Startup and innovation hub collaboration – how to make it work

Out-Law News | 20 Jan 2015 | 3:07 pm | 3 min. read

John Salmon’s Financial Services blog

Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.

Most financial services businesses realise that to innovate effectively they need to engage meaningfully with innovators. For a growing number, this is done through partnering with a startup or by buying in talent and establishing an innovation hub or lab.

Each approach has its challenges, but one that is common to both is culture. Startups innovate not only because they have technical expertise that existing businesses lack. They achieve success in timeframes impossible for larger organisations to compete with because they take a different approach to business. Everyone has now heard the phrase "I'll seek forgiveness afterwards not permission beforehand". Innovators brought in to a more traditional business often have this same mindset.

But how does a financial services business balance the need to engage meaningfully with innovators with responsibilities to shareholders and overall accountability to the wider economy for its actions and the decisions it makes?

The starting point has to be bridging the language gap that almost always exists between innovators, commercial decision makers and compliance teams.

The Uber example

Uber is the latest example of a 'market changing' startup that began by taking the approach of seeking forgiveness after taking action. Founded in 2009, Uber has now launched in 250 countries and is worth $40 billion. It has been accused of bullying everyone from taxi drivers through to journalists.    

But five years in and Uber's founder, Travis Kalenik has made it clear that he understands the importance of bridging the gap between the language of startups – ambition, speed to market and success, and that of regulators and politicians – responsibility and accountability.

Kalenik now speaks of Uber as "partnering" with cities and claims that Uber has created 7,500 jobs in San Francisco, 13,750 in New York, and 7,800 in London according to reports. He believes that Uber will deliver 50,000 European jobs if regulators and governments co-operate with his business.

His goal is to "drive down the cost of taking Uber below the cost of owning a car" – a consumer-benefit focused goal. In taking this approach, Kalenik is building a case for regulatory cooperation that goes hand-in-hand with the overriding interests of the regulators themselves. It becomes very difficult for any regulator to push other interests, such as establishing a competitive market through rules that protect incumbents, ahead and at the expense of innovation that brings with it overriding consumer benefits.

Financial services businesses can learn from Uber's approach. Rather than delay innovative ideas until they have a full grasp of the complete regulatory picture – one that may never come in some instances – they could begin the process by identifying the regulatory objectives which their proposed innovations support.

The Financial Conduct Authority's Innovation Hub, while largely focused on startups, has the additional responsibility of looking into areas where the regulatory framework needs to adapt to enable further innovation in the interests of consumers. Engaging with the FCA's Innovation Hub may open an alternative path to effective advocacy for firms that can highlight the consumer benefits of innovations they propose and how those benefits override other market interests.  

The language between partners

But before a financial services business can get to the point of engaging with the regulator in a language it will appreciate, it has to overcome the language barriers that exist within its innovation development processes. A shared appetite for risk is essential if a financial services business is to benefit from partnering with a startup or innovation hub.

Innovators think and act in very different ways from risk averse global financial institutions. They use terms which tend not to be used in a highly regulated business: "failing fast" and others. By contrast, established financial services firms are incentivised to be risk averse, and as a result, allow slow development cycles and static governance regimes to become entrenched.

For any partnership to work, the parties involved must align their objectives and see value in shared ways of working. This can be difficult when a startup has as its sole focus finding and maintaining operating capital, holding on to talented people and succeeding before someone else does.

The challenge for financial services firms therefore is to incentivise startups they work with, and innovation hubs they own, to see value in building and balancing risk processes and controls with startup mentality. Whether for tax, competition law, data protection, cyber security, financial conduct authority rules or other hurdles that can be seen to hold back innovation, every business looking to extract value from its relationship with a startup or innovation hub needs to set agreed parameters. They need to do this before the startup goes away and does something that causes a serious problem, or the compliance team derails progress and business opportunity is lost.

Those parameters need to be in a language that everyone shares and set out how all can work together to achieve a shared vision.