These organizations aren’t alone. The 2014 GE Global Innovation Barometer survey reports that 85 percent of corporate respondents said that collaboration with startups and entrepreneurs will drive success for their organization in the future.
What’s driving this trend? At its core, there are two key reasons why global brands are moving out of their comfort zone and embracing collaboration with new upstarts: defense and offense.
As Clayton Christensen argued in the Innovator’s Dilemma, many established market leaders are eliminated faster than anyone could have imagined by new entrants with disruptive innovations that create new markets and value networks. The startups that create these disruptive innovations are dangerous because they tend to come from outside the existing status quo and do new things in ways that the existing market simply does not expect.
Disruptive innovation has always been a central factor in the technology industry. As software has permeated every aspect of our lives, the pace of innovation is accelerating in traditional industries such as education, finance, agriculture and food, healthcare, transportation, and even government services. Smart incumbents are recognizing this trend and looking to get as close as possible to the source of these disruptors. At the end of the day, they’re realizing that it’s better to buy them before they eliminate you.
The other major reason incumbent companies are taking note of startups is the urgent need for growth. Since 2008, major corporations have gone through an extended period of cost reduction with the aim of shoring up balance sheets. Six years later, our corporate leaders are lean machines with balance sheets swimming in cash. In the short run, they’re using this cash to reward shareholders with dividends and share buybacks, but there’s a limit to the success of this strategy in the long-run. Many institutional investors are starting to ask pointed questions about where our corporations will find sources of growth in the years ahead.
In March, Larry Fink, Chairman and CEO of Blackrock, which manages $4.3 trillion in investment capital, wrote a letter to the CEOs of 800 major global corporations to share his concerns about growth: “Too many companies have cut capital expenditures and even increased debt to boost dividends and increase share buybacks. Such tactics jeopardize a company’s ability to generate sustainable long-term returns.”
Where will this growth come from as corporations have slashed their R&D budgets to their lowest levels in many years?
Corporations in established industries searching for growth will find it in the same place that tech companies have for years: startups. It’s worth noting that even for our most innovative companies, they acquire many of “their” most iconic innovations. Google bought Android. Apple bought Siri. The list goes on and on.
While corporations are thirsting for growth, the cost to innovate for startups has never been lower. They’re unencumbered by the bureaucratic silos and cultural resistance that innovation teams in large corporations face. The have access to incredible platforms to build globally scalable tools—from the cloud and GitHub to digital marketing channels and collaborate marketplace partners like Local Motors.
The management models for startups, such as the lean startup methodology, have matured while new institutions have emerged to surround promising entrepreneurs with the resources they need to succeed—accelerators, incubators, and hubs. Fifteen years ago, it still took many millions of dollars to validate an innovative new product or service. In many cases today, it can be done for less than $1 million.
Many smart corporations have also shifted their acquisition appetites. Rather than waiting until a startup has scaled its revenue into tens of millions of dollars and grown to hundreds of employees—which means the acquirer will have to pay a significant premium as well as deal with significant integrations risks—smart acquirers are buying earlier than ever. It turns out it’s often less risky to acquire fifteen or twenty smaller startups per year with proven products and excellent core teams than a few mega-acquisitions. Then the corporation can do what it does best: apply its global scale to taking those products into massive markets.
In fact, between these two trends, the challenge for corporations isn’t finding promising startups with technologies that could either take them out or unlock their next growth opportunity. The challenge is that there are so many startups—and the corporations are looking to invest and acquire earlier than ever—that it can be hard to find the real signals in the noise. Smart corporations are aggressively looking to engage with startups through partnerships, investments, and acquisitions. But they need to do so in structured ways that allow them to manage the apparent chaos.
The companies most successful at collaborating with startups are realizing that they need the right structures to make this happen. They have to get out of their own silos, cultural barriers, and corporate jargon and go to the startup community on their terms.
Partnering with accelerators and hubs can be a symbiotic relationship for everyone. Startups can get access to mentorship and industry insight from corporate partners in their formative stage. The corporations get to know a broad swath of vetted entrepreneurs for months or years prior to making an investment or acquisition decision. And the accelerators and incubators benefit from financial support as well as the proximity of partners interested in acquiring the startups they’re helping to grow.
Evan Burfield is the cofounder of 1776, an incubator platform for tech startups.