Co-innovating with startups: 5 steps for success

Few IT leaders have the in-house talent to build the bleeding-edge technologies that many digital initiatives require. To fill this gap, CIOs are increasingly looking to startups to help fuel innovation around blockchain, internet of things (IoT), AI-infused analytics and cybersecurity software.

But working with startups courts risk. Most startups rarely last 10 years, as acquisitions and flame-outs challenge the long-term direction of even the most promising vendors. Then there is the culture issue, which is often a bridge too far for CIOs beholden to big company bureaucracies. New companies just operate differently than enterprises. 

Even so, CIOs can’t afford to ignore the newcomers when seeking strategic partners, and many enterprises have formal programs in place to work with startups. Ninety-five percent of large organizations with a structural innovation program invest in tech incubators, while 90 percent work with startups or niche vendors directly, according to Gartner research. And 84 percent of organizations acquire startups to bolster innovation.

In the market for innovation

Startups are a big part of the operating model for Johnson Controls CIO Nancy Berce, who works with big tech companies and startups as part of a “big bet, no regret” approach to innovation. The company, which develops smart technology that helps manage fire and alarm systems in buildings, is currently working with Google on cloud software to manage data it collects from call monitoring systems, and is building a proof-of-concept with a video surveillance startup.

“I’m looking to change the culture of innovation and bring it in across all functions,” Berce tells CIO.com.

Recently, Johnson Controls sent emissaries from business development and IT to Silicon Valley to scout startups — including those building solutions for encryption, voice detection and analytics — that can help it monitor and detect threats in physical and virtual assets. Berce says the cybersecurity space in particular is ripe for investment, thanks to the rise in solutions that incorporate AI and machine learning. But Johnson Controls is also “dabbling” in robotic process automation and blockchain technology.

“I love the culture of, ‘We’ll solve the problem if there is value in a startup, and if not we’ll move on,’” Berce says. Berce is hardly an outlier; thirty-one percent of 1,000 CIOs said that they are the top driver of innovation for their enterprise, followed by the chief innovation officer (26%) and chief digital officer (21%), according to technology innovation survey KPMG published in October. IT leaders estimated they spend between 20 percent to 40 percent of their time on innovation iniatiatives.

But some enterprises create their own pipeline to startup-fueled innovation.

A pipeline for startups

Mastercard five years ago built Start Path, a global engagement program through which it shares APIs and other technologies, expertise and go-to-market partners with startups, Deborah Barta, senior vice president of innovation and startup engagement, tells CIO.com.

The program is broken into six-month sprints, during which Mastercard supports companies building anything from fraud detection software to biometric security for online banking to solutions that help companies onboard merchants in emerging markets. If the fit feels right, Mastercard may invest in some startups at a later stage, but this isn’t always a given, Barta says. Since the program’s inception, Mastercard has chosen to invest in about 40 of the 2,000 startups it evaluates each year.

Start Path gives up-and-coming companies a leg up, but it also helps Mastercard “be more nimble and take more risks” than most traditional companies, Barta says. “It takes a real investment in understanding the ecosystem,” Barta says of her work leading Start Path.

Few enterprises have the financial resources to build out a technology accelerator, let alone fashion a polished approach to innovation. But that doesn’t preclude them from working with startups on innovative projects. “Organizations are formally or informally outsourcing innovation to the startup ecosystem for a multitude of initiatives,”says Gartner analyst Erik Van Ommeren.

A five-point plan for courting startups

Rather than “putting money on cowboys and hoping for the best” CIOs should do their homework to get prepared for what courting and working with a startup entails. On that score, Van Ommeren offers the following 5 tips from “The CIO’s Guide to Working With Startups,” a report the research firm published in September.

Figure out where startups are needed. Van Ommeren says firms must first figure out what gaps they are looking to fill. What business challenges are you trying to solve that you can’t tackle in-house? Once you know what organizational capabilities need strengthening, you can choose different types of engagement, such as strategic insight to identify growth areas and new markets, nab fresh ideas to boost customer experience or build new products and services, and accelerate your go-to-market plans.

Explain the risk to stakeholders. Startups rise and fall, get snapped up and pivot. Be sure to cover those risks with your sponsors and make sure that the reasons for pursuing work with startups are sound. Also, startups take years to develop so be clear on timelines and stakeholders’ needs for the duration.

Choose a liaison. Pick someone with a high public profile to navigate the landscape of not only startups but also accelerators, incubators, investors, venture capitalists and consultants. This person will create channels to gather insight into the startup world and will disseminate this intelligence to key stakeholders. For example, Barta plays this role at Mastercard. “Research shows that having a good startup liaison is a critical success factor to any such initiative,” Van Ommeren says.

Craft a ‘reverse pitch’ deck. Rather than listening to startups explain what they have to offer, tell them what business problem(s) you’re trying to solve — also known as the “reverse pitch.” But be aware: Today’s tech startups are picky that you’ll have to sell them on why they should co-innovate with you. Lead with your future vision and optimal outcomes, followed by what you have to offer startups (i.e. access to APIs, infrastructure, salesforce, and so on). Be sure it’s engaging, as you must assume that you are “competing with your competitors for the startup’s attention too,” Van Ommeren says, adding “IT leaders must impress startups.”

Hedge against the risks. Engage with legal and sourcing to build template contracts for the chosen types of engagements and the type of startups you like to work with. The templates should address topics such as who owns the intellectual property rights for assets developed during collaboration, what happens when a startup fails or takes off, as well as potential exit options when the partnership is abandoned.

Bottom line: Let the smaller party take the lead on innovation efforts, Van Ommeren says. Startups tend to be more agile and customer-focused. “Otherwise, you put them in a corporate straight jacket and you’ve lost the whole reason to work with them.”