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Feb 6, 2019 | 5 min read

Transformation

Trends Shaping Corporate Innovation Strategy Decisions

Lonjino Lazcano

Senior Project analyst


AMERICA
Corporations have recently faced massive waves of technological innovation from emerging startups. Corporate innovation decision makers are constantly revamping the way they view innovation and invest resources to help their organizations evolve.

Traditionally, corporations have used different methods to engage in innovation depending on the level of leadership commitment and level of expertise in a specific area. The following is a list of personas summarizing the different strategic decisions a company can make to engage in innovation activities:

 

  • Pioneers (usually build): Corporations who are ready to create an internal initiative or a startup spin-off are considered pioneers. They align resources and leadership to launch a project.
  • Dedicated Students (usually invest through CVCs): Corporations who make minority CVC investments are considered dedicated students. They invest in startups to learn from them and inspire their organization to innovate.
  • Aggressive Competitors (usually acquire): Corporations committed to innovation, but lack expertise to build a new platform are considered aggressive competitors. They acquire startups to remain competitive.
  • Experimenters (usually explore through partnerships): Corporations exploring next possible steps in their innovation program are considered experimenters. They need expertise from external players to “catch up” and learn about the innovation ecosystem.

We will analyze the changes of a corporate decisions to innovate through their partnerships, acquisitions, investments, or building initiatives from scratch.

 

Trend #1: Expertise has been disaggregated causing corporations to differentiate themselves by creating Corporate Venture Capital (CVC) programs

Innovation is most likely to occur when expertise, capital, and a strong network align. Environments that fertilize these three themes increase the likelihood of innovation.

Startups can now access insights from experts online or other channels. Access to a wide-range of expertise was previously a resource reserved only for large corporations and venture capital firms. Today, accessibility to expertise via online platforms is causing corporate innovation programs to change their behaviors.

According to a recent study by the Unilever Foundation, there is a strong desire for corporations to improve their innovation capability by working more closely with startups. According to the study, 80% of corporations believe startups can have a positive impact on a large company’s approach to innovation. On the other hand, only 46% of startups who have not worked with corporations are likely to do so in the future. Startups view corporations as less crucial to their growth in comparison to corporations.

Corporations can no longer partner with startups solely on the basis of market knowledge and expertise. They need to build other competencies to remain competitive.

Due to this trend, corporations have increasingly leveraged their capital to differentiate themselves in order to attract startups into their ecosystem. Corporations are starting to heavily rely on corporate venture capital (CVC) as a vehicle to attract startups. We can already see 2018 is on track to set a record for U.S. corporate involvement in venture deals (refer to the image below).

 

The growth of CVCs is a clear indicator that corporations are using capital, in addition to expertise, to attract startups into their ecosystem.

Trend #2: Corporate Innovation Programs are externalizing their research & development initiatives through partnerships and investments

Corporations are no longer fearful of startups and disruption. The last 30 years created massive waves of innovation across the industries, and corporations have grown accustomed to the constant change. Corporations are starting to learn to work and partner with startups.

Startups are the new tools for Corporate Research and Development. Dave McClure of 500 Startups said “Corporates have now wholesale outsourced R&D to the startup and venture community,” speaking at CB Insights’ Innovation Summit. Markets are changing so rapidly that corporations hesitate building a product or service that may be outdated in a few months.

According to the previous Unilever study we cited, the three most important reasons corporations cited for working together with startups are:

  1. learning something new (startups 88%/corporates 85%)
  2. improving efficiency (startups 81%/corporates 81%)
  3. solving business problems in new ways that can scale (startups 89%/corporates 80%)

The next natural step would be to acquire the startups they partner or invest in. However, corporations have shown less interest innovating through acquisitions.  The number of mergers & acquisitions have actually declined in recent years, according to pitchbook (please refer to the graph below). Corporations increasingly want to externalize the risk of innovation to startups.

The software revolution caught corporations off-guard, and they likely expect that artificial intelligence, blockchain, and/or cryptos may change the playing field substantially in the near future. Corporations are waiting until they better understand the upcoming changes in the market before they begin to acquire or build new initiatives at a faster rate.

 

Either way, this trend exemplifies the declining commitment of corporate leadership. There is a decline of corporations building new initiatives or acquiring new companies. Corporations are increasingly exporting their R&D initiatives externally through partnerships and investments. Most corporations currently prefer a “shotgun” approach than a narrow and focused innovation strategy.  

 

Trend #3: Corporations Are Loosely Plugging Themselves Into External Ecosystems

The last core competency of a corporation is their network, specifically their ability to access entire markets with distribution channels they built. They are offering their distribution channels to partners who do not need additional capital or expertise: accelerator programs.

Corporations have previously attempted to build their internal accelerator programs to partner with startups, but those have not produced strong results. Corporations have started creating “outsourced” corporate accelerators instead. They are increasingly partnering with organizations like Plug-and-Play, Techstars, etc. However, the results are mixed.

In a 2017 survey, 500 Startups found that 81 percent of the startups said fewer than 25 percent of their pilots had resulted in commercial sales. This led Y Combinator to give a cold shoulder to the corporate accelerator model. There is a disconnect with the pace and the risks a startup takes and those of corporate mentors.

Companies are continuously modifying their behaviors and will continue to partner with external accelerators until leadership commits to a more robust innovation path (i.e. acquisitions or building new initiatives). In the meanwhile, accelerators make it increasingly more efficient for corporations to partner with startups.

Trend #4: Upcoming Disruptions Will Shape Strategic Decisions of Corporate Innovation Programs

Initial Coin Offerings Will Disrupt Investment Markets

The invention of initial coin offerings (ICOs) is already disrupting venture capital firms, and it may affect corporate innovation programs in the future. ICOs will likely inspire a wave of new startups who can fund their initiatives without large institutional partners. The market may be flooded with an excessive number of startups and initiatives, making it less likely that corporations will build new platforms (they will partner instead). We can expect an increase in incremental innovation.

Artificial Intelligence Will Continue To Democratize Expertise

The wave of artificial intelligence already created sentiment analysis tools tracking trends, emerging players, and insightful content. They will continue to dramatically improve with OCR.

Startups will have a lower demand for expertise from corporations, and will increasingly rely on corporations to provide access to markets and capital investments.

Declining Leadership Commitment Is Creating More ‘Innovation Theatre’ Initiatives

Partnerships and CVC investments can have a real impact of innovation capabilities. However, there are corporations who believe being close to startups will somehow spread an entrepreneurial spirit in their organizations without performing the work needed for a real culture shift.

Unilever defines this as Tech tourism, which is defined as a largely ad-hoc, exploratory activity which lacks the ability to impact core business aims. Activity can range from exploratory trips to tech HQs to engaging in ‘innovation theatre’ to manufacture instant PR gains.

Exploring ecosystems can be useful to help leadership identify the necessary ingredients to change their culture, but it needs to be coupled with leadership commitment to make meaningful partnerships or initiatives.

 

Cover: Photo by Hans-Peter Gauster on Unsplash

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