Over the last few years, the corporate venture model has shifted away from internal R&D towards an open innovation model in which companies partner with entrepreneurs to create new products or services.
If it's done smartly, the partnership between company and startup provides a capital structure that can help the startup grow even faster. In this arrangement, the startup does not become part of the larger business, but rather, remains a separate operation creating value for the corporation.
The corporation could purchase the startup down the road, but that's not the main goal. For the startup, the goal is to tap into resources to develop and scale market-ready technology. For the corporation, the goal is to speed up innovation and to get a window into where technology is heading.
To make the partnership work, the startup needs to be extremely clear about its own goals and its trajectory — and the needs of the corporation. Entrepreneurs need to be aware that corporations are used to doing things their way and that there are usually many layers of executives and managers who have a say in product development. In addition, they might also want a seat at the table, whether that means actually providing input or just listening in.
What About Return?
Usually, venture capital firms invest in startups to eventually exit and make a return on their investment. The motivations are different for corporations. They invest or partner with an entrepreneur because they're looking for a strategic benefit rather than a financial one. Sure, maybe the company can exit at some point in the future, but for many large organizations a five times to 10 times return won't mean much to the bottom line.
Corporations are more interested in how a new technology can help grow their company over time. That's where the financial payoff is – they want an innovation that can help steadily grow revenues and profits in the future. But just because the corporation doesn't need the kind of return an exit can provide, doesn't mean there shouldn't be one.
A Portfolio of Innovation
One reason why the corporate venture approach is appealing, is that companies can develop a portfolio of companies that can help them grow. Typically, companies will invest in a number of earlier stage startups to get that seat at the table. They can then increase their involvement as warranted.
As those startups expand, corporations might add to their investment or acquire the business. Ultimately, the company will own a number of later stage operations that they have helped grow while continuing to invest in early-stage operations that can be taken to maturity.
The Partnership Process
Of course, there are a lot of startups and plenty of corporations, so how can the two sides meet? At RocketSpace, we help the two connect.
In many cases companies come to RocketSpace and say they want to innovate with a startup, though many aren't sure exactly how. We help companies narrow down on a particular focus of interest – what are the different innovation areas and what does the company want to do? Then we'll look at hundreds of companies and select a few that might be a good fit. They present to the company on a strategy day and then we, along with the corporation, pick a partner.
Here's an example. RocketSpace worked with a leading airline company (name confidential) on identifying future trends in their industry and one area we focused on was making the entire travel experience – not just flying – more enjoyable and seamless. We had also been working with a startup that lets travelers book their ground transportation, whether, taxi, bus or train, from a single app. This was something our client wanted to look at – the future of travel and travel experiences. We identified the area of opportunity and then put our client and the startup together on a strategy day to talk about what both wanted. Our client then selected the startup, made an investment, and the two have started working together.
This is just one example of how corporate venture is changing, but there will be many more in the future. Attitudes are shifting where corporations can now see that working with a startup can drive innovation much faster than internal innovation can. Corporations of the future need to be aware of the disruption that's happening outside of their companies and then leveraging those opportunities and collaborate.
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