By Andrey Kunov, CEO, Silicon Valley Innovation Center (SVIC)
Uber, Didi Chuxing, Airbnb, Dropbox, SpaceX, Uber, Spotify… the list is endless but what do all of them have in common? Each one of them is a startup and each one has disrupted an entire industry. Be it hospitality, auto, music or aeronautics, no one has been spared. So what is the antidote to this disruptive trend? – M&A or R&D? What’s the action plan? In this blog , we’ll look at the emerging practice of start-up engagement as a corporate innovation strategy to help established companies uncover growth opportunities behind the threats of disruption.
The innovation leaders pursue a number of corporate innovation strategies to better understand who to face the innovation challenge ‘imposed’ by startups. Many companies are reconsidering their views on innovation, challenged by startups. From innovation tours, R&D, M&A, Corporate Incubators, Accelerator partnerships, Corporate Entrepreneurs, Corporate Investment – the established companies are looking for ways to jump-start their innovation agenda. And many find that corporate startup engagement is more efficient and effective than merger and acquisition & Research and development.
Why Corporations Must Get Innovation Right
We all know that it is hard for established corporations to remain innovative. Larger and thus less flexible, corporations strive to stay abreast of venture-backed startups that are transforming customer expectations and shaping new business models. As a CEO of Silicon Valley Innovation Center, I witness the impact of disruptive forces practically, on a daily basis. The fact is, the average lifespan of an S&P 500 company has been consistently decreasing from about 70 years a hundred years ago, to about 15 years nowadays. The trend is clear – large companies that used to be the leaders 50, 100 years ago, even 20 years ago, are now losing their importance. What’s happening?
Behind Every Unicorn, There Is An Industry Being Disrupted
A lot of the value traditionally created by the large corporations is now being captured by the technology newcomers, the so-called unicorns – private technology companies valued at $1B and more. What’s scary and, at the same time, fascinating, is that these unicorns are now emerging at the exponential rate. Most of them have become the unicorns very recently, just within the last three years. They are actively disrupting the existing vertical markets. In fact, when you look closer, behind every technology company that you can see in the picture below there is an industry that they are actively disrupting.
Venture Capital Investors Could Be Betting On The Future Quite Different From What Your Company Represents
Look at the volume of investment in different technologies and you can see that venture capital investors are betting on a very different future from what many of your companies represent. Of course, one can say that most of the VC money will go to waste. But it’s an interesting way how it gets wasted, right? 95% of all start-ups will fail. Yet the 5% that do survive, will make all the difference in this life.
The volume of investment in a particular area is one of the signals to pay attention to when shaping your company’s innovation agenda . Look carefully at how much money venture capital is putting into a particular vertical market and what kind of companies they are supporting with that capital. Because that may be an early signal that can help you understand where the pressure points are coming from.
The Idea Economy
While you may still be bending your mind around technologies such as cloud and mobile, the startup world is moving ahead full-speed. Look at what’s called the Fourth Industrial Revolution and discover how artificial intelligence is going to open up new windows of opportunities for anyone who knows how to harness its potential that solidifies all technology trends together. How can one keep up, let alone get ahead of the ever changing technology landscape?
The biggest differentiating factors for the companies are going to be:
- the technologies that they’re employing, and
- The organization’s’ capacity to implement ideas into new products, into new value for the customers.
While the technologies are important, they are just the tool that you can use, increasingly more easily from the shelf, to bring your new products to the market. It should not be the exclusive object of your attention. Much more important, however, is the ability to turn new ideas into products quicker by using those technologies. It’s true as true for the start-ups as it is for larger companies. We are truly entering the era of an Idea Economy.
Agility is the prime factor which allows leaders to stay ahead of the competitors
Fortune 500 companies that are digitally transforming themselves, are undertaking fundamental changes that impact their assets, the way they generate value and the way they are organized. Giants like Google, Apple and Amazon have adopted a more distributed organizational structure based on a portfolio management theory, that includes a separate portfolio of internal startups.
At the assets level, we are witnessing a global redistribution of assets in a new way with value chains based on the core competence and digital assets replacing physical assets. Same goes for value creation. Those companies that want to remain leaders are outsourcing all non-essential functions of their business so that they would stay agile in order to be able to change their course more quickly. And the most interesting thing that we are observing with many large companies is the new organizational structures. Instead of having one hierarchical organization, companies like Google or Apple and many others are now adopting more distributed organization design that resembles a portfolio of internal start-ups or internal projects run based on the portfolio management theory. Different types of risks get associated with different types of returns from each particular project. Each of the projects has its own P&L, as if it were a separate business within a larger conglomerate. A well-known recent example of shifting to this organization structure is Google that divided the company into two separate corporations. One is Google, a more mature internet search business, generating most of the revenue. The second one is Alphabet, dedicated to the “moonshot” projects with much higher risks of failure but also the biggest potential for the future expansion.
Start-Up Engagement Can Turn Disruptive Threats Into Innovation Opportunities And Provides The Advantage of Time to Value
What do large companies do to innovate? There are some accepted practices for innovation from within the organization – R&D, M&A, partnerships that have been part of the innovation process of the large companies for tens if not hundreds of years. And there are some corporate innovation strategies that are emerging as part of a new paradigm, an open innovation platform. When companies leverage the resources from outside the company to propel the innovation.
More specifically, I am talking about large companies engaging with technology start-ups. It gives those companies access to the potential for innovation and collaboration, not just from the technology point of view, but also from the point of view of capability of those small groups of innovators to create value for the larger companies in direct partnerships. The advantages of this start-up engagement approach is time to value.
With the R&D development, you would usually look into the long-term results of what your R&D departments will do, six to ten years. With M&A, the results are much faster. You can get the company acquired in one, two years, perhaps. Unfortunately, more often than not M&A completely destroys the incentives of the original creators of those technologies to continue innovating. And if you look at the statistics of Mergers and Acquisitions you can actually see that on average, the results of M&A activities tend to be negative over time. What we have observed from best practices of our clients to be most useful in the way how you could engage with the technology start-ups, is to go through four different stages of understanding, and engaging, and then executing on those insights that you can get by working with technology start-ups.
4-step Framework to Engage With Startups And Accelerate Corporate Innovation
At Silicon Valley Innovation Center, we are using a 4-step framework to help companies accelerate corporate innovation: discover, learn, engage, and accelerate.
1. Discover: Find innovative startups to be engaged in order to reduce the risk of failure. Learn three strategies- accelerating partnerships, innovation outposts and technology scouting (researching the latest trends) in Silicon Valley
2. Learn: Through Silicon Valley Immersion Programs, Startup Showcases and Idea Labs that would help build the connection from various similar sectors and thus adapt innovative ideas through well-organized program from the startups
3. Engage: Arguably, this is the most crucial part of collaborating with startups as there are chances of misaligned incentives. The challenge at this stage is to maintain the startup environment and to empower them with the opportunity to build their system through innovative development.
4. Accelerate: This process of innovation can be accelerated by overcoming the “innovator dilemma” corporate restructuring, outsourcing non-essential functions and so forth.
Stay tuned for more details on the framework and the stages of engagement with start-ups, the pitfalls of each of the steps and tips on how they can be avoided in the next blog in the series.