The Importance of Corporate R&D and Innovation

By Violet Jain

In the past, corporate R&D departments stayed far away from startups. The idea -- from the corporate side, at least -- was that the two forces were working at cross purposes. Procedurally, nothing about them seemed to overlap. From the clashing cultures (buttoned-up vs. disruptive) to the varying budgets (billions vs. shoestring), working together felt totally counterintuitive.

That’s not the case anymore.

Corporate R&D is changing rapidly. According to the 2017 Global Innovation 1000 report from PwC’s Strategy& group, the biggest trend affecting the corporate landscape in the U.S. right now is stronger borders. While it isn’t clear whether the trend will weaken or intensify, its impact is causing a significant contraction in the traditional model of U.S. corporate R&D.

As the ease and speed of technology have grown over the years, corporations have benefited from the free flow of information, capital and talent around the globe. What does increased border control mean for those factors? The current landscape is making it more and more attractive for U.S. corporations to keep their R&D efforts within the country. Previously, various global factors made “outsourcing” of certain R&D processes attractive. For example, due to cheaper labour in China, that country had long been a hotbed for U.S.-based corporate R&D efforts, especially involving testing or manufacturing. While countries like Canada, Germany and France seem to have benefited from the current economic nationalism trend, large corporations in the U.S. and U.K. have had to rethink their corporate R&D strategy.


What This Means for Global Corporations -- and for the Startups That Work With Them

Gone are the days of global R&D outsourcing models -- at least for now. Innovative corporations are taking a new approach. They’re creating standalone R&D “nodes.”

Of course, creating a node from scratch is a nightmare of siloization. The key is to create new synergies -- or take advantage of existing ones. This article will examine the smartest ways that corporations and startups can work together to improve R&D.



The Traditional Model

The simplest, most time-tested method for corporate R&D is one that is fully internal. Here, the corporation handles all the organization, funding and execution of research and development. It’s commonly called the “inside-inside” model. Costs can be high -- in 2017, the 1,000 global corporations with the largest corporate R&D budgets spent a combined $702 billion (according to the Global Innovation 1000 report).


Incubators

Corporations that are ready to deviate from their traditional “inside-inside” model may want to give the “inside-outside” method a try. This one hinges on incubators. First, the corporation generates ideas and research internally, just like with the traditional model. But when it’s time to move to development and testing, the corporation partners with an incubator that’s completely external to the company.

What’s in it for the incubator? Usually, it will receive an equity ownership stake. Sometimes, these pairings work perfectly -- especially if there’s a total synergy between the vision of the corporation and that of the incubator.

But there are challenges, too.  According to a recent study of hundreds of corporate incubators, less than half were able to meet their strategic goals. Less than a quarter met their financial goals.


Accelerators

To address the shortcomings of the incubator model, many startups apply to accelerators. This method is sometimes known as the “outside-inside-outside” system. Plug and Play is a proud contributor to this ecosystem.

Here’s how it works. Startups (and their founders) need a whole suite of intangibles to be successful: technical guidance, industry-specific expertise, key introductions, legal advice, financial strategy -- and perhaps even funding. Those are all things that the accelerator provides.

Once a startup is accepted into an accelerator, the startup immediately benefits from this network and mentorship. And the accelerator benefits, too -- most notably, the typical startup culture can offer the benefit of agility and healthy disruption. The symbiosis between the two is so powerful because it’s “inside” -- productivity is greatly enhanced for both the startup and the accelerator, and the two enter a mutually beneficial symbiosis.

This is a unique model. Once a set period of time elapses -- or once certain pre-agreed goals are met -- the relationship reverts back to “outside,” where the startup and the accelerator cease their formal partnership agreement. In recognition of the resources it provided, the accelerator generally receives some ownership -- typically 5-10% of equity.


Other Models

Corporate R&D partnerships with startups can also take two other forms: “outside-outside” and “outside-inside.”

For “outside-outside,” a corporation and a startup stay at an arm’s length distance, meaning there is no in-house component. This model refers to corporate venture capital. Key drawbacks include higher costs and problems with managing synergies. The “culture clash” regarding timelines and senses of scale can lead to friction between the startup and the corporation.

For “outside-inside,” a corporation and a startup form a single entity -- i.e., through mergers and acquisitions. This is the most drastic model, but it’s a huge business. According to data compiled by PitchBook, U.S. and European corporate buyers spent $1.7 trillion on M&A last year.


Benefits of working hand-in-hand

When corporations and startups collaborate in any way for R&D, the positive potential outcomes are numerous. Aside from the quantifiable gains that prompt both parties to seek out such an arrangement in the first place, corporations and startups can achieve greater agility and increased access to adjacent markets.

Some factors drive the incidence of these types of models down, however. Cost, resources, reach and uncertainty about synergistic fit may cause one or both parties to decline a potential collaboration.

In the case of corporate accelerators, startups often have to face a serious application and vetting process, which can reduce the number of potential corporate R&D partnerships. In fact, a recent study by BCG and Hello Tomorrow found that while 95 percent of startups hope to enter long-term corporate partnerships, only 57 percent actually do.

For those startups that are fortunate enough to have access to a potential corporate partnership, it’s important to consider whether the proposed collaboration serves the startup’s long-term growth plans. What is the corporation’s track record for partnerships of this type? Has the corporation generally provided startups with long-term, lasting benefits?

For startups considering participation in an accelerator, “corporate” should not be a bad word! Similarly, smart and forward-thinking corporations should attach no negative stigma to the words “startup” and “disruptor.” When corporations and startups work hand-in-hand, innovation increases and costs tend to decline overall (even if the opposite is true in the short term).

Regardless of any passing economic trends -- that’s good for everyone’s business.

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