There is no doubt that Corporate Venture Capital (CVC) is currently going through a renaissance. Over the past few years there has been a dramatic rise in the number of corporations investing in private companies, not just in the US but across Europe, Asia and the UK.
According to CB Insights CVCs “took part in $1.7B of investment across 41 deals to UK-based private companies in 2015, representing an eightfold rise in funding from 2011 ($203M across 22 deals).” Across the world corporate venture funds have sprung up with some of the leading players including the likes of Google Ventures, Cisco Investments and Twitter Ventures (US) and firms like Alibaba Capital Partners, Tencent, Baidu and Rakuten Ventures leading the charge in Asia.
Here in the UK we have also seen an increase in the number of firms keen to invest in startups and over the past decade we have worked with leading brands like Diageo to establish innovative accelerator programmes like Distill Ventures – which, since 2013, has committed over £25 million to help founders of innovative new alcohol brands to grow their businesses.
But why now? Why do corporates suddenly care about startups?
The first thing to say is that incumbent advantage is not what it was. We’ve seen huge disruption in the pathway from something being made to a product being purchased. Where in the past the tie-ups between big consumer goods companies and a small number of mega-retailers made it hard for new brands to get on the shelf, the rise of online channels and the hard work that Amazon and other logistics companies have put into solving the challenge of shipping globally has made it easier for small brands to reach a big audience.
While this may be a reason some corporates are fearful of startup challenger brands, the reason many are embracing entrepreneurs is more positive. Aside from purely financial investment plays, corporate venturing is often driven by the following reasons:
Access to true innovation
For some corporates, innovation means incremental changes to existing brands. The NPD machine offers dozens of new flavours, bamboozles us with multiple pack formats, and promises that our skin will be even smoother and the whites of our eyes even whiter. But while the pace of innovation has increased, the results are that many of these companies are barely standing still. Meanwhile, entrepreneurially-led businesses are entering the market with true innovations – not just incrementally different products struggling to justify their shiny badge of “new”.
Unencumbered by legacy systems, unbound by single-track marketing models, and free to reach consumers – and sell to them directly – through their own websites, apps and online marketplaces, these innovators can focus on creating something meaningfully different, inspired by a compelling purpose.
Access to talent
Twenty years ago, the best and brightest graduates did the “milkround” – a series of cocktail parties to meet the blue chip companies offering graduate programmes and a fast-track to senior management. Today’s generation would rather work for themselves and control their own destiny. Empowerment, freedom, a culture which encourages creativity and doesn’t put you in a box. All of these – plus having an economic stake in your company’s future – drive the desire amongst the most talented people to start their own venture or work in a startup.
Entrepreneurs bring energy, dynamism and disruption. They see things differently, challenge things and breathe new life into organisations that are used to doing things a certain way (because they always have). Exposing teams and departments to entrepreneurial thinking can have an inspirational impact, igniting ideas and unlocking the potential of individuals who use the freedom to flourish.
Entrepreneurs can also have a big impact on the way corporates leverage their own assets. Typically large organisations amass assets – licenses or patents, distribution networks, a strong customer base – but utilize them in the same way they’ve always operated. In many cases, entrepreneurs are great at finding ways to leverage these assets in new ways.
But while there has been a surge in corporate venturing, brands looking to invest in startups should be mindful of their approach. Simply absorbing a new brand into your big corporation might very well kill the special sauce that lies behind the startup’s success – the solution is to adopt a partnership approach rather than a straight M&A model.
One of the benefits of this approach is that it can prompt an honest appraisal of what the big corporation is good at, and what is best done by entrepreneurs and startups. An example of this is the Distill Ventures accelerator we created for Diageo. This sees Diageo contribute technical expertise, knowledge of regulations and product specifications, insight into global drinks trends and cash investment to entrepreneurs who bring unique ideas, brands built around a genuine purpose, and innovative thinking in how to build communities around those brands.
Getting these deals right can help big corporates play an active role in the new economy, participating in growth opportunities, adapting their resources and leveraging them in new ways.