By Derek Slater
Big companies can be great at operational excellence and process optimization. Yet, they often struggle with innovation. If it’s business as usual, then many fall into a state of inertia.
Startups have the opposite challenge.
Michael Docherty says the solution is to connect the two worlds. Larger organizations can benefit from partnering with startups, and not just with the intention of buying them.
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Docherty, author of Collective Disruption and CEO of Venture2, focuses on building innovation ecosystems. He has been on all sides of the table with experience as a VP-level executive, a venture investor, and an entrepreneur.
During this conversation with Connected Futures, he makes the case for partnerships:
Connected Futures: Let’s say I’m the CEO of a big company and I meet you in the elevator at a conference. What's your pitch—why should I be looking to engage with startups?
Docherty: Because you need growth.
What they used to call innovation is no longer enough. For a large company to live and grow, you've got to do more than reinvent the core or provide extensions. You really need to find new sources of growth.
That means a lot more risk and a lot more uncertainty. And that's what you're terrible at. It’s also what startups are great at.
Connected Futures: [laughs] Why am I so bad at risk and uncertainty?
Docherty: Look, I’m not bashing big companies. The ability to optimize a complex machine for effective distribution and growth and profits is really a great thing.
But ultimately, what public markets do, and the way compensation, plans, and cultures are driven—it's all about optimization and it's all about the near term.
One of the interesting statistics, which is a little bit scary, showed that for the first time in modern history, stock buybacks are a higher number than CapEx. [Editor’s note: See this CNBC article.] CapEx isn't exactly a measure of innovation, but it's a measure of investment. There's just this unyielding focus on the short term that will always pervade large corporations.
Maybe there are some exceptions, like Google or Facebook, but the rest of us need startups to do this. That's our surrogate new-business-creation partner.
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Connected Futures: How do I start?
Docherty: It can be as simple as sponsoring and getting involved in public accelerators like Techstars, Brandery, and others.
But the danger of getting started is doing just these easiest tasks. Quite frankly, it’s much easier to do the things that let you feel like you’re rubbing shoulders with startup founders. That's only going to get you so far, and ultimately, if you're trying to create new businesses, you've got to learn how to co-create with the startup ecosystem. That's more complex and much tougher. In my book, I talked about Johnson & Johnson, Cisco, and others who are good models for doing that well.
Connected Futures: What is the ‘startup ecosystem’?
Docherty: Sorry if that’s a bit buzzword-y. It's a network of networks. What you have to understand is, based on the business that you're in, which particular networks or groups do you need to be involved with?
For example, most of the public accelerators have to be diligently consumer-tech focused, which might work for many companies but perhaps a P&G might be more interested in science-based technologies. For that reason, they need to look elsewhere.
There are industry groups, such as in [Internet of Things] IoT.
There are also the geographic networks. Of course, everyone has a presence in Silicon Valley—it’s amazing how many industries have set up shop out there—but if you're looking for healthcare companies, you want to look in San Diego or Boston. If you're looking for green tech, that might put you in the Midwest.
So, you connect with not only the startups, but also their support networks like the investors.
Connected Futures: What mistakes or pitfalls does the CEO need to avoid?
Docherty: One of my clients told me about a large consumer health company that found a very interesting life science-based startup. They struck a licensing deal and started helping them with their clinical studies and get this solution ready for market.
By applying all of their governance and oversight, they actually drove the startup to the point where they took their eye off the ball and they messed up their clinical trials because they were too focused on answering the question of the corporate entity. The startup ended up dying.
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If you look at where most companies fall down, it's not in finding partners. The mistake is they're doing that without the right internal engagement at the larger organization.
Once you've got an initial outreach going and an initial interest, it’s about setting up an internal group that has this right balance of separation and integration.
I often use the metaphor of an island with a bridge to the mainland. Enough integration so that these opportunities aren't killed by corporate antibodies, and enough separation that you're not over-encumbering the partnership.
Startups are looking to make decisions quickly and large corporations can provide a lot of support, but can slow also them down quite a bit.
They need to let these startups operate with some distance, with light-touch governance, so they can move fast. When the startup is getting ready to scale, the engagement increases. That’s when it is time to slow down because you want to scale it the right way.
Connected Futures: What are the possible outcomes of these types of partnerships?
Docherty: One potential outcome is equity investment and, ultimately, acquisition. But it's not the only one.
I would say the most common outcome is that you learn from each other and no [long-term financial agreement] goes on.
One type of common formal arrangement is that you license a technology for your area and let the startup continue in their area.
A consumer health company I worked with was very interested in starting a business in digital services. They wanted us to investigate creating a profit center or something to leverage their existing brand, but with a whole new digital platform.
They thought that the best way to do that was to acquire the technology and build it themselves. In the end, they could find people out there that were very happy to build this for them, and they ended up being the customer instead of the builder. What you most likely want in this case is to be an exclusive partner for a period of time or in a certain category.
Coca-Cola has a program that recruits entrepreneurs to build startups around ideas they need. They give these entrepreneurs [support] and Coca-Cola benefits from the product.
In one case, they funded a location-based shelf stocking business. Coca-Cola knows a lot about what it takes to keep their shelf stocked in retail outlets, but it costs them a lot of money if a grocer or retail outlet runs out. It can take days to get that shelf restocked. They created this business through a group of entrepreneurs that's more or less a TaskRabbit for shelf restocking, a group of freelancers that can get into these stores very quickly on demand, restock, and get them back running again. Coca-Cola is a customer and the startup can also work with noncompeting CPG companies.
Connected Futures: Alright, time is up—now we're getting out of the elevator. Any parting words?
Docherty: As a CEO, you really have to be looking at, how can I build the right organizational structure and the right culture of experimentation?
You also have to recognize that your core business and your transformative work are interdependent.
You have to think of this as more of a system, and redefine what the organization is—our core strategic partners are really part of our organizations.