A shifting power balance from corporate to start-up? by Hannah Tilston

Insights from 10 start-up CEOs, CFOs and Founders.

The rise of rapid, disruptive change has created a new imperative for organisations to innovate and compete, with start-ups playing a pivotal role in unlocking new business models, products and services. Whilst corporate benefits from open innovation with smaller firms are much discussed, I used my MBA research to explore it through the lens of a start-up CEO/Founder. This article shares the summary findings and will be followed by deeper dives into each theme.

Finding 1: Start-ups often valued intangible resources (skills, knowledge, reputation) above tangible resources (funding, physical assets) as benefits of a corporate collaboration

The priority of many start-ups is optimising their product-market fit, by understanding the corporates as potential customers, with product/service feedback being the CEOs' most sought-after outcome from a collaboration. An exception was where tangible resources were highly sought-after as a benefit from corporate relationships were start-ups needing access to high value capital assets such as machinery to test their product.

Start-ups were heavily focussed on understanding the corporate problems, opportunities and requirements.

"We want to understand the core drivers of why a course of action is being taken and how the potential product, technology and proposition fits into that"

 

“We got a good insight into the intricacies of how they operate. You see opportunities left, right and centre for how your product can work".

 

Finding 2:Start-up CEOs sought a range of partnership types with corporates, which they expected to evolve over time

CEOs requiring access to high-value physical resources e.g. test equipment preferred strategic partnerships with corporates as a route to access such assets. In doing so, many CEOs acknowledged they risked over-specifying their product to the corporate partner by forming such a close bond so early in their product development.

In contrast, transactional customer-supplier relationships were often favoured by start-up CEOs whose offerings were software-related. Without the need for high value test assets, these CEOs appeared more concerned by the potential for the corporate to appropriate their IP for local gain. A more arms-length relationship was considered one mitigation against this risk.

The start-ups also recognised that different relationship types with corporates suit their different growth phases. A transactional relationship may lead to a strategic partnership that ultimately ends in acquisition. All the start-ups showed openness to a range of future options.

Finding 3: Start-ups are discerning in their selection of corporate partners: alignment of operating characteristics is critically important

The start-up CEOs were steadfast in their opinions relating to the selection of corporate partners. Candidate corporate partners were initially identified by market fit and potential for future revenue. The down-selection focussed on corporate operating characteristics: those exhibiting the most "start-up-like" features (agility/timeliness, a culture of experimentation and clear points of contact) are more attractive as they can support the start-up’s need for rapid progress with limited resources.

As one CEO put it:

"the culture…how they work and how fast they are [determines partner attractiveness]. How they innovate is an important aspect."

 

From another:

"it would have to be at our pace – that would be critical"

and from a third:

"Openness to working with and understanding of start-ups [is very important]." 

 

Finding 4: Compounding competitive advantage may benefit corporates who collaboratively support start-up development

As corporates that can act quickly upon a start-up collaboration opportunity are more attractive partners, they stand to benefit from the highest-quality start-up approaches. Through these collaborations, the corporates can further increase their agility, competitiveness and further improving their attractiveness to subsequent collaborations. Adaptable exploit this positive feedback loop, at the expense of bureaucratic ones. Some corporates may need to transform their ways of working purely to become “eligible” as potential partners for the most innovative and sought-after start-ups.

Finding 5: The traditional power imbalance between corporates and start-ups is shifting

Start-ups are developing increasing power as they disrupt markets and threaten corporate incumbents. Corporates can no longer assume that start-ups will seek to partner with them purely by virtue of their market share and size. Instead, both parties clearly articulating their objectives for the relationship, the value they will contribute (both tangible and intangible) and the distribution of decision-making power is the basis for a successful outcome.

Conclusion

Successful corporate-start-up collaboration is built upon trust, reliant on a mutual appreciation of each other's context, priorities and challenges. Evidently, start-ups are becoming increasingly discerning about potential corporate partners, meaning that the power to attract, establish and drive a collaboration is no longer solely in the corporate's hands. Finance is readily available for start-ups with a compelling proposition; corporates must show how they contribute other forms of value. Each must position itself to be an attractive partner for the other.

The research also highlighted a knowledge gap between start-ups and corporates (and vice-versa), driving misperceptions about each other's priorities, especially related to corporate knowledge of start-up needs. Closing this gap is the first step to generating trust and unlocking mutual value creation. In future posts I'll explore the underlying misperceptions and implications of each finding above, with actions that start-ups or corporates can take to improve their open innovation efforts.

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Hannah Tilston is a transformational leader who has delivered change programmes within supply chain, project operations and HR settings for a FTSE100. Her focus is ensuring businesses deliver value from all their resources – from their internal workforce to their external supply chains and ecosystems, by optimising their design and management. In particular, she supports businesses assessing stakeholder incentivisation at an organisational level, to mitigate siloed change management. Open innovation is a route to transformation, and Hannah has experience in both the corporate and start-up domains as well as research into corporate-startup collaboration. Hannah is a Cambridge graduate and MBA, and in her spare time is a keen scuba diver.