the Fortune
500: Dupont, 3M, Alcoa, Exxon,
Dow, Boeing, Ford, GE, etc.
• Crashed on heels of oil crisis
and subsequent recession
First Wave Silicon Valley Dotcom Bubble Unicorn Era
Highlights
• Capital gains tax rate reduced
• Pension funds allowed to
invest in VCs
• Rise of PC industry
• Control Data, EG&G, Eli Lilly,
Monsanto, etc.
• CVC dropped by >80% after
stock market crash of 1987
Highlights
• Rise of mobile, social media
and healthcare
• The Big Five techs now have
their own capital-rich CVCs
• Relatively modest pullback
in Great Recession, 2008-10
• Will this wave persist?
Highlights
• Rise of internet threat &
telecommunications tech
• Traditional VCs starting to
partner with Corp VCs
• Start of shift from internal
R&D to open innovation
• 2001 dotcom bubble burst
and CVC again fell by >80%
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There are Some Fundamental Reasons Why This Wave Could
be More Sustainable than Past Waves
• It is now a global venture capital and startup ecosystem
• Much less severe pullback in the 2008-2010 recession than in past cycles
• For startups, initial investments are lower and operating costs are more variable
today (SaaS tools, cloud computing, outsourced services, gig economy, etc.)
• Government funding for seed-stage startups is at an all-time high and has
steadily increased for the last 26 years
• Collaboration is no longer just about capital, which tends to be more cyclical
• Startups have gotten more sophisticated in their ability to locate optimal
product/market fit, create new business models and operate in a lean manner
(1) Corporations and the Financing of Innovation: the Corporate Venturing Experience; Paul Gompers; Federal Reserve Bank of Atlanta Economic Review; 4Q 2002 15
One-Third of Deals and One-Half of Investment Dollars are
Not in the Americas Today
Source: Venture Pulse, Q2'18. Global Analysis of Venture Funding, KPMG Enterprise. Data provided by PitchBook, July 12, 2018 16
The Slip in VC Activity in the Great Recession was More Modest
Than in Past Financial Downturns (1)
(1) The History Of CVC: From Exxon And DuPont To Xerox And Microsoft, How Corporates Began Chasing ‘The Future’; CB Insights Research Report; 2017
Only a 25% drop in VC funding from 2007 to 2009 but no appreciable
change in number of deals
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Government Funding (~$2.5B Annually) is Nearly Half of All Seed
Stage Funding (~$5-6B) and is a Persistent Investor (Since 1992)
Source: Small Business Administration website; Office of Investment and Innovation; SBIR/STTR overview; December 2016
• SBIR: Small Business Innovation Research program
‒ A set-aside program for small business to engage in Federal R&D with potential
for commercialization
‒ Awarded over $43 billion since 1992
‒ 3.2% of the extramural research budget (2017)for all agencies with a budget greater than
$100M per year
• STTR: Small Business Technology Transfer program
‒ A sister set-aside program to facilitate cooperative R&D between small business
concerns and U.S. research institutions
‒ 0.45% of the extramural research budget (2017) for all agencies with a budget greater
than $1B per year
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The “Lean Startup” Movement has Introduced a Degree of
Discipline and Rigor to Startups, Reducing Corporate Risk
• Build-Measure-Learn
• Customer discovery
• Product-market fit
• Pivot
• Minimum viable product
• Business model canvas
• Innovation accounting
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The Consensus is Forming That…
• …there is definitely a startup valuation bubble that will
probably burst in the next economic slowdown, if not before
• …but there will be a more moderate impact on overall startup
formation, investments and exit deals
• So a corporate strategy to build a robust startup collaboration
capability is likely to be sustainable for the long term
• …and corporate executive leadership is recognizing that
startup collaboration is complementary to internal R&D
Source: Inovo Corporate/Startup Collaboration Roundtable; 2018 20Copyright © 2018 The Inovo Group, LLC
What are Some Best Practices to Consider?
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Startups Offer Complementary Strengths to Corporations
Startup Strengths Corporate Weaknesses
Agility in search for optimal product-
market fitSlow decision-making; inflexible business
processes; complex/shared accountabilities
New technology/IPHoles in IP in new growth domains (especially
digital tech for non-digital companies)
Willingness to take risks Financial and career risk aversion
Willingness to challenge status quo Fear of cannibalization or obsolescence
Lower downside to market failure Failures are more visible and scrutinized
High risk, high reward incentives Homogenized incentive system
Attraction of young, dynamic talent Typically older workforce profile
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But There are Also Clear Challenges to Collaboration
1. Mismatch in exit objectives (agency issues)
2. Mismatch in pace of activity and decision-making
3. Interfacing a small simple startup structure to a large
complex corporate structure
4. Rationalizing incentive structures when both corporate
and startup people are engaged on a shared objective
5. Lack of trust and a failure to operate transparently and
exchange information freely
6. VC firms are often involved and they have very different
objectives and timelines
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Main Motivation for Corporates is “Exploring New Technologies
and/or Business Models”; “Financial Return” is at Only 10%
Source: The State of Startup/Corporate Collaboration, 2016; joint research study by Imaginatik and MassChallenge; 2016 24
Startups Appreciate Market Assistance More than Funding
Source: Scaling Together: Overcoming Barriers in Corporate-Startup Collaboration; research paper; Bannerjee, Bielli and Haley; March 2016
The Preferred Type of Market Assistance Depends on Whether the Startup is
B2B or B2C – Business Customer for B2B and Publicity/Channel Access for B2C
market assistance
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The Initial Challenge is Finding the Right Startups in a Complex
Global Landscape…Nine Methods and Tools are Used
Join the Community
1. External accelerators…sponsor, attend, connect
2. Silicon Valley outposts…go where they are
3. Passive venture capital…let traditional VC partners do the scouting
Conduct Research
4. Internal scouts…predominant approach today
5. Matchmaking platforms…initial screening
6. AI search tools…general and startup-specific
Become an Attractor
7. PR and sponsorship…outbound marketing of interest
8. Competitions & prizes…financial incentives
9. Internal accelerators…”no strings attached” space, equipment and guidance
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Accelerators Appear to Be the Largest Source of Startup
Collaborations for Corporations
Unlocking Innovation Through Startup Engagement; Best Practices from Leading Global Corporations; report by 500 Startups; 2017 27
The Next Challenge is Determining the Best Mode(s) of
Collaboration…We Count Nine Modes in Use Today
Investment/Equity
1. Strategic venture capital…using money to gain influence and visibility
2. Strategic acquisition (M&A)…gain full control
Commercial Relations
3. Information exchange…understand each other; due diligence
4. Startup as customer…gain influence by providing free goods & services
5. Startup as supplier…revenue can be more valuable than capital
6. Technology licensing…in either direction; probably with exclusivity
Co-Creation
7. Incubator (outside-in startups)…provide space, expertise, labs, etc.
8. Excubator (inside-out startups)…build-your-own startups
9. Co-dev (outside-out startups)…joint but independent
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These Nine Modes Offer Different Levels of Business Integration
and Corporate Control (or conversely, startup autonomy)
Degree of Business
Integration
Degree of Corporate ControlLow
Low
High
High
Strategic Venture Capital
Incubator
Technology Licensing
Strategic Acquisition
Startup as Customer
Co-Dev
Excubator
Startup as Supplier
Information Exchange
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Five Emerging Collaboration Best Practices
Capability Best Practice
1. Scouting support tools & services
2. Evaluation predictive models
3. Integration the “collaboration platform”
4. Formation the “excubator”
5. Management startup maturity level
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1. Startup Scouting – Support Tools & Services
Matchmaker PlatformsDatabases
Scouting Services
AngelList
Enterprise Software
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2. Startup Evaluation – Machine Learning Predictive Models
• Founder: Thomas Thurston
• MESE™ model developed in
conjunction with Intel and Harvard
Business School (C. Christensen)
• Deployed by leading venture capital
firm Hambrecht Ventures since 2008
• Predicts likelihood of 10-year survival
and growth trajectory at that time
• Founders: Arturo Moreno, Fabien
Durand and Javier Alperte
• Founded in 2015 in Spain
• Database of 400k startups analyzed,
145k rounds of financing, 6K IPOs, 20k
acquisitions and 6K failures
• Issues predictive scores that represent
likelihood of success and estimates
the time frame of a successful exit
A Large Number of VC Firms are Building ML Models for Screening or
Investment Decision-Making But They are for Proprietary In-House Use
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3. Startup Integration – the “Collaboration Platform”
• Analogy to software platform
• Recognizes that the complex, dynamic nature of the
ecosystem requires a very different approach thantargeted, selective outreach
• Means the capability to collaborate with any startup via
any mode of collaboration at any point in their maturity
(seed to late stage)
• Various permutations of collaboration are built into the
business system and become the “APIs” of collaboration
(see graphic to the right)
• Scouting becomes more about marketing than search;
marketing the “platform” to the startup ecosystem – “if
you build it, they will come”
Relationship
Asset
Project
Knowledge
Opportunity
The “APIs” of a Collaboration Platform
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4. Startup Formation – the Excubator
• An excubator is an incubator set up to pursue
corporate challenges and needs but designed to
operate externally like a true startup – “BYO startup”
• Like a startup studio but corporate-driven
• Entrepreneurs for the excubator may be recruited
from inside or outside the company
• Excubator startups are operated according to lean
startup principles
• Excubators provide entrepreneurs with risk-reward
incentives that mimic those for true startups
• NextBig is a “startup studio” that assists companies in
establishing and running startups
Our vision is to be the
leading partner and platform
for corporate/startup co-
creation. We combine the
best of entrepreneurial
agility with enterprise scale
to build new ventures that
deliver on the promise of
digital transformation.
https://www.nextbigco.com/
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5. Startup Management – Startup Maturity Level
Demand Uncertainty
Design Uncertainty
System Uncertainty
Organizational Uncertainty
StartupMaturity Level
Accelerate – ExecuteDiscover – Explore Incubate – Experiment
Projects
Scouting
Channels
Kill
Accelerate
Monetize
1 2 3 4 5 6 7 8 9
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The Inovo Group
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For more information, check out our website,or drop us a line…
With Inovo as collaboration partner and guide, organizations transform their innovation offerings, cultures & capabilities.
Brian ChristianManaging Partner and Co-founderThe Inovo Group, LLC213 S. Ashley, St., Suite 300Ann Arbor, Michigan 48104USAP: +1 (269) 930-0574E: [email protected]