Fear(less): Why startups should say ‘YES’ to corporate venture capital money
Written by Topi Jarvinen, Director, Innovation and Entrepreneurship, PwC Finland, Serge Reh, Corporate Innovation, PwC Germany and Florian Nöll, Innovation & Corporate Development Leader, PwC Germany.
Corporate venturing can be a win-win – for start-ups, corporates and wider society
Corporate venturing has been with us for a long time. In fact its origins date back more than a century, when a major US chemicals and plastics corporation decided to invest in a young start-up automobile manufacturer as an outlet for its own products. Today, both companies are global household names.
But while corporate venturing is far from new, what is new is the speed at which it has taken off in the past decade – with more and more corporates setting up corporate venture capital units, seeking to tap into start-ups’ entrepreneurial drive, innovation mindset and vision.
So, if your start-up finds a corporate knocking at the door, is accepting what’s on offer a good idea? To answer that question, it’s important to understand that corporate venturing comes in a number of different flavours, each with its own nuances.
The classic approach is where a corporate invests in a minority stake, similar to a venture capital (VC) investor, but with the added offer of collaboration to support the start-up’s growth. This enables the start-up to continue to reinvent the future by acting entrepreneurially, while allowing the corporate to pursue ideas and opportunities that would be difficult to address through its own entrenched ways of working and thinking.
Another approach to corporate venturing – is the “venture client model.” Here the corporate doesn’t actually invest in the start-up, but instead funds joint projects with it. This can be a great way for start-ups to engage with corporates without giving up any equity. It works best where there’s a clear pipeline of projects aligned with the corporate’s business and helps the startup to find new business opportunities fast. However, it probably isn’t the optimal arrangement for corporations looking to gain insights into opportunities that are outside the current focus areas of today’s business.
Either of these flavours of corporate venturing could ultimately lead to a third flavour, acquisition. But this isn’t an option to be taken lightly on either side. From PwC’s regular conversations with start-ups, we know the vast majority of them are fiercely independent, especially until they reach a certain scale. And corporates are well aware of the risk that absorbing a start-up into their own organisation and culture could smother its entrepreneurial drive and vision – killing off the very reason why they were interested in the first place.
…and a range of benefits
The overall message? That the decision on whether to accept corporate venturing depends on what’s actually on offer. And while start-ups looking for VC don’t usually start by seeking it from corporates, industry statistics show that this is increasingly where they end up finding it – with corporate VC units accounting for a quarter of all VC deals in 2019.
It isn’t hard to see why. Start-ups get to keep their independence while being able to turbo-charge and accelerate their innovation through collaborating with corporate resources and skills. Corporates – virtually all of whom are now facing profound disruption related to the COVID-19 pandemic – get a better ability to keep pace with pervasive change, and to solve problems that they would find hard to address internally.
Corporates also get a further opportunity: the chance to build a healthy ecosystem of fast-growing, innovative companies around their own business. The benefits of doing this extend across society. In a few years’ time, today’s start-ups will be driving the ‘post COVID-19’ economy. So the healthier the start-up ecosystem, the better for all of us.
A two-way street
As opportunities for corporate venturing continue to expand, what’s the best way to prepare to realise them? Like the benefits, this is a two-way street.
However compelling their innovation ideas may be, start-ups need to ensure they’re sufficiently organised and geared-up operationally to be attractive partners to corporates. And for their part, corporations must be able to “let go”, and allow the start-ups they partner with the freedom to do what they do best: innovate to create a better future.
To dig deeper into corporate venturing, why not join PwC’s upcoming Slush webinar? It’s scheduled for 13:00 BST on 24 November. You can sign up for it here. We think you’ll be glad you did!
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