Asian biz tapping startups as external R&D

Rather than rely solely on in-house innovation, Asian companies are also turning to startups as an external R&D source to get first dibs to technologies to help further their business.
Written by Jamie Yap, Contributor

Large Asian tech market players, ranging from IT to telecommunications, are turning to work with startups via programs and venture funds, in hope this gives them an edge with innovative ideas that will boost business growth. Another reason is internal R&D (research and development) in large-sized organizations can be more expensive and yet not produce viable results as fast.

Observers have noted the growing trend of Asian companies outsourcing their R&D to startups. Thompson Teo, associate professor of decision sciences at National University of Singapore Business School, said one driver is the push toward lower costs and operational efficiency since the marketplace has become increasingly and intensely competitive.

Asian companies are tapping startups worldwide as an external R&D source, in hopes to get first dibs on innovative technologies to boost their business.

"Investing in startups enables large companies to be exposed to new bleeding edge technologies that have potential for commercialization," he said. Plus, it also shows the company is supportive of entrepreneurship, too.

Loo Cheng Chuan, head of local life under the Digital Life division at SingTel, said another factor is that much of the innovation today comes from the startup landscape, and not the large corporations. The Digital Life unit is the digital services arm of the Singapore-based telco.

Furthermore, the "pace of innovation is what really makes the difference" nowadays. Again, startups have some advantages over big companies' R&D departments which tend to be slower and more expensive to maintain, Loo said.

Startups are usually run by technologically up-to-date and forward-looking founders, and bring a nimble, refreshing difference to large corporations. In addition, startup execution speed is something that cannot be replicated easily by large companies as well. And since startups operate as a lean entity, they are in themselves more cost-effective too, he explained.

These advantages also bring benefits to the companies working with them, Loo pointed out. First, companies do not have to hire expensive R&D staff. Second, they can afford to "fail fast, fail cheap", by trying out a lot of new technologies easily.

On the downside, however, startup products are usually "not bug-free" and require several iterations which large companies are not used to, he said. Startups may not be able to understand the overall strategic objectives of the company when designing the product or service, so there may be communication challenges as well, he added.

Growing awareness of advantage
Recently, two Asian tech giants announced plans to work with startups to boost their business growth. South Korean electronics and mobile company Samsung created a new US$100 million venture fund to invest in early-stage startups, eyeing particularly those in Silicon Valley. Japanese telco NTT Docomo launched an incubation program as well as a 10 billion yen (US$109 million) venture fund to spur development of new businesses in mobile devices.

According to Thompson, these companies have become more aware that internal R&D can be very expensive, and there are more efficient and cost-effective ways to source for ideas and invest in new technologies.

Concurring, Matt Walker, senior analyst at Ovum, said startups serving as external R&D not only means less costs and risk for the company by eliminating the need to set up new R&D units and hire staff. There is added flexibility because the company can invest in multiple competing approaches to the same technical problem or business idea.

Startups contacted held similar views. Guyi Shen, CEO of Save22.com, a startup behind the price comparison app of the same name, said Asian companies have realized internal innovation is difficult.

The amount of processes and procedures in a big company is designed to execute existing business models, not pioneer new ones. "So to get potential innovation, it is much easier and cheaper to just invest in startups," he said.

According to Shen, there is also a defensive factor involved. "If your competition has an active investment arm [for startups] and you don't, that's a competitive disadvantage because you could be losing out on dealflow. Nobody wants to miss out on investing in the next Facebook or Google…. So, you see a lot of companies are pioneering venture arms in response to their competitors doing the same."

Marcus Tan, director at Clault, an online enterprise-grade security storage service, pointed out that the strategy to work with startups is to have access to innovation that is outside a company's core R&D competencies, but may be complementary to their existing business. A startup's eventual product could also help open new markets for the company, he added.

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