Why big brands are cooling off on startup initiatives
Amid shaky integrations, flat returns and often high costs, incubators and accelerators are experiencing "backlash," analysts said.
As many marketers fall behind in the digital mediascape, a number of brands with budgets to spare are exploring, not just ways to keep up with the channel, but to innovate and ultimately lead the charge in a rapidly evolving space. However, a series of recent announcements suggests this strategy is hitting some bumps in the road.
Taking a cue from the world of Silicon Valley, many decidedly non-technology-oriented marketers, especially in the retail space, have established their own startup incubators and accelerator programs, hoping to produce the next cutting edge successes. After all, how cool would it be to be the creator of a "unicorn" app or service that everyone else tries to copy?
"What's happening right now is, because of digital disruption — because of startups coming into markets — these large companies think, 'Well, we've got to beat the startups at their own game,'" said Ted Schadler, VP and principal analyst serving application development and delivery professionals at Forrester. "And that is impossible."
Late last year and into the first few months of 2017, several of these initiatives have faltered if not shuttered entirely. Target’s mysterious Goldfish project, part of a broader "innovation portfolio," sunk without producing much of note; Wal-Mart cut hundreds from its Silicon Valley workforce amid a shaky integration of the online retailer Jet; and Coca-Cola powered down its own startup accelerator, called Founders, in January, after barely three years of operation.
"This is just a backlash," said Schadler. "It’s executives going, 'You know what, it's not really working, so why am I spending all this money? Let's dial it back.'"
A reversed equation
That’s not to say brands are backing off digital innovation entirely — not by a long shot. The International Data Corporation (IDC) forecasts all business' spend on digital transformation technology will hit $1.2 trillion this year — a 17.8% increase over 2016 — with a focus on tools that better support omni-experience innovations.
However, the reality of non-technology centered brands building out their own, in-house startup initiatives and essentially replicating a Silicon Valley framework appears far slimmer than it once did.
"My work indicates very clearly that you need an innovation process," said Schadler. "But that innovation process is as much about assessing about what's going on in the real world, the outside world, as it is about shepherding projects internally."
The biggest issue is a fundamental split in how the two sides of the industry operate, according to Sean Brown, chief technology officer at the digital agency Organic.
"I think the kind of economic equation is almost reversed for the two different types of entities," said Brown.
"The entire idea behind startups is that everything that they have, they're pouring in on the risk side of the equation," he said. "If you take large enterprises, you might find a very different point of view, where stability is treasured, where predictability is treasured."
Planning, forecasting and a high degree of buy-in are ultimately what makes major enterprises tick, according to Brown; a fledging initiative focused on technological innovation, on the other hand, is likely only going to produce a hit after a series of failures, if it ever produces a hit at all.
The shot-in-the-dark nature of startup projects not only appears incongruent with more traditional business operations, but can also prove exorbitantly costly and ultimately not worth the resources sunk for a chance at that one big success.
"Those two worlds have a difficult time co-existing. There's a very real economic impact to supporting a startup and to incubating startups," Brown said. "You're finding large enterprise organizations are having a hard time intermixing those two very, very different models."
For existing efforts, low returns
Just as enterprise businesses have been hard-pressed to beat startups at their own game, there's a growing sense that just a handful of established tech players — many that were once startups themselves — will soon have too strong a grip over certain areas of the market for outsiders to see any impact.
At one point in the not so distant past, developing a native branded app seemed like a powerful tool for connecting with a growing pool of mobile consumers, and successful examples of such efforts remain popular, such as Target's Cartwheel or Starbucks' customer loyalty and commerce-centric app.
However, Gartner predicts that, by 2019, one-fifth of all brands will have abandoned their native apps entirely as more one-stop, walled garden digital services such as Amazon, Facebook and Google continue to take over, and as existing efforts fail to gain traction.
"Many brands are finding that the level of adoption, customer engagement and return on investment (ROI) delivered by their mobile applications are significantly less than the expectations that underpinned their app investment," Gartner noted in a release. "Many companies will evaluate these experiences against their under-performing applications and opt to reduce their losses by allowing their apps to expire."
Where are budgets going now?
As home-grown startup incubators and accelerators dim, brands might start to put more budget toward a 'if you can’t beat 'em, buy 'em' strategy, experts said. M&A, especially in emerging or particularly disruptive technology spaces like the Internet of Things (IoT), data analytics and financial technology, or FinTech, will continue to grow, according to Schadler.
"For the first time, really, we're seeing these business development and M&A organizations getting funding and getting money from the CFO. [They're] ramping up their staff and their ability to assess," the analyst said. "Just like the software industry's been doing for forever [and] the high-tech industry's been doing forever."
Target, for example, recently revealed it has made four "aqui-hire" deals over the past two years, absorbing smaller startups with strong specialties in data analytics. Though these deals have been inked over a wide span of time, they underscore how big brands, on a larger scale, might be smarter to start integrating more new technology and staff rather than try to grow those assets organically.
"It’s predominantly talent, technology and the cultural fit that goes with it," Target SVP Paritosh Desai wrote in a blog post. "Acqui-hires allow us to accelerate both onboarding the right kind of talent, onboarding the right kind of technologies and getting to market much faster."
Beyond ramping up tech acquisitions, a back to basics approach might become commonplace as the more out-there, bleeding edge digital experiments see fewer returns.
"They're investing in loyalty. They're investing in omnichannel," said Schadler of businesses who've walked back their startup initiatives. "These are things that are reinforcing their core competency as opposed to disrupting their primary value."
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