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Options for Large Companies
WORKING WITH
STARTUPS
Bill Youstra
@youstra
The WhySITUATION
Accelerating advances in technologyExplosion of platforms, form factors &
APIsLow capital requirements for startupsEasy access to capitalCorporate imperative to experiment
(find a better model) is driving M&A exits
VELOCITY AND IMPACT OF EMERGING COMPANIES ARE
GROWING FAST
SourcingProductionPackagingTargetingDistributionMonetization
THIS EFFECTS ALL ASPECTS OF THE ECO-SYSTEM
Strategic advantages for early adoptersInstitutional awareness of experiments
& best practicesEnterprise value gain in core business
or equity share of partnerDistraction of engagement & dead-ends
with partner initiatives
CREATES BOTH OPPORTUNITIES & THREATS FOR LARGE CO’S CORE BUSINESS
Diffi cult for managers to monitor & assess all developments
Too many meeting requests & inbound calls
Decentralized – requests scattered across company w/ little shared learning
All compounded by FOMO - fear of missing out
BUT: DISCOVERY IS INEFFICIENT
Partnerships w/ startups require a disproportionate amount of time
Limits the number of simultaneous initiatives
Money left on the table: large companies often overlook strategic value of their contribution to the emerging company
IMPLEMENTATION IS INEFFICIENT TOO
You need a centralized solution…
…to proactively scan & score
opportunities…
…and secure strategic & product benefits…
…with minimal distraction to operating
teams.
CONCLUSION
and what not to do…
WHAT TO DO
Illuminate new products & services to enhance current offerings
Inform strategic decision-makingRespond quickly to competitive threats
TOP GOAL: CORE ENTERPRISE VALUE
Trying to play VC (optimize for equity returns) is a mistake
There is significant potential financial upside
However: Emphasis is on “potential”Financial, time & opportunity costs are high
WHAT ABOUT EQUITY RETURNS?
VCs in aggregate do only a fair job picking winners
VCs have historically underperformed as an asset class, with a handful of exceptional huge outcomes for a handful of partnerships making the difference
Yet they enjoy superior deal flow, more capital, larger diversification and are much more attractive to entrepreneurs
Can you really do better?
PICKING WINNERS IS HARD
There is a natural conflict between investment returns and operational excellenceExampleGSI’s early investment in PowerReviews complicated the product manager’s ability to later switch to Bazaarvoice. Making the switch damaged the enterprise value of PowerReviews and the reputation of GSI as an attractive investor for startups.
FURTHER: OPERATIONAL CONFLICT
2-3 people focus on innovations for core business strategy and operations: “BD not VC”
Manage centralized intake to screen prospective early-stage partners
Liaise proactively with startup community, conferences & influencers
Understand priorities of internal operating units
Present “Innovation Seminars” and “Demo Days” of concepts or startups to operating groups
Establish boilerplate deal terms (warrants, exclusivity)
SUGGESTED APPROACH: INNOVATION GROUP
Conduct ad hoc research for execs & boardDeconstructing competitor’s innovationsPreliminary research on prospective initiatives
Serve as internal innovation lab, building prototypes for department initiatives
OPTIONAL: INNOVATION GROUP COULD
If you still want to play VC…
APPENDIX
Corporate InvestmentsIncubatorAccelerator
OTHER OPTIONS (NOT RECOMMENDED)
Establish “Media Co Ventures” armStaff with 2-3 investing professionals
with domain expertiseOperate as in-house VCFocus on Series A & B investments,
reserving 50% of capital for follow-on
CORPORATE INVESTMENTS
Significant capital (incl 50% for follow-on)
7-10 year commitmentCan create great pay disparityNot competitive with other capital
sources Can impede BD with attractive start-upsOperational conflict
CORPORATE INVESTMENTS: DON’T DO IT
You can attract uniquely attractive deal-flow
Your business is willing to aggressively embrace DNA transfers from startups
You have at least $200m available capital over 7 years
You anticipate initiating a second $200m fund in 4-5 years
You “firewall” the investing group (like Google Ventures)
CORPORATE INVESTMENTS: PROCEED IF
Cultivate cohorts of seed-stage ventures that are generated internally or externally
Offer cash, offi ces, overhead, support & expertise for 3-6 month sessions
Usually $15-80K for 5-20% equityStaff with 3-6 professionals and a network
of advisorsStage “Demo Day” to introduce hatchlings
to operating groups and external investors
INCUBATOR
Incubator structure limits the number of new ideas you’ll see
Generally too immature to integrate into core business for 12+ months
Very high risk; seed stage ventures have high mortality rate and pivot rate; they may easily pivot out of your interest range
On average, the most successful startups are from second-timers who eschew incubators
This model underperforms for all but the very top incubators (Y-Combinator)
INCUBATOR: DON’T DO IT
Don’t. It’s a seductive notion but ultimately makes no sense.
INCUBATOR: PROCEED IF
Similar to incubator, but with later stage seed ventures; all externally-generated
Ventures are beyond the napkin stage; have a concept, prototype and have engaged with customers
ACCELERATOR
Same downsides as incubators albeit with less risk
ACCELERATOR: DON’T DO IT
You can sponsor a third-party accelerator with terms that provide exclusive benefits
ACCELERATOR: PROCEED IF
Corporate Incubator Founders are employees of co Focus is on developing new initiatives
entrepreneurially No equity upside for founders Some enhanced payout & job with corporate adoption
Side Investment Vehicle Separate fund held outside of operating company
authority Takes referrals from company Possesses warrant transfer rights Takes ownership of pro-rata rights for preferred
warrants
VARIATIONS
