Compared to angel investors or VCs, corporations can offer more of the 'smart' in 'smart money' and longer time horizons, say the authors of a new book Dado Van Peteghem and Omar Mohout
When a startup needs a specific asset or a capital-intensive infrastructure, corporations might even be the only option. For instance, a chemical company can open their R&D infrastructure in order to grant startups access to labs and testing facilities. Another example is the extensive data asset that an insurance company can offer to data analytics-driven InsurTech startups.
By accessing a corporation’s resources, scale, power, and the processes needed to run a proven business model efficiently, a startup can create an “unfair advantage” against its competitors, which the founder of Smartbear and Wordpress platform builder WP engine, Jason Cohen, says is one that cannot easily be copied or bought. An unfair advantage is what every startup is looking for to acquire or cement a leading position. The startup has none of what a corporation can bring to the table. While capital is always welcome, it is all the other support corporations can offer that should smooth the path to success.
Using motherships and speedboats as an analogy, we summarise the most frequently asked questions we’ve encountered during our presentations and workshops on corporate venturing:
- How many startups should a business ideally work with?
There is no exact number as everything depends on the size and ambitions of the company. As a rule of thumb, there are two things to keep in mind: You should try to ‘chat’ and ‘date’ as much as you can with startups, but only ‘marry’ a few. Let’s say you ‘chat’ with 100 startups, ideally you ‘date’ (setting up a project, proof of concept, test ) with about 20 of them and you actually ‘marry’ (invest, acquire) two of them. That’s a conversion rate of two percent. Be critical!
Secondly. always focus on quality, not on quantity. Make sure you’re scouting work is building a valuable funnel of interesting startups and be critical where to invest time, especially the further you’ve moved in the ‘chat, date, marry’ funnel. It’s our belief that focusing and committing to a smaller number of startups to work with will create maximum value. After all, consider the law of diminishing returns and the Ringelmann effect (people become increasingly less productive as the size of their group increases).
- What is the best moment to collaborate with a startup?
You need to differentiate between the chat, date and marry stage. During the chat stage, even pitching is a kind of (soft) collaboration. Any type of structural or commercial collaboration will lead you from the chat to the date stage. As for the marry stage, that’s simple: once a startup reaches product/market t and has a proven business model ready to scale. Are there exceptions? Yes, acquires or IP/ technology acquisition can occur prior to product/market.
- Should you move startups to your offices or house them in a separate location?
Although it’s true that proximity counts, it’s also true that ‘speedboats’ need to keep a safe distance of the ‘mothership’. Nevertheless, to positively impact the mothership culture, frequent and meaningful exchanges are a must. So, the key is to invite both parties to visit each other often instead of merging them in the same location. If you set up a specific location (a ‘home for radical innovation’) to foresee housing for the startups you work with, make sure the location of the startups is not too far away from the company itself to allow a real connection between both worlds.
- Do you give KPIs to the startups you work with or do you leave them alone?
Chances are that a startup has KPIs, after all if there is one thing that characterizes a startup, its measurable growth. However, once a corporation is coming on board (pun intended), KPIs between the speedboat and mothership need to be aligned to ensure that both are sailing in the same direction. For instance, while a startup is focusing on acquiring customers in the market, a corporation might shift the startup focus to converting (i.e. upselling and cross-selling) their customer base as low hanging fruit. The path to grow will probably change and surely accelerate when a corporation enters the equation. That change should be reflected in KPIs. But that’s more a mutual agreement than a top-down push of KPIs.
- At what price do you invest?
The investment amount is driven by single metric: having skin in the game. That applies to both parties: the corporation and founders alike. So, the optimal point is between 2 poles: on the one hand it should be big enough (for the startup) to become part of overall company and small enough to ensure it stays a speedboat and you don’t take away the entrepreneurial spirit. Typical investments start between five and 20 percent of equity. A minority stake is a good first step avoiding the founders perceiving that the prime objective of the corporations is ‘control’.
- What do you need to look for in the founders of a startup?
In many cases, ‘the jockey’ is more important than ‘the horse’ as you need people who can deal with adversity, setbacks, turnarounds, etc. Especially in a tech environment you need hard working ‘fire fighters’ who move fast, make bold decisions and execute against their vision. Founders need to be both stubborn (execute against their vision) and coachable (willing to learn and take information from other people).
Ideally a startup has two to three co-founders representing a mix of business capabilities (sales), product skills (roadmap) and technical knowledge (development). A technical co-founder in a tech startup is a must: if co-founders depend solely on an offshore development team you have a recipe for disaster. The type of people who ideally lead the startup depend on where they are on their journey.
Initially, when ‘bootstrapping’, contact with the customer and making deals is the priority. During this phase, it’s important to have a true entrepreneurial profile who executes against his/her own vision and work independently to make things happen. When scaling up, collaboration with the mothership becomes important. You need a leader who is willing to execute against a shared vision and wants to co-pilot with the company. In the third phase – ‘Maturing mode’ – you’ll probably need to look for a new leadership style, an MBA-like profile over an entrepreneur. Someone who can manage processes, create efficiency, steer teams, etc.
- How do you keep startup founders from losing motivation after being adopted?
Entrepreneurs are driven by growth and excitement more than money. Once you start a collaboration, make sure to keep your promise of helping them to scale through your network and sales people, and keep them excited by setting up a BHAG (Big Hairy Audacious Goal). Avoid the typical ‘earn-out syndrome’ where the entrepreneurs stay on board simply to get their money before they leave. Make sure they stay real entrepreneurs by opting for minority stakes versus taking control, allow them their speedboat environment (don’t try to integrate them into your processes, building, etc.) and mainly: keep the excitement, growth creates happiness!
- How do you make sure that people in the corporation really use/sell the product or service created by the startup?
There is often a commitment from the organisers of the collaboration but disinterest from people who can really drive the collaboration forward (sales and R&D teams, etc). Once a collaboration is set up it is crucial that a consistent stream of information, training and onboarding follow to make sure that the people in the field understand and use the collaboration to the benefit of their roles. Unknown leads to unsupported.
You might also have to rethink some KPIs. For salespeople for example, selling a startup product next to their traditional portfolio might not be interesting if it doesn’t contribute as much to their individual bonus. In their eyes, the startup can literally be the ‘rounding error’ in the business plan. In that case you can put the KPI on penetration of the product in the market instead of the actual revenue.
- Do you need to integrate startups with the corporation at some point?
In a perfect world, the speedboat could become a new mothership, not just part of an existing one. If none of the executives of a corporate laugh at this thought, they have the right mindset for corporate venture as a strategy. It’s this mindset of radical innovation that is the required culture for success for corporations. In reality however, most corporations will integrate the speedboat as a line of business or as a separate department. And as with any integration, there is a 50/50 chance that it will not work out as planned.
- If you invested, do you need to buy the startup in the end or follow an exit strategy?
It’s not necessarily the end goal, but a successful corporate venture strategy will often eventually end with some sort of an acquisition. In our experience, a corporate should decide what is core for their business and market position. These assets can be acquired. However, you can’t own an ecosystem, so full ownership of all players is impossible.
*Dado Van Peteghem is CEO and co-founder of Duval Union Consulting. Omar Mohout is Professor of Entrepreneurship at Antwerp Management School. Their new book launches in Dubai on June 10.