How can procurement teams assess and mitigate the risks of engaging with startups

There is no doubt that the vast majority of corporates recognise that there is value in the innovation brought to the market by startups. However, despite the countless pilots, incubators and innovation competitions, large-scale and successful deployments of startup solutions within corporates are still few and far between.

According to a survey conducted by the Supplier-Enabled Innovation Center (SEIC), 85% of procurement functions identify startup capability as either ‘very important’ or ‘quite important’ to their business. But only 17% of these procurement professionals see their department as “very important” to startup engagements. In fact, 33% believe they are “not at all important”.

Procurement teams have the difficult task of balancing their search for the best solutions for their company, with their duty of minimising risks – which jars with the perception of startups. Indeed, a startup might have the most advanced industrial robot there is, but if it’s not able to guarantee large-scale production and long-term financial stability, the unknowns may be too big for a corporate to take the plunge.

Thankfully, there are ways in which procurement teams can make their companies benefit from the latest technologies while mitigating risks. Below we share some key criteria and considerations from Early Metrics’ startup rating methodology to take into account when assessing a potential startup supplier.

Define clear needs, goals and KPIs

Before a procurement professional starts looking for innovative suppliers, it is obviously essential to define and prioritise the corporate’s strategic and technological needs as well as the addressable scope. But it is also equally important to keep an open mind as to what the solutions to these needs or issues may look like, in order to be inclusive of new technologies or models.

Moreover, procurement managers need to define what success means for their company when engaging with startups. Is the goal to find new products to use internally, to gain a competitive edge, to find add-ons for their client offering or make their brand more innovative? Once the shortlisting of potential candidates is done, it’s crucial for the success of the relationship that both the startups and the company fully understand and are aligned in their goals.

Moving forward, the corporate and selected startups need to set clear timelines, KPIs and checkpoints to assess the suitability of the relationship. This will prevent misunderstandings and delays, consequently reducing risks in working with the startups and enabling the scaling up of the collaborations.

As Stefan Winners, member of the board at Hubert Burda Media said in a BCG study: “It is key not only to create a tangible investment rationale, but also to clearly communicate the objectives and specific outcome of a collaboration. Both parties should therefore set up and sign a letter of intent regarding the collaboration to make expectations clear.”

Look at the financial metrics, but not only

If you are looking for cutting edge technology and innovative solutions, chances are startups will be further ahead of the curve than other traditional providers. This also means that they will have less financial data and client case studies to prove their legitimacy. While it is still valuable to take into account the hard numbers in terms of capacity of delivery and revenue generated, procurement teams need to look at the qualitative aspects of the startup as well to fully assess their risk.

The management team of the startup, for instance, gives a good indication of the growth potential and stability of the business. If the founders master the technical and commercial skills to lead their company and have hired co-founders or staff with complementary capabilities, it is a positive sign for their ability to deliver on their promise.

Indeed, ScaleX’ data on over 2000 rated and tracked startups shows that market expertise and team complementarity are two of the most influential criteria on startup survival rate. This data set also highlights that there is a strong correlation between the founders’ level of commercial skills and their startup’s growth potential.

Moreover, even if they are at the early stages of their journey, the speed at which they have completed their initial technical and commercial milestones is a telling factor that can inform the risk assessment. The technical complexity and derived R&D needs as well as the legal complexity that surrounds a startup’s project must be taken into account.

Another significant risk factor is, of course, the startup’s level of dependence on a few external stakeholders, whether they are suppliers, partners or clients of the startup.

It can be difficult to assess and compare these qualitative and quantitative criteria in the risk assessment process. ScaleX' scoring methodology is one example of a solution that allows to weigh these factors and get a clearer picture of an innovative business’ potential and risk.

Adapt procurement processes and internal communication

Oftentimes, despite a thorough risk assessment and a successful pilot, the collaboration between a startup and a large company loses momentum and dies at the deployment stage. The reasons can be multiple, of course, and there is often shared blame between the innovative supplier and its larger client. So, what can the procurement team do to prevent a failed deployment?

One of the common pitfalls is that procurement vetting processes are too rigid and lengthy, making them unsuitable for innovative newcomers. That is why many corporates will prefer to rely more heavily on their innovation department or localised business units than on procurement to introduce new solutions via pilot projects. This generally results in a lack of awareness of the innovation POCs that have been conducted in different departments, including procurement. We are observing that many large groups have now tasked their procurement functions to collect and centralize information on startup collaborations and POCs launched.

Hence, improving procurement-startup relationships requires more agile approaches to RFPs and due diligence, as well as more cross-department communication to improve awareness and appetite for innovative suppliers throughout the company. Regular internal newsletters throughout the pilot and then the deployment phase is one easy way to raise awareness.

Some of our clients have also improved internal buy-in by setting up a startup relationship management platform where employees across departments can learn more about startup suppliers. Moreover, ensuring the source of the budget and its allocation for the use of startup solutions is clear from the get-go can make a big difference in internal adoption.

On the other hand, difficulties in the deployment may stem from the complexity of integrating new technologies within legacy infrastructures. For example, AI solutions might not work if the corporate’s data infrastructure is siloed and unstandardized. The startup’s team needs to have direct contact with the relevant stakeholders within the corporate's technical and legal teams to ensure smooth integration and foresee potential complications early on.

Then, it’s not enough for the startup to create an API and a written guide, they need to be ready to do some handholding and be understanding of how difficult it is to modify the large machine that is a corporation. Therefore, both the startup and the procurement team need to work together to lay down the foundation and support the implementation of new solutions.

Finally, it is fair to say that engaging with a young innovative supplier can never be completely risk-free. However, large companies should not be discouraged by the risks as they would miss out on game-changing solutions. Ensuring that the startup is aligned with the corporate’s needs and goals, that it performs well in both financial and qualitative indicators, and that the deployment roadmap is planned in collaboration with the business units and relevant internal stakeholders can help minimize the risks and optimise the chances of success.