Engaging with startups

There’s a growing recognition that early use of disruptive technologies can require engagement with startups. More large corporations are looking to increase their engagement with fledgling tech firms, and the venture ecosystem is happy to comply by encouraging their involvement.

Incubators, accelerators, and corporate VCs

Incubators and accelerators that may or may not invest in some or all of the startups that may or may not be housed within their facilities have proliferated in recent years. Just this week ex-IDF officers launched a high-tech incubator in Israel. Last month, the U.K. retailer John Lewis launched a modest incubator in the form of a competition. Also last month, DreamIt Ventures launched an angel investor crowd-sourced microfund to augment one of its accelerators. And Bet.com this week reported on a recent tour linking African-American professionals with various entrepreneur-support programs in countries across Africa. Within the U.S., not only private interests but also state development funds and local authorities have become involved in sponsoring local resources for tech entrepreneurs.

As CB Insights reports, corporate VCs grew in number by 38% from 2010 to 2013, and by 2013 traditional VCs outnumbered corporate VCs making at least one deal by only 169%. Corporate VCs may invest primarily for financial or strategic reasons, or for a combination of both motivations, but the more strategic their interests in the startup technology for their own use, the closer managerial control they are likely to exert over their investments.

An enterprise IT accelerator

I talked this week with Cameron Campbell, who is the head of business development at Work—Bench, a New York City-based accelerator for enterprise IT startups. Work—Bench is backed by RR Donnelley with a $10 million fund that invests in some, but not all the startups housed in the accelerator. For Donnelley, Work—Bench is its more hands-off corporate VC play, in contrast to its other, more directly managed, R&D resources. As the largest printer in North America, Donnelley has diversified and updated its services to become a more complete communications services provider. The company is also leveraging its printing technology to develop functional printing of batteries and sensors for applications from credit card chips to RFID sensors and the Internet of Things.

Work—Bench, however, is intentionally unencumbered with supporting Donnelley’s business operations and is instead cultivated as a means to escape the Innovator’s Dilemma. Work-Bench startups do not have a narrow focus on meeting the needs of Donnelley’s current customers. To place it in the midst of the greatest possible concentration of Fortune 500 firms, the accelerator is based in New York City.

An expansion upon early VC and enterprise experience

Campbell is a veteran of Intel Capital, where he worked directly with the major investment banks in New York. Intel Capital of course is one of the longest-running and most successful corporate VC firms, and the big investment banks have been among the earliest and most committed enterprises working aggressively with early tech startups.

With that experience, he brings a low-key but proactive approach to bringing enterprise businesses into the startup community. Yes, he organizes events that bring enterprise executives and managers together with startup teams and presentations, so that enterprise can find potential new technology partners. But rather than looking at his contacts primarily as prospects for Work—Bench startups, he tries to work the other way. He asks his enterprise contacts what sorts of technology they are interested in, and then sees if through his venture community contacts he can find and cultivate a potential match for that enterprise.

Recommendations for enterprise involvement with startups

Among the recommendations that Campbell offers to enterprises looking to work with startups are the following:

  • Keep an open mind as to the approaches and solutions that new companies offer. Innovation tends to come from the unexpected by offering up a new twist on a perceived problem, and so preconceived ideas of what a technology should offer can close off the potential benefit to a startup partnership.
  • Understand the limits to startup time and resources. This is especially important when it comes to seeing a startup through the enterprise procurement and compliance processes. Bigger tech firms have the resources and experience to navigate enterprise buying processes, but startups are likely to need as much internal help as possible to negotiate the maze.
  • Be a good citizen within the startup community. Even though most startups will end up not being a match for an enterprise, they all gain from honest and constructive feedback from their interaction with enterprise managers and executives. Participation in the new venture community is a likely entrée to an eventual match, however, and providing active feedback is an easy way to build the relationships that could lead to the finding the right startup.
  • Understand that needlessly bending a startup to the specific needs of an enterprise may not be the wisest course. An early enterprise customer may have enough influence to sway the development of a startup’s product, but that de facto customization may not be the best course for a startup to maximize its potential. A startup that pursues the best product roadmap for its position in the market and thrives long-term is ultimately a better partner than one that gets off its optimal course at the behest of an early customer.
  • Become a valuable partner to worthy startups. In working with a startup that has a worthy product, an enterprise can add tremendous value by becoming a reference account and by introducing the startup to other enterprise prospects. This role can not only be acknowledged in negotiating a deal with a startup, but it can also significantly mitigate the risk of working with a new company by strengthening its viability in the market.

Look beyond local, and beyond customer relationships

Most enterprises will not find the best startup technologies by simply strolling into, say, a local, state-funded, incubator. It generally takes a wider and more informed search, involving network contacts such as colleagues at other enterprises, venture capitalists of some type focused in a target technology area, and/or industry analysts with a similarly matched focus.

But local and nonlocal VCs and incubators or accelerators can provide a good education on the opportunities, pitfalls, and methods of working with startups. The community can lead to a broader network and more valuable contacts.

For some enterprises, it will be worthwhile to engage more deeply with startups than by the informal partnerships of early customer relationships. In that case, some sort of accelerator, incubator, and/or corporate VC role will also make sense.

In all circumstances, enterprises have a broad range of relevant resources for tapping new or experimental technologies and for supporting startup partners. Intelligent reciprocity is the key to finding and leveraging the innovation available in the venture community.

Relevant Analyst
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Laura Stuart

Analyst Independent Industry Research

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