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To Jump-Start Corporation Innovation, Choose The Startup Next Door

Not all innovation disrupts, and not all innovators come from Silicon Valley

5Dec

The engineers’ 'eye,' unparalleled capital efficiency, or a glut of top-tier technology grads might all be fueling startup growth in the Midcontinent. But whatever the cause, founders in America’s heartland are finding success with their corporate counterparts.

To a New Yorker or San Franciscan, the idea of a non-disruptive startup may seem oxymoronic. But here in the Midcontinent, most founders aren’t deep-pocketed serial entrepreneurs: They’re fresh from enterprise and mid-market workplaces. Is it any wonder, then, that they want to cooperate rather than compete with industry peers?

Unfortunately, not every Midcontinent founder gets that chance. But more and more often, Midcontinent startups are showing that they’re not to be underestimated.

Midcontinental Might

Forward-thinking enterprises like Jaguar Land Rover are more than happy to forge relationships with startups that others might skip over. JLR recently brought LISNR, a Mercury Fund portfolio company known for its Internet of Sound and Smart Tones technology, into the fold of its technology incubator.

JLR and LISNR’s quest? To create a truly connected, key-free driving experience. Although automakers have been trying to kill the key fob and personalize infotainment systems for quite some time, none besides JLR has publicly announced a viable technology for achieving both goals.

'LISNR is one of the most compelling technologies we’ve seen in this space,' Danielle Alexander, general manager of JLR’s tech incubator, recently told CNET’s RoadShow, 'and we believe working with them will bring us closer to our goals of complete car and device connectivity.'

Like LISNR, Midcontinent startups are particularly well positioned to serve the region’s industrial base because many founders come from those very companies. They understand corporate pain points as intimately as big companies do themselves. And by setting up shop right next door to those companies, such startups can efficiently serve their enterprise customers and acquire the talent they need to scale.

Maximize Midcontinent Relationships

It’s clear that Midcontinent startups can support their corporate peers. But how can corporations hoping to partner with Midcontinent startups support them?

1. Start a sandbox.

Corporate sandboxes and tech incubators funnel problem statements to startups, universities, and other external innovators. By inviting startups that are tuned into the R&D race to play in the sand, large companies can quickly gain ground on competitors.

Be sure, however, to make sandbox projects worth the founders’ while. Unpaid projects rarely attract the best partners. Provide either success-based or non-recurring engineering payments to participating startups. Typically, such payments are a drop in the ocean of a corporate budget. For startups, however, an NRE or success-based cash infusion could be the difference between going bust and building out their next great idea.

Be open with interested startups about the process. If multiple startups are vying for an NRE, let them know they’re in a bake-off, and tell them what they’re playing for.

2. Provide visibility into the partnership’s future.

Mega rounds in the hundreds of millions are rare in the Midcontinent, where the average funding received by startups in first quarter 2017 was less than $6 million, according to PwC/CB Insights’ quarterly MoneyTree Report. The relative scarcity of venture funding in the Midcontinent is one reason why many startups turn to corporate partnerships instead. 

Corporate bureaucracy, however, can stymie startups looking for a partner. Teams of lawyers issue heavy restrictions on intellectual property rights and impose other legal requirements. It can be enough to drown any startup, much less one with an inexperienced founder and no legal team. 

Don’t treat startup partners like regular corporate vendors. Offer a promising founder a pilot period, and explain what will happen after the pilot ends. Might a sales deal be struck afterward? If so, at what scale? What else does the startup need to do to secure that enterprise deal? Is an acquisition a possibility? Which stakeholders will make that decision? 

Above all, be clear, fair, and direct. For startups, time is the most precious resource; don’t rob them of it if their product isn’t the right fit.

3. Be clear and equitable about investment terms.

The Intels, Googles, and GEs of the world have been investing in corporate venture capital arms for decades. Three-quarters of today’s Fortune 100 companies engage in corporate venturing, contributing to almost a third of all U.S. venture deals. 

Yet while CVCs offer an attractive source of capital for Midcontinent startups, they’re also prone to strategic shifts and simple neglect. Sunny Dhillon, founding partner at Signia Ventures, warns that in-house incubators and venture arms can be fast forgotten when corporate priorities change. 

Before discussing a CVC deal with a Midcontinent founder, decide whether the relationship will be financial-first or strategic-first, and be clear about it with the founder. Root out 'not invented here' views, which are antithetical to the very purpose of CVCs and, frankly, self-destructive. Avoid claiming board seats, and skip restrictive terms such as right to refusal in acquisition scenarios.

CVCs must also be sensitive to the trials and tribulations of startups. Bad quarters happen even with market leaders. Finally, be open with founders and financial advisors about how follow-on investments will be handled.

Early-exit disease abounds in the Midcontinent in part because of a lack of growth opportunities and over-reliance on individual customers. Unlike on the coasts, where founders seek to disrupt and quickly sell, many Midcontinent entrepreneurs want to build sustainable businesses that coexist with larger corporations. All they need is a partner willing to give them that chance.

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