Ecosystem: Making corporate accelerators work

This article first appeared in Unlisted & Unlimited, The Edge Malaysia Weekly, on February 13, 2017 - February 19, 2017.
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Innovation has become a buzzword with the emergence of digital technologies. But it is well known that once a company reaches a certain size, it struggles to innovate.

In this age of disruption, the inability to respond and change quickly spells doom. The Eastman Kodak Company’s “Kodak moment” slogan — which encapsulated everything worth saving — serves as a corporate bogeyman, jolting executives to action when disruptive developments upend their market.

In grasping the precarious position they are in, large corporations around the world are responding by setting up accelerators — both internal and external — to stay ahead of the curve and spot innovation as it happens.

But setting up an accelerator and ensuring its success are two different things. It takes a visionary leader, an overhauling of mindsets and strong participation. Most of all, it takes resilience to see it through, say the experts who mooted and eventually started corporate accelerators in Berlin.

Germany’s capital has one of the world’s most thriving ecosystems for start-ups. The city has been attracting entrepreneurs for a long time with its low rents, cool image and open attitude, all of which makes it an attractive hub for creative businesses and the development of disruptive technology.

Some corporate giants realised early on that their existing structures were inherently not made to inspire innovation. Deutsche Telekom was one of them.

Taking advantage of Berlin’s effervescent start-up scene, the telecommunications giant rolled out hub:raum in 2012 as an accelerator to provide seed funding, with the goal of promoting innovation in a telecommunications-related field.

However, Fee Beyer, head of programme management at hub:raum, says having an accelerator look for start-ups that could add value to its core business did not work for the company. So, hub:raum was turned into an incubator instead.

Beyer was one of the speakers at a roundtable in Berlin, organised by Malaysia Digital Economy Corp Sdn Bhd (MDEC) and Rainmaking Innovation, a global cooperative of entrepreneurs with offices in eight countries, for Malaysian corporates that signed up for MDEC’s Value Innovation Platform.

“Deutsche Telekom has a strategic view on what markets will be relevant for the company in the future. This could be the Internet of Things (IoT), cyber security and/or cloud-based businesses. At hub:raum, we look for start-ups in those fields and invest very early,” says Beyer.

“The start-ups that we invest in have a maximum valuation of €1 million to €3 million. Basically, the seed financing and mentoring are to help them to get a foot in the door. In turn, we hold a minority stake in the start-up. Once they are established and begin to build their businesses, we link the tech entrepreneurs and high-growth start-ups with the expert network, capital and business opportunities of Deutsche Telekom.”

She goes on to say that Peter Borchers, who founded and led hub:raum, was a Deutsche Telekom employee. “Back then, he was more like an entrepreneur, or rather an intrapreneur. He worked very hard to get hub:raum off the ground. At the same time, the CEO realised that the company’s existing structure would not really allow it to innovate from within.”

It took two years for hub:raum to build what Beyer calls “street credibility”. “Everyone was suspicious of Deutsche Telekom’s intentions. They wondered if this was another public relations or marketing strategy. To counter that and show that we were genuine, we had a programme at Betahouse — a co-working space in Berlin — where we rented one floor just for our teams and had an open house. People could come in and see the people behind hub:raum and understand that we were really serious about what we were doing,” she says.

The telecommunications giant had intended to connect to the start-up ecosystem. It ran two accelerator programmes because it thought this was the best way to identify good start-ups it could invest in. But it ran into problems. There were 24 start-ups that went through its programmes, but the company only invested in one of them — not a great return on investment for what was essentially a very expensive exercise.

hub:raum terminated the accelerator. It had come with a pre-determined time frame, which allowed companies to spend a few weeks to a few months working with a group of mentors to build their businesses. Its focus then shifted to incubation programmes for early-stage start-ups without a pre-determined time frame.

“When we started in 2012, we set an objective to invest in 10 to 15 companies a year. It was very ambitious, but we thought it would be easy because we had the money,” says Beyer.

“The problem was that we were getting our funding from T-Venture (now known as Deutsche Telekom Strategic Investments) — the venture capital arm of Deutsche Telekom — to invest in the start-ups. But it usually invests in big-ticket projects. So, when we asked for funding like €50,000, we were soon not its priority. After a period of time, it decided to end the deal.”

It was a hard lesson to learn. hub:raum realised that if it wanted to invest more quickly, it would need its own funds to do so. So, it devoted all of last year to sourcing its own funds. “Now that we have it, we will be able to do 10 to 15 investments a year,” she says.

In its five years of operations, hub:raum has invested in 12 companies in Berlin. It also has a presence in Krakow and Tel Aviv.

Another difficulty hub:raum faced was connecting with and getting Deutsche Telekom’s clients, which are big corporations, to work with its investee companies. “Maybe we were a bit too naive, passionate and optimistic in the beginning. We thought everybody in and outside of Deutsche Telekom would want to work with our investee companies. But these companies were in the early stages of growth and that was a problem because the big corporations wanted to see who their customers were,” says Beyer.

“We call it ‘German angst’. They think that if no one has done it yet, it might be wrong or that the start-up may not survive. Whereas in countries such as the UK or the US, if you are the first to invest in a start-up, you consider yourself a pioneer and people think it is awesome.”


Don’t target the core business

Germany-based Metro Group — a €60 billion holding company with businesses such as wholesale and retail food and non-food speciality stores in 30 countries — had a better start.

The group has been working with Techstars, an external start-up accelerator, to jointly run two programmes for three months. The first programme is the Metro Accelerator for Hospitality, which invests in digital and technology start-ups in the hospitality and food technology sectors. The second programme, the Metro Accelerator for Retail, targets start-ups that develop technology-based services and products to accelerate business processes in the retail sector and intensify customer relationships.

“Metro has a large and very active merger and acquisition department that routinely buys and sells stuff that cost between €100 million and €5 billion. It turns out that it is totally a different game with start-ups,” says Dr Alexander Zumdieck, managing director of Techstars Metro Accelerator.

“But it took a long time to get this into the minds of people because they do not understand that they may not need to negotiate every clause. After all, this is not a €3 billion deal that you can take three months to negotiate because the start-up may not exist in three months. If anything, it is a quicker way to kill it.

“The hospitality programme is interesting because it is where we are looking for ideas for our customers. We do not run any hospitality businesses, but some of our customers are small restaurants and hotels. They are our largest customer group in Europe, so we are looking for innovation for them. That is the why we chose to set up our accelerators.

“The retail programme makes the most sense for us because that is what we do. This is mainly for our wholesale customers who are small, resellers of goods that buy in bulk from our big stores.

“We started this because we wanted to learn what is out there in terms of ideas. We run an accelerator for hospitality because we believe it is good to learn what is affecting our customers. You may agree that the hospitality sector is not very digital. The most that comes to mind is probably digital table reservations and food ordering. It is crazy how quickly you can check in for a flight and how long it takes to check in to a hotel.

“Maybe this is because the customer interface is not the most pressing issue in hospitality, or maybe there are a lot of things that need to be fixed at the back [end] of a restaurant, or the fact that people in the restaurant business hardly make money.”

The fact that the hospitality sector is fragmented presents a lot of opportunities for future development, says Zumdieck. “We do not know for sure what the future holds, but the accelerator is one way to learn about this early and quickly. We have more than 600 applications for the hospitality accelerator every year and we see the same ideas being repeated every time, but it gives you a pretty good idea of what is good idea, what is hot at the moment.”

Having an accelerator that does not directly target the core business of Metro has contributed to its success, he says. “That is why we started the hospitality accelerator. With this, I can go to a customer relationship manager and convince him to buy the solution offered by the start-up. It takes a bit of a change in attitude and maybe scale, but it is not something impossible.”

It is more complex when it comes to the retail accelerator, as start-up solutions may impact Metro’s core business. Hence, the group decided to specifically target start-ups offering innovative digital applications for independent traders — a key customer group of Metro Cash & Carry and of large hypermarkets, which is the business model of German retail giant Real.

Zumdieck says the company does not intend to buy over the start-ups as they are “too small to be acquired by a large corporation”. “Metro has been successfully running a large wholesale business and a big cash and carry store for the last 50 years. At the outset, we made it clear that we wanted to learn. It was also made clear that the business model that has been successful for the last 50 years may not be as successful in the next 50. So, we have to do something about this now.

“Is it a long journey? Yes. Is it painful? Yes. Will we lose a few people along the way? Probably, yes.”


Mindset shift

Dr Hardy Kietzmann, director of innovation at Sanofi-Aventis Deutschland GmbH, a multinational pharmaceutical corporation, says companies looking to set up an accelerator to spur innovation should only do it if there is strong commitment and support from the C-suite.

“Try to find an advocate and get his assurance that he will put to work the ideas that you come up with [during the accelerator programme] through whatever means,” he says.

Kietzmann, who is a mentor at Berlin-based Startupbootcamp’s Digital Health accelerator, points out that without the internal processes in place, like in the case of Sanofi, it will be difficult to bring about innovation in highly regulated industries.

“I am struggling. I spend more than 50% of my time looking for items that are completely natural for the pharmaceutical industry to adopt, such as medical devices, wearables and value-added services, but there aren’t any internal processes. I see myself as an advocate for innovation in this Jurassic environment,” he says.

“It works if I have the blessings of someone higher up. If I want to create a spinoff from one of these ideas, it will be easier to get the endorsement to break the rules.”

The collaboration does not stop there if the accelerator or incubator is going to be housed under the parent corporation, says Holger Dieterich, former manager of YouIsNow — an accelerator for early-stage start-ups linked to the real estate sector. It backed by digital marketplace ImmobilienScout24.

Dieterich says getting employees of the parent company to work with the start-ups in the accelerator programme requires a mindset shift. The idea is to encourage intrapreneurship.

“Getting the employees and start-up people to share the office space was really challenging. There was a cultural gap, which we tried to bridge by inviting the employees to come downstairs [where the start-ups were housed] and use the co-working space in the building,” he says.

“I printed out vouchers for all 600 employees at ImmobilienScout24, offering them a three-month sabbatical to join the accelerator programme. I got the green light from the CEO, but realised that I was very naive because those employees love their jobs and have teams with whom they work well.

“I did not understand that leaving your team for a few months and doing your own thing is, culturally, extremely difficult. They have contacts there, they like what they do and they have a team to manage. The vouchers were never redeemed.”

Dieterich, a freelance consultant, also chairs Sozialhelden, a non-profit entity that advocates social activism.

Zumdieck says intrapreneurship requires different processes as employees tend to worry about job security. “Their biggest worry is, ‘What happens if this thing fails? Can I come back to my job? Will I be able to keep my company pension?’ It is a totally different mindset from entrepreneurship.

“In the accelerator, we look for entrepreneurs who follow their dream and passion to build what they want to. They have to feel like they are going to do it with or without you.

“So, what we try to do is build a link between the entrepreneurs and the parent organisation. If you are a start-up that builds digital products for restaurants, we will try to help you distribute it in the 30 countries Metro is active in. Of course, we are super happy to chat with staff. But if they want to join the accelerator, they have to quit their job and apply.”

The accelerators run by these corporations have huge traction as their parent companies only hold a minority stake in the start-ups. This warrants little interference in the running of their operations.

“As part of an accelerator, we undertake small, minority investments. Typically, we split between 6% and 9% with Techstars — nothing that warrants any kind of control and it is typically not seen as a problem as we do not meddle in the company’s affairs. This is conveyed up front. Now that we are three years into the hospitality programme, we have 21 portfolio companies,” says Zumdieck.

While not all investments that come out of the accelerators are successful, it is part and parcel of the process, say the experts in response to a question about strategies to deal with start-ups that do not work out from K Muhundhan, MDEC’s head of start-ups and entrepreneurship ecosystem.

“If you work with young start-ups, they need time to mature. But their shares are cheap compared with those of a medium-sized start-up worth a few million euros,” says Beyer.

“It is extremely important to have someone from the parent company say this is a great example of what can happen in the early stage of innovation and will happen again and again. But we have to stand here and accept it because it is part of the journey. We will fail and fail again. This is the only way we will eventually get new business in.”

Zumdieck says start-ups that graduated from Metro’s first accelerator did not make much money from the business they gained in the process. He adds that the cost of running the accelerator was minute compared with the parent company’s balance sheet.

“For a big corporation, the potential business and leverage you can gain because you are sitting on this big platform could be great. You gain tremendous public relations and branding opportunities. It is not just about the bottom line,” he says.

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