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Eat your vegetables

- or why it’s hard but necessary for startups to collaborate with corporates

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55% of startups that collaborate with corporates are dissatisfied with their partnerships, according to research in Europe by BCG. While the limited data set means results may vary by region, anecdotal evidence suggests this may be true elsewhere. So how can a startup productively collaborate with a bigger firm?

Getting a startup built requires standing on the shoulders of those who have come before. Increasingly, however, it also requires holding the hands of those who are trying to serve the same customers you are. Fintech startups need to collaborate with larger players, be they incumbents, tech giants or the prior generation of disruptors. Competitor or not, you may need their help.

A note of clarification: clients are not necessarily collaborators. In all of our explorations of collaboration, selling or renting a bit of tech to someone doesn’t mean you’re collaborating with their organisation. For startups, this means that white-labelling your B2C product to your formerly incumbent competitors, but now star clients, doesn’t count.

Well, it counts in terms of revenue, but not for our discussion here.

It’s good for you

Our economy rewards people and businesses with specialised skills and knowledge, which in turn encourages people to specialise further. The downside of this is that a founding team may start their business with a solid industry skill set, yet be nowhere close to being able to deliver their full product, offering or service.

The research bears this out. Writing in the International Journal of Technology Management, Inge Neyens, Dries Faems and Luc Sels outline the all-too-familiar challenges startups face relative to more established competitors.

Because of their smallness, startup firms often lack the necessary physical, human, and financial resources to bring a new technology or product to the market (Alvarez and Barney, 2001). In addition, because of their newness, such firms lack a reputation of quality, reliability, and legitimacy that year of experience in providing particular products or services confers on more established firms (Baum et al., 2000; Stinchcombe, 1965).

And this isn’t about hiring rockstar first-ten employees. This is about recognising that the value your firm brings is specific and that it will be more effective - or reach a larger addressable audience - collaborating with other firms in the fintech space.

Say, for example, you’ve started a machine learning-based lending company that can outperform traditional risk management benchmarks through proprietary analysis of millennials TikTok reshares. You may have brilliant tech that yields lower NPLs than 99% of the industry, but who owns the relationships with the customers you need? A partner with lots of customer relationships but no lending expertise would make a strong case for a partner.

You might not like it

Despite the wisdom of collaborating with corporates, many startups have a hard time partnering with larger organisations. According to BCG’s report, After the Honeymoon Ends, startups primarily collaborate with incumbents or larger players “to leverage the ‘unfair advantage’ that a strong corporate partner can supply. Startups want to gain access to their partner’s sales opportunities and market, and they want its reputation to rub off on them.”

But more often than not, this doesn’t work.

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Collaborations with corporates which intended to boost sales and market access didn’t measure up, according to the research, while those seeking a boost to reputation were slightly more successful.

Recipes for success?

Fortunately, there are some patterns that suggest guidelines for how startups can more productively frame collaboration with corporates. In their research, Faems, Neyens and Sels separate startups seeking incremental and radical innovation, as their results vary.

For the incremental camp, working with potential competitors in the early stages of their company development was unproductive, resulting in “relatively more conflicting goals and a higher risk of learning races between the partners”. However, they note that startups are more likely to have productive collaborations with established competitors if they have 1) passed the survival stage and 2) kept employee numbers low. They found a negative association between the size of the startup and its ability to produce incremental innovation. For startups aiming for radical innovation, collaborating with potential competitors helped, but only when the alliance was continuous, according to their analysis.

The authors acknowledge, as most academics do, that further research is necessary to explain these dynamics. Here are a few of the key questions that come out of the research I’ve been doing on how startups can successfully collaborate with corporates:

  • How do startups overcome the “learning race” with incumbents they work with? Essentially, this problem is rooted in cultural mismatch, but how can it be ameliorated?
  • How can the exchange of value for a startup seeking reach and revenue and a corporate seeking growth be better aligned? Perhaps the answer is in Faems, Neyens and Sals’ work which points out that continuous collaboration is most effective, suggesting a longer time horizon for results is necessary.
  • If radical and incremental innovation each require different partnership strategies, how can fintech startups collaborate for incremental improvement via an MVP, while keeping long-term partnerships going to achieve radical improvements? Where should the relative balance be in terms of resource allocation?

As always, your ideas and your questions are encouraged. Reply, comment, DM, email, carrier pigeon or otherwise share your thoughts.

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