You can’t buy love: Reimagining corporate-start-up partnerships in the DACH region
In an ever-changing global economy, reach, access, and innovation are among the assets that support a company’s success. This is as true for well-established large traditional corporations as it is for young start-ups. Developing cutting-edge products and services and getting them in front of the right consumer is central to business success, but it is often the case that a company will be more successful in achieving one of these objectives than the other.
For traditional corporates, market access may be relatively easy, while innovation in their products and services may be more of a challenge. At the other end of the spectrum, start-ups tend to have a solid grip on innovation but often struggle to reach key markets and establish a name for themselves in their industry. Corporate-start-up partnerships are an obvious solution to this challenge, but we’ve seen that making these relationships work can come with its own set of challenges.
While the stakes of finding success in these relationships are high and the challenges of COVID have made the payoff of a successful corporate-start-up partnership more valuable than ever, the appetite for partnerships that offer little return on investment is extremely low. McKinsey thus developed a 360-degree research effort—including surveys, interviews, and case studies—involving DACH corporates and start-ups to:
- Develop a perspective involving both start-ups and corporates on the satisfaction and importance of corporate-start-up partnerships
- Gain insights into the challenges faced by both start-ups and corporates and identify success factors for value-creating and effective partnerships
- Identify action items for start-ups and corporates to unleash the full potential of their current partnerships and pursue opportunities for future partnerships.
Corporates and start-ups derive different but equally important benefits from their partnerships
Interviews with top executives from large DACH corporates confirm the importance of the partnerships. On their websites or in their annual reports, corporates talk about successful relationships with start-ups, noting key achievements such as faster product development cycles, access to new markets, and insights about new ways of working (see case examples “Value-creating corporate-start-up partnerships”). Seventy-five percent of the surveyed start-ups consider partnerships with corporates very important today. Here is a look at what brings each side to the partnership:
The benefit to corporates. Interviews with corporates show that many see partnerships with start-ups as one key to faster innovation and product development. Through partnerships, corporates have the possibility to explore and shape the development of technologies and services in a very cost-effective and time-efficient manner, which would hardly be possible in their existing structures. In addition, partnerships enable corporates to gain early insights into new and potentially even disruptive technologies that might translate into a competitive edge. Furthermore, corporates can strengthen their market position by partnering with start-ups that are building products based on the corporates’ existing products or services. Partnerships with start-ups also give corporate managers insights into new ways of working, like more agile work styles or more frequent releases.
The benefit to start-ups. Start-ups, on the other hand, have high hopes that a corporate partner can help accelerate growth and boost their reputation, sending a positive signal to investors and customers. However, financial motives, like direct equity or debt financing, are not among the key reasons for start-ups to engage in partnerships.
Still, it became clear that both parties could point to specific realities that make successful partnerships a challenge. Corporates noted the “culture clash” with start-ups that arise from different working styles and conflicting technical infrastructures. They also noted the disappointment of a lower-than-expected impact as well as the high administrative effort, where the involvement of multiple decision makers was required. Start-ups described the lack of speed and drumbeat, which is driven by too much bureaucracy and a lack of support (manpower) from the corporate side. These factors slow down data requests or hinder quick decision making, among other things.
Two partnership archetypes are represented, but the characteristics of one set the relationship up for success and mutual satisfaction
To choose the right degree of institutionalization, corporates need to ask themselves whether the topic of partnering is core to their business or more explorative, whether they are interested in a specific technology or rather in the broad field, and how deeply the start-up should be integrated into their current business. Roughly dividing these dimensions, one can distinguish between two partnership archetypes:
Institutional programs. In this model, a corporate sets up a program in order to interact with a wider group of start-ups (e.g., accelerators, “digital factory”, incubators, VC-like investment unit). In general, the goal is to get in touch with multiple start-ups at once and foster innovation across a broad set of topics while helping the start-ups grow. Thus, institutional partnerships are usually broader in scope and more adjacent to the current core business of the corporate.
Individual initiatives. These collaborations between corporates and start-ups are set up based on a very specific need for innovation and are derived from a specific business goal. Individual initiatives aim at a joint project and a specifically selected start-up instead of curating a network of start-ups to explore potential on a wider range of topics. While some partnerships are based on a simple contractor relationship, corporates also set up exclusive joint ventures with start-ups. Thus, these partnerships are often chosen with a well-defined rationale in mind and are meant to extend/complement the core business of each partner.
As in any good relationship, a recipe for happiness (and value) is reciprocity: each partner brings something to the table that the other might be missing. In view of the specific options represented by these archetypes, our research indicates that both start-ups and corporates benefit more from individual, topic-specific partnerships than institutional programs. Already today, 84 percent of start-ups consider a targeted, individual partnership as their most important partnership. This indicates that start-ups see value in corporate partnerships that go beyond a capital investment or strategic guidance—benefits they can also get from other partners such as venture capital firms. Instead, a corporate partner is valued for a specific topic-related purpose that only they can provide, such as providing market access, becoming a future customer, or codeveloping a solution by building on their existing assets.
In addition, satisfaction is higher for start-ups that have individual, topic-specific partnerships—84 percent of start-ups with individual partnerships are somewhat or completely satisfied with their partnerships compared to only 57 percent of start-ups with institutional partnerships. One reason is that topic-specific partnerships generally have higher engagement and commitment from the corporate. Accordingly, 37 percent of start-ups believe that the corporates create the most possible value in individual partnerships, while only 14 percent of start-ups think this is true in institutional partnerships. This could be because topic-specific partnerships often address problems that corporates have as well, creating a mutual benefit for both partners and thus increasing engagement on the corporate side. As a result, 56 percent of start-ups with individual partnerships have achieved their financial goals (e.g., sales targets or project financing), while only 29 percent have achieved them with institutional partnerships.
84 percent of start-ups with individual partnerships are somewhat or completely satisfied with their partnerships.
Our interviews with corporate executives also revealed that they perceive partnerships working best if they target a specific, predefined topic instead of a general, unspecific outcome. Seventy-four percent of start-ups in individual partnerships agreed on common goals in collaboration with corporates; only 43 percent of start-ups in institutional partnerships had a similar experience. This indicates that in institutional partnerships, start-ups tend to have less say in the goals of the partnership.
Five principles of a satisfying and successful partnership
Analysis of the quantitative and qualitative aspects of the research, along with our own experience, point to five clear guiding principles/actions that support the success of corporate-start-up partnerships. An overview of all five is offered below followed by a deep-dive into the advantages of an individualized vs. an institutional approach:
Commitment as currency. Corporate money is not the main attractor and success factor. Success requires commitment and C-Level (“A-Team”) attention on both sides and at the highest level. These two relationship secrets raise the satisfaction level for start-ups by 93 percent and 86 percent, respectively.
Minding the gap. Cultural and technological differences need to be proactively managed before they become major inhibitors. Corporate executives see this as a key pain point of conflict, and so do 38 percent of the start-ups in our survey. Corporate leaders and their start-up counterparts should openly discuss their preferred working style and assume a partner-centric mindset much like a customer-centric one—above all because mutual understanding and flexibility on both sides are key to developing a joint way of working.
Finding the sweet spot. In our interviews, corporate executives underline the importance of pilot projects being sufficiently large to be relevant while still being small enough to be realistic. However, very small pilots are meaningless and waste potential. Essentially, pilots need to pave the way for scale-up.
Rules of engagement. Goals should be aligned up front and partnership-specific KPIs that are likely different from the typical corporate KPIs should be defined and continuously monitored to stay on track towards value creation. A steady drumbeat is key; clear milestones and aligned timelines raise start-up satisfaction by 38 percent and 59 percent, respectively.
Individual over institutional. Start-ups and corporates put more emphasis on and are more satisfied with individual and specific partnerships such as joint product development than general, institutional programs. This is mirrored by the trend of the declining importance of institutional programs: 84 percent of start-ups consider targeted, individual partnerships as the most important and 85 percent of start-ups are satisfied with their individual, more focused partnerships. Out of the remaining 16 percent of start-ups whose most important partnerships are institutional ones, only 57 percent are actually satisfied with their partnerships. To make institutional partnerships more successful, our interviews highlighted the need to clearly separate them from the corporate’s governance and running them independently.
Our research shows that corporates and start-ups recognize the mutual value of a partnership. However, both partners need to actively engage to get it right, which is more important now than ever. Insights gained through our research revealed key success factors that help both corporates and start-ups unleash the full potential of their partnerships. First of all, we found that providing financial resources is not a main success factor for a powerful partnership—instead, manpower and proactive engagement are key. Specific goals need to be aligned upfront and continuously measured against KPIs to help keep the partnership on track towards value creation. Pilots need to be sufficiently sized to be relevant, and a “spray and pray” approach should be avoided. Further, individual topic-specific partnerships are more valuable than institutional ones. Finally, cultural and technological differences need to be proactively managed before they become major inhibitors.
Given the scarce resources in terms of time and capital, now is the time to focus on the truly value-adding projects. What does not add value, will likely be cut—including mediocre corporate-start-up partnerships that satisfy neither of the partners. Companies who already have a partnership should evaluate it based on the metrics outlined in this report. This “diagnostic” should be conducted jointly and include top management from both the start-up and the corporate. They must identify individual pain points and create an actionable plan for how to tackle them. Now, more than ever before, is the time to get it right.