Startups and corporations face a transformative year, with challenges and shifts opening new strategies for collaboration and success.
As we cap off the start of the year, we reflect on recent dynamics and the shape of opportunities for startups and corporations in the year to come. There is much hope that the current startup winter and IPO freeze will thaw over the next 12 months, along with improved corporate appetite for technology spending. Yet, investors and startups are simultaneously preparing for the very real scenario where a comeback doesn’t kick into gear until well into 2025. To paraphrase Yogi Berra’s famous quote, “The future (path to market) is not what it used to be.”
As startups and corporate innovators plan for the coming year, it is crucial for them to fully understand the market shifts at play and to adapt their playbooks for success accordingly. While the previous decade in tech was characterized by substantial digital disruption that led to robust adoption of startup technology, the tide has changed in a significant way.
Here, we take a closer look at four big shifts in the market for tech innovation that have deeply impacted the balance of power between startups and incumbents:
1. Tighter Budgets Drive Vendor Consolidation for Buyers
With IT budgets under continued pressure amid a tenuous economic environment, enterprises face compressed IT budgets for the first time in a decade and many are looking to consolidate vendors. Many customers who were previously embracing startups across their technology stack are now buying more software from incumbents who offer “good enough” alternatives to startup offerings. Plus, recent studies by VCs show that enterprises intend to shift spending away from “best of breed” vendors to platform players, again handing larger incumbents a leg up in many cases.
This is a new reality that startups are still adapting to. For years, enterprises embraced startup technology, often strongly preferring them to incumbents, in domains such as AI. Today, however, the tilt is towards vendor consolidation, a flight to vendor safety, and proving ROI. This also poses a new challenge for those corporate CXOs who have relied on expanding startup innovation as a way to drive change – they now need to deliver innovation and digital transformation, but often with fewer innovation partners.
2. AI Gains Favoring Larger Players
AI is easily the biggest secular trend in tech today, and is claiming a disproportionate share of innovation spending from enterprises. And here, tech incumbents are a formidable force to reckon with. The meteoric adoption of ChatGPT, big moves and counter-moves by Microsoft/Google/Amazon to win the AI wars, and their ability to leverage their complementary assets (e.g., access to substantial cloud capabilities) and willingness to absorb the rising costs of compute and data acquisition – are just a few advantages.
While a startup’s prospects for raising VC funding for AI are stronger than ever, competition from incumbents is stiffer too which arguably makes it much harder to ultimately succeed and emerge as a market winner. The GenAI landscape can evolve at a dizzying pace and is tricky for startups to navigate. A startup product that is differentiated today may be wiped out overnight by product or commercial moves from tech giants. This naturally creates the need for startups to adapt and pivot. But startups, unlike incumbents, can only afford so many pivots before their runway is gone.
Again, this is a distinct shift from previous waves of AI. Incumbents were often slower followers to startups, who were more agile and enjoyed easier access to capital and long runways. Today, incumbents are reclaiming the word “innovation” and are often moving with agility and urgency that trumps that of many startups. This poses a challenge both for AI entrepreneurs as well as corporate buyers seeking to build a vibrant portfolio of AI capabilities.
3. Distribution Tailwinds for Incumbents
In a down market, “the best product” doesn’t always win, but the best distribution can make an outsized difference. Startups leaning on product innovation alone have a tougher task when they go up against the distribution power of incumbents, and this couldn’t be truer today.
In the last 10 years, many decacorn ($10B+ valuation) startups were built atop the PLG (“product-led growth”) movement, where startups drove product adoption via viral bottoms-up user adoption and without large sales/marketing forces. But this era is facing its headwinds (for now), with enterprises clamping down on “shadow IT” spending, spending behavior that lends itself well to traditional sales and marketing channels. Tech incumbents are therefore flexing their GTM muscle and reaching customers and channels with greater ease. While startups are busy biting at each other’s ankles, incumbents are often sailing through the noise with the heft of their balance sheets and distribution strengths.
4. Startup Mortality Spooks Customers
As VC funding declines and startup revenue growth slows, many startups are shutting down or simply going into a “zombie” state, staying alive but producing limited growth or innovation. As of December 2023, over 3000 startups went out of business according to a Pitchbook analysis, representing $27 Billion in investor value destruction.
As mortality rates spiral, corporate customers are much more concerned about the risks of partnering with startups (especially earlier-stage startups), opting instead for the safety and reliability of larger incumbents. Plus, many corporates begin to question whether startups are the only path to disruptive innovation, or whether they can meet some innovation goals via incumbents who don’t face the same struggles for near-term survival.
In Summary:
The current market dynamics pose many opportunities to incumbents and startups alike. That said, the nature of these opportunities and implications to startup-incumbent dynamics differ from what we have seen in past years. It is important to note that while incumbents are faring better in the current climate, there are significant opportunities for startups to transform industries and make an impact on major fields such as AI, sustainability, and beyond. However, succeeding now will take a significantly different playbook compared to times past – when it comes to choosing opportunities, crafting strategies to win, and navigating execution and pivots.
About the authors:
Gary Dushnitsky is an Associate Professor of Strategy and Entrepreneurship at London Business School, and a Senior Fellow of the Mack Institute for Technology Management at the Wharton School. His research and teaching covers topics such as entrepreneurship, innovation and corporate venturing.
Shruti Tournatory is a startup advisor, angel investor and operating leader with 20+ years of experience across venture capital, startups, and public tech companies. Previously she served as a Partner at Sapphire Ventures, leading the global business development function driving revenue acceleration for portfolio companies.