Essec Business School

“It’s startups battling against corporates.”
“There’s a war going on.”
“Watch out you don’t get disrupted!”
“Startup Bootcamp” [1]

These are everyday phrases we see that allude to the apparent war or conflict between startups and corporates. In this jungle-like world of multiple dangers, startups are trying to “disrupt” the industries and take down the large corporate beasts while corporates are waiting for startups to enter the “kill zone” so that they can jump at the chance to swallow them up. A modern-day story of “David and Goliath” where the plucky startup fights against the establishment, a “challenger brand” pitted against the “evil corporate empire”, a scrappy underdog with a mission to disrupt. These are the headline-grabbing narratives that belie value creation. And ultimately, it’s doomed to fail.

Go to any startup conference in any city around the world today and you hear young (and not so young) founders fervently talking about how they are going to revolutionize this industry or that industry, and how those slow incumbents are just ripe for the picking. With the amount of Venture Capital (VC) money sloshing around at its highest level since the dotcom bust, this exuberance is completely understandable. And when we see Blockbuster getting replaced by Netflix or the success of companies like Uber and Airbnb, nobody can blame startup founders for getting excited about changing industries and changing the world.  

Casino Rule 1: The House Always Wins

The notion of an innovation war between startups and corporates is exciting and gets clicks for media companies, yet I would argue that it is an asymmetric war that startups are destined to lose and as such should not even engage in. A startup redefining an industry while dominating the incumbents relies on many factors most of which are external macro changes in technology and policy. While there have been notable examples of startups disrupting industries, they remain the exception. The number of failed startups in the innovation graveyard far exceeds the number of successful startups for a reason. At the end of the day, it is still corporates that have the upper hand. This may come as a surprise but corporates have a huge resource advantage over startups and have the lobbying power to impact legislation to their own advantage. Furthermore, while corporates may have been blissfully unaware of the threat from startups 10 or 20 years ago, this is no longer the case, on the contrary, they are now sponsoring and investing in startups. Google, which anecdotally turned 20 last month, are now the largest corporate investor in the world with a keenly tuned appetite to devour anything in its “kill zone”. Still, the startup culture remains awkward for many corporate types just as the corporate culture creates an allergic reaction in startup types. This culture mismatch is the single largest psychological barrier to creating meaningful partnerships – and it has to be addressed by both sides. Announcing the launch of a corporate accelerator that sponsors a few events may check a few PR boxes but it really does not do much to foster engagement in a meaningful way. Similarly, startup founders and their management teams need to be attuned to the buying cycles of a corporate enterprise to avoid being wilfully ignored by their sponsors and fizzling out.

Huge amounts of VC money are being invested in FinTech startups, however, it is still the large banks that have the banking licenses and the ear of governments and legislatures. A recent example of a startup hitting the legislative and regulatory brick wall is that of Robinhood. Robinhood is a startup brokerage backed by such luminaries of the VC world as Andreessen Horowitz, Sequoia Capital, Kleiner Perkins, and celebrity investors such as Ashton Kutcher, Snoop Dogg and John Legend. But, on December 13th, 2018 Robinhood launched a checking and savings account offering 3% interest that it claimed was insured by the SIPC. However, the SIPC denied they had insured these accounts because they were not legally allowed to and a few days later Robinhood pulled the product off the market. This attempt by Robinhood to become a bank through the back door avoiding the necessary oversight and legislation seems to have fallen flat on its face. The timing of this makes it difficult to determine whether this is a good thing, from the perspective of consumer protection in an industry that is tightly regulated for a reason, or a bad thing, from the perspective of slowing down innovation and stifling competition.

If we examine this issue from the corporate perspective, it becomes clear that such an antagonistic relationship is also detrimental. It is not particularly beneficial (and no fun either) for corporations to be engaging in lobbying and other defensive practices to protect their industries from disruption simply because they cannot control a simple parameter: the customer. In spite of much hard lobbying Uber is still alive. Ultimately, the wider society loses as beneficial technologies as a whole get stifled or even killed in certain markets. Social and environmental parameters are too strong to resist, building up grave blind spots for even the best equipped corporations, such as Facebook’s recent privacy scandals.

Let’s Bury the Hatchet

So how can we ensure that innovation is sustainable for the benefit of society at large? I think the only way to do this is by moving beyond the antagonistic relationship between startups and corporates and toward a more collaborative relationship. This then raises the question of how to make this collaboration happen. For that, certain actions are to be taken by both the startups and the corporates:

1. MORE BUSINESS DEVELOPMENT, LESS TECHNOBABBLE
   Startups have to focus as much on business development as they do on technology. Often their weakness is that they are founded by engineers with little or no business development experience or simple understanding of value structures in a target market. As such, the ability to engage with corporations is somewhat restricted. Likewise, corporates need people that know how to “talk to” startups. Perhaps this could be an opportunity for a marketplace for startup solutions.
2. MEANINGFUL ENGAGEMENT, FASTER ONBOARDING, SHARED OUTCOMES
   Corporates have to develop tools to tap into the various ecosystems that exist around the world. While it may once have been true that firms could only focus on startups in Silicon Valley, we now see that Israel, or Berlin, or Istanbul, or Dubai have ecosystems where startups are doing interesting work in verticals that may have implications for large corporates.
3. DEDICATED POC FUNDING THROUGH YOUR PARTNER CHANNELS
   Corporates have to consider what value proposition they offer to startups. What can a corporate offer to a startup that is not already made available to the startup by accelerators, government programs etc.? This also requires corporates to know what they want to get from the startup and what they don’t want to get from any collaboration. For this, the corporate needs to have a clear understanding of its own strategy, and how its interaction and collaboration with startups fit into this strategy. Corporates should build dedicated offices to provide knowledge gateways to startups for their various needs, such as product development, sourcing, HR, internationalization etc.
4. INNOVATION PROGRAMS FEED THE PORTFOLIO, NOT VICE-VERSA  
   The corporate has to learn how to be an ambidextrous (read: versatile) organization [2] so that it executes its current strategy while looking to innovate. As for the exploration component, the corporate has to consider how to explore and benefit from the interaction with the startup ecosystem. Should it limit itself only to the sponsorship of startup events, or should it conduct open hackathons on problems that it faces, or have its own VC capacity? The corporate also has to consider how these efforts should be aligned with any internal innovation efforts. Again, these decisions are to be made in line with the overall strategy of the organization. Corporates should develop departments that run on “startup time” staffed with specially-trained individuals with strong professional drive and allegiance to the corporate mission. These individuals should be the some of the best people in the organization. Most Corporate VC initiatives fail simply because they operate with corporate reflexes. The best of the startups can be harvested through truly equal partnerships - where corporate executives and startup CEOs are aligned.

The notion that there is a battle with startups trying to disrupt corporates while partly true is not a sustainable innovation model for either side. For the sake of both the startups and the corporates, there needs to be collaboration rather than antagonism. This may sound easy to do but requires a great deal of work and a mindshift on the part of both the startups and the corporates to be conducted successfully. A failure to do this will lead to wasteful use of resources which may otherwise be more effectively deployed to address our shared challenges. Without a collaborative approach, the corporate decision maker will remain inside the walled garden unaware of who is coming to take their lunch money and the startup founders lose out on their opportunity to work with corporates the right way. A great innovation ecosystem is like a body with a working spine; it’s much easier to walk when everything is properly aligned.

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[1] Thanks to Mete Cakmakci, Firat Ozpinar, Frank Sullivan, and Bernhard Raberger for their valuable comments on previous drafts of this article.
[2] See the work of Tushman and O’Reilly who discuss this issue at length in many academic and practitioner articles.