21 Aug 2021
We are in an era of the startup gold rush where small businesses are growing at an unprecedented rate due to the rapid cycle of innovation and the exponential adoption of new technologies like artificial intelligence (AI) on the market. the market. According to the full list of unicorn businesses released by CB Insights, there were over 700 unicorns worldwide as of July 2021. Former popular unicorns include Airbnb, Facebook, and Google – now big companies themselves.
To fuel startup growth, venture capital activity exploded to new highs in Q2’21, with global funding surging 157% from Q2’20. Over the next decade, the term unicorn will likely be replaced by decacorne (a company valued at over $ 10 billion) and eventually by hectocorn (a company valued at over $ 100 billion). In fact, SpaceX and Stripe are two recent examples of startups that have already achieved Hectocorn status as private companies.
A key broader market-level impact driven by startups is that they create technologies that change the mindset of customers. The same customers then expect a similar level of technological development and speed of innovation from large companies. This is generally difficult to achieve for a large company. As startups grow so well, large companies need to reinvent themselves to stay competitive and attract customers. To achieve this, companies adopt various innovation models to improve R&D and production capacities. The behind-the-scenes innovation model has only worked for a few companies in the United States consistently for decades, such as Apple. Most businesses struggle to find the next big disruption internally. They mainly refine the product (or at best penetrate adjacent markets) that gave them the initial success. There are several reasons for the lack of sustained innovation in large companies, the most important being the reward mechanism linked only to success instead of failure being worn as a badge, lack of risk-taking, risk-taking. decision involved in hierarchy and state of mind. of the workforce being like that of the employees rather than that of the independent founders. Therefore, big companies lose their way because they thought too much inside the walls compared to the outside, which is the easiest way to innovate.
To solve this problem, companies are increasingly looking outside for sources of innovation. Hence, they adopt strategies such as venture capital investment and open door innovation. Let’s take a look at these models of innovation that companies use to expand their business horizons.
One of the common strategies adopted by companies is the open innovation policy. It involves developing internal and external ideas to drive business innovation. To do this, companies organize an in-house innovation team or hire a new team experienced in leading such innovation projects. But there are hardly any examples of companies that have made this strategy successful in driving the engine of business innovation. There are several reasons for this. New ideas, once prototyped, typically do not receive the same level of resources and attention as existing income-generating business units. Moreover, the transfer of the nascent product line to integrate them into an established product group for the next phase of growth is often faced with the syndrome of the non-invented here. For these reasons, scaling newly developed ideas into a large corporation has proven to be an insurmountable challenge.
Another notable innovation model is the Corporate Venture Capital (CVC) strategy. It is a growing trend for companies to start their own HVAC or outsource this effort to a company that offers venture capital as a service. Companies are realizing that doing their own CVC does not produce the desired strategic or financial returns. With the exception of a handful of CVCs who have been seeking venture capital for over a decade, CVC’s financial performance ends up being below par. This is mainly due to two factors: the poor quality of the flow of investment transactions and the often missed balance between the management of strategic and financial returns. Even though the CVC has access to high-quality transactions, it is usually too late to generate oversized venture-type returns. These issues with the CVC model have created a trend in which companies are increasingly partnering with an outside firm for the venture capital as a service (VCaaS) model. This VCaaS model gives them access to a first-rate transaction flow at all stages of the startup’s lifecycle while generating strategic feedback. The company that provides venture capital as a service can drive the investment strategy while keeping financial and strategic needs in mind. In addition to fostering agility in decision-making, this strategy also provides excellent exposure to internal product teams to external innovation. This broadens the horizons of internal executives in terms of speed and innovation of startups.
A growing need in the business world is to access the innovation of startups in technological hubs such as Silicon Valley. Companies want to know more about new technologies as well as new business models emerging in these hotspots of innovation. For this, companies often think of setting up innovation outposts in Silicon Valley. The venture capital-as-a-service model responds very well to this need by providing a team of seasoned investors who have the breadth and depth of the Silicon Valley network. Another really cool thing about VCaaS is that companies benefit from the wisdom and guidance of the VCaaS team. Dupont and several other companies have adopted this model to find AI startups.
One piece of evidence to support the evolution of the CVC space and the need for a venture capital-as-a-service model is that companies are launching or creating a fully stand-alone CVC – a term that j ‘would invent as SCVC. These SCVCs are often set up with a name unrelated to the parent company to represent a complete sense of disengagement from the latter. Siemens Next47, Schneider Electric’s SE Ventures, Alphabet’s GV and Gradient Ventures and Cisco’s Decibel are recent examples of such independent venture capital firms formed as a result of this trend. All of these venture capital firms are only backed by their respective companies, but do not even have the reference to the company in their name. These venture capital firms have their own management company and staff, capable of making independent governance decisions. But, unlike a typical venture capital firm, these SCVCs can leverage a firm’s resources as needed – its engineering expertise, customers, go-to-market capabilities, etc.
In summary, businesses must adapt to rapidly changing market conditions, consumer demands, and technology trends to remain relevant. The rate of adoption of new products has increased, putting pressure on a company’s speed of innovation. It has been proven that companies often struggle to increase their turnover by focusing solely on internal innovation. Therefore, they adopt various external innovation strategies such as Open Innovation, Corporate Venture Capital, and venture capital as a service. With these strategies, companies can better adopt their start-up counterparts and drive much-needed innovation agility.