By Arjun Sondhi
An increasing number of large corporations are investing in startups to inspire innovation within their organisation and to prevent falling behind. Over the past few months, there has been increasing number of corporations investing in businesses that sit within the same vertical, with 2018 on track to set a record for U.S. corporate involvement in venture deals (Crunchbase 2018).
But why are more firms investing in startups?
Corporate venture capital (CVC) is helping corporations innovate.
Corporate venture funds are one of the most effective methods of boosting innovation within an organisation.
But why is it more effective than more traditional methods of innovation?
Traditionally, firms would focus on refining existing technologies and products rather than creating new products that would disrupt the market. However, this mentality does not protect firms from changes to the interests and behaviours of the consumer. Companies such as Blockbuster and Nokia should have been focusing on these changes and building products/services in anticipation to market changes, rather than making incremental improvements to existing products.
Corporate venture capital does a lot better job than standard R&D of exploring new territory and ensures the company is always one step ahead. By collaborating with startups that exist within the same vertical the large corporation is injected with fresh ideas that have been grown out of different environments.
Startups also benefit from the relationship
Capital isn’t the only benefit to startups when receiving capital from large corporations.
By partnering with a large corporation, it allows startups to take advantage of the corporation’s network, infrastructure, resources and customers. Being associated with a large corporation also significantly boosts the credibility of the startup, thus opening the doors to more opportunities.
Strategies for a CVC
The purpose of a CVC firm is to ensure that the company is constantly innovating and creating new products. It is also impossible to achieve success with every deal and it is also very difficult to successfully predict consumer behaviours. Therefore, diversification of investments is key to the effectiveness of the fund.
2) Be selective
Filtering your investment opportunities is very important. Rather than investing small amounts in a wide variety of startups, a CVC should invest the resources into a smaller number of startups that they believe have the foundations for success.
CVC firms need to be both time and cost efficient. Otherwise the corporation will view the initiative as a drain on resources, rather than as a necessity for the long term growth of the company.
Arjun Sondhi is the Digital Director at BMC Global Services