A window into external innovation for enterprise companies

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What’s the cheapest way for corporations to understand the forces that could disrupt their business model?

Increasingly, the answer might be engagement with startups through corporate venturing, according to recent articles in CFO Magazine, the annual Money Tree white paper from the National Venture Capital Association and PwC, and insights from a recent panel on corporate-startup partnerships organized by the Hyde Park Angels and hosted at 1871.

Enterprise corporations expect declining revenue and more competitors, while also facing ambiguous and evolving forces that impact supply and demand. Meanwhile, uncertainty reigns around the pressures and the complex changes they require for corporations to reorganize to new threats, hire workers, and define the tasks necessary to compete.

The result has been declining corporate revenue projections and increased competition from new entrants, substitute services and disruptive technologies.

Pick an industry. In financial services there are new crowd-sourced lending alternatives. Big agriculture pits big investments in the Internet of Things against scrappy startups with low-cost information on weather and farming results for individual fields.

In the life sciences, the basis of competition surrounds singular cures for unique diseases, which lately have come more often from external biotech innovators. Insurers are grappling with how to compete in a world where connected cars and autonomous driving may well reduce car crashes – and income from insuring against them.

Corporate venture capital approaches dot-com levels: How not to get burned again

According to the PwC and NVCA Money Tree report, 2014 had been the strongest year for corporate venture capital since 2000. But 2015 left it behind: Corporate venture deals rose from 17.8% of all VC deals to 19.3%. There were 232 deals in the second quarter alone.

(There are guidelines for startups seeking corporate venture partners, too. See: Simple rules for startups seeking corporate venture partners.)

By industry, the sectors with the highest percentage of venture capital dollars were in software, industrial energy, biotech, IT services, media and entertainment, financial services, consumer products and services, and medical devices and equipment. All told, corporate venture arms put $1.6 billion into startups.

Yet as CFO magazine noted in covering the report, the last time there was this much interest from corporations into startups, it was Y2K.

Investors looking for a financial return on a company were burned. Still, many strategic investors found value in relationships with startups even when valuations crumbled because the technology was useful.

For Slalom Consulting, I developed a proprietary tool called WINDOW that looks at market conditions and strength of evolving forces to come up with targeted options for innovation strategies at corporate enterprises. It tells firms what they should consider.

Two ways to tap into external innovation

Let’s look at two examples that are common in the marketplace now — first a more traditional way to tap into external innovation, and then one of which leads back to a corporate venturing strategy.

The effects from new technologies have a growing impact on how corporations must structure their work force, processes and organizational structure. That suggests a growing need for partnerships through M&A and strategic realignment so long as the forces of change are well understood.

In pharmaceuticals, for instance, new lines of cancer research might fall into this category. An enterprise left behind by a promising new cancer therapy for a growing category of diagnosis should jump-start their R&D efforts by acquiring a biotech with an approach that answers the question. (Which is always cheaper – they’ve spent the R&D costs already and may have gotten themselves to Phase II or Phase III clinical trials. The acquirer then will spend its money to get the treatment approved and scale it out to market.) Critically, the disruption might be obvious, but the force isn’t unclear – everyone knows a type of cancer exists and needs to be cured.

When forces are emerging, however, more open-ended measures are called for, including open innovation and corporate venturing, to name two increasing in attention. In this case, it may be unclear which force governs what will happen next. Will it be a new technology? Changing customer demand? The strategic answer might be letting startups spend the money on exploring the customer willingness to pay, and then betting on the winners.

For many companies, this is new territory. Beyond knowing where to look, it’s important to know how. (See “dot-com bubble.”)

Unfamiliar practices call for simple rules.

Three rules for corporations courting startup innovators

The HPA panel’s advice for corporations interested in startups:

  • Be strategic about who you engage with.
  • Partner well with startups that complement your organization by adding new insights to your strengths.
  • Pay attention to fundamentals.

The Sept. 24 panelists were a good representation of startup-and-corporation match-making in Chicago.

The Sept. 24 panelists were a good representation of startup-and-corporation match-making in Chicago.

They included Illinois CIO Hardik Bhatt, who headed the Cisco Smart Cities and Internet of Things groups before going to work for the state (and thanks to a budget impasse, so far, for free), as well as David Weinstein, the Founder and Managing Partner of Freshwater Advisors who, with the Illinois Science and Technology Council, helped kick-start the process of pairing Illinois corporations with startups to drive connections and plug gaps in the armor of corporate technology and innovation.

Rounding out the panel were Julie Szudarek, SVP and General Manager of Groupon Daily Deals; Rumi Morales, the Executive Director of the Strategic Investment Group at CME Group; Jacob Babcock, the Co-Founder and CEO of wireless charging antenna startup NuCurrent, and his corporate connection Rob Diebold is the Strategic Business Development Manager at Molex.

Diebold said he looked to startups because they were more nimble at innovation, filled a hole in a product line catalog – or, added Morales, if they had information about a new technology that the corporate partner would rather engage in than compete with.

Bhatt said he looked for three things in potential startup partners: The experience of the entrepreneur, the quality and uniqueness of their idea, and evidence of sales traction.

Lack of sales traction – or an entrepreneur a little too hungry to seek corporate support to advance their sales – was enough to raise warning flags, Bhatt added.

(See: Why sales traction matters when corporate VCs look for partners.)

Corporate sales channels aren’t set up to help new startup partners, he stressed: What startups do isn’t what the corporate partner does. That’s why they’re considering a partnership.

Beyond that, the Cisco veteran said his company sought to invest in startups with technologies that helped out in functional horizontals instead of industry verticals. (They’re less affected by business cycles.) The process he recommended for enterprise companies was to look for gaps in technologies or services, identify potential partner startups that might fill the gap, and engage with them systematically.

Through Freshwater Advisors, Weinstein has identified one a la carte model for fostering engagement between corporations and startups: Freshwater listens to corporations about their needs for external innovation, synthesizes the needs of several firms or corporate departments, anonymizes and shares the needs with accelerators and venture capital firms to identify potential startup matches. From there, he screens candidates with interesting technologies and helps to organize demo days for internal stakeholders on the enterprise side.

The HPA panel held up as an example the partnership between Jacob Babcock, the CEO of a wireless charging antenna maker, and Diebold, the Strategic Business Development Manager at an electronics component maker.

More sustained and expansive options also exist.

Examples of corporate/startup connections

Here’s how one accelerator has marketed itself as a means for corporations to access disruptive technology ideas, drawing partnership from insurers such as USAA, Allstate, and State Farm Insurance. Here are some of the startups seeking to break into the financial services sector.

New innovation options abound for corporate enterprises.

Understanding which are appropriate is an important first step.

Understanding how to engage next can spell the difference between a successful engagement — or a painful lesson.

– James Janega

@JamesJanega

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