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When corporates meet startups and mash-ups

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Joongshik Wang

BT_20171016_EYSTARTUPS16UZA6_3125465.jpg
Adrian Koh

STARTUPS have been a growing presence in many economies in recent years, given how they have upended some of the well-known industry incumbents and introduced new ways of serving the market.

There is increasing curiosity to meet with - and learn from - startups, particularly for large corporations that recognise that startups have the necessary ingredients of agility, ingenuity and vision to generate disruptive and not just regular innovation.

This interest to connect is mutual. Startups, on the other hand, want to address the gaps they face in industry expertise, scale and financial strength, which more often than not are the domain of large enterprises.

The "party" is already well underway. According to an Insead and 500 Startups' report, 68 per cent of the top 100 companies from the Forbes Global 500, which includes Singapore banks and telecommunication companies, are already engaging with startups. In fact, the top 100 companies are working with startups two times more intensely than the last 100 companies of the Forbes Global 500.

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In Singapore, pockets of tie-ups, alliances and collaborations in the market are indicative of growing interest in such partnerships. Not only is the corporate-startup collaboration phenomena on the rise, but the rules of engagement are also changing.

Typically, an incumbent leader would explore mergers and acquisitions (M&A) or joint ventures with new technologies and capabilities to jump-start innovation. In the last two years, there has been much growth in big-ticket tech M&A globally. But M&A doesn't always offer the right answer.

There are instances where one company may possess a specialised strategic capability needed by another, but overall, the combination lacks the necessary synergies for a viable M&A deal.

In addition, not all management teams are adept at large-scale acquisition integrations, and the cost of unsuccessful M&A deals is high. Some deals may simply be too large to contemplate from an operational or financial perspective. Other times, an M&A is less than successful when investors fail to preserve the value of the acquired startup team and seek to replace the very value that they had purchased.

So while such traditional deal-making models still have their place, companies are also experimenting with more informal engagement models. This can range from hackathons and startup competitions to accelerators and incubators where corporates provide more intensive and targeted support such as mentoring, funding and office spaces to a smaller group of startups.

For example, corporates are increasingly setting up corporate venture capital to engage startup innovations through early stage equity investment.

INDUSTRIAL MASH-UPS

Even as these informal models help to kick-start ideas, another engagement model is emerging and worth noting - one of "industrial mash-ups".

The industrial mash-up concept borrows from the open source movement and Internet "mash-ups" that are able to rapidly create new business value by incorporating specialised services via Application Programming Interfaces (APIs).

Applied to incumbent technology and tech-enabled companies, it will soon start the next wave of accelerated innovation - along with many unlikely partnerships.

The sharing economy is one of the best examples.

Fundamentally, the sharing economy exists because of the idea that one can separate, or detach, new kinds of value from an underlying physical thing. For example, people are able to use their car as a transportation service, or use their apartment as a hospitality service, because another organisation has built an easy-to-use, automated transactional environment on the Internet with new kinds of usage terms that depart from standard lease contracts.

Through similar kinds of abstraction, industrial mash-ups enable the industrial economy's capital assets and processes to be monetised in new ways not necessarily envisioned by their owners - just as technology providers are often surprised by the unintended uses their products serve once they are released.

In industrial mash-ups, companies share services, data or property (ie, capital assets) via increasingly automated methods; separate the original value of a service or asset from potential new business value; or integrate other organisations' specialised services into your own solution (mash-ups).

Unlikely partners can make for successful industrial mash-ups too.

Consider the long list of alliances between companies that were once considered unlikely partners, such as the Apple Inc-International Business Machines Corporation alliance to bring IBM's Big Data analytics capabilities to iPhone and iPad platforms for enterprise customers.

Similar alliances have been announced between traditional competitors such as Cisco Systems, Inc and Ericsson, Inc, as well as non-competitors like IBM and Johnson & Johnson (in a deal that also includes Apple). In that mash-up, Johnson & Johnson plans to bring to market a mobile app that would leverage its clinical know-how and Apple's user experience design and link to IBM's Watson for back-end cognitive computing and Big Data analytics intelligence.

These deals show that industrial mash-ups are very flexible - partners can bring specific portions of their broader value propositions to the deal, and then narrowly define deal parameters in a way that insulates other areas of business.

GOOD PARTNERING PRINCIPLES

Mash-ups does not mean chaos; the fundamentals of good partnering apply too. Partnering organisations must establish clear, shared project goals and objectives early and reinforce them often, and close monitoring of the collaboration internally is key to ensure that the business relationship is evolving as expected.

On the same note, top-to-bottom commitment and executive sponsorship are key to driving progress, which is especially challenging for corporates given their complex processes, policies and myriad projects. Without buy-in from the entire company, such projects often stall.

When working in an industrial mash-up, corporates need to be prepared to embrace the above approach not just with one but with multiple partners, startups, vendors and suppliers. A mash-up often starts with a leader, or several leaders, who structures the terms of the partnership to some extent and continues to shape it. They create a scaffolding - an open-ended deal based on an idea of how they can work together - and offer that scaffolding to more participants, creating a crowdsourced environment for innovation.

Embracing an open-minded mentality goes beyond welcoming new members to the network. Organisations need to be flexible and creative in thinking outside of their industries and technical capabilities, as well as be nimble in assessing the business value of ongoing projects. It is better to fail fast and try something else rather than stick with a struggling project.

Today's biggest innovations tend to depend not only on sector-specific domain knowledge and customer relationships, but also on expertise in analytics, cloud services, wireless connectivity, software, and security. Few organisations possess all of these capabilities under one roof. Partnering - now executed through various models - will pave the way for future innovation.

  • Joongshik Wang is EY Asean transactions leader for technology, media and telecommunications and partner, Ernst & Young Corporate Finance Pte Ltd. Adrian Koh is EY Asean growth markets leader and assurance partner, Ernst & Young LLP.
    The views in this article are those of the authors and do not necessarily reflect the views of the global EY organisation or its member firms