Corporate Venture Funds, Startup Studios, and Accelerators. Why the Buzz?
The zoo of different formats of taming innovation keeps growing.
We received a few requests to explain what a venture builder/startup studio is, especially their corporate versions. So we decided it was time to share our experience as we see it. But let’s start with the beginning.
Hi, my name is Max, I am a founder and director of Admitad Projects, one of the first corporate startup studios in CIS countries. I am definitely not a genius. I’ve made lots of mistakes, and I still do. But here’s what I figured in the last couple of years.
We’ll touch on the following points.
- Current problems. What issues there are, and why has such a demand formed in the market. What is wrong with accelerators, corporate venture funds, etc.
- Historical background. How it all settled in the world and where it’s coming from. We’ll try and paint an accurate picture.
- Corporate venture builders in Eastern Europe. The exact lessons and gotchas we had. Pros and cons of a corporate venture builder and who might find it fitting.
What happened? Why does it suddenly matter?
Indeed, we all were sailing smoothly. Everyone was minding their own business, profits grew little changed. And then, suddenly, some hipsters came out of the woodwork. Innovation, technology, startups, custdev, products, and digital is all over the news. Honestly, it looks like the push finally came to shove.
The world experienced a global shift that keeps going:
- Energy carriers are depreciating.
- The bank rates are steadily below zero.
- The most valuable companies are tech, and the trend is only growing.
- Your competitors used to just post falafel photos on Instagram, but now they are quickly growing into global platforms and start eating you.
When these points became evident, it was made clear this is not just fashion that comes and goes. Instead, it’s about survival in the long term. The basic demand for security turned into a burning one, and new questions started to flow. What’s up with this development agenda? What will become our new “fuel”?
At different levels, the problem is solved in different ways. For instance, a country (specifically, its government) would take a digitalization crash course and learn how to build new things using nothing but its citizens’ intellect. With corporations, things are more complicated. They just want to live quietly in wealth and peace, but all sorts of God-knows-who’s are already pressing them in space and energy (see Elon Musk’s projects in Australia). It means that in industries where competition between private entrepreneurs and states (or state-size corporations) was beyond belief, things finally got hairy — with the horizon of not 20, but only 5 years.
This was the beginning of the demand for innovation, startups, and all sorts of “smoothie technologies” (since they might seem too hip). But demand always meets supply. The big wave brought up lots of shady weirdos with controversial approaches to innovation. This was inevitable, given how fast startups needed to catch up and outdo the competitors.
Responding to the demand, corporations tried to adopt the main tools hastily. They launched corporate venture funds, accelerators, hackathons, incubators, and laboratories. Someone tried to come up with their own venture builders, etc. Still, they copied the format and the shell without understanding the how’s and why’s. It turned out to be yet another cargo cult.
Here is what the corporations forget about when adopting cooperation with startups (in Eastern Europe).
- The market size where they could sell their product is incomparable.
- We’ve got big problems with working towards exits (sales, M&As, IPOs, etc.)
- The investment opportunities and round volumes are different with startups.
- Instead of EBITDA, venture building uses the cult and culture of growth.
Startups have completely different conditions for doing business. It would be strange if tools created for one environment worked in a completely different world.
Other problems boil down to corporations and startups themselves: when you try to marry them, sparks fly all over the market. It’s hard to find a corporation that hasn’t changed its entire innovation team at least once every 2 years.
Who is to blame?
If you asked me to explain the reasons behind the mismatch, I would end up with 3 more articles, so the rough generalization sounds like this: blame it on the conflict of interest and misunderstanding.
One party is all about maintaining a status quo and “preserving whatever brings money”. The other party is all about constant change and disregard for rules and foundations. Ones don’t understand why you shouldn’t kill a project that earns X and spends 3X in the early stage. The others don’t get why the contract should be checked for a week instead of 2 hours. Everyone who has been on either side of the barricades knows this very well.
But in the end, the problem of security and survival remains. Year after year, it’s becoming more difficult for startups to breakthrough, as well as for corporations — to maintain market share from the digital upstarts. Meanwhile, the likes of Googles and Amazons are equally dangerous for both.
The request for security is stronger than the request for personal comfort (“I won’t work with these morons, they don’t understand us”). Willy-nilly, you’ll have to learn how to cooperate and communicate with each other. Corporations are at different stages here: some companies have already taken some knocks, but others have it all ahead. Now, let’s talk about those who have been through all kinds of hell, fighting at the forefront.
Right away, I want to reassure you: for a corporation, the task of “learning to work with innovations really well” is a 5-year race. Therefore, if you have been agonizing over it for 2 years and still nothing’s right, it’s how it should be. You would be lucky if you meet the deadlines faster (I’m talking about reasonable teams that can reflect, learn new skills, and draw conclusions).
By the way, this is the truth the consultants and whoever is hired to deal with transformations usually keep to themselves. It hurts and doesn’t really sell. Instead, you can buy those who promise to build a bright new future in a year.
Look, the important this is when you get into it, when starts your 5-year countdown, and whether you have enough inertia to survive these 5 years (the average time a company stays in the S&P 500 list has decreased from 60 to 17 years).
What do corporate ventures and corporate startup studios have in common?
From a corporate point of view, this is a category of investments with a high risk of not working out but an equally high chance of a big reward.
If you want breakthrough results, it would be foolish to expect them from conservative instruments. Low risk means small reward and vice versa. So if you don’t want to exclude bigger opportunities, you need to learn how to work with venture capital and startups.
Here are popular formats of working with startups and new businesses in Eastern Europe.
- Creating within a corporation. To cut the story short, it won’t work. A small startup can’t survive within a corporation, and there’s a huge cemetery of those who tried and failed.
- Corporate accelerators. It’s the most common format, and we’ll talk about it further in more detail.
- Corporate venture fund. It’s a flexible and customizable format, but it often suffers from incorrect expectations of all stakeholders.
- Corporate startup studios or venture builders. I would call it the next step in evolution after the venture fund. In the next paragraph, I will describe the differences.
What is the difference between corporate accelerators and venture builders?
A successful corporate accelerator is mostly an exception from the rule. Tons of articles have been written about this, so to avoid being repetitive, I’ll only mention two key thoughts.
The most obvious one:
People understand the purpose and format of accelerators differently. In the big picture, corporations use it for project scoring. It generally remains unspoken, which sets false expectations.
The most crucial one:
Tools of interaction between a corporation and a startup. At this stage, it’s a rare occasion when a corporation/accelerator enters the project by more than 7%.
Therefore, the only way a corporation can exert its influence (given that it’s reasonable and knows what it wants/how to develop a business) is through a tracker or some corporate manager. In this case, your best hope is talented communication with a startup founder and/or team. As for a steering wheel, it’s quite “meh”. Nothing to write home about. Also, the corporation will most likely be hostile to a small side business.
Corporate venture funds often face the same problems (but the ownership share is 10–30% there).
When a project is created in a corporate startup studio, it always comes with a controlling stake, immersion in the corporate culture, and understanding of the processes. This is already enough to prevent complaints that no one in your project listens to you.
Here’s a convenient analogy for understanding it. The level of caring about business growth, as well as the level of responsibility, usually correlates with your stake size in it.
- If you as an accelerator own 5%, it hardly concerns you.
- If you as a fund own 20%, it’s better, sure, but you’ll only watch the founder steer the wheel. Spray and pray, as they say. After an investment, all you are left with is hope.
- If you as a startup studio own 80%, then it’s definitely your work and your problem.
Fund, builder, accelerator. How to choose your format?
Let’s suppose you have an infrastructure to grow new businesses, and instead of working with a single startup, it’s tailored to keep a whole portfolio. Then you might want to consider your own venture builder, startup studio, or M&A department to purchase projects as a whole.
If there’s no such thing and, objectively, neither you nor people around you have experience in growing businesses, then it’s better to outsource processes to the project founders. In this case, a venture fund is your best bet.
If you are building a funnel of startups for investment purposes and your tasks are mostly about PR (“We are hip and trendy, smoothies for everyone”) and HR (“We need teams and/or fresh blood for corporates”), choose an accelerator.
If you want to create new businesses and corporate directions noticeable in your holding’s P&L, then a corporate venture builder is right for you.
Attention! There are no good or bad formats, just various tools for various purposes. Each one can be customized for completely different tasks, but the general principles are as described above.
Summing up. What is to be done?
When it comes to new things and the future, no one can predict the unknown. You can only make assumptions (hypotheses) and check whether you were right, whether it produces the effect you expected. Companies that test more hypotheses per unit of time are the coolest and strongest.
I think it’s time for a very snide trick; I’ll shield myself with this quote from Jeff Bezos: “Our Success in Amazon is a function of how many experiments we do per year, per month, per week, per day.”
Now, let me help you avoid falling into traps — here’s something simple and step-through for you to start with.
Step 1: Will. You should strongly decide to step on the warpath to your future, ready to face 5 long years full of pain, fear, and doubt.
Step 2: You should agree on expectations and formats of working with innovation (as well as who’s going to handle it in your team).
To summarize in one metaphor how companies work with innovations, imagine a risk slider that you can control. This slider determines your risk tolerance. If it’s low (i.e. set to minimal risk levels), then you wrap up your project at the first hint of trouble. This is the approach of many CFOs.
If the slider is set to “max”, then you are ready to endure an infinite number of failed tests before you close your project. This is the approach of fanatics and dreamers.
You should agree within your team what level your risk slider is set at; how many tests within one project you are willing to endure (counting in test runs, money, or time). Endless projects are the most common cause of innovation departments’ demise. Another one is the culture that does not allow mistakes, killing the business after the first misfire. How can you learn when you remove from a task a person who made a mistake but take a newbie who knows nothing about it? Mistakes are both normal and extremely helpful.
Once you have decided what risk level suits you, you can select formats for working with startups/projects and adjust them to your expectations.
Step 3: ???
Step 4: Profit!… Hopefully? Nobody knows what awaits you in the future. However, doing nothing is also a choice that entails its own risks. Will it help you in the long term? I’d rather doubt it.