Corporate venturing is currently booming.
In this series of blog posts we’ll share what we’ve learned from our experience in creating partnerships between corporates and startups which deliver value to all sides.
In the past few years hundreds of companies have embarked on a startup venturing strategy.
They’ve been collaborating with, and sometimes investing in startups in order to accelerate their innovation, change their internal culture and even create a hedge against the kind of market disruptions that AirBnB has brought to accommodation, or Uber is threatening to transportation.
However the very same reasons which compel these partnerships – the wildly contrasting cultures and speed of operating, the very different conceptions of the future – can too often sow the seeds of their failure.
When talking about ‘startup venturing’, we’re not just talking just about going and buying a service from a startup, nor are we talking about just going and acquiring a startup outright. Startup venturing differs from straight procurement or acquisition, in that the corporate is advancing some value via investment, grant or expertise and with a degree of risk around what they’re going to get in return. And it turns out that getting these types of deals right is pretty hard.
Over the past eight years we’ve started businesses, invested in startups, worked closely with big corporates, participated in, and even founded corporate venturing programmes.
The culmination of all that experience is an understanding that finding and executing startup venture strategies is far from straightforward. We’ve seen corporates lose money and executives lose their jobs and we’ve seen startups killed by partnerships that never materialised or partnerships which were set up in the wrong way.
But we’ve also seen transformations on both sides; great new businesses getting traction, big corporations innovating much more rapidly, and mutual gains from the cultural exchange.
In the spirit of wanting to see more of the positive and less of the negative, we’re sharing some of our experience to help the development of this fast-growing field.
Looking for the real mutual value
Creating mutual value seems like such an obvious point that you might at this stage be wondering if we’re going to tell you anything you don’t already know.
But bear with us, because we’ve learnt that the real value sometimes isn’t in the places where you think it is. Getting this right is vital in ensuring your strategy is not just a success in the long term, but builds sufficient support across your organisation for it to get off the ground in the first place.
There are a broad set of areas in which you can look for a return:
- Access to technologies or expertise that could transform your business.
- Using under-utilised assets.
- Accelerating internal cultural change.
- Getting a pipeline of future acquisitions.
- Hedging against big disruptions to your core market.
- Simply going for a straight financial return.
Broadly speaking, the first three are likely to pay back in short-to-medium term timeframes, while the second three are more likely to see a pay back in medium-to-long term timeframes.
While every business is different, we’ve found that a combination of short term and long term impacts is often the best way for a successful startup venturing strategy.
However, while identifying what you want to get out if it is important, it’s only a first step. You then need to find the areas of mutual benefit.
How is delivering cultural change within your organisation a benefit to the startup you want to work with? Often companies will try and make this work by offering the startup what they see as a valuable contract – but this in itself can be problematic.
Where there is strong alignment about what the founders of the startup are trying to do and what you need, then partnerships can provide a valuable way to fine tune product-market fit, get some validation to use elsewhere, and perhaps start providing revenue.
However, there’s sometimes a temptation on the part of the startup to try and make the deal work; they want validation and investors are pressing them for revenue. This can drag them away from focussing on creating a product that will scale to many customers, and not being attuned just to one.
We’ve seen this happen, and the distraction it creates, along with unneeded product complexities, can kill a business quickly.
A better approach is what we call ‘looking for the special sauce’. Good startups all have a special sauce; this could be the combination of its founders, a genuinely differentiated culture, or an approach to product. It’s a good idea to identify this and then ask honestly whether what you’re proposing to do is going to enhance that special sauce or dilute it.
We think some of the best startup ventures have been those based on a corporate making the most of under-utilised assets. In many cases these are core elements of the corporate’s business, such as technical and regulatory expertise, that might not even be seen as assets internally.
In others, assets such as route-to-market might currently be given away in the ordinary course of business, missing opportunities to gain additional value from them. Identifying these is often the breakthrough moment in constructing a partnership which delivers mutual value in both the short and longer terms.
In the next post we’ll look at doing the deal in the right way.
IU holds regular breakfast briefings on Creating a Startup Venture Strategy at its offices in London, and also worldwide via webinar. Register for a session here.