What is Open Innovation and How To Create This Happy Marriage?

What is Open Innovation and why is it important

Innovation is a key element to sustained corporate success, in fact, one noticeable trend over the last few years has been the recent burst of open innovation. Open innovation is a collaboration between corporates and startups that fosters and accelerates innovation, bringing mutual benefits. It involves all sectors and is especially observable in high-tech industries where the rate of innovation is rapid and where knowledge is distributed across multiple organizations, making it more difficult to innovate alone. For Corporates, open innovation is a way to benefit from the drive and creativity of entrepreneurial talent and experimental state, allowing them to bring innovative tech and strategies faster to the market. It is a great way for companies to keep track of leading-edge technologies that could disrupt them in the future. In addition, it can be a gateway to external research and development at a relatively lower cost. For startups, Open Innovation is a way to benefit from industry expertise, infrastructure, professional network, marketing capabilities, and above all market opportunities. Indeed, for startups, a corporate client or development partner can provide crucial business validation.

Open Innovation comes with the potential to widen the space for value creation: it allows for many more ways to create value, be it through new partners with complementary skills or by unlocking hidden potential in long-lasting relationships.

Typologies

As described in Nesta (2021), Open innovation involves 6 main modes of collaboration included within a wide spectrum that vary from a simple exposure to innovation to the full acquisition of innovators: This continuum depending on the level of engagement of the companies.

  1. Gaining “exposure” to startups: Many companies begin their startup engagement by increasing their exposure to startups and entrepreneurial culture. This is often done by running one-off startup events, such as hackathons and competitions, or through the provision of free tools, entrepreneurial resources, and sponsorship.
  2. “Trend-spotting” includes more engagement of the firm that decides to have more regular or more structured collaboration with startups; many establish dedicated ‘outposts’ within the most active startups ecosystems. These often serve a ‘trend spotting’ function, scanning a wide range of interesting startups, as well as being a more structured way for scouting innovative commercial or strategic solutions.
  3. Acceleration programmes: Companies sometimes go a step beyond innovation “outposts”, building accelerators, typically providing substantial support to startups. Third-party accelerators remain an attractive alternative in order to expand reach, start quickly, or hedge bets: 48% of Corporate Startup Stars used third-party partners such as Techstars and Startupbootcamp (often in addition to their own programme).
  4. Procurement and co-development: Corporates can undertake innovative procurement from startups.
  5. Investment: Investment in startups requires significant resources and expertise, yet the benefits can be compelling. often creating a competitive advantage through exclusive access to cutting-edge technologies and other innovations. These investments can go through Corporate Venture Capital funds, through off-balance (direct investments without a dedicated financial vehicle), or using both methods.
  6. Acquisitions: This option occurs more rarely. It is an effective way of building up next-generation products, expanding to new markets, or simply acquiring new (digital) capabilities. Depending on the reason for the acquisition, startups either joined an existing unit or continued to operate as an independent unit. Some mature-stage startups were even given responsibilities for other units and products. In addition, many acquisitions of early-stage startups were aimed at internalizing people and talent rather than products and technologies; in these situations, the startup team was often integrated inside the buyer’s corporate structure, though often with some continued autonomy and separation (incentives, location, reporting lines).

These activities are not mutually exclusive and may often be complementary.

Evidence from the Tunisian startup scene

Challenges and Recommendations

The following results from interviews conducted with Tunisian startups that have been able to build the premises of collaboration with Tunisian corporates.

Main challenges

Most of the obstacles to this happy marriage is anchored in the difference of DNAs of the two partners. Corporates and startups are fundamentally two different species, whether in their level of risk tolerance, their organizational cultures, their decision processes, pace and agility, the level of standardization of their processes as well as their perception of time and urgency. While the first need to eliminate risk, entrepreneurs need agility, rapidity, being risk-takers by essence.

All these fundamental intrinsic differences often set the tone for a rocky relationship where both parties are confronted with several difficulties and frustrations:

Problems reported by corporates

Common problems reported by corporates essentially include:

  1. Worries about the strength and validity of the product and service provided by the startups.
  2. Worries about the level of uncertainty surrounding startups; Corporates are risk-averse agents that are intolerant to the uncertainty surrounding startups, including their financial sustainability, their changing teams as well as their product fragilities.
  3. Suspiciousness towards what they often perceive as an inexperienced dark-haired entrepreneur who does not understand the reality and complexity of their own functioning modes and priorities.
  4. Their need to have every decision made quickly which is unrealistic.

All these challenges are even more important when the collaboration is related to products and services that involve the core activity of companies. Indeed, many companies are extremely worried about collaborations with outsiders, which explains why they often ‘stick to their knitting’ and collaborate on peripheral tasks, but never on their most important business issues.

Problems reported by Startups

Common problems reported by startups are linked to an overall feeling of non-startup friendliness caused by :

  1. Difficulties in meeting procurement qualification criteria.
  2. Bureaucratic registration processes which are not designed for ‘non-standard’ procurement.
  3. The inexistence of clear documentation that gives the startup visibility.
  4. Slow decision-making processes.
  5. Slow payment process — which causes significant cash-flow problems for small enterprises.
  6. Startups also mention the lack of interest and trust of corporates and their tendency to bargain too hard on them as well as to try to develop similar solutions internally.
  7. The regulation often makes open innovation harder by definition.

A common challenge for both in open innovation is to take on new partners. New partners always entail costs in terms of search, validation, and compliance, as well as the forming of new social relationships between people..

Main recommendations

For startups

Startups need to enhance different skills to be able to collaborate with companies:

Corporate Education: Know the client

  1. Open up to the industry, attend their events, get to know their ecosystem players because they are the client.
  2. Make sure you are fully aware of the company’s timelines (time to decide, to pay…) and processes (decision process, hierarchy, key influencers, holidays…).
  3. Master their regulation and do not underestimate it.

Peer-Education: Learn from those who know better

  1. Open-up to other startups and to peer learning opportunities: Identify startups that went through the experience and people who know the process that could guide you and help you navigate.
  2. Create a group of advisors, experts who are here to support you in your baby steps.
  3. Onboard experienced, mature people who know the industry, the technology, or the process and who can attend the meetings to reassure the client and install a serious conversation.

Self-education: Knowing yourself

  1. Make sure your solution has been technically strongly vetted.
  2. Learn how to negotiate.
  3. Know when to start negotiating with companies: not too late and not too early.
  4. Make sure you find ways to hold financially, sometimes it is important to take the money when it is offered. Often, there is no room for bootstrapping.
  5. Be resilient, open, smart, and agile by listening to your customer even if it means you will need to pivot.

Many hurdles clearly limit the possibility to collaborate with companies, yet often, once signed, a partnership is often there to stay. In many situations, switching costs are so high that companies avoid redeploying to other companies. It is about resilience, holding enough time to have the first contract signed. That first reference in, and it becomes so much easier because you have been vetted. In a way, your due diligence is already done, others have done it with you before them.

For companies

  1. Become a “Corpup”
    Raise your awareness by taking part in all types of events linked to the startup scene, get closer to these Bravehearts, look into accelerators, become a coach, a jury member, a business angel, and access hands-on knowledge and education.
  2. Become a startup-friendly company
    (a) Go out of your way to reduce the time taken to register as a new user and aim to pay your suppliers promptly.
    (b) Try to avoid asking startups for ISO certification or financial indemnities because of the burden it imposes on them.
    ( c) Try to put in place dedicated legal teams.
    (d) Build fast-track processes for startups, potentially including template agreements, new due diligence processes tailored to startups, and technical upskilling programs.
    (e) Be transparent about how long each step will take because the startup in front of you can die in the process.

Written by Houda Ghozzi

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