What startups need to know about corporates
The relationship between startups and corporates is typically not seen as a natural one. The fear of being absorbed by a multinational or lured into exclusivity often restrains entrepreneurs from connecting. What we observe, however, is that corporates are exploring a wider range of venturing instruments. Presenting interesting opportunities for startups.
03 mei 2016, Tim de Rooij
- Corporates’ role in financing young ventures is increasing (20-25% deal share)
- Corporates’ attitude towards young ventures is changing (scalable business models and lean innovation practices are seen as examples of best practice)
- Corporates are open to different forms of collaborations, focused on learning, experimenting and jointly developing disruptive business propositions take-aways
Facts and figures
For startups, 2015 was a good year when it comes to venture funding. Although the number of deals declined to 7872 in 2015 (from 8089 in 2014), a recent study shows total venture capital invested (globally) hit an all-time high of $128.5 billion versus $89.4 billion in 2014¹.
Research also indicates that approximately 25% of the deals involved a corporate investor. It is evident that corporates’ role in venture funding is substantial and growing, as indicated by the positive trend observed when looking at the total corporate venture capital invested in EU and US ventures (Figure 1).
Figure 1: Approximation of corporate venture capital invested in the US, ASIA and EU in EUR billion (Source: CB Insights, PitchBook, team analysis (team assumptions were made with respect to investment figures for ASIA)).
Corporate venturing activity in Europe is growing
Considering the fact that the European economy is bigger than the economy in the US, the amount of corporate cash flowing into European companies seems modest. The trend, however, is positive. The compound annual growth rate (CAGR) of capital invested in European ventures by corporate VCs in the period from 2011 to 2015 equals 38.3% (Figure 2). In 2015, the total number of European VC deals equaled 1,387 and approximately one-fifth of them involved a corporate investor¹.
The most popular segments among corporates are Financial Services (CAGR: 142.2%), Information Technology (CAGR: 67.6%), Consumer Products & Services (CAGR: 34.8%) and Healthcare (CAGR: 23%). The Financial Services CAGR was strongly impacted by the EUR 136M Series E funding round by Funding Circle in 2015. The lead corporate venture capital investor participating in this round was DST Global, the corporate venture capital arm of Mail.Ru Group.
Figure 2: Total corporate venture capital invested in Europe in EUR billion (Source: PitchBook data)
In the top 10 most active corporate venture capital investors in European ventures we find, among others, Deutsche Telekom Strategic Investments, Intel Capital, Qualcomm Ventures, Swisscom Ventures, and Tengelmann Ventures (not in any specific order). Depending on the parameter you select for the ranking, about a quarter to one-third of this top 10 consists of US-based corporate VCs².
Corporates’ attitude towards startups provides opportunities for young ventures
The relationship between startups and corporates is typically not seen as a natural one. The common saying that they ‘speak a different language’ portrays this. However, we see this is starting to change, as corporates are increasingly interested in learning from flexible and adaptive practices, which startups master so naturally. Corporates realize that radical innovations are not likely to come from the inside. To break-down old structures, reinvent core businesses, and optimize customer channels, corporates understand they may be more effective by connecting with ecosystem players, instead of trying to do it all organically. By ‘connecting’ we refer to different corporate venturing models, including partnerships, joint-ventures and corporate venture capital (more on these models in coming CV-series). By ‘ecosystem players’ we refer to leading organizations in an innovative domain, including startups, scale-ups, SMEs, other corporates, municipalities, governmental organizations and universities. For example, in the Dutch Smart Lighting ecosystem we observe large corporates like Philips, scale-ups like Tvilight (spin-out of TU Delft University) and cities like Amsterdam and Eindhoven that are using new technologies to become ‘smarter’.
The open attitude of corporates towards startups provides great opportunities for innovative ventures. Although the term corporate venturing is not yet fully embedded in the European corporate dictionary, we (Deloitte) increasingly receive client requests regarding ‘inorganic innovation’ and ‘connecting with startups’.
More specifically, corporates are interested in:
- Acting as a launching customer for promising solutions that may help them to improve their business
- Setting up experiments in ‘real environments’ to test new technological innovations
- Sharing IT / R&D facilities on premise (i.e. dedicated ‘start-up floors’), to stimulate learning and introduce employees to start-up practices
- Setting up partnerships to jointly develop combined offerings
- Providing venture capital funding in return for equity
One of the key challenges corporates face when pursuing these objectives, is identifying the right ventures. Accordingly, when ventures are identified, what do you offer them and what ‘venturing model’ fits best? Key challenges on behalf of the ventures are finding out which corporates can help them scale and how to find the right person to talk to.
When is it a good idea to approach a corporate?
So given these insights, when is it a good idea for startups to approach a corporate? Well, let’s kick in some open doors.
- First question: What do you need to achieve the following milestone in your strategic roadmap? If the answer is something different from the likes of ‘just funding to survive until the next milestone’, connecting with a corporate might be a worthwhile consideration. In the case that your answer touches upon problems regarding ‘launching customer’, ‘experiment in real environment’, ‘product market fit achieved, now ready to scale’, move to question two.
- Second question: Do you have a solution that adds value to corporate XYZ’s business? Will it improve its operational efficiency? Enrich its customer’s experiences? In other words, are the benefits of connecting with your venture clear? When the answer is YES, move to question three.
- Third question: Is the timing right? Strategically assess whether you think you are ready to meet the minimum expectations of the corporate. Can you deliver on your products’ or services’ promise? If you are hesitant, consider postponing your moment of contact. If the answer is YES, investigate which corporates may be suitable, what innovation / start-up related initiatives they have in place and which people to talk to.
Next, make the call and set the stage for a collaboration focused on learning, innovating and scaling.
In the coming CV-Series #2 we will share our thoughts on what corporates should know about startups. Stay tuned!
About Deloitte Corporate Venturing Advisory
We are living in a time in which product life cycles are getting shorter and fast-growing startups can challenge entire industries. It is crucial for corporates to be aware of what is going on at the edges of the core business and act upon this awareness.
Corporates have to connect with or develop relevant ecosystems, learn from scalable business models and work together with innovative ventures to leverage capabilities and resources. Ongoing growth can be established through experiments, corporate incubation, startup accelerator programs, partnerships, joint-ventures, corporate venture capital investments or acquisitions. This, in short, is our definition of corporate venturing.
In order to support corporates in shaping and executing their corporate venturing strategy, Deloitte Netherlands launched an integrated Corporate Venturing proposition. Part of this practice is Fast Ventures, a data-driven and structured approach to effectively scan ecosystems, select focus areas, align key stakeholders within your organization and take appropriate action.
¹ CB Insights, KPMG. (2016). Venture Pulse Q4 2015. Amstelveen: KPMG.
² Pitchbook data over period 01-Jan-2011 to 31-Dec-2015 retrieved on 04-April-2016 and Fast Ventures analysis