Break Out to Open Innovation

Mercedes-Benz AG produces over 2 million passenger cars annually for a global market in the throes of transformation. Automakers are meeting new demands for electrification and connectivity, new competitors are arising, and customers have new expectations, such as the desire for sustainable mobility. All of these trends are driving the need to speed innovation in every facet of the automotive industry.

In 2016, R&D and digital business managers at Mercedes’s headquarters in Stuttgart, Germany, realized that their efforts to collaborate with startups — a valuable source of external innovation — were being hampered by the company’s existing innovation processes. Those processes were overly focused on internal development and ready-to-implement solutions provided by the company’s established base of suppliers and weren’t well suited to uncertainty-ridden collaborations with promising technology startups. The company needed an innovation pathway capable of more effectively integrating startups earlier in the R&D process and significantly reducing the time required to identify, develop, test, and implement their most promising technologies and solutions.

In response, a new team within R&D was formed to build a better bridge between the promising ideas of external startups and the innovation needs of Mercedes’s internal business units. The team joined forces with partners from academia and industry to cofound Startup Autobahn, what we call an open corporate accelerator (CA). Unlike a conventional corporate accelerator — typically established by a single company for its own benefit — an open CA welcomes multiple sponsor companies and can attract a broader array of more mature startups. This model, also known as a consortium accelerator, improves sponsor access to external innovation and enhances the overall competitiveness of regional ecosystems.1

Startup Autobahn is operated by the Plug and Play Tech Center on the ARENA2036 research campus of the University of Stuttgart. Since its founding, it has attracted 30 large corporate sponsors (clients for startup solutions), including automotive OEMs and suppliers, as well as companies from other industries, such as IT, logistics, and chemicals. It has enabled Mercedes, in its role as a sponsor, to screen thousands of startups, execute more than 150 pilot projects, and implement 17 innovative solutions.

For instance, Mercedes worked with a startup named What3Words to jointly develop a voice-activated navigation system that guides users to precise locations by dividing the world into 57 billion 3-meter squares. It took less than a year to move from the first interaction with What3Words to the integration of its system into Mercedes’s A-Class car models, a process that usually takes multiple years and complex iterations.

The need to expand and accelerate innovation is not unique to Mercedes or the auto industry. Incumbent companies in retail, financial services, health care, and many other industries are well aware of the competitive risks posed by the limitations of their innovation chains and startups’ ability to rapidly exploit digital technologies.2 They, too, are searching for new models of innovation that can transform startups from competitors into partners. Mercedes’s experience shows how the open CA model can enable effective integration of startups into corporate R&D processes and accelerate innovation efforts.

An Upgraded Approach to the Corporate Accelerator

The open CA design differs from a conventional CA in two principal ways. First, it emphasizes and accelerates the strategic fit between sponsors and startups by nurturing only innovations that fill a gap in a sponsor’s products and processes, instead of making a less-focused equity investment in the startup itself.3 Second, it harnesses the network effects of open innovation and platforms by inviting the participation of multiple sponsors, startups, and other stakeholders rather than establishing exclusive sponsor-startup relationships.4

The emphasis on the strategic fit of sponsor and startup makes it more likely that a startup’s solution will be successfully adapted and integrated into a sponsor’s business.5 To achieve this, Mercedes has adopted a venture-client approach, which uses a proof-of-concept (POC) project funded by a business unit (BU).6 In this way, BUs validate and adopt startup solutions at low risk and cost, and startups receive the funding needed to develop and adapt their solutions without sacrificing an ownership stake.

To further streamline the innovation process, Mercedes grants startups supplier status from the beginning of their collaboration. This accelerates the passage of startups through the internal protocols that can slow engagement with external partners as well as the integration of the solution, if and when POCs prove out. For instance, startups are asked to sign only a narrowly tailored nondisclosure agreement, which reduces the legal friction that attends broad-based agreements. The expedited supplier pathway also eliminates some of the in-depth evaluation parameters that are designed to de-risk collaborations with established suppliers. This significantly reduces the time needed to get the collaboration started and sharpens the focus on assessing the potential of the startup’s technology.

The network effects inherent to the open CA design offer sponsors greater access to innovative solutions: Multiple sponsors attract more startups. Because multiple sponsors share the cost of running the open CA, they all save money compared with establishing individual, conventional CAs. Conventional CAs need to invest in creating a strong scouting team and in building an excellent reputation to attract the best startups, whereas an open CA shares at least part of that burden among all platform partners. Additionally, if they choose, sponsors can enhance their startup partnering outcomes by exchanging best corporate practices among themselves.

There are downsides to an open CA model too, however. As in any open innovation scheme, individual sponsors have less control over the program structure and thematic focus of the platform. Individual sponsors also do not garner as much brand visibility in an open CA as they might in a traditional CA, because sponsorships are not exclusive. To ameliorate some of these disadvantages, Startup Autobahn actively follows open innovation principles. It encourages sponsors to influence the selection of themes and technologies for each program and to share their ideas on how to organize and further improve the platform. Additionally, to compensate for the absence of individual visibility, it publicizes project successes to generate greater brand visibility for sponsors and startups.

Key Considerations in the Open CA Process

As with conventional CAs, there are three phases in the open CA process that Mercedes uses: scouting and selection, solution adaptation, and solution integration. Each phase has its own defining challenge, which Mercedes’s CA team has used as a prompt for evolutionary improvements in the process.

Phase 1: Scouting and Selection. Matching startup technologies to business unit needs is the defining challenge in the first phase of the open CA process. When the fit isn’t right, conflicting expectations arise, POC projects tend to fail, and budding partnerships are cut short.

To avoid this, the Mercedes CA team tries to ensure that there is a strong match between BUs and startups early on. It hosts regular one-day Deep Dive events devoted to specific technologies, during which startups can meet interested BUs. The CA team also invites BUs to approach it with their specific needs or interests, and in response it identifies likely startup candidates and arranges one-on-one meetings.

Phase 2: Solution Adaptation. The defining challenge of the second phase of the CA process is proving that a startup’s solution can fill specific sponsor needs. Typically, startups find that meeting sponsors’ development requirements is an arduous challenge, especially in terms of quality and time expectations. The embryonic organizational routines and procedures of the startups tend to be too weak to ensure the delivery of the results that sponsors are expecting.

To meet this challenge, the Mercedes CA team helps startups and BUs jointly design and run POC projects. To narrow the innovation focus and clarify sponsor expectations, the projects have short timelines and explicit goals. Both features help startups focus on the critical success factors in the engagement. Typically, the timeline for POCs is limited to 100 days, during which the business unit and the startup work together to adapt the startup’s solution for Mercedes’s processes or products. Project outcomes are defined and milestones are set in advance to ensure that expectations are clear and measurable.

Phase 3: Solution Integration. The defining challenge of the final phase of the CA process is implementing the solution at scale. Startups usually have multiple projects and demands competing for their attention, and they struggle to mobilize and prioritize the resources necessary to achieve scale. Meanwhile, sponsors struggle to sustain the continued commitment and active engagement of their internal participants in the face of day-to-day operational demands and ever-shifting priorities.

Startup Autobahn supports a successful transition to the solution integration phase by hosting an Expo Day at the conclusion of all POC projects and the end of the adaptation phase. During Expo Day, representatives of the business unit and the startup share results and what they have learned with senior executives of the sponsor company, the media, and sometimes potential investors in the startup. Afterward, a decision is made: The solution is either integrated into products and processes through the BUs, or the collaboration is terminated.

The Mercedes CA team helps BUs and startups successfully manage the transition from solution adaptation to integration by ensuring that the startup’s solution and team are well embedded within the sponsor organization. One way the team does this is by providing access to its internal network of contacts. This network acts as a tight support web, and it helps cushion the bumps in the path to solution integration. Its nodes help startups connect the dots within the sponsor company and make sense of often complex internal processes and initiatives.

Maximizing the Rewards of Open CA participation

Mercedes’s ongoing participation in Startup Autobahn offers three insights into the ways in which corporate sponsors can make the most of the innovation opportunities offered in the open CA model.

Build internal commitment to external innovation. The innovation returns that corporate sponsors reap from open CAs are directly related to the level of commitment they can generate inside their own organizations. At Mercedes, this commitment is generated in three ways.

First, the CA team helps to identify existing technological “white spaces” within the business units, such as the need for a video recognition technology that can support autonomous driving. Once a white space is identified, the CA team helps the BU to fill it by actively searching for possible solutions. The a priori agreement with the business unit on the white space helps establish and maintain the unit’s commitment to finding a solution during the search. The CA team also provides a view into innovative solutions and technologies that are emerging beyond the business unit’s radar. This not only opens unexpected paths to innovation but also generates increased trust on the part of BUs and a greater openness to the CA team.

Second, the staff time and funding needed to engage in POC projects comes from the business unit. This requirement bolsters BU ownership of the project and helps overcome “not invented here” syndrome. The CA team helps the BU stay focused on and committed to innovation goals by easing the workload around administrative and organizational processes. Toward this end, the CA team will use its support network to help align internal stakeholders (in functions such as IT, legal, purchasing, and communications) around the project.

Third, the CA team ensures that the BU’s commitment to external innovation is rewarded. One way it does this is by stepping back and ensuring that BU managers get credit for successful solution adaptation with senior management at events such as Expo Day. This exposure not only bolsters the motivation of the business unit managers but also raises the probability of a successful solution integration and a long-term relationship with the startup, thus fulfilling the raison d’être of the CA team.

Embrace co-opetition. Maximizing the benefits from the open CA model requires an explicit willingness to establish cooperative relationships with competitors.7 Startup Autobahn creates an environment of co-opetition among its sponsors and startups from the first Deep Dive of a new technological program until the Expo Day for each POC project it spawns. Multiple startups may offer similar solutions, and multiple sponsors compete to attract the best startups. Sometimes multiple startups will work together with a sponsor in one project, and sometimes multiple sponsors work together with a startup in a project. Sponsors will also share best practices for engaging with startups and managing successful POCs.

Co-opetition benefits individual sponsors and the region’s industrial ecosystem. It enables the continuous improvement of Startup Autobahn’s program structure and activities. It also results in higher overall levels of innovation, with more POC projects running concurrently and making faster progress.

Choose a playing field. Sponsors in an open CA can improve results by setting parameters for the kinds of startups, technologies, and applications they choose to pursue. Setting a priori search parameters helps them avoid ending up with an unmanageable portfolio of projects.

In running more than 150 POC projects, the Mercedes CA team has found that having a mix of projects — in terms of technologies, incremental and breakthrough innovation, and risk levels — delivers the best returns. But this requires caution in the scouting and selection phase, because the early decisions about which innovations to pursue directly influence the scope of outcomes in the solution adaptation and integration phases.

A mix of process- and product-related applications is also desirable, particularly when the BU is producing complex products with many interdependencies. In general, product innovations tend to have longer implementation timelines with higher solution integration risk, whereas process innovations tend to have shorter implementation timelines, with a lower risk of integration challenges.

The CA team has also found that working with startups that are located nearby accelerates POC development and is more likely to result in a positive integration decision. In addition, engaging with later-stage startups increases the chances that a POC project will deliver a functioning prototype.

The open CA model requires lower levels of investment than the conventional CA model. It reduces the uncertainties of working with early-stage startups with unproven solutions. And, as Mercedes has discovered, it produces more successful implementations in less time.

As the pace and intensity of the technological transformation continues to increase, incumbent companies across industries are finding it difficult to fulfill their innovation needs internally. An open CA, as typified by Startup Autobahn, offers a model for expanding and enhancing access to external sources of innovation.