Do corporate-startup relationships work?

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ONE theory in the startup ecosystem is that the success rates of both startups and corporates will rapidly improve if they were collaborating instead of competing with each other because startups excel at proving innovative concepts while corporates are successful in scaling these concepts.

The question is, is this theory correct?

Based on the discussion panel at the MaGIC Academy Symposium 2017’s fireside chat on Should Coporate Invest, Acquire and/or Partner With Startups?, startups choose to collaborate with corporates for this reason though the type of corporate they choose depends on the type of business they do.

The panel comprised CoGar Mobility Sdn Bhd chief executive officer Alan Cheah, RecomN Group co-founder and CEO Jes Min Lua, Axiata Digital Group chief portfolio officer Srinivas Gattamneni, and Media Prima Digital group general manager Nicholas Sagau. It was moderated by country managing director of Accenture Malaysia Azwan Baharuddin.

“One of the reasons we partnered with Tan Chong Group is that the nature of our business requires us to have a lot of cars. Even if we raised RM10 million in funding we wouldn’t have been able to set up our business operations or acquire a fleet and manage it without the expertise and knowledge this strategic partnership brings us,” explained Cheah.

Tan Chong Group is the primary distributor of Nissan vehicles in Malaysia; early last year its travel agency Mayflower bought a 55% stake in GoCar.

Lua said that for her services marketplace startup, the main pain point was creating trust with customers which, as a startup, is difficult achieve while working to scale up.

“We are good at customer acquisition, on-boarding service professionals and building a product but what do we know about building trust and managing risk?” she pointed out. About a year ago, RecomN started a partnership with insurance provider Allianz Malaysia, which saw the latter manage the risk that comes with transactions on the platform and get its products into the market in a disruptive way that allowed RecomN to build the customer trust it needed and focus on scaling up the business.

Relevance in a changing world

What is in it for the corporates then? Though they may have large customer bases, collaborations with startups allow them to remain relevant to their customers in terms of new products and services, as well as giving them the opportunity to inject new ideas into their business.

“The core business of many large corporates is under threat. Their relevance in the consumer space is decreasing,” said Srinivas, explaining that this is why Axiata created its digital division to acquire and partner with startups so that it could keep creating new products and services that would allow it to remain relevant with consumers.

“Not everything can happen inside the walls of the temple,” he said.

Echoing this, Sagau said that as the largest integrated media group in Malaysia, Media Prima traditionally looked inwards for ideas from its more than 4000 staff. “But if you keep doing that, you close yourself off from other ideas and people. This is why Media Prima Labs was created – a digital arm that can partner with as many people as possible and connect them to our core business,” he said.

Communication is key

Collaborations, however, come with challenges, not least in differing expectations from both parties. Two fundamentally different entities working together will always be difficult, so clear communication is highly important for people from each side to work together effectively and business to run smoothly.

Cheah said that GoCar faced a major hurdle with its corporate partner in the early days of the partnership because the latter basically did not understand how the startup operated and tried to impose its own processes upon it. “It’s quite a common thing to happen where the corporate does not set up a space in which the startup can run on its own.”

To solve the problem, Cheah and his team set out clear rules and regulations to “protect GoCar from its stakeholders,” as he puts it, making sure that the corporate understood how the startup worked and determining what each party brought to the table. “We spent three or four months doing nothing but mitigating expectations. But once that was settled, our growth speed was phenomenal,” he revealed.

“You have to give the startup some space, don’t stifle them too much,” he advised corporates looking to acquire startups.

From the startup perspective, Cheah likened the relationship with coporate partners to a parent-child relationship: “If you want me to be a pro, provide me with all the resources I need. I report to you with my grades each month, and if I get good grades, give me my allowance,” he quipped.

“The corporate is there to guide the startup with its experience and resources, and the startup has to be transparent about what they are doing.”

Lua added that while creating a space in which a startup can work unimpeded is important, it is essential that every division of the corporate is aware of and works towards the same goals as the digital division.

She also advised startups that are considering collaborations to treat relationships with corporates like a romantic relationship – date before you marry or in other words go for a partnership before an acquisition so that you know what you are getting into.

Independence vs dependence

“We really are trying to change,” confessed Sagau, saying that the digital divisions of corporates face a big challenge when trying to do things differently from the way they have been done for the past 10 or 20 years.

It is imperative that the boards of coporates be open to experimentation with new processes and incorporating new ideas so that more startups can be brought on board, he continued.

Srinivas added that though startups may bash coporates about their slow execution and general lack of speed, the bureaucracy is essentially in place to keep everyone safe. “Shareholders want some bureaucracy in startups so they don’t face the same risk the startup does. You must remember that nine out of 10 startups fail but nine out of 10 corporates survive for at least 20 years, so its fundamentally a question of how much risk the corporate willing to take.”

According to Srinivas, it comes down to a balance between how much independence a corporate can give a startup it invests in and how much dependence the startup needs to properly leverage on the corporate’s resources. Too much independence turns the corporate into a corporate venture capital while too much dependence stifles growth and innovation.

This is why collaboration at the right time is also important for both parties. Sagau said that because of its extremely wide consumer reach, Media Prima only looks at startups that are able to handle the load that the corporate will bring it, which means that the startup has to be of a fairly significant size.

“Understand why the corporate is investing and how critical you are to their long-term vision,” advised Srinivas, explaining that if the startup is only going to be an ancillary part of the coporate’s vision, it may be better to obtain venture capital investment.

“If you are going to be critical to the corporate, make sure the corporate has a significant stake – at least 25% - so that somebody in the corporate wakes up every morning thinking about you and how they can help you grow.”

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