Partnering with Startups – risky business?

In our latest series of blogs and vlogs, Capgemini Ventures is looking at the role of startups in transformation and value creation – and for any partnership to be successful, the importance of risk management can’t be underestimated. So, we’ve joined forces with Early Metrics, a leading independent startup rating agency, to outline some of the key considerations.

Risks are inevitable when running any business – not least within the ever-evolving, highly uncertain environments within which startups operate. However, while risk-taking is a common trait found in entrepreneurship, it doesn’t come as easy to large corporates that are more comfortable in pursuing success using traditional, low-risk methods. How then, do we strike a balance and handle risk management for sustainable innovation?

Startups face numerous risks in their different growth stages, which sometimes lead to failure. This could be due to internal factors, such as a weak business model or poor financial planning; or it could be down to external factors, such as market demand or the recent pandemic. But even when startups get it right, large corporates still face challenges when it comes to adopting the new cultural shift required to work with them.

To ensure a safe and secure partnership, it is therefore imperative to assess a startup’s maturity on a number of critical aspects via a structured and customized process. This process should take into account some of the following considerations:

Reducing risk exposure when partnering with startups

1. Analyze financial risk first

According to CBInsights, running out of cash, or failing to raise new capital, is the most common reason (38% out of 111 researched) why startups fail. Money is the fuel that runs startups, and it is easy to burn out without proper financial planning.

Analyzing a startup’s financial data is therefore just as important to a large corporate as it is to an investor. And it is the responsibility of a large corporate to assess the startup’s key financials to ensure stability over the course of their partnership – no matter whether it’s projected to be a long-term or short-term relationship.

2. Prioritize cybersecurity

Cybersecurity is perhaps the biggest risk when partnering with any organization, not just startups. While disruptive breaches at major firms often make headlines, such as the recent Kaseya or SolarWinds stories, startups are becoming a prime target for organized crime due to their perceived lack of defense against hacking, so it’s important to thoroughly check if the startup has the right security measures in place.

The number of data breaches in small businesses is almost the same as in large enterprises, as per Verizon’s Data Breach Investigation Report 2021. The damages caused by such attacks are almost irreversible in most startups; 60% of small businesses fail during the aftermath of a cyber-attack. Consequently, it is not enough just to master the initial defense to avoid a breach, it is of equal importance to have a robust cyber-response strategy planned out and in place.

3. Ensure data privacy

Data is a vital asset for businesses of all sizes, but as startups scale up to partner with large customers, it is particularly important for them to have adequate privacy policies in place to handle confidential data responsibly. Even with the blurred geographical borders of a connected world, it is essential to stay compliant with regional regulations, such as the GDPR.

The key for startups is therefore to recognize the need to have data privacy practices in place and take necessary measures for proper guidance – with the constant support of an internal or external Data Protection Officer (DPO). The large corporates partnering with startups also need to assess their privacy posture for engagement and to avoid future risks and possible huge financial penalties.

4. Minimize operational risk

Operational risk is the most common risk of all. After all, an incredibly innovative product is ineffective unless the business fit has been established. Without confirmation that a product or service can be successfully integrated into the existing business model, an investment in resources may be wasted. For this reason, early-stage startups often hit significant roadblocks as they scale.

Effective mentorship from a trusted partner is vital in equipping the startup with the tools it needs to succeed. Over- and under-mentorship both handicap growth, so a clear plan at the outset is crucial in mitigating against risk or overriding the innovative value of a company by subsuming it fully into the bigger company’s ways of working. To address these challenges, it is necessary to undertake a comprehensive review of the Startup.

5. Check for regulatory compliance

Organizations of all types and sizes are exposed to compliance risk, whether they are public or private entities, for-profit or non-profit, state, or federal. But regulatory compliance is an especially complex area for startups during the early stages. As a startup begins to scale, it is crucial to remain compliant to local laws and regulations – but it doesn’t have to feel daunting with the support of a trusted expert.

Capgemini, for example, helps startups understand the importance of all-inclusive policies that include anti-money laundering and anti-fraud guidelines in order to avoid future risks. We also help clients look for existing and/or past legal cases with startups, issues involving fraudulent activities, reputational damage regarding compliance, or any possible political influence.

Partnering for success

Managing risk is never an easy task for organizations that focus solely on commercial growth. They must instead allocate specific resources and efforts towards risk management in order to avoid the kind of impending crisis that can damage their organization’s future.

We understand that startup partnerships require special consideration and customizable processes. We’ve therefore developed an assessment framework in partnership with Early Metrics, which provides a comprehensive view of a startup’s bankruptcy risk and growth potential to business.

Our assessment framework is not just a decision-making tool, it’s consultative and resource led, providing valuable guidance and expertise to Capgemini’s business leaders and sectors, It enables them to assess the risk, so that ultimately organizations can make faster and better decisions when collaborating with startups.

For further insights on sustainable innovation with startups, don’t forget to keep an eye out for the remaining blogs and vlogs within this series. Meanwhile, you can catch up on our previous blog article here.

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Authors:

Vasuja Kishore Salikineedy, Senior Manager, Startup Assessment Services Lead, Capgemini

Vasuja is a lead for Startup Assessment Services (SAS) as part of Startup Catalyst initiative by Capgemini Ventures.

Early Metrics, ratings & research empowering a changing economy, independent agency based out of London

Early Metrics produces ratings and research to empower a changing economy. The independent agency has developed a scientific methodology to reliably evaluate both qualitative and quantitative metrics in startups and SMEs.