Launched in 2006, Chris Cera’s Philadelphia startup, Vuzit, had burned through its initial investment capital by 2009, and its cloud-based document management system was not bringing in sufficient revenue to keep it afloat. The venture might have failed if a consultant hadn’t suggested it tap a new market: behemoth businesses seeking help innovating.
By 2010, a big bank and a large aerospace company hired Vuzit to help brainstorm and implement new technologies. The bank needed to develop mobile deposit technology quickly to keep up with its competitors. The aerospace business needed to index, store, and display top secret documents for the U.K. The new customers meant the small company brought in enough cash to repay the majority of its investors. Perhaps more important for its future: “The engagements also allowed us to pivot, [and] we spun off a new company, Arcweb Technologies. Today, both companies are profitable and self-funded,” Cera says.
This kind of role reversal, in which a startup takes on a mentoring role to help a large corporation’s in-house reseach team develop, test, and validate innovations, is one result of the popularization of open innovation, says Coley Brown, chief executive of VisionMine, an Englewood (N.J.) consulting firm. (His firm worked with Vuzit in 2009 and 2010.) Some get acquired; others get their technology licensed. All gain major clients that fund further growth and drive higher valuations that, in turn, improve the odds of future investment, Brown says.
The concept of open innovation arose in the late 2000s, driven primarily by mobile commerce technology and the need for large corporations to adopt it quickly to stay competitive, say Brown. “Big companies’ existing R&D teams were not staffed enough or tech savvy enough to jump into [mobile commerce] overnight, but it was a requirement.” Big companies still struggle with innovation: In a May 2013 Accenture (ACN)survey of more than 500 executives, more than half labeled their innovation process “sluggish,” despite two-thirds saying that they depend strongly on innovation for their long-term success.
“The reason they are failing is that it’s easy to come up with an idea but hard to get it implemented. And the bottleneck is the willingness to take risk,” Brown says. “Bring a small organization into the process with 10 or 15 people with tech expertise, and the group tends to work very quickly and do something in a couple of days that the large organization might do in a couple of months.”
Small companies that get recruited by VisionMine usually co-locate with their larger customers, sending engineering teams to corporate headquarters and working side by side with in-house staff. While such arrangements can create conflict or jealousy, Brown says corporate team members are often happy to find themselves working with other innovators. The aversion to risk that is common at larger organizations where failure is demonized vanishes when the team is given lots of freedom to test ideas, let them fail fast, and then move on.
Jay Rosan, a physician and vice president for health innovation at Walgreen (WAG), searches for product and service ideas from small companies that will help the retail drugstore chain stand out. “In the past, new things had to primarily come from within the walls of a big company. But then the R&D pipeline started drying up, and there weren’t as many new ideas being developed. Now there is a tendency to understand that new, young companies can bring us ideas that can be differentiating for us,” Rosan says.
For instance, this year trained staff at Walgreens stores will begin collecting blood for testing via finger pricks, rather than inserting a needle into the customer’s arm. The innovation—which will save money for people with high-deductible insurance and be less invasive—was developed by a Palo Alto (Calif.) startup that is partnering with Walgreen. “They developed it and got it approved by government. We wouldn’t have done that on our own. We’re using their technique and technology and our people. In the end it will bring people into our stores who wouldn’t normally come in,” Rosan says.
He scours the Internet for new medical ideas and devices, attends conferences around the world, and also develops very young companies through the Walgreen Venture Fund, established in 2010. The fund has invested more than $100 million in innovative startups, Rosan says.
Small companies that want to get hired for an open innovation project typically face challenges getting in front of executives who are familiar with the concept and willing to try it, Brown says. “If they try to engage the corporation directly, and they don’t have an executive champion, they’ll quickly get lost in the quagmire of procurement and compliance. The thing to do is look for executive-level contacts and work those, rather than trying to go through normal channels.”
Young companies making decisions about taking angel or venture capital should lean toward investors who have corporate ties and are willing to make introductions or even take on the role of business development for them, Brown advises.