Why large corporates should consider working with startups

In large corporations, no matter how hard you (they) try, innovation is always harder. Either artificial and somehow imposed, one of those corporate announcements:

Our employees get 4h a week to spend on their own ideas

Or, within the corporation, there might be attempts to facilitate hackathons followed by in-house incubators. grow platform, A Bosch Company , Area 120 by 谷歌 , SAP.iO Venture Studio by SAP , Ericsson One by 爱立信 , InGenius by 雀巢 are a few examples.

Internal hackathons - 24h or 48h sprints of brainstorming and trying to put together something that would showcase and help test idea's potential is another attempt to support or force new business ideas to be born within corporations. Often, with a follow-up support of an internal business accelerator. Meta , parent company for Facebook , Instagram and WhatsApp , is among champions in running internal hackathons and trying to innovate in-house. However, its most successful and long-living products, apart from Facebook itself, were acquired from outside. Meta Platforms, the corporation lead by its founder and CEO Mark Zuckerberg, had enough funds and human resources to experiment and try building its virtual reality and economy, metaverse related products and solutions, even its own digital currency for past few years, but none of this has seen daylight for now, and much of the efforts were frozen or abandoned in 2022-2023 in the wave of the economic slow-down in Silicon Valley and the tech space worldwide.

Facebook has reportedly attempted to invent, train and introduce its AI-powered chatbot, BlenderBot, but pulled it down soon after testing it with first audiences, as the bot tried suggesting silly and sometimes even dangerous ideas to those trying it out. Meanwhile, 微软 teamed up with ChatGPT AI , an AI chatbot created by a startup OpenAI , and while it is not perfect, this has become the biggest and loudest attempt to introduce AI to wider audiences, forcing Microsoft's stock price to pleasant heights .

Corporate accelerator, formed to host ideas born within a corporation, or the internal business accelerator, is among other attempts to drive innovation and its commercialization in-house. Why wouldn't it? A corporation has seemingly everything it takes: connections, human and financial resources, market intel, equipment, even distribution, marketing and sales channels. All that most start-ups do not possess and spend hours, days, and even years trying to obtain for their growth.

In most cases, what all those attempts are missing is passion, combined with the right deep knowledge, or the totally opposite - the lack of a specific knowledge that would make abandon the idea too soon ("I know it will not work") or that would have encouraged for wandering that allows for coincidences to take place (as Will Smith puts it in his book, Will, don't block the Universe!), too narrow focus forbidding from seeing a use-case for an innovation outside of the corporation's scope.

Start-up is naive,

its founders have some knowledge, in many cases, especially with more experienced co-founders in their mid- or late careers, the knowledge is very deep in a specific topic but limited in everything else, or it is solely a combination of tech knowledge which allows to experiment and build something that might work, or a scientific knowledge powered with limited lab facilities, to transform the written knowledge and findings into an MVP. Start-up has nothing to loose except its founders' time and some money, or larger money meant for wandering and taking risks, and hopefully achieving what's been ideated and conceptualized.

Start-up is flexible.

It does not have one corporate stakeholder to be responsible to (except for a founder's wife or partner), it does not have a 4-hour per day limit to work on the idea, instead giving all the time in the world someone can crave out of a night sleep or weekend.

Start-up is fast.

It does not have to wait for a quarterly meeting of a board or a bi-annual open-door day with a corporation's CEO to present an idea of a pivot. It does not have to book in hours or days of the corporation's engineers months in advance to work on some R&D tasks. Instead, a start-up might not have engineers at all. Or it is formed of engineers only.

Start-up can.

No matter how, it can. Whenever you ask if the start-up can deliver what you are asking, you get a yes. And then the team figures out, how. Or does not figure out and fail. But it can, always.

Start-up is entitled to say no.

It is not accountable to its parent corporation to deliver a specific solution to a specific need it has promised, or to go in the direction it align to. If something might not be for good for a start-up, its mission and call, and founders see it, they will say no. They will keep the mission and reason saint. They will be able to focus. And pivot.

Start-up has a mission and reason.

If it does not, it dies. The reason is not 4 hours a day provided to employees by the corporation to wander and try build something that would increase the corporation's stock price, or improve its public image.

联合利华 's former CEO, Alan Jope once said if its brand does not have a mission and stance, it might be about time for it to go (as per Bloomberg Businessweek , If a "brand can’t find its purpose,” he’d consider putting it on the chopping block ).

At the same time, same Unilever has gotten in too many arguments with the brand and company it acquired years ago, Ben & Jerry's , leading to the brand suing its owner, and the owner forcing the brand for its products to be sold in specific markets (Israel, after withdrawing following to its geopolitical and social stance), or even its somewhat limited brand-name along with a recipe being sold to another firm to work as a separate company, without the brand board's confirmation .

In the book Creativity, Inc., Edwin C. (Ed Catmull), Pixar Animation Studios co-founder and President at Walt Disney Animation Studios , carries readers all the way to the Steve Jobs building in Emeryville CA where its first HQ was based, and introduces to Pixar's early environment. Its founders and first employees, a computer scientist, an animator, an entrepreneur among them, all young souls, were seeking their way to make feature animation movies, and put their everything in the early projects.

As years passed and Pixar grew bigger, it had to reimagine its creative process. It faced what all start-ups turned large firms to become corporations face. It was everything that kills creativity, willingness to take risks, try out, pivot, and move forward. There were annual and long-term plans in place, budgets, forecasts, HR planning, production pipelines. All that a normal company has in place so its C-execs, investors, co-owners, and partners, as well as VPs, Managers and teams can plan and act accordingly. Everything that almost made Pixar's creativity fade away forever. As per Ed's story, the company managed to save it from loosing its image, its reason and mission, but we can see today that Pixar is a part of Walt Disney's Corporation, working hand-in-hand with its parent company on its projects, along with its somewhat independent projects.

Ok, you got it. If you believe the thirst of start-up founders is something you can not or do not want attempt to replicate, it is obvious that to introduce a possibly viable innovation, you might want to get strategically engaged with a start-up.

How would you engage with a start-up?

The options a corporation has include fully or partially acquiring, investing, creating a joint venture, or establishing another strategic partnership, as joint-selling, or develop or become a part of a B2B2B or B2B2C chain involving the start-up.

Full or partial acquisition of a start-up

First, to be bold, this is something start-ups do not seek. Start-ups are created to scale. A start-up founder's dream is to grow a unicorn (over 1 billion worth firm) and then sell or bring it public. The founder's mission is to change the world. It is not to build a product and sell it off. But things happen.

Large corporates tend to speak with start-ups from their giant power positions.

We own the market, we know the audience, we own supply chains, data. We have 100 year experience. You can go with us or risk vanishing in a year or two.

Show your cash-flow! Right, you don't have one!?

What's your runway? Oh, you don't know or don't want to tell?

O.K., let's speak in a few months (when your company will be dying and you'll be starving).

Start-up founders hate that. Start-up founders are brave, proud (of what they've built and can achieve in future) and dreamy. Some or many of them would better close down than sell to someone squeezing their egos. Some of them just left similar corporation or exited another unicorn, and don't buy in to tricks. Some of them don't recognize the trick but would (almost) never consider the idea of selling the young firm or its shares. They would sell shares to VCs, and VCs do not enjoy having a corporate share-holder with its own interests (see the story on Ben & Jerry's v. Unilever above).

The idea is clear. If a corporation wants to acquire a young tech firm, it has to make it clear for its founders and management that they are and will be respected and valued, and make the offer attractive enough to help or make give up individual dreams and be willing to make sacrifices for the firm's good.

As an example, Facebook, now Meta, acquired Instagram over 10 years ago . The transaction was a combination of the company's growth support plan offer, cash and Facebook's shares, along with keeping Instagram's management and even involving it in Facebook's management.

Investment in a start-up

A corporation willing to engage with a start-up and participate in its success can invest in it rather than acquiring part or the whole of it. What is the difference between investing and acquiring a portion of it? Not much in terms of a transaction. One party sells a part of the company to another party.

Everything else is what differs. Investment means believing in a firm, its dreams, goals, plans, and intended path, not just getting it or its assets. An attempt to set valuation is also unlike. In one case, it is assets, cash-flow, revenues, income, customer base, and intellectual property that sets value. In another, investment scenario, especially in early stages of a start-up, it is everything else. The team, the promise, the dream, the potential.

As an investor, a corporation can chip in funds meant for start-up's future growth or a product advancement, along with helping to test what's been built or starting to scale. The investor has a clear exit plan, as well as possible further considerations of a follow-up investment in future rounds, to increase its presence and further support the firm.

Investing in a start-up does not exclude possible future acquisition. Investing and getting to know the firm and vice versa will allow for both parties to consider future transaction based on trust being built, or destroying any trust that might have appeared, along with any joint future plans. It is easier to split in an investor - start-up relationship through future rounds, buyback (rarely), or management buyout of the shares owned by the corporate investor.

In a deal announced by 微软 & OpenAI in January 2023, it is hard to distinguish whether the follow-up injection of funds from the internet giant Microsoft in the fast-growing firm owning Chat GPT was an investment or a partial acquisition. While the both companies communicate clearly this as an investment, buying a noteworthy amount of shares in a company for some ten billion dollar and integrating the young firm's product in all the main Microsoft solutions is not a usual investment example.

Forming a joint-venture with a start-up

Bidding on a start-up is never 100% safe. Setting up and announcing a joint-venture to develop and introduce a new product is a commitment a corporation should consider twice. While bidding with just cash, by investing or acquiring a company, is a significant move, and especially an acquisition requires significant additional resources, to transition the firm to becoming a part of the corporation, a joint-venture is what requires from the corporation high levels of trust and excitement about what the young technology firm has achieved, and what both can create and achieve together.

Though any big-enough acquisition or investment (but why to invest or acquire something insignificant) can impact the corporation's stance, stock price, and long-term relationship with its shareholders and directors, it is a joint-venture that can leave a mark on these factors the most.

What if the start-up runs out of money?

What if the young firm's solution does not work?

What if the founding team of the technology firm decide to give up and do something else?

Is everyone 100% committed and willing to work together for the joint-venture, without looking for other pivotal paths for one party's possible good?

These are all questions the corporation's C-suites could be asking themselves and their directors and managers when evaluating the possible venture. Along with reconsidering its own human resources and market readiness for a possible ground-breaking product offering of the venture.

JOANN Stores - large handicraft equipment and accessories retailer in North America, and SVP Worldwide , brand owner and manufacturer of Singer, Husquarna Viking and Pfaff sewing machines entered into a partnership in 2022, to introduce a sewing machine with a built-in projector and sewing pattern customization app. JOANN brought in the deal young technology firm, Tailornova , which it had partially acquired, to develop the app. JOANN - a strong retailer, SVP Worldwide - an acknowledged hardware manufacturer, and Tailornova - a promising software developer. Ditto launched in early 2023 , after a repeated change of management in the venture and product development challenges seemingly overcome. Jo-Ann, which had become publicly traded company by that time, saw no positive impact on its stock price on the day of the launch or after it, instead significantly losing its value from 4.6200 in Feb 2, to 3.500 by Feb 14, with a further drop in its price for another month.

A joint-venture can be a huge opportunity but also a trap. A joint-venture involving various parties should be well-considered, taking into account existing supply chains and sales channels, market readiness and opportunity, human and capital capabilities, partner risks, and any impact on to existing business relationships.

Entering in a sales or marketing partnership with a start-up

Joint-selling, co-selling, joint-marketing and other ways to introduce start-up's offering to the corporation's client base can be a cautious way of testing out the product and its market fit, possible closer partnership between the two parties, and the capacity of the team and technology.

Such a partnership can become a standalone activity of a corporation to work with a start-up, without any future plans to capture the young firm, too. Adding another revenue stream without much of risk (joint and co-selling), showing its customer base the corporation is innovative and open enough, helping its customers by suggesting (co-marketing) them a product or solution that fits their needs might turn into something bigger in future, but can be totally enough to start.

In some cases, a large corporation can not be flexible and fast enough to be able to engage with a promising, young tech-firm in any other way, even if its top management wants that. The larger the corporation, the more stake-holders are there to get sign on before the management can make and confirm decisions on an acquisition, investment, or a joint-venture. Starting to work with a firm is something that allows to keep the desired company around, help it thrive, and let the corporation's decision-makers see and believe in the probability of the success of the possible future deal.

For a technology firm just initiating its business development, such a partnership can become a game-changer, opening for large groups of its target audience and providing a source for product feedback, cash-flow, data, and encouragement for further growth.

Mimi Hearing Technologies , Germany headquartered innovative firm scaling and advancing its technology to improve one's detailed hearing from various smart devices without increasing volume, partnered up with 飞利浦 to include the technology in the latter's smart TVs. The Dutch home appliances maker does not purchase from Mimi. Instead, as soon as the technology is activated on the device by the device's user, Mimi is entitled to an agreed fee.

Similarly, car-makers can partner up with technology providers for vehicles, especially nowadays, when 宝马 , Toyota Motor Corporation , Tesla , 大众 and other automotive companies have started switching from "what you purchase is what you get" to "when you pay is what you get" , meaning, your car might have back-seat heating included technically, but it would work only if you start subscribe for this comfort feature.

Product companies are becoming platforms enabling for innovators to sell through them. Service companies have enabled such an opportunity for long.

Large money and effort are put into enabling, boosting, and supporting innovation within corporations and making the ideas thrive and see the daylight. The reasons are obvious. Control, rights, demand, necessity, and resources speak for themselves. It seems much easier to build something in-house than try to acquire from outside. Still, as with many good things in this world, it is very hard to replicate something that happens naturally in uncontrolled and unforced environment. It is the openness, readiness to collaborate, and preparedness that defines whether the corporation will succeed in introducing the innovation to a corporation's future growth, regardless of the source.

In further stories dedicated to corporates working with start-ups, we are going to discuss more in detail on

1. How partnerships between corporations, large companies and young innovative firms can work.
2. What's next after starting to work with a young technology firm.
3. How to connect with start-ups.
4. How to assess and determine the best way of working together, and whether it is a good idea at all.
5. How to negotiate a future deal between a corporation and a young technology firm.

Comment, send to someone who'd have his/her thoughts or experience to share, and drop me a line about what you think.

The author.

Aivars Mirzo Lipenitis helps detect, initiate, set-up and make thrive strategic partnerships between young technology firms and corporations. Aivars has former founder and manager experience in business services, internet business, media and entertainment. Aivars M. Lipenitis also trains and judges start-up and researcher teams at business acceleration and innovation funding programs in Europe, U.S. and Asia. A.M.Lipenitis teaches technology entrepreneurship with a focus on business modelling, sales strategy and customer oriented marketing. The author is researching innovation ecosystems.