Breaking new ground is essential for German SMEs, otherwise companies will go under in the wake of upcoming disruptions. An alternative away from classic models is the strategically planned formation of corporate startups from within the company. Even if the company fails, a cultural change or a strategic reorientation can stand out as benefit factors.
Increasing pressure to innovate meets entrenched patterns
For decades, the German small and medium-sized enterprises stood for innovation. This trend now seems to have stalled. The major upheavals facing the labour market, as a result of AI and digitalisation in particular, pose a challenge. A study by the Saarland University entitled "Artificial intelligence in European SMEs: status quo, prospects and what to do now" (2019) paints a bleak picture and shows how much the disruptive potential of artificial intelligence is underestimated in German and European SMEs. [1] Moreover, as a study by the Bertelsmann Foundation in cooperation with the IW Consult research institute (10/2019) shows, only a quarter of the 1,000 companies surveyed have a culture of innovation, while almost 50 per cent of companies have little or no innovation.[2] However, innovations rarely arise purely by chance. Rather, it requires a strategic orientation that includes a systematic "trial and error" principle in order to regularly help shape new developments instead of running after them and being left behind.
In contrast to this, especially in medium-sized family businesses, there is often a lack of willingness to abandon old and successful business models or to modify them completely. Sluggish processes and, in some cases, the problem of company succession, which alone can fill entire articles and papers, also prevent a reorientation that does justice to the ever more rapidly changing (market) world.
Ways into the future - an overview
The classic variant of a company's further development lies in the company's own research and development department. Although this has not completely lost its relevance, there are some problems that often stand in the way of real innovation. For one thing, the department belongs to the company, which is why it is fully integrated into the corporate culture. Particularly in medium-sized companies, this is still rather hierarchically structured, the focus is on optimising existing processes. Accordingly, truly innovative ideas are very rarely pursued, also because this would require resources that cannot be provided by the department alone. Many entrepreneurs (and also many employees who have been part of the company for a long time) do not want to change anything about the predefined, successful processes and structures that have been optimised down to the last detail.
In order to circumvent these manifold problems, a company can enter into cooperations with start-ups, because these are mostly agile, future-oriented, creative problem solvers and have hardly any predefined processes and structures. However, this is both an advantage and a disadvantage. While the factors mentioned are extremely relevant if innovations are to emerge, they stand in contrast to the corporate culture and view described above. The values and attitudes of companies and startups rarely match, and the two also pursue different interests and goals. Start-ups want to scale quickly and achieve the most lucrative exit possible, companies want to set themselves up for the future in the long term. Also, "finding each other" is a big challenge, as the spheres of action hardly overlap. Start-ups operate in cities, for example in co-working spaces, and can be found at pitches and meetups. Medium-sized companies, on the other hand, tend to be located in rural areas, attend trade fairs and networking events. All these factors make cooperation between SMEs and start-ups more difficult or do not allow promising collaborations to develop their full potential.
Those who do not want to go in search of startups themselves use funds or family offices. In these cases, start-ups are more of an investment opportunity in the area of corporate ventures. In this respect, too, the investors can adapt or use innovative technologies or products of the start-ups. However, the cooperation is not as close, which rarely has an impact on the company's own corporate culture.
Innovation labs and hubs can be seen as an already elaborated possibility. These serve as a "forge" for new ideas by offering expertise and financial support in addition to a professional environment adapted to the requirements. The topic of innovation hubs has also already been discussed in detail in a different article.
Founding your own corporate start-up
A very promising option that seeks to combine the advantages of Innovation Hubs and Startups while avoiding the pitfalls is to build your own Corporate Startups. As temptingly simple as this path may sound at first, it turns out to be rather complex in reality. Many preparations are necessary to ensure that the venture does not fail before it really got off the ground. The three process steps described below for building your own corporate start-up are all equally relevant.
The first step is strategy development. This can start with workshops aiming to identify employees from your own company who show entrepreneurial tendencies and like to contribute their own ideas. It is precisely these business ideas and concepts that also need to be developed. A central, often underestimated factor is the complete conviction of the management to go this way and the communication of this attitude to the employees.
The second step is to lay the foundations for the successful establishment of a start-up. Here, the first step is to put together the team. Similar to the case of the Innovation Hubs, this should consist of internal employees identified in step one as well as external experts. In addition to capital of a relevant size, further resources from the parent company must also be provided. Optimally, these are resources that the company could afford to lose if a failure were to occur. Similarly, this also concerns the creation of working space and the provision of materials as well as access to corporate structures. Then it is important to iteratively develop the business idea (or ideas). Objectives of a quantitative or qualitative nature should also be set, on the basis of which a rough orientation is possible.
The third step involves the actual construction of the start-up. The need for possible additional financing from own capital or from external investors must be considered. The targeted development of processes and structures far away from the parent company are the other milestones. It is essential in this process that the support of the start-up remains guaranteed, even over a longer period of time. For this, it is advisable to have a member of top management involved who is laying a "protective hand" over the start-up so that it can grow calmly and autonomously.
What is the point of all this effort?
There are several answers to this perfectly legitimate question, not all of which are always equally applicable. The first relevant point, however, should apply to almost every corporate start-up: a high level of commitment and motivation among those involved. After all, what could increase employee motivation more than the opportunity to contribute one's own ideas and build something completely new without having to personally bear the risks that a founder usually bears? A cultural change can also be the result: Entrepreneurship becomes a fundamental part of corporate culture, which will have positive long-term consequences. In addition, the start-up can pave the way for a new corporate strategy and be the driver of a strategic change. In addition to these impact factors, which cannot be measured directly, there can of course also be economic success at the end of the road; however, the parent company should not focus exclusively on this. It seems much more important that corporate start-ups can generate or initiate innovations or new business models that create a competitive advantage over the competition and ultimately ensure the survival of the company.
Don't rush - take your time
Before a company decides to embark on the exciting, promising and - it should not be concealed - risky path of developing its own corporate start-ups, some "wishful thinking" or better "thinking traps" should first be defused in one's mind. For one thing: The entire venture requires time, money, resources and energy. Both the numerous preparatory steps and the further support of the start-up are not for "free", but rather costly. Of course, there is no guarantee that the start-up will make profit in the end. Under certain circumstances, it was an attempt that failed and left behind "only" intangible profits. But even if the start-up should become successful and produce profitable work, it will take several years before said successes occur. Patience, perseverance and trust are therefore required.
No one should start an enterprise of this scope with "rose-coloured glasses", but rather with careful consideration and realistic expectations. Founding your own corporate start-up is in almost all cases not a sprint, but a marathon. This can be exhausting and some races have to be abandoned before the finish line because it is simply unrealistic to reach it. In others, you have to persevere to the end to reap the rewards of your hard work. Recognising which of the two variants applies when, is the great art that must be mastered.
Co-Authors: Robert Bauer, Christian Wewezow
Sources:
[1] https://www.uni-saarland.de/universitaet/aktuell/artikel/nr/12967.html
[2] https://www.handelsblatt.com/politik/deutschland/bertelsmann-studie-innovationskraft-sinkt-der-deutsche-mittelstand-verschlaeft-die-zukunft/25145334.html?ticket=ST-1005277-eRzD9KKVJdivFNtwqdkb-ap3