2,500 years ago Buddha said, “Everything changes, nothing stays the same.” For those of you who like your philosophy a little more contemporary, Mike Tyson says, “Everybody has a plan ‘til they get punched in the face.”
Well, everyone’s business is about get punched in the face!
Adrian Turner, head of the government’s Data61 organisation, is more brutal than most.
According to him, more than 40% of Australia’s jobs will be gone in 10 years. A CEDA report predicts the same thing, but gives us 13 years. Either way – everything is about to change, big time.
We know there will be losers. We have seen roadkill already: Nokia, Blackberry, Kodak … even the venerable Weight Watchers lost 90% of its market cap over three years because it missed the Fitbit-inspired wearables craze. While in Australia, Cabcharge, Darrell Lea and traditional media have all felt the icy hand of disruption crush their once strong business models.
It is the companies that continue to delight with product development that survive and win market share. Companies like Apple, Google, Amazon and, in the Australian context, Qantas and CBA.
If you want to win market share and avoid getting crushed, you need to innovate. Australia has a poor relationship with innovation, regularly appearing last (or close to last) on lists of most innovative countries.
The reason is cultural. When kids go to school in the US, they learn that America has achieved amazing things, like putting a man on the moon and inventing the Internet. I can remember the only thing we were ever taught about that Australia invented was the Hills Hoist.
Hardly the sort of stuff to set a young person’s heart racing with ideas of invention and entrepreneurship. Culturally, we have carried this image of ourselves for decades.
As a nation, we have not focussed on innovation until the past 10 years, when technology really started to disrupt our businesses. Now it is critical that we innovate.
We can innovate and be successful. Not just the inventions that are always rolled out – Wi-Fi, Cochlear and the dual-flush toilet (true story, the good people at Caroma did that with a $130K government grant). It is time to look at the remarkable businesses Australia has created in the last five or so years.
Names like Atlassian, Acconex, Freelancer, Siteminder, Hotels Combined, Red Bubble, WiseTech, Big Commerce, Avoka… the list goes on.
We have created many companies worth hundreds of millions of dollars and, in some cases, billions.
There is a lot of talk about needing our start-ups to be close to each other in Sydney or Melbourne, to create the next Silicon Valley, Alley (NYC), Wadi (Israel), Mountain (Cameroon) or Docks (Ireland).
While that may be helpful, our entrepreneurs have proven that it is not necessary to be in a major metro to succeed. Global leader in mobile invoicing, Invoice2Go, got to $100M+ in valuation from Copacabana Beach on the NSW Central Coast – or the “Silicon Banana Glen” as it will now be known.
Safety Culture has the world’s most downloaded safety app and is proudly headquartered in Sturt Street, Townsville – perhaps now “Silicon FNQ”.
As research for my book, I looked at 550 M&A and investment deals in Australian tech. A clear trend is that a lot of our start-ups are being fuelled by large increases in the amount of Australian and US venture capital investment here. However, the most striking metric for me was the massive growth in the number of deals involving large companies taking a minority stake in a fast growth company (i.e. not buying them 100%).
This grew from less than 20 transactions in 2012 to over 90 in 2016. This has been spurred on by the growth in Corporate Accelerators (NRMA’s JumpStart, LJ Hookers LJX-Lab and the recently announced Qantas AVRO Accelerator) as well as corporate venture groups (such as Telstra Ventures, NAB Ventures, Reinventure, etc).
Now, more than ever before, large corporates are looking to invest in fast growth companies. There are three main reasons:
First, large companies struggle to innovate by themselves at the pace that is required today.
Second, in a hyper-connected world, it is critical to partner with a number of other organisations.
For example, big data requires large disparate data sets, that’s why both NAB and Westpac have invested in data platform play Data Republic. With projects involving the Internet of Things, fintech or autonomous vehicles, it is necessary to bring together groups who have not previously needed to work together – software makers, payment gateways, connectivity providers, customer-acquisition channels and the like.
Third, innovating with a partner(s) is faster and more efficient. Procter & Gamble lead the world with their innovation partnerships methodology.
Currently, 35% of their product line has been created with partners. They have doubled their innovation output in five years while reducing their R&D spend from 5% of revenue to 3%.
All attributed to partnering. Finding the right partner to innovate with is not unlike finding a partner in real life. So, how do you win at The Innovation Dating Game?
There is a move away from 100% acquisition. It is not surprising. Marriage is hard – high risk with high reward.
While the figures vary, it appears that at least 50% of corporate acquisitions do not deliver on expectations.
Meanwhile in the human world, divorce rates have been trending downwards for years, currently at 30% in Australia. So it is more likely you will have a failed M&A strategy than a failed marriage.
Companies are looking to get involved with innovators not by buying them but by partnering with them. But the good fast growth companies are wary of large corporates. Taking a strategic investor (like a corporate) onto their share register may limit exit options and has the potential to stifle them with governance/reporting. Alternatively, getting into a channel or distribution arrangement can also be restrictive as the innovator ends up moving away from its product roadmap to developing for the big corporate channel.
Many great innovative businesses have been killed by getting too close to a big corporate.
So the corporates now need to woo the high quality innovators. Their money is not enough. They need to show they have an innovation-friendly culture.
The corporates need to prepare for The Innovation Dating Game. This is similar to someone starting out on the dating scene – you go to the gym, get a better haircut, smarter clothes, etc.
For the eager-to-partner corporate, this manifests as establishing internal innovation teams, holding hackathons, sponsoring innovation events and establishing innovation funds.
Hence the reason fintech incubator Stone & Chalk has 25 major corporate sponsors. The big corporate sponsors are on the hunt for innovative companies.
After the “looking” stage comes the actual dating, where each side cautiously checks the other out – not wanting to commit.
Almost every day we see another headline about these sorts of relationships.
For example, CBA’s sharing economy digital identity deal with Airtasker and Qantas’ deal with Airbnb.
If things are still progressing well, then perhaps engagement is on the cards. The parties may pursue more formal arrangements like giving API access to transaction platforms, mutual IP licensing or even a joint venture. One of the more successful examples is the deal struck by Swinburne University and Seek to create Swinburne Online – Australia’s most successful online university. It is not a pairing that would have jumped out immediately to business strategists, but the relationship has delivered stellar dividends to the venturers (even though their cultures are about as different as you can get).
The Dating Game is not necessarily sequential. You don’t always have to move through the stages towards an acquisition. You can date forever. In fact, you can date multiple companies while being engaged to others and still be looking for new relationships – all at the same time. Unlike in human relationships, polygamy is critical for a healthy business.
Ultimately when businesses do get punched in the face by disruption, the blow may well be softened by a solid innovation partnering strategy.
There will be many people inside BigCo who do not believe the company can innovate. The cynicism will kill any forward movement. It is critical to bring together a group of like-minded optimists and celebrate every small milestone.
It is worth remembering that when one member of the Coopers beer family wanted to get into the homebrew business in the 1970s, some family members were against it (as was Coopers’ traditional customer base, the pubs). Despite this, the company went ahead and created a homebrew business.
In the 1980s, the traditional Coopers beer business fell on hard times. What carried them through was the revenue from homebrew. Now, Coopers is the largest homebrew beer business in the world.
BigCo’s need to avoid the inno-veneer, where a BigCo tries to present itself as an innovative company by, for example, sponsoring incubators or innovation events, but in actual fact they are only paying lip-service to innovation.
Big corporates can’t just turn up at a co-working space, flash their big balance sheet around and expect the good fast growth companies to swoon. Fast growth companies are suspicious of the potential for large corporates to kill them with governance, etc. Therefore, BigCo’s need to show they are truly committed to innovation. This means having a clear strategy, an ability to accept failure, leadership who support innovation and, preferably, a proven innovation record.
BigCo’s need to be deliberate in identifying the sort of fast growth company they are looking to partner with. It is better to use the rapier than the broadsword – otherwise, a lot of time will be wasted talking to companies that do not fit. Best to avoid falling lemming-like towards trends like Internet of Things, fintech, big data etc. Just because a company has all the right buzzwords in its Information Memorandum, it doesn’t mean it is the right fit for your organisation.
Picture this: the CEO of BigCo has dinner with Eastern Suburbs friends on Saturday night, hears a pitch for a fast growth company, and suddenly strategy is thrown out of the window as the CEO pushes BigCo to invest in this company. It happens far more than you would think. It is a disaster for BigCo, blows morale out of the water and is highly likely to end in failure.
Doing a deal because of the strength of character of the senior executive who supports it rather than because of well thought out strategy is a danger zone. Avoid the bad MVP: Manager’s Vanity Project.
BigCo needs to be careful to choose a fast growth company with the right level of maturity. If the potential investee is too young in its development, it can be difficult for it to have a sustained partnership with Big Co. Think of the myriad of photos of Hugh Hefner with a young blonde girlfriend by his side. There is an incongruity which makes you wonder about the relationship. The same thing with BigCo’s – best to avoid being the old guy in the bathrobe arm in arm with the hottest start-up. It may not end well.