This article is part of Scale Up Europe, an initiative with 170+ innovators brainstorming how Europe can propel its startups to the next level. In a series of interviews and deep-dives, Sifted is exploring the region’s most pressing and strategic questions. Read the full report here.
Are European corporates ready to step up and work more closely with startups? The Covid pandemic is likely to act as an accelerator, boosting collaboration beyond proof of concepts, trials and other timid approaches.
“For most companies, Covid has brought about a heightened level of consciousness about how important digital transformation is and how fast it needs to happen,” says Julie Ranty, managing director at Viva Technology, the annual tech conference in Paris.
One reason for the acceleration is that digital transformation increasingly ties into the broader picture for corporates, with motivations ranging from productivity gains to attracting talent, or as a tool for reaching green and sustainability targets. Another is a change in culture. As a result, Ranty says collaboration with startups has accelerated as well.
“Covid, because it has brought about so much uncertainty, has forced all businesses into a test-and-learn kind of mindset. That is giving more space to risk-taking,” says Ranty. “As a result, decisions that used to be put on hold for months and go through neverending audits are being made much faster by corporates.”
Well-established companies are getting over their usual tendency of waiting it out or putting back decisions in areas that aren’t necessarily within their comfort zones, and it’s now CEOs who are getting involved in these kinds of deals. The change is most radical when looking at corporate behaviour over the past five years, says Ranty. Covid is serving to further accelerate the trend.
“Corporates typically were turning to startups as a way to monitor what’s new to the market, in a protectionist approach — collaboration was something for annex areas and startups were rarely linked to anything core business,” Ranty says, adding that this has changed drastically in recent years.
“Fast forward five years, and you’ll find most corporates are now convinced of the benefits of working with startups. They know they can shave years off their R&D, they can revamp old habits and structures internally, and they can shake up corporate culture to introduce more agility and attract talent.”
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Leapfrogging to new tech
For some, especially companies in the luxury and cosmetics sector like LVMH or L’Oréal, developments with startups have been integrated back into the core proposition and become a part of the products on offer. In the industrial sector, companies including Vinci or Volvo have set up incubators and put open innovation at the heart of their R&D strategies.
“The name of the game for us is uncertainty, and it’s not because of Covid, it’s because of the deeper change in our industry around electrification and decarbonising transport — an era of leapfrogging to new technology, and trying to solve problems without knowing exactly where we will end up among this innovation revolution,” says Lars Stenqvist, executive vice president of Volvo Group Trucks Technology and chief technology officer of Volvo Group. “We need partners to get there and we need agility, to adjust along the way.”
Stenqvist’s team has been working for five years on a collaboration strategy, learning and adjusting to strike the right tone. “When we started we were just excited to have a startup hub, and we scanned too broadly. Our approach was too general,” says Stenqvist. The way the group’s breakthrough innovation unit, called CampX, is run now, starts with a set of engineering challenges like electrification or smart mobility and brings partners around the table to search for answers.
“We went from everything being super confidential to sharing what we’re working on. It’s all within a careful framework of course, but we’re inviting partners in and opening up Volvo’s markets and commercial opportunities to partners,” says Helene Niklasson,
who heads CampX. “And we have the freedom and budget to make decisions quickly and create those links between innovative partners and our best engineers in-house.”
“We have heritage and knowledge with some of the world’s top engineers. Startups have agility. Together we can reach a win-win, built around the smartest people”, says Niklasson.
Valuation and takeovers
There is one caveat to how far European corporates have come on working with startups: they still do very few takeovers relative to their US counterparts. “It’s probably the point that has evolved least in recent years,” says Viva Technology’s Ranty. “That feeds into the broader issue of exits, which is a real problem for European startups.”
At Volvo for instance, the conversation about whether the group should invest in a startup isn’t one to have early on. “How can we work together, bring knowledge together and what values do we share? That’s what we’re interested in first and foremost,” says Stenqvist.
“Corporates more and more are going to be asking themselves the question: do I pay 10 times operating earnings to buy this startup, or do I develop in-house and accept that it’s going to take me four or five years?” says Ranty. VCs can play a role in educating the broader ecosystem about understanding startups data and valuing their assets, she says. That’s step one to encouraging more takeovers.
The underlying idea is that corporates are convinced of the need to acquire startups — but they are put off by obstacles including valuation models that have little in common with the financial analysis of well-established companies. Whether that really needs to change though, and whether startup takeovers should be encouraged as a vector for exits is a subject of debate within the ecosystem, and there’s no clear consensus.
Participants at a Scale-Up Europe workshop in May from companies including Sodexo, Telefonica, BMW and Airbus, as well as startup founders, argued acquisitions are only part of the fix for Europe.
“Takeovers are essential for corporations. Not only do startups grow, corporations also grow in this process and represent the opportunity to disrupt existing business models to meet changing consumer needs,” says Belen Moscoso del Prado, chief digital and innovation officer at food services company Sodexo. But different types of partnerships can help address technology and consumer needs, she says.
“The goal should not be to get acquired, but to create European digital giants,” says Adrien Nussenbaum, cofounder and chief executive of startup Mirakl. “We need to foster the market conditions incentivising European companies to go public, not sell and list on Nasdaq. From larger European mutual funds to lower taxes on capital gains there are a lot of levers.”
Recommandations for scaling up
As part of Scale-Up Europe, 170+ entrepreneurs, investors and innovators in Europe have drafted a 21-step plan, with the goal of spawning 10 tech giants each worth €100bn+ within the decade.
Here's a summary of the recommendations for startup-corporate collaboration:
- For public authorities:
- Establish a tax credit for European corporates investing in European startups
- Adopt a Small Business Act for business administrations that will benefit startups
- For the ecosystem:
- Elaborate a charter of reporting and best practices on collaboration (open innovation, procurement) and takeovers
- Develop an Erasmus inspired exchange programme for tech allowing employees to move seamlessly between startups and bigger companies
Sifted has played an active role in the Scale-Up Europe initiative and produced a report detailing a community-led action plan for the region. Read the full list of recommendations in our report.