Digital disrupts everything. This is the realization companies across the world and industries are coming to as “software eats the world.” For large corporations, this realization is even more disconcerting because of constantly breaking stories of how Silicon Valley startups are upending entire industries through digital technologies. If you look at companies like Uber, Facebook, Alibaba, Google, Amazon, and other big tech companies, you see a trend of disruption that in many cases overturns entire industry business models relied on by existing companies.
However, the nature of disruption is that it does not seem to be happening until it does. Blockbuster did not experience disruption until people stopped borrowing physical DVDs and started streaming content. Traditional taxi companies did not realize they were undergoing disruption until taxi-hailing apps like Uber launched and people simply stopped using traditional taxis. These stories have one central theme; a Silicon Valley startup utilizes digital technologies to disrupt a legacy industry. Businesses whose industries are yet to undergo disruption can, therefore, look to what is happening in the Silicon Valley startup ecosystem to preempt the coming disruption to their industry.
Silicon Valley startup engagement can be approached in a variety of ways including partnerships, acquisitions, investments, etc. However, the main outcome of such engagement should be to introduce startup DNA into the corporation; to unlock the same capabilities these disruptive startups have. To dig deeper into this topic and provide valuable industry insights on how to introduce startup DNA to your company, Mike Sigal, general partner at 500 Startups and co-founder of Upside Partners, recently held an hour-long webinar for SVIC, some excerpts of which are included below.
Startups chose which funding partners to work with based on several factors. While the amount offered is important, startups, especially those working on massively disruptive solutions, will often pick a partner who can support this push for world domination. This is the difference between corporate venture capital and traditional venture capital, says Mike. While traditional VCs look for financial returns, most corporations look for strategic returns, two approaches that can have a bearing on a corporation’s ability to effectively partner with Silicon Valley startups.
“If you are not able as a large institution to create, if you will, a gear shift between the operating speed of your institution and startups, then you stand almost no chance of being able to engage with great startups,” Mike says. This means that while your company may be interested in strategic returns, which is, to gain insights into how digital technologies can influence current offerings, it is important to understand the motivations and goals of startups and to provide a means of appropriately aligning your expectations with theirs.
The next step in introducing startup DNA to a corporation is promoting entrepreneurial reasoning in managers. Mike cites a study by Saras Sarasvathy, a professor at the University of Virginia, Darden School of Business, who discovered that the key differentiator between managers and entrepreneurs is how they think about the future. She found that managers tend to have causal thinking while entrepreneurs have effectual thinking. To illustrate this difference, causal thinking says, “To the extent that we can predict the future, we can control it.” Corporate focus on forecasts and projections are an example of this thinking. Effectual thinking, on the other hand, says, “To the extent we can control the future, we do not need to predict it.” Startup focus on building the solutions of the future demonstrates this mental outlook.
Mike explains that for startup DNA to excel in a corporation, managers must be trained on effectual thinking. He is quick to add, however, that this does not mean that how the entire organization runs and is managed must change. Instead, he says that effectual thinking should be applied when working on future solutions or solutions to future problems. This dual mode of thinking is essential to running a thriving corporation in the present while preparing it for the future.
Capital-efficient Learning and Experimentation
In a typical corporate environment, the process of making investment decisions follows a long, time-consuming path. Between solution identification and proof of concept, an organization can take up to eighteen months and spend millions of dollars. This is an expensive capital-inefficient way of learning what solutions can work for your company. Similarly, as most Silicon Valley startups have a growth cycle of eighteen months, by the time a partnering corporation decides on the way forward, the startup may either have died or pivoted to something else.
Mike suggests that for corporations to efficiently learn from startups, they need to squeeze this timeline to just weeks. His suggested process involves four steps:
- Defining a challenge,
- Syndicating that challenge to the Silicon Valley startup ecosystem,
- Selecting a startup, and
- Running time-based experiments
By using such a narrow project scope and limiting time to proof of concept, a corporation can increase the efficiency with which it learns from startups.
“What you’re ultimately trying to achieve is the ability to generate a lot more data about your idea or how you think a technology can help you in a much shorter period for much less capital invested. This is the essence of how you become an effective learning organization,” says Mike.
Startup Sourcing and Evaluation
“Being ready not to be disrupted is figuring out how to work with startups,” says Mike, “but you do need to make a concerted disciplined effort to figure out what they have to teach you.” Learning from and working with startups means first understanding why it is important to work with them. Mike points out four main reasons:
- Silicon Valley startups utilize emerging technologies at the core of their operations. They also tend to be early adopters of experimental technologies.
- They excel at disintermediation as they tend to have lower costs than traditional vendors, allowing them to deliver services at a lower cost.
- They can unbundle products to deliver targeted solutions to customers, something large corporations struggle to do due to regulatory constraints and brand risk.
- They democratize solutions, making them available to non-traditional customers.
These four factors point to why it is crucial for large corporations to work with Silicon Valley startups. However, while it is possible to reach out to startups by using startup scouts, running competitions, sponsoring accelerators, or creating corporate VC funds, Mike says these tend to provide an inefficient route to finding the right startups. Instead, he suggests creating a sourcing funnel with the following steps:
- Identify 50+ startups operating in your industry.
- Reach out to about 30 that fit your business case.
- After contact, filter down further to 20 that match the applied needs of your experiment.
- Shortlist 10 of these.
- Interview, remotely, 5-7 of these.
- Conduct in-person interviews with 3 finalists.
This process, Mike says, will take no more than a few weeks and primarily involve one person throughout the process. Compared to other means of startup sourcing, this is more capital-efficient and often results in better-matched startups.
Startups Hold the Key to Future-proofing Your Business
Working with Silicon Valley startups is perhaps one of the most important decisions a company can make in future-proofing its business. By setting up small experiments and collaborating with startups to generate meaningful data, corporations can go through fast learning cycles to help them arrive at solutions that are practical to commercialize. At the same time, such collaborations will help corporations avoid costly investments that take years to generate any meaningful insights. “Innovation isn’t magic; it’s skills that can be learned and perfected. And that comes through discipline,” says Mike. This disciplined learning is something corporations can assimilate by partnering with Silicon Valley startups to introduce startup DNA into their ranks.
Watch an In-depth Webinar on Startup DNA at Corporate Scale by Mike Sigal
In this in-depth webinar, Mike Sigal takes a deep dive into how organizations can integrate startup DNA into their operations to foster a culture of innovation.