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One hand washes the other

Written by Josh Russell on Wednesday, 31 July 2013. Posted in Innovation, Technology

It can hardly have escaped anyone’s attention that an increasingly close relationship has grown up between tech giants and innovative start-ups

One hand washes the other

Large companies within the tech sector haven’t always had the best track record when it comes to innovation. For every Google or Apple that has built a reputation around actively challenging and disrupting the status quo, there is an IBM or Microsoft that has allowed its comfortable market position to stagnate. While small companies are often nimble, huge corporations have acquired the reputation of being cumbersome and lumbering, playing the solidly built dinosaurs to their malleable mammalian cousins.

Clearly then, there’s something in the nature of these large organisations preventing them from easily being able to innovate. In the opinion of Peter Bance, entrepreneur-in-residence at investment firm Octopus Investments, their sheer size is one of the things impairing their manoeuvrability in the marketplace.

“If you’re in the business unit of a large company, by definition you are busy making and selling today’s product instead of thinking about tomorrow’s,” he comments. “Corporations end up pouring the vast majority of their focus, attention, investment and resources into the business of today.” By way of contrast, micro-enterprises and new businesses constantly have to have an eye on the future and where they’re headed. “In the world of the start-up it’s all about creating the business of tomorrow.”

The tech landscape has certainly changed. Even in the public eye, people are much more aware of the concept of small teams delivering powerful innovations, with consumers seeing products such as the Pebble smartwatch firing the starter’s pistol in the race for bigger corporations to develop their own equivalents. Suddenly, innovation has become the domain of the small- and medium-sized enterprise (SME) – and the big players in the industry are certainly sitting up and taking notice. “They realise a lot of the sources of innovation are outside of their businesses – not all of the good ideas are internal,” explains Bance. “Corporates are now firmly aware of that and using all of those resources at their disposal to tap into that talent.”

This can take a wide variety of routes. “There is a spectrum of mechanisms that corporates are now realising are useful and either accessing new technologies, new business opportunities or talent,” says Bance. Stretching from traditional internal R&D routes, by accessing new talent, all the way to acquiring businesses lock stock through mergers and acquisitions (M&A), there are plenty of ways large corporations are reaching out to SMEs in the tech space. “In between internal R&D and acquiring businesses, there are other methods that are used, such as in-licensing technologies, joint developments, joint ventures or minority investments through corporate venturing.”

Perhaps one of the most high profile examples of corporate firms working with small innovators is happening right on our doorstep. Incubators such as Telefonica’s Wayra and Google’s Campus London provide spaces and resources to assist burgeoning tech enterprises with their new products and innovations. With other methods such as corporate venturing and M&A, this ensures these large multinationals have a connection to important developments as and when they arise.

“The large corporates are doing those things as an insurance policy, to make sure no breakthrough new innovation surprises them or potentially disrupts their business model completely,” Bance explains. “Players out there, the more nimble ones, are either going to represent a potentially life-threatening new innovation or something that is the next big growth area. It’s a window into the future.”

Thus far, this could all sound rather cynical, as though these corporate enterprises are parasitically subsisting off their smaller brethren. But, in actual fact, nothing could be further from the truth. Instead, the relationship is one of mutual benefit.

“There is a real natural marriage between small innovative start-ups and large established corporations,” comments Bance. Having access to operational resources such as huge R&D departments or factories of a million square feet is entirely beyond the reach of most start-ups, but, by forming close partnerships with large corporations, they can access resources usually only available at a much larger scale. “You couldn’t dream of having those resources yourself or building them organically, whereas by tying up with a large corporation you can get the operational firepower that the large corporation has already invested billions developing.”

And there’s another obvious factor. The funding gap, in which it’s often hard for an SME to secure capital between seed funding and acquisition or debt finance, can cause many a great idea to stall, and the tech space is particularly prone to enterprises slipping between the cracks. Bance explains: “Quite often there’s not enough risk appetite in the investment community, whether that’s equity or debt providers that are willing to bridge that chasm for a start-up to go from a proven idea to a profitable business.”

This is another huge bonus for enterprises in the tech space being courted by the multinationals. “Corporates have the depth and patience of capital to bridge that chasm,” says Bance. “There’s a financial synergy to plug what is a structural gap in the capital market between angel funding and debt finance.”

But one mistake smaller enterprises often make is assuming that, because a corporation is making a financial investment, they’ll be on hand every step of the way. “Ironically, it’s easier, quite often, for corporates to write a big cheque than to be operationally helpful,” laughs Bance.

Which, in some cases, is to be preferred, as often too much involvement from a corporate partner can end up destroying the very independence and culture that enabled the smaller enterprise to be disruptive and unique in the first place. “Performing that dance correctly is one of the trickiest things in the marriage between giant and minnow,” explains Bance. “If you get the corporate’s money, you might also accidentally get the crushing force of a corporate culture that is anti-innovative and ends up killing the goose they hope will lay the golden eggs.”

Despite this, close relationships between corporations and start-ups are helping the UK tech scene flourish. And it really can’t be denied that it’s proving to be a beneficial relationship for all involved. 

About the Author

Josh Russell

Josh Russell

Our former editor, Russell was the man in charge of properly apostrophising our publication and ensuring Oxford commas are mercilessly excised. Our former digital doyen, he’s also a Photoshop pro, a dab hand with InDesign and the man to go to if you need a four-hour soliloquy about the UK's best silicon startups.

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