As most of the venture capital in the first quarter of 2019 in Europe came from corporations, it’s clear that big established players have realized the need to leverage the brains of the rising entrepreneurial wave. Yet, this is easier said than done. Complex corporate structures, hierarchies, risk management, and not least 9-to-5 habits could prevent any organization from being innovative. And working with startups, that usually bring along 92% failure rate in their first three years, flat hierarchies, and try to disrupt and speed up traditional processes, might turn into a nightmare.
“In Bulgaria, there is a vivid entrepreneurial ecosystem but the open innovation theme and incumbents-startups relationship, in particular, is still something unexplored, despite the potential. A tiny portion of the corporations actually engage with startups, and even when they do it, they often lack the confidence and are struggling to do it well,” summarized the situation in Bulgaria Veselina Markova of Eleven Ventures, who is also managing the Visa Innovation Program in Bulgaria.
It’s the fear of failure that most of the times is the deal-breaker. When approaching these relationships, both sides are expected to enter with high ”failure tolerance” and accept that potential relationship failure is not equal to a personal one, she adds. To reduce the failure potential, for instance, Visa Innovation Program first runs diagnostics of the startups to identify what they might need before they are introduced to potential corporate clients part of Visa’s network – in this case banks like UBB, Postbank and Reiffeisenbank.
“If you are talking about joint business generation between larger corporates and corporates, a couple of issues need to be overcome. The first one is the reputational risk related to the stability of the startup. What if the startup product you gave into the hands of your customers, would not be there anymore in six months? On the other hand, the start-up needs to cope with and overcome the typically complex and cumbersome corporate procedures. Most of the time startups would fail to go through such processes because in e.g. in procurement processes corporates have strict an elaborated requirements on compliance, risks, stability…,” Christof de Mil, CFO and Innovation leader of United Bulgarian Bank (UBB), gives us a brief summary of some of the concerns corporates have when even entering negotiations with startups.
Yet, of course, there are ways to make this relationship work. Building capacity within the corporation and letting employees understand what innovation really means and how it contributes to their professional development, setting up the right structures, developing separate governance, are the first three milestones.
We dug deeper into the topic to put together a comprehensive picture of learned lessons and working strategies. Below you’ll find some insights provided by local and regional players from the financial and healthcare sector, but also acceleration and innovation specialists. Here’s what we learned from Eleven Ventures, Sopharma Trading, United Bulgarian Bank, Postbank, garnished with some international experiences brought by Israeli Bank Leumi.
Step 1: Nurture the culture of innovation
Corporate employees with established 9-to-5 habits are often not keen on working on internal innovation activities or with startups, especially when there’s no clear correlation between their own professional development and the additional work they have to do, explains Rene Tomova, founder of Creative Shower, the Design Thinking Lab of Eleven Ventures, who’s been leading Sopharma’s internal innovation program. In the corporate structure, managers and employees are captivated and overwhelmed with day-to-day activities and there needs to be a clear commitment from the organization to balance properly business as usual and innovation.
While for the employees, innovation could be just faster horses or electric vehicles when approaching a hot problem, the startup may come up with a personal drive-drone – and its a matter of strategic approach to align the expectations of both sides and to focus on what is the tangible outcome. Sometimes just mixing the two worlds could help for inspiration and leaning in the internal processes. In other cases, comprehensive internal innovation programs and activities help.
“Internal Innovation programs help our employees avoid being stuck in every-day operational tasks and provoke them to explore the opportunities of the near and far future that will alter our healthcare lifestyle for good. As we all know ‘culture eats strategy for breakfast’,” tells us Prolet Phillipen, Chief Innovation Officer at Sopharma Trading.
The pharma trading company recently started SOinventure, an innovation program featuring one track for employees, and one external – for startups. The two groups received the same challenges to work on. For two months 25 employees worked applying design thinking and lean startup methodologies and looking for new ways to engage customers. Sopharma has also just started its corporate acceleration program and in the next few months will be working with four startups with the explicit goal to pilot at least one new product.
“SOinventure brought excitement to our organization. They [the 25 employees] had the opportunity to get inspiration from the start-up world learning about their wins and failures and actually realize what it takes to be an entrepreneur,” summarized Philipen. The company is now working to find the best way to keep the energy going and to install the new mindset and way of working sustainably in the organization. “It was extremely rewarding to hear from the participants that they have tried out tools and methods in their current operational tasks and it works well for them,” adds Rene Tomova.
For Postbank, the main activities in this direction are being concentrated on training as part of B2B initiatives with the private software academy SoftUni and entrepreneurship organization Endeavor. “We had established an internal Digital ambassadors program. Based on employee’s needs and interests, special training for the digital ambassadors in the bank’s team was developed, “ the team of Postbank tells us. As part of the program, more than 1000 employees of the bank took online and offline specialized training programs at SoftUni last year. Additionally, to keep contact with entrepreneurs the bank supports the business accelerator program Dare to Scale, providing mentorship for participating founders.
A practical way UBB and its owner KBC Group stimulates the creativity and innovative thinking of employees this is through SurfStudio – an innovation lab equipped with different technologies where employees can experience them and get inspiration. “People open up when they are in touch with new things. Based on this experience people start to be creative naturally. You need to inspire people. Secondly, you need to give people the freedom to create things.”
Step 2: Establish an Innovation Team
Setting up the right structures and convincing middle management to give their teams time to create once there’s a commitment on the C-level, is also an important step, senior executives explain. A dedicated innovation team, that would coordinate the experiments and piloting the MVPs that are popping up is essential.
Senior-level leadership and a dedicated team are a necessity. The innovation team doesn’t have to be large. At UBB, for instance, it’s just four people. What is important, however, is to grant all employees the responsibility to come up with ideas and propose them, as the innovation team’s role is to centralize communication and processes, inspire and facilitate innovation within the strategy of the company, not creating the innovation itself. “People should know they are the ones that are expected to innovate, they are allowed and there is a team that will support them,” advices Christof De Mil.
Sopharma Trading has also started building up an innovation team, appointing Prolet Philippen as Chief Innovation Officer, as well as a Head of the Internal Innovation efforts and a new CTO who is building a dedicated team to support the execution and maintenance of the new products and services that came out of the internal track of SoInventure once they have passed through MVP design sprint.
Step 3: Think of more flexible governance
While building an internal culture of innovation, a company could work with external startups. There are different ways to look at startups of course. For some corporates, they are just a source of inspiration and in such cases, corporate incubation programs are started. Thus corporations don’t really risk working with a young venture and failing. It’s quite a different case when startups are perceived as partners and business generation opportunity. And this is where the real challenges begin and the true opportunities lie.
There are these objective burdens in the startup-corporate relationship, called governance and procedures. Even with dedicated people and the right mindset, if a corporate puts startups through its standard governance processes, chances are 90% of them to fail. Especially for startups trying to work with banks. it’s close to impossible to go through all the checks like compliance, risks, stability.
“You will have your CEO who will ask you about the return of investment and sometimes as innovation officer you cannot demonstrate this. It’s hard to find the balance between innovation and working with companies that might be profitable in ten years from now vs the fact that you need to report on a quarterly basis,“ Ohad Maimon, EVP Business Development and Strategy at max by Leumi in Israel tells us during the Fintech Junction conference in Tel Aviv, where the first cohort of the Visa Innovation Program was brought to gather more insights on how financial corporates function.
“A dedicated governance, including e.g. different decision levels, is what also supports every company willing to work with startups and go for innovation – they need to be fast and agile. A corporate might need a separate track and separate governance for innovation and cooperation/co-creation with startups,” says Christof de Mil.
Prolet Philipen agrees separate governance is needed. “I believe it has to be separated from the other corporate processes with dedicated mandate and budget, so to be more flexible in piloting new solutions and testing their potential before implementation.” In her opinion developing separate governance processes for startups is indeed also a good starting point to revisit some of the existing processes in order to make them more efficient and value-adding for the whole organization.
Before You Start a Pilot…
Once an organization has been able to go through these fundamental steps, the time comes to start thinking of strategies on how to prepare for a Proof of Concept and actually try to pilot a product together with a startup. Fortunately, there are some rules and good practices on setting up the right expectations on both sides, deciding on common key performance indicators, and also methodologies for common product development. Don’t miss our next series.