How to har­ness the over­looked po­ten­tial in B2B soft­ware Start-ups

Once a month, researchers at Copenhagen Business School provide Børsen readers with a current and research-based perspective on the challenges facing leaders.

This time, associate professor Mercedes Delgado writes about how the interaction between founders, authorities and companies in Danish industrial clusters within e.g. fintech, life science and logistics are essential to promote successful software startups.

Where does innovation happen in today’s economy? It is often found in the companies supplying goods and services to other businesses and the government. These firms drive innovation and create good jobs by providing business-focused products and services (rather than consumer products). In the USA, UK and Denmark, these suppliers make up about half of all companies, forming what we call the “Supply Chain Economy.”

A large and increasing number of these suppliers are business-to-business (B2B) software companies that rely on STEM (science, technology, engineering, and mathematics) skills. Some examples include engineering services, design, cybersecurity software, advanced manufacturing, smart logistics, environmental services, e-commerce, Internet of Things (IoT), and fintech services. These B2B services are often very scalable, meaning they can grow quickly by selling across different industries. Some of them, like cloud computing and Artificial Intelligence (AI), might even in extreme cases become essential technologies that businesses everywhere rely on. In Denmark, companies of all sizes drive this growth: startups like Reflow and Climify, scaleups like Onomondo and Pleo, and large established companies like Niras and Maersk. 

However, many young B2B service companies which are crucial to digital transformation face serious challenges as they try to survive and grow. They struggle to access talent with STEM and entrepreneurial skills, raise capital (especially without patents as collateral), attract business customers, and gain access to data infrastructure. 

To tackle these challenges, founding teams need strong leadership both within the company and externally. Since their potential business customers might be in different industries with unique needs and regulations, these startups must carefully plan their strategy to prioritise which markets to enter and when. 

Take the example of Onomondo, a Danish scaleup making IoT connections easier for industries like logistics and transportation. This summer I visited their cofounder and CEO, Michael Freundt Karlsen, with a group of MBA students studying entrepeneurship at CBS. Karlsen highlighted how early partnerships with local customers were critical to their growth. Their collaboration with Maersk, through Corporate Venture Capital (CVC), helped them test and improve their global cellular network. He also emphasised how important it is for employees to understand their customers in order to identify the right set of end users and customers. This illustrates the two types of leadership needed for startups to grow: internal leadership (engaging with the employees to implement the strategy) and external leadership (building partnerships with key customers).

Customer Data is key

While collaboration with customers is important for any company, it is especially tricky for startups creating “intangible” products like software. These companies often need access to customer data to test their algorithms and prove their value. Early customer partnerships are crucial for all types of software startups: from environmental services (like Reflow and Renable), to Diversity-Equity-Inclusion services (like Develop Diverse), and from smart buildings (like Climify), to big-data analytics (like Dataverz). For university startups, like Climify and Dataverz from DTU, the universities themselves often become important partners, providing resources to validate and commercialise their new services. Many of these B2B startups also join accelerators and university entrepreneurship programs to tap into local innovation networks. 

What about startups using AI (machine and deep learning) in their B2B services?

They are different from other software companies in several key ways. First, they need a founding team with strong AI skills beyond software skills. Some companies show off these capabilities with new leadership roles like “Chief AI officer” or job titles like “NLP engineers” or “Director of Machine Learning”. These positions help signal the importance of AI talent and build trust with customers and investors like the Brazilian AI-fintech scaleup Traive.

Benefitting from collaborations

AI services also tend to be tailored to specific industries due to the specificity of the data infrastructure, regulations, ethical considerations, and business needs. For example, AI for fintech is quite different from AI for aerospace or AI for healthcare. Therefore, AI startups may especially benefit from engaging with multiple stakeholders – government, regulators, universities and business customers – to train and test their software, and to build trust.

A good example is Merlin, a Boston-based scaleup developing AI pilots for autonomous flights using a strong AI-software team. To test, validate and certify their software, they work with many different stakeholders: universities, industry regulators, the government and both military and commercial airlines. Merlin’s business team, led by its CEO and key employees, is experienced in dealing with each of these groups, showing how important it is to have strong external leadership. 

Denmark may not specialise in developing AI technology (as measured by patent data), but there is still potential to build on its culture of multi-stakeholder collaborations and the strength of its industry clusters, such as fintech, life sciences, and logistics, to build unique AI applications for these fields. 

So, how can we help foster succesful B2B startups in Denmark?

Founders must actively engage with the regional industry clusters (especially with local business customers). The Government and corporations can help by providing the data infrastructure and opportunities for early experimentation and testing of software through procurement activities and sandbox initiatives. Finally, universities’ entrepreneurship education programs for managers and entrepreneurs could facilitate not only the generation of the next wave of startups, but also provide new skills for more effective collaborations among startups, corporations, and other stakeholders.