“Tool in innovation toolbox” — thoughts about SME-startup collaboration — Part I
Corporate venturing and corporate-startup collaboration have been hot topics already for years. Probably all big corporations have innovation strategy in place and set of activities and initiatives to collaborate with startups. With SMEs and medium-sized enterprises this is not the case, and SME-startup collaboration has received much less attention than corporate-startup collaboration. I argue that startup collaboration is a useful innovation tool also for SMEs and should be found in their “innovation toolbox”.
This writing is divided into two parts. This first part talks about open innovation, why established companies collaborate with startups and why SMEs should consider that too. Part II describes how SMEs can get started and what to keep in mind in the process.
From Closed to Open Innovation
The concept of Open Innovation has been around for almost twenty years. Almost everyone seems to agree that to keep up with the changing business landscape, accelerating pace of change, globalization, and digitalization, companies have to look outside their organization for innovations, including business model innovations. Henry Chesbrough defined Open innovation to be “a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology.”
Since the introduction of the term in 2003, open innovation has gained huge popularity. Lots of academic research is done around the topic, governments and public sector organizations are promoting it, and also a good number of intermediaries (like management consulting companies) are helping organizations to develop their open innovation capabilities. I can argue that the term ‘open innovation’ is increasingly used as a substitute for the word ‘innovation’ because the old ‘closed’’ model of innovation is considered to be outdated by many people.
Startups as a source of innovations and new ideas
We are living in the ‘startup era’. Startup companies have become one of the most important sources of innovation and new ideas for established corporations. But it is good to remember that they are not the only source. Sources like universities and research institutes, customers, competitors, etc. remain important too, but they are not focused in this paper. But why companies are increasingly looking outside of their organization and for external capabilities to make innovation happen? One reason is that because there are already many ambitious and talented experts out there who are trying to solve the same challenges that they’re tackling but with a startup company. Gary Hamel wrote in a Harvard Business Review article in 1999 (Sept-Oct issue): ”Out there in some garage, an entrepreneur is forging a bullet with your company’s name on it. Once that bullet leaves the barrel, you won’t be able to dodge it. You’ve got one option: you have to shoot first.”. This describes nicely the ‘sense of urgency’ that established including companies, including SMEs, should feel. This was written more than 20 years ago, and the topic is still very current.
”Out there in some garage, an entrepreneur is forging a bullet with your company’s name on it. Once that bullet leaves the barrel, you won’t be able to dodge it. You’ve got one option: you have to shoot first.”
-Gary Hamel, HBR issue 9–10/1999
But how do established corporations collaborate with startups? What are the practices to tap into this innovation well of startups? Most of the largest corporations in the world embrace open innovation and have their strategies on how to approach it. And most big corporations allocate lots of resources for their innovation work. For example, Cisco describes that its “innovation engine” is based on 5 pillars: Build, Buy, Partner, Invest, Co-Develop. If you check the link you can see that Cisco’s engine looks like a well-lubricated innovation machine. But good to keep in mind that the mentioned “innovation engine” is tuned for a company with a revenue of 51,9 billion USD (in 2019). Consulting company Board of Innovation lists 16 different programs/initiatives that companies can run including e.g. Venture fund, Innovation lab, and external Incubator program. There are lots of corporate-startup collaboration examples available and research done around the subject.
Corporate-startup collaboration can be divided into individual initiatives and institutional programs. In individual initiatives, collaboration is built around a specific business goal (e.g. joint development project). Institutional program is a program in order to interact with a wider group of startupsat the same time (e.g. accelerator or hackathon). Recent (Oct 2020) McKinsey report on corporate-startup partnerships in the DACH region recommends corporations to focus on individual initiatives as they create more value. Too general “spray and pray” approach satisfies neither side. The following quotes from the McKinsey report describe challenges in too general programs well: “Corporate–startup partnerships are sometimes a zoo for suits” “We are exhausted by the number of partnerships that we seem to start but that lead nowhere — where is the value in that?” As even bigger corporations (with much bigger resources) are advised to focus on individual initiatives, SMEs should have very good reason to even consider other initiatives.
The perspective of SMEs
When we shift focus from bigger corporations to mid-sized companies and SMEs in Finland, there is much less information, examples, and success stories available. And this seem to be case in other countries too. By a definition (by e.g. Statistics Finland) SME is a company with less than 250 employees and revenue under 250 million EUR. But these euro and employee limits are not important in the context of this paper, and we can just as well discuss collaboration between established companies and startups. In Finland SME startup collaboration has been promoted e.g. by the Confederation of Finnish industries (who published a guide together with Tekes in 2016), Chamber of Commerce, and Yrittäjät. I feel SME startup collaboration is an important topic and worth more promotion initiatives as it holds big potential and can create value for both sides.
German Alexander von Humboldt Institute for Internet and Society studied collaboration between startups and mid-sized companies in Germany (published 2017). A study found that German mid-sized companies rely on limited resources, are risk-averse, often rely on closed innovation strategy, and are not feeling the need to digitize? The following quote from the study sums up the general thinking well: “As long as the order book is full, a mid-sized company will not be thinking about investing in digitization, finding new business models or cooperating with startups.”. I can argue that this applies to SMEs and midsized companies in Finland and many other countries as well. Positively, the same study found that 95 % of mid-sized companies with collaboration experience could see themselves cooperating again.
I have noticed cases where the mindset and culture of the SME have blocked ideas of open innovation and startup collaboration. Companies may believe that they have the best expertise, and all products and solutions can be developed in-house. Or they see that their products have satisfied their clients for years and they may be even growing. So why should they change anything? Just like other change and development initiatives in organizations, the right mindset and willingness to develop is a precondition for a successful collaboration initiative.
But what can SMEs hope to get out of startup collaboration? Why bother? The two most important corporate motives for startup collaboration in the recent McKinsey report (October 2020) were to gain access to faster innovation and product development and to gain early insights into new technologies and previously untouched customer segments. Based on discussions with SME companies I see that these motives may be equally important for them and possible key drivers for collaboration for many SMEs.
Challenges and similarities
Challenges in corporate-startup collaboration due to the cultural differences have received lots of attention. And for a good reason. Differences in e.g. ‘clock speed’, contracts and bureaucracy can create big challenges, smother innovativeness, and ruin collaboration even before it starts.
German study about startups and mid-sized companies in Germany found that mid-sized companies and startups share more similarities (than corporations). They are both customer-focused, innovative, and usually attend to niche markets. A smaller difference in company size leads to quicker decision making and they both are often led by strong personalities. And based on my experience both see time as being a very valuable asset, are practical, and are expecting measurable value from collaboration, not just positive PR.
Tool in SME’s “innovation toolbox”
I believe that most SMEs agree that they cannot develop their products and business (and business models) solely in-house and that they have to open up and exploit innovations and expertise found outside of their company too. Despite this consensus, not all of these companies have taken any concrete steps to do this yet. I argue that collaboration with startups is a concrete, cost-effective, and efficient way for SMEs to realize open innovation and tap into external innovations and expertise. Thus, startup collaboration should be a tool to be found in all SMEs’ “innovation toolbox”.
