If you're at a corporation and you're reading this... you’re probably spending too much #@(%$> money. Yes you. That's not an insult. I don't work at a corporation. I don't see your spreadsheets. I'm just looking at the figures.
But as a startup guy, I'm still in shock about the numbers.
For an example, according to Pricewaterhouse Coopers, among the Global Innovation 1000 companies, total R&D spending rose 3.2% in 2017 to an all-time high of 702 billion dollars. It’s tough for anyone to wrap their mind around just how big of a number that is, so I’ve dug up a few other figures in order to allow us all to have a broader perspective.
You could buy a brand new Florida Marlin’s stadium. 21 times. For each county in the state of Florida.
In fact, while we’re on the topic of sports. You could buy all 32 NFL teams 27 times.
You could buy 2 cups of Starbucks every day for a year for every person in the country of Brazil. (Including the kids that shouldn’t be drinking Starbucks).
You could buy gasoline for a year for every adult in America.
"I'd Like to Teach the World to Sing (In Perfect Harmony)" is a pop song that originated as the jingle "Buy the World a Coke" in the 1971 "Hilltop" television commercial for Coca-Cola.
In it, they say they would like to "Buy the World a Coke". Well you could actually do that. In fact, you could buy one 2-liter bottle per week for every single person on the planet. Not just once. Every day... for a year.
You could buy 7 Mac laptops for every school-age child in the United States.
Okay, okay, that’s plenty of examples. I’m sure by now we’re all more clear on the enormity of capital being spent.
But you’re probably thinking to yourself Anthony, that is the sum total of all the R&D of the ONE-THOUSAND largest companies in the world and you’re right.
You're smart, so you would probably find the continuance and make a case for extrapolation as well.
AND, if we were to split the spending between each of them it only sets us at a measly .71 billion dollars each
AND once we start to divide that up among the departments that would utilize such a budget...
Okay fine, maybe it doesn’t seem like such a large figure as buying sodas for everyone in the world, but here's my rebuttal.
Bernstein Research analyzed historical R&D spending as a percentage of sales, and drew a correlation to the stock performance of 68 large-cap technology companies.
In many cases, those that shelled out the most actually saw a decline in their share prices after five years, while those that spent less performed better, suggesting that R&D isn't an ideal benchmark of stock performance or innovation.
More numerically, the study found that tech companies spending more than 18% of revenue on R&D tend to under perform the market, while those that spend less outperform. Despite the high R&D budgets of all the companies we have discussed, just one spent more than 18% of revenue and that was Intel.
Strategy&, (no, that is not a typo) a business unit within PriceWaterhouseCoopers has been publishing an annual report of the top 1000 most innovative companies in the world for over 12 years now. In that time, it has found no statistically significant relationship between spending and sustained financial performance.
Its findings apply to total innovation spend, as well as innovation spending as a percent of revenues.
Thus, spending on innovation is not related to growth in sales or profits, increases in market capitalization or shareholder returns. In fact, in every single annual report that Strategy& has published, the top 10 most innovative companies are rarely the top 10 spenders.
Enter Corporate-Startup Engagement
In most companies, certain types of innovation can be considered risky. Oftentimes there isn't a budget for risky projects and what's more, such a risk can make innovation leaders shy away due to it being seen as a failure or blemish on their performance.
Step 1: Pilot
Piloting with a startup can provide a significant amount of savings. Generally, startups are well positioned to be an active vendor, supplier or partner due to the value provided by engaging with a well known corporations. Oftentimes the startup is on the cusp of what's new, innovative and different -- something of which that every corporation wants to be regularly exposed. What's more -- the startup is focused on providing red-carpet service due to not being overwhelmed by the constraints of other projects and engagements.
Story: One of our Fellowship members here at Gearbox told us about how they engaged with a certain well known "ride hailing" startup a few years back. This was unfrortunately once they had already grown to a certain degree of notoriety.
They mentioned how the beginning stages of the engagement were fairly lackluster and as time went on, the corporation gained less and less from the engagement until eventually they weren't even returning their calls.
Notably, had they engaged sooner, or engaged with a startup that wasn't already at such a late stage, they would have been able to maintain and nurture the connection.
This early connectivity is key for many reasons, but finding the sweet spot between the maturity of their technology and the price tag that comes with it, is even more compelling.
Elaboration: If the technology is too early, it becomes a headache to run the pilot. If it the technology is too late, they are less likely to engage and often times have other things on their plate that demand their attention.
When the intersection between the two is right, this connectivity can cause both parties to collaborate seamlessly and create a wealth of future opportunities.
Picture a new department dedicated to AI (column A) versus engaging with an AI startup (column B).
Starting with the factor of just time, at most corporations it could take up to 2 years to even begin building the product after the budget has been allocated, personnel has been hired and a strategy has been implemented.
Next, consider the financial cost associated with the salaries, healthcare, benefits and perks of full-time employees. Then, calculate their equipment requirements, work space, flights, conferences, etc..
It begins to significantly add up. To make matters worse, evidence of the project being a good decision or a bad one won't be in-hand until the <widget> is built and taken out of the box.
Time: Technology already exists. Startup and corporation create evidence.
Financial: No salaries. No healthcare costs. No work space. No equipment costs.
Step 2: Investment
Assuming the pilot has already taken place, why wouldn't you invest? The corporation has gained value from the collaboration, insights have been gleaned from the output and a body of evidence has been created. It's time to double down.
Once again, the cost of a pilot and an investment would be dwarfed in comparison to the alternatives.
Investing later would come at a larger cost (or a smaller piece of equity) where corporate venturing is concerned.
Traditional corporate venturing would lack the insights of already having worked with the founding team in a pilot, informing your due-diligence and seeing firsthand how the technology or service is being used and explored by key members of the corporate team.
Traditional corporate venturing without pre-piloting also wouldn't have a firm grasp on establishing a fair valuation for the startup -- as they are unable to position it against the financial gains that would be associated with potential integrations and partnerships.
Finally, traditional corporate venturing without a pre-pilot would also not benefit from having access.
Essentially, every time an investment is made without a pilot, an investment is being made into strangers.
Step 3: Acquire
Assuming that a pilot and an investment has already taken place -- acquisition has enormous benefits. From having a body of evidence, to demolishing integration costs, to streamlining due-diligence, the entire process is better, faster and cheaper.
Acquisition price would be significantly cheaper. Perhaps more importantly, the access may be what even makes an acquisition possible in the first place.
Think for example if Marriot would have had an engagement like this with AirBnB before they took the top spot in market share. If Kodak had access to Instagram. The founders would potentially be excited at the opportunity to work together.
Acqui-hire possibilities would also go up. A win-win for all parties involved. Of course, in hindsight, Instagram may have missed out on larger acquisition figures in the future (had they kept growing in this scenario) but defensibility and access is a necessary component of corporate innovation. What's more -- a bird in the hand etc.. etc..
As long as the beneficial pieces of the pilot are still in play -- integration has already taken place. Which is good, because acquisition integration is very expensive.
How expensive? EY did a survey on it to find out. The survey found that companies, on average, spent 14% of total deal value on integration.
Pulling figures from Mergermarket show that the average deal size for disclosed value transactions over the past 12 months was €256m (US$342m). This suggests that the integration costs per deal are averaging out at €36m (US$50m).
Consider the humble seesaw. Or a teeter-totter if you're reading this from the Midwest.
On the left-hand side picture the corporation riding high. On the right hand side is a low, low startup. In the beginning, the corporation is in the heightened position of power, but sometimes the scales tip.
The successful startup will eventually have less of a need to engage. Less of a need of investment. Less of a need for acquisition. Without having had a pilot or an investment -- they might not even return your emails 2 years from now.
And the higher their side goes, the more expensive whatever engagement will be.
Playground rules being what they are, if you find yourself one day being the one sitting in the dirt -- they're just going to laugh at you from their high-horse, sipping on their drink box. In this allegory, their drink box is something like Cristal or Armand de Brignac and their laugh rings out in bank statements.
Data Levels All Arguments
We've shown that innovation is expensive. That R&D is losing effectiveness. That there is no correlation between top performers and spending. That a body of evidence isn't created until well-after the risk is taken. That the chain of events from pilot to investment to acquisition are better, faster and cheaper for areas of time and money.
I have nothing further. I rest my case, your honor.
About Gearbox: Gearbox.AI provides the leading corporate-startup engagement solutions designed to help innovation leaders, corporate development professionals, and strategic partnership executives master the art and science identifying and aligning with what's next.
Through a unique combination of a membership community, AI-driven software, and cutting-edge expertise, Gearbox is focused helping corporations keep pace in an ever-changing digital world and providing startups with new avenues for growth.
The result for modern innovators is unprecedented agility, risk management, and superior results. Proudly headquartered in St. Louis, with offices in Denver, Chicago, and Los Angeles, Gearbox serves as a pivotal partner to large corporations and a champion to innovative startups.
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