December 15, 2022

Collaborating with Startups from a Corporate Viewpoint

Written by
William Horyn

Co-authored with Divya Sudhakar

Despite the attention and acclaim the startup ecosystem has commanded over the past decade, many corporations have been slow to tap into this movement. Of those that do lean into the promise startups offer, many are unsure of the potential playbooks or mishandle the relationship based on startup maturity and focus, a pitfall we’ll dig into later. As the pace of innovation accelerates and technology continues to permeate every aspect of how we live, work, and play, it’s more important than ever for corporations to establish and maintain an active strategy of startup engagement. In this post, we’ll examine how this has changed over time and consider a few ways in which corporates can work with startups to drive mutually beneficial outcomes.

A Brief Historical Perspective

Though Silicon Valley didn’t earn notoriety until the end of the 20th century, there was a subset of forward-thinking corporations who embraced partnering with early-stage ventures before it was cool. Going as far back as 1914, DuPont — the long-standing chemical and plastics manufacturer — was an early investor and strategic partner of a budding startup at the cutting edge of the automotive revolution called General Motors. Over time, DuPont invested more and fostered an increasingly tight partnership with GM, betting that the startup’s success would drive additional sales of DuPont’s products (such as artificial leather, plastics, and paints) as well as generate a handsome return on investment. Though DuPont was a first-mover, others soon followed suit including the likes of 3M, Alcoa, and General Electric. These conglomerates sought to diversify their product offerings and revenue streams, putting excess cash to work outside of their core business models.

As technological breakthroughs began to accelerate throughout the back half of the 20th century, startup formation and corporate engagement followed suit. The advent of the personal computer ushered in the second wave of corporate-startup engagement, as many organizations realized the power of new technological advancements and the need to capitalize on them. Key players in this era included Cisco, SAP, Xerox, Microsoft, Intel, IBM, and others, who sought to partner with Silicon Valley innovators. (Members of the Geodesic investment team bring experience from the corporate venture arms of Intel and Cisco, and have seen successful partnerships firsthand.)

The 1990’s subsequently spawned mainstream adoption of the internet, leading to breakout disruptors such as Google, Amazon, and Salesforce. Having been high-growth startups themselves, these pioneers understood the importance of tapping into the early-stage technology ecosystem and established a proactive stance more quickly than their predecessors with a focus on R&D benefits. And today, this trend has continued but with a notable expansion to include industries outside of traditional Silicon Valley incumbents as technology indiscriminately reshapes all companies and markets. Businesses such as Shell, General Mills, Pfizer, and Schneider Electric have all leaned into startup engagement to position themselves for the next 5, 10, and 20+ years, recognizing that the failure to do so risks falling behind at best and obsolescence at worst.

The Importance of Startup Innovation for Corporations and Ways to Work Together

There are multiple reasons why a corporation may choose to engage in the startup ecosystem. From our experience, some of the top ones include:

Diversification into new markets, from both a product and a geographic perspective: Partnering with startups can represent a quick path into a new geography or market segment not currently served by a corporation’s portfolio. In addition to broadening the product offering in the near-term, this can yield valuable insights and inform a potential organic strategy in the medium/long-term.
Accelerate Product Roadmap: Startups have the benefit of being agile, with the ability to quickly iterate a targeted product set based on real-time customer feedback. For better or worse, established corporations don’t always have the same luxury given processes and guidelines that have been put in place. It’s also understandably challenging for a large corporation to focus on incubating an entirely new product/market when existing products are generating substantial sums of revenue. Engaging with a startup operating in a similar or adjacent category can speed up a corporation’s own roadmap, providing access to otherwise inaccessible market intel.
Improve Competitive Positioning: Ultimately, startup engagement offers the potential for substantial competitive advantage. This can be in the form of having access to the latest technology, market intel, new GTM motions, and new geographic access, among others.

To make this topic a bit more tangible, we’ll discuss some practical ways to realize value from startup engagement including examples, some of which members of our team were directly involved with during their time at Intel and Cisco:

Go-to-Market:

GTM partnerships are a key and common way to work with emerging companies. They represent an opportunity to mutually realize synergies without necessarily over-committing resources or product roadmap on either side. They can take many forms, but two common approaches include:

Co-Sell: Co-selling arrangements generally involve a collaborative selling motion, with one party amplifying the distribution of another product and receiving a share of the sale proceeds as an incentive. Given that corporations typically have established platforms, they are usually the party that promotes a startup’s solution. The incentives are aligned: the startup benefits with additional distribution and sales, while the corporation collects a portion of the sale and strengthens the attractiveness of their platform.

An example of this is the AWS Marketplace. AWS enables many enterprise software vendors to be listed on their Marketplace, thereby creating additional distribution for these vendors. When software is sold through the Marketplace, AWS receives a share of the spend. In fact, AWS sellers are able to be compensated based on sales made through the Marketplace, creating a strong incentive to encourage Marketplace sales.

Original Equipment Manufacturer (OEM): An OEM relationship requires deeper alignment between parties, as there is often a meaningful technical integration and only one seller. Typically, the corporation will sell a startup’s software under their own brand or a new brand created for the specific solution. As with the co-sell motion, there is a bookings share and the startup benefits from greater distribution. However, because the software has been rebranded there is less market awareness for the underlying vendor, and as a result they may negotiate a greater share of the sale proceeds. In addition to partaking in the deal economics, the corporation benefits by leveraging the OEM arrangement to quickly gain presence in a new market or segment rather than increasing sales of their core products as is often the case with a co-sell agreement. It’s worth noting, though, that the seller often bears the brunt of related support costs in these types of partnerships.

An example would be Cisco’s partnership with Turbonomic, in which the two companies announced an application performance solution — Cisco Workload Optimization Manager — that was powered by Turbonomic’s software under the hood.

Product Partnerships:

A product-oriented relationship (as opposed to a GTM-driven one) is another way for corporations to engage with startups for mutual benefit. This can manifest in different ways, including:

Product Integration: Create a “better together” story. In the late 2010s, Mobileye was a leader in mapping and self-driving technology, while Moovit was known for its comprehensive urban mobility application. When the two companies joined forces in 2020, they sought to unite their individual core competencies and together bring to market a new foundation for the future of mobility.
Product Enhancement: Better suit customer needs. In response to changing infrastructure and increasing regulatory demands on Financial Services Industry (FSI) businesses, Fortanix — a Silicon-Valley based enterprise security vendor — developed a security solution (SDKMS) to offer a single point of management for data security across the enterprise. However, Fortanix did not go it alone — their new platform is underpinned by Intel’s SGX solution, a secure hardware foundation that boosts the security of application code and data for cloud deployments. By working together Fortanix and Intel were able to produce a new FSI-friendly security paradigm enabling digital transformation while also protecting sensitive data.

Acquisition:

Lastly, with enough conviction on both sides, an acquisition can serve as an effective means for corporates to benefit from startup innovation. This yields full control over the product roadmap and GTM motion, while driving deep alignment to corporate strategy and accelerating time to market for any new solutions. There are of course numerous examples of this, such as Cisco’s acquisition of Opsani or Intel’s acquisition of Nervana Systems.

How to Create a Successful Partnership with Startups

As tempting as it may be to launch into GTM or product partnership discussions with promising startups, many corporations misjudge these opportunities, resulting in wasted resources and poor outcomes for all parties. The below graphic depicts a framework intended to inform the decision-making process when engaging with startups:

It is critical that any initiative strikes an appropriate balance of startup stage and level of engagement. Ideally, the startup: A) is at a stage where they can maintain the integrity of their product roadmap, and B) recognizes the benefit of working with a corporate and is willing to invest in the relationship accordingly. This is the “Zone of Success” that all corporates and startups should seek to operate in when working together. The absence of this balance risks a waste of time and money in the case of the two left quadrants (resources that are particularly vital for the startup), and an unsatisfactory outcome in the case of the upper right quadrant wherein the startup and corporate never achieve the ambitions initially sought after by both parties.

To ensure any engagement is on track for the Zone of Success, key factors to consider include:

The corporation needs an internal sponsor(s) owning the relationship to ensure accountability and continuity
Clarity on goals and a roadmap, with measurable milestones or KPIs
Open communication to establish and maintain alignment

Bringing it All Together

It’s no secret that startups are driving the bulk of technological innovation and transforming every aspect of how we live, work, and play. While it can be overwhelming, this trend represents substantial opportunity for corporates who are willing to lean in and find constructive ways to engage with the startup ecosystem. This has already become a competitive differentiator, and if executed carefully can yield profound outcomes for all parties involved. With that said, not all startups are created equal and it will be key for corporates to ensure they are getting access to the most promising innovators. This can be achieved through a variety of means such as developing brand presence as an active and collaborative participant in the startup ecosystem (e.g. events, thought leadership, founder-friendly initiatives) or leveraging the expertise of established investors to source and promote the best companies (e.g. partner with VCs). Regardless of the chosen path, these are exciting times and we at Geodesic encourage corporates to welcome the potential that startup engagement offers!

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