Start-up finance: Ten reasons why small and mid-sized companies need start-ups

And why, despite their differing corporate cultures, win-win situations are possible for SMEs and start-ups

Established small and mid-sized companies know their markets and customers and often anticipate trends. Yet, they are not always able to respond to disruptions on their own. In such cases, it can make sense to work with start-ups. This article sets out the ten main reasons for such cooperation. By Henning Thiele (CFO Diersch & Schröder Group)

The almost 3.5 million small and mid-sized companies are the backbone of the German economy, accounting for around 99.6 percent of all companies that are subject to corporate tax in Germany. They possess extensive expertise in their fields of business.

In particular, the digital transformation is more likely to be the domain of start-ups. This actually opens up scope for cooperation between start-ups and small and mid-sized enterprises (SMEs). However, when this does happen, it frequently leads to a clash of cultures. Small and mid-sized companies operate with long-term goals in mind, bonding and developing their employees over long periods and often even across different generations. It is often family businesses that constantly and strategically develop their expertise. Start-ups, on the other hand, tend to be agile, dynamic and creative.

Yet, many areas of the economy are currently experiencing noticeable disruptions. With their business models, small and mid-sized companies do not have an immediate answer to this.

Characteristics of start-ups
Start-ups are a special form of business enterprise. Generally speaking, they are characterised by innovative business models, swift implementation, scalability and extremely rapid growth. Today, start-ups are mostly found in the technology and Internet sector. Typically, they are active in online commerce, software services, financial technology, biotechnology, nanotechnology, new manufacturing processes and the entire gamut of Industry 4.0 activities.

How SMEs and start-ups benefit from each other

Small and mid-sized companies on the one hand and start-ups on the other differ in many ways, but can still benefit from each other.

  1. SMEs can outsource tasks that require special expertise.
    Sometimes small and mid-sized companies lack the skills or agility needed to implement an innovative idea. This inhibits their continued organic development. SMEs then benefit from outsourcing special tasks to experts who hold the necessary expertise and also from their dynamism.
  2. Ready to go: start-ups are already in the operating phase
    Start-ups have a market-ready product and exactly the necessary expertise to drive a development forward. The advantage of this is that they have already analysed the market thoroughly, have a business plan and qualified employees and are ready for implementation. This means that they can start working with an established company immediately.
  3. Involvement secures start-up expertise for SMEs - before others beat them to it
    Capital is what start-ups lack the most in order to monetarise their business idea. For this reason, they are frequently on the lookout for partners. Investors in turn secure a share of a groundbreaking new technology or innovative business idea.
  4. Start-ups offer swift access to special IT know-how
    The pace of development in IT and digitalisation is very dynamic, making it too cumbersome for companies to establish their own departments. Instead, the SME can resort to the specialist expertise held by start-ups.

  5. Small and mid-sized companies benefit from start-ups’ creative working methods.
    They have comparatively fixed working methods due to a defined corporate culture and many years of practical experience. Start-ups are much more flexible in this respect. This is an advantage as small and mid-sized companies can leverage this creativity for their own benefit – and perhaps even learn from it.

  6. Start-ups offer opportunities for testing ideas in the implementation phase
    Working with start-ups offers opportunities for trying out new ideas. As the start-up has already completed planning, market analyses and preparations for implementation, it can immediately embark on implementation complete with the first important reality check.

  7. Small and mid-sized companies benefit from the start-up’s speed
    As a rule, start-ups have strong digital skills. In many cases this allows them to act far more swiftly than established companies. SMEs can benefit from this speed by working with a start-up.

  8. SMEs and start-ups share true entrepreneurial spirit.
    What start-ups and SMEs have in commonent is that they are both driven by an entrepreneurial spirit. They understand the importance and value of an innovative idea and have the strong will to implement it and bring it to market. Aspects such as risk or market penetration are also familiar to both types of company. Whereas start-ups are still in their infancy, SMEs have simply been around for longer. In many cases, they have amassed great experience over generations and built up a solid customer base. Conversely, start-ups are at the very beginning of their efforts to build up business relations and can therefore benefit from SMEs’ established customer networks.

  9. SME involvement drives return on investment
    Small and mid-sized companies can invest in start-ups to help establish them in the market. This commitment can then generate a considerable return. On the other hand, it mustn’t be allowed to become an “expensive hobby”, as small and medium-sized enterprises usually have only limited scope for absorbing risk.

  10. Start-ups help to overcome obstacles to innovation by SMEs
    Innovation by small and mid-sized enterprises may be impeded by a lack of innovative ability, insufficient digitalisation or a shortage of the necessary human resources. By investing in start-ups, SMEs can overcome traditional barriers to innovation and thus maintain their competitive edge.

Strengths of small and mid-sized companies from which start-ups can benefit
Small and mid-sized companies are often owner-managed family businesses that maintain long-term customer relationships and plan their activities strategically and on a risk-oriented basis. They have short decision-making paths and can act flexibly. They have highlyexcellently trained personnel, a solid customer structure and precise knowledge of the market.

Start-ups in a medium-sized holding company

The founders of a start-up often have a plan from the outset to sell the company after it has successfully established itself on the market. After this, they move on to new projects.

It can therefore make sense to take a stake in the start-up at an early stage provided that it is a good fit for a mid-sized holding company. This allows the start-up to continue developing and to make its expertise available to multiple SMEs, generating synergistic benefits across the holding company. Various forms of cooperation between SMEs and start-ups are conceivable: classic supply chain relationships, project tie-ins or equity interests. This is profitable for both sides, resulting in a genuine win-win situation.

We are always looking for interesting partners or new impulses. So let’s talk.

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