Open innovation has become a popular term these days, especially within large companies which have the feeling that they have no choice but to find new ways of nurturing innovation in order to keep up the pace of today's business world. They are increasingly keen to engage with startups - either by launching their own scheme or by taking part in a local or sectoral open innovation programme - convinced that dealing with "disruptive" businesses will help them accelerate change and innovation internally.
Yet 80 to 90 percent of open innovation centres fail. These figures, cited in a recent report by Capgemini Consulting and Altimeter, summarise a paradoxical difficulty faced by most companies: they want open innovation, but it doesn't produce the sought-after effects. So how can these big companies best go about accessing it?
Open innovation is shackled by the "magical thinking" of startups
The main reason why open innovation strategies fail is tied to an important fact: they are shackled by the "magical thinking" of startups. Essentially, large companies believe that they are insufficiently innovative because they do not have enough contact with creative types: Steve Jobs' cherished misfits, the people that practice the "first principles thinking" promoted by Elon Musk, without facing the limitations and obstacles of large organisations. The objective of open innovation policies therefore often involves identifying one or more startups and integrating them into a large group process in order to bring their energy, ideas and new methods. However, these attempts mostly fail because large groups are ill-adapted to listen to partner or integrated startups.
What is more, the daily reality of venture capitalists is also discouraging: 98 percent of startups do not become highly successful – that is, they do not manage to identify and develop a sufficiently large-scale economic model to be able to capture or transform a market, and are thus condemned to survival, bankruptcy or resale in financial conditions which are greatly inferior to those initially expected. And when these young companies manage to convince one or more investors to participate in development, this figure improves yet remains far from guaranteeing success: less than 20 percent of backed companies were considered to be remarkable investments, having been the source of radical transformation of a market.
While many startups raise several hundred thousand pounds, big corporates devote billions of pounds to Research and Development and have access to resources which are often unique, in addition to experienced people and organised and large-scale capacities for innovation, yet have failed to find the formula for achieving major, radical innovation. They thus see startups as "dragon slayers" – a defeatist approach nearing magical thinking. Realistically, Uber has not yet eradicated traditional taxi companies and is itself being challenged by new companies, AirBnB has not replaced Accor and LendingClub has not pushed Wells Fargo out. These companies were not necessarily aiming to defeat traditional players, but rather to pre-empt or transform part of their market.
Understanding value chains and their potential or planned evolution
This is not to say that startups are not remarkable or that there are no undeniable successes. On the contrary, these companies are incredibly rich in skills, talent and enthusiasm. But large organisations should not be looking at these young companies individually to define their open innovation strategies. Instead, groups of startups are the key to transforming markets, as they reveal trends and echo the newly emerging needs of clients. Individually, young companies are – with few exceptions – sure to experience a lack of success. But they are driven by ambition, a process and determination that come from an entrepreneurial spirit together with strategic thinking, which is very often an innovative contextualisation of market experience and the observation of emerging potential opportunities.
In order to be truly innovative, a large company needs to adopt an approach which is similar to that of a venture capitalist, but within the context of the challenges facing a major group. It needs to identify emerging trends, and understand the developing ecosystem of actors and potential evolution in the value chain in order to create innovative applications with ultimately high stakes – that is to say, which have significant transformation potential in the years ahead.
Essentially, it is important to not focus on the wrong objective. While it is certainly useful to work with a few innovative young companies, this reinforces the belief that large groups do not have the structural ability for innovation, while not addressing the real factors. The main objective of open innovation should therefore be to understand value chains and their potential or planned evolution, with companies examining the swarm of startups around them and identifying potential shifts in their sector and reconfigurations in process that could be threats or opportunities.
About Aster Capital
Aster is a venture capital firm that focuses on energy, manufacturing and mobility sectors. It has offices in San Francisco, Beijing, Tel Aviv, Nairobi and Paris and manages over 300 million dollars in funds. Aster has invested in more than 50 startups over the last 16 years, including Solairedirect and ConnectBlue.