Startups and Corporations: the Winning Partnership

With the increased need to diversify their innovation enabling vehicles, more and more corporations are drawn on the startup partnership path. Make no mistake, this is not a single sided deal, chief executive officers of both corporates and start-ups share the common strategic goals of growing their respective company, improving its competitive positioning and generating revenue. Some corporations even go as far as to partner with potential disruptors. Although it might sound counterintuitive this can be beneficial because of the difficulty for an established business to disrupt from within and difficulty of the startup to understand the industry they so much desire to disrupt.

But working together - two companies of different  sizes, cultures and strengths - comes with various potential pitfalls. Chief executive officers of start-ups often find themselves talking not to the chief executive officers of corporates, but to employees much further down the hierarchy. Making aligning expectations even more difficult. Complications also commonly arise from a clash of cultures: agile versus waterfall. Different work ethics and different risk appetites might, further down the line, spin the collaboration out of control. 

Although the benefits of a collaboration are different for each party, they are substantial enough to bring the two together and make them work through their differences.

For startups, revenue is often the primary incentive especially if the startup is an early-stage company. Big corporates can invest considerable amounts of money in a partnership. This capital infusion can free start-ups from the need to seek outside investments. Corporates can also have a long-term interest, which may stabilize a start-up and help it to reach break-even or even profits very early. Such an approach allows the start-up to achieve sustainable growth, independently from scarce venture capital.

Another benefit for startups to enter in a collaboration with a legacy company is riskless internationalization. Working with a multinational established organization offers a startup the possibility to expand into other countries by partnering with the corporate’s local subsidiaries. Furthermore large corporates can be an ideal partner as they have enough brand recognition, marketing and distribution channels for a startup to use in the scale efforts. Moreover, large user bases may also help start-ups to refine and optimize their products.

The benefits for startups don’t stop here. Partnering with a corporation can also present some intangible benefits such as case studies/testimonials for future sales and intimate industry knowledge. A successful partnership substantially enhances the reputation of start-ups and serves as reference cases for future sales as - in most cases - corporate decision-makers look for references and companies with industry experience before signing on the dotted line.

For corporations, usually the most cited benefit is innovation. To protect their strategic position, corporations need to become aware of market shifts caused by new technology or innovation in their industry, or coming from adjacent ones. Startups, being free of corporate governance chains have more freedom to develop truly disruptive solutions. Corporates may discover value not only in increasing revenues and margins by using the solutions provided by startups, but also in the expansion to emerging business fields. Innovation is the antidote to disruption as it secures a future competitive advantage. As internal innovation initiatives usually gravitate around incremental innovation designed to protect the core cash cows, collaborations facilitate the necessary disruption of one’s own business model, which is difficult to achieve from within.

Although usually not the primary driving force behind a collaboration initiative from the corporate side, new revenues that result from a partnership can not be ignored.

Furthermore start-ups tend to be more customer centric as they are not as standard process-driven as established corporates. They can adapt and customize solutions more easily, allowing the corporation to serve and know its customers better. Working with customer centric  and innovative startups allows a corporation to better track changes in the market trends, purchasing behaviours and technology trends that can ultimately may bring about the disruption of the corporation's industry.

On top of the tangible benefits described above, corporations are drawn to startups collaboration for some intangible benefits too. Working with start-ups can spark a more entrepreneurial culture in an otherwise hierarchical organization.

Even if the benefits of a collaboration are clear for both sides, there are the challenges that need to be overcome.

The primary challenge for a startup is associated with sales cycle times. Sales cycles of corporations conflict with the start-up’s short-term need to generate revenue. As start-up teams are small, each bet on a corporate deal is a risk of running out of cash if the deal doesn’t come through. Shorter sales cycles equal to a higher survivability rate rate for the startup. Furthermore start-ups often feel treated in a top-down way instead of at eye level. They find it challenging to be perceived as serious businesses, making them make compromises that they wouldn't otherwise have made.

On the corporate side the challenges for a collaboration revolve around internal issues. The not-invented-here syndrome is ever present in innovation, even more so when the innovation comes from the outside. It can be difficult for a corporate to internally adopt inventions that were developed in collaboration with start-ups. There is also a risk of competition or cannibalization of existing corporate solutions. Therefore corporates need to manage shareholder expectations, in particular the short term interest versus the long term benefit.

Furthermore business units may not be aligned on the collaboration’s goal and its possible outcomes before its kickoff. Which can lead to conflicting requirements and delays further down the line.

Lastly, an important challenge to be overcome by the corporations is a cultural one. The culture of corporates is one in which failure has a heavy cost for those involved, and thus, unlike what happens in start-ups, failures are both avoided from the outset and not openly acknowledged when they happen. It is therefore a key challenge for C-Level managers hoping to build an internal culture of innovation in their blue chip company on the heels of the startup collaboration, to structure and sensitize their organization to take collaborative approaches seriously and give projects the support they need to become a success.

Partnering between two different size companies will never be easy, regardless of how much they need each other. The success of a collaboration depends on one hand on mutual understanding (each side appreciating the risks and the differences the other faces in embarking on collaboration) and on the other hand on thoroughly preparing before signing on the proverbial dotted line.

Article originally published in Entrepreneur.