Corporate venturing: Entrepreneurs enter the embrace of bigger companies

Being nurtured by a larger organisation may involve gratitude mixed with cautionDan Hubert has reason to be thankful for the interest several big companies have shown in his UK-based start-up, AppyParking, a smartphone app that helps drivers find parking spaces. Aviva Ventures, the insurer’s recently created venture capital fund, invested $1.5m seed funding in January. AppyParking had previously won a $10,000 prize from Ford in a competition to find ways to relieve congestion and now supplies data to the carmaker. It has also taken part in Microsoft Ventures’ accelerator programme, which was “like a mini-MBA”, says Mr Hubert. “Having a big brand name partnering with you adds a lot of value and makes people listen when you are a small start-up and trying to get in the door,” he says. Large corporations are increasingly seeking relationships with start-ups, driven by the need for innovation and the fear that a nimble upstart will turn their business model upside down. They are collaborating with start-ups in various ways, from competitions and hackathons to setting up venture capital arms and corporate accelerators. Yet corporate venturing, where big businesses invest in start-ups, has a mixed reputation and has been through several ups and downs. At the end of dotcom boom, many companies shut or spun off their incubators and investment teams. Now it is undergoing a boom. Companies worldwide made $75.4bn worth of corporate venture investments in 2015, five times the level of 2012, according to Global Corporate Venturing, which monitors the industry. About a third of European accelerators are run or supported by big businesses. Start-up accelerator programmes are usually associated with technology companies, but they have spread to a wider range of organisations, such as Barclays, retailers Topshop and Asos, and betting group William Hill. Accelerators provide office space, training, mentoring and sometimes investment, usually up to £200,000. There are pitfalls for the unwary, however. “Small companies move fast but large ones move slowly,” says Mr Hubert. “You are hoping for your milestones to take place under your control but you are then at the mercy of the other guys. ”Corporate investors who demand preferential rights, such as first refusal on a deal or clauses that ban start-ups from working with competitors, can put off other investors and customers. London in particular has nearly 50 accelerators of various types, leading to accusations that some offer poor value in return for a stake in a small business. Ben Branson created Seedlip, which makes non-alcoholic distilled drinks, less than a year ago but already Distill Ventures, set up by Diageo, the world’s largest distiller, has taken a minority stake. Distill Ventures allows Diageo to make small bets on emerging brands at a time of changing consumer tastes that include drinking less alcohol.

“Something crazy like nine out of 10 food and drinks start-ups fail within or just after their first year,” says Mr Branson who recently completed Distill’s accelerator programme. The investment from a company that knows the industry will be a big benefit, he says. Distill Ventures’ model gives it an option to buy the company outright at a future date. That would not suit every entrepreneur, but Mr Branson is happy with the arrangement because “I don’t want Seedlip to be small and I don’t want to do it for the rest of my life”. David Levine, founder of DigitalBridge, a Manchester-based start-up whose technology enables users to upload a photo of a room in their house and customise the wallpaper, paint and furniture, has just completed retailer John Lewis’s JLAB accelerator programme. Having worked for big, ponderous companies, he was “sceptical to say the least”, but was then delighted with the scheme’s bespoke advice and mentoring. An in-store trial, in which John Lewis customers could see what products would look like in their home, was set up within five days. Vidsy, whose self-service platform enables brands to commission and distribute video content from 1,500 film-makers, is involved in Founders’ Factory, a London accelerator backed by companies such as Aviva, L’Oréal, Guardian Media Group and Holtzbrinck Publishing. Gerard Keeley, Vidsy’s chief executive, says the credibility this confers “was a very important thing for us, given that we are selling directly to the top 250 advertisers”.

Before becoming involved with corporate venturing, entrepreneurs should ask if their goals are aligned with those of the larger business. Tio, developer of an app that enables children to build moving toys and robots, won a £10,000 Varsity Pitch competition funded by Tata, the Indian-owned group, and now takes part in events with Tata Consultancy Services. Tio is “an educational toy with a mission to increase Stem [science, technology, engineering and maths] skills,” says Peter Spence, Tio’s co-founder. “It’s important that things are aligned on not just the competitive or financial side, but on your social goals.” Tata is a good fit because of its focus on engineering and tech, he says. For big companies, questions remain over the value they derive from their activities. Many are still working out how to evaluate the impact of accelerators, but they seem likely to do still more of it.Stuart Marks, chairman of innovation specialist L Marks, which has assisted John Lewis and others in setting up accelerator programmes, says: “So many corporates are being bombarded by disruptive forces that this is the only way they can continue to stay ahead of their game.”

by Brian Groom