What’s the secret recipe for a happy marriage between startups and corporates?

The Indian startup ecosystem has evolved over the last decade, with the emergence of over 40 unicorns that have made their mark on the global map. The momentum has picked up pace and it is expected that another 15-20 unicorns will be added to the elite list by the end of March 2022. These startups, and many more, have challenged the dominance of established corporates and made them take note of the pace of innovation and disruption, which, if not acted in time, can potentially cause irreparable damage to the corporates.

As aptly stated by Jack Welch, Former CEO of GE, “If the rate of change on the outside exceeds the rate of change on the inside, the end is near.”

Not to be left out, the corporate sector has started showing keen interest in startups. They have been organising and aligning specific initiatives to take advantage of the vast potential of working with promising startups. The most common structure of engagement is a corporate accelerator, which brings together established corporates and agile startups under one umbrella.

A corporate accelerator is sponsored by an established for-profit corporation to support early-stage startup companies through mentorship, capital, and other nonfinancial resources. In recent times, corporates from various industries such as Reliance, Mahindra, Tata Group, L&T, Microsoft, Amazon, and Intel have launched different initiatives and structures to work closely with startups.

The association can either be to work closely on seeding and scaling an idea/product or establish a funnel for strategic investments. These initiatives spur innovation, helping corporations innovate and evolve to stay competitive in a rapidly changing market.

Why the increase in interest?

It has been documented by research professionals that innovation is stifled due to excessive red-tapism as companies become larger and more bureaucratic. This is because larger organisations have several layers of decision-making, which is incongruous with a startup’s way of functioning.

Startups have a flat organisation structure and require freedom in decision making and rapid execution; flat-footed, large organisations don’t have this.

But, at the same time, large firms are astute and realise that they cannot afford to miss the action and dynamism intrinsic to the startup sector. This is why leading corporates, keen to get the best of both worlds, have ventured into the startup domain.

From the perspective of a startup, while it may have a great idea it will typically lack strong financial management skills, adept human resource faculties, and a brand that signals consistency of experience. Established corporates have all these attributes and can offer these benefits to the startup on a platter, thus bringing to the table a significant value proposition.

From a strategic viewpoint, it makes eminent sense to enter a new line of business via a startup. If the idea does work out, the corporate can simply enter the new business line via the startup.

The startup would have undertaken all the research and effort, and the corporate can simply piggyback on the its success, resulting in productive usage of pecuniary and human resources.

Even for tech companies such as Intel, Microsoft, and Cisco, it makes natural sense to enter the domain as many techies who work for such firms normally leave and start their firms. Since these companies want to continue to be involved in the work of these exited employees, they invest in these startups. This preserves their relationship, bringing mutual benefits.

The Indian startup scene has witnessed much activity in recent times and corporates want to cash in on the rewards. It’s clear that a marriage between corporates and startups, if cordial and stable, can benefit both parties.

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Is the grass really green on the other side?

Despite all these developments, there are disadvantages to this strategic alliance. There is very likely to be a culture clash between startups and corporates as the former are likely to be more entrepreneurial and nimble; the latter may be more focused on Return on Investment (RoI).

The startup’s founders may not be happy at this excessive focus on RoI and may be more concerned with other parameters such as customer satisfaction.

Startups must understand the purpose behind the corporate association; some corporates are looking for startups that they can buy out, onboard as suppliers, or use their platform to promote their services.

At times, the corporate is too focused on the startup to solve the problem, which might the focus myopic. In essence, each of these purposes will call for a different level of expertise and maturity of startups, and the likely success of the association.

Additionally, startups are usually led by young founders lacking business maturity while corporates usually put a premium on leaders with considerable years of experience. This may result in a generational clash, resulting in a weakening of ties.

As in the case of any association, there are advantages and disadvantages for both sides. On a broader level, corporate accelerators do provide a much-needed platform and resources to early-stage entrepreneurs to prepare for dynamic market conditions, help them test assumptions and prototypes, and provide structure and processes to become self-sufficient.