By Andrew Thomson
Large corporations and small businesses have not always had the most friendly relationship. The corporate giants are often seen looming over the “little” businesses and startups, taking away market share and raising prices so they can’t compete. Meanwhile, many disruptive startups have faced a backlash from larger corporations claiming they aren’t playing fair – just think of Uber. However, this frosty friendship is warming up.
Corporations have awoken to the fact that these small businesses and startups hold a wealth of innovative knowledge in which they themselves lack. A study by KPMG revealed that 88 percent of corporate respondents believe that it is necessary to collaborate with startups in order to stay innovative. Moreover, programs such as STIR plainly outline the benefit of cooperation between startups and corporations, as they bring tech innovation to public services.
We have therefore seen more corporations interacting with the startup community, moving away from a competitive landscape and towards one of collaboration and corporate venturing. As we analyze the road to corporate-startup alliances, it is clear that large corporations have now become attractive potential customers for startups and small businesses. Here’s how this complex relationship is evolving:
Up until about a decade ago, any commitment to startup alliances, let alone startup activities, was limited. Large corporations rarely engaged with the startup world at all. This was partly through culture and partly through a limited number of other companies that had useful capabilities for them. Corporations were instead risk averse and insular in their approach to business.
The mindset within Corporations around starting new projects was to make sure everything was perfect before release, taking few large bets. This clashed directly with startup thinking which tended more towards testing ideas quickly and iterating based on early results, an approach that has been popularized by The Lean Startup.
It has only been in the last 10 years or so that sentiments have really begun to change. The cost of setting up a business and the ability for these small businesses to innovate, scale, and ultimately challenge larger businesses has landed the attention of corporations. Their approach to engagement started in the simple form of ‘signaling’ an interest (e.g. sponsoring events), which then expanded to a deeper engagement (e.g. via startup accelerators, or co-working spaces), and investments.
For corporations, much of this process was about dipping their toes in the water and sussing out opportunities that would benefit them. Accelerators and co-working events, for example, proved a great way for corporations to spur innovation within their own walls, and expose larger firms to emerging technologies and trends. The increase in collaboration coincided, or even prompted, a more entrepreneurial mindset within large companies, encouraging them to be more open to engaging small companies. According to a KPMG study, this outlook has only grown in importance – almost 90% of corporates say they required startups to enable them to innovate in 2014.
Partnering through accelerators was also perceived by some as a PR move for corporations, looking to associate their name with exciting new startups. From 2011 to 2016, the number of global active corporate investors with an interest in startups – or at least their technology – tripled to 965. We therefore saw a higher willingness to engage in startups and finance entrepreneurship for collaboration, rather than contention.
In recent years we have seen a much more widespread understanding from corporations about the business value in engaging in the startup world. There is less interest in PR-type activities and more interest in solving real business problems. Larger companies are looking outside their own walls to find the talent and innovation that small business and startups offer. Corporations are now focusing in on procurement as they realise that smaller companies are often the best place to look for solutions to their own business challenges.
Corporations have essentially become the perfect customers for small businesses. For example, banks are buying from fintech startups to keep up with the demands of customer expectations, while big businesses are investing in startups supplying AI recruitment solutions to improve HR processes. Accepting that not all the talent lies within corporations, big businesses have to engage externally. At VentureRadar we helped a manufacturer of ultrasound-based treatment devices find technical assistance from a small business after they came across a glitch in their devices. Not only did this small business contractor solve the problem, but it was more efficient and cost effective for the larger manufacturer compared to their traditional approach of trying to solve the problem internally.
A new relationship has therefore blossomed whereby corporations are happy to work within an ecosystem of small business collaborators that can provide them with new solutions, solve technical problems and help with innovative activities. In return, this collaborative environment presents small companies with a huge opportunity as securing a corporate client can quickly build a strong reputation for your business and stir word of mouth referrals. Startups and small companies should therefore make the most of this change in friendship.
Andrew Thomson is the founder of VentureRadar, a platform that monitors data on innovation around the globe, discovering and ranking companies to make them visible to potential partners, customers, and investors.