An increasing number of big companies are hiring small businesses to help them develop innovative products, processes, and procedures.

If your company is an innovator, you may be able to team up with larger firms to grow your business much more rapidly.

Many small businesses see themselves mainly as competitors with larger companies in their particular industries. But that is not always the case. Many larger companies, recognizing their sluggishness in developing new products or services, are actually looking to smaller companies—often their own competitors—for a hand in speeding up the innovation process.

Why Large Companies Are Slow Innovators

There is a significant amount of literature discussing the weaknesses of large companies when it comes to innovation. In the past several years, many articles and blog posts have appeared with headlines like “Why Small Companies Have the Innovation Advantage,” “Why Big Companies Can’t Innovate,” “NASA Finds Big Ideas from Small Businesses,” “Saying a Large Company Can Innovate More than a Small One Is Wrong,” “Innovation: The Big Can, the Small Do,” and “Why Small Companies Are More Innovative.”

Some of the reasons that many observers see smaller companies as more innovative include that:

  1. Small companies are more nimble, with less bureaucracy and fewer organizational approvals to obtain before an innovation is developed and commercialized
  2. They are less burdened by status quo thinking than larger companies

Decision-makers at larger companies often have a “don’t rock the boat” mentality, because of the fear of making a mistake that could cost the company a lot of money, and as a consequence cause them to lose status within the company or even their position. In addition, it is often extremely costly for large companies to commit resources for innovative projects because of significant overheads that they must allocate to these projects.

Furthermore, to big-company decision-makers, innovative projects often seem like small potatoes at their start—i.e., they seem like projects that won’t add very much to the bottom line for a long time.

Finally, some observers say that big-company thinking does not easily lend itself to innovative thinking. Rather, they suggest that large companies are much better at execution than at innovation.

Small Companies to the Rescue

The result of all of these factors is to slow down innovation potential at large companies. One recent development has been that larger companies are now looking at small innovative companies in a new light—as potential partners in developing new products, processes, and services. And this presents significant opportunities for small businesses that can provide the needed assistance.

A Case in Point

A recent Bloomberg BusinessWeek article titled, “Behemoths Struggling to Innovate Hire Small Companies to Help,” noted what the author called a “role reversal,” where “a startup takes on a mentoring role to help a large company’s in-house research team develop, test and validate innovations.”

The article highlighted the case of a startup called Vuzit, which commercialized a cloud-based document delivery system. Vuzit was launched in 2006, but in its first few years, did not bring in sufficient business to sustain itself. By 2009, it had run out of cash. Its fortunes turned around, however, after a consulting firm suggested that it market itself to large companies that were seeking help in innovating new products.

By 2010, Vuzit had been hired by two large companies—a bank and an aerospace firm—to “help brainstorm and implement new technologies.” The bank wanted to develop mobile deposit technology quickly so that it could keep pace with its competitors. The aerospace company wanted to index, store, and display top-secret documents for the U.K.

Chris Cera, the founder of Vuzit, said that these new customers enabled his company to repay the majority of its investors. In addition, he said “The engagements…allowed us to pivot, [and] we spun off a new company, Philadelphia-based Arcweb Technologies,” a product design and development company.

According to Coley Brown, CEO of VisionMine, of Englewood, NJ, the consulting firm that worked with Vuzit in 2009-10, this type of role reversal—with a small company helping a larger one—has become emblematic of the “open innovation” trend. This trend is generally defined as using flows of information and knowledge from both within an organization and from external sources to accelerate innovative development.

Dr. Henry Chesbrough, Executive Director of the Program in Open Innovation at the Haas School of Business at the University of California, Berkeley, and a major proponent of the open innovation concept, puts it this way:

“With knowledge now widely distributed, companies cannot rely entirely on their own research, but should acquire inventions or intellectual property from other companies when it advances [their] business model.”

Coley Brown, of VisionMine, said that open innovation helps some smaller companies get acquired, while others have their technology licensed by the larger firms they work with. Either way, he says, these smaller firms gain major clients that fund further growth and drive their valuations higher.

The Bottom Line for Small Businesses

In an article on in March, titled, “Innovation: Small Businesses Live It, Big Businesses Buy It,”” Mike Templeman, CEO of Foxtail Marketing, summed up the small-firms-help-large-firms-to-innovate trend in the following way:

“Small businesses and startups are the breeding grounds for innovation. Unhindered by the same tethers that hold down big businesses, these companies are able to innovate in ways that their larger counterparts cannot. In fact, innovation is a necessity for small [businesses]. They don’t have the financial means to accomplish many of their goals, and thus they have to find creative means to an end.”

“…Small business owners and serial entrepreneurs who understand the relationship between big business and innovation are able to exploit it to achieve some awesome financial success. Understanding pain points of larger businesses, creating an innovative solution and then developing that solution into a scalable product will undoubtedly attract the attention of larger companies. This can result in company buyouts, leases, licensing agreements, or partnerships that provide financial windfalls for the small business.”

“….Big corporations are constantly on the hunt for smaller startups that can fill a void. They not only look for innovative solutions but also [for] companies that already have a strong presence and have scaled [up].”

Templeman advises and challenges small business owners to consistently consider such opportunities to help larger companies innovate.

AvatarLew Koflowitz

Lew Koflowitz is an associate of Harborcove Financial. He is a highly experienced financial writer, editor, and public relations professional.