More than 2,000 startups in China — about 10 percent of the total number — folded during the last fiscal year, according to Chinese venture investment site gplp.cn. O2O, ecommerce and transport startups were the biggest casualties.
When startups fail, both the founders and any brands that have put money into the startups suffer losses. Yet, this has not deterred brands from investing. Alvin Foo, head of Airwave China, the mobile business unit of Omnicom Media Group, believes that brands have little choice.
“Innovation doesn’t come from companies like us,” he says.
The Unilever Foundry is one of the highest profile examples of a major business reaching out to startups. The consumer goods giant launched the accelerator in 2014 with a “mission to transform Unilever’s growth model to make sustainable living commonplace”.
Its first two years have resulted in over 100 pilots globally, says Dorcas Lau, Unilever’s vice-president, digital marketing and ecommerce for North Asia.
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As a result, 60 percent of the multinational’s sub-brands have changed their approach to marketing briefs since working with the foundry. Zooming in to China, the foundry had planned to accelerate the incubation of six Chinese startups this year.
“Brands are always open to new, innovative ideas and willing to take a leap of faith but the underlying tech has to be resilient enough to go to market,” Lau says. “We look for [startup] partners that can provide solutions for both our brands and our consumers.”
So how can brands not only decide which startups to invest in, but also ensure their success?
Look before you leap
Kapil Kane, innovation manager of Intel China, says it is most important for brands to invest in startups that align with their own corporate objectives and strategies. “Brands cannot understand something that is not their core strength,” Kane says. Some strategic diversification can help a business to offset risk, but making random speculative investments should be a no-go.
Most big brands are prudent, setting up venture-capital arms to take care of their fledgling units. “You are doomed to fail if there is no business unit to help in managing the investments,” says Kane, who is behind Ideas to Reality, an internal accelerator for Intel employees in China.
Barriers to entry are always a key consideration for startups, but that is especially true in the Chinese market. “If the solution proposed can be easily copied by other Chinese companies, then it is not a good investment.”
Other critical questions that Kane says brands should think about before investing in a startup:
- Is the startup solving a pain point, and how significant is that pain point?
- Has the startup identified a gap in the market they are trying to fill, and how big is the gap?
- What are the startup’s cost structures and revenue streams?
- What kind of partnership should the brand and startup form?
Partnering with Shanghai Technology Entrepreneurship Foundation, Unilever launched its foundry programme in China during September last year. One startup which Unilever is working with is Nanjing-based food delivery app Line0 (see below).
“In our experience of working with startups in the past 12 months, apart from having an experimental mindset, it is important to have a strong brief with clear business objective and expected deliverable. During the process, deeper engagement and frequent progress review are necessary,” says Lau.
Judging from the wild success of China’s original startups — Alibaba, Tencent and Baidu — OMD’s Foo says the country’s strength in innovation lies in business models, rather than technology.
“Alibaba did not become successful because they were innovative in technology,” he says. “Instead, they created this ecommerce ecosystem, whereas Tencent tapped into the lifestyle ecosystem.”
Foo currently runs OMD Innovation Fund, the agency’s joint accelerator with Chinaccelerator, which seeks cutting-edge marketing strategies among digital-media startups. Since its launch in April last year, the accelerator has hosted three batches of startups, cultivating a group of nine businesses, each awarded RMB300,000 in seed funding.
Avoiding culture clash
While brands may be keen to embrace the startup wave, some may have overlooked how incompatible entrepreneurial DNA can be with their relatively rigid structures.
Coming from a startup background himself, Foo believes that it is nearly impossible to integrate startups directly into big brands.
“How can you expect someone who wants to change the world to work in an organisation that never changes?” he asks.
“The last thing I want to do as a startup founder is to report to big companies.”
But partnerships can work well when brands learn to accommodate startup culture, Kane says, so brands should shield startups from the rest of the organisation early in their relationship. “There are many rules in big corporations,” he says. “Startups already have their own challenges in getting their product out, and when you tell them to follow your way of doing things, they will go mad.”
Operating at arm’s length has other benefits, too. Although a partnership with a big name can open up access for the startup company, Foo cautions that it can also be a liability to them.
“Assuming the startup works with Omnicom, maybe WPP or other agencies won’t work with them,” he says. “This is the last thing we want for the startups when we invest in them, so we don’t go in as Omnicom but instead invest through SOSventures.”
When a good match is made, both partners benefit.
For example, Alibaba’s US$100 million investment into luxury online sales platform Mei.com allowed it to tap into the luxury market and address the counterfeit controversy faced by its ecommerce site Taobao. Alibaba declined an interview for this article. Similarly, Apple supplier Foxconn’s investments in startups such as Chinese taxi app Didi Chuxing have helped to diversify its market following the slowdown in global smartphone and PC sales.
Alvin Chiang, founder of IoT startup Bowhead Technology, which is manufacturing a line of smart water bottles called Gululu (see below) in partnership with Foxconn, says he sought out several world-class brands, including those in the bottled-water and toy businesses before inking the deal with the empire.
“Foxconn has strong sourcing capabilities to help us get durable, safe and BPA-free materials for the water bottles,” says Chiang. “With the mechanical engineering support received from Foxconn in the product’s prototype, we are able to reduce the number of people working on hardware and allow our core team to concentrate on the software.”
Invest for the long-haul
Over the last 12 months, Unilever Foundry in China has engaged more than 100 new startups and conducted six pilots in the area of digital marketing and e-commerce.
“These pilots not only delivered business results but more importantly demonstrated the potential and scalability of the new models," adds Lau, "which generate enthusiasm for more Unilever brands to partner with startups for testing and learning purposes.”
All in all, startups can reciprocate benefits for big brands, such as helping them to be perceived as innovators, but it’s a long-term process. While it usually takes years before new businesses turn a profit, they can do important work in the meantime.
OMD taps its accelerator as an idea generator. Foo cites the example of OMD Innovation Fund assisting Visa address a pain point: getting Chinese tourists to pay with Visa, rather than UnionPay, when travelling overseas.
“Ten startups came on board to advise Visa on the solutions,” Foo says. “It is hard to imagine how an agency like us can come up with 10 new ideas otherwise.” OMD eventually went with a campaign that used bicycles equipped with GPS devices to lead travellers off the main tourist track to another that feaatured Visa merchants.
“The startups are very likely to help us when we want to solve difficult problems faced by our clients,” Foo says, but adding a caveat that investment into startups is a "very painful and long-term process".
"You won’t see results until five to seven years. We are only doing this to get into the innovation space because it is hard to drive innovation internally.”