Corporates Want Startups To Disrupt Them. It’s Not An Easy Fit

Australia’s biggest companies are struggling with the sheer pace of change as old certainties are challenged by twin threats. On the one hand they need to keep a watchful eye on the new generation of technically savvy entrepreneurs, and on the other, there is the growing menace of global technology giants extending into new sectors.

Some are developing their own innovation hubs to create new value while trying to build deeper links into the startup ecosystem and defeat the disruptive pincer. But culturally, are they equipped on either front?

Julian Malnic, the managing director of Fluid Minerals doesn’tthink so. Malnic launched his first venture – Nautilus Minerals – in 1993. The business went on to list on the Toronto Stock Exchange. His next venture, the ASX listed Direct Nickel, was founded in 2004.

In 2014 he won the Shell Innovation Award after creating a simple and robust metallurgical process for the low-cost production of nickel and cobalt from an abundant ore source called nickel laterite. The problem he solved was a difficult one that had caused all manner of trouble in the past for well known Australian miners like Andrew Forrest at Murrin Murrin and Clive Palmer at QNi.

With 25 years in leadership roles in the industry behind him, the former pipeline labourer and one-time mining industry journalist has strong views about the ability of Australia’s biggest miners — and its biggest companies — to innovate and to work successfully with other innovators.

It is not a flattering picture.

“To be kind I would say that they haven’t gotten around to innovation yet, although CEOs are starting to sprout the right words,” says Malnic, who is also the founder and chairman of the Sydney Mining Club. “They are about 30 years behind other industries, culturally.”

He tells Which-50, “We have been taking them fantastic innovations, like the marine mining of high-grade copper and zinc deposits, for this entire period. For entrepreneurs like me, I don’t mind saying they are ‘brain dead’. They have no spirit of creation.”

“If you ask them what they are doing in innovation they say ‘Look, we are introducing driverless trucks!’ Well, surely the automotive industry must be credited with that?”

Malnic’s point: “They are not trying to change the fundamentals of mining.”

In the time-honored fashion of Australian miners, Malnic is blunt about the problem. “For a hundred million, or two, they would discover masses of new things to do. Instead they make multi-billion dollar blunders like Rio Tinto’s calamitously bad investment in the Riversdale Resource Limited and its Mozambique coal deposits, or BHP’s very ‘un-smart’ investment in the Ravensthorpe nickel mine in WA, coupled with its investment of  [around] $800m in the QNi plant in Townsville which it sold to Clive Palmer for very close to nothing.”

“Their second tier management is on huge salaries, and not one [of them] has ever risked a single dollar. Maybe at the Melbourne Cup!”

He contrasts his assessment of the timidity of Australia’s traditional industry leaders with that of two other well-known miners. “Look at Gina Rinehart and Andrew Forrest’s mighty iron operations. They ate the iron ore lunch of Rio and BHP in the Pilbara.”

Malnic’s views are shaped by the world of rock and ore, but they are not a million miles removed from the sentiment of entrepreneurs in other sectors, who need to decide whether to butt heads with entrenched incumbents or to try and collaborate with them.

New Wave

Digitalisation has produced a renewed need for business to innovate at speed and at scale — a particularly daunting prospect for incumbents saddled with a long history of legacy technology and procurement procedures.

But while change in large corporates often occurs at a glacial pace the need for innovation grows stronger with the arrival of every new insurgent competitor. That, in turn, has led many companies to seek inspiration and support from external partners, to power their transformation.

“The speed of disruption and the fear of disruption has obviously caused smart corporates to say ‘we need to find better ways to innovate’,” says Gartner analyst Neil McMurchy.

Much of the pressure to innovate, he says, comes from the business side and the need to deliver new customer experiences quickly at the front end of the business.

“They’re not competing on the back end of their business so much,” he told Which-50. “It’s very difficult to get a competitive advantage out of being slightly more effective from a cost structure perspective.”

Innovative customer solutions require a more cutting-edge approach, something corporates struggle with because of the sheer scale and inertia of their own systems. While that problem is nothing new, digital technology has made traditional procurement processes often too slow to meet customer demand.

“What’s happened is the business [side] has started to assert itself in technology decisions, They’re saying ‘look the risk of us not delivering a new customer experience using this piece of new technology is a greater risk than if this vendor goes bust’,” McMurchy told Which-50.

“It’s a flipping of risk,” he says. With IT departments and traditional vendors unable to keep up with the pace, large corporates need a new source of innovation. “So they’ve gone looking.”

Venus And Mars

It is important to recognise that despite the best intentions, the relationship between incumbent market leaders and startups can be complicated, fraught and unsatisfying.

Which-50 spoke to a number of executives with experience in both worlds.

“This odd pairing can achieve great things, but beyond the rhetoric of disruptive collaboration, the startup/corporate partnership landscape is littered with tales of unmet expectations and misconceptions – on both sides,” says Sandy Plunkett, the founder of Innovation Clearinghouse, and herself a venture capitalist in the past.

“Both entities, in theory, need or want what the other can provide. Startups pride themselves on speed, innovative tech, and risk-taking.  Corporates have customers, scale and structure. Protecting all three generally means they are risk-averse, with all the procedures and red tape that goes with that.”

Even the most willing corporate innovator champion will also run into internal static and bureaucracy, she says.

“Managing that tension alone is no small feat. So startups need to dig deep to really get as much of a clue as possible about the willingness of a corporate partner to adapt and move at speed.”

Gerd Schenkel founded uBank and Telstra Digital, then did a stint as the managing director of payments company Tyro. These days he runs BGA Digital and brings a well-rounded perspective to the debate.

Like Plunkett, he stresses the natural tension in the relationship. “On one hand, startups are expected to inject much-needed innovation into the Australian economy, finding better ways and taking at least some share from established providers. On the other hand, many large organisations have engaged with startups by means of providing early-stage funding, plugging a gaping hole in the Australian innovation environment, which still lacks the kind of risk capital on offer in other advanced economies.”

But this can create a situation of undue influence and false promises, Schenkel told Which-50. “Which startup is going to take the risk of competing with their biggest shareholder? And few corporate executives are brave enough to sponsor a truly disruptive investment with their boards. Instead, these investments often come with promises of support, such as inclusion in national distribution networks, access to valuable data and other intellectual property, and the like.”

According to Schenkel, “Speaking to many startups about their experience, those promises are almost never kept and a feeling of regret of having made a deal with the ‘enemy’ persists,” he said.

“The feeling of disappointment is mutual though: corporates who expected to learn and benefit from technology transfer from their investment portfolios, have found that they are simply not set up to incorporate those new ways of working into their legacy organisations. Perhaps it would be more prudent then for corporates to focus on themselves, change how they operate and set themselves up for the future, rather than decorate themselves with small, glitzy startup investments?”

Michael McDonald, Co-Founder and CTO Flatworld International, a high tech data services business says, “As with most relationships, communication is key and, all too often, misunderstanding, miscommunication, and misalignment can doom these liaisons from the beginning.”

Startups often view corporates as ‘The One’, rarely understanding that they’re dealing with a very large, distributed group of stakeholders within the corporate entity, each having to be engaged with and satisfied for the project – the relationship – to have any chance of kicking off, he warns.

McDonald says tech startups, in particular, rarely understand the complexities involved in delivering and deploying software to and within large corporates – both requiring a large amount of project management and time to implement.

“Implementation is where the biggest misunderstandings are often found, with startups not realising that to implement software in a large, complex, corporate environment, software must be designed as a well defined ‘lego brick’.”

“The ‘brick’ not only has to fit into the corporate environment easily but, if successful, must also be simple to scale. Add into this the level of support required to get these projects operating and virtually no startup is organised correctly to engage a corporate successfully. In most cases, the relationship will be an unrewarding experience for both entities.”

Blame On Both Sides

And he says corporates can be equally to blame for the missteps and mistakes in this kind of attempted engagement. “Unless they have staff who have worked in startups, it’s likely they don’t understand startup culture at all. Instead, they’ll expect the startup to understand and engage with them in the same way an Oracle or IBM would. This will include how to deal with the very real issues of contract negotiation (which can take months) and cash flow (it can take months to get paid, if at all).”

Additionally, contractual conditions are normally placed upon startups – such as the requirement that they be insured for millions of dollars to protect the corporate from any potential reputational and operational downside.

“If you combine all this with the fact that large corporates are highly fragmented – so you’ll need stakeholders from the IT, operations, sales, marketing and finance departments to come together to deliver a) project support, b) clear requirements, and c) clarity (ie what do these requirements actually mean) it’s unlikely the relationship will work and could, in fact, break the startup completely,” McDonald says.

Karen Lawson has worked as a senior executive at News Corp and Yahoo in Australia, been a board member and director of technology startups, and was most recently the CEO of the Slingshot Accelerator. Like Schenkel she has experience in both camps, though she expresses more optimistism.

“Corporates and startups are often perceived as being at war with one another. A David and Goliath battle of win/lose.”

She says there are plenty of statistics that suggest corporate lifespans are shortening as they struggle to innovate, and that thousands of jobs are being shed.  Yet she notes its also hard for startups most of whom fail.

“The solution is not all-out war its something perhaps harder. Collaboration, empathy, and outstanding leadership. I have seen what happens when startups work with corporates with support and knowledgeable guidance.

“They were able to access customers, resources, knowledge, expertise and run fast tests and trials. They were connected to the right contacts with authority. They grew faster. They were able to raise VC capital more quickly as they had a corporate customer and/or tangible evidence of product market fit,” she said.

“In some cases the corporate invested, more often than not they became a customer, advisor, channel to market or connector to industry. The best thing is corporates were able to unlock their lazy assets and execute value for the startup.”

Success shouldn’t always be measured in their funding rounds, she said. “If we could open up the doors to genuine collaboration we will see real growth and job creation.”

Accelerators Aplenty

Many corporates have turned to accelerators for their external innovation. The Australian market has “exploded” in recent years with little sign of slowing, according to those in the industry, as well resourced corporates seek out innovative startups to shortcut their innovation.

Which-50 spoke with several of Australia’s leading accelerators about the changing market and the increasing role of corporates. Not surprisingly they take a more positive view of the relationship.

“Corporates want to connect with startups,” said Craig Lambert, co-founder of Slingshot, Australia’s most active accelerator.

“The reason why they want to do that is it is a great way to quickly and inexpensively source products, experiment with new business models, potentially look at high-value investments. So the accelerator model works really well for corporates that want to engage startups.”

The corporate involvement, which for Slingshot includes Newscorp, Caltex, HCF, and Qantas, is welcomed by the startups too, according to Lambert, whose accelerator regularly receives over 500 applicants for just 10 places.

But it is the corporates driving the increase in the accelerator market.

“Our business continues to grow because more corporates want to engage startups. There’s a universal acknowledgment that engaging startups is a great way to shortcut research and development,” Lambert said.

“They’re all trying to do it. I don’t think I’ve spoken to a corporate that hasn’t recognised startups will play a roll in their innovation. They’re all doing it differently, they’re not all running accelerators, but the accelerator mode does provide a really good framework and a process for success.”

Lambert, like Gartner’s McMurchy, says the appeal for corporates is not necessarily innovation per se, but the speed of innovation.

“Startups give you the ability to give things at speed. Because they’re outside of your environment. They’re not encumbered by business unit constraints,” Lambert said.

“They just get on with it.”

Indeed many Australian and international corporates now run their own accelerator programs. Julie Trell, Global Head of Telstra-backed accelerator Muru-D, says more and more accelerators are popping up and corporates are more willing than ever to work with startups.

Trell told Which-50, “I’ve heard time and time again at gatherings like the World Economic Forum, or talking with people leading innovation teams at corporates, that businesses recognise that in order to stay relevant, understand new ways of working and find new technology that they can achieve this by working with startups.”

She said the maturity of startups she sees in accelerators is also changing, with many more later-stage companies beginning to utilise the programs. She said there is now an opportunity to focus on “up-market” companies as they scale up.

A Changing Model

Traditionally, accelerator programs have seen VC organisations provide access in exchange for an equity stake in the startup – typically between five and 10 per cent. However, many corporates now provide support to startups in exchange for early access to innovation, rather than direct financial returns.

“They’re certainly not seeing it from an investment perspective,” says Gartner’s McMurchy. “It’s getting access to innovation and spurring internal innovation.”

That approach is part of Microsoft’s strategy in Australia. The software giant runs its own accelerator program, ScaleUp, which now operates in eight locations, including Sydney, and has a portfolio of over 730 graduates who have collectively gone on to receive billions in follow-on funding.

But Microsoft doesn’t see much of those billions, at least not directly. According to Emily Rich, Managing Director Australia and New Zealand, Microsoft for Startups, for Microsoft the attraction is early access.

“We’re not asking for a pound of flesh,” Rich told Which-50.

“At Microsoft, we see the value of investing in startups and sharing knowledge to find strategic alignment earlier on in the value chain. We leverage those gains and provide our global network of customers, partners and venture capitalist firms with direct access to the very best and brightest market leaders of tomorrow.”

Other corporates are recognising the non-financial returns too, according to Rich.

“As innovation and digital transformation initiatives start to drive the strategic direction for more and more corporates, I’ve seen them really come to the table and adopt a solution driven attitude.

“More than ever, corporates are coming to us seeking cutting-edge technologies and industry-leading solutions and it’s through programs like ScaleUp that Microsoft is providing startups with a platform to get in front of these corporates to create those global growth opportunities.”

The digital technology driving the corporates’ search for innovation has also begun to affect the accelerator programs themselves, according to Rich.

“With the advent of easy to deploy cloud technologies and other microservices the accelerator model that was once focused on MVP development and setting you up for further funding is starting to expand its horizons.”

Rich said accelerators now employ a much more holistic approach to build every aspect of a startup’s business and ensure they are “enterprise ready”.

Two-Way Street

While the potential of startups to provide corporates with innovation is clear, it is still risky and many of those risks are hard to identify, according to Gartner.

The research firm warns, “Startups eager to establish a client base may make exaggerated offers that can strain their financial stability and product investment. SVM leaders need to carefully consider a startup’s proposals and weigh it against the company’s stability to ensure success.”

Startups too can expect new challenges with larger partners. Gartner analyst Neil McMurchy says he has seen corporate clients lose startup partners, who simply did not have the legal resources to enter into an 85-page vendor contract.

Ultimately, it is a two-way street, according to David Burt, executive manager of Innovation at CSIRO and the executive responsible for the ON Accelerate program.

“There are two sides to this,” Burt told Which-50. “One, is the startup ‘enterprise ready?’ and two, is the enterprise ‘startup ready’?

“Startups being enterprise ready means understanding how enterprises make major buying decisions and having appropriate risk-mitigations in place, like appropriate levels of insurance, that reflect how established enterprises make decisions.

“Enterprises being startup ready is usually a function of procurement procedures being flexible enough to accommodate firms without a long history of delivery, combined with an economic buyer at the enterprise who’s happy to accept the career-risk that comes with buying from a non-proven supplier.”

Startup Outcomes

From the startups perspective, managing and growing that relationship can be more important than traditional measures like funding, according to Burt.

“The most valuable thing for a startup is to have is an early adopter enterprise customer that has appropriate expectations – an enterprise customer that understands the startup may be developing their product in parallel with delivery, that there may be time delays with deployment, that the start-up is searching for its business model and so pricing (and support levels) will have to change over time.”

Andrew Lai, Managing Director of agtech accelerator SproutX, says for startups ultimately revenue is king and funding can be more valuable than a corporate customer.

“Given the conservative nature of partnerships and investment in Australia, my favoured indicator [of success] is just simply revenue,” Lai told Which-50.

“Nearly every Australian investor, corporate and institution want to see significant revenue/sales hence I always encourage startup companies to focus on generating revenue whenever possible.”

The notion of outsourcing innovation to circumvent the agility challenges large corporates face is an attractive prospect. However, it is worth remembering the gains will likely be incremental, according to Gartner’s McMurchy.

“It’s constantly doing new things a little bit better. It’s not like this innovation they’re trying to get is going to be absolutely game-changing and put them five years ahead of the competition. It’s really the game of inches about getting a little bit better across a lot of different areas across the business.”

So while the tactic may be new, the process perhaps not so much.

Take A Bet

We asked Julian Malnic what advice he would offer to the executives running the biggest businesses in his industry.

“Spend $100 million a year in investments in anything that might lead innovation in the Australian resources sector. Don’t over-think it,” he says.

“They have proven that picking winners is not their strong suit. So long as the proposition has a reasonable case for how returns will be made and how an exit will be achieved, back them. Then after two to three years take a good look at the results, and study the successes they generate — of which there will be a small and highly-rewarding few — as well as the characteristics of the losses.”