Small is the next big thing : by Michael Niddam
As seen in the BVCA Journal Summer 2020 Edition
As we eagerly await updates about potential vaccines for COVID-19 that could enable a return to ‘normal’ life, it has perhaps never been clearer that our future depends on innovation. Thinking creatively has always propelled humanity forward, but innovation as we know it is changing.
Previously, corporations held sway, with unchallengeable resources to invest in research and development (R&D) to improve their existing products and develop new ones. However, in recent weeks, it is innovative start-ups that have taken the spotlight, with fast-growth businesses leading developments in testing, contact tracing, PPE and even vaccination.
The crisis has accelerated mass-market adoption of digital alternatives to legacy products, services and ways of doing business. Stay-at-home restrictions and concerns about overburdening public health services have boosted companies offering remote access to GPs and other telemedicine services with many reporting increased demand of 50% or more. Meanwhile, the insurance sector – often reliant on face-to-face meetings – has been unable to meet the increased demand as interest in certain products such as life insurance and income protection has spiked due to the public health emergency and concerns about job security. The benefit of agility has been further highlighted during the pandemic, with start-ups switching their focus, or adapting current technology, to help support communities. Agetech innovator Birdie, for example, has rolled out specific features to its home care platform to help carers identify symptoms of COVID-19 in elderly patients and report data to relatives, health services and local authorities. Meanwhile, Transcend Packaging – a sustainable packaging products company that makes paper straws for McDonald’s – announced in April that it would produce a million face masks per week for the NHS in Wales, with the capacity to increase production to two million per week.
Let’s step back, though. Why are start-ups challenging corporations as the leading innovators?
Previously, economies of scale ruled – the bigger you were, the more easily you could achieve profitability, the more cash you had for R&D and the more you innovated. With the rise of venture capital, though, a good idea and team is enough to generate interest and grow a company.
Furthermore, society has entered a new paradigm. Disruptive technologies are transforming the way we live and work, prompting massive demographic and economic shifts. This has challenged large, cumbersome legacy companies, as they struggle to react and adapt quickly enough to new opportunities in the way that start-ups are much more capable of doing.
In this context, it is no surprise that some of the world’s largest companies are restructuring, divesting business units or breaking themselves apart. Such actions help them streamline operations, create more focused and more agile business models, and, crucially, keep abreast of technological change and remain competitive with industry disruptors. However, there are only so many times a company can spin off divisions, and Harvard Business Review found that, between 2000 and 2017, 52% of Fortune 500 companies have gone bankrupt, been acquired or folded due to digital disruption.
This leaves us with the uncomfortable truth that large corporations are not the main creators of innovation. Complex corporate governance, large overheads, and cumbersome management structures and capabilities of scale prevent them from truly innovating. Nevertheless, they can provide platforms for entrepreneurs and start-ups to access resources that would otherwise be out of reach, in turn allowing corporations to benefit from the agility of the start-ups.
Therefore, I believe this pandemic has brought to light the importance of the two co-existing.
52% of Fortune 500 companies have gone bankrupt, been acquired or folded due to digital disruption
If corporates can shift their models to support innovation in start-ups, they can profit from their productivity and technological gains, ensuring their survival for several years
to come. In turn, corporations can continue providing valuable resources and can guide start-ups on how to scale. However, the requirements of innovation now mean that the smaller, nimbler companies need to take a more central role in driving this process. Working together will be the key to providing the best outcome for everyone.
If we want to preserve the capital that we, as a society, have collectively invested in the world’s largest corporations, we need to change their approach towards innovation. By becoming financiers of innovation, rather than creators, these corporations can ensure they are not forced out of a market and can benefit from productivity boosts from disruptors that came to the fore during the pandemic.
Recent history has made us more acutely aware than ever that time is our greatest commodity. Let’s not waste any more of it waiting for the future we want to see. It’s up to all of us to build it together.