“If you want to know where the market is going, find problems”

Mike Sigal is a true Silicon Valley pioneer. He has spent over 25 years working in the global startup ecosystem as an entrepreneur and an innovation advisor. Today he’s a partner at 500 Startups’ FinTech Fund, as well as the Co-Founder of Upside Partners, which helps corporations and institutions innovate through the application of startup and VC best practices. I talked to him about how startups and corporates can help each other grow, in many different ways and wanted to share some of the highlights of our ‘nexxworks Innovation talks’ here as well.

But do make sure that you listen to the podcast episode too. It’s worth it:

Though there are many reasons why corporates and startups can help each other out as Mike explains in the podcast, the one I loved the most is about perspective: how startups tend to see gaps in the market where customers are being underserved in some way, while corporates often have blind spots to the evolving needs of their (underserved) customers. He was also ruthlessly honest about how most startups don’t make it or how corporates don’t’ always choose the right startup partners. And though there is isn’t a “best way” for both to collaborate, I learned from Mike that there are approaches that can minimize risks in the matter.

Find the problems

First of all, startups are notoriously great at finding and solving problems because that’s pretty much all they encounter in the phase that they are in. That’s in fact the best way to keep innovating, according to Mike: “find a problem, solve it, go on to the next problem, solve that ...” As the years tick by, corporates become a lot less apt at that. And that’s a huge disadvantage because identifying and solving problems in little tiny bites, is what would offer them a goldmine of experiential data - which is by the way a lot more valuable than consultancy or research data - about how the market is evolving.

But – and that’s the tricky part here – if companies want to partner up with the right startup, they first have to find and clearly formulate the problem that they want that startup to solve. That’s a crucial step in any of this type of collaboration. And then they ought to launch that problem into the startup ecosystem. A good way is for instance to publish that problem on several channels like www.f6s.com. They will already learn a lot from all the questions and interactions with hungry entrepreneurs that will ensue. That too, is a great way to learn more about the market, its customers and their needs. And when they finally pick the most fitting startup to work with, they need to be fully aware about the urgency of the startup life cycle (which can be or very short or very high frequency) and thus be prepared to move and experiment fast together. You’ll miss the opportunity if you don’t. Mike also warned against demanding exclusivity from day one in the relationship, as the best startups will just walk away from that.

“When both have found each other, I always advise them to date before they get married”, added Mike. “In other words, that corporates should test the waters by first working with a startup as a partner or vendor and only then - when they feel the “love” between them – invest in them or even acquire them. It’s always better to move in steps.”

Little bets instead of big ones

According to Mike, one of the biggest mistakes of corporate innovation is that companies move in big bets and big investments, and don’t measure whether or not the investment is successful on the right risk and reward metrics. “Venture capitalists always measure risk and rewards according to the stage a startup resides in – angel, seed, series A or hypergrowth: they all have different needs - and yet corporations never seem to differentiate when it comes to their internal innovation ‘startup’ projects.”

“So the key lesson for them is to look at innovation investments as something that needs to be phase gated as a project achieves a certain level of success, takes a certain amount of risk off the table and then needs more capital to grow further. Because no innovation project is instantly going to generate material revenues. You have to figure out how to make it work. What corporations can learn from that is that they need a portfolio approach to their investing and that they should take lots of little bets in improving their business early. And then put more money into those bets that are working and stop funding those bets that aren't working. And if you add up the return of all of those consistent little bets and compare that to the possible (it’s never certain that it will pan out) return of the one big bet, you’ll understand how the former will offer more value.”

Another thing that corporates can learn from VCs about innovation is that the latter are very good at predicting new evolutions because they are continuously talking to entrepreneurs who have a very clear vision about the future. So what VCs excel at is synthesizing all these different voices into a thesis about where the market is going. They don’t necessarily come up with new ideas themselves, but they do have a lot of data and insights about where the market is heading and then they find certain patterns. So I always tell corporates to get out more and talk to a lot of entrepreneurs. They don’t’ have to collaborate with all of them, obviously, but just opening up the conversation is already a great way to lose that blind spots that a lot of them tend to have about customers and the market.

Mike ended our conversation with some very solid advice about the latest fintech trends, but I won’t give that up here. You’ll just have to listen to our podcast conversation. It might seem a bit mean now, but you’ll definitely thank me later!