Umang Sota (MBA ’21) examines entrepreneurial efforts at large companies.
Almost ubiquitously, words like “Innovation” and “The Next Big Thing” are associated with startups. VC firms are competing every day to get a sliver of potentially the next Uber or the next Google. Up-and-coming talent and even the long-time industry veterans are happy to work for less just to get the opportunity to work for these startups.
But what about the big guys—hundreds of large, established companies that still make up a large part of the world’s GDP?
They are seen as dull, slow, bureaucratic. As per a study by consulting firm Innosight, the average tenure of companies on the S&P 500 has decreased from 33 years in 1965 to 20 years in 1990 and is forecasted to shrink to 14 years by 2026.
Many leaders of their time, such as Dell, Sprint, and Kodak, have been replaced by Facebook, Netflix, and PayPal.
So is it all doom for large corporates, and all the “cool” stuff will be done by the startups? We looked at some large corporates such as Walt Disney and Goldman Sachs to understand the different challenges corporates are facing and the models they are using in their journey to make “Innovation” a priority.
We all know the roadblocks that these big companies face in their journey to continuously reinvent themselves. While it is easy to say that these firms suffer from plain inertia and/or lack of vision, most of them are actually wrestling with more complex dynamics.
Disney, for instance, had been capitalizing on the revenue from selling streaming rights to Netflix and, in a way, helped accelerate the decline of its TV revenue. It’s not that Disney didn’t want to innovate or didn’t see tectonic plates shifting in the media industry, but it is challenging to balance various internal stakeholders’ immediate objectives and the company’s long-term vision.
Others, with their large-size organizations, get caught up in the political turf wars within their current pool instead of working together to enlarge the size of the pool. The issue of budget creeps up often as well. Even though most of these organizations have free cash flows to fund these innovative ventures, most LoBs (lines of business) are reluctant to give money out of their kitty until they see a direct and immediate return for the respective LoB, which can be hard for long-term innovative solutions. Goldman Sachs would have faced similar tensions when it first started working on a self-service digital platform.
And then there is the challenge of giving ownership and compensation in line with the individual contribution. Corporate structures struggle with giving employees/startup partners equity in new innovative ventures, which is the main pull of the startup world.
But the tides are changing, and these behemoths are using various channels to be part of the next innovation cycle.
Straight-Up Acquire/Corporate VCs: Some corporates want to focus on their biggest strength, which is in scale and execution. Thus, they acquire promising startups/small firms and commit resources, capital, and time to scale the startups tremendously.
Tata Group, one of the largest conglomerates in India through its holding company, Tata Industries, promotes and incubates Tata Group’s entry into new businesses. Through this engine, Tata Group has invested in several businesses such as Inzpera Health Sciences, a pediatric care startup, and Flisom, a Switzerland-based solar energy startup.
Such investments demonstrate that external investments and acquisitions are a win-win strategy for both the corporates and startups. Startups offer great entrepreneurial talent and excellent technology in their particular space. At the same time, these startups will benefit from the strengths of Tata Group including established market credibility and global relationships (both with suppliers and with customers), besides the ability to provide capital.
Further, a big advantage of having a corporate investor/owner comes from the fact that the corporate firms typically don’t invest to exit in five to seven years but rather to build a large business for decades. While every business has the pressure to deliver growth and profitability numbers, this long-term commitment to building a business (rather than a significant focus on valuation and IPO) can be immensely helpful in the success of the startup.
Accelerator Programs: Another way corporate organizations approach innovation is through Accelerator Programs, which essentially address the most common criticism corporate firms face (i.e., around the hierarchy, structure, and resulting red tape in some cases).
There are two types of accelerator programs. The first type includes those under which corporates mentor startups building adjacent services to help launch or scale in the market. This also provides newer revenue streams to corporates. Disney’s partnership with India’s ed-tech startup BYJU (valued at over $5 billion) is a case in point.
Others are those under which corporates give a platform for their own employees to break free from their day-to-day roles and work on fresh ideas or develop creative ways to deliver value for their customers through company investment and mentorship from senior management. Tata Communications’ program “Shape the Future” is built along the same lines and has successful offshoots like NetFoundry (which through its connectivity-as-a-service is enabling further innovation across its enterprise customers).
Made “In-House”: Acquiring startups or investing in accelerator programs in today’s world of highly liquid private markets can be very expensive. Also, in some cases, it may not be a strategic fit due to regulatory and other security concerns. Goldman Sachs, in addition to having investment teams look at new-age fintech start-ups, does invest heavily in in-house development. Their proprietary tools and information are highly sensitive and believed to be a source of their competitive advantage. Thus, spending resources in-house to continue building on their strengths can be a great strategy to stay competitive while controlling risk.
And honestly, in most cases, it may be that the particular corporate firm is best positioned to disrupt the industry. Disney is a classic example. Disney has unrivaled content assets in the form of Marvel, Pixar, Lucasfilm, and now 21st Century Fox. With the right approach to innovation through Hulu and Disney+, there is no reason Disney can’t be a market leader in this world of digital and new media, despite not being a first entrant.
While all these approaches have their own merits, they also have their own risks.
Most large corporates are, by design, meant to maximize profits and minimize risks. We have fortunately reached a stage where corporate firms recognize that the biggest risk of all is not to take any risks. So maybe, just maybe, we live to see these kingdoms return to their former glory.
Inputs for this article included primary conversations with Ankur Chawla (MBA ’20), Former Corporate Strategy & Business Development at Walt Disney; Irene Kwok (MBA ’20), Former Product Manager at Goldman Sachs; and secondary media coverage at https://www.tata.com/business/tata-industries,https://www.theinformation.com/articles/how-iger-broke-disneys-netflix-addiction.
Umang Sota (MBA ’21) is originally from India and has worked in product and business development roles in the enterprise technology sector across Asia and Europe. Prior to joining HBS, Umang was the Global Head of Product for Tata Communications’ Cloud & Data Center Services based out of London. In addition to technology, she is passionate about early education and has taken on active leadership roles in projects around education for the last 10+ years across India, Singapore, and the United Kingdom.