Cultivating a culture of disruption

As I have said in my previous blog, never before has it been as easy or as quick to start a business as it is today. From start-ups to the middle market, companies are rising up to challenge the status quo.

But what distinguishes true disruption from regular innovation? It is when a technology or idea is used to build a sustained structural advantage over competitive rivals.

Achieving this requires ingenuity, nimbleness and vision – traits associated with start-ups and small firms. It also takes industry expertise, scale, and financial strength – typically the domain of large enterprises. We want to cultivate disruption by bringing these different companies together, which is why EY surveyed more than 100 start-up leaders earlier this year.  

It turns out many of these young companies are open to partnerships – good news for large corporates who want to buy in. These corporate VC deals accounted for 25% of all VC activity today, according to EY's insight, the Innovation Paradox.

Venture Capital is the financing partner of choice for two-thirds of the start-ups we polled. Financing of course fuels growth, by paying for top talent and expansion-friendly infrastructure. The reasons for favoring VC included speed of due diligence, investment size, and friendly terms. But it is also because the value-add these investors offer, from professional networks, to technical talent, mentorship, and strategic perspective.

Big companies are desirable partners too; after VC and private equity, corporates ranked next as preferred funding source. The reasons here are access to marketing and management talent, distribution networks, and regulatory know-how (half said regulation was central to their long-term success!). Enterprises that nurture smaller companies can expect a better returns and results.

Before investing, big companies must decide if the investment is strategic or financial. They must also decide if they can lock that cash away for five to 10 years. It may help to frame an investment as buying optionality on promising R&D and human capital. Regardless, clarity of purpose is important in building the right valuation and partnership structure for success.

We are in a renaissance of entrepreneurship. EY research indicates one-third of these firms are open to exiting their business during the growth cycle. Today, strategic firms like Google and Facebook are buying up compelling start-ups. For more traditional enterprises, a strategic partnership or buyout might be just what's needed to transform regular innovation into real disruption.

For more details, please see EY Digital Deal Economy.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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