FinTech Breakfast: Corporate Startup Engagement

How do you unlock meaningful commercial value through pilots with startups?

Despite the snowy conditions, a brave group of business and innovation execs from banks such as HSBC, Barclays, Santander, Fidelity, Macquarie, Deutsche Bank, RBS, Nationwide and State Street gathered for the February Rainmaking FinTech breakfast to explore the ingredients for successful corporate startup engagement.

Nektarios Liolios started the session by highlighting the challenges he’d seen banks experience in creating meaningful value from startup engagement and emphasized the need for both a clear innovation strategy plus the internal capability to drive successful engagements.

Jordan Schlipf, Partner, Rainmaking Innovation, stated that:

“if an engagement doesn’t make money or deliver significant learning, then it can’t be considered as innovation.”

Why collaborate?  What’s in it for both corporates and startups?

The key reasons corporates engage should include:

  • to achieve collaborative growth of new customers or revenue

  • to gain exposure to new business models

  • to work with more innovative suppliers than the standard corporate IT roster

  • to leverage the “free R&D” represented by $150bn invested annually in startups

For startups, the reasons included:

  • to ramp up growth and achieve success stories

  • to gain fast access to a large customer base

  • to de-risk international expansion

The message is to progress with caution when choosing which startups to collaborate with. Working with “zombie” startups that struggle to grow and progress through funding rounds and instead survive through endless corporate pilots, is often a long road to nowhere.

The vast majority of corporations see less than 25% of their initial pilots with startups scale into solutions that can be taken to market. So why is what is currently being practised not working?

There are a number of activities that can often be described as ‘innovation theatre’. As a corporate, being involved in hackathons, startup competitions and other similar initiatives, doesn’t always drive real value. The principle reason for this is that these activities do not result in a high quality Series A startup being engaged by a focussed and capable business unit.

Despite engagement between startups and corporates being seemingly straightforward, the reality is that the two are not the most natural fit, due to the ways in which they conduct business. The corporate-startup landscape requires careful navigation, strategy and execution.

So what does work?

  1. Having a clear strategy at the P/L or business unit level is important to guide corporates in what kind of startups to look for

  2. A dedicated corporate startup budget is needed

  3. A portfolio approach of multiple bets across short, medium, and long term horizons

  4. Investing to remove internal red tape, to allow engagements to complete within 3 months

Engagements between corporates and startups are often executed on a number of levels. First, engagements often focus on cost reduction and process improvement. Engagements can also look to identify sustainable profit streams in the near future. Lastly, they can focus on ground breaking ideas that may result in substantial future growth.

Should engagement be directly through a P/L or with the Innovation team?

Traditionally, engagements have been sourced and managed by innovation teams, but they have often struggled to identify P/L needs to drive the necessary internal engagement.

Instead, by engaging directly with a P/L or Business Unit, you are increasing the chance of the pilot being focussed on a real area of priority. Attendees also agreed that there was value in aligning pilots across Business Units for shared services through governance such as a Digital Advisory Board.

How does Rainmaking approach it?

At Rainmaking, we have an 86% success rate for new business line and revenue creation across our Commercial Pilot Programs. A recent example of a pilot with an airline resulted in finding a $15m saving in fraud in just 3 months! These results are achieved by executing the process below from strategy definition to focussed pilot execution:

A lively Q&A session followed…

Should the corporate take an equity stake?

Many in the room felt that the corporate should take an equity stake in the startups, to share in any resulting upside coming from the engagement, especially where a value proposition is being co-developed.

The discussion highlighted the riskiness of equity investment and the existence of other mechanisms for sharing value creation, including revenue share. Jordan restated that a corporate doesn’t need to have an equity stake in order to successfully partner with a startup.

Which capabilities should be viewed as core to the corporate vs non-core?

If a new capability is required, it may be that the fastest way of acquiring it is through startup engagement. Banks no longer need to be fully vertically integrated if they have made the conscious strategic decision about what is core vs non-core. Additionally, the market will indicate where partnerships are not possible, as there will not be an available deep pool of Series A-B startup.

For core capabilities, different engines of growth are required, including venture building.

Nektarios closed the session by thanking everyone for the lively debate and highlighting the next Rainmaking breakfast on March 27th.

This breakfast will be focused on creating a robust innovation strategy in uncertain times. We will tackle the unbundling of the traditional, vertically integrated bank, where limited budget, a platform environment, and micro services become the modus operandi.

Please get in touch if you would like to join the this breakfast in London. Register your interest via Elena Rueckert at er@rainmaking.io.

By Rob Morris

Managing Director, London Corporate Innovation

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