Interview with Ana Carolina Alex, Co-Founder of 27pilots.
Nike does it, Microsoft does it, even American Express and PepsiCo do it. Corporate innovation programs directed at startups is old news. We are talking about accelerators, investment funds, or innovation labs. Sure, the synergy between corporate and startup is a great recipe for disruptive innovation. However, is the traditional Venture Capital model truly the best strategy to achieve it? BMW Startup Garage and 27pilots is a living proof that innovation can be reinvented. According to 27pilots, the new standard for corporate venturing is the Venture Client model. To find out more, we reached out to Ana Carolina Alex.
Let's start with a little introduction. Carolina, could you tell me a little bit about yourself?
Carolina: I’m Carolina from Germany. In 2016, I joined the BMW Startup Garage. It was launched a year earlier. So, by the time I joined it was still in its very early stages. Last year, we decided that what we did in the BMW Startup Garage is so great and successful that we have to make it accessible to the whole world. That’s why we decided to found 27pilots. So, I’m a co-founder of that new company. What we do is that we help corporates to set up and operate Venture Client units.
What is the Venture Client model?
Carolina: So, the inventors of the Venture Client model are my co-founders Gregor Gimmy and Matthias Meyer who worked as Innovation Managers in BMW. What they did in 2014 was talk to a lot of people at BMW, reflect and decide on how can BMW work with startups. They wanted to find what model makes sense and not just go for one of the common models like accelerator or incubator, or whatever existed at the time. They really thought: "Okay, what can we do that would be highly attractive for startups?", and said, "We can be a good client for them because all startups need clients." That was the birthdate of the whole idea that if a corporate or a company becomes a client of a startup in an early phase, it becomes a Venture Client because it has a venture to do so. If you want to do that at scale, you have to introduce Venture Client units like the BMW Startup Garage. That means that with the BMW Startup Garage, and now with the other Venture Client units, we set up an organization, process, brand, and rules that enable the corporate to work with startups at scale in a supplier-customer relationship.
Am I correct in assuming that you're the pioneers of this kind of approach?
Carolina: Yes. Although, corporates always worked with startups. Even before the BMW Startup Garage, BMW worked with startups, they had client-supplier relationships. However, establishing a model around that, the process to scale it, giving it a name Venture Client, we are pioneers in that, absolutely.
Why is it an important change to the corporate-startup relationship?
Carolina: It's important because it's kind of a mind shift. There is this belief around a lot of corporates and even small-to-medium size businesses that they can only work with startups if they invest in them.
So, they set up their investment units like accelerators, corporate venture capital or something like that which is very expensive and risky. It also limits you to a very limited number of startups because you can only do a very limited amount of investment due to budget restrictions. The other, a maybe more important side of it, is that there are many startups out there that don't want an investment from corporates and these are often the good startups. Not every startup is looking for investment at every stage of time, right? In the life cycle of a startup, there are only a few moments when they look for investments, so you’re also limited in that way too.
“What usually is not a part of the investor’s job, however, is to efficiently connect these startups to the business units within the corporation.”
So, on the same note, do you think the Venture Client model also changes the nature of the relationship between the startup and corporation (as compared to the traditional corporate-investor model)?
Carolina: Yes, absolutely! When corporates are acting as financial investors with strategic KPIs, they really focus on finding good investment startups and that’s their main job–doing good investments and hoping that the whole thing will work out. What usually is not a part of the job, however, is to efficiently connect these startups to the business units within the corporation. So, it's like another wall that the startup has to go through. It becomes another innovation department for startups that they have to enter to get where they actually want to be, which is the core business of the client. With the Venture Client model, on the other hand, you kind of take away this wall because you don't do any projects without the business units. That’s the whole idea–to go directly into the units.
What does it take to launch the Venture Client model successfully? What would be your top tips?
Carolina: So, my tips besides contacting us… Maybe one would be to have a clear focus with regard to the objective behind your Venture Client project. The objective behind it should be to solve the challenges of the corporation by using the solution provided by the startup. That's the whole idea behind it. It's not marketing. It's not a cultural change. If you really focus on that and focus on the Venture Client model, you have a really clear value proposition. Don't do ten things at the same time: Accelerator, Venture Client unit, incubators, and community building. Don’t do all of it at the same time with the same people. It's really a waste because you can get so efficient if you focus on one thing and do it well.
Could you tell us about some other important lessons that you learned along this journey?
Carolina: Yes, I mean one of the very important takeaways is that the Venture Client unit shouldn’t be used as a tool to define strategy. The strategy should be defined beforehand. So, at 27pilots, we demand the business units we work with to clearly define what they want. A fictional example: we know that we are looking for predictive maintenance software that can do this and that because this is something that the corporate client wants to implement. We don't want to come with the idea by saying “Hey, here's a startup that does predictive maintenance, isn't that something cool for your company?” If they then say, “Oh, that could be something, let's try it out and see how it works.” We say “No. First, really involve your strategy department and make a decision on whether this is something you want to do and allocate your budget to”.
Why is that important, Carolina?
Carolina: This is one of the lessons we learned. In the beginning, we had projects like that. We had very innovative, creative and open-minded people in the company that just wanted to try things. “Oh, that would be a cool function that the startup suggested there. Let's try it out and build a prototype and then show it to management and let them decide if this is something that works.” This is something that could work. However, in our case, 90% of the time these kinds of projects just ended up in the bin like “Oh, nice project, it was fun and everything worked fine but we couldn't push it further.”
“At the moment, where the whole ideation process is over and the corporate knows what they want to do, we can come with solutions.”
Why didn't it work?
Carolina: If you look at the innovation funnel, it seems normal. In the beginning, you have 50,000 ideas coming in and in the end, you have 1,000 ideas that survive and actually become an innovation. Now, the question is where do you want to put your focus and your effort. We saw that with the Venture Client unit, the place where we can bring the most value is right after this ideation process. At the moment, where the whole ideation process is over and the corporate knows what they want to do, we can come with solutions. Of course, because you’re much further in the whole innovation funnel, the probability that this initiative will be successful is much higher. We could start earlier and it would probably also bring value to the corporate, but if we can choose, we go further in the funnel. I think that this is also fairer for startups because sometimes I fear that they are being used as an input for strategy or input for cultural change and similar stuff. And I think it's not fair because they want to do business, they want to sell their product and so, I think, this is a sweet spot to work with startups. We can start much earlier but then we make sure to be very transparent about it.
What role does the company culture play in the Venture Client model?
Carolina: There's this belief that there is a problem between startups and corporates because they have such a different culture and there is a culture clash. That is not our experience. We believe that every company has its own individual culture. So. even large companies working with one another have different cultures that clash. If Bosch works with Continental, they will probably have some different culture around the collaboration. So, I don’t think that this is a special thing for startups.
In the beginning, my hypothesis was that it is good if the corporate has innovation at its core; if they are an innovative company that has an innovative product. Now, I say that this is not necessary. For instance, one of our recent clients is in the cement industry. It isn’t a very innovative product and I wouldn’t say that they had innovation at their core. In fact, in some ways, it’s even easier to set up a Venture Client unit from there because the company likely to have a specific problem, for instance, “my trucks don’t arrive on time and I need a solution”. Then, we come in with a very innovative solution brought by a startup that is highly flexible, brings a lot of great technology and resources. Most importantly it delivers what the corporate needs and they are fast and flexible.
“The startups we work with often have more resources than the corporate.”
What do you mean by saying that startup brings a lot of resources?
Carolina: Many people say that startups have too few resources and that we have to help the startups and so on. I think that's also often not true. Most startups we are targeting have to have at least some initial venture funding. The spectrum here is really wide: from startups that just graduated from a good accelerator to a startup with C-series funding. The sweet spot is around series A, that’s where most startups come in. So, the startups we work with often have more resources than the corporate.
“Startups are extremely focused. They have one niche problem that they solve. They usually have the best people in the world that can solve that particular problem.”
How come? The corporate has a thousand problems to solve, right? There are a thousand things that need new solutions, innovations, and work. So, they have to distribute their budget and their resources to all these different projects that are going on. Startups, on the other hand, are extremely focused. They have one niche problem that they solve. They usually have the best people in the world that can solve that particular problem. I don’t know, let’s say it’s a machine learning algorithm for gardening. [Laughs]. Probably they have the best people in the world when it comes to machine learning for gardening. Then if they’re good at solving it, they can use their profit to develop the technology even further. Also, in most cases, it's quite logical why they are able to raise more money for that one niche problem than the corporate. If the corporate solves this problem internally, usually the only client the corporate can sell it to is itself.
That makes sense.
Carolina: Then, you end up with a business case in which you cannot invest a lot of resources. A startup can sell the solution to everyone. So, the business case is a totally different situation and that's why startups find VC’s that put in so much money in them. That's why we often say that startups have more resources to tackle a particular niche problem than corporate.
That's a very interesting and useful observation. Thank you for sharing your insights with us. Where can people find you?