Automotive startups grow with increasing OEM uncertainty - here is how



Tanja Kufner
10/09/2018

With electric cars, ridesharing, and self-driving technology, the automotive industry is on the verge of disruption. In the near future, people won't need to own vehicles anymore - it'll become a luxury. Just like back in the day, when mass-produced cars first hit the streets and horses went from being an everyday necessity to becoming a recreational asset for wealthy equine enthusiasts.

 

Uncertainty for car manufacturers

OEMs and suppliers fear that the rapid pace of technological development, new business models, and changes in consumer behavior will cannibalize their revenues. That's why most large and established manufacturers of transportation equipment are investing heavily into innovation efforts and mobility startups.

Despite the trend for automotive companies to become startup investors, this is hardly a cure-all solution and will - speaking from experience - more often than not harm the startups they choose to work with. I know of one OEM that bought up around 20 used car platforms and perhaps even more parking apps, and they are no closer to bridging the widening innovation gap.

 

Rapid innovation can only come through rapid outsourcing

Consider autonomous driving; While most large tech companies (Apple, Waymo, Uber, etc) and OEMs (like Ford, GM, Tesla) treat this technological development with the 'early bird gets the worm' mentality, recent trends suggest that partnerships and sharing of data are the best approach to get self-driving cars on the streets. No matter how large the OEM is or how much R&D investment their balance sheet shows, no company can collect and analyze enough data to prepare for every single possible driving scenario - just take a look at the Tesla, Uber fatalities. Investment in data analytics startups is on the uptick . But yet, car makers are hesitant to give up ownership & control of their data, leading to gaps in knowledge that are costly and can, and will, be fatal when applied to real life driving scenarios.

This cautionary tale of corporate innovation serves as a great example of what happens when an OEM wants to maintain control of everything from sensors, to software, to suspension systems for autonomous driving. The exorbitant costs of keeping everything in-house and the sheer time it would have taken them to satisfy consumer safety standards apparently convinced Honda of a wisdom that is only slowly emerging as of now: In order to stay competitive on the innovation front, one has to let go of total control and outsource wherever possible.

 

Opportunities for startups arise

Transportation is becoming cheaper, faster, and more sustainable. OEMs are starting to learn that working with startups is the best way to bridge the innovation gap, and there's more investment in future mobility than ever before. Right now there's a huge opportunity for startups in:

  • Autonomous driving technology
  • Artificial intelligence & machine learning
  • Blockchain use cases
  • Data collection and analysis
  • Connected car
  • Industry 4.0
  • Smart materials
  • Cybersecurity
  • AR & VR
  • Sensors
  • Mapping technologies
  • IoT
  • Etc.

While corporates have large teams of world-class engineers, their change management processes directly hinder their ability to keep up with external innovation. Meanwhile, startups lack the infrastructure and funding to rapidly grow on their own. Tesla has come a long way since being considered a startup, but even with a ton of capital, they consistently fail at meeting production goals.

So how do startups stand a chance in this industry then? One important lesson is to  stay away from hardware. It is common knowledge that startups doing hardware are much more likely to fail than those who don't, and probably even more so in the automotive industry. But what many startups can do better than legacy enterprises is technological development - not because of an inherent difference in engineering capability, but because of corporate processes preventing quick reactions to change. 

Agility is key to technological innovation, just like it's easier to weave through traffic on an electric scooter versus in a heavy duty truck. Traditional car manufacturers require extensive corporate processes to keep their employees working together to move the company forward, so it's not uncommon for a contract to take over 18 months for approval. This kills innovation before it is even born.

 

Car manufacturers & automotive startups - a perfect match?

The obvious answer is in front of us: OEMs and suppliers need startups to innovate, and startups need corporates to get traction and grow. Sounds like a win/win, right?

 

Not necessarily. Partnerships with corporates are almost always doomed to fail, and in most cases they kill the startups in the process. Simply identifying the right person within a large automotive company takes ages, and getting the decision makers to trust a small, fresh-faced startup with managing a large part of their core business is extremely difficult, if not near impossible.

For large, established companies, there are countless benefits to working with startups:  they're cheaper than your current suppliers, they're motivated, and they build an innovative product that can be a huge benefit to the business. There are crucial hurdles to take though: Getting C-level buy-in is a necessary and tiring process, as is securing Board approval for the project and budget, which is natural when the board only meets twice a year. The legal department has to draft contracts, and compliance, IT and procurement all have to be happy with the cooperation(spoiler: they aren't and will never be). The list goes on

Those processes exist to make sure the company is functioning at a certain standard, and by their very nature, startups will break those rules. This fundamental mismatch and unwillingness to compromise is why OEMs can buy all the startups they want and hire all the data scientists they have room for, and still not become innovative.

But there is hope. Despite the inevitable hurdles, a collaboration between startups and corporates has the potential to be a massive success for both parties- if done right.

 

Startups: do your research

As a founder, even if you reach the right people and an OEM takes interest in your startup, it will not guarantee its longevity. If all goes well, you'll come across tons of obstacles in IT, compliance, procurement, and you'll be treated like a low-level employee. Plus you can expect to be paid six months after completion. Without additional funding, your company will run out of cash by then, leaving your dreams in scrambles and you moving back into your mom’s basement.

This doesn’t have to be the outcome though:

Be very careful of when and how you approach a corporate. Do your research, and choose your potential partners carefully. You run the risk of corporate 'innovation mining,' where large companies show interest in startups but then just copy the idea and build their own expensive, clunky version of it. Corporates also favor acqui-hires, where they basically buy your company and turn you into an employee with no control over the direction of your product.

If you want to work with a specific OEM, see what their history is with startup collaboration. Read the fine print and get two or three legal opinions before you sign anything. Get advice and be coachable. Network. Go to tons of investors and collect feedback - it's like free consulting.

 

Corporates: willpower is key

If you're a key decision maker at an OEM and you're serious about building internal capabilities to successfully partner with startups, excellent! There's still a lot of work you need to do before even going out to meet with founders. Your biggest obstacles will be IT, compliance, procurement, and the Board.

dynamics

 

Keep in mind that all of the naysayers just want to do their job right, and their job is to make sure there are processes in place. Suddenly, you're asking them to make tons of exceptions for a small startup, which is already super risky and if something goes wrong, it's their responsibility for not making sure the rules were followed. They have no motivation to help you.

Before engaging with a startup, you have to make sure you have:

  • C-level buy-in and Board approval
  • Defined IT Security requirements - what software is allowed, what is an absolute no-go, where can you get approvals ahead of time
  • Founder-friendly legal contracts ready to go (if there's delays or they only benefit the corporate, it would drive away the best startups and potentially kill the ones who do sign)
  • Special permissions from Procurement and a direct line of communication with finance (or whoever pays service providers)
  • An internal Business Unit sponsor (someone experiencing the pain points the startup is intended to solve)

It's incredibly hard to get this done, but not impossible. One key takeaway from my experience with corporate innovation is that the best way of dealing with the hurdles is to circumvent them entirely.

 

Sacrifice process for progress!

Corporations need to be more agile - do not wait until your team builds a detailed, 10-year roadmap. Collect user feedback and iterate the next day. Think outside the box. If you can't get exceptions, create them. Having a legal separation between the core business and the innovation efforts is a great way to bypass the rules, but that also takes time.

I've lived it first hand, from both sides. It usually takes a corporate 3 years of working with an accelerator to really learn how to do innovation the right way. But if you meet a startup with a really good solution, they won't wait around until you get your ducks in a row. The OEMs with the most innovation experience have learned a very important lesson: The ones that truly succeed in the global market are the ones that understand the importance of getting their startup investments right.

 

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