Beyond corporate venture capital: new ways

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Nov 5, 2017 - 2.1.3 Lean Startup. According to Ries (2012), Lean Startup represents the synthesis of customer development methodologies, agile software ...
Beyond corporate venture capital: new ways corporations can engage with startups

NEI GRANDO

Paper presented to the Administration Department of the Faculty of Economics, Management and Accounting at USP, as a requirement for the Economics of Industrial Innovation course (EAD-5871), taught by Prof. Dr. Paulo Roberto Feldmann.

São Paulo, November, 2016

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ABSTRACT Corporations have continually sought innovations to keep them competitive, conquer new markets, deal with the qualified professionals mobility, shorten product life cycles and the increasing complexity, specialization and convergence of technologies. Startups have new talents with promising ideas and entrepreneurship, agility to change, willingness to deal with risk and the power of digitization, but lacking in resources, brand credibility and easy access to the market. Many corporations are working innovation beyond their organizational boundaries by interacting with startups through programs that, when well structured, bring benefits to both parties and generate value for customers. In addition to the successful interaction models known as corporate venture capital and partnerships that consider startups in more advanced stages of their life cycle, new forms of engagement have emerged that allow corporations to interact with groups of newer startups, by short periods, using simpler governance. This article presents, based on the literature and other information collected, the best-known models for the engagement between corporations and startups and a brief analysis that points out the most appropriate model of engagement considering each startup stage and the corporate objectives. Keywords: startup programs, corporate accelerators, corporate incubation, spin-offs, open innovation, hackathons, corporate venture capital 1. INTRODUCTION New firms generally do not have all the resources needed for growth, like physical space, people, and funds, neither the reliability and legitimacy that the knowledge and experience brings over the years creating, producing and delivering new technology or quality products to the market (Stinchcombe, 1965; Freeman et al., 1983). For startups, it is even more difficult to overcome these liabilities of newness and smallness as shown by the concept of Startup proposed by Ries (2011, p.8) as "a human institution designed to create a new product or service under conditions of extreme uncertainty", and by Blank and Dorf (2012, p. xvii) as "a temporary organization in search of a scalable, repeatable and profitable business model". These concepts denote that for startups entrepreneurs there is no way of stating whether this "innovative" business idea will work out and be sustainable. That is, the risks in such ventures are high and will require support and resources not only in the process of seeking the ideal business model that will adjust the product to the market, but mainly in the growth phase in scale. On the other side, corporations face the dilemma between the efficiency of exploiting their resources to the fullest, including using process improvement and incremental innovations, and seeking to create new products and services with radical and even breakthrough 2

innovations (March, 1991; Roberts, 2004), and are pressured to accelerate their innovation processes due to: shortened product life cycle; the increased competition; the increasing complexity, specialization and convergence of technologies; consolidation of the venture capital industry; greater mobility of qualified professionals and increasing distribution in the generation of knowledge (Rondani & Chesbrough, 2010). Using Open Innovation, a more distributed, participatory and decentralized approach to innovation, which is based on a landscape of abundant and widely distributed knowledge, these corporations can commercialize external ideas, as well as internal ones by deploying outside, as well as in-house, pathways to the market (Chesbrough, 2011). This concept includes the interactions between corporations and startups, which can combine the strengths of each other to create substantial value and achieve their goals successfully. While the large companies have recognized brand, resources, scale and routines dedicated to running a proven business model, on the other hand, startups have ideas of great growth potential, organizational agility, and willingness to risk (Weiblen & Chesbrough, 2015). Large companies, particularly in technology, have developed several ways of relating to startups using traditional models, such as Corporate Venture Capital. Now these models are complemented by new proposals that favor the interaction between these organizations with a more simplified governance with a cohort of startups in a shorter period (Weiblen & Chesbrough, 2015; Mocker, Bielli & Haley, 2016, OpenAxel, 2016). The main objective of this article is to present the most common ways corporates can engage with startups to develop innovations and access new markets and capabilities with more speed and lower costs. Based on the literature and other information, a brief analysis points out the most appropriate model of engagement considering startup stages and the corporate objectives. 2. LITERATURE REVIEW 2.1 – The Basis This section presents some basic concepts that could be useful to understand better the most common engagement channels corporates can use to engage with startups. 2.1.1 Open Innovation For many years, large corporations have used internal R&D as a valuable strategic asset to gain completive advantage in in their respective industries and to act as barrier to newcomers and incumbent competitors. They used to work in a closed innovation model, as presented in Figure 1, to generate their own ideas that they would then develop, manufacture, market, distribute and service themselves. The heavily investments in R&D and brightest people, allowed them to look the best and largest number of ideas to get to market first and to reap most of the profits. They protected these ideas aggressively controlling their intellectual 3

property to prevent competitors from exploit it, and with the profits, they conduct more R&D, creating a virtuous cycle of innovation. But now, since de beginning of the century, some facts combined damage the closed innovation cycle, as the dramatic rise in the mobility of knowledge workers - making it difficult to control company’s proprietary ideas and expertise; and the growing availability of private venture capital - which has helped to finance new firms and their efforts to sell ideas that have spilled outside the research labs (Chesbrough, 2003). Using the open innovation model, the firms can generate value commercializing internal ideas via channels outside of their current businesses through vehicles such as startup companies - which might be financed by the company and staffed with its own personnel and licensing agreements. Additionally, ideas originated outside the firm’s labs can be brought inside for commercialization. As presented in Figure 2, the firm's boundaries are more porous, enabling innovation to flow easily between the firm and partners like startups, universities, suppliers and customers. So, this can be a more profitable way to innovate, because it can reduce costs, accelerate time to market, increase differentiation in the market, and create new revenue streams for the company. (Chesbrough, 2003, Chesbrough, 2011).

Figure 1 - The Closed Innovation Model Source: Chesbrough (2003) Note: In this model, a company generates, develops and commercializes its own ideas.

Figure 2 - The Open Innovation Model Source: Chesbrough (2003) Note: here, a company commercializes both its own ideas as well as innovations from other firms and seeks ways to bring its in-house ideas to market by deploying pathways outside its current businesses. The boundary between the company and its surrounding environment is porous (represented by a dashed line), enabling innovations to move more easily between the two.

2.1.2 Business Model Creating value from technology does not simply mean managing technical uncertainties, as there are significant economic uncertainties. Identifying and executing a new or different business model is an enterprising act, which requires understanding of both technology and the market. The economic value of a technology remains latent until it is commercialized, somehow through a great business model (Chesbrough & Rosenbloom, 2002).

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Teece (2010) defines that "business models reflect the management hypothesis about what customers want, how they want and what they are going to pay, and how a company can organize itself to better meet customer needs, and be well paid to do it". Osterwalder et al. (2005) defines a business model as "a conceptual tool that contains a set of elements and their relationships and allows to express the business logic of a specific company. It is a description of the value a company offers to one or several customer segments and the company's architecture and network of partners for the creation, marketing and distribution of this value and relationship capital to generate profitable and sustainable revenue streams". In a shorter form, "a business model describes the fundamentals of how an organization creates, delivers, and captures value" (Osterwalder & Pigneur, 2010). 2.1.3 Lean Startup According to Ries (2012), Lean Startup represents the synthesis of customer development methodologies, agile software development and lean practices used in Toyota's production system. It applies to all companies facing uncertainty about what customers want, and such a methodology proposes a process that involves rapid testing of hypothesis validation, client learning, and a disciplined approach to product development. The process is agile, lean and uses a minimum of resources iteratively in development cycles, and interactive in the continuous relationship with clients and other stakeholders. The Lean Startup methodology favors experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional “big design up front” development (Blank, 2013). This methodology proposes that the first version of the product should be a minimum viable product (MVP), that can find a set of customers that are animated enough to use and pay for the long-term vision of the ideal product. The idea behind MVP is that a Startup can eliminate waste by limiting the first version of a product to the essential features that validate the long-term vision and fundamental hypotheses of the business model. The focus is on confirming the hypotheses about the MVP, to turn the product into something that customers really want, and that it is sold for profit. When this happens, the Startup has what is known as Product Fit to Market or Product / Market Fit (PMF). However, when minor improvements to the product under development do not resolve, it is necessary to change one aspect or central component of the business model at a time, such as product, target market, or revenue model. Each of these changes of direction is called pivot. The PMF often enables exponential sales growth and great interest for venture capitalists (Ries, 2012, Blank and Dorf, 2012). 2.1.4 Venture Capital and Corporate Venturing Venture Capital (VC) has its origins in the financial market and emerged in the United States in 1946, with capitalists aiming to become partners in entrepreneurship, primarily 5

aimed at company and its subsequent sale. The investment occurs by the acquisition of shareholding or other movable instrument, by individual investors (“Angels") or institutional investors (Venture Capital Funds) in emerging companies with great potential for growth and profitability associated with high risk levels. The VC differs from a common financing because the entrepreneur is free of any debt if the valuation does not occur as expected. In addition, guarantors or guarantees are not required (Rieche & Faria, 2014; Bartlett, 1999). The US stands out in these investments, according to the National Venture Capital Association (NVCA), in 2015 alone, invested 59.1 billion dollars in 4,380 operations, while the other countries invested $51,3 billion dollars into 3,755 venture capital deals. Corporate Venturing (CV) emerged in the 1960s (Chesbrough, 2000), when companies in the United States and Europe began investing in new businesses, initially aiming to obtain high financial returns and later to generate innovation in a global scale to maintain its competitive advantages and increase its consumer markets. It is the corporate entrepreneurial effort that leads to the generation of new businesses, internal or external, by the company. Such businesses can arise from innovations or generate them in the exploration of new markets, new products or both, and can generate new business units. Per Chesbrough (2002), the CV activity is limited to new business generated initiatives within the company, generally resulting from an idea developed by one of its employees. When the entrepreneurial investment is developed outside the investor company it is denominated Corporate Venture Capital (CVC), a program that seeks to identify and exploit the synergies between itself and the startup to increase the sales and profits and to achieve an attractive return on investment. According to CB Insights report (2015), the global CVC participated in a fifth of the all VC financing rounds. It is growing and is a reality in hundreds of organizations. 2.1.5 Incubators and Accelerators The concept of business incubation offers a connection between technology, know-how, entrepreneurial talent, and capital. These organizations support tenant new venture firms with an infrastructure that includes business services, networking, access to professional services, university resources and even capital. The intent is to help new businesses by providing enabling linkages to help them survive, scale-up, and grow. The firsts incubators were established in a Research park in California in 1951, and an incubator program in New York in 1959 (Mian et al., 2016). In 1980 there were only 12 incubators in the United States, in October 2012, there were over 1,250, with the estimates that globally there are about 7,000. The majority are “mixed-use”, assisting a range of early-stage companies, and about one third of it focusing on technology businesses. The incubation model has been adapted to meet a variety of needs, from fostering commercialization of university technologies to increasing 6

employment in economically distressed communities to serving as an investment vehicle (InBIA, 2016). These business incubators are operationalized as science parks, technology incubators and innovation centers, and are generally established through public-private collaborations among universities, industry, and all levels of government (Mian et al., 2016). The initial incubation models primarily focused on providing physical office space and financial resource support to early-stage high potential ventures. Throughout the 1990s, new incubation models emerged, including intangible high value added services, such as aid in evaluating different market opportunities, access to knowledge, product development support, expertise and networks of entrepreneurs, and provision of entrepreneurial finance. Now, there is a shift suggesting a new generation of incubation models, which focuses on knowledge intensive business services, like the accelerators, that offers much more than the basic rental services for which the incubation models were founded (Pouwels et al., 2015). “Accelerators” are organizations that aim to accelerate startups by providing specific incubation services, focused on education and mentoring to cohorts of ventures, during an intensive program of limited duration. The first accelerator, Y Combinator, was established in 2005 in Cambridge, Massachusetts, and has been a source of inspiration for many accelerators to follow. By 2013, Seed-DB, a platform which analyses accelerators, reported over 213 accelerators worldwide, which have supported approximately 3,800 new ventures. This model has several features that places it apart from the other incubation models: (1) accelerators are not designed to provide physical resources or office support services over a long period; (2) they generally offer pre-seed financial investment in exchange for equity; (3) as a next step of finance for the early-stage startups, they are closely connected to individual investors (business “angels”) and less focused on venture capitalists; (4) they emphasize business development and to prepare start-ups to become an investment ready; (5) the accelerator model works in a time limited support, from three to six months, aiming rapid progress through intense interaction, monitoring and education. Some accelerators keep a continued networking support with the alumni after graduation. (Pouwels et al., 2015). 2.2 Corporate-Startup Engagement methods Chesbrough (2003) defines open innovation as “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively”. Recently Chesbrough (2011) emphasized two aspects that this definition suggests: (1) the “outside in”, where external ideas and technologies are brought into the internal company’s innovation process; and (2) the “inside out”, where un-utilized and under-utilized ideas and technologies in the company can go outside to the market thorough others’ innovation processes that incorporate them. But just more recently Weiblen 7

and Chesbrough (2015) relate the “outside in” and “inside out” facets to Corporate Startup Engagement (CSE) and presents a typology of corporate engagement models with startups, see Table 1, where the authors start with corporate venture capital and corporate incubation, as the more traditional and stablished models that funds startups but that requires equity, following by two new corporate engagement models that generally does not require equity, startup programs (outside-in) - like corporate accelerators, and startup programs (platforms) like app stores and cloud-computing freemium startup programs. Table 1 - Typology of corporate engagement models with startups and their key goals Innovation flow direction Outside-in Inside-out Equity Yes

No

Corporate Venture Capital Participate in the success of external innovation and gain strategic insights into non-core markets. Startup Program (outside-in) Insource external innovation to stimulate and generate corporate innovation. (like: corporate accelerators)

Corporate Incubation (spin-off) Provide a viable path to market for promising corporate non-core innovations. Startup Program (platform) Spur complementary external innovation to push an existing corporate innovation. (like: app stores and cloud-computing freemium startup programs)

Source: Weiblen and Chesbrough (2015)

There is little literature about the set of corporate relationship methods used to interact and collaborate with startups. There is also little literature about the new methods corporate engage with startups. So, in this study, there were used articles about some of these methods, reports from organizations, white papers from consulting firms and complementary information from company programs websites to find the most common methods corporate use to engage with startups that are presented in the next sub-sections of this section. Per Mocker et al. (2015), the right corporate–startup collaborations could be mutualbeneficial for both sides, mainly when the approach to these innovation partnerships are made systematically, but that can be difficult to accomplish. To clarify the corporate objectives and deliver against them is as important as the methods used to work with startups. The following four objectives aim to cover the reasons any method or program must take into consideration: (1) rejuvenate corporate culture - the interactions with startups exposes the corporation employees to agile teams, lean approaches and fresh thinking, which creates awareness of new market trends and emerging technologies, and even a more entrepreneurial mindset; (2) innovate big brands – working with startups modifies the corporate brands perception, as an innovation-driven partner, among customers, suppliers and future employees; (3) solve business problems – the development of new innovative products and solutions with startups can be a quicker and more cost–effective way to solve key business problems, because they bring new technology, business model and fresh talent to work together; (4) expand into new 8

markets – startups tend to have the necessary capabilities and agility to compete in emerging sectors, so for the corporation it can be an important channel to expand business operations. Kohler (2016) presents the most common objectives and expectations the startups have in mind when looking for a corporate accelerator program, which some is also common to other CSEs, as follow: (1) access to resources – access to corporate resources, assets, and capabilities can affect the startup’s growth and knowledge positively, including the possibilities to interact with company executives, experts and decision makers; (2) increase credibility - corporate backing and brands could boost startups visibility and credibility; (3) access to markets – startups that aims to sell to companies in a business-to-business way, could aim the corporate sponsorship a distribution channel to growth the company, or as a customer, which speeds up the product/market fit process; (4) getting funding – in many cases corporate funding is the main startup interest for the engagement. The follow sub-sections present a short description of the most common corporate-startup engagement programs and their main characteristics. 2.2.1 Corporate Venture Capital The CVC investment is made in a way like those made by independent VC funds, thus receiving a minority percentage of startup's participation quotas. The Ernst & Young (2009) research results, points that the corporations' strategic objectives for their CVC initiative are multiple and include: mapping emerging innovations and technological developments; take advantage of a window on new market opportunities; import or improve innovation with existing business units; develop new products; provide revenue growth opportunities for the company; develop relationships with independent VCs; identify and establish partnerships and joint ventures; identify candidates for acquisition; and leverage internal technological developments. In contrast, CVC units can add value in different ways to startup businesses: identifying opportunities for partnerships; facilitating sales, marketing or distribution; access to R&D teams and facilities; aid for raising funds; global expansion of activities; strategies of recruitment and selection of personnel; design or engineering support; regulatory and tax compliance; establishing internal and accounting controls; and with the opportunities that arise through the relationship and support of a wellknown brand. Thus, for startups entrepreneurs, who can contribute synergistically to the interests of organizations, the CVC is an interesting alternative in the search for investment. However, while the CVC capital is always welcome for young entrepreneurs, and the large company technical and market insights can facilitate the path to success, being bound to a corporate in the industry might limit the startup’s freedom to pivot and to collaborate with or exit to competitors of that big player. It could not be clear if the corporate investor has a 9

hidden agenda that contradicts the startup’s goals, especially when considering corporate agendas can change along the time. For corporations, besides the financial investments, the management of the CVC processes take time, scanning potential investment candidates, due diligence prior to making an investment, the monitoring costs of the many board meetings of the startup, and discussing possible exits for the venture (Weiblen & Chesbrough, 2015). 2.2.2 Corporate Incubators Many great ideas and promising technologies that arise inside the corporate environment do not fit with the current core business or business model. So, aligned with the inside-out aspect of Open Innovation model concept, to profit from these misfit internal innovations, corporate incubators have emerged as a channel to bring them to market through startups. Corporate incubators, such as the independent incubators, provide the new venture with colocation, expertise, contacts, and funding with the intention to provide the founding team with an entrepreneurial environment in which radical innovation can grow faster in a less bureaucratic way than inside the parent organization. The corporation expensive equipment and customer access, can also be shared with the startups to facilitate the process. There are downside risks, such as overprotection backed by the corporate, which might increase the possibility of later failure; close ties to the parent organization that might prevent startups from pursuing partnerships with other companies that compete with the parent corporation; or even from developing competing products that might disrupt the corporate backer. After the startup spent its early days in the incubator and got traction on the market, if it succeeds, it could be reintegrated into an existing business unit or as a new unit inside the company to be scaled up, or it could conquer new markets as an independently spin-off, or as a last but interesting case it can be sold to another corporation. (Weiblen & Chesbrough, 2015). 2.2.3 Corporate Accelerators An independent accelerator is a kind of business incubator, while a corporate accelerator is also a kind of corporate incubator that focuses the relationship with external startups. Corporate accelerator programs are aligned with the outside-in aspect of Open Innovation model concept presented by Chesbrough (2003), these programs don’t run constantly and has time limits for startups which products falls into a certain category. Generally, the cohort of startups selected from the applications receives support, funding, coaching and co-location. (Weiblen & Chesbrough, 2015). A corporate accelerator can make corporate-startup collaborations more efficient and costeffective, because this engagement might result in a set of possible collaborations, not so easy to achieve. Per Kohler (2016) the corporation could: (1) supports pilot project, funding the development of innovative solutions and products by startups, which gives corporations the 10

opportunity to explore innovation prospects at a lower cost, in a shorter timeframe, and with fewer risks in relation to the core business. Corporations can also explore market opportunities, and even solve business challenges through startups’ talent or technology; (2) become the startup’s customer using some of the startups solutions, acknowledged during the program, to solve some corporation hardships. This can be an important step for startups to test their product-market fit and to help them scale their operations; (3) become a distribution partner; (4) invest in startups, backing and supporting them at lower capital requirement and higher speed compared to internal R&D, with access to new markets and capabilities; (5) acquire startups during the program, which is a quick and impactful way to solve specific business problems and enter new markets, and also an appealing exit strategy for the startups. 2.2.4 Platform Programs When a startup participates in a corporate accelerator or another outside-in startup programs, its role is like that of a supplier trying to harness a new technology for the corporation. The platform program works in the opposite way. The goal of this inside-out innovation approach is to get startups build their products using corporation-supplied technology resources to expand the market for the corporation. In this case, the innovation occurs when many startups produce complementary innovations which strengthens the common platform. Some of the most known large company’s platforms, that share resources with startups, are Apple Store and Google Play Store for mobile applications (apps), enabled by Apple iOS and Google Android operating systems, that gives to these corporations a 30% revenue share of every sale (Weiblen & Chesbrough, 2015; Gawer & Cusumano, 2014). Per Repschlaeger et al. (2013), startups have limited capacity to implement, operate, maintain, and manage technological information and communications infrastructure resources that are reliable and scalable enough to support growth expectations in a short period in an environment of uncertainties. The characteristic of fast scalability and intrinsic elasticity to cloud computing, in addition to its affordable prices, is especially important for startups who, from this perspective, are predestined to the role of cloud service consumer. Some of the most known company’s programs that provide public cloud computing set up to support the creation of startups and to boost their development are: Microsoft Bizpark, Amazon Web Services (AWS) and Google Cloud Platform for Startups, that provide cloud freemium services that can facilitate the creation and development of startups. However, it is important to startups consider restrictions and risks, such as lock-in risk, service level agreements, and provider's ability to meet legal and regulatory requirements applicable to the startup target market.

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2.2.5 Co-working Spaces Physical co–working spaces that includes access desks, meeting spaces and internet, are another increasingly common way corporations use to share resources with startups in order to facilitate interactions among them. Generally, startups can use these corporations coworking spaces for free, as a flexible office environment for them (Mocker et al., 2015). 2.2.6 Events (conferences, hackathons and competitions) Corporations can choose to attract startups through events, that are gatherings sponsored by one or more companies, like hackathons, conferences or competitions for startups. They can contribute financially, by offering venue for an event or even by providing mentors. Challenge Prizes are competitions that focus attention on a specific issue and incentivize innovators to provide new solutions, while hackathons or hack days are a more focused form of competition that is growing in popularity. The hackathon consists of a “marathon” in which computer programmers, interface designers, graphic designers and others collaborate intensively for a short period in software projects. In this approach the participants are encouraged to use of creativity and experimentation in a challenged way to compete for funds and other forms of support. (Briscoe & Mulligan, 2014; Mocker et al., 2015). For corporations, these events tend to be good starting points to be exposed to new ideas and technology trends to foster internal learning, drive internal culture change by exposing employees to the entrepreneurial mindset of startups, provide new perspectives of emerging business trends and technologies, foster external association of the corporate brand with innovation, and mainly initialize vetting of potentially interesting startups or technologies. For startups, the main intents to participate in such events are networking opportunities with potential customers, mentors and other entrepreneurs, opportunities to improve pitching and possibilities to receive financial prizes. (Mocker et al., 2015; OpenAxel, 2016). 2.2.7 Partnerships Corporations can work with startups thought partnerships, a strategic form of cooperation to co-create a product or tackle a specific problem. The following kind of partnerships are particularly attractive to startups: (1) product co–development, that may include joint research and development of products or services that tackle a business problem of the corporate or their client. The companies specify, develop and pilot the solutions jointly. Besides the alignment in terms of complementary capabilities as well as culture, to achieve the co– development success, the partnership typically depends on a clear brief from the corporate with a pre–designated budget; and a clear time–frame within which they decide whether to terminate the deal or continue beyond the pilot; (2) procurement from startups allows corporates get significant benefits accessing cutting–edge technologies and new business 12

models. It allows corporates quickly find alternate solutions to specific business problems or opportunities, but requires a more collaborative mindset and a wholescale rethink of the procurement processes. For the startup, this validation of having a large company as a leading customer that provides revenue is an important aspect in the way to scale up and growth (Mocker et al., 2015; OpenAxel, 2016). 2.2.8 Acquisitions Acquisitions, the logical extension of corporate venturing, refer to purchasing startups and either merging their technologies into an already existing corporate structure, or keeping them as a subsidiary of a corporation, managed directly or indirectly by the acquirer. This can be a fast and impactful way of buying complementary technology or capabilities to solve specific business problems and enter new markets. The advantage, for a startup, is that the exit with a trade sale clearly evidences a successful venture that brings significant respect and admiration within the startup community. One important acquisition strategy variation is the acqui–hiring practice which refers to purchasing a startup specifically to access first and foremost its talent, the skills and expertise of a team, and not because its products, technology or other assets. The Facebook founder and CEO Mark Zuckerberg has said “Facebook has not once bought a company for the company itself. We buy companies to get excellent people”, considering acqui–hiring the most important strategic objective of buying startups, that now is a common practice among digital businesses (Mocker et al., 2015; OpenAxel, 2016). 3 – ANALYSIS The Figure 3, summarizes the information presented in section 2 about the corporate objectives to engage with startups, the common methods corporate use to engage with startups and the common startup objectives to engage with corporations.

Figure 3: Corporate-Startup common ways to engage and each side objectives Source: developed by the author, based on text from Mocker (2015) and Kohler (2016)

Some methods are more appropriated for each startup stage along a startup life cycle. As terminology highly differs on the startup stages, this article refers to the terminology as: idea 13

stage - the beginning of the startup, when the startups are validating ideas for a product or service and whether there is a demand for it; seed stage - when the product or the prototype is being build; early stage - when the product is being tested or ready and the startup has initial customers; growth state - when the startup has an established product, a sizable customer base, growing revenues, some profit and an stablished team; and maturity state - when the startup business is well established with a proven business model, a crowd of loyal customers, and profits. Thus, corporate sponsored or hosted events like conferences, hackathons and competitions are great at idea and seed stages; business support programs like corporate accelerators and corporate incubators, as well sharing resources programs like platforms and co-working spaces, generally are used in the seed and early stages; corporate venture capital investments are more appropriated during the early and growth stages; partnerships or alliances makes more sense during the growth and maturity stages of the startups; and finally, the acquisitions generally occurs when the startups reach maturity stage. See Table 2. Table 2 - Corporate interactions that generally occurs in each of the startup phases Startup Stage CSE methods CSE summary description Idea & Seed Events Corporate-hosted events often in competition format Seed & Early Corporate Accelerator Business support program – external startups (outside-in) Corporate Incubator Business support program – spin-offs (inside-out) Platform Programs Sharing resources tools like app stores, cloud-comp. services Co-working Spaces Sharing resources: physical space, internet, meeting room Early & Growth Corporate VC Direct investments from corporates in exchange of equity Growth&Maturity Partnerships Any commercial agreement focused on creating joint value Maturity Acquisition Acquisition/Acqui-hiring of a startup by a corporate Source: Developed by the author, based on Schättgen and Mur (2016) and the literature review

Considering the general key corporate objectives to interact with startups, some authors relate the most appropriated methods to achieve those objectives. An adaptation can be found at Table 3, per what was described in section 2. Table 3 – Corporate-startup engagement methods related to key corporate objectives to interact Corp. Objectives / Rejuvenate corp. Innovate big Solve business Expand into new culture brands problems markets CSE methods Events *** *** ** * Platform Programs ** *** * * Co-working Spaces ** *** * * Corp. Incubators *** *** ** ** Corp. Accelerators *** *** ** ** Partnerships ** ** *** ** Corporate VC * * ** *** Acquisitions ** * *** *** Source: Adapted from Mocker et al. (2015) Note: ***Most recommended, **Recommended, *Least recommended

The Insead and 500 Startups (2016) research, based on the 500 world's biggest public companies per the Forbes Global 2000 ranking found that 262 (52%) of the companies are engaging with startups, mostly through CVC, following by events, accelerators & incubators.

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Based on cases and mentions by Weiblen and Chesbrough (2015), Insead and 500 Startups (2016), Mocker et al. (2015), internet research and access to websites aiming to validate information, some programs from several companies were selected to exemplify practical and well succeed CSE, presented here in Table 4. Table 4 – Some corporate programs which collaborate with startups Company Program name … Since Engagement type Info / Site ABStartups CASE 2014 Event-Conference http://case.abstartups.com.br Accenture Fintech Innovation Lab Corp. Accelerator www.fintechinnovationlab.com Amazon AWS Activate Platform aws.amazon.com/pt/activate AT&T AT&T Foundry 2011 Event-Hackathon http://soc.att.com/2gpF1qM Bosch Bosch Startup 2014 Corp. Incubator www.bosch-startup.com Bradesco InovaBra 2014 Corp. Accelerator www.inovabra.com.br/startups Braskem & Braskem Labs 2015 Corp. Accelerator www.braskemlabs.com Endeavor Dell Dell for Entrepreneurs 2013 (“umbrella” with www.dell.com/learn/us/en/uscorp1/d several programs) ell-for-entrepreneurs Google Campus 2012 Co-working space www.googleforentrepreneurs.com Google Google Cloud Platform 2014 Platform https://cloud.google.com/developers/ for Startups startups Google Google Ventures 2009 Corporate VC www.gv.com Heineken Orange Grove 2013 Co-working space http://bit.ly/2g0hmfY IBM IBM FOAK 1995 Corp. Incubator www.research.ibm.com/clientprograms/foak/index.shtml Intel Intel Capital 1991 Corporate VC www.intelcapital.com Intel Intel Wearables 2014 Corp. Accelerator http://intel.ly/2guwqR8 Itaú & Cubo 2015 Co-working space http://cubo.network Redpoint Mastercard Start Path Corp. Accelerator www.startpath.com Microsoft BizSpark 2008 Platform bizspark.microsoft.com PayPal Startup Blueprint 2013 Platform https://blueprint.paypal.com Pfizer Pfizer Venture 2004 Corporate VC http://on.pfizer.com/2gdfLBd Investments Sansung Sansung Ventures Corporate VC www.samsungventures.com Sansung Sansung Accelerator 2013 Corp. Accelerator http://samsungaccelerator.com SAP SAP Ventures 1997 Corporate VC http://sapphireventures.com SAP Startup Focus 2012 Platform (HANA) http://startupfocus.saphana.com/ Siemens Siemens TTB 1999 Partnership www.ttb.siemens.com/en (outside-in) Telefonica Wayra 1998 Corp. Accelerator http://wayra.co/en Telstra Telstra Ventures 2011 Corporate VC www.telstra.com.au/ventures Wenovate 100 Open Startups 2015 Event-Conference www.100open.com.br Xerox Xerox PARC 1970 Corp. Incubator www.parc.com Source: developed based on the literature, reports from organizations and company/programs websites Note: The “Database of Corporate Accelerators” at https://www.corporate-accelerators.net/database/ presents about 70 accelerators around the world, and the CB Insight article posted on November 5, 216 at https://www.cbinsights.com/blog/corporate-venture-capital-active-2014/ shows “The 55 Most Active Corporate VC Firms Globally”

4 – FINAL CONSIDERATIONS The study shortly presented the best-known CSE models, as well as which ones are the most appropriate for each startup stage and which ones are more related the corporate objectives. This can be useful for corporate innovation managers, startup entrepreneurs and academics.

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CSE, through well-structured programs, can bring benefits to both parties and generate value for customers. The initial relationship, the short programs, not involving equity, can bring the confidence needed to both parties for future partnerships or programs involving equity. Startup entrepreneurs must prioritize serious corporate programs, in which deals are made and decisions are taken quickly, looking for a relationship that brings synergy between startup solutions and competencies with the corporation objectives and needs. This study faced limitations not only because of the few literature available about this subject, but also because it has only used secondary data. It shows that there is an opportunity within the academic field to do more research about CSE as well about each of the models presented here. REFERENCES Bartlett, J. W. (1999). Fundamentals of venture capital. Madison Books. Blank, S., & Dorf, B. (2012). The startup owner’s manual: The step-by-step guide for building a great company. K & S Ranch. Inc, California. PubMed Abstract OpenURL. Blank, S. (2013). Why the lean start-up changes everything. Harvard business review, 91(5), 63-72. Briscoe, G., & Mulligan, C. (2014). Digital Innovation: The Hackathon Phenomenon. Chesbrough, H. W. (2000). Designing corporate ventures in the shadow of private venture capital. California Management Review, 42(3), 31-49. Chesbrough, H. W. (2002). Making sense of corporate venture capital. Harvard business review, 80(3), 90-99. Chesbrough, H., & Rosenbloom, R. S. (2002). The role of the business model in capturing value from innovation: evidence from Xerox Corporation's technology spin‐off companies. Industrial and corporate change, 11(3), 529-555. Chesbrough, H. W. (2003). The Era of Open Innovation. MIT Sloan management review, 44(3), 35-41. Chesbrough, H. W. (2011). Everything you need to know about open innovation. The Forbes Magazine. March, 21. Retrieved May 25, 2016, from http://www.forbes.com/sites/henrychesbrough/2011/03/21/everything-you-need-to-knowabout-open-innovation/ Ernst & Young. (2009). Global Corporate Venture Capital Survey 2008-09: Benchmarking Programs & Practices. Retrieved Nov 15, 2016, from http://www.ey.com/Publication/vwLUAssets/SGM_VC_Global_corporate_survey_2008_200 9/$FILE/SGM_VC_Global_corporate_survey_2008_2009.pdf Freeman, J., Carroll, R., & Hannan, M.T. (1983). The liability of newness: Age dependence in organizational death rates. American Sociological Review, 48, 692–710. Gawer, A., & Cusumano, M. A. (2014). Industry platforms and ecosystem innovation. Journal of Product Innovation Management, 31(3), 417-433. InBIA. (2016). International Business Innovation Association. Retrieved Nov 16, 2016 from https://www.inbia.org/resources/business-incubation-faq

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