UPDATED: January 28th, 2020
Engagement. Often a word that begins to lose its luster once it has been used time and time again within a given enterprise. Advertising agencies have engagements. Consultants have engagements. Even most contract and freelance workers are considered an engagement.
If you were to make an assumption about what kind of products and services were to exchange hands during one of these "engagement" examples listed above, chances are you would be correct.
Corporate Startup Engagement (CSE), however, takes on many forms.
Notably, this is due to the wide variety of stakeholders involved, the current landscape of challenges that each is looking to solve and their knowledge of what is (and is not) possible.
For some, it's about access to the ecosystem to explore the potential. For others, it's more about core business alignment.
Also, civic-pride, brand equity, and good-will make their way into the grouping as well.
In this article, I'll be sharing the 10 most common types of Corporate-Startup Engagement(s) and a few notes on the current state of each.
And there are actually 10 of them! It's not just a nice round number for click-bait. (This time?).
Lastly, we'll also share what to expect from each, best practices and a few case studies / examples.
Here is the current landscape:
1 - Events
Startup and entrepreneurship events offer an excellent opportunity to engage with a startup for a brief period and at a low-cost.
It allows executives to have eye-opening experiences, first-hand, by seeing innovation, culture, and growth from startups.
Considering the internal journey of corporate startup engagement grows in three phases (Insight, Integrate, Invest), events are a great way to dip the proverbial toe into Insight waters.
It allows executives access and exposure to entrepreneurs, talent, ideas and cultures that cannot be found elsewhere.
Naturally, a Hackathon is an event where technical individuals have an opportunity to solve a problem or tackle a challenge over a weekend.
Corporations or support organizations facilitate with the entrepreneurs to find possible alignment to challenges, core-business, innovation, trials or technologies.
Startups are then generally given some prize or, in some cases, a contract to work with the partner corporation on the new technology.
Startup competitions are similar to a Hackathon, but generally with a business plan or prototype being showcased instead of lines of code.
In a startup competition, panels of judges are assembled, entrepreneurs are scored based on a predetermined criterion which has already been shared with the founders, and a reward of some kind is provided.
This allows the winning entrepreneurs to receive some access, awareness and (often) a small amount of operating capital or a contract deal.
It received over 1,500 applicants from 32 different countries.
Sponsorships occur at any of the events listed above -- although not mutually exclusive.
Corporations looking to expand reach, prominence, access, and awareness into the local, regional or national ecosystem(s) can easily afford to make a small contribution.
However, sponsorship doesn't always align with goals. It's simply a notice to the entrepreneurship community.
Before doing any of these events, be sure to have a specific engagement mechanism or innovation leadership in place for harnessing the output -- otherwise what comes next will be far too chaotic for a startup, and they will likely lose interest.
2- Support Services
Support services are a corporation's internal resources and capabilities offered to startups.
Through these support services, corporations are looking to provide, wherever possible, an unfair advantage to the startup.
Generally, from an operational perspective, these services are designed to establish access between startups and corporations for potentially more significant, later-stage engagements.
Local law-firms often get involved with accelerators, incubators, and other entrepreneurship programs to provide counsel to early stage entrepreneurs.
This establishes excellent brand equity with the community and brand awareness to growing companies within the ecosystem.
Occasionally, corporations allow partnered startups to have access to the in-house counsel for guidance or contracts.
Services such as these can be a mixed-bag for startup founders.
On the one hand, the cost savings and connectivity to legal veterans can be attractive.
On the other hand, founders aren't free to throw around their trust when it comes to outsiders making their contracts -- especially when a corporate partner could stand to benefit from a grammatical error.
Through these programs, entrepreneurs become more familiar with the services that are offered by the corporation and have excellent access to any technical support issues that may arise from implementation.
Regarding resources, a large number of corporations have repositories of information available to entrepreneurs.
Sometimes it's about providing startups with amplification or access.
Consider, for example, the tens of thousands of entrepreneurs who were able to launch their dreams by having a platform like the Home Shopping Network which allows them to have an immediate entry into the lives of potential customers.
Consider how eBay created a marketplace for people to sell their products.
Consider how Uber created a small army of freelance transportation providers.
The Unilever Foundry, for example, creates opportunities for external entrepreneurs to build upon concepts currently being explored by Unilever.
These programs de-risk the time and capital required for R&D labs to create something similar.
By offloading internal ideas, and meanwhile providing a springboard for entrepreneurs, a win-win is created.
Through exclusive Launchpad-only promotions and one-of-a-kind marketing services, Amazon has roped off a small part of their core business to ensure that entrepreneurs, and their products, have room to grow and thrive on their platform.
Mentorship / Connections
Although not always, through an accelerator or corporate accelerator program, corporate partners can offer guidance, insights, and assistance to entrepreneurs.
A great example of this would be Delta Airline's Delta Innovation Class (below).
Note that this is significantly more useful if (a) the mentor has direct industry experience within the same field as the entrepreneur or (b) if the mentor has a background, even if only a blurb, in startups.
Far too often individuals are assigned (not volunteered) to corporate / startup programs. This leads to founders smiling along and rolling their eyes later -- and their counterparts doing the same.
It's important to note during these type of engagements that startups have very different challenges, and unless it is market or vertical specific, prior entrepreneurs understand these challenges the best.
3- Benefit Programs
This is potentially one of the best ways to work at a very early stage with startups that could be a significant customer tomorrow, especially in industries where the churn rate is quite low.
The idea is to...
- help startups grow into a substantial business with the help of a corporate partner,
- get your service ingrained into their day-to-day business as they grow and
- have a retention model in place at the end of year one.
Discounted Core Offering
A startup program is a package which includes support services and product(s) from the corporate at a discount.
Fees can be waived for few months or up to several years. For example, Paypal Blueprint (*formerly?) offered: free transaction volume up to 1.5 million USO (50,000 USO of PayPal fees for 18 months).
*editor's note: link for Paypal Blueprint could no longer be found. It may have migrated to a different program or was discontinued.
Additional perks of this program include:
- HubSpot CRM
- Startup onboarding
- Dedicated sales and marketing strategy consulting
- 24/7 technical support
- Access to exclusive HubSpot Academy training and education
- Access to community of fellow founders and experts
Aside / disclaimer: At Gearbox, we have established many partnerships with corporations (and other mid-to-large stage startups) to offer an aggregation of these perks, including a generous partnership with HubSpot for Startups, through a program we call Gearbox Cargo (seen below). It has proven to be significantly useful for the new founders, the companies that are providing the service and even our corporate partners who engage with said startup.
4- Co-working Space
Co-working space is a venue where large corporations or integral support organizations host local startups to facilitate interactions among them.
Primarily, these interactions are guided to spur creativity, inspire ideas and add new chemistry to corporate culture.
But moving into coworking spaces is not only reserved for startups -- more and more corporations are seeing the benefit of becoming integrated into the local startup and innovation ecosystems.
And the rest of the world is taking nice. WeWork is now valued at more than $20 billion, according to CB Insights.
The company has gone from just 1,000 members between two locations in New York in 2010 to more than 130,000 members across 163 locations today.
From June 2016 to June 2017, the number of enterprise companies using WeWork grew by 90 percent, while the number of members from enterprise companies increased by 360 percent, according to a WeWork company spokeswoman.
A large part of WeWork's growth is also expected to take place in Asia, where it recently announced it had raised $1.4 billion in an investment led by SoftBank to expand in China, Japan, and Southeast Asia.
A new complementary urban model is now emerging, giving rise to what others are calling “innovation districts.”
These districts, are geographic areas where leading-edge anchor institutions and companies densely cluster and connect with start-ups, business incubators, and accelerators.
For almost two decades, CIC has focused on strengthening communities, building work environments, and creating programming to attract and support entrepreneurs and their teams.
5- Innovation Pilots
When corporations reach maturity, the measure of success is very different: it’s profit. Once a business figures out how to solve its customers’ problems, organizational structures and processes emerge to guide the company towards efficient operation. Seasoned managers steer their employees from pursuing the art of discovery and towards engaging in the science of delivery. Employees are taught to seek efficiencies, leverage existing assets, and distribution channels, and listen to (and appease) their best customers. - HBR
Indeed, R&D is expensive, time-consuming and often fruitless. PriceWaterhouseCoopers reports that half of all companies say they are only “marginally effective” (i.e., wrong) at converting R&D spending into actual products.
Because of this, more and more companies are looking to step out innovation.
Access to cutting-edge startups can solve a wide variety of problems, de-risk capital and create bodies of evidence for future opportunities.
Piloting with startups allows mitigating costly downstream endeavors such as acquisition, integration, investment and licensing.
While this is all well and good, there are often problems in..
- (a) sourcing difficulties
- (b) operational inefficiencies and
- (c) lack of direction from key-stakeholders.
Naturally, BMW has cars and allows for startup founders an opportunity to have their <widget> placed inside of their vehicles.
Also, they offer a suite of services to the startup such as access to decision makers and influencers in the automotive industry. The startup, in turn, receives an early contract, complete with a small amount of compensation for the test run.
For BMW, sourcing is a bit easier with having such a program where these types of opportunities come to them directly.
Basically we asked, ‘What can we offer to the best startup on earth with the best technology, lots of cash, and the most talent to get them to come to us and not to someone else?’ The best thing we could offer is to be their first — hence, venture — client. No VC or accelerator out there would say they can achieve that value proposition because they are not clients, they are investors. -- Startup Garage co-founder Mathias Mayer
An academy model pairs corporations and startups together for pilots. The organization acts as an accelerator to startups, by providing them with services, mentorships, and perks and they serve as a facilitator for corporations by providing them with startups which directly match the areas that are looking to be explored.
Academies provides all of the benefits of an accelerator to an entrepreneur as well as a direct sourcing mechanism for corporations which is free from the portfolio bias of other organizations.
Startups that fit the interest of the challenge apply and are vetted using artificial intelligence for core-alignment.
Simply, if the pilot is then successful, the corporation is often given the opportunity to invest and perhaps even acquire downstream.
Corporate startup engagement is often launched to de-risk innovation gaps and establish access to entrepreneurs.
Through the academy model, there are significant cost savings versus an innovation outpost, corporate accelerator or corporate venture capital and additionally a more substantial benefit to the multiple departments which can source startups to solve challenges and explore opportunities.
6- Incubation Spin-Offs
A corporate spin-off, also known as a spin-out, or starburst, is a when a company "splits off" a section as a separate business.
Like R&D, spin-off incubation is a form of internal innovation. In the most common incubator model, ideas are generated inside the corporation, developed and then spun out.
Because the entity that owns the incubator plays such a prominent role in creating the new business, incubators often receive equity ownership stakes similar to those of startup founders.
Incubators typically recruit entrepreneurs to take ownership of the startup, although sometimes internal employees spin out along with the new company.
Not all internally incubated business concepts are spun out, in which case they are functionally similar to R&D.
Corporate incubators focus on sectors relevant to the parent company, and there are many examples of successful corporate incubation programs and startup spin-outs, including:
- McDonalds’s spin out of Red Box (acquired by Coinstar for $150-plus million)
- Google’s spin out of Niantic Labs & Pokémon GO (reportedly worth $3.5 billion)
- Oracle Labs’s development of the Java programming language
- Amazon’s Lab 126 creation of the Kindle, Echo and Fire products
According to New Markets Advisors, a significant portion of Fortune 500 companies — including Procter & Gamble, IBM, Walgreens and The Hershey Company — have some incubator efforts in at least one business unit.
On the other hand, incubation can be difficult. What's more, a study of 300 corporate incubators stated that only half deliver on their strategic goals, and only a quarter deliver on their financial goals.
7- Capital Investment
While there are several mechanisms for Corporate Startup Engagement via investing (Micro-credit, loans, debt, Limited Partner in a fund, etc..) the majority are easy to understand so here we're going to explore the "why" primarily.
Corporate venture capital (CVC), for example, is the investment of corporate funds directly in external startup companies for an exchange of equity.
With traditional venture capitalists, the primary goal of an investment is to own a stake in a fast-growing startup.
Corporations have an enormous added benefit of synergy to the core-offering or mechanisms that promote the success of new business horizons.
Not only that, they can add significantly more value to the startup than a venture capital partner through direct access to connections, customers, distribution, mentorship, production and other critical assets.
Financial investment is often done with the goal of a financial return whereas a strategic investment is done most of the time for a supplier, customer or competitor with the primary purpose of integration down the road (and integration is expensive).
A strategic investment could also be done from the perspective of diversification or being defensible.
So in 2001, the company launched a corporate venture-capital fund to engage with cutting-edge biotech firms when they were just startups.
Since its inception, 7 of the startups in their portfolio have achieved a successful exit. (below)
A corporate VC fund like Lilly Ventures can move faster, more flexible, and more cheaply than traditional R&D to help a firm respond to changes in technologies and business models.
To further de-risk and test relationships for culture alignment, innovation investments make the most sense once an experiment has already taken place between a corporation and a startup.
Directly -- if a pilot was successful, invest. If it was really successful, spend more. If it was transformational, do your best to acquire them. (See section 8).
St. Louis based Monsanto recently partnered with AgTech startup PairWise in a $100M collaboration to advance agriculture research and development by leveraging gene-editing technology.
This partnership is expected to drive new and needed solutions to help farmers produce better harvests, protect crops from evolving threats, and conserve resources in the face of mounting environmental challenges.
Through such a pairing, the overlap is significantly more clear than that of a venture capitalist, angel investor or even corporate accelerator.
Monsanto benefits from having an innovation partner in this niche and PairWise gains the benefit not only the investment and expertise but also integrating with a household name.
In some cases, such a fund can even help stimulate demand for a company’s products.
Investments in a fast-growing startup can provide access to founders and inroads to untapped customer markets.
Both of these acquisitions fundamentally relied on the ability to integrate, capitalize and expand upon not only the purchase but the core offering of the acquiring corporation.
In the case of WhatsApp, Facebook gained large, immediate market share into low income, third world countries -- where the company had struggled to find sustainable acquisition and retention strategies.
Considering messaging is still the single most used app on a mobile phone, with the highest retention rate (and massive opportunities for integration such as payments, taxi-hailing, directions, advertising, etc..) it all begins to make more sense.
And for those worried if people would jump ship in opposition to the parent company, Instagram's pre and post-acquisition data tell a different story -- the users not only stayed but continued to grow.
At the same time, of course, investments may earn attractive returns—an added benefit for a tool that helps capture ideas that may ultimately shape an organization’s destiny.
Startup investments would, again, be based upon core-alignment due to the downstream opportunities, but it's not uncommon for corporations to simply look at their potential to generate revenue.
Investment Sourcing as a Service
Sourcing and procurement against a corporations business-alignment are often a difficult task.
There are several companies and organizations out there that can provide large corporations with a few early-stage companies with whom they may want to work.
Each comes with their own advantages and disadvantages.
Sourcing from accelerators and venture capitalists
CON: Startup sourcing from accelerators or venture capitalists is not "sourcing" at all.
They tend to only sell and promote the companies within their portfolio (and still charge corporations for the service).
This is the equivalent of your spouse asking where would you like to eat and then giving you a menu of all the places he or she enjoys.
PRO: They have invested serious cash into the startup and under the golden rule of putting your money where your mouth is they have vetted them with their dollars.
Not to say there can't be enormous opportunities for partnering with venture-backed companies, but be sure a diagnostic has taken place at the executive level, and not merely a startups sales packet before any of these introductions occur.
8- Mergers and Acquisitions
Vast cash reserves and opportunities in emerging markets may drive the deal activity in the next few years. In the past few years, companies many of the most innovative corporations have been very aggressive in M&A.
According to Pitchbook, the top 10 buyers of IT companies since 2010 are Google (Alphabet), Facebook, Yahoo, Oracle, IBM, Cisco, Twitter, Microsoft, Apple, and Salesforce.com.
Alphabet's acquisitions in 2017
CB Insights has listed several nontech companies in the top tech acquirers rankings which include: Publicis Groupe, Accenture, Walmart, WPP, and Canon.
This category also contains acquihires whereby an acquisition is made to acquire the team instead of the product or service.
9- Accelerators and Incubators
Accelerators & Incubators provide opportunities for corporations to support a small group of startups during a relatively short period (most of the time between three and six months).
In the case of a corporate accelerator, corporations offer founding help, space and mentoring in exchange for equity.
However, accelerators have been under fire as of late due to their poor performance metrics.
Forbes columnist Brian Solomon writes:
only 2% of companies to emerge from even the top 20 accelerators have a successful exit.
Even less at the corporate accelerator level -- where the success of the startup makes less of a difference as pursuing the bottom line.
According to the Kaufman Foundation, accelerators are currently undergoing 3 trends of change in order to keep up with an evolving access to innovation
- Evolving Upstream: Established accelerators, such as Y-Combinator and Rock Health, have evolved into seed funds.
- Expanding Scope of Services: Accelerators are starting to establish side funds to do follow-on funding.
- The Growth of Corporate Accelerators: Corporations have seen the value of being more connected to innovation and startups in their industry.
American startups are on the rebound, with approximately 310 entrepreneurs for every 100,000 adults in the U.S. today.
That translates into roughly 530,000 new business owners coming onto the scene every month.
The rate of failure for new businesses, however, still remains high.
It’s that very failure rate that’s led to the creation of an entire industry of startup support programs designed to help entrepreneurs beat the odds.
It’s working–for some, anyway, even if they’re not who you think.
Accelerators tend to take one of three broad approaches to generating income from startups:
- Growth-driven: programs are primarily dependent on growing the startup as it generates revenue from equity
- Fee-driven: plans charge clients member and service fees as well as rent
- Independent: programs are supported not by income from startups, but by sponsors, public funds, and events
Corporate accelerators currently represent a perilous strategy due to high cost, significant launch requirements (both time and personnel) and a tiny sample of startups with whom to engage.
For the best of the best players who may be hesitant to give up equity in their companies in exchange for a short-term boost in resources and uncertain futures, corporations are scary.
Besides, startups know inherently that they couldn't compete if it came down to a legal arm wrestle so they may shy away.
Lastly, there's the matter of speed: new corporate accelerators are notorious for not having established rapid implementation protocols or experienced know-how that startups require.
Leaders of corporate accelerators need to ask the following questions:
(What) Proposition -- what the program offers;
(How) Process -- how to program is run;
(Who) People -- who is involved; and
(Where) Place -- where the accelerator is hosted.
The role of Entrepreneur in Residence, or EiR, has never been well-understood.
For our purposes, let's assume there are two types of EiRs: advisor EiRs and builder EiRs.
Advisors are there for insight to others, and builders are, well, building things.
At inception, it wasn't a big deal in the tech industry when EiRs (advisors) were found mostly at venture capital firms, but the role has expanded to educational institutions, governmental agencies, and increasingly, technology companies.
The transformation signals a new appreciation of the importance and opportunity presented by the startup economy.
Entrepreneurs in Residence originally came about as temporary roles for startup veterans who could help VC firms with high-level strategy and introduce other entrepreneurs and potential new deals.
In return, the EiRs (advisors) drew a salary between startups and could score a possible investment in their next venture (i.e., builders).
Beyond VCs, EiR's are also finding productive homes in academia.
The entrepreneur-in-residence will often wear many hats at a university.
These professionals may take on the role of in-class lecturer, mentor student startups on campus, serve as a coach to entrepreneurs, judge business plan competitions and serve on advisory boards.
Some universities will have their entrepreneur-in-residence support community outreach initiatives by advising small business owners and working with local high school students on special projects.
These talented men and women bring real-world expertise and entrepreneurial practice to students and academia, enhancing the business theoretical framework taught on campuses across the world.
When Vanderveldt became Dell's first EiR in 2011, there were only six or seven others in Fortune 500 companies, she recalls. "It's still not common," she admits, "but it's a trend."
Bringing the entrepreneurial mindset to the corporate world can sound a little touchy-feely, but execs who built their careers in large organizations may not even know what they don't know about entrepreneurs, the culture or the challenges they face.
Fundamentally different from both enterprise customers and consumers, entrepreneurs often don't get what they need from their tech vendors.
That makes it the corporate (advisor) EiR's job to tell their corporate counterparts what they don't know -- and to help them cut through the (abundance of) red tape to create products, procedures, and programs that are valuable and accessible to startups.
In sum: there's no point in having an EiR to work with startups if you're not going to implement what they say.
This, of course, doesn't give them a golden megaphone, but entrepreneurs often have a lot to prove and firsthand access to the most up-to-date trends and insights that frequently fall behind at the corporate level.
To some organizations, the EiR is a de facto creator who will run a new business division -- generally a moonshot.
Occasionally, this individual will be given some equity in the spin-off.
Considering the majority of the risk is on the side of the corporation, these equity shares usually fall in the 5-15% range, although they are not subject to dilution, as the corporation would continue to fund the project if it became successful.
Internally sourced EiRs are then the individuals who work at a corporation but don't seem quite to fit in.
Intelligent, ambitious and driven, these people may have been more suited to the entrepreneurial lifestyle, but responsibilities, capital expectations or risk aversion got in the way.
If you find yourself with a squeaky wheel type, it may be an excellent fit to let them run a new business venture.
As recently as February, however, the Harvard Business Review and Scott Kirsner of Innovation Leader said There’s No Such Thing as a Corporate Entrepreneur, citing five primary reasons:
- Bureaucracy and politics.
- Fear of failure.
- Private vs. Public.
For corporations, sourcing EiR builders externally is a problematic and fruitless matter.
The goal would ultimately be to find someone who has firsthand experience in taking a venture and turning it from zero to 100.
Finding a seasoned entrepreneur who has already done this means that
- (a) they've likely had an exit and made a significant amount of money -- thereby rendering disinterest for such an engagement,
- (b) they could probably do much better off on their own or
- (c) just would prefer to not have their future tied to a corporation with billions of dollars that could be put to legal fees.
That being said, the unfortunate situation for finding builder EiR's is thus: either sourcing people who don't have excellent credentials that will say yes or sourcing people who have excellent credentials that will say no.
While there are many kinds of corporate-startup engagement models out there, the primary functions remain the same:
- Solving challenges.
- Exploring opportunities.
- Deploying capital.
- Obtaining access.
Even with many options available, one thing is sure -- corporate-startup engagement is happening more and more each day, and the results are looking more promising than the older models of both innovation and entrepreneurship as a solo sport.
R&D isn't working like it used to for most companies.
Innovation is following suit.
However, new things are being developed all the time -- on the couches and in the garages of hungry, driven entrepreneurs.
Corporations will need to find their best route to match, add value and integrate if they wish to capture opportunities.
LEGAL DISCLAIMER: THIS REPORT IS PROVIDED FOR INFORMATION PURPOSES ONLY AND UNDER NO CIRCUMSTANCES SHOULD THE CONTENTS BE CONSTRUED AS LEGAL, BUSINESS, TAX OR INVESTMENT ADVICE.
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. Headquartered in St. Louis, MO 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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