Corporates can’t build everything themselves- no matter how good they think they are.

When it comes to innovation, some initiatives may be too risky or outside of a corporation's capability zone, leading to a longer learning curve. Other endeavors may be too new or too complicated to initiate, and corporates may not have all the required skills in-house. This makes partnering with startups with the necessary capabilities more suitable.

This collaborative approach to innovation – also known as Open Innovation – can come in many shapes and sizes. From CVC funds to joint ventures and from M&A to free and paid pilots, anything is possible when large organizations seek to collaborate with startups.

Whatever the form of the collaboration, metrics and KPIs are crucial to its success. How to measure your corporate’s open innovation activities? Find out how by reading what Dan Toma, Partner at OUTCOME and co-author of Innovation Accounting and The Corporate Startup, shared on this topic during our recent Innov8rs Learning Lab on Startup Collaboration & Ecosystem Engagement.

Open Innovation: Pros & Cons

Corporations can’t always undertake innovation on their own. Some initiatives may pose too much risk to consider building or require a lengthy learning process. Additionally, corporates may lack the necessary talent in-house to tackle new initiatives. Thus, collaborating with startups that possess the needed skills may be more convenient. According to Dan, these open innovation collaborations are mutually beneficial. On the one hand, startups gain access to money, reputation, customers, and industry insights. On the other hand, corporates gain time (startups are way faster) and customer and tech insights.

Over time, Dan has identified four major types of corporate-startup collaboration in the open innovation context:

  1. Free or Paid pilots (a “Free Pilot” refers to a trial or experiment where the startup provides its product or service to the corporate at no cost, often in exchange for feedback or the opportunity to showcase their solution to potential customers or investors. On the other hand, a “Paid Pilot” refers to a trial or experiment where the startup charges the corporate for using their product or service).
  2. Joint Ventures (e.g., new product development, market research, technology research)
  3. Acquisitions (more commonly referred to as M&As)
  4. Venturing deals (more commonly referred to as CVCs)

Choosing the most appropriate collaboration option depends on your corporate's investment, risk, and commitment preferences, as well as the desired outcomes. Therefore, if you’re willing to allocate significant resources to open innovation, paid pilots, M&As, and CVCs may be the most suitable options. Conversely, if you’re concerned about overcommitting or are at an early stage of the open innovation journey, free pilots and joint ventures may be preferable. As Dan suggests, the level of investment reflects the level of risk taken.

However, not all partnerships are guaranteed to succeed. Statistics show that 38% of partnerships with seed-stage startups fail, while 27% of partnerships with series-A startups (i.e., the next funding round after seed funding) fail. Dan attributes partnership failure to corporates’ lack of readiness and maturity to conduct open innovation.

“Open innovation is not the silver bullet for a failing corporate innovation ecosystem”.

In other words, if your organization can't manage innovation effectively, partnering with startups will not improve the situation- you’ll just move from 'Innovation Theater' to 'Open Innovation Theater'. Also, it’s essential to approach each type of collaboration differently and not assume that a one-size-fits-all approach will work. “If you excel at CVC, it doesn't necessarily mean that you'll be equally good at piloting or joint venturing with startups, and vice versa”, advises Dan. Continuously monitoring and improving these collaborations is equally important. How to measure the four most popular open innovation types?

Measuring Open Innovation: Framework & KPI's

To effectively manage and evaluate your open innovation initiatives, it’s crucial to identify the key performance indicators (KPIs) that need to be measured at the program level. Once these KPIs are determined, they can be tailored to the specific type of open innovation being employed. And Dan has developed a framework that can help you measure your corporate’s activities in this sense.

The framework has a funnel view and is structured around three phases: demand, live, and outcome. It emphasizes the importance of measuring open innovation activities throughout the entire innovation process, from identifying needs and opportunities to evaluating results.

Tracking and analyzing essential metrics or KPIs at each stage of the process can help you enhance your organization’s open innovation efforts, recognize areas for improvement, and attain better outcomes and improved performance. Additionally, each phase of the framework includes specific KPIs that may vary based on the type of collaboration being considered. In the next section, we will examine what this means practically.

  • Demand phase: do startups seek this collaboration type? What is this telling us about the future?

During the Demand phase, it's crucial to determine if startups are interested in collaborating with the corporate, and vice versa. This involves assessing the level of demand for a particular type of collaboration, identifying potential trends, and making informed decisions about the future of your innovation activities. To measure the success of this phase, you can track KPIs such as the number of requests received or sent for paid and free pilots, joint ventures, M&As, or corporate venture capital investments in a given period. Another useful KPI is the average cost of attracting a pilot, a joint venture proposal, or a potential venture/acquisition candidate.

  • Live phase: how is the collaboration going? Are there any unexpected issues we can solve before it’s too late?

The Live phase of the funnel measures ongoing collaborations. During this phase, it's essential to closely monitor the progress of your collaboration and identify any unexpected issues that may arise. By doing so, you can take corrective action before it's too late. To measure the success of this phase, you can track KPIs such as the number of initiated pilots, projects, acquisitions, or investments in a given period. Additionally, it's crucial to assess progress towards pre-defined goals that have been agreed upon in advance.

  • Outcome phase: what impact did this collaboration type have? Is this what we were expecting?

The Outcome phase consists of measuring the impact a specific completed collaboration had on the corporate. This involves assessing the success of various collaboration types and deciding which ones are most profitable for your organization. To measure the success of this phase, you can track KPIs such as the average cost of completing one pilot, joint venture, acquisition, or investment in a given period. Additionally, it's crucial to measure the new revenue generated as a result of the acquisition or investment made.

Using this funnel-based approach and its three phases, we can now explore how to measure a collaboration with a startup around free or paid pilots, joint ventures, acquisitions, and venturing deals.

Measuring Free and Paid Pilots

Demand phase: for this type of collaboration and this first phase of the funnel, you should track the following KPIs:

  • Number of requests received/sent for either of these two types of collaborations per unit of time.
  • Average cost of attracting one demo (this might include the travel budget of the startup collaboration team or certain event sponsorships).

Live phase: for this type of collaboration and this second phase of the funnel, you should track the following KPIs:

  • Percentage of initiated demos from the total proposed (for added clarity, this should be ideally computed separately for each type of demo).
  • Invested capital per unit of time (for paid demos).
  • Average invested capital per unit of time (for paid demos).
  • Invested resources in a unit of time for either of these two types of collaborations (e.g., time investments).
  • Average invested resources per unit of time for either of these two types of collaborations.
  • Progress in accordance with a pre-agreed roadmap and towards pre-defined goals.

Outcome phase: for this type of collaboration and this third phase of the funnel, you should track the following KPIs:

  • Percentage of completed pilots from the total initiated.
  • Average cost of completing one demo per unit of time, including both the cost of the Demand phase and the cost of the Live phase.
  • Collaboration-specific outcomes, which will most likely vary from demo to demo, but they should be mutually agreed upon at the beginning of each demo (e.g., if the collaboration aimed to reduce the onboarding time of new clients for a corporate-developed solution by utilizing a startup-owned technology, the key result indicator to track would be the reduction in onboarding time).
  • Average time to outcome.

Measuring Joint Ventures

Demand phase: for this type of collaboration and this first phase of the funnel, you should track the following KPIs (for further granularity, these indicators can be tracked by the type of joint ventures, such as new product development, market research, or technology research):

  • Number of requests received/sent for joint ventures per unit of time.
  • Average cost of attracting one joint venture proposal per unit of time (this might include the travel budget of the startup collaboration team or certain event sponsorships).

Live phase: for this type of collaboration and this second phase of the funnel, you should track the following KPIs:

  • Number of projects initiated per unit of time.
  • Percentage of projects initiated from the total received and sent per unit of time.
  • Invested capital per unit of time.
  • Average invested capital per unit of time.
  • Invested resources per unit of time (e.g., time investments).
  • Average invested resources per unit of time.
  • Progress in accordance with a pre-agreed roadmap of the joint venture and towards pre-defined goals.

Outcome phase: for this type of collaboration and this third phase of the funnel, you should track the following KPIs:

  • Average cost of completing one joint venture per unit of time, including both the cost of the Demand phase and the cost of the Live phase.
  • Collaboration-specific outcomes, which will most likely vary from joint venture to joint venture, but they should be mutually agreed upon at the beginning of each demo (e.g., new revenue from products co-developed or resources spent per insight obtained in the case of technology research).
  • Average time to outcome.

Measuring M&As

Demand phase: for this type of collaboration and this first phase of the funnel, you should track the following KPIs:

  • Number of requests sent for acquisitions per unit of time.
  • Average cost of scouting one possible acquisition candidate per unit of time (this might include costs associated with due diligence etc.).

Live phase: for this type of collaboration and this second phase of the funnel, you should track the following KPIs:

  • Number of initiated acquisitions per unit of time.
  • Percentage of initiated acquisitions from the total sent per unit of time.
  • Total invested capital per unit of time.
  • Progress in accordance with a pre-agreed roadmap of the joint venture.
  • Progress towards pre-defined goals.

Outcome phase: for this type of collaboration and this third phase of the funnel, you should track the following KPIs:

  • Average cost of acquiring a startup per unit of time, including both the cost of the Demand phase and the cost of the Live phase.
  • New revenue generated per unit of time as a result of acquisition made.
  • New revenue to cost ratio (total cost of acquisition, including the internal costs such as salaries of the responsible people) per unit of time.
  • Assets appreciation per unit of time.
  • Assets appreciation to cost ratio (total cost of acquisition, including the internal costs such as salaries of the responsible people) per unit of time.
  • Collaboration-specific outcomes, which will most likely vary from acquisition to acquisition, but they should be agreed upon when the acquisition is made (e.g., market capitalization).

Measuring CVCs

Demand phase: for this type of collaboration and this first phase of the funnel, you should track the following KPIs:

  • Number of requests received/sent for venturing per unit of time.
  • Average cost of attracting one possible venture candidate per unit of time (this might include the travel budget of the startup collaboration team to certain hubs or certain event sponsorships).

Live phase: for this type of collaboration and this second phase of the funnel, you should track the following KPIs:

  • Number of initiated investments per unit of time.
  • Percentage of initiated investments from the total requests received and sent per unit of time.
  • Total invested capital per unit of time.
  • Average ticket size (investment) per unit of time.
  • Average stake taken in ventures per unit of time.
  • Progress in accordance with a pre-agreed roadmap of the joint venture and towards pre-defined goals.

Outcome phase: for this type of collaboration and this third phase of the funnel, you should track the following KPIs:

  • Average cost of taking a stake in a startup per unit of time, including both the cost of the Demand phase and the cost of the Live phase.
  • New revenue generated per unit of time as a result of investment made.
  • New revenue to cost ratio (total cost of venturing, including the internal costs such as salaries of the responsible people) per unit of time.
  • Assets appreciation per unit of time.
  • Assets appreciation to cost ratio (total cost of venturing, including the internal costs such as salaries of the responsible people) per unit of time.
  • Collaboration-specific outcomes, which will most likely vary from venture to venture, but they should be mutually agreed upon at the beginning of each collaboration (e.g., market capitalization).

In Summary

Open innovation is a collaborative approach to innovation that involves partnering with external stakeholders, such as startups. To ensure that your corporate’s open innovation efforts are effective, you must measure and evaluate these activities at every step of the innovation process, which can be viewed as a funnel with three sequential phases: demand, live, and outcome.

In the Demand phase, it's important to identify if there's interest in doing open innovation with your organization and determine the type of collaboration in demand. In the Live phase, you should closely monitor the progress of the collaboration, identify any unexpected issues and take corrective action if necessary. Finally, in the Outcome phase, it's essential to measure the impact of the partnership and determine if it aligns with your expectations.

By measuring key metrics at each phase, corporates can make data-driven decisions that optimize their innovation efforts and maximize their chances of success. This includes identifying areas for improvement, tracking progress in developing and implementing new ideas, and identifying potential challenges or obstacles that may need to be addressed.