4 minute read 12 May 2018
start up pitching idea large organization

How the union of big and small companies cultivates disruptive innovation

By

Ryan Burke

EY Global Growth Markets Leader

Global leader helping companies grow and profit in this transformative age. Passionate about eradicating child illiteracy and raising neurodiversity awareness. Father of two.

4 minute read 12 May 2018

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True disruption blooms when the agility of start-ups collides with the expertise, scale and financial strength of large enterprises.

Never before has it been so easy or quick to turn an idea into a real business. From start-ups to the middle market, competitors are rising up to challenge the status quo across many major industries. One need only glance at the apps on our phones to see how radically consumer behavior is changing.

Disruption or just innovation?

But what distinguishes disruptive innovation from regular innovation? On first glance, these concepts may seem like two sides of the same coin. Certainly, many companies both new and established are breaking ground within their sectors. To truly disrupt, though, means going a step further; it’s using a technology or idea to build a sustained structural advantage over rivals.

In this sense, real disrupters aren’t nearly as common as you might think. For every shining star like Netflix or Snapchat, there are dozens more that have fizzled out, only to fall from the sky. But it is worth noting the key attributes common to many of these breakthrough organizations when they do succeed.

Creating strategic partnerships and alliances gives access to newer market segments and paves the way for acquiring an extra group of customers.

A creative collision

Disruption requires ingenuity, agility and vision — traits we often associate with start-ups and fast-growing smaller firms. It also requires industry expertise, scale and financial strength — more often the domain of large enterprises. At the same time, we must understand that innovation often comes out of that in-between space where industries collide.

I believe that more disruptive businesses can be cultivated by bringing these different enterprises together – from large companies to small start-ups across a range of industries – to leverage their respective strengths and capabilities. But what do they think? We recently surveyed more than 100 start-up leaders to better understand their perspectives and plans.

As it turns out, many of these young companies have surprisingly open attitudes toward capital raising and partnerships. At the same time, many of EY’s large corporate clients are increasingly open to or actively investing in start-ups on a recurring basis.

At what point in your growth cycle would you consider an outright sale?

The art of adding value

That’s not to say big companies are out of the running. After venture capital and private equity, our survey showed corporates were next in line as preferred funding sources. The small companies that favor corporates as investment partners told us they do so for access to marketing muscle, management talent and wide-reaching distribution networks.

Also, large companies have in-house regulatory knowledge, which gives them another edge. Half of the start-ups we polled rated regulation as one of the top two factors central to their long-term success. Big corporates with supervisory relationships across multiple jurisdictions can offer unique insights and strategic advice invaluable to new entrants.

At the same time, enterprises that open up their own value chain and offer true mentorship may gain an advantage over rivals when courting start-ups. And establishing a constructive relationship early on dramatically raises the odds of a successful result for both parties.

Making M&A meaningful

Before investing, big companies should have a clear idea of their own goals when partnering with smaller firms. Are they looking for a strategic investment or a financial return? Do they have the stomach and longevity to lock capital into a company for five to 10 years? Are they prepared to walk away and lose it all if they back the wrong horse? Corporate cash may be plentiful, but so are competing business opportunities and quarterly investor expectations.

Please rank the following in terms of importance to your organization for acheving ists strategic/stated objectives

Large corporations with limited research budgets should consider framing venture investments as an option to buy promising R&D. In this sense, M&A opportunities can be weighed not only in terms of revenue streams or technology acquired but also in terms of human capital and even culture.

Whatever the case, this clarity of purpose is important on both strategic and functional levels. If you know exactly why you want to buy in, you can build the best valuation framework and partnership structure to achieve your goals.

We are in a renaissance of entrepreneurship, with tens of thousands of talented firms sprouting up across the globe. Our research indicates that one-third of these firms are open to exiting their business during the growth cycle. The gulf between traditional corporate giants and sprightly start-ups can seem daunting at times. But on both sides of the equation, a strategic partnership or sale might be just what’s needed to transform regular innovation into real disruption.

Summary

Disruptive innovation emerges when large and small enterprises work together to leverage their respective strengths and insights.

About this article

By

Ryan Burke

EY Global Growth Markets Leader

Global leader helping companies grow and profit in this transformative age. Passionate about eradicating child illiteracy and raising neurodiversity awareness. Father of two.