Large corporate is the USA have been investing in external startups since the late 1990s. The investments evidenced stomach for high-risk, fast-paced environments. Such investments having seen ups and down in the corporate investments, but rarely seen constant dip in venture capital or PE investments in the startups across the world. Corporate Investments in India are witnessing such trend too.
Indian eco-system is buzzing with start-up activity like never before. Overall, India stands at third position (after USA and China) in terms of number of start-ups in the world. In India, the number is increasing exponentially.
Indian technology prowess is already proven, with India already an established IT and ITES outsourcing hub. In the decade of 1990’s and 2000’s, India exported IT services for solutions largely for consumption and implementation in geography outside India. However, 2010’s decade was different when solutions were made in India consumption within India and for the world.
This means two things – Availability of skilled technology professionals and working on solutions of the problems that India has and the world needs.
Big corporate has vast reach, catering to marquee customers. Deep involvement in achieving operational and service level agreement, in most IT services organizations, becomes the key focussed area, missing the new trends in the market. New and nimble ventures spot them and prepare a blueprint to address them, swiftly and inexpensively. Software product companies, in their pursuit to get marquee customers, often loose the value proposition game, till it is challenged by the current breed of start-ups.
World is already looking at disruption. In mobility, Uber, Gett, Ola, Lyft have displaced city licensed taxi. New Age ecommerce companies Amazon, Flipkart, Snapdeal and Enjoy have made brick-and-mortar stores to close. Digital Payments like Paytm, UPI, PayPal are innovating lower cost servicing models to challenge the hegemony of Visa and Master. This list continues in utilities, Agriculture, transportation and logistics, travel and tourism, government procurement and alike.
With disruption the name of the game, can corporate stay ahead in the race? And how?
Answer is Yes. Here is how.
Some companies (Bosch, Target, Shell, Qualcomm, Microsoft, Pfizer, Suzuki, Barclays, Sony, BNP Paribas, Intel, and many others) are already sourcing their innovation from start-ups in India. Some have their own R&D centres, which are supplemented by external innovation from start-ups, also bringing in competitive feeling. Why are some companies successful, more than others, in the corporate venture capital (CVC) game?
Motivation for investment
Strategic is one reason why CVC investment is made in a new venture. For example, Lucent Venture Partners, which invests the telecommunication equipment maker’s funds in external companies, makes investments in start-ups that are focussed on infrastructure or services for voice or data networks. While Lucent would like to make money on its investments in these start-ups, it is willing to accept low returns if its own businesses perform better because of these investments. Other objective is financial, wherein company is looking for attractive returns. Here, a corporate seeks to do better than private VC investors, due to what it sees as its superior knowledge of markets and technologies.
Ways to invest
- Strategic objective, tight operations integration (Driving): CVC investments are made when corporation wants to launch the product or service themselves, however, routes it to a startup. It monitors and at times, helps launch too. If it succeeds, it integrates. If it fails, valuable lessons are learnt about the pitfalls to avoid in this business.
- Strategic objective, loose operations (Enabling): Integration with corporate is purposefully not tight, so that the startup flourish independently, acquiring other customers too, which would have been difficult under the shadow of corporate venture.
- Financial objective, tight operations (Emergent): If there are tight links to its operating capabilities but that offer little to enhance its current strategy. For example, a company can sense an opportunity in a strategic “whitespace”- a new market with the new set of customers. Exploring such a market at times is difficult for the company focussed on serving its current market.
- Financial objective, loose operations (Passive): Ventures are not connected to corporate’s own strategy and is generally a long-term experiment, riding on the new wave of social behaviour or new technology.
While corporate VC investments have generated decidedly uneven financial returns, they should not be judged primarily on that basis alone.
Source: Extracts from the research by Dorothy Leonard-Barton and Clayton M. Christensen