The Corporate Innovation Dilemma and the Case for Partnering Earlier with Venture Studios
As every business on earth is being forced into survival mode, this is the time to calibrate to a new reality and make calculated bets on the future. There’s never been a better time to innovate across the entire venture landscape and our corporations should not be excluded from this thinking.
We’re living in a time where there are many questions swirling around the venture-fueled IPO market and the fundamental value (and multiples) of technology businesses. WeWork’s valuation correction and Casper’s modest IPO pricing are the beginning of the reckoning that many of us in the early stage venture community are curious about. How can we build fundamentally strong businesses that can still yield venture multiples? Is it possible to build them alongside our acquisition targets from the outset?
Historically, most innovation-ready corporations have engaged with the startup ecosystem through M&A, corporate venture capital and in-house incubator programs. I refer to this as the “buy, invest, and build matrix”. Poor decisions across this matrix have proven to be expensive, timely and deprioritized. I believe that partnering is the path of the future.
Buying — can be risky and expensive
I was struck recently by the news about the FTC blocking Edgewell’s $1.37B acquisition of Harry’s. It begged a much greater question about the risks of 10-figure transactions and the stakeholders who support them. Venture investors, advisors, banks, vendors and especially Harry’s employees (and their families) had to immediately react to their new reality. How could this have been avoided? Was there a way to capture this value earlier?
Aside from the Harry’s example, there are plenty of large acquisitions that haven’t gone as planned. Walmart’s $3.3B acquisition of Jet.com in 2016 has had a mixed outcome. Jet.com’s core platform never truly reached product-to-market fit and their personal shopping experiment Jetblack closed its doors last month.
Clearly not all M&A is bad, but when you partner it’s less expensive.
One acquisition worth paying some lip service to is Unilever’s $1B purchase of Dollar Shave Club (DSC) in 2016. Five years earlier, DSC gained initial traction via a $5,000 budget YouTube video squared directly at competing with Gillette. What most people don’t know is that one of DSC’s first checks came from LA-based venture studio Science Inc. Mike Jones (Science’s CEO) understood how to support DSC through its initial growth and sat on their board from launch until they sold.
A year later, P&G responded with the $100M purchase of Native Deodorant. At the time of this acquisition, Native had only raised $500K! This is an acquisition that did not get the attention it deserved. CEO Moiz Ali was a second time founder with no previous experience in personal care products. His previous company, Caskers, was a digital membership and community where members could purchase craft spirits online.
This is an example of a great acquisition from a company that mimics venture studio economics. Moiz didn’t have any subject matter expertise in deodorant but had become a master at marketing digital memberships and scaling subscription revenue. He was scrappy and had a tight cap table, reaching product-to-market fit extremely early and allowing the $100M price to dictate a multiple that he and his investors were surely excited about.
Investing — can be siloed and deprioritized
The next pillar on the corporate innovation matrix is investing. Most corporations are investing in the startup community through in-house corporate venture capital (CVC) vehicles.
In concept, CVC’s make a ton of sense. Larger, slower moving corporations began missing out on the upside of earlier stage interests. They also had less visibility into the rapid pace of their competition.
Executing it efficiently has become increasingly difficult despite an increase of activity in the space. According to a recent Bain study, there are now over 800+ active CVC vehicles, 4x more than there were five years ago. Becoming a participant in the VC ecosystem is one thing; succeeding and executing the proper strategy is another.
Touchdown Ventures is a modern example of how companies like Kellogg’s and Aramark have partnered and completely outsourced their CVC function. A recent interview by startup insights platform Radicle, dives into the nuance of the financial and strategic paradox that most CVC’s need to consider from the outset.
I also like what the team at Cintrifuse is doing in Cincinnati. They have taken a community-based approach to boost Cincinnati’s startup ecosystem in partnership with companies like Kroeger. Smaller US cities whose economics are largely influenced by Fortune 500 are smart to lean on agile fund managers.
Recently, CVC’s investment activity in later rounds have slowed due to inflated valuations. As a result, corporations are looking to partner earlier through building.
Building — agility, failing fast and founder talent are major gaps
In a recent piece from Marc Andreessen titled It’s Time to Build, he corroborates my argument by suggesting that every corner of the economy needs to be working together to innovate. The key word is “build”.
The corporate landscape has initially partnered with venture studios the most in this function, just in different ways. M13, a venture studio in LA recently announced a partnership with P&G where they would work launching a handful of consumer businesses together. P&G would lean on their R&D and M13 would focus on finding the best founding team possible while crafting an efficient go-to market strategy.
Similarly, J&J has partnered with Founders Factory, a growing London-based venture studio that just opened a NYC office. The Founders Factory model is a bit of a hybrid, where they are not only incubating companies within the healthcare vertical but will also be making investments in early stage opportunities on behalf of the partnership.
The reason why corporations are beginning to partner, especially in building, is for speed-to-market and for founder talent.
At Human Ventures, we are focused on sourcing a bench of exceptional founder talent and support them as they validate innovative startup concepts. Our current corporate partners rely on Human for access to these founders, paired with the need to develop rapid solutions for a specific opportunity. It is our belief that the earlier a founder is working on a corporate problem set, the more effective we’ve been at graduating concepts to funded businesses.
The Future — is reliant on innovation at a time of uncertainty
Questions in these uncertain times are being answered at an increased pace by a handful of venture studios. Initially made popular by Bill Gross’ Idealab in the 90’s, studios have become an efficient use of capital to create a repeatable process for starting companies and attracting talent under one roof. Today, corporates are leaning on these hybrid-incubator-funds to help them innovate.
There has never been a better time for corporations to take a step back and look at partnering externally. Historically, management consulting offerings have owned a large portion of innovation budgets and are producing unclear results relative to their cost.
Venture studios are agile, have great access to founder talent and can help corporates explore R&D areas at a fraction of the time and budget. Studios are typically filled with nimble platform teams and entrepreneurs as opposed to post-MBA consultants. The unique mix of talent in these environments are an evolution of the value-add platforms that most venture funds are known for.
At Human Ventures, we are beginning to see service-to-market fit for the ability to pair founders with a specific focus and validate builds quickly. Earlier this month we launched Humans in the Wild, a health and wellness focused incubator program anchored by a cohort of 12 world class founders. At the conclusion of the 100-day program we’ll have a handful of targeted, investable companies to seed in the market.
We are now working on tailoring this offering to a select group of corporate innovation partners where the program is customized to their needs. A partner-sponsored cohort will yield them the ability to ingest the companies internally or seed them externally alongside investment from their CVC.
The spun-out companies launch with a major advantage, as they have their first enterprise customer baked-in from the outset. Venture studios benefit because they have the first opportunity to invest alongside the corporate partner in this scenario. Incentives are aligned from the very beginning.
According to a recent whitepaper from the Global Startup Studio Network, “seed-stage investments for startups created by top-tier studios are more likely (34%) to result in an exit than the average Series D investment (27%)”. This statistic supports my thesis that corporations should be partnering with studios in much earlier stages than their typical CVC investment. Having exposure to “studio-stage” innovations is not only more agile but can also yield stronger multiples at more reasonable acquisition prices.
I encourage the ecosystem to look at venture studios and their companies as a new asset class. As corporates determine their innovation and investment roadmaps for 2020 and beyond, venture studios are trending as a key external partner.
For any comments or partnership inquiries, I’d love to hear from you: email@example.com.