Opinion: Big corporates are starting startups to survive the digital war

Photo credit: zabelin / 123RF Stock Photo.

It’s a confusing time for established financial services leaders. They are unwillingly engaged in a digital revolution, mostly unarmed, exposed, and unprepared for the war they never saw coming. New fintech startups have put customers at the center of their existence, harnessing new technology to facilitate transparency and efficiency, resulting in meaningful product relationships that just make sense.

Not only are these products more customer-centric, but they are also available to people who traditional banks and insurance companies have excluded entirely. Fintech startups have built businesses around those that banks do not and cannot serve in emerging markets. Aside from partnering, large financial services companies can only do one other thing in answer to this: make up some new clever words.

Fintech startups have built businesses around those that banks do not and cannot serve in emerging markets.

We see more words being created where two things collide to form one new thing. We see it in mainstream entertainment (Brangelina, Beniffer, etc.) and in politics and economics (Brexit). In the finance world, the term fintech has been thrown around for a few years now. Last year, it was further qualified into specific categories such as edtech, regtech, insuretech, and more.

But it’s 2017 now and big businesses need a new word to take on the digital war. Let me introduce “corp-up.” (Hmm… not the prettiest word.) This is “corporate” and “startup” merged to create the newest word in the business world. It doesn’t roll off the tongue, being one of the clumsier in this category, but it does deliver an interesting message: big businesses in banking and insurance are coming after the startup world with capital and intent—a powerful combination that we should not ignore.

I recently visited a few countries to spend some time with large financial services players. These are big brands with impressive accolades in the balance sheet and asset department. They celebrate being in business for generations with millions of customers. When you look under the hood, though, they are desperately inefficient and heading to possible (or certain?) death in this digital future. Enter the corp-up to the sound of trumpets.

Big financial services businesses are full of smart people with a huge amount of experience. They have money, brands, licenses, branches, and advisors, but they lack one thing: a business culture that allows change.

Change is risky. Typically, operating costs in these fat businesses are high, meaning these businesses stopped focusing on the little guy years ago and focused on the people who could afford bigger fees to justify these higher costs. As Michael Schlein pointed out in his recent interview, three billion people globally are invisible to banks, and this is one of the contributing factors. Small fees = not interesting.

McKinsey has been talking about the impact of digitization on business for a while now. A recent paper talks about how the digital revolution is just beginning. If you think today is frightening, wait a few months and watch from the sidelines as things get really interesting. The bottom quartile is expected to see revenues drop like Ivanka Trump’s clothing line from Nordstrom, while the top quartile (who adopt technology) will enjoy disproportionate growth with their faster, better, smarter products and processes, making customers happier while they vote with their wallets.

So, corporates are investing in and starting startups to help them change the game within their game. But you don’t easily find entrepreneurs in corporates. This gives rise to another interesting trend: hybrid. This is where corporates are building multiple challenger ventures on the outside, away from the internal corporate antibodies, driven by a team of seasoned entrepreneurs who have done it before, not long-standing managers looking for a new challenge. These “scouts” are part mercenary and they head off and pave new roads with a small (financial) allegiance to the parent but with a pioneering agenda. If they fail, the parent walks away pretending they didn’t see the spilled milk in aisle four. But if they succeed, the corporate business has a new lease on life, positioned as a leader in innovation and calling their successful children home.

This is not a single startup, but a series of fast iterations of businesses. The simultaneous nature of venture builders means that projects can share resources, management, infrastructures, software, and skilled team competencies. One failure could produce technology that could be used in another success story.

This model creates fast-moving startups right from the beginning and into an MVP and beyond. Don’t confuse this with accelerators or incubators. Instead, their focus is simply the process of constant startup creation that is value accretive to the market segment the corporate is playing in, built using an interdisciplinary team and a loose, but highly effective structure to build fast, away from the daily business.

Someone once referred to venture builders as the nest, while startups are the eggs. Eventually, these eggs are going to hatch into beautiful tech unicorns and fly away (or a Pegasus unicorn to make more sense).