As traditional institutions struggle to innovate on their own, many have begun exploring other avenues. One of the most popular has become to partner with a disruptive fintech start-ups. While there are both great benefits and certain pitfalls in such a partnership, we believe that the benefits of working together far outweigh the risks.
Some of the advantages and benefits for corporates include:
- External Innovation and Disruption: Fintech start-ups tend to have greater freedom to create genuinely disruptive solutions, which can mean increased revenues for corporates, access to new markets and disruption of one’s own business model.
- Time-to-Market and Cost: Start-ups can generally deliver functioning, comprehensive solutions in one tenth the time it takes incumbents. Through a partnership, corporates will save significant amounts of time and money (i.e. ETFmatic is able to save our established partners 1-3 years in time and £1-3m in costs with our solution).
- More Innovative Suppliers: While a start-up potentially provides a similar or competing product to its corporate partner, their ability to innovate and low-cost structure may have them quickly outperforming your existing service provider.
- Customer-Centric: Start-ups tend to develop solutions with our customers as opposed to for our customers. Agile methodologies enables them to adapt and customise solutions quickly and easily enabling partners to provide improved solutions to their customers.
- Creative and Agile Culture: Partnerships with fintech start-ups opens corporates to more creativity and innovation. In an environment so rapidly changing, fostering an innovative culture internally would prove highly beneficial.
- New Revenue Streams and Business Lines: Corporates are able to monetise previously inaccessible audiences with new business models like ETFmatic’s.
Partnerships not only provide advantages for corporates, but also provide the following benefits for start-ups:
- Rapid Scaling Opportunity: Start-ups are able to acquire customers at scale and capitalise on the incumbent’s existing distribution network. This drastically increases the start-up’s valuation, revenues and ability to refine and optimize its products.
- Road to Profitability: Increased revenues and capital injections are two of the key drivers for early-stage start-ups. However, start-ups can become free from the need of further outside investment by product development investments from its partners. When partners are interested long-term, start-ups are stabilised and helped to reach break-even or even profits relatively quickly.
- Enhanced Reputation: Start-ups are able to use successful partnerships as stamps of approval or proofs of concept. Passing of corporate’s due diligence and closing the deal can help further partnership development for the start-up.
- Easier Internationalisation: Depending on the arrangement, the corporate partner may leverage their extensive network to assist in the start-up’s business development and make introductions to friends, clients and subsidiaries.
- Market Knowledge and Mentoring: While start-ups help institutions innovate and react quickly to market changes, corporates can mentor their partner and share their knowledge and long-term experience of the sector.
- Access to Proprietary Assets: Through a partnership, a start-up can exploit underutilized corporate assets such as data that could lead to the creation of new business opportunities.
However, while we feel that partnerships are a net positive for both parties, they also present risks that need to be taken into account as well. Considering the risks on the corporate side, we see:
- Reputational Damage: Failures may damage the corporate’s brand and reputation when client or corporate data is involved in the product development process.
- Lost Investment: Approximately 50 percent of partnered start-ups still fail, so the investment risk is high.
- Misaligned Employees: Due to the traditional, corporate processes, employees avoid risk as failure jeopardizes their careers and might feel threatened by the start-up’s unfamiliar culture.
- Unsure Outcome: Results are difficult to predict as the products are sometimes unfinished.
- Maturity Misalignment: Corporates engage with start-ups with new business models or technologies that it is not yet ready to adopt or experiment with.
Start-ups partnering with corporates also have to contend with the following risks:
- Revenue Need: There is a limited amount of time to find customers or funding for both bootstrapping and VC-financed start-ups. Corporates often take their time making decisions, so start-ups have to constantly run cost-benefit analyses regarding the resources allocated toward the partnership.
- One Customer: Finding a solution for one corporate client distracts a start-up from developing universal, scalable products and strategies. Being dependent on a single partner will negatively affect the start-up’s bargaining power and freedom.
- Delayed Projects: The partner’s internal bureaucracy often leads to delays which are financially hard for a start-up.
- Wasted Resources: Start-ups tend to have few resources, which won’t be allocated resourcefully if their partner views them as a source of free consulting services rather than collaborator.
- Premature Scaling: Successful proof of concept or sales to innovation departments or first clients does not mean that the market is ready for scale.
- Loss of Start-up Culture: There is a high risk of losing the agility and spirit of a start-up, as well as the talent, when the partnership and corporate decision-making are too interdependent.
While the aforementioned risks are apparent and should be taken into account, at ETFmatic we feel the potential benefits for both corporates and start-ups far outweigh them. Both partners must simply understand the other’s interests, expectations, incentives, culture and work ethic and then identify the most appropriate collaboration model for the situation.