Enterprises turn to startups for innovation

Enterprises turn to startups for innovation

ANZ says startup initiative gives bank early access to new ideas.

A growing number of big Australian companies are seeking partnerships with startups to stay innovative.

Several major Australian enterprises are partnering with startups or running startup accelerator initiatives, including Telstra (muru-D), Optus (Innov8 Seed) and ANZ bank (Innovyz).

“In our view, one of the key ways to grow is to focus on startups,” says Nick Reade, ANZ bank general manager of small business banking. “It’s a segment that is interesting from the perspective of getting access to ideas.”

ANZ does not appear to be the only Australian enterprise with that view.

Telstra CIO Patrick Eltridge recently said that working with startups is a “strategic necessity” for Telstra. “We are way beyond the point where we build all this stuff ourselves,” the CIO said.

At the Future of Payments conference earlier this month, an HSBC official said that banks are increasingly seeking partnerships with startups as their attitude has changed from “a small-y ‘yes’ to a capital-Y ‘Yes’.”

Bosco Tan, co-founder of the startup finance website Pocketbook, said he has seen a sea change in enterprise attitudes toward startups.

Pocketbook is a website that lets users visualise transactions from all of their bank accounts, similar to in the US. As part of its business, Pocketbook has had talks with some of Australia's top banks.

“Certainly from the discussions we've had, it is very much the case that big companies are more receptive,” said Bosco Tan, co-founder of finance website startup Pocketbook.

“I think there is more understanding in large companies now around the principles of disruptive innovation and the lean startup.”

Reade says ANZ has been focussing on startups for the past five years, though the initiative has ramped up in the past two. The ANZ-sponsored Innovyz START accelerator program opened its doors in 2012. In April this year, the bank made a one-year, $1 billion pledge to lending money to startups. In the first six months, ANZ has lent $750 million.

ANZ recently announced a partnership with Ingogo, a startup that makes a mobile app for hailing cabs. The alliance will place payment terminals in cabs.

“At the end of the day, we’re a massive organisation,” says Reade. “We’re doing a lot of innovative things, but we recognise that the startup market comes with a whole lot of really smart people with really great ideas.

“ANZ will get the first opportunity to work with some of these smart companies and some of their ideas because we’re involved.”

Working with startups provides “access to thought leadership and innovation earlier than you would get yourself … Rather than build it ourselves, sometimes partnering is easier and quicker and cheaper.”

Telstra is likely getting involved with startups for the same reason, says Reade.

“They’re probably not going to make any money from selling those few people phones, but they’re going to get access to ideas and technology.”

Tan notes that big companies are starting to think “outside of the box” as they seek to innovate.

“It's not only finance sector talking to finance startups, or retail sector talking to retail startups. The level of thinking companies have seem to be much more fluid than that. Meaning, at times though not always, it's more about capturing value – like a venture capitalist – rather than all just about strategic investment.”

Case studies show that internal innovation is too expensive and may not succeed, while external partnerships are relatively inexpensive and have led to success, he says.

“In Australia in particular, the vernacular and the mainstream coverage of startups have increased. So has the maturity of startups themselves. This all means it's less of a risk for big companies to take the plunge of partnership.”

However, while enterprises may be looking to increase their work with startups, not every big company has gotten the recipe right, according to Ollo Mobile CEO Hugh Geiger.

“Fluffy mission statements about driving innovation is a giant red flag,” he warns.

Ollo is a startup that has developed a wearable 3G telehealth device designed to protect seniors and young children. The company has recently launched a crowdfunding initiative for their CloudPhone product.

“We're talking to a number of public companies. Some are doing it right, others not so much,” says Geiger. “The main issue we've experienced are lines of approval—if they have traditional corporate structures, the guys that are 'startup focused' actually have little or no authority to do a deal.

“The ones doing it right have CEO buy-in, and one or more entrepreneurs recruited to manage that business line. They know why they're there, they can articulate clearly what they want from a deal, and they have a strong idea about how a deal would fit the existing business.”

It can be a major risk for a startup to partner with an enterprise, Geiger says.

“It's all very exciting. But getting turned down by a big name is a great way to spook existing investors and dent team enthusiasm. It's one thing if a [venture capitalist] or another angel says 'no' but it's a big deal if it's a 'corporate partner'.”

Many enterprises are extremely averse to risk and won’t make a deal unless the startup has deployed a product and has a dominant position, adds Geiger.

“If you've got those things you might be better off just having them as a customer and taking funding from a professional source that wants to help you conquer the world, not just buy your product [or] service.”

Reade says that ANZ bank has a philosophy of being open to lending money to startups that show solid business plans and positive cash flow forecasts, even though startups tend to have “unproven financials.” The bank approves seven out of 10 loans to startups, he says.

However, it’s not a stance that is shared by all other banks, he said.

“Some of my peers at other banks talk to me and say, ‘What are you doing, lending money to startups?’”

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