Taking the Proactive Route
According to a report by McKinsey Digital, corporate venture capital (CVC) organizations participated in about 25% of all venture-capital fundraising in 2019. McKinsey analysts report that about 75% of Fortune 500 companies now have start-up accelerators, incubators, or CVC funds (or all three).
Corporations invest in start-ups for two big reasons:
- to minimize the risk of being disrupted from fast-moving start-ups
- to accelerate the pace of innovation within their own product lines
Collaboration helps companies identify emerging technologies that may someday threaten their core business. Or, collaboration can be a cheaper, faster alternative to ramping up internal innovation. Some early-stage companies run pilot projects to create an ecosystem for commercializing the corporation’s most ground-breaking products.
Disruption Occurs Quickly
Fast-moving start-up companies with a visionary leader, big ideas and adaptable, motivated talent can change the world.
In less than 30 years, start-ups such as Google, Facebook, and Amazon have disrupted corporations that assumed they were too big to fail.
Enterprising imaging companies disrupted Kodak even though Kodak engineer Steve Sasson is credited with inventing the digital camera in the 1970s. Kodak executives decided not to scale up and commercialize digital imaging technology because it could disrupt their film and camera business revenues. When Kodak’s patent expired in 2007, other companies seized the opportunity to develop and commercialize digital photography.
Under the guidance of its visionary founder Jeff Bezos, Amazon has disrupted the business models of major publishers, retailers, entertainment companies, and grocery stores. Companies of all sizes have had to adapt to changes in customer expectations due to the “Amazon effect.”
According to the Amazon start-up story on fundable.com, a 30-year-old Bezos convinced his parents to lend him money from their life savings in 1994 to start Amazon. Bezos was working on Wall Street when learned the new Internet was growing at a rate of 2300%.
Amazon started selling books online first because books were universally popular and didn’t cost a lot of money to buy. But Bezos always had much bigger plans. In 1995, Amazon received $8 million in Series A funding from Kleiner Perkins Caufield & Byers and went public in 1997. By 1999, Kleiner Perkins Caufield & Byers’ investment in Amazon had created returns of over 55,000%.
All venture capital firms (including corporate venture capital groups) know that some start-ups they fund will eventually fail. But they accept that risk if it means that someday they will find the next early-stage Amazon.
Innovation Requires Fresh Thinking
Unlike venture capitalists who primarily seek financial gains, corporate venture capital groups often invest in start-ups for strategic reasons.
Collaborating with start-ups can provide access to specialized talent, supplement the corporation’s internal R&D projects, or add missing technological elements to products in development. Corporations also collaborate with small companies to help grow the demand for new types of products that the corporation’s homegrown technology will deliver.
Not All Corporate Ventures Last
According to McKinsey analysts, many CVC groups stop investing in a start-up after 2 to 3 years. They start with good intentions, but the CVC strategies may shift and the partner company may no longer have expertise in the desired industry.
Only 28% of startups are satisfied with their collaboration with CVC groups; 72% of start-ups see room for improvement. Entrepreneurs get frustrated by unclear goals, unrealistic financial expectations, interference from multiple corporate stakeholders, or the slow bureaucratic pace of corporate decision-making.
Eventually young companies that benefit from corporate ventures may choose to seek venture capital from other sources, go public, grow through acquisition, or be acquired by a private equity group or a different corporation.
On a website page, Adobe Ventures lists some start-ups that made successful exits after Adobe Ventures provided early-stage funding.
For example, Adobe invested in EFI when the start-up “Electronics for Imaging” was focused primarily on developing digital prepress workflows and front-ends for color copiers and first-generation electrographic and inkjet presses.
EFI went public in 1999 and grew into a global leader in the transformation of analog printing processes to digital processes and workflows. EFI has built industrial digital imaging systems for ceramics, corrugated packaging, superwide graphics, textiles, and building materials. EFI grew by acquiring entrepreneurial manufacturers of grand-format and wide-format printing systems (Vutek, Raster Graphics, Matan), early-stage developers of specialty wide-format inks (Inkware), and start-up developers of print MIS/ERP systems (PrintSmith, PACE) and digital color proofing (BEST Color). Using this acquired expertise, EFI developed powerful automated workflow suites and specialized inks and printing equipment for each of the industries they serve. In 2019, Siris Capital acquired EFI for $1.7 billion.
In 1996, Adobe invested in Digimarc, a 1995 start-up that pioneered the automatic identification of media, including packaging, other commercial print, digital images, audio, and video. Digimarc “invisible” barcodes are now being used to improve the recycling of plastic packaging, to trace food products that need to be recalled, to limit the unauthorized duplication of brand products, and to use augmented reality (AR) to make printed labels and packaging interactive.
Collaboration Benefits to Start-Ups
CVC groups are typically strategic investors that are willing to put more money into the start-up without expecting a purely financial return within 12 to 18 months.
While the infusions of cash are indeed welcome, entrepreneurs relish the opportunity to get access to the corporation’s pool of existing customers and in-house marketing savvy. Plus, a joint venture with a well-known corporation helps the start-up gain credibility with other investors, including future acquirers or IPO supporters.
In an “Inside the Strategy Room” podcast, McKinsey analysts discussed some of the keys to successful collaboration between corporations and start-ups.
“The success rate is higher when the corporates come in not just with one objective, but a holistic approach to working with the start-up,” said Tawana Sibanda, a partner in Leap by McKinsey. “A singular objective such as ‘all we want from this start-up is talent’ ignores additional capabilities that the start-up could provide. And, it can frustrate entrepreneurial companies that do not like being shoehorned.”
Corporate venturing isn’t new, and it can take many forms. In the outsourced R&D model, the start-up has a complementary capability or technology that the corporation wants to acquire. Commercialization models help later-stage start-ups with adjacent technologies or proven markets grow bigger faster. Or, a corporation can become a contracted customer or supplier for specific products and services.
My Firsthand Experiences
When I worked at the LaManna family business, our innovation-focused graphics converting business partnered with 3M to test the equipment, processes, and materials for developing computer-cut decorative or branding vinyl graphics for cars and recreational vehicles. We beta-tested 3M’s Scotchprint® 2000 digital printer, the first high-speed electrographic printer capable of producing large-format, outdoor-durable graphics at volumes required to commercially produce graphics for brands and vehicle manufacturers.
Vomela’s first facility was just 6 miles from 3M global headquarters in St. Paul, Minnesota, so we frequently hosted engineers from 3M’s internal R&D business units. They wanted to experiment with our state-of-the-art converting equipment to test innovations such as reflective adhesive vinyl for traffic and safety signs and vehicle markings.
The partnership remains innovative, so the 3M-Vomela relationship has lasted more than 70 years.
Good Questions for Deal Makers
As you look for your next potential acquisition target, pay attention to young, growing businesses that have benefited from a collaborative venture with a big corporation. How well the acquisition target worked with their corporate partner suggests how the small company might perform the post-sale integration phase.
For example:
- How well did the executive team manage the funding that the corporation provided?
- Did the small company help its collaboration partner achieve its strategic goals?
- Did the small business combine its industry expertise and in-house talent with the corporation’s funding and
- strategy to chart their own path for scaling up their business?
- Did the relationship experience prepare the smaller company’s management team to better meet the ambitious growth goals of a financial investor?
Call me at 561-543-2323 and tell me more about the types of companies you are looking to buy. I can introduce you to well-prepared business owners and share my industry expertise and information about opportunities to come.
RECOMMENDED READING
McKinsey Digital. “Scale or Fail: How Incumbents Can Industrialize New Business Building”
Kodak invented the digital camera – then killed it. Why innovation often fails | World Economic Forum (weforum.org)
McKinsey: Inside the Strategy Room: How Corporates and Start-ups Can Collaborate successfully (Edited transcript of podcast)