Business Acceleration 2.0: The strategic acceleration of successful startups

companies.

1.  Global Innovation

Corporate companies, like Apple, BMW and Telefonica appear to be omnipresent. But these companies are under constant pressure. Comparably new companies quickly appear on a global scale and challenge established industries and companies through disruptive business models, products and processes.

A current phenomenon, the training and education of young companies / startups by established corporate companies, is a reaction to the danger of disruptive innovation. Large companies more and more enter the field of corporate business acceleration with the goal to even better understand innovation and to improve their existing business models.

One reason is that in today’s business environment continuous innovation is a matter of survival. In case a company cannot innovate fast enough it faces severe challenges such as rising competition, loss of customers, or even the risk for its survival.

The need for continuous innovation has always been important. We have to consider innovation as controlled risk-taking in ever-changing environments. Innovation became a pre-condition for staying in the market only since the start of globalization.

The average lifespan of leading companies has decreased significantly in the last century. In 1920, the average lifespan of a leading US company, listed on the S&P 500 index, was between 60-70 years. This lifespan decreased to 15-20 years in 2010. It is assumed that by 2030 approximately 75% of the S&P 500 Index will be replaced by companies that have not yet been heard of.¹

What has changed?

1.1.  Innovation in global markets

The globalization and the digitalization of industries play a vital role for the innovation strategies of corporate companies. International markets are moving closer together which leads to decreasing information costs as well as decreasing transaction costs. Both consequences have significant implications on the options for corporate companies on how they innovate.

Globalization intensifies the pressure that Porters five forces put on traditional markets. In a globalizing world, the five forces shape entire industry landscapes². Four out of the five forces increase the need for corporate companies to focus on innovation. These four forces are:

The rivalry amongst competitors,

The bargaining power of buyers,

The bargaining power of suppliers,

The threat of substitute products and services.

The threat of new entrants as Porter’s fifth force however is increasingly becoming even more important as young technology companies develop innovative business models and processes.

Ventures with the potential to disrupt established industries tend to be in a very early research stage of their prospective markets. They are able to discover new business trends or opportunities swiftly as they are at the base of where customer needs are happening. By being very reactive and flexible these startups can perceive and identify unnoticed customer wants and needs and respond quickly by including them in their products and solutions. Corporate companies, which are characterized by established and successful processes and structures, are substantially less flexible than these companies and have longer decision-making processes then startups.

Through this pro-reactive flexibility startup companies have the opportunity to establish strategic disruptive innovation and so can thus create new markets and business models relatively quickly. Disruptive innovation has the potential to replace existing technologies or services and suddenly affect established industries and markets.

Nowadays all established companies can face a disruption of their industries caused by innovative startups that do not necessarily have to be competing in the industry or with a similar business model.

Many large companies do not succeed in developing disruptive innovation themselves due to several disruptive innovation barriers such as risk-averse corporate climate, innovation process mismanagement or dominant business concepts. For corporate companies it is a massive challenge to develop disruptive products and services as their success is difficult to forecast without any prior history. Corporations prefer strategic and operational control while disruptive products and service may need flexibility in order to become successful. Hence corporate organizations need to constantly improve their internal practices and procedures in order to stay competitive. Creating better products or services is at the heart of innovation.

Disruptive innovation tends to have an emphasis on product or service attributes. This explains why disruptive ventures have the potential to challenge established industries, because they can react more quickly to customer feedback and needs due to their smaller size. A faster reaction to customer feedback, together with a focus on the product and service gives disruptive companies the potential to lure away customers, to capture large market shares and to confront established companies with an innovative way of doing business, which might be in conflict with established ways. Especially business-model innovations tend to be particularly disruptive to established companies as they are harder to replicate innovative business models single products or services.

However, inventing new ways to do business is not easy. But for a corporate company it can be of interest to observe how different business models can succeed in order to be able to improve existing corporate models.

In order to stay competitive, corporate companies need to be aware of any potential threats or potential opportunities arising from the innovative startup environment and they have to constantly transform their products and services and even business segments. Corporate companies need to make certain that adequate knowledge and technologies are identified in order to maintain a leading innovation status.³

1.2.  General Setting

Successful innovation is based on the development and integration of new knowledge into established processes. Efficient innovation is a combination of capacity and creativity, with creativity being the ability to flexibly produce work that is original and unexpected, high in demand and useful. Companies can integrate new knowledge through different options. There are several ways for corporate companies to stay innovative.

Five main ways to generate new knowledge and create new insights are:

In-house Research and Development (R&D)

In-house R&D is a common way for corporate companies to stay innovative. In order to grow more rapidly, some companies even form strategic alliances and share R&D resources and costs. In-house R&D tends to be expensive. Therefore this option is often reserved for large corporate companies with the required financial assets. The creation of innovative products and services can nowadays not rely solely on internal information sourcing anymore, but also has to consider external knowledge to develop innovative products or services. The globalisation and digitalisation result in an increase of available knowledge, combined with marginal costs for storage and transmission. Hence established companies can no longer rely only on Internal R&D to maintain technological competitiveness. An advantage of in-house R&D is that it provides control of and ownership over the new knowledge, which can lead to a technological competitive advantage. Disadvantages are that it is costly and relies mainly on internal information sourcing.

External R&D / External knowledge acquisition

The importance of external R&D has increased in recent years as a result of globalisation and digitalisation. The capital requirements for external R&D tend to be lower than for internal R&D and also the risks and damages of failure are reduced. External R&D is only a complementary option for internal R&D due to the tacit nature of innovation. Meaning external R&D will not lead to success alone but needs to go hand-in-hand with internal knowledge creating processes. Advantages of external R&D and knowledge acquisition are that they also include external information sourcing and are not as costly as in-house R&D. Disadvantageous is that it entails a risk of loss of technological know-how and hence the loss of technological competitiveness.

Sole market observation

Market observation is a complementary tool to identify incremental innovation, since it helps to identify and to clarify the customer’s wants and needs. It is a passive tool to monitor market developments and hence cannot be used to discover disruptive innovation. Disruption innovation in its core means now products in new markets of which the potential customer was not even aware yet. It requires a certain proactiveness towards the market it creates and towards potential customers. Sole market observation is not efficient to identify new markets for which product requirements are not yet defined. Sole market observations are a comparably low cost alternative and good tool to capture feedback from the market and customers. However they are disadvantageous since they are only passive observations and hence cannot be used to discover disruptive innovation or disruptive trends.

Corporate Venturing

Corporate venturing is an element of corporate entrepreneurship. It is a process, in which teams in a corporate company have the opportunity to use the assets and resources (e.g. market position, brand, etc.) of the corporate company to their advantage in order to create, develop, introduce and manage a new business that is distinct from the parent company Fostering innovation to maintain a competitive advantage is at the heart of corporate venturing. Corporate venturing consists of two forms, namely internal or external. Internal corporate venturing is the creation of organizational entities that reside within an existing organization. External corporate venturing on the other hand is the co-creation of a new business activity, in which the corporate company leverages external partners to successfully create a new venture.

An advantage of corporate venturing is that it can result in new business entities which reside in the existing organization. Successful corporate ventures can also be the result of strategic partnerships between companies and lead to entirely new companies. Corporate ventures have better access to financial, human and organizational resources than young technological companies in the free market.

However the usage of organizational resources such as the brand recognition can present threats. Failures of the corporate ventures can indirectly harm the reputation of the mother organization. Not always the best options are being supported due to established frameworks and potential politics within the corporate company

Incubation / Acceleration programs

Business accelerators can be seen as a late-stage incubation programs that are either privately funded or corporate run programs that mentor, assist and support young companies for equity or other forms of return on investment.

A business accelerator is hence a business entity that enables young entrepreneurs and upcoming companies to develop their business ideas in a sustainable way through an array of trainings, counselling and mentorship, investment, as well as other resources and services. Business incubators can be seen as mentorship entities that provide guidance for companies through childhood while business accelerators mentor and guide young companies through the adolescence of their company development.

Similar to an incubator, the accelerator guides startups through their company development. An increase in the number of incubators / accelerators results in increased competition for the most promising and attractive startups.

Advantages of incubators / accelerators are that they are close to the entrepreneurial scene where ideas of disruption are generated and hence give the corporate mother the opportunity to monitor upcoming ideas. Supporting disruptive ideas gives the corporate organization the opportunity to either react on the disruptive change or to in-source it. Disadvantageous is that building an incubator / accelerator is very costly in terms of time, finances, planning and requires a lot of commitment. Physically building an accelerator is only the beginning, as it also has to be rooted in the surrounding entrepreneurial environment in order to attract promising startups. Establishing a successful acceleration / incubation program is a long-term investment that may not provide quick results and therefore it may not be the most beneficial way for corporate companies to seek innovative products / services or business models. However being close to the entrepreneurial scene the corporate company can learn a lot from startups and vice versa. That may be one of the reasons why more and more corporate companies establish their own acceleration programs.

Conclusion: All of the above mentioned ways to integrate new knowledge into a company provide advantages as well as disadvantages. Recent developments in the incubation / acceleration program context, put this topic into focus, as they demonstrate an increasing interest of corporate companies in this field.

Figure 1 Five ways for corporates to innovate

1.3.  Definition of the Problem

The globalization of markets, increasing international competition, the disruption of markets through new technologies and business models as well as the digitalization of products and services require that corporate companies place great importance on innovative ideas.

While innovation is moving to the forefront of corporate agendas, several corporate companies have started to develop structures in which they can capture the value of innovation in the emerging knowledge-based economy. Innovative business ideas, products and business models can disrupt entire industries in a short amount of time. In order to adapt to such circumstances corporate companies need to review and redefine their overall innovation strategies and processes. Developments in recent years show that many corporate companies attempt to do so by establishing incubation or acceleration programs.

However, the recent corporate accelerator market evolution demonstrates that more and more corporate companies are running or intending to run their own accelerator or incubator program in order to stay innovative.

In October 2012, the National Business Incubation Association (NBIA) estimated more than 7,000 incubators to be active⁴ worldwide. The Seed-DB database estimated 213 acceleration programs⁵ to be active worldwide.

Mainly the number of digital accelerators focusing on e-commerce, digital, telecommunication, and IT is increasing. One reason for this might be that the product development of digital ICT products does not take as much time as the development of non-digital products.

Due to the startup environment having a strong momentum corporate accelerators need to move fast in order to identify and support the most innovative young technological ventures or to recognize those which could become a threat.

The increasing competition between accelerators, as an effect of the rising number, also increases the difficulty to attract the most talented ventures for their own accelerator programs.

Therefore it is difficult for corporate accelerators to find and identify the technological ventures with the most potential for innovation and to accelerate them. Even if the most promising early-stage companies have been identified and enter the acceleration program, the survival of their businesses is still not guaranteed.

A rule of thumb states that nine out of ten product attempts still fail.⁶ That means that approximately 90% of all startups in incubation or acceleration are prone to fail and on the long-term will put a massive pressure on incubators / accelerators by not being able to return or exceed the investment put into them.

So under the current circumstances, corporate companies are more likely to waste money on acceleration programs than to generate a positive return on investment. A negative return on investment can weaken the competitive position of the corporate company. Corporate acceleration is now a critical innovation option for corporate companies and currently the success rate of corporate acceleration is far too low. Therefore establishing and running corporate acceleration programs needs to be seen as a long-term investment for identifying, and possibly insourcing promising products / services and/or business models.

This book takes these aspects into account in order to outline a process to more efficiently accelerate young ventures. It provides corporate companies an overview of what they have to