By Michael Jackson on Wednesday 25 January 2017
Those in the startup world are often quick to dismiss corporates. After all, they are bogged down with endless process and bureaucracy. And history has shown them to be vulnerable to disruption – sometimes on an epic scale. But not all industries are as dumb as the telecoms industry. As we search for the next big fintech breakthrough, it may turn out to be a more collaborative effort between corporates and startups rather than another story of David usurping Goliath.
Corporate accelerators and incubators can appear somewhat superficial – often looking like they were conceived by a branding team that has been instructed to boost its company’s innovation credentials. Indeed the true value of accelerator programmes is debatable, particularly for the startups involved. A truly worthwhile project isn’t one that needs to hit headlines and it certainly isn’t one designed to temporarily boost share prices or jump on a trend just for the sake of it.
For startups that do embrace collaboration with corporates - and there are many ways that can happen - there’s a lot to be gained by getting access to an established business with considerable knowledge, experience and influence. There are also significant technical benefits by partnering with an established provider, for fintech companies in particular, as well as reputational gains for both parties.
But it’s not just reputation, or access to talent and technology that makes collaboration particularly valuable in fintech. It’s also the reassurance that businesses (and investors) get from knowing that a plucky startup with some interesting technology also knows how to do business legally. An example of misstepping here landed rather hard earlier this year when LendingClub, the peer-to-peer lending platform, was investigated by the Department of Justice over potential disclosure failures, leading to the departure of senior executives and the CEO. Navigating a regulatory minefield in a highly-complex area like fintech is a lot easier when you’re partnered with a company that knows the terrain (and maybe even the regulators).
Interestingly, KPMG found that 94 percent of startups that had undertaken a collaboration would do so again. Furthermore, over half (54 percent) of the 137 startups questioned classed partnering with an established business as “essential for success and preventing failure”. A similar study conducted by Nesta found that access to finance, market knowledge, technical expertise and brand exposure were all incredibly useful benefits for startups that choose to work with corporates.
Enterprises actively seeking out collaboration with startups also have much to gain. Where established businesses move slowly and can be sluggish to spot new opportunities (and ways to capitalize on them), this is where a startup often excels. Working with a constant stream of new talent and technologies helps larger businesses stay up-to-date with trends.
While that sounds like a functional reciprocal solution to the problems of both startups and enterprises, simply paying ‘collaboration’ lip-service won’t result in any long-term gains. No amount of tours around ultra-modern offices, ‘catch-ups with founders’ or catapult schemes are going to provide the value of an ongoing long-term collaboration - whether that comes about through a joint venture, equity investment, a customer relationship or some sort of licensing agreement.
Of course, not all blue chip companies are sold on the notion of working with startups. Jamie Dimon was highly critical of startups, saying that they were careless with data, didn’t provide transparency on how it was used and opened users up to potential fraud (after Lending Club’s woes one could argue he makes some very valid points). But while JP Morgan Chase has the luxury of a vast and intelligent team of staff and developers working on new services in-house, there’s must surely still be value in getting some external perspective. Although collaborating with a startup for fresh ideas and then bogging the project down in red tape isn’t going to yield results either.
Companies that find a way to work closely with startups as a part of everyday business will ultimately be better equipped for adopting new technologies and will have a distinct advantage over businesses struggling under the shackles of legacy systems.
Blockchain is a great example of this innovation writ large. If banks and insurance companies want to build products and services using blockchain, then they’re going to need some outside perspective. And if they’re ignoring or dismissing blockchain, it’s very short-term thinking. While both startups and corporates may be wary of forming long-term partnerships, greater collaboration in fintech could ultimately pay serious dividends.
Formerly COO of Skype, Michael Jackson is a General Partner at leading early stage Mangrove Capital Partners. Michael spends his time looking for investable projects and advising portfolio companies as they grow into significant operations. He is also on the board of blockchain.info and is an advisor to AXA.