Yin and Yang of Digital Disruption: 5 suggestions for a successful Startup-Corporate collaboration

The business your company operates in is already dead... although not yet. But it is a matter of time. High-Tech is transforming the real economy at an amazing speed. If your company or your industry has not been disrupted by the FAMGA (Facebook, Apple, Microsoft, Google and Amazon) yet, be sure it will be sooner or later, either by one of these companies or some other digital player. Disruptors show no mercy, they don't respect any tradition, they take no prisoners. The only hope for your corporation to survive is to work with startups.

Digital evangelists and consultants in the digital transformation space are probably spamming you with end-of-the-World phrases, like: "Change!; Evolve or you are in trouble!; Disrupt, or be disrupted!; Be digital or be nothing at all!". And there is no but... they are, simply, right!

We cannot negate reality but what we can is give you a handful of concrete recommendations on how startups and corporations can work together to harness disruption. We, at KAHI, are strong believers that (tech) startups and corporations are part of the same problem and solution, and this was the topic of our firechat at DES 2021 conference in Madrid: how to build win-win relationships between startups and corporations.

Kahians have a long experience in working in the space of technology adoption. Operating in the space between technology creators and technology users, facilitating a mutual change process. All the way back from the adoption of Digital Maps for contextual advertising to the more recent space of how to use Artificial Intelligence to augment human workers in factories.

By working in this space we have been witnesses and actors in the digital transformation of economy, and one of the things that we've found is that corporates and start-ups can establish symbiotic relationships that generates magic (As Arthur Clarke said, “Any sufficiently advanced technology is indistinguishable from magic”)... but this is if, and only if, the execution path is right.

The key challenge is that, despite both types of companies seek the same business goals, they are quite different in approaching their operations. Startups are agile, visionary, bold while corporations aim to be predictable, consistent and reliable; and these differences generally interfere with their collaboration. But counterintuitively, these very differences make them highly valuable to each other. Corporations need to be a little bit more ‘startupy’... and Startups need to be a little more ‘corporaty’.

Let us now make our 5 key suggestions for a successful corporate-startup collaboration:

Having the right people and in the right places is what makes company’s muscle memory. Corporations tend to regulate the innovation process because they are convinced that by following the process they are too going to ‘always’ make innovation predictable, consistent, and reliable. However, at the end of the day, it’s a customer-centric culture and a positive attitude, but not the process, that drives entrepreneurial success. It is the drive, vision, and ability to make things happen of “intrapreneurs” what ultimately makes the difference so finding the right “intrapreneurs” becomes critical.

While it is possible to find internal workers that can be nurtured to be “intrapreneurs”, the hard reality is that corporate working culture does generally not foster these types of personalities. Steady jobs, lack of true end-to-end accountability on company results, and political powerplays favor the development of dependable corporate leaders. Entrepreneurial personalities are often unrecognized and seen as misfits. To this effect, hiring intrapreneurs that have previous experience both corporations and in the startup world can be an incredibly beneficial and bridge this culture gap.

For this reason, it is extremely important that corporations co-innovate with startups. Corporations should seek in startups not only short-term technological remedies for their business challenges, but also the agile, bold and rebellious spirit of entrepreneurship. They need to leverage external forces that challenge the status-quo, that are not afraid to fail, and will relentlessly persevere to identify, develop new solutions and drive their transformation.

The power of entrepreneurship is unquestionable and unstoppable. If corporations do not collaborate with startups, this power will be latent and invisible… until it brutally manifests itself as a disruption in the corporation’s business.

Companies need to be obsessed about knowing their customers and their partner’s problem sets.

The true value of your products and services is determined by a customer willing to pay for it. It is seldom related with the technical or intellectual merits of creating or delivering the product or service. Conversely, the true value of the products and services that a supplier can provide to you is only as relevant as your capacity to fully understand its potential.

It is the norm that companies create marketing departments with the intention of communicating to the market and making themselves understood. It is not that often, that companies create departments aiming to bridge the communication gap in the other direction: getting to really understand the market.

Entrepreneurs are risk-takers and urgency is the norm. So many times their solution is to take a shortcut to the market: deliver what they believe is great without validating what their customers really need. This is a mistake. Entrepreneurs should not worry excessively about exposing intellectual property and having their ideas stolen. They should focus on the prime customers and dig into establishing the right product/market fit with a rigorous methodology, like the one developed in "The four steps to Epiphany" by Steve Blank or from our strategic partners at Alta Ventures and Technium who wrote one of the original Lean Startup books “Nail it, then Scale it".

Similarly, the tyranny of the urgency is also the norm in corporations but in this case risk-taking is sometimes subconsciously avoided. This leads them to have short attention spans and give up on understanding startups too soon. This is also a mistake. It limits corporations’ capacity to source disruptive innovation because it makes them select startups based on their capacity to communicate with clarity and not on its true technological merits. What looks good wins over what is good. Corporations’ innovation departments should put more effort into deeply understanding what startups can offer them beyond the self-evident aspects and less time in showcasing the latest and greatest.

This superficial and reckless attitude of not trying hard to understand the other is not only arrogant, but it is also a major hamper to innovation. Corporations give up on understanding what startups can provide them, and startups fail to understand what corporations really need. It is as absurd as two loudspeakers shouting at each other.

Corporations are performance-driven. They are generally good at developing existing markets, products and customers. Innovation, however, brings disruption and can not be managed as the mainstream business. It requires an operating model within which new ideas can ripen and blossom. The corporation needs to create a protected environment – yet not overprotected – to foster true innovation, with different performance metrics, dedicated budget and resources, which is managed with an entrepreneurial mentality.

The same thing happens for startups. Although their urgency for results (i.e. revenues) is even more pressing than for sustainable corporations, they need to understand that there are certain shortcuts that lead nowhere; they cannot shortcut understanding true customer needs, they cannot shortcut going through long sales cycles – which is better to understand as purchasing cycles –, and they cannot shortcut making their products look and feel reliable. If cashflow is a concern, they better focus on finding the right investors for the stage of development to get enough liquidity.

Now, it is easy to overdo these recommendations.

On the corporate side, it is easy to create isolated and disconnected teams (we call them “mushroom projects”) that end up having no impact on the business. There should be a clear path of incorporating the newly born business venture into the normal corporate structure once they are mature enough or quickly spinning out and letting it live on its own. This should not only be a goal, but also a commitment.

On the startups side, it is also tempting to abuse private funding. Once founders are sufficiently diluted, they may become comfortable at living off the funding (with decent salaries and no true commercial accountability) instead of really pursuing profitability.

But in any case, it is lack of resources more often than indifference what hampers entrepreneurship and for this reason we recommend not strangling innovation.

Startups providing solutions to corporates have a big responsibility. The reputation of the corporation is on the line, so startups really need to meet the standards. The end customers of the corporation do not care who is behind the curtain. They expect a solution to be at the expected level of excellence, and they generally do not want to be “beta testers”. This is one of the main inhibitors that discourage corporations from doing business with startups and therefore startups must strive to be "corporate-ready".

Being “corporate-ready” means that the solutions have to work in real operational life, that the start-ups have to have an operating model which plays well with the corporation and they need to be serious about their commitment following through to the end. If start-ups do not meet this, they do not get to play.

What more, the startups solution and overall communications should aim to look clean, sharp and professional. Although this (investing resources in improving appearance) may sound superficial and frivolous in the eyes of talented technologies, it is the looks and not the technical excellences what most of the time influences the opinion of corporations about startup’s corporate readiness.

Proof of concepts can be deadly distractions, and press releases are lethal traps.

It is fantastic for a start-up to close a Proof of Concept (PoC) with a big company. But be aware of not ending up in the dangerous loop of one PoC after the other. There is a risk of never scaling up the business with real purchase orders. Startups have limited resources and, therefore, need to be very careful in picking their battles. They need to triage PoC opportunities from the beginning to avoid becoming simply entertainment, and instead constantly strive to convert them into recurring service contracts.

So, when does a PoC lead to something? When it is done with the right people and when it helps demonstrating that there is a positive impact to the business. And this means it is driven by business or product owners who are interested in evaluating the return-of-investment (ROI). It needs to be led by the ones who own the the fundamental "pain-point" can only be solved with the proposed solution.

And even more dangerous than the "PoC trap" for a startup is the signature of "Letters of Intent" and press releases. Corporation often use these to be perceived as a dynamic and innovative companies. The reason for this might be the fundamental disconnection between the corporate unit that is signing the agreement and the customer-facing units that are actually selling the value proposition to the end customers. Purchase orders, rather than press releases, are the documents that really matter to a fruitful relationship between corporations and startups … when startups and corporations end up talking like true partners.

Startups and corporations have immense benefits from collaboration. And it is possible to make magic from the combined energy. Startups are a source of fresh talent and ideas that can help rejuvenate corporate culture, bring new technologies to the table. Likewise, corporations provide numerous advantages for startups apart from being customers. They provide market knowledge and experience, established networks and brand power.

But these (sometimes) contradictory types of companies can only become complementary and reinforce each other if their collective energy is harnessed properly. The relationship needs to be nourished and to some extent properly managed. Success is not a coincidence. Leveraging the union between these two strongly depends on the relationship being actively and proactively managed.