Investing, Collaborating With Startups: Playbook For Corporates

Collaboration between startups and corporations has increased in recent years. Despite a decline this year in the amount of corporate venture capital (CVC) investments compared to last year, the number of transactions and investment amounts are higher if compared to 2019 and 2020. In addition, the number of CVC funds has increased in recent years, which demonstrates the interest among companies to attract innovation from outside their organizations.

According to Silicon Valley Bank (SVB), the objective of the corporate funds that exist today fulfills one of three purposes: strategic 32 percent, financial 19 percent or hybrid 49 percent.

Companies get the best benefits when collaboration and investment in startups meet both strategic and financial goals. If a corporation pursues only financial objectives, then it is more advisable to invest in a traditional venture capital fund that has greater experience, resources and economies of scale to invest in startups. 

On the other hand, if the objective is just strategic, there is the risk of only considering the qualitative benefits of the investment, leaving aside the economic benefits. In such a case, besides entering a new market, strengthening an ecosystem or main business as well as the market penetration that a new business model or technology can bring, it should also offer a financial return that is quantifiable. Although it can be difficult to measure some strategic decisions from an economic perspective, due to the uncertainty that a new development or an emerging technology may bring, tools such as those that use real options can lead to a good approximation by linking decision-making to the economic value that those technologies or businesses can develop over time.

However, investing and collaborating with startups requires the corporation to develop a process that takes time, resources, money, and effort before consolidating and obtaining the best results. At the end, innovation is not about designing a one-size-fits-all model that any company can fit into, but designing a model that makes sense to the strategy of each organization. Thus, before embarking on an investment or collaboration process with startups, it is important to consider two key questions:

1. How are investments and collaboration with startups expected to contribute to the company's strategic and financial plans?

2. How can our company start a program with startups that allows us to capture value, develop new capabilities and evolve over time?

To answer both questions, we suggest a playbook called SCALE that defines a roadmap for collaborating and investing in startups and emerging technologies from initial stages up to strengthening company growth and business transformation:

Strategy – This is the starting point for any company since strategy defines the markets and segments the company will enter and the competitive position that it will take. In addition, strategy also defines the business model, channels and differentiators, as well as the technological, cultural and service vehicles that will make it easier to escalate a competitive position. Within this strategy it is important to consider the role that innovation plays as a vehicle for growth and to create a competitive advantage, as well as the role that technology-based startups can play within a winning strategy. For example, a startup can become an additional channel to explore new markets where the company does not have a presence. It can also develop insights about the consumer that may not be available, facilitate faster scaling, complement services, strengthen or develop new capabilities and platforms and even transform the core of the business.

Codify – Companies must translate part of the strategy in an innovation roadmap and codify a set of programs aiming to create value and growth for the organization by transforming culture, mindsets, structures, and a leadership that pursues strategic and financial impact over the long term. Thus, by understanding trends in technology and business models, the company can identify the corporate venturing and CVC models as well as the ecosystems it  should build to leverage the strategy. Hence, this stage is also to codify the innovation thesis in terms of collaborating with and investing in startups as well as having the opportunity to experiment, fail, learn, and pivot to amplify the model.

Amplify – Once you have built and validated the foundations of the corporate venturing and CVC model, then extend the model to a greater number of solutions and searches, broaden the ecosystem and strengthen your innovation and investment organization in those key activities that will allow your company to be more successful and with dedicated and more specialized teams. On the investment side, the team should look forward to strengthening the deal flow process that includes the search for opportunities (scouting), their evaluation (screening), selection of the best opportunities, due diligence, investment committee and the deployment of capital. Additionally, establish retention plans for the best-performing staff. In other words, drive the model forward and take more risk to make a quantum leap in the company’s growth.

Leap – At this stage, the corporate venturing and CVC model become more sophisticated, along with  the access to ecosystems in other parts of the world that complement the innovation roadmap. The tools, processes, structures, people, and reward system also mature to better contribute to the company's strategy. The investment model can also be strengthened by investing in venture capital (VC) funds that are strategically located in those ecosystems to add value in the deal-flow process. Hence, the CVC acts also as a fund of funds (FoF).

Evolve – As we have noticed, industries are transforming faster than ever before, due in large part to emerging technologies and business models, forcing organizations to transform and adapt to changes accordingly. As a consequence, companies must embrace the risk and uncertainty created by these new paradigms with a new mindset and evolve their innovation structures and organization to adapt rapidly. 

To be effective in implementing the SCALE playbook, consider some suggested recommendations and caveats. 

Recommendations:

• Establish clear objectives to be achieved in every stage

• Define metrics that validate that you have achieved the result

• Identify key resources at every stage

• Select the key activities that guarantee success at each stage

Consider some caveats to avoid complications:

• Many organizations hire an investor from a traditional VC fund, leaving aside the strategic component for the company and key considerations in the investment process that can range from minority stakes to making full acquisitions if the technology or startup becomes a strategic asset.

• Some companies adopt corporate venturing models that are not necessarily appropriate in contributing to the company strategy and growth objectives.

Luis Hernández Alburquerque is an expert leader in corporate venturing and corporate venture capital focused on transforming mindsets to build growing organizations based on innovation, technology and venture investments.