Marcus Daniels and Ben Yoskovitz are not modest in the goals they share for their Toronto-based company, Highline Beta.
Co-creation, the partnering of a startup and a large company to attack a corporate problem, helps produce a product actually needed by companies. Read on
Highline Beta, they say, represents both the “next evolution” of startup accelerators and the “next paradigm in corporate innovation.” These are significant claims.
Highline Beta, which launched in July, is attached to Highline.vc, a pre-seed fund and accelerator of which Daniels is co-founder and CEO. The emergence of the company illustrates the increasing popularity of co-creation, where startups are used to tackle major problems suffered by large companies. In most cases, co-creation involves a startup being created specifically to address a corporate problem.
Among the big companies now using the co-creation model are Canada’s McCain Foods and Coca-Cola, which has used its Coca-Cola Founders initiative to partner with 15 startups in 10 countries. At Coke, co-creation is being used to address what David Butler, the company’s vice-president of innovation, calls “big challenges.”
At Highline Beta, the goal is to use co-creation to create better startups and improve the success rate of startup investing.
The process is expected to work like this: First, Daniels, a digital entrepreneur and pre-seed investor, and Yoskovitz, a product-focused entrepreneur and angel investor, will use their business contacts to find noteworthy corporate problems, then use a “foundry program”— similar to a small accelerator — to investigate each issue, test possible solutions, and determine if there’s potential for a startup. If so, the pair will then turn to their network of entrepreneur contacts. They will seek “venture backable founders” — inside and out of Canada — who are capable of launching the necessary startups. Finally, Highline Beta will back the resulting startups with pre-seed money.
“We really believe this is fundamentally a new model that will generate better startups, which will in turn get better returns for ourselves, better outcomes for our founders and a lot of strategic value, if not great returns, for our corporate partners,” Daniels said in a joint interview with Yoskovitz.
Yoskovitz contends Highline’s approach will help generate startup ideas based on legitimate, “painful” problems. In other words, it eliminates the need for startup founders to sit in front of whiteboards, attempting to dream up innovative ideas.
“All the problems already exist. We believe they are effectively locked up inside these large companies,” Yoskovitz said. “When we co-create a company on Day 1, we’re not starting at zero. We have an identified problem, we have some signals that tell us where the solution should go, we’ve got the founders, and we’ve got the pre-seed capital. It’s by no means a guarantee of success, but we think we’ve de-risked the opportunity for ourselves, as well as for the founders that are going to start the companies.”
The approach cannot entirely “de-risk” each resulting startup, Daniels added. “The reality is that it’s still a pre-seed investment.”
Daniels and Yoskovitz are pitching their approach as novel, though they acknowledge the model is similar to the match-making approach of Montreal-based TandemLaunch. (Yoskovitz previously invested in TandemLaunch).
Started by Helge Seetzen, TandemLaunch links startup founders with technology developed within universities and colleges. The focus is on consumer electronics, and according to Seetzen, TandemLaunch works with companies such as Apple, Samsung, and Sony.
“We’re sort of like the granddaddy of co-creation in Canada,” he said. “The approach of incubating companies internally inside a (larger entity) has been around for a long time, but when we set up shop in 2010 in Canada, there was really nobody else.”
TandemLaunch has a staff of 14 that scouts for entrepreneurial talent and evaluates intellectual property from more than 500 universities worldwide. The best technologies are paired with select founders. The resulting startups incubate within TandemLaunch for a year and are given $500,000 in financing.
“You get surprisingly good companies,” Seetzen said of the co-creation approach. “And I don’t say this to blow our own horn.”
All the problems already exist. We believe they are effectively locked up inside these large companies
TandemLaunch’s last fund included 15 investments; only one of the startups has failed and some have secured as much as $10 million in venture capital. “That is an insane survival rate in seed-stage venture capital,” he said. “Co-creation breaks a lot of the assumptions of traditional seed stage venture capital.”
Seetzen said he has advised a number of people who are attempting to set up similar co-creation models. “I try to encourage them, but at the same time I think a lot of them will run into some significant hurdles,” he said.
“Building these outfits is basically like building a startup — there’s a degree of luck. Some stars have to align for these things to work.”
Seetzen noted that many accelerators have floundered and shut down. He expects the same to happen with the growing crop of co-creation vehicles. “But there will certainly be some that survive and do really well,” he added. “And I look forward to seeing those.”
At Highline Beta, Daniels and Yoskovitz expect to raise between $10 million and $20 million for their pre-seed investments but declined to name any of the investors. An initial pre-seed investment could be made this fall.
Similarly, they wouldn’t say which big companies they are talking with about internal problems in need of startup solutions.
Daniels admits there will be challenges in making the venture work, but argues the potential return is worth the risk.
“We are creating a new model,” he said. “This is a new operating system for disruptive innovation, not incremental innovation. It’s pretty ambitious.”