In a world where innovation is fast-paced and distributed, large, multinational corporations increasingly scour the globe to acquire cutting edge ideas, talent and technologies that they can leverage to grow their business. Investments in local startup ecosystems, in particular, provide an increasingly rich source of talent and technological potential and are fast becoming a staple in well-rounded corporate innovation programs. Many top international firms are either highly engaged in a variety of third-party accelerators or running their own accelerators as an extension of their corporate innovation strategies.
Given the growing appetite for innovation, you might think that getting large companies engaged in your local startup ecosystem would be like picking low-hanging fruit. However, recent DEEP Centre research suggests that striking effective partnerships between startups and large anchor companies is a lot harder and less straightforward than it sounds, especially in Canada.
In 2018, the DEEP Centre completed a broad analysis of the Atlantic Canadian startup ecosystem and worked closely with federal and provincial agencies to explore options for boosting corporate engagement with Atlantic Canadian startups and SMEs. This work highlighted the challenges related to a lack of innovation competencies at established firms in Atlantic Canada and proposed the development of a regional “corporate innovation catalyst” that would provide leadership to instill a stronger innovation culture within large companies, create a regional focal point for engagement, train startups on how to partner with large firms, and forge deeper trilateral connections between universities, entrepreneurs and corporations.
Some key findings from this research include the following:
Most Canadian corporations are inexperienced in corporate venturing and lack the corporate culture to support co-innovation with startups. Executives interviewed by the DEEP Centre talk frequently about the importance of corporate culture and how it is vital to have the CEO’s direct support for investing in or partnering in startups. “Although the board and the executive are aggressive when it comes to innovation,” said one executive, “there is a challenge in the sense that innovation is not a department that solves all your problems. It requires a whole culture shift from the top down.”[i] “Every organization has a different culture and structure,” said another executive “There is no cookie cutter approach that will work for all companies in all situations. It depends on the CEO, the desire, the regulatory environment, among other things.”[ii] Even companies that have made investments in start-ups and experimented with innovation outposts still face significant challenges. As one executive explained, “Although we have tried to insulate the innovation team, they are still part of the same bureaucratic structure and subject to same regulatory processes. The culture and speed of execution is very different for big companies, which has a huge impact on our ability to be entrepreneurial.”[iii]
Many of Canada’s corporations are innovation laggards and do not operate in the same sectors that BAIs and investors tend to prioritize. With financial services a clear exception, the sector mix of large corporations in Canada does not favour engagement with startups. Indeed, our resource-heavy economy is among the key reasons why large corporations have accounted for less than 10% of VC funding over the last five years. Comparing established Canadian corporations to their U.S. peers shows that even on a size-adjusted basis, the largest Canadian corporations contribute 10 times fewer resources to financing and purchasing VC-backed companies than their peers south of the border. Many of Canada’s key sectors, which include transportation, power generation, heavy manufacturing, forestry, mining and oil and gas, are renown for being late or reluctant adopters of technology. The companies in these sectors typically operate conservative, low-margin, commodity-based businesses where innovation cycles are slow and access to investment capital is highly constrained. Few of these large industrial companies have R&D teams, which means their in-house capabilities for evaluating and adopting new technologies are normally poor, and their skills for working with or investing in startups are immature to non-existent.
Canada represents a small market for large international companies. While many large international companies have regional headquarters in Canada, these sales-and-marketing focused operations are rarely focal points for innovation. The largest Canadian companies, on the other hand, are themselves global companies and make investments around the world to support innovation. Several executives noted that it’s hard focus the innovation energies of large international companies on a comparatively small ecosystem like Canada. Said one executive: “Our CEO is interested in making investments and partnering with startups, but we need to attract his attention. Canada is not even the strongest market for us. The US market is far bigger and Continental Europe is very significant. It’s hard to sell Canada as a place to invest in comparison.”[iv]
The fragmentation of Canada’s startup ecosystem creates many touch points for engagement and not enough critical mass. Canada’s startup ecosystem is not only small in comparison to our most direct neighbour, it is also populated by a large number of BAIs and universities that are spread across a large geography. As a result, there is no single place they can go to find a solid overview, in short order, of the country’s most promising startups, the technologies that are being prototyped, and the university-based research projects with commercial potential. As one executive put it, “One of the challenges is that the environment is extremely fragmented and there are almost too many opportunities for engagement.”[v]
Insufficient visibility into complex global supply chains impedes the ability of small firms to secure their first sales. While large firms often lack adequate data about their suppliers, small firms – and particularly young companies – often struggle with access, visibility, and establishing the correct contacts within large and complex organizations. Many of the case studies profiled in the study sought, first and foremost, to improve visibility and streamline access to opportunities for partnership and engagement. Companies such as Rogers, Google and TD, for example, have all implemented deliberate, systematic and appropriately-resourced approaches to SME engagement that ensure that they can proactively identify the highest-potential SMEs amongst a pool of thousands of suppliers and extract the greatest benefits from these relationships. A key focus of these efforts has been the creation concierge-like interface for SMEs s can reduce the complexity facing potential suppliers, accelerate the development of mutually beneficial relationships and enhance the ability of large firms to source ideas and innovations from a larger and more diverse pool of external contributors.
Lack of SME scale and capacity is an obstacle to doing business with large multinationals. These differences in scale and capacity can create risk and, by extension, reluctance on the part of large firms in Canada to engage with SMEs, particularly in highly regulated sectors such as finance and utilities. As one executive noted, “while SME’s play a key role with innovation, their size, capacity and quality controls are sometimes of concern or risk for developing partnerships.” Similarly, another large-firm representative noted, “we certainly see a niche for small companies that provide a unique product, local content or greater flexibility but the majority of our spend remains with large companies that have the ability to meet the capacity we are looking for.” Finally, one executive noted that SMEs are particularly disadvantaged in areas where large firms “are looking for scale and coverage” either nationally or internationally. While there are no quick remedies to address the problems associated with scale and capacity, these limitations are precisely the reasons why investments in supply chain development can make good business sense, particularly when SMEs are bringing highly novel and innovative products, services or components to the table.
Failure of startups to understand the intricacies or economics of large-scale industrial processes. A common observation offered by executives at large firms is that entrepreneurial startups often have an insufficient appreciation of the scale and complexity of the businesses they are marketing solutions to. As one forest products executive put it, “We are very cognizant of the intricate challenges of running an industrial process. It’s still difficult despite 100 years of experience. Many cleantech solutions simply haven’t been calibrated to the needs to large industrial applications.” Several executives also noted that while startup companies may have valuable IP and solutions, they are not often prepared (or able) to share the financial risk of demonstrating technologies with their larger partners. “They want a demonstration partner,” said one executive, “but the deals fall apart on financial terms because the risk of the investment all falls on the bigger partner.” When unproven technologies come with large upfront capital costs, the larger partner bears a disproportionate risk if the technology doesn’t work.
[i] Interviews conducted by the DEEP Centre, February – May 2018. Source anonymized for confidentiality.
[ii] Interviews conducted by the DEEP Centre, February – May 2018. Source anonymized for confidentiality.
[iii] Interviews conducted by the DEEP Centre, February – May 2018. Source anonymized for confidentiality.
[iv] Interviews conducted by the DEEP Centre, February – May 2018. Source anonymized for confidentiality.
[v] Interviews conducted by the DEEP Centre, February – May 2018. Source anonymized for confidentiality.