Corporations Need Startups for Strategic Insights

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“We are surrounded by data but starved for insights.” — Jay Baer

The corporate world today contains more data than ever before; companies are flooded with data tracking product development, customer behavior, and market trends. But data in and of itself is worthless without a way to generate meaningful and actionable insights for a corporation’s business strategy – insights into emerging technology likely to disrupt the status quo; views of their customer’s pain points, demands, alternatives; awareness of the competitive landscape and trends; familiarity with core and emerging markets; and technical expertise to guide the company’s research, development and product roadmaps for years to come. 

Traditionally, corporations have used a variety of methods to gain insights on their business strategy. Historical methods are tried and true, and in the vast majority of cases, should continue. However, they are no longer sufficient for companies that need to stay ahead of the curve. Where do they fall short? Let’s take a look at some of the most common techniques.

  • Research & Development → Expensive and binary. R&D is often done in a vacuum, without enough consideration for customer demand and market trends.
  • Consultants → Consultants often identify a point-in-time plan and hand it off to the company, where it sits on a shelf, never to be looked at again.
  • Customer interviews and focus groups → Customers don’t always know what they want, and when they do know, their demand is typically immediate. If a customer asks for XYZ feature, will that need still be around in six months once your team has developed and commercialized it?
  • Competitor analysis → Timing is again an issue; if you’re over-indexing on your competitors, you’ll always be a step behind.
  • Industry research → Industry and market research is usually expensive, and since it’s forward-looking, there’s no guarantee that it will be accurate!
  • Academic research and university partnerships → Academic research is great for learning about frontier technology, but it rarely provides actionable, commercializable next steps.
  • Employee insights → Your employees already have a day job. Do they have the incentives to speak up about change? Does your company have a culture that would allow insights to roll up to the C-Suite? Maybe… but maybe not.

Over years of working with corporations and a growing number of startups disrupting virtually every industry, we at TechNexus have seen time and time again that entrepreneurs and their startups are a powerful source of insight for corporations. These insights are particularly valuable because startups are working on problems at the leading edge of change (in ways that corporations generally are not). The insights generated by startups are won by concrete, hands-on interaction with new technology and new markets as opposed to arms-length observation or desktop evaluation or surveys. The insights that startups gain are continuous and fast, not simply a point in time lesson learned.

Speed, accuracy, expense, and aligned incentives are just a few of the shortcomings of traditional methods that corporations use to gain insights. Working with startups can supplement these methods and help corporations explore new technologies / products, learn about customer demand, identify new markets, and build a culture of innovation. 

To develop new technologies, corporations typically rely on their R&D functions. A surprisingly high number of new products fail; estimates range based on industry and the definition of failure, but one thing seems certain: launching a new product is not easy.

“about half of all resources allocated to product development and commercialization in the U.S. goes to products that a firm cancels or produce an inadequate financial return.”

-R.G. Cooper in “Winning at New Products”

Research from StatGate estimates the outcome of new product launches for companies that are considered top, middle, or bottom performers.

Working with startups isn’t going to replace a corporation’s R&D team; however, it can be a strong supplement to what the corporate is doing in house.

“Startups often have greater funding, focus, and flexibility than their corporate counterparts.”

By working with early-stage companies, corporations can take advantage of the startup’s unique perspective without drawing away resources from its internal priorities. Initial prototypes from the startup can speak to the realm of technical possibility; the corporation can get insights on what technology is promising before it dumps additional time and resources into R&D that may or may not be successful.

Working with startups can also bring insights into new and tangential technologies for a corporation. Review any Fortune 500 company, and you will find that they are experts in their core technology. They have to be. But what about the emerging technologies that may disrupt the company’s industry in the near future? Corporations can’t possibly hire experts in all technical fields. Working with startups can provide them access to highly specialized technical experts in a variety of fields. However, expertise isn’t enough — a culture of innovation and the freedom (and risk tolerance) to go play and learn is critical for letting those experts innovate. Luckily, a startup often combines both the expertise and ideal culture.

It’s not enough to simply develop new products and technologies — in the real world, these solutions need to be commercialized. Testing out customer demand is critical for corporations before they invest significant capital in new businesses. Luckily, startups can also provide key insights into customer demand for new technologies and solutions. The initial sales strategies of many early-stage companies often relies on virality – word of mouth marketing or traditional channels like direct sales and channel partnerships. The traction that these companies achieve (or conversely, don’t achieve) can be key data points for corporations as to what technology and customer bases to pursue. Several of our corporate partners engage startups in sales opportunities — sitting in sales meetings or gathering customer feedback to gain insights on the customer’s problems, preferences, and what type of sales strategies are most effective. As we’ve already alluded to, startups can move much more quickly than large corporations; if a particular sales strategy isn’t working, the startup can pivot its model and try something new. 

Similar to their core technology, corporations typically have a solid understanding of their core markets and target customers. We’ve found in working with corporations that this knowledge is often seen as fixed, though in practice, we know that markets and customer demand is constantly changing. By working with startups, corporations can push the assumptions of what they think they know about their target markets — size, growth rates, core products and more. Within a corporation, exploring a brand new market (or launching a new product to your core market) can be costly and binary. It will either work or fail. Working with startups in a variety of markets and technologies will provide insights on these markets in a more efficient manner than if the corporation were to execute it all internally. In sourcing startups for our existing corporate partners, we’ve also gained insights on markets simply based off of the number of startups that are serving them — if there are a plethora of startups at a particular cross section of industry and technology, we can gather that customer demand is likely large. Conversely, if few (or no) startups are serving a particular market, the corporation may learn that either limited customer demand exists or that this may be an underserved opportunity area.

Technology, customer, and market insights are all key for corporations to glean from working with early-stage companies. However, perhaps the most important lessons to learn relate to a culture of innovation and how corporations may integrate that innovation into their day-to-day operations. Startups don’t have a status quo; as such, they are more apt to evolution and creative solutions because there is no standard of “how they’ve always done things.” Corporations are often risk averse — they don’t want to cannibalize their own business with new technology or products, but startups have little fear of doing so. As such, startups can evolve faster: they have less to lose, are often closer to the customer, and have higher growth expectations in order to survive (and often in order to raise a subsequent round of venture capital funding).

A culture of innovation might be hard to measure in relation to financial success, but research by PWC’s Strategy & Business recently attempted to do just that. The graph below compares performance on three financial metrics (5-year CAGR for revenue growth, gross margin, and market cap) for companies that were rated more innovative and companies that had a high R&D spend as a percentage of revenue. As the graph shows, higher R&D spending doesn’t necessarily equate to better financial performance, but a culture of innovation does. 

Ultimately, corporations need startups for strategic insights — into emerging technologies, the evolution of customer demand, shifting markets, and how to build an ongoing culture of innovation. What’s more — generating these insights can’t be a point in time activity. With the speed of innovation today, corporations need to constantly be seeking new insights. By developing an ecosystem of startups, corporations can build a constant and iterative process for maintaining a competitive strategy.

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