More and more corporates are deciding to invest in start-ups, but why do they decide to do so? Why do big companies decide to invest a part of their assets in a risky business? Why don’t they focus on their own businesses instead of helping entrepreneurs with crazy projects? These questions stressed my mind in a particular way, so I decided to understand their point of view and find out a clear and concrete reason that could explain their business strategy: surprisingly enough, I found four + one quite interesting answers.
1. Trend/Fashion: We Want to Be Different
We usually talk about corporates as if they were abstract or thinking entities disregarding any kind of reference about all the people that compose and manage them. Obviously, the reality is that a group of (experienced) people on the board of directors take decisions on the future of the company; therefore, as any other human being, they are influenced by trends.
A new trend in the fashion market begins, primarily, with the purpose of being different: we are continuously looking for something new that exalts our identity and shows that we are not like any other person. At the same time, we want to be accepted by the society and we enjoy being part of group: then, more and more people follow the trend until the next one becomes the new way to be different.
Corporates follow the same “fashion” logic: they want to show their clients that they are not like their competitors. So, when the difference of the services becomes ambiguous, the solution is to do something unexpected like investing in start-ups, or in other companies. Therefore, continuing the line of reasoning, we will find that little by little all other corporates will do the same because they do not want to feel stuck outside. We are really in the “Start-up” trend: even my baker knows that. Now, if you do not have breakfast with “founders”, lunch with “pitches” and dinner with “investors”, it means that you are out.
Another important psychological aspect that should not be underestimated is the doubt that enters the minds of the people of “non-fashion” corporates: “If other corporates have been investing in start-ups for years, there might also be an economic advantage.” Indeed, there is one, and I will discuss it in another paragraph.
2. Social Impact: Leave This World a Little Better Than We Found It
Corporates are not unsensitive entities unconnected with the surrounding environment, in fact, in the last years, we have witnessed the growth of corporates involved in impact investing: investments and activities with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return (Ed. Wikipedia source). Some of you could think that investing in start-ups does not necessarily fit the “Impact Investing” purpose: how could supporting a company that creates drones or develops an app for clothing could have a social or environmental impact? That feeling is correct, however, investing in start-ups has a concrete influence in the social sector because it creates now jobs. Hence, they are not always “Impact Investing” activities, but they are absolutely activities with a social impact.
Wishing to describe the reasons why corporates decide to invest in start-ups for a social impact we can identify two major aspects:
- they want to help people to become better entrepreneurs, share their experience and expertise, cooperate to solve critical situations (emergencies in poor areas), …;
- they what to show that they are not evil companies with only lucrative purposes. Since they are continuously judged by the society, they want to ingratiate public opinion.
In both cases the result has a positive impact on the society, but while in the first case the investments are done by an action of “generosity”, in the second case it is simply “opportunism”.
3. Make Money: We All Need to Pay Bills and Eat a Plate of Pasta Everyday
It is not a matter of being venial and charity is another topic. A company cannot afford to lose money or invest without a future profit: thus, all financial activities that a company does must be sustainable and must provide an economic return. Although investing in start-ups is a very risky activity (you cannot improvise it) it satisfies the need of profitability.
According to David S. Rose’s statement, a business angel can potentially generate annual returns of 25%. Hence, I would say that a corporate is not so different to a business angel when it invests in a start-up and it can get same returns. Obviously, there are different dynamics but the theory behind “investing in start-ups” is similar whether you are a private investor or a company.
Angel Investing is also an opportunity for private investors to diversify their financial portfolio of investments. Therefore, we can start talking about Corporate Angel Investing, to identify the same activity by corporates.
Note: In my opinion, Corporates can easily cover the investment gap between business angels and venture capitalists’ investment phases: that is the slot of 0.5-2 million euros. Indeed, this point of “non” contact is a huge problem in Europe, so I will analyse it in a future article.
4. Business Differentiation: Evolve or Die, Find New Business Opportunities
As time goes by, competition between corporates in a saturated market becomes very aggressive, thus a differentiation strategy is necessary in order to preserve, or increase, the position in the market (a remarkable example are telecommunication and automotive companies in these years). Einstein’s quote “Insanity: doing the same thing over and over again and expect different results” explains perfectly the attitude of corporates to survive in the market trying to give their customers a little bit more for less. A very crazy behaviour, while they should start to look at their products/services/clients from a different point of view.
Another way to “be different” is conquering new markets. Indeed, if we look back thirty/fifty years ago, we will appreciate how the markets have changed during these last decades; so new markets emerge at any time. However, entering a new emerging market is quite difficult for a corporate. Let me explain. If a company with 1 million euros of income needs to find (only) 100.000 euros to grow 10%, a company with 1 billion euros in revenue needs 100 million euros to get the same 10% growth. Obviously, a new market is small by definition (but it can grow) and it is not big enough to justify a strategic investment from a corporate. Moreover, it is highly possible that the corporate does not have the good attitude to tackle this challenge because it is – we could say – a little bit “fossilised” in its thinking and processes.
Thankfully there are several solutions for them (well described in a lot of publications/books) and investing in start-ups is one of these. Indeed, investing in start-ups can help corporates to
– produce new products and services with the good esprit;
– enter new markets with a proper strategy and expectations.
5. New Clients: Increase Sales and Clients Portfolio
No comment… 🙂
These were my four + one reasons why corporates invest in start-ups. Let me know what you think about them and if you have other reasons in mind.