Pollenizer Chairman, Tony Faure spoke a few weeks ago at the Mumbrella360 conference, he talks about how corporations could be working with startups to innovate rather than getting wiped out. He explains the advantages and drawbacks startups face when in competition with major corporations and talks about examples of how companies could have benefitted from courting these up and comers. Here’s the full talk.
I want to talk to you about two things that I’m really passionate about. First of those is marketing, media and the industries we’re all a part of. The second is startups and disruption. I want to talk about the fact that those two things should go together. Where at the moment they appear largely to be apart.
To illustrate that, I want to start with a story from 2001. In 2001, I was running Yahoo! when it was still good too. I was on the board of Seek because we just put a lot of money into Seek. It was the end of the dotcom boom and we were about a year into the dotcom crash. Two big things were going on for Seek. First one was we were growing and we were growing nicely but the second was we were running out of money. We were running out of money at the worst time to run out of money, because everybody who was very excited about dotcom’s the year before, was now gloomy and pessimistic.
We were quite worried. We were worried that even though we were growing, we weren’t going to make it to profitability with the money that we currently had. We were worried that we won’t be able to raise anymore.
In our board meetings, item number 2 on the agenda most weeks, well most months, was who are our competitors and what can they do to us that’s going to stop is making it to profitability. We had three very serious ones – we had Fairfax, we had News, and we had a business run by Monster, who was the global leader in recruitment and PBL – three massive competitors. We look to all those guys and we thought “What do they have that we don’t?” and the answer was, they had customer relationships, they have brands, they have shit loads of capital. In almost every way they have the things that we would want and they’re in a position to make things really hard for us. We try to figure out “What do we think they’re going to do?” We wrote a list. These are the things we think they could do, these are the things we think they’re almost inevitably going to do, and this is how we’re going to react to it. We kind of vowed that meeting by meeting, we would make sure that we were keeping on top of the whole thing.
What actually happened was that none of the things that we thought they were going to do, did they do. In fact, they didn’t really do anything for the years between about ’01 and ’03. They did what they were doing anyway. I allowed Seek to get through the profitability and to a position where it became pretty much unassailable. As a result of doing that over the next decade, they allowed about three and a half billion dollars’ worth of value to be created by Seek at their own expense. It’s kind of a weird thing. Why would companies that have great brands, great assets, loads of money, and all those things going for them manage to lose to a bunch of guys based in Melbourne without much money who are just working really hard?
An interesting question is also a question I think that car sales would probably have asked in their boardroom and so would “wotif.com?” and so, around the world would LinkedIn, and so would, a good example, is probably Netflix, right? Netflix for years thinking, when is the day that blockbuster turn on the tap and make life really hard for us? Those days never came either. You think to yourself, why is that? Is it that these companies are run by idiots? Is it that they’re very complacent or is it something else?
Maybe the answer in the end is it’s something else, right? They’re not run by idiots. I have lots of friends who work for all those companies and they’re very smart, much smarter than me. They understand as well what the issues are that they’re facing and they understand that other little companies like Seek are out there nibbling away their business and trying to disrupt them everyday.
Even though they understand and even though they can see this happening, they don’t seem to be able to do anything. If you look at Sue’s list of really interesting companies there, the number of them that was spun out of a big successful company is zero. There is no example that I can think of anywhere in the digital world of a startup that was spawned from an existing successful big company.
I think it’s fair to say that if you’re a big, successful company the chances that you can successfully disrupt yourself are null. Instead of trying to do that as lots of people continue to, it makes a lot more sense to accept that and kind of develop a plan B. What are you going to do instead?
Most companies asking, starting media companies in Australia that have a plan B have one of these two plans. Plan one is “Close your eyes and really, really hope that it doesn’t happen to you.” That’s the sensis plan. If you’re unkind, you might say that’s the Fairfax plan, where gradually someone erodes and eats away your business while you watch.
The second plan, I’ll come on to a bit later. There’s a plan B for what you can do instead. So big companies have a problem, what are they going to do to solve that problem? They can’t disrupt themselves but they’re going to be disrupted. Who are the right people to do the disrupting? You would think that the answer to that would be startups – young, aggressive, digital companies chasing after these big guys. The answer would be, it’s definitely true that they have the skill sets. If anybody here has ever worked in a startup, has anyone here worked in a startup? Dave you have? Yes, a small number. That’s great.
What do you know about working in a startup? You know that you have hardly any money, you have hardly any time, and you have hardly any chance of raising more money if you can get through the money you currently got. It’s a really difficult environment to work in. What it does make you do, is it makes you innovate. It makes you very focused on what it is that you need to do everyday and you kind of get yourself into this test and learn cycle where – I think Andy called earlier “Rapid Prototyping” – we’d say that’s all about failing fast. Take something out there, make it happen, see if it works and it doesn’t, try something else. So great skill sets for being disruptive.
As you saw from Sue’s presentation, when that comes off, if you’re Facebook, if you’re LinkedIn, if you’re Seek, if you’re REA, it’s fabulous right? You make tons of money, you make lots and lots of funds and you totally put the knackers on serious industries that never quite recover.
The problem is that most startups don’t succeed. Most of the startups that are raising small amounts of money and typically its a few hundred thousand dollars, don’t get to the end of that process with a successful business. They fail, and because they fail or they look like they’re going to fail, they find it very hard to get funding. If you can’t get funding, you can’t get into the next stage.
That’s a problem for all sorts of startups. There’s a particularly acute problem in Australia. About half the companies, half of what I call prototyped companies trying to raise money are successful in Australia as would be in the US or Europe or anywhere else. This is a difficult place to run a startup. Some of those companies, it would be fair to say, failed because they’re bad ideas, they went terribly when executed, and that kind of stuff but there’s a small group of them that I think would be great businesses when they grow up if they got a chance to grow up, but they don’t.
The startup problem isn’t they have the wrong culture, it isn’t that they don’t move fast enough because they don’t have enough money. They don’t have enough experience. Typically a lot of startups are run by very young people who were very enthusiastic but not very experienced to what they do and they lack a way to scale. Once you do realise that you’ve got a good idea, how you scale that idea is really driven by distribution. Distribution is something that most startups also don’t have. On the one hand, we have big corporates worrying about the fact that they’re going to be disrupted, not really able to do anything about it and not quite sure what to do next. On the other hand, you have startups full of young, smart people with a total passion for what they do, learning really quickly, with a massive danger of running out of money.
Seems to me there’s a pretty obvious solution in the middle here about how those guys should be able to work together. The plan B for most corporates, if they don’t take the “Let’s hope it all works.” plan, is M & A (Mergers and Acquisitions). Let’s go out and buy some of these companies. The problem they all have is there aren’t very many of them. So for corporates, the idea that I can go out and solve my problem by buying a startup is expensive because there aren’t many of them. When they get sold, they get sold for lots of money and risky, because you’re taking on a culture that you may not fully be able to understand.
Seems to me that the logical thing that we should think about doing here is partnering up between the media companies on the one hand in the marketing organisations and the startups on the other. There’s precedent for this and if anyone’s aware of this between the US, the Googles, the Intel’s, the CISCOs already have their own venture funds. The logic there is deploy money to create businesses which are going to disrupt you in the long run. They’re already doing it.
Outside of the tech industry, there are a lot of medical companies doing it. Certainly the beginnings of the telco industry taking this very, very seriously. A company called Telefonica, Latin American telco’s, Spanish telco’s spending huge amounts of money on setting up incubators in 15 different cities. Even Telstra and Optus over here are at the point of understanding that this matters.
So why aren’t we doing it in media? The New York Times is an investor in a company in America called Betaworks which creates media startups. Hirsch is an investor in a company called Science which is based in LA. It does the same thing, media based startups. That opportunity is here. We’re not really seeing it develop yet. My rant today is that it would be great if we did.
Check out the video in full below:
Since the 50’s, the music industry has practiced “Artist & Repertoire” management, where either a record label or music publisher is responsible for talent scouting and overseeing the artistic development of songwriters and recording artists. It would be exciting to see corporates start to build startup “A&R” departments by partnering with the likes of Pollenizer and other incubators.
I agree with you. I think this is a highly effective model for modern corporates to find talent and grow a portfolio of businesses. It matches how the our world operates where talent wants to control its own destiny and we need to open the surface area of influence for a company to stay competitive.
I think the premise of the post is a good one – larger, more traditional organisations typically struggle to reinvent or disrupt themselves and working with start ups (& more established digital or tech pure plays) in some shape or form is a great way to drive growth. 3 key success factors:
1. Flexibility of approach: it doesn’t have to mean M&A (multiples for growing companies are often based on revenue and are high risk or expensive if already proven), or an investment fund (although with the right structure and team they can work – at Betaworks for example, which Tony mentions above, John Borthwich is really empowered to lead and make his own portfolio invest decisions. Partnering is sometimes a more interesting model – the key being that the start up fits strategically with your business. The first 100k users for any start up is often the most difficult and marketing support (on & offline – although online probably more valuable) has real value. Equally I personally don’t the business model for media companies should be being a VC.
2. Team & Culture: in my experience having digital savvy people within the corporate is crucial to speak the same (or similar) language, and help clear the way for the start up to focus on what they do best – develop great tech & products. If a start up is to be baked into the corporates product set in some integrated way then running similar (often ‘agile’) dev processes are also super useful so that both companies are aligned.
3. Strategic Fit: does the start up clearly fit with your corporate vision or strategy? the more closely aligned here the better. For example, most media companies are in the content business – so anything that helps with publishing, or monetising, or entering new adjacencies will fit and have a better chance of working. Anything that’s non-core always runs the risk of a lack of executive support or focus over time. It might seem an obvious one but I’m constantly surprised how many companies invest in questionable “adjacencies” when they should be focused on their core business.
All those may seem obvious statements but the track record of most larger companies working with start ups is relatively poor. I also think that creating innovative ways of driving organic growth through existing teams shouldn’t be overlooked – most businesses in my experience have a ton of untapped ideas and potential but typically lack the ability for them to surface and actioned.
This seems to be a hot topic these days. I agree with Chris that there are a lot of challenges standing in between startups and corporations working harmoniously together. But I also think these challenges can be considerably alleviated if applied through the model that Tony is advocating and which US companies like Cisco, Coca Cola, Google, Intel, etc. are already using.
It’s not a traditional VC model either – these companies deploy considerable capital and resources to scour for and fully incubate potential businesses that could disrupt itself. More often than not these skunkworks type of projects are not led by external startup founders who bring in their own disparate sense of culture – they are employees of the company itself tasked with finding “the next big thing” even if it means disrupting the company’s core operations (at least in theory).
Essentially, corporations need to get in the business of getting themselves out of business. Their survival depends on it.
Check out my writeup of a similar talk given by Innosight’s Scott Anthony: http://www.fastcompany.com/3026264/leadership-now/want-to-change-the-world-join-a-corporation
This is so true, thanks for putting this together Nicola!
There is definitely a trend towards analyzing what is going on outside and buying start-ups. Innovation is achieved at an increasingly faster rate. Internal R&D teams are no longer enough for a company to stay competitive, and this creates the risk of companies becoming obsolete. For instance, a patent used to protect a company for 20 years, but today a new technology can appear in 2 years and completely disrupt the industry making the patent obsolete.
I am one of the co-founders or a start-up, linknovate.com, which is trying to simplify the search for cutting-edge technologies and experts. We have talked to so many people in companies, universities, research labs, start-ups… a big change is going to happen soon.