CIOs seek R&D partnerships with early-stage companies: Interest grows in startup partnering
“The best way for us to get research is with startups,” he said.
Other organizations have also arrived at that conclusion, leveraging tech-oriented early-stage companies as de facto R&D centers. The reasons boil down to resources and culture. Even large enterprises struggle to allocate personnel to incubate the breadth of technology innovation, from artificial intelligence to IT security to cloud computing.
From a cultural perspective, traditional non-tech enterprises face pressure from startups with the agility to forge ahead of them in digital business. The enterprises may try to adopt elements of startup culture to blunt the effects of digital disruption. Some financial institutions, for example, say they are emulating a startup’s embrace of emerging technologies and minimum viable product mindset.
Interest grows in startup partnering
However, attempts to run a startup within an enterprise aren’t always successful, industry observers noted. For enterprises that don’t wish to follow that track, the next best thing is to partner with tech-driven early-stage companies. CIOs and other corporate executives with an innovation mandate are looking to startups for an edge.
“It’s increasingly common for CIOs and … CTOs to look at ways to partner with the startup community, often in conjunction with venture capital firms or accelerators,” said Nigel Fenwick, vice president and principal analyst at Forrester Research.
He said the interest in early-stage companies stems from a recognition among enterprises that they need to be more agile than in the past and that building an in-house startup to acquire that agility is a difficult task.
The idea, he said, is to “nurture a startup as a way to getting access to technology without the barriers that you typically find if putting an [in-house] innovation program together,” Fenwick explained.
Fenwick said one of the roles of Forrester’s own chief business technology officer is to bring local startups into the organization and have them demonstrate their technologies. He said C-levelexecutives, in general, are showing greater interest in startup activity. He points to higher C-suite attendance at the CES conference as an example. He noted that CES evolved into more of a technology show than a consumer electronics expo, but still believes the arrival of top executives is a telling trend.
“There’s a recognition that executives need to keep a finger on the pulse of what is happening in the emerging technology ecosystem and figure out how to apply that in their businesses,” he said.
At ORU, keeping tabs on startups and emerging technologies helps mitigate the risk of working with early-stage companies.
“We will risk 10% of our investment in IT on startups,” Mathews said. “So, in order to risk 10%, we are always keeping up with what’s the latest thing.”
The university’s interest encompasses such fields as AR/VR, educational technology and cloud computing. In the latter category, ORU works with N2N Services Inc., an Atlanta startup that offers an integration-platform-as-a-service offering for the higher education sector.
Michael MathewsCIO, Oral Roberts University
Mathews said N2N offers the ability to integrate in the cloud ORU’s ERP system, learning management system, CRM system and time clock system. N2N also addresses the issue of undocumented scripts and APIs that can proliferate in an organization.
“N2N takes all those scripts and APIs and puts them in a cloud library,” Mathews said, noting ORU has at least 500 such items in N2N’s repository. “I will rest assured, as a CIO, we have a record for each one.”
Mathews said he’s now looking for startups that understand where the university is going with mixed reality — inexpensive VR glasses that clip on a smartphone versus VR goggles such as Oculus Rift — and can further extend ORU’s EON platform into the education field.
Beyond partnering: Buying a startup
Buying a tech startup is perhaps the ultimate evolution of partnering. Some non-tech companies are doing just that on the theory that it’s better to buy a startup than to be one.
“Some corporations kind of play to their strengths; they know innovation might not necessarily be their strength,” said Matt Sondag, managing director in the mergers and acquisitions practice at West Monroe Partners, a business and technology consulting firm in Chicago. “It’s tougher for them to innovate.”
Sondag said such enterprises recognize they can’t move as fast as a startup, citing a multitude of decision-makers, too much red tape and the obstacle of internal politics as contributing factors. In short, they’d “rather buy it than build it,” he added.
Some non-tech companies are doing just that. In the retail space, where big box stores find themselves under pressure from online sellers such as Amazon.com, Wal-Mart Stores Inc. in 2016 acquired Jet.com Inc., an e-commerce company that launched in 2014. And in financial services, BBVA, a banking group based in Spain, purchased Openpay, a fintech startup based in Mexico. That late 2016 transaction let BBVA add a payment service provider to its portfolio of digital businesses.
Sondag suggested more deals along those lines may be in the offing in 2017. He said corporations didn’t invest much as the economy trudged along following the Great Recession. Now, he said, those companies are “flush with cash” and with the stock market recently trading at record levels have considerable buyer power.
An acquisition may provide a faster track to innovation, but it comes with its own hurdles. Forrester’s Fenwick said enterprises acquiring early-stage companies to spark digital transformation are purchasing the skills of the startup team — and those team members can depart if they become disaffected. He said the challenge for startup buyers is to update their big-company culture so they don’t lose the talent they have acquired.
“Cultural challenges, change management issues and different approaches to how systems are built and maintained have a major impact on how well the acquisitions play out,” added John Stiffler, senior director and leader of West Monroe Partners’ mergers and acquisitions practice.
Here, CIOs can play a role in making a startup acquisition work. Stiffler said an acquired startup’s culture may be built around a very fast-paced, agile work environment, while the corporate IT team might take a more conservative approach.
“CIOs on each side of the transaction should focus on how to best bring the two organizations together — especially during the pre-close time period,” Stiffler said. “Far too often, a number of synergies are missed because too much time is spent focused on the technology itself, rather than pulling the teams together at both the process and people levels.”