On Corporate Startup Accelerators

Transcription

1 Business, Technology & Organization On Corporate Startup Accelerators by Cristina Rueda Foreword by Alberto Díaz July 2016 This document is under construction. Forever.

2 Index Foreword Introduction A Brief History of Accelerators What is an Accelerator? The Arrival of the Corporate Accelerator Why Do Corporates Want to Interact with Startups? Impact on the Organization Best Practices Conclusion...14 References and Recommended Reading

3 Foreword Digital Migration Partners is delighted to release this white paper about corporate accelerators as part of our evolving experience in corporate consulting, startup investment and academics. This experience has lead us to conclude that fostering a deeper collaboration between corporations and startups can be a key driver for the improvement of productivity and wellbeing in all sorts of companies regardless of their size, industry or structure. Why? Because we believe the corporate and startup ecosystems have a lot to learn from each other in terms of innovation, processes and organizational design. We understand digital transformation results from the release of productivity as technology disintermediates different parts of the value chain while simultaneously empowering the customer. These seismic and subtle changes can shift industries in a very short period of time. In the long run digital transformation success lies at an organizational design level. Answering these three questions i) How to work, ii) How to organize and iii) How to lead are the key to set a new sustainable competitive advantage in the digital era. Startups have some good lessons to share regarding these three questions. How? There are several paths to digital transformation: from straight forward venture investments, to platform adoption, education etc. that can build capabilities or integrate new processes into the organization. We perceive a corporate accelerator as one more path to achieve digital transformation that can lead an organization to greater innovation and strengthening of a more digital oriented culture. As part of our work, we have come to realize that there are certain pre-conditions required for a corporate accelerator to realistically transform an organization. A corporate accelerator can only lead to this type of transformation at a large company if it is a wellbacked initiative (at the board and executive level), it is strategically aligned with the company s direction, and it is brought in-house with the support of advisors who know the company very well. A corporate accelerator will not achieve its transformative potential if it is only perceived as a financial vehicle to make successful investments (albeit, it could provide for some interesting financial returns), as a PR tool to improve the corporation s image, or because everybody else is doing it. We, in fact, believe that outsourced corporate accelerators won t result in the kind of digital change we understand as truly transformative at the organizational level. Skin in the game seems a more reasonable approach for companies that truly seek a transformation and don t see startups as pure suppliers but journey partners. Internal quality mentorship seems to be much less of a commodity than offering external business basics training to the startups The end result of a well-structured collaboration between startups and corporations must be win-win to both parties. Startups have a real opportunity to build even more solid assets such as industry knowledge, scalability proof and financing among others while corporations can internalize innovation, new ways of working and talent that thinks differently. We hope this easy reading paper is the trigger for you to consider a corporate accelerator a solid option in your journey to digital transformation both from an innovation and organizational design point of view. Alberto Diaz Founding Partner at Digital Migration Partners 3

4 01 Introduction The first startup accelerator appeared in the US in 2005 as a mechanism to provide seed investment to nascent technology projects. Accelerators have since become critical players in the startup ecosystem as funders, mentors and deal-flow sourcing platforms for venture capitalists, more mature investors and potential business partners. The startup acceleration sector has grown exponentially and evolved significantly over the past 10 years. Today, there are more than 300 accelerators worldwide of which around one third are in Europe alone (Robin Wauters, 2015; Heinemann 2015; As of 2010, a special type of accelerator managed by corporations corporate accelerators or corpaccelerators has emerged in response to growing interest on the part of corporations to engage with the startup ecosystem. Large companies have become interested in corporate accelerators due to their perceived need to learn about emerging technologies that have disrupted or can potentially disrupt their industries. Additionally, companies are seeking new ways of working that are more flexible and agile, as well as wanting to recruit talent more in sync with a digital and entrepreneurial mindset. In this paper we offer a brief history of accelerators, define what they do and then discuss the inception of corporate accelerators as well as the main differences between corporate and traditional startup accelerators. Based on the limited literature available today, our own experience as consultants and anecdotal information from corporate clients and startups, we conclude by offering some best practices and lessons learned. Source: DMP 4

5 02 A Brief History of Accelerators In March of 2005, the first accelerator, Y Combinator, opened its doors in Cambridge, Massachusetts as a seed fund for startups. The idea was straight-forward: invest relatively small amounts of capital into a cohort of earlystage startups and accelerate their growth with targeted support during a three-month period with the hope of long-term investment gains. Y Combinator was followed in 2006 by Techstars, founded by well-known venture capitalist Brad Feld and serial entrepreneurs David Cohen, David Brown, and Jared Polis in Boulder, Colorado. Most literature agrees that the arrival of early-stage startup accelerators coincided with private and corporate venture funds deciding to reroute investments away from less mature startups following the internet crisis of 2000 and the financial crisis of In other words, accelerators arrived to fill the gap left by venture capital as it reduced its investment capacity and refocused on later-stage startups (Hoffman and Radojevich-Kelley 2012; Bliemel et al. 2013). After these dry financing periods, startup accelerators have managed to become permanent fixtures of the funding ecosystem. With their perceived ability to aggregate, filter early-stage startups and source deal-flow to venture capitalists, coupled with advances in information technology which have significantly reduced the cost of launching a new business and made the comparatively low investments of accelerators more attractive that in the past, accelerators have been able to secure that permanence. Furthermore, the financial exits of Y Combinator and Techstars, in startups such as Reddit, Airbnb and Dropbox, among other program alumni, led to the exponential expansion of accelerators in the US and elsewhere (Hochberg 2015). Nowadays we can find accelerator programs sponsored by private investors, governments, universities and large corporations. Accelerator programs have sprung up in all continents and vary in focus, depending on their sponsor s goals. Their ultimate aim is to promote entrepreneurship and innovation; however, their specific focus may differ. Some seek to spur innovation in a certain city while others in an industry vertical, university or in-house at a larger corporation. In the case of private investors, an important goal is to also provide for a valuable exit. Between 2009 and 2015, the number of European accelerators grew consistently year-over-year. Top rated seed accelerator programs in Europe include Seedcamp based in London and Startupbootcamp, a pan-european accelerator with program locations and office spaces based in Copenhagen, Amsterdam, Berlin, Israel, Eindhoven, Istanbul and London. In addition, US giant accelerators like Techstars have also set up European programs in London, Berlin, Madrid and elsewhere. Image 1: Evolution of the accelerator industry in Europe Source: fundacity.com/european-accelerator-report

6 03 What is an Accelerator? Startup accelerators are commonly misunderstood or mistakenly lumped in with other institutions supporting early-stage startups, such as incubators, angel investors, and early-stage venture capitalists. The table below attempts to differentiate these players and identify their key differences. Throughout the rapid growth of accelerators in the past few years their basic principles have largely remained the same. Cohen and Hochberg s (2014) frequently cited paper summarized them as programs that help ventures define and build their initial products, identify promising customer segments, and secure resources, including capital and employees. Throughout the rapid growth of accelerators their basic principles have largely remained the same. Most accelerators focus on promoting technological innovation and scalable solutions. Some accelerators see themselves as generalists, some through the underlying technology they promote (e.g. Impact Accelerator promoting FIWARE technology startups in the EU) and more and more, we see accelerator programs verticalizing their offering by industry (e.g. healthcare, fintech, tourism etc.). Accelerators typically support startups by means of mentors, networking sessions, educational opportunities and access to potential investors. In addition, startups often receive financing, typically ranging from to , and office space. In return most accelerators take between 5 and 8 percent of equity, which is purposely below a controlling stake (Cohen and Hochberg 2014; Hoffman and Radojevich- Kelley 2012). Several startups enter an accelerator together in groups called cohorts and the programs are typically limited 3 to 6 months after which participating ventures usually pitch their companies in front of investors during a demo day. Florence Heinemen (2015) defines accelerators as programs which: pphelp early-stage startups through various means, and at a minimum with mentorship and connections to potential investors. pphave management objectives which are often monetary (but not necessarily). ppare fixed-term with durations of equal to or less than 12 months. pphave a cohort-based intake and process. pphave a selective application process. pptypically provide stipends. pptypically (but not necessarily) take a non-controlling amount of equity. 6

7 Table 1. Five institutions that support startups Incubators Angel Investors Accelerators Hybrid Early VCs Duration 1-5 years Ongoing 3-6 months 3 months - 2 years Ongoing Cohorts No No Yes Yes No Business model Rent, nonprofit Investment Investment, can also be nonprofit Investment, can also be nonprofit or have another business goals Investment Selection Noncompetitive Competitive, ongoing Competitive, cyclical Competitive, ongoing Competitive, ongoing Venture stage Early or late Early Early Early Early-late Education Ad hoc, human resources, legal None Seminars Various incubator and accelerator practices None Mentorship Minimal, tactical As needed by investor Intense, by self and others Staff experts support, some mentoring As needed by investors Venture location On-site Off-site On-site On-site Off-site Source: Hathaway (2016) 7

8 04 The Arrival of the Corporate Accelerator During the most recent upturn of private and corporate venture capital activity around 2010, corporate accelerators appeared as a new phenomenon alongside their non-corporate peers (Hochberg 2015). Large companies have come to the realization that creating structured channels to capture innovation and talent and get closer to the startup-mindset is critical. Most literature suggests that the arrival was probably triggered by either one company or the combination of companies being more eager than in the past to be close to entrepreneurs in order to increase their innovation potential, access new talent, learn about new technologies and absorb new ways of working. In addition, record-level corporate cash reserves in the US (Sanchez and Yurdagol 2013) led to greater resources for M&A activity, corporate venture investments and seed money through accelerators. With startups essentially disrupting every industry, large companies have come to the realization that creating structured channels to capture innovation and talent and get closer to the startup-mindset is critical. There are several ways in which corporations are accessing the startup accelerators ecosystem. Some corporations lend their support to industry-focused accelerators such as Reimagine Foods (foodtech), GameFounders (gaming), Level39 (fintech), some establish accelerators in partnership with independent accelerators like Techstars (e.g. Techstars Makro, Techstars Disney, L Oréal s investment in Founders Factory) and others set them up on their own (i.e. BarLab from Mahou San Miguel). Table 2: Different accelerator models Support to vertical accelerators Corporate outsourced accelerator (Techstars Makro, Winton Labs LMarks etc.) Corporate accelerator (Barlab, BMWOpen Garage) External/Internal Corporate Accelerator (Microsoft Ventures) Resource investment / organization involvement Cost $ $ $ $ $ $ $ $ $ $ $ $ Board/executive commitment Contact with startup ecosystem PR/CSR (commitment to entrepreneurship) Impact on organization Conflicting goals Impact on startups Conflicting goals Source: DMP 8

9 In Europe today, there are already plenty of corporate accelerators, and their number is growing; some invest for equity, others don t, some impose commercial preference rights, while others just financially sponsor the accelerator. It is critical to recognize that, unlike independent accelerators, there are many formats and each subtle difference shapes the relationship with startups. From the perspective of startups, it has also become quite clear to them that it is inherently more valuable to accelerate their business with industry experts who understand the fundamentals of their sector and the connections within that industry vertical (NUMA 2015). In other words, while learning about methodologies, like lean canvas, SCRUM, or Agile, is valuable at a pre-seed level when a prototype has yet to be developed, at a seed investment level, industry-focused mentorships and connections can lead to commercial transactions. It is in this context that we have began to witness verticalization in the acceleration ecosystem, with horizontal preseed accelerators and vertical accelerators focused on specific industries. Corporate accelerators are key actors of this verticalization movement. In corpaccelerators there are many formats and each subtle difference shapes the relationship with startups. Finally, and this is particularly true in Europe, the preponderance of corporate sponsorship in accelerators is directly related to the fact that accelerators in Europe have yet to find a sustainable business model (Numa, 2015). Unlike their US peers, startup exits in Europe are not as prevalent and many accelerators have opted to rely on corporate support by directly marketing their services. Table 3: Worldwide examples of corporate accelerators Company Name of Accelerator Sector Website Bayer Bayer Grants4App Pharma grants4apps.com Bbc BBC Labs Media bbcwlabs.com Nike Nike+Accelerator Retail / Sports nikefuellab.com Novartis Bioupper Pharma bioupper.com P&G Connect+Develop Fast-moving consumer goods (FMCG) pgconnectdevelop.com Pearson Pearson Catalyst Media Catalyst.pearson.com Pepsi Pepsico10 Fast-moving consumer goods (FMCG) epsico10.com Prisa Prisa inn Media prisainn.com Qualcomm Qualcomm Labs Telco Qualcomm.com/invention Volkswagen Electronic Research Lab Auto vwerl.com Walmart Walmartlabs Retail walmartlabs.com Wells Fargo Wells Fargo Acelerator Banking & Finance accelerator.wellsfargo.com Source: DMP and Florian Heinemann s Corporate Accelerator DB 9

10 05 Why Do Corporates Want to Interact with Startups? There are many reasons for a large company to form a partnership with a startup. A startup may have a unique technology that is of value to the larger company. Startups can help a large company s brand by giving the large company the image of being innovative. Large companies often have certain practices and processes that are necessary but can cause the large company to move slower than a startup. Therefore the speed at which a startup can operate can be of value to large companies. The decision to, and reasons for, partnering with a startup, depend on the company s strategic objectives. They are not always constrained by cheapest or fastest they may be more focused on owning a market for a long-term, in which case the larger company may decide to build the business internally so they can maintain control. Partnerships can also lead to an acquisition, allow the corporate to acquire new talent, new ideas or adopt new ways of working. It is important to note here that, unlike traditional accelerators, large companies rarely invest in accelerators with a financial exit in mind. In fact, most literature shows that from a pure financial perspective, to date, no corporate accelerator is making a profit (Heinemann, 2015). Rather, corporations display a wide variety of strategic explorations when setting up inhouse startup accelerators. In his thesis, Florian Heinemann (2015) concludes that most corporations use strategic considerations when selecting their in-house portfolio of accelerated startups. Examples abound. Bayer s Grant for Apps, for instance, looks for health technology or IT solutions that can connect and empower patients or healthcare stakeholders 1. BBVA s Open Talent recruits specifically Fintech companies, be that wealth management, cryptocurrencies, lending platforms etc 2. Another excellent example is Mahou San Miguel s Barlab in Spain seeking to recruit startups that can help transform the customer experience at the bar and, ultimately, help Mahou San Miguel s clients, the bars

11 06 Impact on the Organization A corporate accelerator is not only a structured way of funneling innovation to a large corporate, it is a mechanism that can enable and promote cultural change if it is set up in the right way. Startups are, in many ways, the complete opposite from large corporations. Startups are often described as nimble, cost-conscious, fast-decision making, failfast, risk-taking organizations, with overworked (and often underpaid) but super motivated employees. Large companies, on the other hand, are complex organizations, with lots of cost-controls, but are not necessarily cost-conscious, slow at making decisions, and in general, promoting a careful approach to change. These types of corporate cultures don t necessarily promote entrepreneurial mindsets. A startup accelerator that seeks to promote projects that have already passed the ideation stage and are in the process of conceptualizing the actual product or service and developing a business plan can provide a corporation with a window to the ecosystem of startups. It can enable the corporation to keep abreast of new ideas and trends in the market. An in-house corpaccelerator is more a way of thinking than a physical space: it is a mechanism to expose a mature company to the speed and flexibility of startups and can positively impact internal processes in the corporate as well as optimize innovation and talent. An in-house corpaccelerator is a mechanism to expose a mature company to the speed and flexibility of startups. Finally, there are tangential benefits that can result in the support of entrepreneurship and impact the corporation s public relations and/or corporate social responsibility objectives. Image 2: Corporate accelerator virtuous circle of digital transformation Source: DMP 11

12 07 Best Practices Academic research and literature on startup accelerators is very limited given their fairly recent arrival. Corporate accelerators being an even more recent phenomenon, have been studied even less and there is little built consensus on best practices. However, some best practices and lessons have started to emerge. In this last section of the paper we attempt to summarize some of the most salient conclusions we have reached as students and participants of corporate accelerators: ppcommitment At the Top. To run smoothly an accelerator must have top executives onboard and, if possible, board support. An accelerator that is run with no involvement from top executives will have lower chances of succeeding as it will not carry the weight to ensure that employees across the company get involved in the program. Furthermore, commitment at the top will ensure greater investment, in terms of resources and time. And the greater the investment devoted by a corporate to its accelerator, the greater the success. An accelerator that is set up as a public relations strategy and has no institutional depth can be discarded quickly, whilst one that is more ingrained in the company will be long lasting. ppa Corporate Accelerator is Not a Traditional Private Accelerator. Unlike traditional accelerators, these programs have to meet clearly defined corporate objectives, which are most likely not financial in nature but more geared towards strategic goals and connecting their workforce to new ideas, and new ways of working. ppan Accelerator Must Have a Strategic Rationale for the Corporate Sponsor and Carry an Imprint of its Identity. In other words, it must support existing strategic goals and be absolutely aligned with where the corporate wants to go. Portfolio selection should be done with the strategic direction of the company in mind. Innovation for innovation s sake is not sufficient as a strategic rationale and crystal clear communication with the startup as to why it has been selected is necessary from the get-go to ensure a win-win collaboration. ppsuccess Requires Significant Resource Commitment from the Startups and the Corporation. Many startups apply to corporate accelerators because they believe that the partnership will give them access to scale and muscle to grow, but startups must understand that offering value to a corporate will force it to refocus already stretched resources to the program. Corporates, on the other hand, must realize that a fruitful collaboration will only take place if internal resources are dedicated to interacting with the startups and steering those interactions in the right direction. ppcorporate Accelerators Must Designate In-house Mentors to Work with the Startups. Corporate mentors are not consultants, they support the startup in learning about the corporation and designing a potential win-win collaboration, but at the same time learn about the startup, its way of thinking, attitude, processes and technologies and can bring in-house all those learnings. In a way, corporate mentors can become transformation agents of the corporation and play a vital role in the success of the program. ppdetermine If Equity Stakes in Startups Are Necessary. Corporates should think hard before investing in an early stage startup. Setting up pilots to test the commercial viability of a collaboration between the startup and the corporate probably makes sense before an investment is committed. Furthermore, the corporate must develop a clear strategy for why an investment makes sense. For corporate programs that end up taking equity stakes, long-term structures that support their investees and provide ongoing support beyond the program must be put in place. From the startups perspective a corporation potentially owning a part of the startup can have a 12

13 profound long-term impact upon a startups business. Tying a startup to a corporate can be commercially restrictive and ultimately limit the capacity of the startups business before it has even started. ppan Accelerator Can t Be an M&A Strategy. For those corporates who have implemented an accelerator as an M&A strategy, they often do not appreciate the early-stage nature of the startups that ordinarily participate many of whom are still trying to achieve product market fit and have little or no traction. ppwin-win Collaboration Terms. A corporate should attempt to reach a balance between attracting the best startup teams and keeping an option to engage with them once the program is completed without handicapping the startups with excessively onerous requirements. Furthermore, taxing terms lead to individual negotiations with the participating startups and different classes of startups within one single cohort, distorting the program from the outset. From the perspective of a startup, the devil is in the detail, and sometimes startups overlook and ignore the exact terms and conditions the corporate accelerators require. The allure of getting access to a corporate may require a startup to agree to preference rights both commercial and as equity investors. Inexperienced founders and startups can often overlook the importance of these terms and do not appreciate their long-term implications. These terms may ultimately restrict a startup s ability to raise funds from external investors. ppa Corporate Accelerator is Not an MBA Program. While methodologies and practices like business canvas, SCRUM, Agile or growth hacking are relevant and useful to startups, a corporate accelerator is there for the startups to learn about its business and for the corporate to learn the products, technologies and way of working of the startup. A corporation must engage with the startup. Engaging means creating a way to collaborate, align interests, improve or test a product and decide whether a longer-term collaboration makes sense or not. In other words, an acceleration is a two way relationship. Corporations that engage in accelerator programs can t simply outsource a series of lectures for the startups and be done. They need to set up the mechanism for employees to work hand-in-hand with the startup. ppa Corporate Accelerator Should Recruit Startups with Functional Prototypes. It is easier to identify commercial opportunities within the corporate if a startup s product or service has moved past the conception and ideation stage and there is more than an MVP in place. ppa Corporate Accelerator Must Engage all the Organization. The accelerator sponsor must involve the complete organization from the get go. The best ambassadors of the program will be its employees. Employees across the whole company should get a chance to to meet with the startups at showroom events or participate at talks and events organized at the accelerator. 13

14 08 Conclusion While the startup accelerator landscape is an everchanging one, collaboration between startups and large corporations is here to stay. Corporate accelerators are a great vehicle for large companies to tap into the startup ecosystem, learn about new technologies, access new talent and engage in new ways of working that can ultimately transform their organizations. However, corpaccelarators must be set with strategic not short term financial objectives in mind, total support at the board and executive level, and the whole organization must be engaged at some point with the program. Programs that are set without full board support or in response to PR needs, will not succeed as the structures to carry the programs over time will not have been established. Finally, there is a delicate balance between the corporations objectives and those of the startups participating in the program. These can be aligned and the corporation must strive not to harm participating startups by demanding excessively restrictive conditions. 14

15 References and Recommended Reading Bradford, Jon. Corporate Run Startup Accelerators: The Good, the Bad and the Plain Ugly. Tech.eu. Chrishton, Danny (2015). Corporate Accelerators Are An Oxymoron. Techcrunch.com. Cohen, Susan (2013). What Do Accelerators Do? Insights from Incubators and Angels, Innovations, 8:3/4, pp Cohen, Susan and Yael V. Hochberg (2014). Accelerating Startups: The Seed Accelerator Phenomenon, working paper. Deering, Luke, Matt Cartagena, and Chris Dowdeswell (2014). Accelerate: Founder Insights Into Accelerator Programs, FG Press. Fehder, Daniel C. and Yael V. Hochberg (2014). Accelerators and the Regional Supply of Venture Capital Investment, working paper. Feld, Brad (2012). Startup Communities: Building an Entrepreneurial Ecosystem in Your City, Wiley. Fundacity. European Accelerator Report 2015 [fundacity.com/european-accelerator-report-2015] Hallen, Benjamin L., Christopher Bingham, and Susan Cohen (2014). Do Accelerators Accelerate? A Study of Venture Accelerators as a Path to Success, Academy of Management Annual Meeting Proceedings. Hathaway, Ian (2016). Accelerating growth: Startup accelerator programs in the United States by Ian Hathaway. Hathaway, Ian (2016). What Startup Accelerators Really Do. HBR Heinemann, Florian (2015). Corporate Accelerators: A Study on Prevalence, Sponsorship, and Strategy. Master s Thesis, Cambridge: Massachusetts Institute of Technology. Hoffman and Radojevich-Kelley (2012). Analysis of Accelerator Companies: An Exploratory Case Study of Their Programs, Processes, and Early Results. Small Business Journal, 8, NUMA (2015). Accelerate Now! Current Trends and Strategies for the Future. Sanchez and Yordagol (2013). Why Are U.S. Firms Holding So Much Cash? An Exploration of Cross- Sectional Variation. Federal Reserve Bank of St. Louis Review, July/August Simoudis, Evangelos (2014). Using Corporate Incubators and Accelerators to Drive Disruptive Innovation. corporate-innovation.co Stross, Randall (2013). The Launch Pad: Inside Y Combinator, Portfolio. Wauters, Robin (2015). European startup accelerators: current state and future trends. Tech.edu Winston-Smith, Sheryl and Thomas J. Hannigan (2015). Swinging for the fences: How do top accelerators impact the trajectories of new ventures? working paper. Yael V. Hochberg (2015). Accelerating Entrepreneurs and Ecosystems: The Seed Accelerator Model, in Innovation Policy and the Economy, Volume 16, Josh Lerner and Scott Stern editors, National Bureau of Economic Research. 15

16 Digital Migration Partners is a digital transformation and organizational design consultancy that provides advisory and commited follow up services from a Business, Technology and Organization standpoint. We believe that digital transformation is a strategy and not a goal, and hence our aim is to enable companies to increase the productivity of their operations, enhance their value as a business and guarantee their survival in an increasingly uncertain environment. Created in 2010, with a team possessing sound knowledge of business and digital management. Digital Migration Partners forms part of a number of academic and professional networks including Adigital, ISDI among others. Contact Madrid C/ San Lorenzo 11 C.P Barcelona C/ Diputació 37 C.P For more information office@digitalmpartners.com Copyright 2016 Digital Migration Partners S.L.