Why Companies don’t partner with Entrepreneurs to build New
Businesses
Most people would agree with the following three statements:
1.
One of America’s strengths is our ability to
innovate
2.
Large Fortune 500 companies are not particularly
good at innovation
3.
Most of America’s innovation came from
entrepreneurs.
So why don’t Fortune 500 companies outsource innovation to
entrepreneurs? They will outsource
almost anything to gain competitive advantage.
For example, Fortune 500 companies will outsource their business
strategy to Bain, manufacturing to China, customer service to India, R&D to
research universities, and IT to Accenture.
But one almost never hears about an outsourcing deal with
entrepreneurs. Why not?
I have asked business executives this very question. The answers vary some but tend to center
around three themes.
1)
They believe it is less risky and easier to buy
(M&A) an innovative company once it proves it is successful.
2)
They don’t know where to find entrepreneurs -- corporate
executives usually don’t engage with technology focused entrepreneurs in their
normal business dealings.
3)
They believe that most startups will fail – they
are concerned they might waste their time on ideas, people and small start-up
companies that are not likely to work out.
These beliefs are not always correct.
Let’s look at all three hypotheses in more detail.
M&A - Buying a company that has a proven track record
This is a sound strategy, provided one does not have to
enter into a bidding war with a competitor.
Often times, a company that has proven it can disrupt a market will hire
an investment banker and invite several bidders to the party.
The risks of an M&A are obvious to anyone that has
acquired a smaller, technology based company.
First, your company may lose out to one of your competitors and
completely miss the opportunity to capture a novel technology. Second, even if you prevail and win the bid,
you may have to overpay to acquire the company if your competitors are also
bidding. Third, all too often the acquiring
company finds it difficult to integrate the new company into their
culture. This often leads to partially
destroying the very company one just paid for.
So while acquiring smaller innovative companies is a viable
and sound strategy, it is not without risks.
Finding Entrepreneurs
Most Fortune 500 executives are very involved with other
executives in their industry and community, government regulators, chambers of
commerce, their customers, board of directors and various non-profit boards
usually within their community. While
this gives them tremendous exposure to many people, they rarely come in contact
with their local entrepreneurial community.
However, university affiliated technology accelerators and
incubators are very well connected with entrepreneurs and are indeed an
“aggregator” of seasoned, innovative start-up entrepreneurs that can make it
relatively easy to get to know individuals that could help them solve problems
and/or create disruptive technology, which would create a huge competitive
advantage.
Don’t most technology startups fail?
Startup companies that are part of well-respected
accelerators and incubators have a very high success rate. Most experience a 60% to 70% success rate
(defined as being a vibrant company 5 years after they start and/or sold to a
larger company). At ATDC, over 90% of
our incubator graduates were successful organizations or part of a larger
organization 5 years after they graduated.
Conclusion
Fortune 500 companies are always looking for ways to gain
advantage and improve their bottom line.
By partnering with a well-known accelerator or incubator, they can
partner with innovative entrepreneurs that can build new transformative
companies where the Fortune 500 company can either obtain an exclusive license
for a nominal cost or make an equity investment well before a bidding process
ever starts with a company that has a high likelihood of being successful.
The time is now for progressive Fortune 500 executives to
partner with startup ecosystems, accelerators and incubators. The investment in terms of time and money is
minimal; the opportunity to take advantage of disruptive technology is very
real.
The time is now.
