Partnering with Startups to Drive Innovation€¦ · 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,

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


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


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


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


An Entire Support Ecosystem is Available to Companies Today

Accelerators

Corporate Services

Scouting Tools

Funding

AngelList

Enterprise Software

Startup Studios

eFounders


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?

10

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%

11

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


Will It Last?


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%

14

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

17

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

18

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


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?


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


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


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

25

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


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


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


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


1. Startup Scouting – Support Tools & Services

Matchmaker PlatformsDatabases

Scouting Services

AngelList

Enterprise Software


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


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


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/


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


The Inovo Group

Copyright © 2018 The Inovo Group, LLC 36

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]

mailto:[email protected]

Documents

Partnering with Startups to Drive Innovation€¦ · 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,