By Sean Adler, CEO of GZI. He is a mentor at Founder Institute and an expert at leading networks like GLG, Guidepoint, and AlphaSights.
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Corporate innovation can ignite growth for your startup. One large company can play the role of many smaller private counterparts like private equity firms, venture capital firms and startups if you find the right corporate partners. It’s important to be mindful of the structure, scale, timeline and role of each respective corporation if the goal is mutual benefit. Here are the ins and outs of navigating through vertical and horizontal relationships with the black and white knights of the corporate world.
Management Structure
The management structure is far different from startups. Instead of dealing with a few key people who can move through the system quickly, you will probably be channeled through multiple departments. The larger the company, the more infrastructure necessary to keep operations flowing. Smaller companies are more agile and can pivot without needing to push operations through multiple departments with segmented leadership.
In this case, the large company is the enabler and the smaller company is the orchestrator. Intelligently negotiated revenue sharing agreements between large and small companies can boost margins for the enabling company while the orchestrating company drives growth. The infrastructure of a larger company gives smaller companies a myriad of options for integration that don’t exist otherwise.
Startups also invert the traditional management hierarchies within large corporations. There is no need to take something and have it pushed between multiple departments. This creates a different kind of management dynamic within Fortune 500 companies since agile companies are now partnered with large departments within a given organization. When you take a company used to lean operations and partner it with a massive corporation, it can create true hypergrowth in ways traditional private investors can only imagine.
Scale And Risk
The corporate gods can do everything private investors can and more—it’s just a more complex process. Mergers, acquisitions and divestitures are the preferred finish line for startup investors. Since scaling laws demonstrate diminishing growth at larger sizes but act in favor of small companies, partnering with large corporations is both a new beginning and a sign of the finish line. Large public companies are used to more steady growth over longer timelines. This creates a mutually beneficial engagement when you combine that with the explosive growth of startups.
Venture partnerships are highly competitive in private equity but less risky for large corporations that aren’t dependent on limited partnership agreements. This provides you and your team a golden opportunity if your company reaches a seven-figure valuation since the startup teams that lead them are highly coveted and large corporations are less familiar with the process of scaling up.
Corporations hire specialists for individual departments within a set hierarchy. Startup founders are often good in multiple overlapping domains but tend to operate out of one specialty at the early stages. This can have a dramatic effect on C-suite management in large corporations with traditional hierarchies since younger companies tend to have flatter hierarchies. Onboarding founders who are used to weaving between domains can spark innovation across multiple departments with less effort.
Timeline Variety
Corporate innovation exists to create a symbiotic relationship by lending existing resources to startups that can develop a novel product in a different way. Startups are used to working with smaller timelines structured on a yearly or bi-yearly scale. Large corporations have an existing budget and market, making them used to less agile timelines. Combining the high-risk profile of a startup with that of larger, more conservative corporations balances the scale, allowing both to move in tandem. For example, blockchain was utilized in small tech startups long before the corporate world embraced it, and alternative data is beginning to emerge as a similar development.
Comparing the startup lifecycle to large corporations is like comparing human years to dog years: 15 human years to one dog year for the first year, nine human years for the second year of the dog’s life, and each human year is five dog years for the year onwards. Both are mammals, but the rate of maturity for growing startups is faster at scale than for large corporations. Just make sure your startup doesn’t become a pet for the corporate gods in spite of a dog being man’s best friend.
Playing Your Part
Knowing your customer applies to both your sales cycle and corporate innovation. It’s important to keep this in mind when reaching out to individual departments at large corporations because understanding their organizational flow makes the process easier for everyone. Look for vertically aligned corporate relationships where your startup can do something unique within their operations; it’s beneficial to your reach since nothing will happen unless both companies benefit. M&As, joint ventures and corporate venture capital all involve slightly different cost-benefit scenarios, yet none of them will come to pass unless the target companies communicate the benefits.
Be mindful of the type of engagement you seek within corporate partnerships since the flavor influences their taste for engagement. Simple distribution and revenue sharing agreements will be much different from M&A, corporate venture capital or joint ventures. Startup founders can use capital-raising platforms like Foundersuite to screen for corporations with venture arms in order to increase the likelihood of suitability. Corporate venture capital and joint ventures mean the creation of a partnership since the goal is mutual growth, whereas negotiations for liquidity events in M&A are for becoming part of their company instead of a partner.
Optimal growth requires a positive-sum game to nurture it. Playing your role in the game requires an understanding of the moving pieces with the players involved. Use the pieces from this article to put them in motion.