Business From the Magazine Innovation

Big Companies are Learning to Work with Small Ones (But It’s Not Easy)

Illustration for Techonomy by Emmanuel Polanco

Dutch phone company KPN didn’t see it coming. After startups began to make it easy for people to send text messages over the Internet, eating into the SMS business of telcos worldwide, KPN’s share price plummeted. In 2001 the company’s chief executive announced massive layoffs and issued a profit warning. Three years later Facebook paid $19 billion—more than the market cap of KPN—for just one of those upstarts, WhatsApp.

Welcome to a new world, where the smartest people at the biggest companies are constantly being blindsided by seismic shifts.

Telecom operators are hardly alone. Moves by Silicon Valley upstarts are accelerating car manufacturers’ moves to morph into mobility service companies. Insurance companies are seeking ways to compete with digital interlopers that process and pay claims in seconds. Growth for banks is elusive at a time of rapidly accelerating disruption, so they are entering new markets like digital identity, while energy companies are expanding into everything from health monitoring services to food delivery.

That’s not all. Businesses across the spectrum are wondering how to respond to artificial intelligence technology, which promises to impact everything from the way steel is produced to how farmers grow crops.  “Every few months a new technology or approach or concept pops up,” says Robert Wolcott, professor of innovation and entrepreneurship at the Kellogg School of Management at Northwestern University. “And there is a greater sense of urgency across most industries to do something about it.”

That urgency is driving big corporations into the arms of startups.

It is no longer just about Silicon Valley tours where buttoned-up executives meet young entrepreneurs in hoodies, as if visits to “startup petting zoos” could somehow make companies more innovative. Corporates are acquiring, investing in, or partnering with startups around the globe in record numbers.

More than 1000 big companies worldwide have opened corporate venture arms, spreading their bets by taking stakes in multiple startups. Some corporations are creating their own stand-alone “startups” and recruiting entrepreneurs to run them. Another strategy is opening stand-alone incubators and accelerators or joining ones backed by multiple players. Other models include hackathons and global startup competitions, or opening labs in universities and then taking stakes in the companies that get spun out. (The following article, on page 14, details another approach—using crowd funding platforms to validate corporate ideas.)

There is good reason to outsource R&D to young companies. They bring agility and fresh thinking to big corporations that are not only bogged down by bureaucracy but are slaves to quarterly results. That makes it difficult, if not impossible, to willingly cannibalize cash cows. “Startups have a huge advantage: they don’t have legacy systems or legacy thinking,” says Harrie Vollaard, head of innovation at Rabobank, a forward-looking Dutch multinational financial services company. But big corporates have something startups don’t: market expertise and customer reach. On paper, they make appealing partners and customers for startups, which seldom have the resources or experience to scale on their own. In a recent accelerator Startup bootcamp survey of global startups, 45 percent said they are looking to sell their products and services to corporates; 30 percent said they want to collaborate with corporates to pilot a project or for a proof of concept, and 17 percent said they want to partner for distribution or resale purposes. (See chart below.)

But there are downsides to working with behemoths. For starters, big corporates work on different time scales. Take the case of Hoana, a Honolulu- based medical device startup. It announced a partnership with a large automotive seating manufacturer in 2015 to introduce a vehicle seating system that can detect the physical and mental status of occupants. The product is still in the testing phase. “Anything you put in the car has to go through at least two to three years testing, so the time line on monetization is very different,” says Edward Chen, Hoana’s President and COO. “Our collaboration is going well, but if we were based entirely around the auto industry we would probably go out of business.” The frustration for startups can be similar when working with companies in industrial manufacturing or highly regulated and conservative industries such as banking and insurance.

Institutions are burgeoning to help bridge the gap between the large and small. To say that there has been an explosion of incubators and accelerators in the last few years is an understatement. Over 180 specialized accelerators worldwide are playing the role of coach, helping corporates understand internet time, even if they can’t yet dance in step. The accelerators offer early-stage companies short, fixed-term programs that feature education, mentorship, financing and connection to big corporate customers. There has been so much demand that Startupbootcamp created specialty accelerators for banking, insurance, food, digital health, smart cities, and the Internet of Things.

Admiral Group, a large UK car insurer with a presence in seven countries, has joined both the Plug and Play Tech Center in Silicon Valley and Startupbootcamp InsurTech in London. “It gives us a lot of visibility on what is happening in the market and what the trends are,” says Ori Hanani, head of operations for Admiral Group’s French unit. “We try not to get distracted by shiny things that seem very cool and instead concentrate on whether this will generate value for our shareholders.” Both Admiral Group and Rabobank say they are getting value from working with accelerators because their membership is linked with broader company-wide innovation programs.

But for too many big financial services companies, joining an accelerator “is just a box-ticking exercise,” says Nektarios Liolios, cofounder and CEO at Startupbootcamp Fin- Tech London, who has witnessed many failed efforts. “It is very rare anybody has put any serious time in trying to be strategic about this before embarking on the journey. Ask many of them how they measure the success of their initiatives and it is interesting to hear the answers you get—mostly corporate blah blah and naïve assumptions.” The banking sector has a particularly steep learning curve, he says, because “there is no R&D culture. They don’t understand that you need to try multiple things at the same time and that not succeeding is an important part of the process, to find the one thing that will actually work.”

And, adds Liolios, “none of this will have any success unless banks invest heavily in culture change internally.” Regine Haschka-Helmer, a digital transformation and innovation specialist and CEO at Seedlab in Berlin, agrees. “A lot of corporations are turning to accelerators to solve all their problems and make them more innovative,” she says. “It is never going to happen. Accelerators are like an island. They are good for learning and getting in touch with the startup scene, but not for transforming the core of your company. Corporations need to first define what they want to change internally.”

So how does a company change internally and integrate innovation into the way it had traditionally operated?  There is no off-the-shelf innovation operating system. Every large business is struggling, and there is general agreement that no one has found the magic formula. Banco Santander, a Spanish retail and commercial bank with operations in more than 10 countries worldwide, is experimenting. “There is a need for cultural change, to think differently and work in a different way. It means taking people out of their comfort zone,” says Sigga Sigurdardottir, chief customer and innovation officer at Santander’s UK unit. She is part of a 20-person innovation team focused just on that market. The team sets up partnerships with fintech startups to help the bank roll out new digital services (see box on next page).

The bank has created an alternate governance approach for innovation projects. Senior leaders meet monthly to make decisions “incredibly quickly,” Sigurdardottir says. Sometimes that means approving projects that  may cannibalize existing profitable businesses. “It is often not an easy conversation, especially when revenue models are in place, so we frame it around the opportunity and the customers,“ says Sigurdardottir. The bank has little choice, she says. New European legislation will soon open the floodgates to new competitors. Banco Santander is shoring up its defenses by participating in accelerators such as FinTech Innovation Lab and also operating its own $100 million venture fund, Santander InnoVentures.

Illustration for Techonomy by Emmanuel Polanco

Santander Learns from American Startups

Banco Santander, a 160-year-old bank operating in more than 10 countries worldwide, is working with startups to roll out new digital services to its client base. Thanks to a collaboration with U.S. startup Ripple, Santander UK was able to introduce blockchain technology for international payments via a new app it tested with customers in May 2016. And the bank added an automated small business lending service in April 2016 with the help of Kabbage, another US startup. The bank’s venture arm is an investor in both companies. “Bringing fintechs into the bank really helps break down silos,” says Sigga Sigurdardottir, chief customer and innovation officer at Santander UK.

Putting money into startups is another trendy way to absorb some of their DNA, or maybe more. In 2016 corporate venture funds invested $24.9 billion in 1,352 deals globally, according to CB Insights. Not surprisingly, the most active funds were those of big tech companies long active with startups. Intel Capital and GV (formerly Google Ventures) were tied for first place, with 50 deals each. The venture arms of Salesforce, Comcast, Qualcomm and Cisco were also in the top 10, as were funds run by GE and Bloomberg.

But operating new corporate venture funds are companies that would not likely have dreamed about such an approach until recently, such as Campbell Soup, JetBlue, Kellogg’s, Volvo, and auto parts maker Robert Bosch as well as farming equipment maker John Deere. In the UK, the most active corporate venture firms include an arm of ad agency Saatchi & Saatchi called Saatchinvest, consumer goods company Unilever, pharma company Pfizer and Aviva, an insurance company, according to CB Insights.

But not all companies think a venture fund is a good idea. “We decided not to set up a corporate venture capital fund because it creates unhelpful incentives,” says Todd Roberts, senior vice president of Canadian Imperial Bank of Commerce (CIBC), one of the five biggest banks in Canada. “You end up investing just because you have a fund, and then you have pressure to exit those companies. We think that to hold on to something for five or seven years and then get out runs counter to our objectives as a company.”

But that doesn’t mean CIBC doesn’t ever fund startups. It is one of six banks that invested a total of 27 million Canadian dollars in a fintech company called SecureKey last October as part of an ambitious plan to roll out a national digital identity network in Canada to offer a secure way for consumers to exchange all types of personal data. The project– possibly the largest privacy-by-design consumer digital identity service initiative to date–is expected to be the first widespread commercial use of blockchain technology in financial services.

Striking a deal with a big corporate like a bank is 50 percent hard work, says SecureKey CEO Greg Wolfond. “The rest is timing, good luck and the ability to get to the right person inside the company. We were lucky enough to get through to the right people.” The banks are not just placing a bet on a new technology. They are hoping SecureKey’s digital identity and authentication technology will help them branch out into entirely new markets and put them at the nexus of the digital economy.

General Motors’s $500 million investment in ride-sharing company Lyft was spurred by a similar motivation. GM, which has its own corporate venture arm, chose instead to invest in Lyft directly. Says Jochen Renz, managing partner at New Mobility Consulting: “Autonomous driving will almost certainly start with ride-hailing fleets rather than personal vehicles. Through the investment in Lyft, GM most probably wanted to…test autonomous vehicles in real world driving conditions and get access to future business models enabled by robotic cars.” Autonomous fleets enable the collection of vast amounts of data that help train the artificial intelligence required to manage driving. GM also made a direct investment of around $1 billion in Cruise Automation, an autonomous vehicle startup. Other traditional businesses are also making direct investments, aiming to leap into the digital age: Unilever spent $1 billion to buy Dollar Shave Club, a startup that sells razors online; and Walmart spent $3.3 billion on internet retailer Jet.com.

Corporations can’t always find existing startups to buy or partner with. So they are turning to professional “company builders” such as Barcelona-based Heywood & Sons to create their own “startups” from scratch, often headed by experienced entrepreneurs.

Another company builder is Founders Factory in London, backed by corporates in six sectors: easy-Jet (travel), L’Oreal (beauty products), Aviva (fintech), Holtzbrinck (education), Guardian Media Group (media) and CSC Group (artificial intelligence). Founders Factory has a 60-person staff and promises to build and scale over 200 early stage tech companies in those six sectors over the next five years.

A website for buying used cars online called Hellocar was created by Founders Factory and then spun out as a stand-alone company at the request of The Guardian. It was looking for new types of e-commerce sites to generate revenue for the newspaper. Founders Factory hired a serial entrepreneur to be the CEO. Hertz was brought in as a partner to increase the supply of used cars and Aviva, a global insurer, to provide insurance. “All of them helped in the go-to-market process,” says Founders Factory co-founder and CEO Henry Lane Fox. “Now we are getting interest from clients in energy, agriculture and consumer goods,” he continues. “All these companies realize that new technologies will impact their channels of distribution, their business models and their productivity. The race is on to get it right, and big companies are just too distant from what this world of digital really looks like.”

Like other insurance companies, Dusseldorf-based Ergo Group, the primary insurance arm of Munich Re, finds itself under pressure to react to dramatic changes impacting its multi-trillion-dollar industry. Ergo is in the midst of a $1 billion spending spree to transition into the digital age. The company is modernizing its IT and processes while separately launching a fully autonomous digital insurance company called Nexible.

And it is deepening its relationship with startups. Ergo finds them in a variety of places: it is currently a member of Startupbootcamp InsurTech in London and has begun doing some investing. “The first step after we qualify them is to put them in touch with the relevant business unit,” says Ulrich Kleipass, Ergo’s head of innovation. “We can support the startup in our digital labs in Berlin for one month or three months. If we don’t get a commitment from the business unit we stop the project. We can’t force innovation on them. It is up to them.”

Ergo additionally has project managers for scaling successful projects, integrating them with the company’s IT and bringing them to market. “Currently we have eight projects running,” says Kleipass. “You qualify 600, talk to 200, introduce 50 to the business side, go in-depth with 15 and wind up with five projects.” When it comes to working with startups and going digital, “there is no silver bullet,” he says.

Groupe Danone Outsourced the Creation of a New Company

Global food company Danone turned to company builder Heywood & Sons to help it find a way to create a direct connection to Spanish consumers of its Font Vella bottled water. Heywood built a startup for Danone with the help of an experienced entrepreneur. The new entity quickly discovered that customers in Barcelona hated lugging water bottles home from neighborhood shops. So it set up a website that offered a delivery service via WhatsApp. Pep Viladomat, CEO and  co-founder of Heywood & Sons, says using WhatsApp got five times more people to subscribe to the service than when they tried something similar with a conventional website. Danone always intended to bring the project back in-house, but when it did it had to drop WhatsApp. “We cannot use a service for our customers that does not explicitly explain where the data is saved,” says Gemma Ferrer, Digital Business & Transformation Marketing Manager at Danone Waters. But she says Danone is pleased with what it learned about business models with the startup and its direct-to-consumer approach. Danone later created a site called www.fontvellaencasa.es to make it easy to arrange recurrent delivery.

But the fate of companies and even entire industries hang in the balance. Corporations face a Kodak moment: They can treat tech as strategic, move quickly with the help of the right startups and change business processes and company culture. Or they can make superficial moves and be too slow in transitioning to digital and see their businesses decline. Film pioneer Eastman Kodak filed for bankruptcy in 2012.

JENNIFER L. SCHENKER has been on staff at The Wall Street Journal, Time, International Herald Tribune, Red Herring and Businessweek. She is launching a new print magazine called The Innovator aimed at big corporates to explain how tech impacts business and to help connect them to start-ups.

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