Why do so many global companies invest in startups?
IT giant Intel recently invested in four Israeli startups, including an AI firm and a blockchain technology pioneer.
The deals, made within a few weeks in autumn 2018, came via Intel’s VC arm Intel Capital. They are among the latest examples of Big Corporate’s blossoming love affair with startups.
Often through what is known as Corporate Venture Capital (CVC), blue chips in increasing number are being drawn to entrepreneurs.
Intel’s fellow Californian resident Google was a trailblazer on this front.
GV (formerly Google Ventures) was launched in 2009 with US$100m of capital set aside for seed and growth funding for tech enterprises.
This subsequently grew rapidly and, in 2014, was complemented by an additional US$125m specifically for European startups.
While recent focus has reportedly shifted towards more mature firms, its legacy is a series of investments in firms such as Shape Security, which claims to have prevented over US$1bn worth of cybercrime in the last year.
Siemens AG, Salesforce, Comcast Johnson & Johnson and Dow Chemical are a few other examples of CVC adopters.
As of October 2017, it was reported that there were over 1,000 CVC funds created by corporations worldwide, and new ones continue to emerge.
In November this year, beauty empire L'Oréal announced the launch of Business Opportunities for L'Oréal Development (BOLD), a CVC fund which will take minority stakes in innovative startups.
It will seek high growth opportunities in areas such as marketing, digital, retail, communication, supply chain and packaging. The startups will benefit from L'Oréal's expertise, networking and mentorship.
Another global firm announcing new CVC plans in recent months is Japanese automotive parts maker Toyoda Gosei. It plans to harness enterprise funds to “accelerate open innovations for [the] practical application and commercialisation of new technologies and products”.
One of the main benefits of CVC investment for the startup – as cited by the British Business Bank – is that it offers the support and guidance of informed investors. Startup founders can access the expertise of the corporation’s leaders, teams and networks.
Other CVC advantages for entrepreneurs include a greater reach for products and services, a wealth of new, valuable contacts and the opportunity to work with experts to further innovate. It might also be the stepping stone to a full exit, should an initial investment be followed up by a full acquisition, for example.
But what of the corporations? Why would an often-risk averse corporate board agree to inject capital into potentially high risk entrepreneurial endeavours?
Just as the CVC approach offers startups access to the benefits enjoyed by the big players, they also enable corporations to do things usually reserved for startups.
They include innovation that is unhindered by hierarchical bureaucracy.
In L'Oréal’s case, this partly means looking for “new business models” in relevant areas like packaging, retail and communication.
As BOLD president Laurent Schmitt explains:
“The fund strengthens our open innovation strategy of connecting L'Oréal's expertise with an ecosystem of enthusiastic entrepreneurs in the beauty sector to address together new consumer needs and aspirations in our industry."
For media and entertainment firm Sky, the innovation its CVC vehicle targets includes disruptive consumer video services, digital monetisation solutions and big data management.
Another benefit of startup investment for corporations is the nimbleness that it affords.
If a multi-national is looking to expand into a new global market or launch a new product, approval from decision-makers on various levels may be needed. The move may take years of planning – and failure to deliver could inflict lasting damage to the overarching brand and reputation.
Startups, however, are much more experimental by nature. They can move forward swiftly with growth plans, and, with the right management team in place, can adapt speedily to challenges. This is especially useful in volatile markets that require a fast response to changes.
For the corporation, startups present an instant route into a new or periphery area. Earlier this month, for example, US beer, wine and spirits corporation Constellation Brands’ CVC fund invested in a bottled cocktails startup and an enterprise whose products include gluten-free beer.
Launching such products as a corporation might have been an arduous process, potentially costing significantly more in resources than the value of the investment.
The CVC move has positioned the company in the box seat of two exciting propositions. The investor in this instance stayed relatively close to its core market. But CVC may be used to gain exposure to something on or beyond the corporation’s market boundaries. A fleet-footed startup may be considerably faster at taking the corporate empire into unchartered territory.
Alongside growth opportunities, startup investment also provides businesses with access to new talent. Skilled individuals with specialist knowledge can offer the wider organisation new ideas, fresh enthusiasm and a different perspective on existing challenges.
A CVC investment can also be a strategic play towards a bigger deal. It is a means of de-risking acquisitions, possibly by backing severals firms all involved in a particularly cutting-edge field relevant to the corporation. The best performing among them may eventually succumb to a full takeover.
The array of startups ripe for investment enables CVC funds to achieve highly diversified portfolios of investments, spanning industries and geographies.
In some circumstances, largely in the tech sector, CVC activity helps to build the so-called ecosystem of the company. For example, a key factor in the success of the sales management tool Salesforce has been its investment in firms that have developed complementary “bricks” to their flagship product, writes medium.com.
Of course, CVC also enables companies to profit directly from their investment. Instead of eventually acquiring their CVC investments, they may speed their journey to an exit - or receive generous dividend payments as they grow.
Given the many benefits of CVC investing, this emerging trend looks certain to continue growing in coming years, as while enabling corporations to diversify, compete and grow, it could also be the catalyst that creates the big businesses of tomorrow.