The Achilles Heel of Corporate Accelerators
The world of business is changing more rapidly than ever before. Companies that used to be too-big-to-fail giants, such as GE, GM, and General Mills are all suffering heavy losses, while newly formed startups are taking on, and toppling, the largest corporations in the world.
According to Standard and Poor’s data indexes, the average lifespan of companies on the S&P 500 Index has dramatically decreased from the middle of the 20th century to now.
In the past, it was not uncommon for companies to maintain their position for 40-60 years – now, making it over 20 years is almost unheard of.
With the constant threat of destruction looming over their heads, many corporations have explored the models of venture capital firms by creating their own internal accelerators. Called “corporate accelerators,” these programs are generally developed and ran by public listed companies, who provide office space, mentorship, investment, and general assistance to startups.
However, unlike normal accelerator programs, corporate accelerators do not aim to help their startups disrupt. Rather, they aim to utilize the startup’s disruption to boost their own corporations, or only use the programs to boost their own PR agendas. Each corporate company has their own desired goals out of their accelerators – and these could have nothing to do with actually helping startups. No matter the goal, this trend has caught on, and by 2016, corporate accelerators have invested over 206.740 million dollars in 11,305 startups.
Impressive numbers, sure. But even though more than 120 corporate accelerators have been unveiled within the past 8 years alone, according to the Database of Corporate Accelerators, only 71 programs were still kicking in 2017.
Here are four main reasons why many corporate accelerators are doomed from the start.
Problem #1: Mentality
The first issue that keeps many corporate accelerators from succeeding is that corporates and startups do not share the same mentality regarding failure.
Corporates view failure as the ultimate evil. Companies like Enron, Lehman Brothers, Kodak, and Blockbuster have all made sure of that. Poor acquisitions, embarrassing product launches, bad hires, failures to innovate, and many more mistakes have created a list of collapses and scandals that gives nightmares to every 9-5’er. Most companies attempt everything possible to avoid soiling their fluffy white tails with failure.
On the other hand, startups need to fail faster. Most great startups, especially those that reach unicorn status, are those that embrace the “fail fast, fail often, and fail forward thinking” motto. In fact, it is this exact type of thinking that enables disruption to exist in the first place. By failing fast and failing often, and by rapidly testing and perfecting their products/services, startups launch themselves towards extreme success – faster than corporates could ever think possible.
It is this collision of mentalities that causes corporates and startups to immediately start off on the wrong foot. By putting restrictions on failure, corporates automatically make it very difficult for startups to grow, ameliorate, and find their winning formula.
Problem #2: Director Compensation
The second issue behind the success probabilities of corporate accelerators can be found by looking at the structure of compensation for corporate accelerator teams. Most corporate accelerator Directors are not compensated depending on the success of the program. In most situations, the Directors are put on standard salary packages, just like every other employee that is part of a large corporate company – to do otherwise would be highly antithetical to standard corporate norms.
Because corporate accelerator directors, and in many cases, the accompanying program staff, already have nice, cushy salaries, there is no incentive to put in the excessive time and effort needed to run a grueling, intense acceleration program. This in turn strips away everything that startups need to flourish: high-energy environments, long hours, quick decision-making and rapid experimentation. Both the corporate and the startups wither, and, unfortunately, die.
Problem #3: Timing
Corporates and startups also fail to see eye-to-eye in terms of how they time and measure their success.
Generally, corporates operate on one-year cycles, and measure success and performance quarterly, semi-annually, and annually. They generally have multiple years upon which to measure different metrics, and can easily calculate and determine whether or not they are performing up to standard. They constantly expect growth, and better numbers than the previous quarter or year – and if they fail to see growth, or are performing less than satisfactory, programs are scrapped, employees are fired, and steps are taken to ensure success.
Startups, au contraire, take time. Sure, startups need to act with speed to eventually find success – but, that success most likely doesn’t arrive on a timely basis. Startups take time to grow, to test, and to build. Take the example of Spotify: founded in 2006, it took 2 years to launch, 4 years to secure (small) initial funding, and – 11 years down the line – still hadn’t made a profit. Startups are generally shit-shows upon launching, and in the US, generally only 4% survive to see a second year.
With this mismatch, corporates are more likely than not to measure a startup’s success long before they are ready, leading to premature failure for both sides.
Problem #4: Alignment of Interests
Corporate accelerators and startups simply do not share the same alignment of interests. For corporate companies, especially public listed companies, shareholders expect profits, execs expect growth, and internal teams stick with what’s proven. Risks, especially risks with only a 10% chance of success (which is what corporate accelerators face daily) are not aligned with corporate interests. Some corporates may also facilitate corporate accelerators only to gain PR material, or to follow the herd to the promised land of innovation.
Startups, on the other hand, are most likely not formed to put more money in the pockets of corporate shareholders. Some may begin with acquisition or commercial agreements in mind, but in most cases, startups begin with an idea – to create something that will change the lives of the founders, and their audiences, for the better. Startups join corporate accelerators to gain access to funding, office space, and mentorship; not to make Jeff Bezos and Co. even richer.
Another potential problem arises when the startup has the option to exit. A startup might gain substantial interest from another corporate, and may be given the offer to be acquired. However, corporate accelerators may have the power to veto an acquisition by an outside party, or may have the right to buy first. In these instances, the startup might want to exit, to be acquired and to have a payout. The corporate, however, will view an acquisition quite differently – a payout from an acquisition would be child’s play to a large corporation, and would give their competitors advantages while stripping their rights to the startup’s benefits. This misalignment of interests concerning exits can cause many headaches in the long run.
These four commonalities between many corporate accelerators push a good portion towards extinction.
However, not all is dark and gloomy in corporate accelerators – many of them are able to thrive and produce fantastic startups. Stay tuned for our next article on the main factors that allow corporate accelerators to thrive.
Written by Justice Kelly, Corporate Innovation at Chinaccelerator & MOX