corporates and startups: engage or else!

and March 25, 2016 0 comments

Singapore-based DBS Bank is Southeast Asia’s largest bank by assets, but its leaders are not taking continued prosperity for granted. Nor should they, knowing as they do that Asian banks may be even more vulnerable than their Western peers to near-term disruption by fintech startups.

623-1To head off the threat, DBS has invested $1.2bn in digital initiatives. Incongruously, this includes extending a helping hand to Asian entrepreneurs, whilst simultaneously, and aggressively, answering challenges from the startup world. DBS recently launched a Hong Kong-based mentoring program for startups in collaboration with a leading local incubator. This complements its pre-accelerator in Singapore offering participants $25,000 in seed funding. The bank has also introduced reduced-fee accounts for entrepreneurs and released a mobile app for budding Singapore SMEs, among other goodies.

What is more, in 2015 alone DBS has given 5,000 employees—nearly one-quarter of its total headcount—the chance to participate in hacking challenges and hybrid team projects involving startups.

Unlike a conventional venture capital (VC) or M&A relationship, there are no overarching strategic or financial objectives evident here. So what does DBS stand to gain from all this? Believe it or not, quite a lot. It can be difficult bordering on impossible for large organizations to teach themselves how to become innovation-driven. DBS’s hunch was that engaging closely with startups in many different ways would help the organization imbibe their creative and agile culture. And the bank is by no means an outlier: many of the world’s most iconic companies are similarly seeking cultural contagion from startups, drawing on a broad spectrum of novel channels for engagement.

less risky relationships with startups

For the first time, all the different ways incumbents are engaging with startups have been documented in a report, co-authored by INSEAD and the Silicon Valley venture-capital firm 500 Startups, “#500 Corporates: How do the World’s Biggest Companies Deal with the Startup Revolution”. The most well-known channel, and still the most popular, is corporate venture capital, (164 corporations of the Forbes Global 500), a sector that saw the number of deals rise by 30% between 2009 and 2013, in line with the soaring stock market. Indeed, the majority (61.7%) of The Wall Street Journal’s Billion Dollar Startup Club have received funding from at least one corporation (which does not include investment firms like
Goldman Sachs).

However, it goes without saying that VC is an expensive proposition, one that may be out of reach for smaller companies. Our report shares the good news that if a company lacks the financial resources to invest, or is not quite ready to take the plunge, there are plenty of other ways to engage that are relatively low-cost and low-risk.

The same goes for companies in need of innovative talent that lack the cash flow to acquire, or acqui-hire, a company or team. Mingling with startups in a more open-ended way builds a bridge that some entrepreneurial talent may choose to cross—without jeopardizing the bottom line.

the ecosystem of engagement

Here are a few of the more common ways to engage, in descending order of popularity:

  • startup competitions: 76 corporations of the Forbes Global 500 have held competitions, which usually involve entrepreneurs pitching their startup ideas as they vie for a cash prize. Comcast, for example, has Innovations for Entrepreneurs, Philips sponsors an Innovation Award, and Pernod Ricard runs a contest for social-impact startups called The Venture. Companies can use competitions to engage a particular demographic (e.g. L’Oreal USA’s Women in Digital program), and/or foster partnerships unlikely to come about otherwise (e.g. the Head Health Challenge, a joint endeavor of General Electric, Under Armour, NIST, and the National Football League).
  • accelerators/incubators: 64 corporations of the Forbes Global 500 have set up incubators and/or accelerators to aid the development of nascent companies. Some incumbents are using these programs as tools to facilitate networking and relationship building. For example, an interesting model has been launched by Airbus Group with BizLab, where entrepreneurs and intrapreneurs (employees) are working under the same roof. In addition, Deutsche Telekom, Orange, Microsoft, and Coca-Cola are just some of the companies that have taken their accelerator program international—the Coca-Cola Founders seed/startup platform has been set up in 11 countries while Microsoft’s Microsoft Ventures Accelerator is present in seven countries.
  • startup program: 57 corporations of the Forbes Global 500 provide packages of free corporate products and services to startups. For example, PayPal waives fees for transaction volume up to $1.5 million. This is the most widely used way for regional banks to engage with startups (see above). Itaú Unibanco Holding (Brazil) and Garanti Bank (Turkey) are targeting women through their entrepreneur programs. Maybank with the New Entrepreneur Fund grants a startup loan to enterprises under full Bumiputra (Malay ethnic group) ownership.
  • Factoring in corporate VC, 68 of the top 100 companies from the Forbes Global 500 are engaging with startups somehow.
  • Europe leads the pack: While writing the report, we were surprised to find that the epicenter of corporate/startup engagement was actually Europe. France, in particular, stood out as the country where almost every corporation on the Forbes Global 500 is engaging with startups, and using 1.7 different channels to do it. Tied at a rather distant second place were Germany and Switzerland, while Japan at fourth place has the distinction of being the sole non-European country in the top five (but Japanese corporations are employing VC almost exclusively). The United Kingdom rounds out the top five.
  • It is too early in the game to hypothesize why Europe is out in front, but it is a notable trend nonetheless.
  • start small and lead decisively: Even if you are able to invest in or acquire a startup right away, there is something to be said for starting small, this could be by sponsoring an event or offering support services. That way, you will have a better sense of how startups work before going all-in, and thus be more likely to avoid imposing big-company standards and KPIs where they do not apply. Starting small also means not petitioning the biggest players right away; small startups make for easier collaborations.

No company we looked at followed exactly the same pattern of engagement. The key is to know your objectives, resources, and timeframe before elaborating the right strategy to work with startups. The leadership team should be steering the initiative from the beginning with strong support as well as vision, budget, and a stable organizational environment for experimentation.

Perhaps the main take away from this report is that with these new lower-commitment channels, there is little for startups and corporates to lose by engaging, especially compared with what both parties have to offer one another. The world of startups is such a hotbed of disruptive potential that established firms can ill-afford to have their backs to it. Meanwhile, entrepreneurs crave access to the bounty of resources big corporates enjoy—and since nine out of ten startups fail, engagement may be a matter of survival for them as well. As our report demonstrates, corporate/startup collaboration will be an essential part of every company’s innovation portfolio going forward.

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