\Corporate Innovation Opinion/

SMEs need to step up to the corporate innovation challenge

Innovation might sound like it is too expensive for small companies — but done right, it takes less resource than R&D.

By Laurent Kinet

In a Medium post last month, I wrote that corporations and large companies were the most innovative bodies on earth. It may sound counterintuitive, but corporations are the cornerstones of startup ecosystems. Selling to a larger corporation — or doing a substantial deal with them — can be a key part of the entrepreneurial journey. Low levels of venturing mean few ecosystems, and few ecosystems mean low innovation.

More and more large companies are running startup programs, CVC funds, hackathons and other venture labs. But they are still not doing enough.

First, large corporations should all do it. The mere existence of corporate venturing directories shows that it’s still the exception. Each and every large business has a role to play in the fostering of global innovation.

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Second, despite their growing startup venturing arsenal (investment funds, internal events, corporate labs, partnerships, M&A, intrapreneurship, you name it), the level of resources injected into these instruments is still very low compared to their total financial weight. The global insurance group Allianz invested €1bn in its CVC fund Allianz X (0.7% of yearly revenues); AXA launched its Axa VP fund with $150m (0.14% of yearly revenues) — the percentages drop even lower with a 10-year investment horizon.

Corporations should definitely do more. But if they don’t, there is an unprecedented opportunity for… small and medium-sized companies.

The time has come for SMEs

Innovation has become a business imperative, not only for large companies, but also for mid-sized businesses, which are facing tougher competition, pressure on margins, more demanding regulation, and globalisation. Why shouldn’t they benefit more from the growing trend towards corporate venturing, which is still largely captured by large enterprises?

SMEs heavily rely on M&A for ensuring their growth already. They could also take the hunting role to spot and acquire new champions of innovation — young, agile startups giving them a decisive competitive advantage. When it comes to external innovation, there is a taut thread, getting thicker and thicker, between two opposite sides: the small, nifty, creative startup on the one hand, and the obese, multinational giant on the other hand. In between stand the SMEs, representing 99% of all businesses in the European Union, and yet not able to make hay while the sun shines.

Startup venturing sounds expensive but takes fewer resources than long and intensive R&D programmes.

Startup venturing might sound like it is too expensive for SMEs to undertake, but in fact, it can be managed with far fewer resources than long and intensive R&D programmes.

Medium-sized businesses bring together the best of both worlds: small enough to ensure agility, flexibility and speed, and large enough to invest the required effort. They can surprise their environment with unexpected connections. In that sense, they can also play an important role in a global innovation endeavour.

Call for a middle-market venturing

Traditional innovation scouting (yes, it’s an oxymoron) is done by large companies — the “corporate venturing” trend. It is a critical step in the innovation lifecycle; collaboration between small agile innovators and giant industrial strengths is the nuclear fusion that can spark a new life. But the problem is that it is still too much a preserve of large companies.

If European middle-market businesses entered the startup arena with strength, determination and high innovation expectations, our startup ecosystems might well become the ultimate weapon to get a voice in the geo-strategic economic battle.

How can they do that?

  1. First, they should decide to turn to startups through a structured, systematic approach. Simple monitoring of emerging startups is a good start.
  2. Identify their problems, threats, and opportunities for improvement in their strategy and organisation — and start from there to spot startups that bring valuable answers.
  3. Use technology to do the heavy lifting. Scouting startups can be a tedious and time-consuming task. Large companies often use consultants for this, which can be expensive, Middle market companies have fewer resources. They can’t always afford ruinous consulting, and rarely have corporate development, M&A or dedicated innovation teams. Luckily, they can rely on technology and new-generation tools to help them. Examples:
    1. AI-powered scouting tools can source the best-fitting innovation clusters, not only from simple keywords, but from complex, elaborated inputs that will render a better match with a bottom-up, context-based search — with the help of natural language processing, computers are now able to identify business connections from the ground up;
    2. Technology can also spot ‘perfect clones’, find the exact twins from an ideal target;
    3. Some companies offer semi-automatic startup valuation reports;
    4. Others can assess the cultural fit between organisations (which is known as a critical failure factor);
    5. Through the whole corporate innovation value chain, you will find new technologies and innovative players democratising the venturing process; most of them are startups themselves.

Middle market companies have a role to play in this game. No reason to leave all the good meat to giants.

Laurent Kinet is cofounder and CEO of Novable, an AI-based startup scouting company. 

 

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