First and foremost, digital transformation is about innovation. Partnerships, acquisitions and corporate venturing are useful tools for boosting a company’s capacity to innovate. But how can disparate corporate cultures successfully merge?
Digital transformation has been the subject of much scrutiny over the past years, but with an ever-changing business landscape, it is vital that companies recognise its importance.
They are becoming aware of the need to deliver high-quality products, be customer centric, and have the ability to innovate, to truly succeed in today’s competitive markets. Innovation doesn’t, however, happen at the push of a button. It requires hard work, and the risk of failure is high. There is no magical formula. Every company has to discover – or rather create – its own pathway to modernisation.
Corporate venturing as an innovation strategy
There is, however, a promising strategy for reducing risk: collaborating with, acquiring or investing in a startup.
“Corporate venturing” refers to the financing of a business using venture capital provided by other companies. Unlike Silicon Valley’s venture capital funds, where the business model is investment and the goal is usually to scale up rapidly and make a lucrative exit, the aim of corporate venturing is to support or enhance one’s own company. It is based on the principle of reciprocity: the investor benefits from the new ideas of a startup, while the startup’s founder benefits from the investor. The so-called “corporates” bring into the partnership their customer base, an established market and international subsidiaries. In many cases, their products fit well with the startup and increase its market importance.
Expanding the portfolio and developing the startup scene
The risk is lower when companies invest directly in a successful startup, since marketable products are already present. It is also easier to determine whether the startup’s products fit well into a company’s existing product portfolio. This is no doubt an important reason why digital companies such as Facebook and Alphabet/Google regularly buy up specialised companies – Alphabet has purchased 30 companies in the past three years alone, including cutting-edge analytics for its cloud platform.
The most important thing is for corporate venturing to be used to supplement a company’s own portfolio, by adding new technologies as well as products and services that have already been introduced to the market. Software AG’s acquisition of Cumulocity IoT in 2017, for example, was in keeping with the company’s goal of strengthening its position of technological leadership in the Internet of Things.
From a startup’s perspective, corporate venturing is a good alternative to raising Silicon Valley-type venture capital. Simply put, venture capitalists (VCs) are more likely to invest in digital products and services that target private individuals, so many B2B startups fall through the cracks.
Not every partnership, however, requires direct investment. More institutionalised forms of venturing are also possible, such as operating incubators or accelerators to support future or existing startups with the right resources.
Corporations and startups – two cultures merging
While incubators may provide the hoped-for increase in digital expertise and agility, they can also pose challenges – specifically, the need for technological as well as cultural integration. Technological integration is relatively easy, as both companies have experts who can work together on an equal footing, but building a common culture, is often a challenge.
A startup’s operations are very agile; improvisation is common, and employees quickly assume responsibility even for areas that are new to them. This is the advantage of a small enterprise, where the founder is always within earshot. Large companies, on the other hand, have established certain processes and a sophisticated organisational structure – which are essential for managing a global workforce of more than 5,000 people.
Startup employees are likely not accustomed to a process-based organisation, which can lead to friction. There are many rules, and operational areas are more separate from one another. It is often seen as positively revolutionary for a trainee to make a suggestion to the development head. In this situation, it’s important for the two partners to come together, reach compromises and learn from each other. The startup can benefit from the investing company’s experience, creating structures and processes, while its contributions include fresh ideas, greater agility and an ability to innovate.
The more successful the startup, the more self-assured the people involved are. The situation becomes critical when founders suddenly find themselves in the role of a manager, and it is not uncommon for them to leave the company after a certain period of time. The company’s leadership can avoid this problem with the help of entrepreneurial thinking and by allowing founders to serve in roles that offer opportunities for advancement.
To be successful, it is crucial to think beyond existing boundaries
Successful corporate venturing requires cooperation between two equal partners. Only then can an investment build the foundation for sustainable business ideas. The time is long past when companies could do everything themselves. Medium-sized businesses in particular need to create stable networks. Startups can be part of such a network, so interesting startups that the company might want to invest in are identified as a matter of course.
Particularly in the high-tech environment surrounding many mid-sized companies and startups, partner ecosystems are crucial for staying one step ahead in the digital world.
Another criterion for success: Both partners need to think in terms of new business models. Only then will they be able to develop new ideas for genuinely useful services and solutions.
Finally, the senior leadership team’s attitude is vital – they need both the ability and the spirit to innovate. Most importantly, they need to have confidence – in ideas and technology, in outstanding employees, and of course in themselves. Startups make an important contribution through their culture of turning ideas into reality, as well as their ability to see the bigger picture and rethink existing products and services.
In many family-owned companies, members of the founder generation are having an increasingly difficult time promoting innovation; they cling to what is already in place. A partnership with a young enterprise makes it easier to achieve necessary changes, while providing new opportunities for the startup. In the course of the integration process, both partners change: the startup matures, while the long-established company is rejuvenated and modernised.
Bernd Gross, CTO, Software AG