July 28, 2017
Why Not to Buy a Startup
by Girish Joshi
While partnership with startups or even a purchase of a startup can fast-track innovation efforts, the only solution is to become a startup.
The startups are the talk of the town today. Fintech, insurtech, retailtech, regtech, autotech, edtech are the new vocabulary for enterprises. Innovation is on the priority list of most executives globally. Many are getting worried about the risks, disruption and impact of startups.
With more than $80 billion of investment funding already injected into the startup ecosystem in the last three years, it would be foolish for companies to overlook startups. There are more than 4,000 startups globally active at the moment across various categories that are challenging incumbents across industries.
A good number of companies across financial services, insurance, retail, travel and healthcare segments are already exploring partnership with startups. But many executives are confused about how to deal with startups.
Buying a startup not the right answer for innovation
There are still questions on how effectively companies can leverage and integrate startups into their ecosystem. A few companies are exploring selective startups for purchase while many others are keeping their options open.
While buying a startup may sound like a good move, it does not guarantee success. Companies can buy a startup — but not the innovation.
Companies must innovate internally first. While startups can help to bridge the innovation gaps to some extent, they cannot solve the basic innovation challenges. There is a need to build innovation culture.
See also: Startups Take a Seat at the Table
Many large organizations today struggle with innovation. If a startup coming from nowhere can innovate, drives passion within teams and delivers incredible value, what is stopping the large companies to excel?
The problem is with the traditional, tactical approaches. Many executives, used to stringent financial measurements, measure innovation with a similar yardstick. The results are obvious. When innovation initiatives fail to deliver quick results, executives back away.
It is time for executives to revisit their approach on innovation.
Get the basics right before fixing the organization
Innovation demands commitment, agility, perseverance, collaborative culture, hard work and passionate teams. Innovation is mostly achieved as a result of failures and continuous learnings. There is no company in the world that has delivered disruptive innovation without witnessing failure. 90% startups fail, proving that innovation is not easy.
Today’s dilemma is that executives hate failure. The quarter-on-quarter pressure, macro-economic conditions and competitiveness in business hinders them from committing 100% to innovation. Organizational complexities, silos, bureaucracy and rigid culture add more pain in delivering innovation.
Startups are no longer a bubble, but an ongoing challengers
Many see the growth of startups as a bubble that may bust soon. But startups are not going away, so companies must exercise caution and develop a symbiotic relationship with startup ecosystems.
The best strategy is to partner for co-existence. While many startups operate on the periphery of business, they will move into the core part of business across industries. We are already seeing many examples in banking and insurance, where startups are getting licenses to manage end-to-end business. London-based startup Monzo, Berlin-based Number26 (N26), Atom and Tandem in the U.K. and Klarna in Sweden signal the backing of banking regulators for startups globally. Similarly, Lemonade in New York, Oscar in New York, Zhong An in China and Acko in India are examples of insurtech startups licensed for business.
Soon, companies will find startups snatching portion of their business. The only way to respond is to become a startup. Companies must start thinking like startups and act and deliver value like startups.
Without building an innovation culture, this is not going to happen.
Innovate or pay the price: Choice is yours
Startups will continue to be a challenge for companies of all sizes. Companies must innovate continuously and develop tailored strategies to manage the growing influence of startups. While partnership with startups or even a purchase of a startup can fast-track innovation efforts, these are not sufficient to transform a company or ignite its culture.
Companies must simplify complexities and structure and invest in people to develop an innovation-centric culture.
See also: Innovation: ‘Where Do We Start?’
Innovation is not a commodity that can be purchased using financial muscle. Innovation will never be up for sale and cannot be purchased or mimicked. It has to be built from the ground up.