By Mark Esposito and Terence Tse

Entrepreneurship is the key to economic growth, and right now, Europe’s economy difficulties need solutions. This article discusses the challenges that businesses, particularly those in the Eurozone, face in a collaborative innovation partnership, and how to overcome these challenges in order to form the most beneficial partnership.

 

The idea of collaborative innovation in Europe takes its cue from the World Economic Forum’s long-term studies on entrepreneurship and drivers of entrepreneurship. Europe in particular has been a region of interest for increasing entrepreneurship-based activities because the continent has experienced significant difficulty in getting out of the financial downturn that began in 2008. Whereas the US has slowly but surely been improving its unemployment rate and productivity, countries in the Eurozone have struggled, especially countries such as Italy and Greece, where the threat of slipping back into recession looms continually.

As entrepreneurship has long been regarded as a path for economic growth, entrepreneurship has been proposed as a specific course of action to address Europe’s economic woes. Fostering entrepreneurship in Europe for the most part is particularly ideal as the continent has the elements necessary policy-wise and resource-wise for creating innovative new businesses that can offer the potential for new markets and new products and services. At the same time, however, issues specific to Europe such as restrictive regulatory frameworks and lack of access to capital have also stifled entrepreneurial activity. Entrepreneurship as a concept cannot thrive on its own; it is similar to a plant seed that must have the right factors in order to bloom.

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In order to understand the factors needed to support entrepreneurship, researchers at the World Economic Forum and knowledge partner A.T. Kearney embarked on identifying the mechanisms of entrepreneurship. Through their work, they pinpointed three phases in the lifecycle of entrepreneurship: the first phase is to promote entrepreneurship – to attract individuals who may not have otherwise considered becoming entrepreneurs or joining entrepreneurial enterprises. The second phase is capitalisation, or to ensure that access to capital is available to entrepreneurs to get their businesses off the ground. The last phase is to scale these businesses and the ideas that come with them – to be able to manage high growth and increase output quickly in order for new businesses to succeed.1

The objective of this article is to address the final of these three phases of entrepreneurship: scaling up. The ideas gathered in a recent World Economic Forum summit of researchers, business leaders, and academics led to one main overarching idea: collaborative innovation. In Europe, collaborative innovation has the potential to change the status quo as it offers an alternative to future and present entrepreneurs who may have become frustrated or have had their momentum stopped by the slowing constraints of regulatory policies and government oversight.

 

What is Collaborative Innovation?

Collaborative innovation is the partnership between a young, entrepreneurial firm on the move and an established, large corporation. The goal of these partnerships is to commercialise new ideas and technology, with the intent of promoting economic growth and improving regional competitiveness. The idea behind collaborative innovation is that the partnerships are mutually beneficial: entrepreneurial firms gain assistance in scaling up – access to markets and capital – while established firms enhance their competitiveness by adding or expanding their businesses through technology and market innovations gained from collaborative innovation. However, collaborative innovation comes with its own set of challenges, which the researchers at the World Economic Forum and A.T. Kearney have divided into five categories. We will describe each of these challenges in turn, along with ways to overcome them, followed by ideas on the role that policymakers can play to help facilitate collaborative innovation.

 

Five Challenges to Collaborative Innovation

The five challenges to collaborative innovation are: 1. understanding the business case for collaborative partnerships; 2. utilising the full potential of networks; 3. constructing flexible partnership structures; 4. defining mutually beneficial intellectual property (IP) agreements; and 5. preparing management and employees for shifts in company culture in a collaborative environment.

 

1. The Business Case for Collaborative Innovation

With rapid improvements in technology and business efficiencies, markets are much more likely to evolve more quickly than ever before. Within this macro-environment, businesses both large and small face a continual uphill climb to stay competitive and relevant. For this reason, constant innovation – be they product or process innovations or incremental or revolutionary innovations – is necessary. Collaborative innovation offers an opportunity for both young firms and established companies to fill the gaps in either how their businesses are run or how they meet the needs of their customers. For young firms, lack of capital or access to markets in a very sensitive, early stage of existence can severely inhibit the chances for long-term survival. Meanwhile, many established firms have problems with too much red tape that prevent them from having the type of agility that small startups have to produce and test novel ideas and approaches. They are obliged to many layers of management that causes large firms to distribute resources in a way that rarely prioritises or rewards the risk that comes with R&D spending.

Collaborative innovation offers an opportunity for both young firms and established companies to fill the gaps in either how their businesses are run or how they meet the needs of their customers.

With collaborative ventures between young and established firms to generate and commercialise innovation, however, both of these business predicaments may be addressed. Put differently, the economic incentives are unique for each type of firm: for the young firm, sharing and co-creating business innovations with an established firm can gain them access to capital and to markets, credibility through brand recognition, and management expertise in scaling and distribution. For the established company, partnering with a young firm allows the business to let its partner take the risk of doing discovery and R&D – and also because they can accomplish these goals more quickly. In addition, the established firm gains knowledge in new areas.

In the beginning, the value and business case of collaborative innovation for small, young firms will be more evident – they are in a position to benefit immediately from marketing and operational and scaling know-how. For established companies, the benefits are less obvious in the short-term, but the most successful businesses understand that blockbuster products and services don’t appear overnight, and require an investment of time and effort. For instance, the Coca-Cola Company developed the program Coca-Cola Founders to pursue innovation by means of partnering with an experienced entrepreneur from any country. The entrepreneur is given funding and an advisor/mentor and access to Coca-Cola’s core business units such as marketing or distribution.2 In this collaboration setting, problems are jointly identified and solutions attempted by the entrepreneur. When the startup is ready to start, Coca-Cola provides additional funding to nurture the new business. Although Coca-Cola invests funds and resources while not receiving any ownership stake or rights to the IP in return, they perceive these partnerships as an opportunity to find ways to expand the brand creatively for the longer term.3

 

2. Utilising the Full Potential of Networks

In Europe, networks are fundamental for entrepreneurial businesses seeking to scale up their ideas and innovations. With twenty-eight countries each functioning as a different market complete with its own distinct legal and regulatory obstacles, collaboration with local, established firms offers a way to enter new markets without having to start from square one. For the young firm, the right type of partner will be a reputable business that has a long-term view of operating the company, and therefore more likely to think strategically about their partnerships. Moreover, businesses which understand that market conditions and preferences are constantly in flux are much more likely to be open to collaboration because they can see the value that startups offer – experimentation, pilot programs, risk-taking, and agility. In other words, established businesses that understand the business case for collaborative innovation are ideal for partners because they understand the value and are much more likely to be helpful in providing the necessary resources required for a young firm scale up. On the other end, location and proximity to young firms is more important for established firms for a collaborative partnership – while young firms have yet to discover core competencies or their markets, established companies have existing markets and customers to serve that may have an impact on the type of strategic partnerships related to collaborative innovation to form.

The ideal network for finding strategic partners and promoting collaborative innovation efforts includes firms, advisors, intermediaries, capital providers and service providers who understand the goals of collaborative innovation and have themselves the capacity and networks to make the right connections and play the role of mediator. Partnerships within such a network also foster a commitment and responsibility to achieve goals so as to protect those relationships. Ultimately, the networks should form an ecosystem within which each actor is part of an interconnected value web.

The ideal network for finding strategic partners and promoting collaborative innovation efforts includes firms, advisors, intermediaries, capital providers and service providers who understand the goals of collaborative innovation and have themselves the capacity and networks to make the right connections and play the role of mediator.

Additionally, joining and reinforcing the capacity and effectiveness of already existing innovation-centric networks and ecosystems will aid some firms in developing and improving partnerships. EIPs, or European Innovation Partnerships, a European Commission initiative, are one place where small and established firms can add to the diversity of actors seeking mentorship, partnership, and better coordination of resources and participants.4 Conversely, a firm may elect to create their own formal ecosystem. One example is Lufthansa. With their headquarters based in Cologne, Germany, the company decided to start a unit called the Lufthansa Innovation Hub in Berlin, where there is a bigger startup scene. Using the power of their own reputation as a technology giant to attract entrepreneurs and startups, the Lufthansa Innovation Hub scouts specifically for travel-oriented tech startups with the intention to co-create new products and services, and also to gain knowledge on startup tech technology trends for the main corporation.5 Networks, for both young and established firms, are an important factor for collaborative innovation, whether it is drawing upon the aid of colleagues, creating an innovation ecosystem, or adding value to an existing network or ecosystem.

 

3. Creating Flexible Partnership Structures

Optimal partnerships require a flexible structure in order to strike a balance between two objectives of collaborative innovation: to quickly capture moving market opportunities while also carrying out due diligence and negotiations in order to fulfill the needs and protect the interests of both partners. As one partner will be a young entrepreneurial firm and the other partner will be an established firm, each will have different interests. As a result, to reconcile those differences, having clear sight of a vision and understanding the objectives and business case for collaborative innovation is the first step towards having an effective partnership. With that in mind, a partnership structure that is flexible to be able to react to various scenarios will be the most fruitful setup for both firms.

It should be noted that partnership structures are different from corporate legal structures. Partnership structure refers to the conditions and boundaries within which the two companies work together. They can be formal or informal, and range from knowledge-sharing to acquisition. Technology innovation ecosystems have become a popular structure for corporations to collaborate with technology startups. For instance, in the technology sector, Microsoft works with startups through Microsoft Ventures, a three-pronged program that includes providing standard accelerator services such as office space and mentors as well as free use of Microsoft products, access to Microsoft’s network and corporate partners, and seed funding for those startups ready to scale.6 GE Healthcare has a similar structure with Healthymagination, a strategic fund dedicated to funding startups. GE has the opportunity to become a more involved partner once a startup is ready for commercialisation. For instance, one of their first startups, Check-Cap, eventually established a formal relationship with GE when they needed a partner to manufacture their product.7 In summary, partnership structures should be able to minimise risk while taking advantage of fleeting market opportunities.

Moreover, the level and type of collaboration will also depend on the industry and the demands of technology development. For instance, capital-intensive industries may choose to focus on early-stage collaboration so that they may test and assess technologies on their internal platforms before moving on to invest more on a potential innovative technology. A consortium approach – as opposed to a collaboration between just two companies, a young firm and an established firm – is less nimble and thus makes more sense only in particular industries where the level of complexity requires more than two companies to innovate.

Finally, time should also be a factor in the structure. Innovation takes time to make an impact, and established companies should concentrate their capabilities and resources on how to scale up impactful innovations.

 

4. Defining Mutually Beneficial Intellectual Property Agreements

Once a young firm has developed its intellectual property to a point where it has value, how to share its value becomes an issue in a collaborative innovation partnership. Entrepreneurs in young firms see IP as their most important asset, while established firms view everything as for sale. Interviews conducted during the World Economic Forum’s research indicate that corporate attitudes toward IP negotiations were perceived by heads at the new firms to be ‘unfair’, leading to a breakdown in goodwill and unwillingness to continue open collaboration in the longer term. Established firms should attempt to understand the young firm’s point of view when negotiating IP agreements or even share their own technology. In the case of pharmaceutical industries, companies like Eli Lilly & Co. licenses drugs to startups with an option to buy back the drug if they successfully pass some clinical trials.

Other ways the young firm can feel in control of their IP is to document interaction. Informal, oral conversations should be summarised in writing after discussion to provide clarity on the information shared and evidence in the case of an IP dispute. Entrepreneurial firms can also protect themselves by having experienced and sophisticated investors and members on their board of directors. Governance controls, material transfer agreements and restrictive covenants should all be reviewed and approved by the board. IP and specifically, IP protection, is progressively becoming a playing field for competitors. While successful IP litigation can generate licensing revenue for companies and enfeeble competitors, such as in the case of Apple versus Samsung, using IP protection as competitive and comparative advantage runs counter to advancing innovation and cooperation.

In Europe, there is another specific set of challenges in IP protection. With the exception of startups in the UK, web startups cannot patent text and datamining (TDM) inventions under European national copyright legislation. This means that startups are limited to treating their software and algorithms as trade secrets, which have virtually no legal protection. With the increase of human capital movement across borders and higher risk of compromised IT systems, safeguarding trade secrets is an unreliable way of protecting intellectual property.

 

5. Preparing Employees for Shifts in Organisational Culture

Culture is an important component in collaborative innovation. Attempting to merge two separate identities into a single identity is neither the goal nor a necessity. Instead, finding ways to relate to each other creates an environment for working together as partners, and not as one symbiotic creature. Now that industries and disciplines are no longer as solid as they once were, firms are aware that they need partners in order to stay innovative and competitive. For collaborative innovation, more than likely the two partners will have different styles of operating, especially since one partner is a young firm and one partner is an established firm. Entrepreneurial firms tend to focus on completing things quickly, as popularised by the lean startup method. This could be a good influence for entrenched firms who have more layers of management and are used to requiring more time to implement a project, but in most cases, what the established firm can do to assist in successful collaboration is to be open about what they seek from collaboration.

In order to achieve their goals, an established firm needs to be comfortable about being more open about sharing competitive insights and information. Building trust goes a long way toward developing the potential of the partnership. The first step towards doing so is to work together to find common ground on the vision and strategic goals in the next three to five years that first made the case for partnering together. This essential step goes a long way toward eliminating apprehension or hostility about collaborating together. Ideally, each firm would look for ways they can help the other firm reach their goals, as well. These sessions will ultimately help build internal support for collaboration. Another idea includes employee exchanges, where employees from the startup and employees from the corporation switch positions to increase understanding of the other firm’s culture and way of working, as well as to gain business knowledge. Being ready to allow mistakes to happen and accept failures along with small wins will also keep a collaborative culture intact.

 

Public Policy Can Aid Collaborative Innovation

Building trust goes a long way toward developing the potential of the partnership. The first step towards doing so is to work together to find common ground on the vision and strategic goals in the next three to five years that first made the case for partnering together.

Public policy can help spur collaborative innovation by providing flexibility to markets. For businesses to thrive, public policy should provide a framework that facilitates businesses’ ability to run smoothly. In order to create the right framework, creating a conversation with multiple stakeholders will provide the necessary perspective on what businesses need, such as fiscal and legal structures that encourage rather than discourage collaborative innovation. For instance, patent registration is one area where policymakers can have a substantial effect for innovation. Patent costs are too high; patent attorneys and translation make up 94-99% of the cost; one way policy can lower costs is through simplifying the system and harmonisation. To create a multi-generational entrepreneurial outlook, policymakers can also use the classroom setting to create future entrepreneurs by teaching them the fundamentals of starting a business as well as how to become comfortable with risk-taking and with the possibility of failure.

 

Conclusion

The greatest challenge for young firms and collaborative innovation is in choosing the right partners. This may mean partnering with several firms, as long as the young firm does not stretch itself so much that it has trouble managing either its partnerships or resources. Questions a young firm may ask to help them select partners include how a potential partner can aid the firm in reaching its goals, and whether or not there are many barriers to getting started. Additionally, young firms must not underestimate the skill and investment of time it takes to build and access networks. Although larger corporations may have more leeway in choosing partners initially, a young firm will have more leverage once it develops its own value proposition.

The greatest challenge for young firms and collaborative innovation is in choosing the right partners.

For collaborative innovation to help the established firm meet its business goals, commitment from top management is imperative. Additionally, the established firm should stay aware of any tendency to slip into attempts to assimilate the smaller firm into the larger firm, as it will go a long way for the partnership – the startup needs to maintain creative mentality and entrepreneurial drive that is necessary for innovation but easily diluted in a larger firm. Trust, structure, and comprehension of the strategic goals that each partner strives to gain from collaborative innovation is key to working together and creating value.

Collaborative partnerships are meant to be mutually beneficial – young firms gain access to global networks and resources while large companies gain new knowledge and potential new markets to drive their own renewal process. Given the infinite scenarios and needs, the idea of collaborative innovation is, above all, to be flexible and open about possibilities.

About the Authors

Author-Site3Dr. Mark Esposito is a Professor of Business and Economics, teaching at Grenoble Ecole de Management, Harvard University Extension and IE Business School. He serves as Institutes Council Co-Leader, at the Microeconomics of Competitiveness program (MOC) at the Institute of Strategy and Competitiveness, at Harvard Business School. Mark consults in the area of corporate sustainability, complexity and competitiveness worldwide, including advising to the United Nations Global Compact, national banks and NATO through various Executive Development Programs. From 2013-14, Mark advised the President of the European Parliament, Martin Schulz, in the analysis of the EU systemic crisis and worked as cross theme contributors for the World Economic Forum reports on Innovation Driven Entrepreneurship. He tweets as @Exp_Mark

Author-SiteDr. Terence Tse is an Associate Professor of Finance, ESCP Europe Business School & Head of Competitiveness Studies at i7 Institute for Innovation and Competitiveness. In addition to working in governmental advisory capacity, Terence writes extensively and appears on television programmes in China, France, Greece and Japan, discussing the subjects of competitiveness and economic affairs. Before joining academia, he worked in mergers and acquisitions at Schroders, Citibank and Lazard Brothers in Montréal and New York. Terence also worked as a business consultant both independently and at Ernst & Young. He tweets as @Terencecmtse

 

Endnotes

1. World Economic Forum. “Collaborative Innovation: Transforming Business, Driving Growth.” World Economic Forum, 2014.

2. Ron Miller. “Coca-Cola Hopes Its Startup Incubator Is The Real Thing.” November 10, 2014. http://techcrunch.com/2014/11/10/coca-cola-hopes-its-startup-incubator-is-the-real-thing/.

3. Ibid.

4. European Commission. “European Innovation Partnerships.” http://ec.europa.eu/research/innovation-union/index_en. cfm?pg=eip.

5. Lufthansa Group. “Lufthansa Group unveils raft of quality and innovation actions.” July 9, 2014. http://www.lufthansagroup.com/en/press/news-releases/singleview/archive/2014/july/09/article/3077.html.

6. Wilhelm, Alex. “Microsoft brings BizSpark, Bing Fund, and its accelerators under one roof.” The Next Web. June 25, 2013. http://thenextweb.com/microsoft/2013/06/25/harmonized-under-the-name-microsoft-ventures-microsofts-startup-activity-set-to-rise-with-increased-investment-3-new-accelerators/.

7. Parmar, Arundhati. “GE Healthymagination Fund looking for startups to invest in.” http://webcache.googleusercontent.com/search?q=cache:8IP7UHrJ7c0J:https://www.kauffman.org/resource-center/ge-healthymagination-fund-looking-for-startups-to-invest-in.aspx+&cd=1&hl=en&ct=clnk&gl=us.

 

References

1. Butler, David. “From Startup to Scaleup: the Next Wave of Innovation.” August 6, 2013. http://www.coca-colacompany.com/innovation/from-startup-to-scaleup-the-next-wave-of-innovation.

2. Butler, David. “Startup Refreshed: Why Coke is Joining the Entrepreneurial Revolution.” May 30, 2013. http://www.coca-colacompany.com/innovation/startup-refreshed-why-coke-is-joining-the-entrepreneurial-revolution.

3. The Coca-Cola Company. “Coca-Cola Founders.” http://coca-colafounders.com/.

4. The Economist. “Apple versus Samsung: Copy That.” August 25, 2012. http://www.economist.com/blogs/schumpeter/2012/08/apple-versus-samsung.

5. European Commission. “European Innovation Partnerships.” http://ec.europa.eu/research/innovation-union/index_en.
cfm?pg=eip.

6. GE Healthcare. “About – healthymagination.” http://healthymagination.gehealthcare.com/en/about.

7. General Electric. “Healthymagination | GE.com.” http://www.ge.com/about-us/healthymagination.

8. Hughes, Jonathan, and Weiss, Jeff. “Simple Rules for Making Alliances Work.” Harvard Business Review, November 2007. https://hbr.org/2007/11/simple-rules-for-making-alliances-work.

9. Jarvis, Lisa M. “Licensing Out.” Chemical and Engineering News vol. 92:12, March 24, 2014.

10. Krasny, Jill. “6 Companies That Want to Invest in Your Startup.” Inc.com. February 14, 2014. http://www.inc.com/jill-krasny/six-companies-that-want-to-invest-in-your-startup.html.

11. Kurtz, Nathan. “Microsoft Ventures: The Original Startup Goes Back to Its Roots.” Entrepreneurship. http://www.entrepreneurship.org/resource-center/microsoft-ventures-the-original-startup-goes-back-to-its-roots.aspx.

12. Lufthansa Group. “Co-creation hub.” http://hub.lh.com/.

13. Lufthansa Group. “Lufthansa Group unveils raft of quality and innovation actions.” July 9, 2014. http://www.lufthansagroup.com/en/press/news-releases/singleview/archive/2014/july/09/article/3077.html.

14. Meisner, Jeffrey. “Announcing Microsoft Ventures for startups to build, innovate and grow.” Microsoft. June 25, 2013. http://blogs.microsoft.com/blog/2013/06/25/announcing-microsoft-ventures-for-startups-to-build-innovate-and-grow/.

15. Miller, Ron. “Coca-Cola Hopes Its Startup Incubator Is The Real Thing.” TechCrunch. November 10, 2014. http://techcrunch.com/2014/11/10/coca-cola-hopes-its-
startup-incubator-is-the-real-thing/.

16. Parmar, Arundhati. “GE Healthymagination Fund looking for startups to invest in.” http://webcache.googleusercontent.com/search?q=cache:8IP7UHrJ7c0J:https://www.kauffman.org/resource-center/ge-healthymagination-fund-looking-for-startups-to-invest-in.aspx+&cd=1&hl=en&ct=clnk&gl=us.

17. Van Gool, Lorenzo. “Google-backed Factory Hub and Hardware.co Accelerator coming to Holland.” Startup Juncture. February 17, 2015. http://startupjuncture.com/2015/02/17/google-factory-hub-hardware-co-accelerator-holland/.

18. Wilhelm, Alex. “Microsoft brings BizSpark, Bing Fund, and its accelerators under one roof.” The Next Web. June 25, 2013. http://thenextweb.com/microsoft/2013/06/25/harmonized-under-the-name-microsoft-ventures-microsofts-startup-activity-set-to-rise-with-increased-investment-3-new-accelerators/.

19. World Economic Forum. “Collaborative Innovation: Transforming Business, Driving Growth.” World Economic Forum, 2014.

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3 COMMENTS

  1. Dear Mark, and Dear Terence,
    I strongly agree your 5 topics.
    Collaborative innovation is a very difficult subject to cope with. And it is a quite new subject for industries.
    In the past, big companies organised themselves in order to create innovation internally. Actually they discover that they need another way to work if they would like to continue to get more Innovation and continue to growth.
    As you already said in your article, from the last 15 years, we can see emerging big programs from big companies, in order to help startups, coaching them, financing them sometimes …
    Nevertheless, from my point of view, I would like to insist on the main challenge so many times underestimated ! The trust !
    How 2 entities can build something and help both?
    How matching their present needs and their needs into 3 years ? How to assure that thanks to the fact the situation will change, the 2 entities will still being aligned?
    To much time some issues are coming from this topic.. . How to keep being aligned? How to act in order to respect development of the other stakeholder?
    It is part of the business and more about Human being values. ..
    Gaëlle

  2. You’re so interesting! I don’t suppose I’ve truly read through anything like
    that before. So great to find somebody with originmal thoughts on this subject.
    Really.. thank you for starting this up. This site is one thing that iss required on the web,
    someone with a bitt of originality!

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