Corporate venturing: bridging the gap through innovation

por Lauren • mar 16, 2020 in Featured, Startups

Both for startups and established firms, corporate venturing has become more of a necessity than a novelty, but a cultural gap exists between both parties.

However, recognising this could be the foundation to build a bridge between the two.


KEY POINTS

    • Startups and corporates must recognise a cultural gap exists between them.

    • For both parties, bridging this gap will play a key role in creating a successful partnership

    • This bridge, according to Innovation Expert John van der Linden, may be built within the value creation and disruptive innovation arena

    • By recognising the strength of their ‘failure leads to growth’ culture, startups can target how corporates can benefit from joining forces with them

    • Apart from being beneficial for startups and corporates, these partnerships may be a way to scale wide-spread innovation for nations

    • In the digitalisation age, innovation is becoming increasingly necessary to support a nation’s economy, and government’s should play a part in investing in these projects

    • Europe’s plans to boost innovation



As we mentioned in the first part of ‘Insights into Corporate Venturing for Startups - ‘Redefining corporate venturing: a unique case study’, there is a clear cultural gap between startups and established firms, from a difference in time-scaling to the (de)centralisation of management, that becomes noticeable once entering corporate venturing (CV).

We highlighted that one aspect which both parties should identify in order to successfully collaborate is why they are looking to cooperate with the other. Based on their findings, it becomes possible for them to be each other’s missing link. However, in the same way, it is important for both sides to acknowledge that there is also a cultural gap between them, and in doing so, they may be able to bridge this gap.



Understanding both sides


We spoke with John van der Linden, who, through his past jobs, has gained relevant insight into the workings of both cultures. Now, he is a Senior Consultant and Executive Coach at his own firm Becoming Aware, with which he educates firms on disruptive innovation and how to make improvements within this space.

He is also a field project professor at Solvay, and is a trainer at the FranklinCovey organisation. Lastly, he is an active investor with a Venture Capital Fund called 9.5 Ventures, which creates new ventures for corporations.

However, prior to taking on these challenges, van der Linden worked for the world's largest consumer goods company - Procter and Gamble (P&G) - where he was their Global Open Innovation Manager. This experience gave him the knowledge which he now relies upon to inform other companies on how to make the right decisions to keep up with competition within the innovation-economy.

Pictured: John van der Linden.

Because of his three decades of experience within a corporate and his current jobs, which have exposed him to the world of startups and scaleups, van der Linden has witnessed this issue first-hand. He says: “For both sides, it is important to recognise the gap between their cultures.

You could say corporates are like ballet dancers and startups are like ice hockey players. When established companies or ballet dancers make mistakes, people will notice, so nothing can go wrong, and if something does go wrong, it is usually bad for the general image of the company.

“However, when looking at this culture within startups, it is more like a constant battle scene, but when things get messy, it is acceptable.” From the surface, the large gap between these two could be seen as ruinous. But, van der Linden emphasises, “this can also be a starting point to build on, the whole ‘failure isn’t acceptable’ vs. ‘failure can help us grow’ mentality.”



Shift towards value creation


Increasingly, it is the latter’s mentality which is stirring innovation globally. Whilst working at P&G, van der Linden noticed a massive shift that took place when looking at the relevance of corporates’ technological development and the technologies that large companies were known to create.

Van der Linden clarifies: “Incumbents used to create the new technologies that played a big part in the technological revolution, i.e. robotics, AI, 3-D printing, and other tools. Now, most of these technologies are either already developed, or they are being made and improved by startups at a quicker pace.”

When considering how established firms can keep up with this new take on innovation, van der Linden reflects on his position at P&G: “I learned that even large companies can’t always get by on in-house innovation.” He further highlights that established companies now need to find a way to adopt the right technologies to drive innovation within their business and products.

However, van der Linden again refers to corporate culture and how this could hinder innovation: “The problem here is that, often, companies that are established and have been doing the same thing for years struggle to look at their product and company needs in a different way.”

Knowing this, and bearing in mind the cultural gap that exists within both sides’ failure mentality, startups’ main strength becomes evident: they can afford to make the mistakes that corporates often can’t or won’t make, and are able to look at these products from a completely different and new angle.

However, one could argue that simply improving an existing product is hardly ground-breaking, or innovative. Van der Linden agrees that it is hard to distinguish what is innovative from what is simply ‘new’. He says: “Today, you hear the word innovation being thrown around all the time – but what does it really mean?”

Van der Linden emphasises that these incumbents are still innovating in a way, but that their internal innovation is rather predictable: “Think of car manufacturers, they go from creating a car named Number 1 to further developing it in stages, naming it Number 2, then 3 and so on. Often large companies or current leaders are well set to win this game of renewal.”


"Even large companies can’t always get by on in-house innovation."




But, van der Linden continues, this doesn’t suffice in the current innovation-economy: “For me, innovation means doing something different that leads to new value creation. Creating something new is more like an invention, innovation is more likely learning from a best practice to move the game ahead.

The latter arises from finding a true problem that people are willing to pay money for to solve. If your idea for the product’s development can resolve this issue, the idea is worth pursuing. The disruptive element comes with a new business model.”

Van der Linden further explains this through the example of the cars: whilst the large manufacturers are creating new versions of the same cars, “entrepreneurs and startups are working to solve the mobility issue, for example exploring the idea of a world where people don’t own their own cars anymore”, says van der Linden. He adds: “These corporations often don’t have the flexibility and innovative minds to solve these problems like startups can.”



Value creation vs disruptive innovation


Van der Linden highlights that startups should consider these shifts and these elements during the development stage of products. In the past, startups would design a product first and then find the target audience, the relevant investors and, at times, a corporate to collaborate with to launch the product and bring it to the market.

He now advises startups to firstly consider that risk aversion is still the priority for corporates, and to ensure their product idea is stable and concrete, but also to focus on value creation, moving towards problem-solving in a way that the corporate itself probably won’t be able to successfully develop the product in-house.

Here, van der Linden highlights that, for entrepreneurs and prospective startups, the most viable way into corporate venturing with an established firm is identifying a corporate relevant within their industry or expertise, and identifying what problems this company may be facing when it comes to innovating. Based on what is identified, they should ask themselves: ‘What can we offer them with the skills we possess?’ and then create a new tool or technology based on this.

However, startups can also focus on discovering the shortfalls of established firms when it comes to providing for all segments of a digitalised society. “That is how, in a way, four young guys in a garage can outsmart these companies’ level of innovation in terms of value creation, but also problem solving.

"Imagine for example that you are a telecom company in the 1990’s and some guys come around with a vision for Skype – offering free calls internationally, and with audio too - whilst you are making heaps of money on international calls! That is the disruptive innovation that is going on.”

Credits: John van der Linden.

According to Harvard Business Review, the disruption aspect of disruptive innovation signifies ‘the process whereby a smaller company with fewer resources is able to successfully challenge established incumbent or established businesses.’ In its analysis, it states that, ‘specifically, disruptive innovation targets the low-end or new-market footholds that are overseen by incumbents as they increasingly focus on improving products and services for the more demanding or profitable customers’.

The entrants become disruptive if they successfully gain a foothold by delivering a ‘more-suitable functionality’. Van der Linden says that here, the core question is ‘how can we adopt these existing technologies to do a better or cheaper job on delivering the needs of consumers than the original manufacturers are doing?'.

The same incumbents often fail to respond to this market swiftly, as mentioned before, due to their chasing of higher profitability in more-demanding segments. Once the entrants have moved upmarket, and the mainstream customers ‘start adopting the entrants’ offerings in volume’, we speak of disruptive innovation.

Although it is difficult to specifically pinpoint what is considered ‘disruptive’ - not all innovation targets these aforementioned footholds - it highlights a specific aspect of corporate venturing where startups could have the upper hand.



Two birds, one stone


Van der Linden emphasises that established companies need to embrace these entrants, otherwise the younger, more creative generation of workers might decide to get ahead of them rather than work alongside them. However, rather than fully disrupting a certain industry and independently finding the right resources to develop the product from scratch, a startup could consider pitching this solution to the relevant corporate and collaborating on the development of the product.

Van der Linden adds: “And this is what I tell my students, understand the scope of existing technologies and products and discover how you can innovate within these to benefit your product development.” Chances are, as a startup, they will be able to develop the idea in a way that a corporate with less creative insight may not be able to. However, the established firm will have the industry-insight and market know-how to successfully launch the company.


"Startups should ask themselves: 'How can we adopt these technologies to do a better or cheaper job than the original manufacturers are doing?'."




Furthermore, through such a collaboration, both parties can also speed up the development and scaling timeframe and guarantee the eventual success rate of the finalised product. To illustrate this, van der Linden again refers to the gap in cultures, now from a time perspective. He compares a large player to a tanker and the startup to a speedboat.

On the one hand, the corporates have been able to grow to the size of tankers because they have the right systems in place to manage the big machinery. However, when they want to change course or steer into a new direction, they have to plan the move much in advance.

The startups are like speedboats, agile and able to explore the smaller corners of the ocean where the tankers can’t enter, at a quicker speed, but they lack the strength to face harsher waters, and the size to help them stand out from all the other, smaller boats.

The captain of the tanker may wish he could go faster, and the person at the helm of the speedboat may wish his boat was a little bit more impressive in size. Instead of competing, van der Linden states, they should focus on finding a way to complement each other.

He adds: “Sometimes, corporates try to turn into speedboats, but this doesn’t suit their format and the way they work, mainly because their culture doesn’t support failure. They should instead focus on being masters of execution in their own department.” From this point of view, the speedboats should focus on mastering the art of failure and continue to learn quickly, whilst enjoying the liberty to adjust accordingly.

Credits: John van der Linden.

This is reflected in the timeline of product development and scaling. As shown in the graphic, the development phase for startups is very short, however, once entering the growth and scaling stage, they stall, as they lack the funding and brand recognition to successfully launch their product.

Overall, the timeframe from developing an idea to launching the product can be from 8 up to 12 years. However, experience shows that established firms struggle to beat this time. Although they have the resources to scale a product quickly, their development phase is slow, and the struggle to innovate at times slows the process down further.

As the graph shows, both sides could meet each other halfway, and by joining forces around the startup’s development phase (A), this could be followed by the corporate’s scaling phase (D), thetimeframe for both the development and scaling phases could be halved.



Larger problem - necessity in Europe


Decreasing this innovation timeframe doesn’t merely benefit both corporates and startups, it is also proving to beincreasingly important for nations globally in the competitive innovation economy. According to van der Linden, supporting these collaborations is something European institutions should focus on.

He says: “Although Europe is developing more than its fair share when it comes to fundamental knowledge and creating patents. In practice this rarely gets translated into the creation of large or successful partnerships or product development at a rate that can compete with the rate at which the US or China are innovating.”

Van der Linden puts this down to two elements, one of which stems from the same fear which holds back many established corporates: risk aversion. He says: “Many entrepreneurs I have met in China and the US are proud to share their failures, almost like a badge of honour to prove that they won’t make the same mistakes again. In Europe, failure is still seen as something to be ashamed about. This also becomes evident when looking at getting access to ‘risk’ capital, which is much easier in the US.”

The second main factor, van der Linden says, is the complexity of the European market: “The EU has made a lot of advancements to make the market more uniform, but still there are multiple cultures and languages involved. In China and the US it is less the case, which makes scaling here easier.” When analysing the lack of continuity within these systems, it is relevant as well to look at the (lack of) systems in place to facilitate research and development within innovation.

Already in 2017, the President of the European investment bank, Werner Hoyer, said there was a chance Europe would be left behind major global markets unless it changed its approach to innovation. He referred to the growing importance of how existing technologies are developed, adding: “It’s no longer just a matter of coming up with a new product.”

McKinsey Global Institute’s discussion paper ‘Reviving innovation in Europe’ highlighted that a century ago, Europe was a global powerhouse of innovation, but that it has started to lose its edge. It stated: “Despite some notable exceptions, many innovative companies are found elsewhere.


“Many entrepreneurs I have met in China and the US are proud to share their failures, almost like a badge of honour to prove that they won’t make the same mistakes."




“Europe is falling behind in growing sectors as well as in areas of innovation, specifically within digital and new frontier technologies where it is being outpaced by the United States and China.” According to its study, the ‘share of European companies that consider themselves true innovators is notably lower than in the United States’.

In his article, Hoyer also referenced the US, which he said has been making digital advances in several sectors: “US innovation pushed ahead of Europe in the 1990s. Today, the companies dominating digital services are largely American—Google, Amazon, Facebook, and Apple. One reason our economy did not rebound (from the financial crisis of 2008) as strongly or as fast as the US, was our long-term lack of investment in research, digitalisation, and education.”

He warned: “If we don’t innovate [...] quickly with massive investment and a greater appetite for new approaches that carry a high risk and high potential return, there is a real possibility that Europe will be left behind the US for generations.”



Support from higher up


However, these advances, in part, stem from a triangular system which first boosted the American economy during the mid-30s, and which largely spurred market reform since. In 1931, an MIT professor, Vannevar Bush, was passionate about elevating the role of science and engineering in society, and advocated for a triangular alliance of government, academia and private businesses.

Vannevar Bush at Berkeley (29 March 1940)

Bush wrote that it had become clear that basic science such discovering the fundamentals of nuclear physics, lasers, semiconducting materials, computer science etc, was not only essential to national security, but that it was also crucial for America’s economic security. He added: “New products and new processes do not appear full-grown. They are founded on new principles and new conceptions.”

As Walter Isaacson says in ‘How America risks losing its innovation edge’, the research and development that produced the three innovations which propelled the US economy in the last 50 years (and into the digital age)- the computer, the microchip, and the internet - each came from a triangular alliance of government, academia, and industry. ‘This was, in its own way, one of the significant innovations that helped produce the technological revolution of the late 20th century’.

However, since the start of this century, US federal investment in research has slowly decreased, with science and technology research federal funding expected to be cut by an additional 15 percent. Private corporations have also begun to dismantle research institutes, as short-term investors increasingly are demanding shorter time horizons in returns on investment. This aspect alone is one which could be fixed by corporate venturing, and the decreased timeframe for innovation.

Sustaining innovation is the only way forward


Arguing that this lack of federal support could be detrimental to the US’ position as a leader in innovation, VentureBeat wrote: “The countries that will blaze the most enduring paths to tech innovation progress are those embracing policies to foster invention.”

According to the McKinsey Global Institute’s paper, Europe’s economic prospects are increasingly dependent on innovation, especially digital and new frontier technologies. It stated that ‘innovations including artificial intelligence, Internet of Things, blockchain, high-power computing, and the integration of biology and engineering have the potential to deliver the breakthrough in productivity that Europe needs’.



In reaction to this shift in importance, investment in European tech and early-stage startups is at a record high, with $23 billion invested last year, a five-year increase of 360 percent and an increase of 21 percent compared to 2017. It is also gaining ground in certain areas like AI, especially at startup levels - the number of AI startups has tripled in the past three years.

In 2014, the European Commission launched a funding program to promise more European breakthroughs, discoveries and worldfirsts. Included in ‘Horizon 2020’, the biggest EU Research and Innovation program, with nearly €80 billion of funding spread across seven years (2014-2020) was Fast Track to Innovation).



It promotes ‘close-to-the-market innovation activities open to industry-driven consortia that can be composed of all types of participants’, and allows European businesses to co-create and test breakthrough products, services or business processes that have the potential to revolutionise existing or create entirely new markets.

However, there are still just two European companies in the worldwide digital top 30, and Europe is home to only 10 percent of the world’s digital unicorns. Another McKinsey research ‘Tackling Europe’s gap in digital in AI’, found that, although ‘Europe has about 25 percent of AI startups, in line with its size in the world economy, its early-stage investment in AI lags behind that of the United States and China’.

The same study highlighted five priorities for Europe moving forward:

  1. Incumbent firms need to accelerate digital transformations and embrace AI

  2. Continue development of vibrant ecosystem of deep tech and AI startup firms

  3. Progress on digital single market is still incomplete

  4. To capture the opportunity, companies need to build the right talent and skills

  5. Think boldly about how to guide societies through the potential disruption



The last point concisely summarises that the understanding of the importance of potential disruption and making bold decisions goes further than corporate venturing and the partnerships between startups and incumbents. However, the increase in such collaborations may further stimulate governments to see the importance of funding and facilitating these.


In the next part of our ‘Case Study: Insights into Corporate Venturing for Startups’, we research hackatons, incubators and accelerators, and how they can benefit startups looking to work together with corporates.